Decision

Charity Inquiry: Afghan Heroes

Published 25 March 2021

This decision was withdrawn on 27 March 2023

This report has been archived in line with our policy as it is over 2 years old.

Applies to England and Wales

The charity

Afghan Heroes (“the charity”) was registered on 26 October 2009 and was governed by a Memorandum and Articles of Association incorporated 28 September 2009 as amended on 22 October 2009 and 10 June 2010.

The charity’s objects were to promote the efficiency of the armed forces and to relieve serving and former members of the armed forces and their dependents who were in need by virtue of their physical or mental health or their economic circumstances.

During its operation, the charity had three wholly owned trading subsidiaries, all of which have since been dissolved. These were:

a) a trading company established to operate a pub near Minehead, Somerset b) True Heroes Retreat Ltd (Company number: 6987236) (“THRL”), the trading company for the premises known as The Retreat, in Ashcott, near Glastonbury c) True Heroes Ltd (8278736), a general commercial trading company

The charity was removed from the register of charities on 12 May 2020 and is recorded as a removed charity on the register.

Events leading up to the inquiry

In 2011, the Commission received a number of complaints from the public about the charity following the publication of its first set of annual accounts. These concerns related to the proportion of income applied for charitable purposes and related party transactions. As a result, the Commission wrote to the charity and provided regulatory advice and guidance and reminded the trustees of their legal duties and responsibilities.

In August 2013, the Commission undertook a detailed review of the charity following a continued pattern of public complaints against the charity. At that time, the Commission also received concerns from some of the trustees about how the charity was being operated. The Commission met with all five of the trustees appointed at that time in October 2013 to discuss its ongoing regulatory concerns about the administration and management of the charity. The Commission identified that the charity’s proposed business model was to establish a network of pubs, each of which would have a veterans’ retreat associated with it. Each pub was intended to financially support its associated retreat. At the time of the Commission’s engagement, the charity had plans to expand its portfolio of two pubs but were advised to suspend their expansion plans whilst the Commission examined its regulatory concerns.

On 22 November 2013 the Commission opened a statutory inquiry into the charity under section 46 of the Charities Act 2011.

The inquiry closed with the publication of this report.

Issues under Investigation

The inquiry was established to examine the following regulatory issues:

• the administration, governance and management of the charity by the trustees and whether they acted collectively as a trustee body and whether particular trustees had dominant roles within the charity
• the trustees’ decision-making processes in relation to the use of the charity’s funds in paying for services which may have given rise to a conflict of interest and in purchasing and refurbishing two pubs
• whether the charity’s assets were spent in furtherance of its charitable purposes
• the financial position of the charity
• whether there were unmanaged conflicts of interest and/or unauthorised trustee benefit issues
• the charity’s financial controls and risk management
• whether or not the trustees complied with their legal duties and responsibilities as charity trustees under charity law

Findings

The inquiry’s findings are based on the report of the Interim Manager (“IM”) appointed by the Commission to review the charity’s operation and structure; on the Commission’s own engagement with the trustees and on information provided by the trustees in the course of the inquiry.

The administration, governance and management of the charity by the trustees, whether they acted collectively as a trustee body and whether particular trustees had dominant roles within the charity

At the opening of the inquiry, the charity had five trustees, which included the two founding trustees of the charity who will be referred to as “Trustees A and B” in this report. The Commission understands that Trustees A and B passed away during the course of the inquiry. As will be demonstrated further in this report, the inquiry found evidence of poor decision making by the trustees, inadequate record keeping, an inability or unwillingness by the trustees to address known governance issues, failures in managing the charity’s funds responsibly and failures to act with reasonable care and skill in managing the charity’s affairs.

In terms of day to day management of the charity, the inquiry found that, despite the charity’s trustees holding meetings and documenting their decisions in the first years of its operation, as the charity grew, giving rise to increasing demands, fewer meetings took place and decisions were being taken mainly by Trustees A and B. Despite receiving written advice about this issue from the charity’s auditors and the Commission, the inquiry found that the trustees failed to adequately address this issue resulting in a lack of records that could demonstrate how the trustees made collective and informed decisions.

