Speech delivered by Alan Shatter TD, Minister for Justice, Equality and Defence during Private Members’ Business on the Charities (Amendment) Bill 2014 (Second Stage)

A Cheann Comhairle,

I am pleased to address the House on this motion.

We are all concerned at recent disclosures regarding certain charitable organisations. We are all concerned at the impact these disclosures are having on Ireland’s charities, many of which are excellently run and have nothing to fear from increased transparency and accountability. The Charities Act of 2009 provides for a system of regulation of charities in Ireland at the heart of which is the creation and support of strong trust and confidence in our charities. On the part of Government, we plan to support this through the phased introduction of the Charities Act.

In addressing the motion before us today therefore, I will first take some time to remind the House of our work in this area since coming to Government and outline what we intend in the coming months.

The Charities Act was enacted under the previous Government in February 2009, with cross-party support. My own party, then in opposition, was pleased to support it as a necessary advance in the regulation of a sector that plays such a vital role in our economy and society. A vibrant and well governed charity sector is in everyone’s interests, and the measures contained in the Charities Act are aimed at supporting this.

The Act provides for the establishment of a new regulator for the charity sector. The Charities Regulatory Authority is to be an independent State Agency charged with the registration and regulation of all charities operating here. The creation of this body is essential to the full roll out of the Charities Act.

By the time this Government took office in March 2011, over two years from the enactment of the necessary legislation, the Authority was not yet established and no concrete plans for its establishment had been announced. A number of minor, primarily technical, sections of the Act had been commenced, and that was all.

Under the restructuring of Government Departments that took place at the time this Government was formed, the Charities Act came into my area of responsibility as Minister for Justice and Equality. As with all other areas of existing or planned expenditure, the establishment of the new regulatory authority had to be examined as part of the Comprehensive Review of Expenditure conducted by all Departments that year. During this process, it became clear that the roll out of the Charities Act as envisaged by the previous Government was no longer financially viable given the urgent need to reduce government expenditure.

Notwithstanding this, it has at all times been the policy of this Government to strengthen the regulation of the charitable sector in pragmatic and proportionate ways. This is why, on coming into Government, we took some time to examine alternatives to the regime envisaged in the Charities Act, that might deliver improvements in charity governance without the expense to the State and its citizens of establishing a new independent regulator. The outcome of this process was a recognition of the fact that, given that the Charities Act had been enacted, and stood on the statute books, any meaningful new regulatory measures outside of the framework of the Act would first require its repeal or, at the very least, substantive amendment.

The Charities Act represents an important legislative milestone in this State. For the first time, charitable purpose is defined in law, comprehensive statutory registration of charities is provided for, and the legal basis is established for a significant increase in the information about charities and their affairs to be made available to the public. In view of this, and notwithstanding the fact that – for reasons of cost – it was no longer possible to implement the Act as originally envisaged, we have at no time proposed the repeal of this legislation. Such a move would not represent an advance in the regulation of the charities sector.

Instead, we have put our efforts into determining how best to bring key measures of the Act into force in a way that does not involve unsustainable expenditure on the part of the State, and yet is capable of delivering a demonstrable improvement in the regulation of the sector.

To advance this, my Department conducted a public and stakeholder consultation over an eight week period from January to March of last year. The constructive engagement of an active and informed stakeholder community has been one of the hallmarks of the development of charities regulation over many years. Since taking responsibility for this area, I have continued this approach. I was impressed by the scale and calibre of stakeholder participation in last year’s consultation. I was also struck by the breadth of support among the sector and the general public for the introduction of these reforms. This engagement is helping to inform our approach and I am committed to an ongoing dialogue with our stakeholders as we proceed.

Following last year’s consultation, I developed proposals for the implementation of the Charities Act and these were approved by Government last July. This will involve the establishment of a Charities Regulatory Authority and development and publication of a Register of Charities as provided for under the Act. In order to minimise the cost to the taxpayer, we are initially going to establish the Authority on a small scale, to be staffed by officials from within my Department.

