Regulatory inquiry finds charity’s £5m investment lost £3.9m
The Charity Commission has published a report of its inquiry into Kingsway International Christian Centre (KICC), which found former trustees had invested £5m of the charity’s money on the promise of a 55% return, and had made a £3.9m loss when the former trustee responsible for the investments was declared bankrupt
16 Dec 2016
KICC is a large, growing evangelical church, which operates 19 places of worship and runs a television and radio station ministry. Its current income is around £7m a year.
In February 2011 the Commission opened a statutory inquiry into the charity after identifying concerns that its accounts referred to investments of £3m being made with one of the then trustees, who despite being described as ‘qualified independent trader’ was not authorised by the then regulator the Financial Services Authority (FSA).
It appeared payments were being made to the individual’s private bank account and were speculative and high risk in nature. They involved foreign exchange trades, with investments made in four tranches between 1 June 2009 and 30 June 2010 and totalling £5m. An investment agreement between the charity and the ex-trustee stated that ‘The guaranteed level of monthly profit under this agreement is 5% per month with the exception of the months of August and December where the guaranteed level of monthly profit is 2.5%.’
However, the Commission’s inquiry found the decision making trustees did not verify his qualifications or experience or obtain independent professional advice before deciding to invest. Given the proposed rate of return of 55% per annum was so high and the amount of £5m so significant, the inquiry’s view was that independent professional advice should have been sought.
At the end of March 2010 the income from the investment was requested and £734,220 was returned to the charity by the ex-trustee. For the second year of the investment £50,000 per month for 10 months was returned to the charity. The rest was theoretically being reinvested but the trustees did not seek independent verification of this.
The Commission appointed an interim manager on 31 January 2014 to review decision making in relation to the investments. The inquiry report now published has concluded that the trustees who made the investment were responsible for mismanagement in the administration of the charity. They did not inform themselves sufficiently about the nature of the investment and could not show that their decisions were based on sufficient and appropriate evidence particularly as they did not seek proper independent advice on a high risk, high value investment scheme.
The majority of the decision making trustees believed that confirmation received from HMRC that the first £3m investment qualified for tax relief was an endorsement of or approval for the investment per se; HMRC made it clear that any additional amounts to be invested would require express guidance - however the decision making trustees made two further investments of £1m each without seeking consent in advance from HMRC, resulting in a significant tax liability for the charity of £560,000.
The decision making trustees obtained a personal guarantee, of initially £2m increasing to £3m, from the ex-trustee, which would be repayable within 14 days should the decision making trustees decide to withdraw their investment. However the report found they failed to evidence whether or not the ex-trustee would be able to meet this personal guarantee.
The Commission said there was too much reliance on the expertise of the trustee when he was personally interested and conflicted in the decision to invest charity funds through the trustee’s investment scheme.
In February 2011, the FSA began legal action against the ex-trustee, which involved freezing assets up to a value of £6.85m, at which point the charity had been paid only £1.3m in return for its £5m investment, although a ‘portfolio balance’ in a ‘monthly report’ supplied to them by the ex-trustee showed around £7m of charitable funds under management.
In May 2011 the ex-trustee resigned as a trustee of the charity and entered into an Individual Voluntary Agreement (IVA) in November. The claim by the charity in the IVA was £6,960,647 representing the total amount invested plus the return.
In June 2012 the charity received an initial payment of £341,768 under the IVA. The terms of the IVA were that a further £100,000 would be payable annually for four years together with 50% of any income (after tax) over £300,000. The vast majority of funds would not be due until the end of the IVA. The charity would have to wait five years to be able to determine whether or not the IVA had been successful in recovering funds.
The first anniversary of the IVA was in November 2012; the ex-trustee failed to meet this payment and was in breach of the IVA which failed. The following October the ex-trustee was declared bankrupt. He made various offers to repay the charity, which were either not accepted or failed due to factors outside the current trustees’ control.
The trustees who took these decisions resigned at various dates between 2009 and 2014.
Michelle Russell, director of investigations, monitoring and enforcement at the Charity Commission, said: ‘This case is a reminder that trustees must ensure that they do not permit any personal associations to interfere inappropriately with their judgement as charity trustees and that any decisions they make are in the best interests of their charity. When trustees are considering a high risk decision, particularly one involving significant sums of money, they should take independent professional advice from properly qualified persons to ensure that they are not exposing the charity to significant risk.