Fleecing the shepherds

Houses of worship, as all not-for-profit organizations, are particularly vulnerable to fraud. The authors outline fraudsters’ methods and ways congregations can avoid becoming victims while still helping those in need.

Jeanne Thoreau, pastor of First Presbyterian Church, walked into her office at the beginning of the workday. No sooner had she sat at her desk then her secretary stepped in to ask whether she’d accept a collect call from a parishioner. The church periodically received requests from members in crisis, so she didn’t suspect anything when she agreed to take the call. (All the examples in this article are real but we’ve modified them to protect the anonymity of those involved.)

The caller identified herself as Margaret, a “new Christian and a new member of the church. My husband and I were at services a few weeks ago. Maybe you don’t remember us; you were so busy we didn’t have a chance to talk.” She went on to say that her husband had recently gotten a new job in the parish’s city, and they were relocating from their former home several states away. Unfortunately, their car broke down in an adjoining state. She said they’d been stranded by the side of the road until a motorist picked them up and offered them a place to stay until they could sort things out.

“How can we help you?” asked Pastor Thoreau.

“Well, $75 would be enough to fix the car. There’s a Walmart just down the block from the First Presbyterian that forwards money. If the church could just advance the money for a little while, we could pay you back from his first paycheck. If we can’t get there in the next day, my husband will lose his new job.”

Pastor Thoreau paused for a moment and thought that describing themselves as “new Christians” was unusual for members of the Presbyterian tradition. Moreover, her congregation wasn’t so large that she would’ve missed seeing two new members, let alone failed to greet them. At the same time, she disliked the thought of not extending charity to a parishioner in need. Then an idea came to her. She asked, “You said you were at services a few weeks ago. Tell me, what does our sanctuary look like?” She heard a click and the line went dead; she never heard from “Margaret” again.

OFFERING A RIDE ISN’T THE SAME THING AS DRIVING THE GETAWAY CAR

Fraud examiners, including readers of Fraud Magazine, have become accustomed to stories in which parishioners fall victim to fraud perpetrated by religious leaders. What may be less obvious, however, is how often religious groups themselves fall victim to fraud from outsiders or even members of their own congregations. Pastor Thoreau’s story is unfortunate, but by no means unusual in religious communities. The very best aspects of religious life such as charity, community and forgiveness can converge to make even the best-run religious groups vulnerable to fraud.

A major attribute of many religious organizations is charity for congregation members or other members of the community. This usually involves direct giving of small amounts — $50 to $100 on average. The authors interviewed 12 clergy in four different denominations about their experiences with those in need. In most of these cases, the church asked for little or no documentation of need. As one pastor put it, “Does that mean that sometimes people receive money they don’t deserve? Possibly, but it isn’t much money, and our religious calling is to help. It’s enough that people ask us. Absorbing the occasional undeserved donation is part of the ‘cost of our business.’ ”

The difficulty in these situations is striking the balance between charity and good stewardship. Charity can become indiscriminate — depleting an organization’s discretionary funds to the point where truly needy individuals can no longer receive assistance. Even worse, a congregation’s desire to help the poor can dull their skepticism and make them unknowing participants in scams that purport to help those in need but in reality only line the pockets of the fraudsters.

The remedy, of course, is not for congregations to become more parsimonious. Small donations to needy individuals are still the “cost of doing business.” Instead, congregations can become better at recognizing the warning signs of more serious scams. Fraud examiners, either as professional advisors or as members of their own congregations, can help prevent religious organizations from becoming enablers of fraud.

WHEN RAISING UP TURNS INTO SHAKING DOWN

Sometimes an individual has needs greater than what an organization can provide out of its discretionary funds. In one case, a father and son said they recently had moved to a new town seeking work in the burgeoning oil fields of Western North Dakota. They were living out of their car, unable to accumulate the $3,000 necessary for the security deposit and first month’s rent on an apartment. They appealed for assistance to the minister of the church where they had been attending for several Sundays. The amount was in excess of the church’s funds. Instead, the minister brought them to front of the congregation, explained their story and asked the parishioners to help. The father and son collected more than the $3,000, and the parishioners left feeling they’d helped one of their members in need. The congregation subsequently learned the same thing had occurred at three other churches in the area, and the pair left town with more than $10,000.