In time, and in order to enable the development of the services provided by the Authority, charities themselves will be required to meet some of the costs of its operation through payment of a modest and proportionate annual fee. This is provided for in the Charities Act. In this way, the regulation of charities will become largely self-financing in due course. It is only through utilising this provision that we are able to establish these new structures at this time of constraint in Government spending. The proposal to levy annual fees on charities was contained in the consultation documents published this time last year and charities had the opportunity to give their views on and propose alternatives to a suggested fee structure. I will take account of the views expressed and alternatives proposed before putting a fee structure in place. Registration fees will not be payable by charities before 2015 at the earliest.

Following Government approval of my proposals in July, I announced my intention to establish the new Authority in 2014, following the necessary resource approvals from the Minister for Public Expenditure and Reform. Sanction to fill the post of CEO on an interim basis, and a number of other administrative posts from within existing resources was received by my Department in mid-December. The sanction given represents a reduction on the resources originally sought, such that the new Authority will initially be staffed by approximately ten administrative staff. Its focus in the early phase of its operation will be on the preparation for publication of a statutory Register of Charities.

We are very aware of the urgency of making progress on this. That is why I announced last Friday that I intend to have the administrative staff positions filled by the end of February. Arrangements are also being made to fill the post of CEO of the new Authority on an interim basis by this time. In relation to the independent Board of the new Authority, I also announced last Friday my intention to make appointments to this Board by Easter. To facilitate this, I will issue this week a call for expressions of interest from suitably qualified persons who wish to be considered for appointment. I look forward to being able to report further progress to the House on this important work in the near future.

The importance of high standards of probity within our charities cannot be overstated. These are, many of them, large organisations, with a substantial financial turnover. Many of them receive significant levels of government funding, in addition to funds raised through the generosity of the Irish public. They have a duty to use these funds efficiently and ethically in pursuit of their charitable purpose. And those who provide the funds have a right to know that they are being used for the purpose intended by the giver – be that Government, philanthropic organisation, corporation, or private individual.

Where funds intended for charity are not being used as intended, or indeed where they are being used inefficiently, such that an unacceptable proportion of the funds is spent on overheads, that should concern all of us, not least the charities themselves, who must strive to benefit their given charitable purpose to the maximum extent possible. No-one disputes that those who are employed by charities must be remunerated at an appropriate level for the work they do. But the charity sector is not well served by a lack of transparency over senior executive salaries, nor by excessive levels of remuneration, where such may exist.

In recent weeks we have heard a series of disturbing allegations about the use of charitable donations by different organisations. The details of these have been the subject of considerable examination by others in this House, and I do not propose to revisit the details of these this evening.

Insofar as my own responsibilities as Minister for Justice and Equality extend, I have given detailed consideration to the question of the appropriate use of donated funds by charities. In June 2011, responsibility for the operation of the Charitable Lotteries Scheme was transferred from the Department of Public Expenditure and Reform to the Department of Justice and Equality.

I wish to say at the outset that there are two cases before the High Court in relation to the Charitable Lotteries Scheme, and that I do not wish to say anything that will create any difficulty for the Judges of the High Court in determining these matters. However, as Minister, I have a responsibility to notify this House about these matters that are, in the context of the Court proceedings, already in the public domain and are directly related to the question of the transparent use of donated funds by charities.

It is in that context that I wish to make the following limited comments about the Charitable Lotteries Scheme.

The Scheme was established in 1997, in response to claims by a number of charities that their ability to raise funds had been severely curtailed by the introduction of the National Lottery in 1987. Under the terms of the Scheme, funds are paid out to eligible charities that have been operating a fundraising lottery since at least 1997, in which products are sold that are similar to products sold by the National Lottery. The total amount paid out in any one year is determined as part of the budget allocation and was, at its highest, €8.618 million in 2009 and 2010 and at its lowest €4 million in 2013. Eligible charities must apply each year for funding under the Scheme and the total available funding each year is divided amongst the successful applicant charities. The allocation of funding under the Scheme is by reference to gross sales of qualifying products averaged over three years and it is a requirement of the Scheme that all funding paid out under the Scheme must be used for charitable purposes only.

However, in relation to lottery fundraising operated by a charity receiving funding from the Scheme, there is no requirement for such a lottery to be operated efficiently, or indeed at a profit. There is no incentive for such charities to keep their operating costs of such lotteries down. In fact, the Charitable Lotteries Scheme incentivises charities to leverage public funds, payable under the Scheme, by maximising their gross ticket sales with no regard to either operating costs or how much of the money raised by ticket sales is, in fact, used for charitable purposes.