Whilst the charity had five trustees at the time the Commission opened its inquiry, it was apparent to the inquiry that trust had broken down between Trustees A and B and the other three trustees, who resigned shortly after the inquiry was opened. The records, together with interviews of the trustees conducted by the IM, indicate that there was a significant deterioration in governance resulting in an almost complete breakdown of management oversight, systems and processes. The inquiry found that this deterioration resulted in governance control appearing to rest almost exclusively in the hands of Trustees A and B and which led to the other trustees raising concerns with the Commission about the charity’s operation prior to the opening of the inquiry.

The trustees’ decision-making processes in relation to the use of the charity’s funds in paying for services which may have given rise to a conflict of interest and in purchasing and refurbishing two pubs

As detailed above, in 2012, the trustees decided to concentrate the charity’s activities on a business model that would establish a network of pubs. These pubs would in turn support the running of a veterans retreat at each location, offering accommodation to homeless veterans and veterans suffering problems arising from their service in the armed forces. In order to achieve this, the trustees loaned £130,000 of charity funds to the charity’s subsidiary THRL to acquire the lease and to refurbish a pub in Ashcott in Somerset, re-named as the Retreat.

The Retreat

The trustees do not appear to have considered all relevant factors when taking their decision to make the loan to THRL. The inquiry found that the trustees failed to undertake sufficient due diligence before providing funds to THRL. While the trustees confirmed that some professional advice was received from solicitors in respect of the acquisition of the lease, there is no evidence to demonstrate the trustees took reasonable care when making the loan. The inquiry found that the charity failed to document it in a formal agreement, and no interest was charged on the debt, contrary to written advice provided by the charity’s auditor. Further, the inquiry found no evidence that the trustees considered whether making the loan was in the best interests of the charity or more specifically, whether the terms of the loan to the subsidiary would enable the loan to be treated as an appropriate charitable investment by HMRC.

Furthermore, the inquiry identified that THRL made significant losses of over £100,000 in the financial year ending 31 December 2013. Such losses were predominantly funded by the charity, as a result of charity funds being received into THRL’s bank account from a company, Prize Promotions Ltd (“PPL”), which fundraised on behalf of the charity (see below for further information on the charity’s relationship with PPL). As a result of the lack of segregation of the charity’s income from the pub operation and THRL, inadequate controls and inaccurate record keeping, the trustees were unable to accurately monitor the financial performance of THRL and its pub operation. As a result, the inquiry found that they did not take adequate steps to promptly minimise the level of loss and protect the Charity’s interests.

During 2014, the Retreat’s operation was wound down following a decision to wind up the charity by the IM in consultation with the Commission. The final beneficiary staying at the Retreat was re-located in August 2014. The Retreat was subsequently sold in March 2015 by the IM.

It is estimated that the total losses incurred by THRL were over £185,000, which the charity was unable to recover.

The charity’s second pub

The trustees also loaned over £40,000 to another of its wholly owned subsidiaries to refurbish a second pub in Somerset, near Minehead. This was the first in a plan to set up eleven further post-services facilities around the country, all replicating the model of the Retreat in Ashcott. However, the inquiry found that neither the charity nor the subsidiary had any formal legal interest in the pub concerned. Whilst the charity’s subsidiary entered into a lease with the landlord in June 2013, the lease was not drawn up by legal professionals and, in the Commission’s view, can be considered to have provided insufficient protection to both tenant and landlord. In addition, the trustees also failed to identify that they would be unable to obtain permission for potential beneficiaries to reside above the premises (as per the services offered at the Retreat) due to a restrictive covenant over the property that restricted the use of the accommodation above the pub to residential use only. The trustees failed to seek appropriate professional advice that could have identified this.