Commonly known as “raising up” in many Protestant traditions, the practice of soliciting help from a congregation for members in special need is a time-honored custom in many religions. While this practice reflects the mission of charity in many religions, congregations would do well to follow the advice that fraud examiners regularly provide to their clients: More internal control is needed as the value of the assets at risk increases.

Religious leaders may decide that occasional small losses are a reasonable price to pay for a congregation’s commitment to charity. It’s a very different matter, however, when a leader brings an individual before members for additional help. Among other things, the leader has, in effect, vouched for the individual. Congregants are less likely to be skeptical. As such, the clergy has a greater responsibility to investigate and ascertain whether the request is legitimate.

AFFINITY SCAMS: EVEN CON ARTISTS ARE ‘BELIEVERS’ WHEN IT SUITS THEM

Frauds aren’t limited to newcomers of the church. Fraudsters sometimes use their memberships in congregations to bilk other members. These schemes, commonly known as “affinity fraud,” exploit the trust and faith that members of religious communities have for each other. (See “Affinity is only skin deep: Insidious fraud of familiarity” by Frank S. Perri, J.D., CFE, CPA, and Richard G. Brody, Ph.D., CFE, CPA, in the March/April 2013 issue of Fraud Magazine.)

Although we didn’t uncover any affinity frauds among the clergy we interviewed, there have been a number of high-profile scams reported in the news:

• Bernie Madoff counted Yeshiva University, the Kehilath Jeshurun Synagogue, the American Jewish Committee and many wealthy members of the New York Jewish community among his victims. Madoff relied heavily on his own religious membership and that of investment partner J. Ezra Merkin to gain entry to Jewish investors and institutions. (See “The Madoff Scandal and the Future of American Jewry,” by Jonathan S. Tobin, Commentary magazine, Feb. 1, 2009, and “Madoff’s World,” by Mark Seal, Vanity Fair, April 2009.)
• Shawn Merriman, aka the “Mormon Madoff,” was a well-respected and successful investment broker. He was also a lay bishop in the Church of Latter Day Saints, known more commonly as the Mormons. What was less obvious, until 2009, was that Merriman was also a criminal. In more than 14 years of criminal activity, Merriman ran a Ponzi scheme that bilked his investors (including his mother) out of more than $20 million. [See “Affinity Fraud: How To Avoid Investment Scams That Target Groups,” the Securities and Exchange Commission (SEC).]
• Donald J. Nadel and Joseph M. Malone, operating as Renaissance Asset Fund, raised more than $16 million, largely from members of the Jehovah’s Witnesses. The pair promised risk-free returns of 10 percent to 25 percent in as little as four months. Renaissance was nothing more than a Ponzi scheme. Investor funds were used largely to finance Nadel’s and Malone’s lavish lifestyles, and few investors saw either interest or a return of their capital. (See the SEC’s “Affinity Fraud: How To Avoid Investment Scams That Target Groups.”)

The list could continue with many more victims and religions.

No specific religion seems more prone to fraud than another, but most religious affinity frauds share common characteristics. Fraudsters are usually respected members of congregations who use their positions to enlist fellow members. They may even imply religious endorsements of the schemes they solicit within the confines of churches, synagogues or mosques — sometimes even as part of weekly services. Affinity schemes can be especially pernicious and effective frauds. The solicitations take place in an environment where the perceived affinity among people of similar religious beliefs lowers their natural tendency to be skeptical. Moreover, the frauds closely resemble legitimate investment funds or charities that are affiliated with religious organizations.

The best advice is vigilance and awareness that affinity can dull our natural skepticism. Investors should be acutely sensitive to any investment that relies heavily on religion rather than return on investment in its sales pitch. Unfortunately, this advice directly opposes the trust and fellowship we seek in religious congregations, but all fraud examiners know one thing: money changes behavior.

