Understanding External Conduct Standard 3: Anti-fraud and anti-corruption

External Conduct Standard 3 requires a charity to take reasonable steps to:

• Minimise any risk of corruption, fraud, bribery or other financial impropriety by its Responsible People, employees, volunteers and third parties outside Australia, and
• Identify and document any perceived or actual material conflicts of interest for its employees, volunteers, third parties and Responsible People outside Australia.

Let’s unpack what this means.

What is ‘fraud, corruption and bribery’?

Fraud occurs when someone acts in a dishonest or deceptive way to gain a benefit, or so that someone else experiences a loss. Fraud can occur when:

• Making decisions.
• Handling information.
• Managing and using funds.
• Managing property and other assets.

Corruption refers to dishonest or illegal behaviour for private gain, especially by people with power or influence. Some charities may operate in countries or regions with a high degree of corruption.

For the External Conduct Standards, bribery occurs when someone offers money or something of value to a public official to persuade them to do something in their official duties that they would not otherwise do for an advantage.

Fraud, corruption and bribery can occur in any organisation, including a charity. But having suitable policies and procedures to combat these threats will help a charity reduce the chance of:

• Losing money through fraud or other financial misconduct.
• Contributing payments or other gifts – knowingly or unknowingly – to corrupt people or organisations.
• Unauthorised access to information, hacking, data breaches, viruses and phishing through cybersecurity attacks.
• Damaging its reputation and losing funding.
• Breaching laws in the overseas country where they are operating.
• Regulatory action being taken against the charity.

What does ‘conflict of interest’ mean?

A conflict of interest occurs when someone’s personal interests conflict with their responsibility to act in the best interests of their charity.

A conflict of interest in a charity can involve Responsible People, employees, volunteers or third parties working with the charity. A conflict of interest may be actual, potential or perceived, and may be financial or non-financial.

Recall that Governance Standard 5 requires a registered charity to take reasonable steps to ensure its Responsible People disclose any perceived or actual conflicts of interest (See the ACNC short courses on Governance Standards).

Some conflicts of interest are unavoidable, especially in situations where activities are carried out within a small community.

External Conduct Standard 3 does not require a charity to completely avoid or remove a conflict of interest. Each charity should identify and document a conflict of interest and then manage the issue so it does not affect the charity’s decision-making.

‘Reasonable steps’

The ACNC does not prescribe what a charity must do to meet External Conduct Standard 3. Each charity must decide the appropriate action required based on its own circumstances.

The ACNC expects each charity to consider the risks of fraud and other financial impropriety associated with its overseas activities – including those conducted in collaboration with a third party.

The reasonable steps that a charity takes, and the procedures it maintains, will depend on its particular circumstances and the associated risks. These factors will be different for each charity.

To decide on the steps it will take, a charity should consider:

• Its size and the number of staff and volunteers it has.
• The effectiveness of policies and procedures that govern its activities.
• The nature, scale and complexity of its overseas activities or funding.
• Its level of knowledge and experience in managing similar projects or activities.
• The location of its activities, and actual or perceived corruption levels in those regions.
• Its need for permissions, licences or other approvals from overseas government bodies.
• Its work with third parties, particularly arrangements for third party payments.
• How it identifies and manages conflicts of interest.
• Issues with previous overseas activities.

For some charities, the nature and location of their activities means that there are more risks and a greater need for comprehensive measures. For others, there may be fewer risks and it may be adequate to implement a limited number of measures.

For example, a charity that wants to build a school in a region known for government corruption faces a greater risk of dealing with corrupt officials than a charity that operates in an area with more transparent processes and less corruption.