Following the loan, the subsidiary made significant losses and the charity was unable to recoup its investment. As above, the trustees again failed to undertake sufficient due diligence before committing significant charity funds to this venture. The inquiry found no evidence of any detailed financial and business appraisals being undertaken and considered by the trustees prior to entering into an arrangement with the landlord and owner of the pub. In essence, the trustees envisaged that the pub would generate sufficient profits for the subsidiary company to maintain its working capital and service the needs of, and provide accommodation to, vulnerable beneficiaries. However, the inquiry found no evidence to show that the trustees exercised reasonable care when making the loan to its subsidiary, given there was no evidence of a loan agreement, repayment plan or interest being charged. The inquiry found that the subsidiary company used the loan to refurbish the pub but ultimately neither the charity nor the subsidiary had any formal legal interest in the pub and the charity was unable, due to the restrictive covenant, to accommodate beneficiaries at the site.

The charity and its subsidiary subsequently withdrew from this business venture towards the end of 2013. The audited annual accounts for the year ended 31 December 2013 report that this subsidiary made a loss of £73,538 and owed the charity almost £43,000. The charity was unable to recover these funds which resulted in a significant loss to the charity. The trustees failed to take adequate steps to promptly minimise the level of loss and protect the charity’s interests.

Whether the charity’s assets were spent in furtherance of its charitable purposes

Following the establishment of the charity in 2009, its initial activities focused on raising money and sending out “Ammo Cans” to British troops stationed in Afghanistan, which contained sweets and other items that would perhaps be considered a luxury by the troops. The charity also provided some entertainment services to post-service and medical facilities, as well as some merchandising trading. In 2012, it was decided by the trustees to discontinue these activities and to concentrate the work of the charity on offering accommodation to homeless veterans and veterans suffering problems arising from their service in the armed forces. As detailed above, this resulted in the acquisition of the Retreat venue and the first veteran was accommodated as a resident in March 2013. By the end of 2013, there were five veterans and a mentor resident at the Retreat.

The inquiry found that the trustees established three wholly owned trading subsidiaries, of which Trustees A and B were the sole directors. The inquiry understood that the basic business model was that the profits from the businesses would sustain the charitable functions of the charity and provide support to the beneficiaries staying in the accommodation.

Concerns about the services provided by the charity

The inquiry questions the efficacy of the care and support provided to the charity’s beneficiaries. Whilst appearing to be well meaning, the inquiry found that the trustees gave insufficient regard to the complexity of providing successful support to veterans and the risks associated with providing such facilities in close proximity to the supply of alcohol. The inquiry also found that Trustees A and B appear to have largely distanced themselves from other established charitable and support organisations that could have assisted in providing professional help to the charity’s beneficiaries on issues such as mental health, housing, pensions and employment. Rather, the inquiry found that the trustees chose to seek solutions to these complex problems themselves.

Whilst the trustees clearly applied some of the charity’s resources in furtherance of its charitable purposes, the inquiry found: - the charity’s financial management was generally inadequate, highlighted specifically by the amount of the charity’s funds applied as unauthorised trustee benefit (see further below) - that the charity lost significant funds through its trading subsidiaries, as well as merchandising and events trading activities and that the trustees failed to properly manage its arrangements with PPL to ensure the charity received an appropriate level of return and received all it was entitled to - that the efficacy of its support services was questionable and that the trustees failed to rely on established support organisations which could, if used, have improved the charity’s services and the support it was able to provide to its beneficiaries

The financial position of the charity

Prize Promotions Limited

During 2012, the charity trustees instructed the company PPL to fundraise on its behalf. PPL operated a prize draw in the charity’s name with a percentage of the proceeds given to the charity. However, the inquiry found limited evidence that the relationship between the charity and PPL was properly documented or monitored by the trustees. Indeed, the trustees confirmed to the inquiry that the charity did not have a written agreement in place with PPL. The inquiry found no evidence that the trustees obtained independent professional advice in relation to their fundraising arrangements with PPL or conducted adequate due diligence on the company at the time.

It is the inquiry’s view that PPL acted as a ‘professional fundraiser’ for the charity and was therefore required by law to have in place a written agreement with the charity that met certain criteria, and to make available its books, documents and records to the charity on request. This report notes that PPL disputed the inquiry’s view and claimed that it was acting as a fundraising consultant for the charity.

