Since 2017, the Wellington trust had loaned approximately $40,000 to a company owned by a former trustee at an interest rate below the market rate, an investigator found. Photo: 123RF
A charity that supports fathers has been investigated for "gross mismanagement" after it unlawfully dished out tens of thousands of dollars in loans to a former trustee and continually failed to disclose the arrangement.
Kidz Need Dadz's website says it provides education and support to help fathers play an active part in their children's lives.
The Charities Service started investigating the Wellington charitable trust after receiving a complaint in 2020 about a conflict of interest in relation to a loan and this year found evidence of serious wrongdoing and the unlawful use of funds.
Its investigator Blair Wootton sent a warning notice to Kidz Need Dadz Charitable Trust Wellington in August, one of three trusts from different regions connected to the charity.
He required the Wellington trust to close the loan with the balance paid in full by the end of October. This deadline was met, and the loan repaid.
Wootton said since 2017 the Wellington trust had loaned approximately $40,000 to a company owned by a former trustee at an interest rate below the market rate.
"Lending money to a related party below the market interest rate has led to and receiving a pecuniary private benefit from the use of the trust's funds," he said.
"Charities Services considers this to be an unlawful use of the trust's funds."
Its investigation found the former trustee benefited from the related party loan by avoiding bank fees and having access to a lower interest rate and the ability to repay and draw down as it suited - like a revolving credit facility with a favourable interest rate.
Wellington Kidz Need Dadz's own rules state its income and property cannot be used "for the private pecuniary advantage of any individual".
Wootton said the loans constitute a private benefit to those individuals, which constitutes serious wrongdoing as defined in the Charities Act 2005.
He said the Wellington trust had poor financial controls and had not adequately managed the conflict of interest.
"We have noted the loan agreement dated 30 October 2017 was solely signed by related parties of [the former trustee] including the witness who was an employee of [the former trustee]," Wootton said.
"It also appears the Trust transferred cash amounts to [the former trustee] before the loan arrangement(s) were proposed to and accepted by the board on 11 November 2017 and 8 July 2018."
Wootton said there was no record of the loan arrangement in the Wellington trust's annual financial statements, as is required.
"When we queried the omission, the Trust advised the reason for this was each year as at 31 March the loan balance was nil and as this treatment had been acceptable to the preparer and reviewer of the accounts, Community Capacity Accounting and no disclosure was made."
He said offsetting of amounts was not allowed, and it was not sufficient or appropriate to only record balances only at year-end.
"We consider this action prevented users of the financial information from identifying the loan to a related party, which is contrary to the objective of transparency."
Wootton said the Wellington trust also failed to disclose the loan as a related party transaction - a transfer of money or other resource between the reporting entity and a person or other entity that is closely associated with it and has the ability to influence it.
"We also note that the trust was declaring in their annual returns that they do not lend money in their ordinary course of business despite the fact this arrangement has been ongoing for a number of years."
The Charities Service also requires the Wellington trust board to complete trustee governance training from an independent provider and provide corrected financial statements for the year ended March 2021, disclosing all cash movements related to the loan and the related party transaction.
If Kids Need Dadz Charitable Trust Wellington does not meet the October 2023 deadline for those remedies, the charity can be removed from the Charities Register.
Kidz Need Dadz Wellington chairperson Stuart Miller said they had met the requirements of the Charities Service, as outlined in its warning letter.
"The Charities Service is satisfied that we met the requirements of the warning notice. We've changed to their recommendations and moving forward it's not happening anymore."
Miller reiterated the loan had been repaid in full and trustees would undergo governance training.
He said the intent of the loan was to create an investment account for the charity, which had a surplus when interest rates were below one percent.
"The original impulse was to try and make the charity more liquid because we had this surplus fund of about $20,000 to $40,000," Miller said.
"It was loaned to someone to try and get a higher interest rate. A loan is a bit of a misnomer. We tried to get an investment account that gave us a higher rate of interest for the charity."
It resulted in a return of about $1000 a year.
"We've spent a lot of time and energy resolving the issue which pulls us away from our core work. As an organisation we have unlimited demand and we have limited resources," Miller said.
"As a charity I don't think you can ever stop learning, there is just so much to do."
The former trustee who received the loans has not responded to RNZ's request for comment.
* This story was updated with comments from the Kidz Need Dadz Wellington chairperson on 11 November, 2022.