Luxembourg charity financial governance bill should be welcomed by sector

The recently proposed new bill (No.8447) follows the Caritas Luxembourg affair that shook the Luxembourg charitable and non-profit sector in July. It was revealed, following the filling of a complaint for embezzlement, that €61 million had been misappropriated within the Caritas Luxembourg association.

Although the investigation is still ongoing – having already revealed that over 8,200 transactions were made to hundreds of accounts opened in numerous countries – the affair has caused a crisis of confidence in the charitable and non-profit sector, which operates on donations collected from the public and public funding.

The new bill aims to prevent future embezzlements of this kind in other organisations receiving donations or public funds, and to strengthen public confidence in financial governance. Submitted on 10 October, the bill would amend the law of 7 August 2023 on associations and foundations.

The aim is to introduce stricter rules regarding the approval and signing of payment orders and transactions exceeding certain thresholds that may be considered significant.

Bill No.8447 has two main proposals. First, the establishment of a more stringent ex-ante approval mechanism for transactions exceeding  €10,000, or even €100,000, with a reinforced prior approval mechanism. Second, the indication of funding agreements between the state and an association or foundation upon its registration. This second axes amends the modified law of 19 December 2002 concerning the commercial register and companies, as well as the account and annual account of enterprises.

The bill stipulates that associations and foundations collecting public donations or receiving public funding are only validly committed to any payment, donation, guarantee, or any other onerous act under the condition of approval:

• when a transaction is equal to or exceeds €10,000 by two directors or by one director and the person responsible for the day-to-day management
• when a transaction is equal to or exceeds €100,000: by four directors or by two directors, two persons responsible for the day-to-day management and a certified accountant or an auditor responsible for auditing the accounts of the association or foundation.

In any case, the approval must be preceded by a discussion during a meeting held physically or via a duly documented telephone or video conference.

At first glance, the new draft mechanism for reinforced prior approval may seem burdensome for some organisations in the charitable and non-profit sector managing significant sums on a daily basis. For transactions equal to or exceeding €100,000, it requires the involvement of at least four directors or two directors and two persons in charge of the day-to-day management, whereas the law of 7 August 2023 only requires a board of directors composed of at least three directors and the possibility of delegating daily management to one or more persons.

However, it may be regrettable that this bill does not provide for the establishment of a counterbalance to ensure the sound, transparent, and honest management of the associations. For instance, the legal requirement for presence of one or more treasurer, particularly to address the lack of control for transactions below €10,000 which, if repeated, could very well be subject to embezzlement.

While this bill marks a first step in strengthening transparency and accountability in the management of funds by associations and foundations, it is entirely permissible, even recommended, that organisations establish internal mechanism for good financial governance. Organisations must work to mitigate any potential risks or threats of embezzlement by explicitly providing for financial management and control mechanism to restore and strengthen public confidence and protect against fraud, money laundering, and the financing of terrorisms.

Although bill No.8447 must still undergo a legislative process before its final adoption, this initiative can only be welcomed to help enhance transparency and accountability in the vital charitable and non-profit sector.

Co-written by Sami Ben Mahmoud of Pinsent Masons.