By Clement Ngai, Paralegal
The External Conduct Standards (Standards) announced by the Federal Government are expected to come into effect in August of 2019. Although the Standards were scheduled to begin on 1 July 2019, the Standards were introduced by regulation, and will not commence until after having sat in both chambers of parliament for 15 sitting days, to allow for either chamber to move to disallow the regulations. Based on the existing Parliament sitting schedule, the regulations will not come into effect until after 15 August 2019.
The Standards have been introduced to ensure that Australian charities meet minimum levels of transparency and accountability when operating overseas. However, these Standards are expected to impose a significant administrative burden on charities, as they develop the policies and procedures required by the Standards. In September 2018, Mills Oakley provided The Treasury with a written submission in response to the draft proposed Standards. The majority of the issues and recommendations raised in these submissions remain applicable to the Standards tabled to Parliament in late November 2018, and contained in the Australian Charities and Not-for-profits Commission Amendment (2018 Measures No.2) Regulations 2018 (Cth) (Regulations).
Each of the four Standards contained in the Regulations covers a separate facet of operations for charitable organisations including:
- control of financial resources;
- record keeping;
- anti-fraud regulations; and
- protection of vulnerable individuals.
The Standards apply to any registered entity that operates outside Australia, or works with third parties that operate outside Australia. These Standards cast a wide net and will have a significant impact across the entire not-for-profit sector. Although charities registered with the ACNC as Basic Religious Charities are not required to comply with the existing ACNC Governance Standards, no exemption exists excepting Basic Religious Charities from complying with the External Conduct Standards.
Standard one – Activities and Control of Resources (including financial)
The first of the Standards has the broadest subject matter, covering four requirements for registered entities. Under the Standards, charities must:
- take reasonable steps to ensure that their activities outside Australia are carried out in a way that is consistent with their purpose and character;
- maintain reasonable internal control procedures;
- ensure that funds given to third parties outside Australia are used:
- in accordance with the charity’s status as a non-profit; and
- with reasonable controls and risk management processes in place;
- comply with Australian laws relating to nine separate areas (including money laundering, financing of terrorism, sexual offences against children, slavery, trafficking in individuals and debt bondage, people smuggling, international sanctions, taxation and bribery).
Whilst increasing public confidence in the not-for-profit sector is a vital objective for the ACNC, the trade off for this Standard is a substantial increase in the costs to charities that these changes represent. Charities should consider whether it will be necessary to devote additional financial resources to the development, or overhauling, of existing policies and procedures, in order to ensure sufficient compliance with this standard. This is particularly important for basic religious charities, since they have not been required to comply with the ACNC Governance Standards.
Due to the present absence of guidance regarding the precise extent to which charities must take steps to comply with the standard, charities may need to consider whether partnerships with overseas partners may put the charity at risk of breaching the standard; few charities have the resources to litigate in the event that written agreements with the partner organisation are breached, and this may present issues in situations where enforcement of an agreement is necessary to maintain compliance with the standards. Furthermore, charities should also be wary that the standard is silent with regard to steps that charities must take toward sub-contractors; how far down the chain must a charity ensure compliance?
Standard two – Annual Review of Overseas Activities and Record Keeping
The second standard requires a charity to keep records of its activities and expenditure on a country by country basis, for each financial year. Charities that undertake a broad range of operations must be wary of the steps that they will need to take to meet the minimum standard of record keeping required by this standard.
For example, a charity that oversees more permanent or long-term projects would have procedures in place that can facilitate these reporting requirements. However, where an entity provides time-critical emergency relief or short-term project services, they may have difficulty in retaining sufficiently detailed records for the ACNC. For charities that operate internationally, careful consideration of the requirements of the standard may be necessary to minimise the risk of reduced efficiency and effectiveness when conducting charitable work overseas.
The exposure draft of this standard included a provision that could require this information to be included in the charity’s Annual Information Statement. The Mills Oakley Not-for-Profit team made submissions during the consultation period with the Treasury, raising concerns that this provision could result in the disclosure of sensitive or confidential information to the broader public. This provision was thankfully excluded from the Regulations tabled to the Parliament in November of 2018.
Standard three – Anti-Fraud and Anti-Corruption
This standard requires the charity to take reasonable steps to minimise risks of corruption, fraud, bribery or other financial impropriety by the responsible entities, employees, volunteers and third parties outside Australia. Additionally, charities must document any perceived or actual material conflicts of interest from these groups.
Although a requirement to report conflicts of interest already exists at a board level, individuals that may not have a vested interest in a charity’s operation, such as employees, volunteers and third parties, are now also required to disclose such interests.
Charities should prepare for the increased burden of needing to implement policies and procedures that inform their employees and volunteers of responding to potential conflicts. For larger charities that have a high turnover of staff, this will represent a significant undertaking; the red tape created by the level of scrutiny, education and compliance may even deter volunteers considering volunteering for the charity. Again, this is of particular significance for basic religious charities, as they are currently exempt from the Governance Standards.
Although many entities already conduct their own due diligence on third parties they intend to collaborate with, the standard is silent as to precisely how closely a charity must examine future partners. Charities should consider whether the time resources and expense associated with higher level of due diligence, may impact on the charity’s operations, or for international entities, even require the charity to seek expert assistance.
Standard four – Protection of Vulnerable Individuals
Finally, the fourth standard requires the registered entity to take reasonable steps to ensure the safety of vulnerable individuals outside Australia, who are provided with services or benefits by the charity, or through a third party engaged by the charity.
This standard essentially imposes a duty of care on the charity over ‘vulnerable individuals’, defined as:
- a child; or
- an individual who is or may be unable to take care of themselves, or is unable to protect themselves against harm or exploitation.
Particularly in countries of the Global South, this can extend to a very broad range of people with which a charity may come into contact. Charities should take care in navigating the legal ambiguity in the standard, as to precisely what actions individuals conducting work for the charity would need to take to fulfil this duty of care. Charities should, however, consider the implications of requiring employees and volunteers to report any incidents of harm and exploitation to local authorities, particularly where there is a risk of greater harm to vulnerable individuals.
A failure to meet the External Conduct Standards may result in enforcement powers being used against the charity, including warnings, directions, enforceable undertakings, injunctions, and the suspension and removal of entities from the ACNC register. The ACNC is intending to release guidance for charities in the next few months to assist charities with understanding both the meaning of the standards, and items that charities need to consider.
In the meantime, charities should:
- have a look at the way they manage their risks around overseas activities;
- have a look at how they send funds overseas;
- consider what will be necessary to organise the charity’s affairs, and so best respond to the requirements of the Standards; and
- consider the proposed standards and consider how they apply within the charity’s context for operating overseas or sending funds overseas.
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