Under this Scheme, since 1997, successive Governments have paid out a total in excess of €120 million in National Lottery surplus funding and taxpayers’ money to a group of charities that operate fundraising lotteries.

On assuming responsibility for the operation of the Scheme, I immediately undertook a review of payments being made, the manner in which the Scheme operated and the nature of fundraising activities of organisations that was being supplemented by the State under this Scheme. I became very concerned that the fundraising activities of some of the organisations that benefit from the Charitable Lotteries Scheme operated at very low profit margins and that the operation of the Scheme incentivised inefficient fundraising practices that could be used as a means to leverage government funding under the Scheme. The focus on the number of tickets sold, rather than profitable fundraising, ensures additional funding from Government for the charity concerned.

Accordingly, I took steps to reduce Government support for inefficient methods of charity fundraising through the gradual phasing out of the costly and inefficient Charitable Lotteries Scheme

My decision to phase out the Scheme was based on the budgetary exigencies of the period and the fact that the Scheme is an inefficient and uneconomic use of the State’s resources – for the following reasons:
1. It encourages inefficient fundraising practices and high administration costs,
2. It creates an incentive to run a charitable lottery at a low profit margin or at a loss,
3. It resulted in low proportions of profits reaching designated charities, and
4. It was unfair to the donors that a low proportion of monies donated was being used for charitable purposes and that the Scheme had essentially evolved into a mechanism to obtain taxpayers and National Lottery surplus funds.

Many of the lotteries whose organisations benefit from the Charitable Lotteries Scheme operate at very low profit margins. The proportion of profits generated that flows to the charitable cause for which the lottery products are sold is very low. For example, in the case of Rehab, who received approximately two-thirds of the total available fund each year, the proportion of the face value of a Rehab Lotteries instant win scratch card that was retained for the benefit of the charitable organisation averaged around 1% and around 15% for draw lotteries over the period 2008-2010.

In May 2012 an audit was carried out by the Department of Justice on the Charitable Lotteries Scheme funds received by Rehab for the two year period 1 January 2010 to 31 December 2011. It was found that, in 2010, the amount of costs in generating the lottery sales in Rehab represented a significant percentage of overall sales revenue – leading to a low profit margin. For example, bingo sales of €3,190,000 in this period yielded profits of only €548,000. Scratch card sales of €3,969,000, yielded profits of only €9,452.
In summary, 2010 figures supplied by Rehab Lotteries show their gross lottery sales of almost €7.2m yielded a net profit of €558,000 or 8%.

Sales      Prizes    Costs     Surplus

Bingo Sales
€3,190k  €1,250k  €1,392k  €548k

Scratch Card Sales
€3,969k  €2,611k  €1,348k  €10k

In November 2011, I met with Rehab and queried the size of the profits accruing from the scratch card product of the Rehab Lottery noting that it generated a profit of only €9,452 based on product sales of close to €4 million. I noted that the profit ratio seemed disproportionate and expressed concern at the approach being taken to public fund raising. I made it clear I was considering issues relating to the Scheme.

In October of 2012, I wrote to all beneficiaries of the Scheme advising them of my intention to wind down the Scheme gradually over a period of three years, beginning in 2013. I emphasised to them that the gradual withdrawal of funding was intended to give them an opportunity to review their fundraising practices where necessary to ensure their profitability. It is important to charities and their donors alike that fundraising efforts are run in a business-like and efficient manner and that the maximum possible proportion of funds raised is used to support charitable activities.

My objective in phasing out the Charitable Lotteries Scheme is to wind down a scheme that I believe is no longer fit for purpose.

I understand that, at a meeting of the Joint Oireachtas Committee on Justice, Defence and Equality held on 9th October 2013, the CEO of Rehab referred to the winding down of the scheme, describing it as a “shocking decision” by Government. I hope after this evening my approach to the Scheme is now better understood.

The planned reduction in payments first took effect at the end of last year. Funding was to be reduced each year as follows: maintained at €6 million in 2012, €4 million in 2013, €2 million in 2014, €1 million for 2015 and nil for 2016. The Scheme would then cease to operate.