The inquiry found that without a valid written agreement in place, it was unlawful for PPL to carry out fundraising activities on behalf of the charity and PPL was therefore not legally entitled to be remunerated for its services or expenses without a court order. The trustees were unable to explain on what basis the trustees decided that it was in the charity’s best interests to pay PPL remuneration or expenses in connection with its services (or to permit it to make deductions from the funds it raised on the Charity’s behalf).

PPL obtained in excess of £3.5 million in revenue from the public during its relationship with the charity. Of that total, approximately £750,000 was passed into the bank account held in the name of THRL, one of the wholly owned subsidiaries of the charity, with approximately £2.8 million claimed by PPL as costs and profit. The amount passed to the charity therefore represented roughly 20% of the gross amount collected by PPL from the public.

To compound these issues, the inquiry found that the trustees did not arrange for the review, inspection or audit of PPL’s records of activities conducted on the charity’s behalf or the amounts claimed by PPL from these activities to ensure that the charity had been receiving the proceeds it was due in accordance with the terms specified on the prize draw tickets and fundraising law.

The inquiry found that a significant source of the charity’s fundraising income therefore was not generated in accordance with legal requirements. In addition, the fundraising activity conducted on behalf of the charity resulted in numerous complaints from the public both to the Commission and the charity. There were indications from these complaints that solicitation statements were not made in accordance with charity law during these fundraising activities. The charity’s fundraising procedures did not explain the statutory obligation to include certain information in any solicitation statement made to donors or purchasers before any fundraising transaction or donation.

The trustees were unable to demonstrate to the inquiry that they actively managed the reputational risks arising from the fundraising activities or that they ensured that the charity complied with relevant laws applicable to fundraising. The charity’s relationship with PPL was severed at the end of January 2014 prior to the appointment of the IM. Following this, the IM sought to recover substantial funds from PPL, which was subsequently placed into administration. A claim pursued by the liquidators of PPL ran for a number of years but was ultimately not successful.

Financial Position

At the time the inquiry was opened, the charity’s financial position was poor. The inquiry found that in the financial year ending 31 December 2013, the vast majority of the charity’s income, which comprised mainly of income from its arrangement with PPL and trading income, was expended on the costs associated with raising such funds. The inquiry found that of £1.2million raised during 2013, direct charitable expenditure amounted to just £53,000.

The inquiry found that the charity sustained significant losses through its commercial trading and subsidiaries in each year of its operation. From 2009 to December 2013, these losses totalled £337,000 according to the charity’s published annual accounts. Income from the public, whether as donations or through the arrangement with PPL, was used to cover these losses. Trustee A was primarily responsible for the day to day management of the charity’s fundraising trading activities.

The inquiry found that the charity’s auditors had advised the trustees to conduct merchandising trading through a trading subsidiary, in order to insulate the charity from trading losses and to ensure that profits arising from non-primary purpose trading could be gifted to the charity without incurring corporation tax. Whilst the trustees agreed they would follow this advice in December 2012, the trustees confirmed to the inquiry in October 2013 that this decision had never been implemented and merchandising trading had continued to run at a loss, which was not in the best interests of the charity.

The inquiry saw no evidence that Trustees A and B, as well as the other trustees, took adequate steps to address the losses to charity funds arising from merchandising and events trading activities during the first three years of its operation or to shield the charity from trading losses. The inquiry identified a substantial deterioration in the already low proportion of expenditure directly applied for charitable purposes as a percentage of total expenditure which fell from 21%, in the first two years of operation, down to 4% for the period from 1 January 2012 to 31 December 2013.

Following the appointment of the IM, the viability of the charity was assessed, and it was determined that the business model was incapable of generating sufficient funds to be self-financing, including the costs of the care of the beneficiaries and that the commercial ventures brought significant risk to the charity and its funds. There were also concerns about the competence and capability of Trustees A and B to make the model profitable. Whilst solvent at the time the IM was appointed, the charity’s financial position was determined to be unviable, particularly given the unrecoverable losses incurred by the charity’s subsidiaries. Based on these reasons, the decision was taken by the IM to wind down the charity’s operation.

