Preserving Charitable Assets within Charitable Purposes
Following Andrew Lind’s recent papers in Melbourne, including at the Charity Law Association of Australia and New Zealand Conference on the External Conduct Standards, here are some headlines for all charities to consider:
1. The External Conduct Standards (ECSs) commenced on 23 July 2019.
2. The external conduct standards are intended to provide greater confidence that funds sent, and services provided, outside Australia are reaching legitimate beneficiaries and are being used for legitimate purposes. (Reg 50.1)
3. There are 4 ECS set out in the Australian Charities and Not for profits Commission Amendment (2018 Measures No. 2) Regulations 2018, in summary:
Standard 1—Activities and control of resources (including funds)
Standard 2—Annual review of overseas activities and record‑keeping
Standard 3—Anti‑fraud and anti‑corruption
Standard 4—Protection of vulnerable individuals
4. The ECSs apply to all charities (registered entities) including Basic Religious Charities (BRCs). There is some overlap with the ACNC Governance Standards, but this is intentional, as the ACNC Governance Standards can only apply to federally regulated entities (based on the Corporations head of power in the Constitution). The ECSs instead rely on the External Affairs head of power in the Commonwealth Constitution and so they can apply to a broader range of charities.
5. They apply when a charity, operates (including sending funds) outside Australia in whole or in part. (Reg 50.4) They apply to any (front line) purpose delivery outside Australia even if it is one-off or minor (including inside Australia activity directly related to outside Australia purpose delivery). They do not apply to Incidental activity outside Australia related to (front line) purpose delivery in Australia. (Reg 50.4(2) and the EM).
6. The EM has the following, perhaps surprising, example about when the ECSs apply: A registered entity which is a church asks for collections in Australia for the purpose of sending the funds overseas to contribute to foreign disaster relief. The registered entity gives the small amount of funds raised to an overseas church, which is not a registered entity. Because the amount of money raised is small when compared to the church’s overall collections and donations to other organisations and causes in Australia, the incidental element is satisfied. However, because the funds are sent to an overseas church for a foreign purpose, it is not directly related to the pursuit of the registered entity’s purposes in Australia. As the activities are not directly related to the pursuit of its purposes in Australia, the entity has obligations under the standards.
7. Therefore, minor sending of money or resources overseas (other than to another Australian registered charity) should be assumed to be caught (and more closely looked at), requiring compliance with the EC Standards.
8. Most of the regulatory powers of the ACNC in respect of non-compliance with the ECSs (e.g. to give warnings and directions) apply to all charities including Basic Religious Charities [BRCs] (the only carve out for Basic Religious Charities being re the suspension and removal of Responsible Persons). Yes Responsible Persons (governors) can be sanctioned or removed for non-compliance with the ECSs (but for BRCs) and charity registration may be lost (along with tax concessions as a result).
9. Record keeping is a black letter compliance issue and as the case of Fenn v ABC  VSC 60 shows (pleaded failure to comply with the general record keeping provision of the ACNC Act not failure to lodge AIS) the record keeping obligation under the EC Standards needs careful compliance attention.
10. The ECS record keeping requirement does not need to be reported but can be called for from time to time by the ACNC. If they do, charities should expect that the ACNC may well then “cherry pick” the more substantive operations and call for evidence about compliance with the other ECSs in relation to that more substantive (higher risk) movement of resources overseas.
11. When a charity sends money to an overseas bank account of another Australian registered charity – the ACNC takes the view that the sender of the money is responsible under the EC Standards to take reasonable steps for the safe conduct (oversight of management) of the money into the overseas bank account. The ACNC guidance says this:
Third party registered with the ACNC
Education For Kids is a charity registered with the ACNC and based in Australia. It sends money overseas to another charity, Cambodian Aid Inc, which is also registered with the ACNC. Cambodian Aid Inc works in local communities in Cambodia to provide school children with books and healthy lunches.
Because Cambodian Aid Inc is also a charity registered with the ACNC, it has its own obligation to comply with the Standards for its operations outside Australia.
Education For Kids must comply with the External Conduct Standards for the management of the money it sends overseas. Cambodian Aid Inc must comply with the External Conduct Standards for its activities overseas.
Education For Kids does not need to comply with the External Conduct Standards for Cambodian Aid Inc’s activities overseas.
12. The ACNC ECS Guidance says that the regulator expects ECS compliance right through the distribution chain to the front line charitable service delivery. The ACNC guidance says this:
When the External Conduct Standards apply to work with third parties
Working with a foreign organisation
An Australian charity provides improved sanitation to overseas rural communities. It has a partnership with a foreign charity not registered in Australia to help with sourcing local materials and labour.
The Australian charity must comply with the External Conduct Standards for its own activities overseas, as well as those of the foreign charity that relate to the projects they work on together.
Working with multiple foreign organisations
An Australian charity works with a charity overseas that is not registered with the ACNC. The Australian charity provides funds to help the overseas charity purchase and supply food to villages experiencing drought and other disasters. The overseas charity then works with other organisations overseas that aren’t registered in Australia to help it distribute the supplies.
The Australian charity must comply with the External Conduct Standards for its own activities overseas as well as those of its overseas partner charity and the other organisations the partner charity works with on this project.
Working with a related party
An Australian charity raises money to help alleviate hunger in locations around the world. It gives all the funds it raises to a parent charity in the United States. The parent charity then disburses the funds to various causes around the world in line with its mission
The Australian charity must comply with the External Conduct Standards for the transfer of funds to its parent organisation overseas, as well as the parent organisation’s distribution of those funds.
Our charity law team is regularly advising charities on ECS compliance along with the development of policies, processes and MOUs to assist in the discharge of the duties under the Standards.