My decision to phase out the Scheme is currently the subject of Judicial Review proceedings brought by the Rehab Group and Rehab Lotteries. The Judicial Review hearing took place on 24th, 25th and 26th July 2013 and judgment of the High Court in this matter is awaited.

In the meantime, the Rehab Group and Rehab Lotteries have chosen to embark on separate litigation against the State under competition law, claiming damages of up to €1.5 billion in connection with the operation of the National Lottery. Whatever the outcome of this costly action, it is likely to exert a significant burden on either public resources or charity resources or both. This seems to me unfortunate at a time when both public and charity resources are under such extreme pressure to meet the frontline needs of our citizens as we work together towards our recovery. As I have said, while I do not wish to make comment that may in any way prejudice the outcome of proceedings that are before the courts, it is important that, as Minister, I take this opportunity to brief the House insofar as is appropriate for me to do in the context of a debate about governance of charities and use of donated funds.

I would like to emphasise that, in explaining the areas of my concern, I do not want in any way to detract from the excellent service Rehab provides to its service users, nor do I want to undermine or denigrate the work of dedicated Rehab staff engaged in the provision of those services. My essential concern is to ensure that Rehab and the other charities who have benefitted from this Scheme operate efficiently in the raising of public funds and that a substantial portion of funds raised is used for the objectives of the charity and those who rely on its services.

I will now refer to the amendments proposed to the Charities Act. First let me make this general point. It is at present the Government’s focus to work towards implementing the Charities Act as it stands. To embark on a process of amending this legislation at this time would, in my view, be an unnecessary distraction from the work in hand. The Act provides for a full review of its operation five years after the establishment of the Charities Regulatory Authority. That review will allow for a proper, considered and consultative process to determine whether there are ways in which the Act needs to be improved. We do not at present envisage amending the Charities Act.

I would like now to refer to Section 2 of the proposed Bill. The Government does not support the amendment to include the advancement of human rights in the list of purposes that are of benefit to the community. This is not due to any lack of recognition of the vital role of human rights organisations in our communities both here and worldwide. Rather it is in light of the importance of ensuring that the new systems of regulation of charities is appropriately aligned with the system of charitable tax exemption that has long been operated by the Revenue Commissioners. Under this system, the Revenue Commissioners recognise the advancement of human rights as a charitable purpose only in the case of a human rights charity that has consultative status with the United Nations.

Under Section 40 of the Charities Act, organisations holding a charity reference number denoting that they hold a charitable tax exemption number from the Revenue Commissioners, will be automatically placed on the Register of Charities by the new Authority. It is therefore important that the two systems are aligned. It is important to recall that the Charities Act was consciously framed so as not to negatively impact on any organisation that currently enjoys charitable status with the Revenue Commissioners.

Accordingly, under the circumstances, I consider that the amendment is not necessary, as human rights organisations that already have charitable tax exemptions will be automatically registered as charities, under Section 40. Furthermore, the provisions in Section 3 of the Act provide for the extension of charitable status to organisations with purposes not specified in the Act, and this is an issue that could be considered in the context of the aforementioned five-year review.

With regard to Section 3 of the proposed Bill, the Government does not support this Section. I have already set out our plans for the Charities Regulatory Authority to be staffed to an interim level by the end of February and to have its Board appointed by Easter. Following that, it will work in a preparatory mode for some time to enable it to develop the Register of Charities for publication and put in place such other administrative policies and procedures as are required for its operation. This will include the transition of the functions of the Commissioners of Charitable Donations and Bequests for Ireland, who are to be dissolved on the formal establishment of the new Authority and their functions transferred to it. Once the necessary arrangements are in place, the Authority will be formally established by Ministerial Order and the Register of Charities published. Subject to the necessary arrangements being in place, this will be before the end of 2014. In light of this, the Government does not support the proposed amendment.

I would like to conclude by reiterating how important it is that trust and confidence in our charity sector is restored. The new system of charities regulation that is provided for in the Charities Act will be an important part of this. Critical also is clear leadership from the charity sector itself. Our foremost charities must lead by example and demonstrate through their own actions that there is no place in Ireland’s charity sector for poor governance or a lack of transparency. In light of recent events, the Irish public’s demand to know what becomes of their charitable donations seems entirely reasonable. It is a demand that can only be met by the charities themselves. I call on them to do so.