Whether there were unmanaged conflicts of interest and/or unauthorised trustee benefit issues

The inquiry found significant evidence that there were unmanaged conflicts of interest within the charity and that trustees had received unauthorised benefits. Specifically, the inquiry found that four out of the five trustees in post at the time of the opening of the inquiry were involved in related party transactions for the provision of goods or services to the charity. Numerous transactions involving connected parties were found not to have been properly authorised by independent trustees alone and, where required, the Commission. The charity’s Memorandum of Association specified the circumstances in which the charity’s trustees were permitted to be remunerated, which required the prior written consent of the Charity Commission.

The inquiry found that the requirements of the Act, specifically section 185, had not been met in relation to these payments and no Commission consent was sought or given. The inquiry found no evidence in minutes of meetings that the trustees took steps to avoid or seek authorisation for the conflicts of interest and/or loyalty which arose from these transactions, either in accordance with the charity’s Memorandum of Association or otherwise. The inquiry also found there was insufficient segregation of duties between the trustees, employees, and directors

The inquiry identified that concerns about these payments were raised with the trustees by two different auditors in connection with the audits of the annual accounts for the accounting periods ending August 2010, December 2011 and December 2012 and the auditors gave advice to the trustees on how to resolve these concerns. The trustees failed to follow this advice or to address these issues. The charity’s financial records and its subsidiaries show that Trustees A and B, either personally or through directorships of companies that provided services to the charity (ADA Consultancy Services (UK) Limited and Aquarius Systems Limited) received payment for products or services supplied the charity and/or its subsidiaries. The inquiry estimated that the total value of unauthorised remuneration paid to connected persons by the charity was at least £347,951 during the charity’s operation. The majority of this sum (over £250,000) appears to have been directed to Trustees A and B, with the remainder being received by two of the other trustees through their involvement in companies which provided professional services to the charity.

The charity’s financial controls and risk management

The inquiry found that the charity (and its subsidiaries) had poor financial controls, accounting systems and stock control systems that did not allow the trustees to manage risks or to adequately protect the charity’s property. For example, the inquiry found there were inadequate segregation of duties to ensure that cash collections were not misappropriated or misapplied. Stock systems and controls in relation to merchandising activities were inadequate resulting in the charity being unable to accurately confirm and reconcile its stock levels. It was also identified that the charity’s books and records contained significant errors and omissions that resulted in, amongst other things, the debt owed by THRL to the Charity being significantly under reported on the intercompany balance.

Trustees A and B, who held two of the three places on the charity’s management committee and were directors of the trading subsidiaries, were signatories on the charity’s bank accounts and those of the subsidiaries. They, together with two of the other trustees, were subject to conflicts of interest on connected party transactions as described above. The inquiry also found that there was inadequate financial reporting to the full board of trustees which exposed the charity’s funds to undue risk.

Whether or not the trustees complied with their legal duties and responsibilities as charity trustees under charity law

As detailed above, the inquiry found that the trustees failed to comply with their legal duties. These included:

• failures to safeguard the charity’s funds and to manage the charity’s income responsibly
• failures to act with reasonable care and skill in governing and managing the charity
• failures to comply with the charity’s governing document and the law; and
• failures to act in the charity’s best interests

Based on the findings detailed above, the inquiry found numerous examples of misconduct and/or mismanagement by the trustees, which provided the evidential basis for the regulatory action taken by the Commission to address its concerns during the inquiry.

Conclusions

Despite the apparent good intentions of the founding trustees when establishing the charity, it is clear that they did not possess the skills and experience necessary to ensure the charity and its subsidiaries were well managed and that robust governance and management processes were in place to protect the charity’s funds and reputation. Trustees A and B controlled the day to day management of the charity and therefore bear most of the responsibility for the wide ranging misconduct and/or mismanagement in the administration of the charity, which resulted in the Commission exercising its powers in February 2015 under section 79(2)(a) of the Act to remove them as trustees of the charity and which also permanently disqualified them from acting as trustees. The Commission also concluded that the other three trustees in post at the time the inquiry was opened were also involved in misconduct and/or mismanagement at the charity, but to a lesser extent than Trustees A and B.

The Commission concluded that the lack of effective governance and financial management at the charity, as well as poor decision making practices, resulted in the charity’s poor financial performance, its trading losses and the year on year decrease in the proportion of funds it applied in furtherance of the charity’s charitable purposes. Despite receiving professional advice from the charity’s auditors as well as receiving advice and guidance from the Commission, the trustees were either unwilling or unable to address a myriad of issues that included significant unauthorised private benefit to the trustees during the charity’s operation.

The decision to enter into the charity’s arrangement with PPL lacked proper documentation, due diligence and demonstrated a failure by the trustees at that time to negotiate terms which were in the charity’s best interests. The trustees failed to act with reasonable care or skill, and this continued through the life of the arrangement as the trustees also failed to make provisions for the review and inspection of PPL’s records and activities conducted on the charity’s behalf. It is the Commission’s view that a significant source of the charity’s fundraising income was not generated in accordance with legal requirements and that this harmed the reputation of the charity.

The Commission took decisive and timely regulatory action, first by addressing the risks of the trustees expanding the network of pubs and retreats and by exercising its regulatory powers to protect the charity’s remaining assets. In fully addressing its regulatory concerns, the charity was ultimately wound up in 2019. The Commission acknowledges that it has taken an extended period to conclude its inquiry and publish this report which has been caused in part by the protracted consideration of a legal claim to recover monies that the IM considered were owed to the charity and delays in completing the liquidation of the charity.

Regulatory Action Taken

In December 2013, the Commission issued two temporary protective orders under section 76(3)(d) of the Act to the charity’s banking provider in relation to five bank accounts connected with the Charity and its wholly owned subsidiaries. At the same time, the Commission also issued a temporary protective order to the trustees under section 76(3)(f) of the Act in respect of transactions and payments involving property or funds held on behalf of the charity and its subsidiaries.

In February 2014, the Commission appointed Brian Johnson (currently of UHY Hacker Young LLP) as IM of the charity under section 76(3)(g) of the Act. This appointment was to the exclusion of the trustees. The IM initially conducted an in-depth review of the charity’s governance, finances and the charity’s arrangements with its subsidiaries and third parties. During the second phase of the IM’s appointment, the IM oversaw the dissolution of the charity and the winding up of its affairs.

On 24 February 2015, Trustees A and B were removed as trustees of the charity under section 79(2)(a) of the Act.

On 22 February 2019, the Commission issued an order under section 84B of the Act which directed the IM to wind the charity up.

Following the dissolution of the charity in May 2020, the IM was discharged from his appointment in July 2020. During the course of the appointment, the IM incurred fees of £150,000, which were met from the charity’s funds.

Issues for the wider sector

Partnering with a specialist individual or business to raise money for a charity can bring benefits. However, to meet their legal duties, trustees must ensure that:

• these arrangements comply with the specific legal requirements that apply
• they can show that the arrangements, including the costs, are set and monitored in the best interests of the charity, protecting it from undue risks to its reputation and other assets
• money raised is always used in an effective and efficient way to advance the objects of the charity and support beneficiaries

Trustees should be satisfied that:

• there is strong management of the people and organisations that the charity works with
• they can explain fundraising costs, being transparent about how the charity benefits

The Commission issued a regulatory alert about working with Third Party fundraisers in 2016.

Charity trustees should ensure that they have a conflicts of interest policy in place to ensure that they are fully aware of their responsibilities and that any conflicts that do arise are appropriately managed.

Where a charity trustee has a conflict of interest they should follow the basic checklist set out in the Commission publication Conflicts of interest: a guide for charity trustees (CC29) and where necessary or appropriate take professional advice.

The law states that trustees cannot receive any benefit from their charity in return for any service they provide to it or enter into any self-dealing transactions unless they have the legal authority to do so. This may come from the charity’s governing document or, if there is no such provision in the governing document, the Commission or the Courts. Further information is available from Trustee expenses and payments (CC11).

Trustees who receive an unauthorised payment or benefit from their charity have a duty to account for (i.e. repay) it. The Commission cannot relieve trustees from this duty.