BRINGING COMFORT AND ASSISTANCE TO … NO ONE

Bringing enlightenment to the lost and comfort to the afflicted are an integral part of many religions. Consequently, religious congregations sometimes are faced with appeals from external organizations to sponsor missions, schools, hospitals and direct aid to the needy throughout the world. Such appeals don’t always funnel money to the deserving.

The prospect of funding churches, hospitals or missions that ultimately prove to be fraudulent is more myth than reality in practice. The consensus among mainstream clergy is that most parishioners who support religious charities tend to do so through established channels administered by their denominations. Organizations such as the Presbyterian Mission Agency, Catholic Charities, Islamic Relief or United Jewish Community Federations often act as conduits for member donations and have well-established vetting procedures for the projects they fund. These organizations are less exposed to frauds because of these procedures.

Non-denominational sects are at a much-greater risk from fraudulent missions and related scams because they often don’t have procedures and staff to ensure that charities are legitimate. The best time to evaluate a charity is before making a contribution, but we encourage regular evaluations.

All congregations should consider consulting with charity evaluators such as Guidestar or Charity Navigator. These organizations independently evaluate charities and provide ratings of the financial health and accountability and transparency of the charities. Charity Navigator states that its mission is to “advance a more efficient and responsive philanthropic marketplace, in which givers and the charities they support work in tandem to overcome our nation’s and the world’s most persistent challenges.” Similarly, Guidestar’s mission is “to revolutionize philanthropy by providing information that advances transparency, enables users to make better decisions, and encourages charitable giving.” Both of these organizations, like those they evaluate, are not-for-profit. Of course, frauds also occur in projects sponsored by large religious organizations. Corruption in international humanitarian projects is a major problem in many parts of the world. (See “They stole food from the mouths of babes: Examining humanitarian aid fraud in developing countries,” by Catherine Cole, CFE, Fraud Magazine, January/February 2013.) A discussion of this issue is beyond the scope of this article, but readers should use the charity rating services mentioned above or request the policies used by their religious organizations to approve projects.

DON’T LET FRAUDSTERS HIDE BEHIND THEIR RELIGIONS

The affinity that fosters decreased skepticism among congregations can also work to keep fraudsters from exposure and prosecution. Congregations often remain reluctant to prosecute members of their own faiths, even when they know they’ve been victims. Worse, fraudsters who speak a similar language of faith are well-prepared to take further advantage of their victims by exploiting religious principles of forgiveness and profess their repentance while looking only for easy escape routes.

Because there are competing interests between charity and accountability, congregations should take steps to ensure that they really have been victims. One of the surest ways to identify a fraudster is for members of clergy associations to compare notes. In the opening case, Pastor Thoreau did just that. Soon after her experience with the fraudulent phone call from “Margaret,” Thoreau shared her story with five of her clergy friends. When she’d finished, one of the others groaned, “You mean to tell me that I was conned? Twice?” Thoreau’s friend had actually responded to Margaret’s request for $75 and even followed through on an additional request for another $100 two weeks later.

What to do when you suspect a fraudster? File a report with the local police. If the fraud is an isolated incident and the dollar amount is small, the police aren’t likely to follow up. But file the report anyway. Once police are aware of the fraud, they can alert other congregations in the area. Multiple reports from various congregations might direct the police department’s attention to a larger scheme, and it might investigate and arrest the fraudsters.

In fraud prevention, as with faith, the truth will set you free. Too often, congregations fail to follow through on prosecuting fraud or embezzlement because they fear that public reporting will damage their reputations or religions, reduce future pledges or discourage prospective future members.
Unfortunately, word of frauds often leaks, and congregations are damaged twice —for the frauds and the cover-ups. Religious organizations, like most charities, can trade only on their good names. If those are tarnished, it may take years to recover or never return.

Religious organizations should have faith that they’ll be forgiven for making honest errors in the conduct of their missions. Moreover, organizations of any type seldom grow and prosper in secrecy. Any lack of transparency in operations that fosters frauds not only precludes learning from the frauds but also from recognizing other weaknesses in financial controls. Facing the truth can open honest dialogues about the need for better internal controls at all levels of the organization. These include not only protections against fraud but also ensuring that the group’s resources are used most effectively. (See “Stealing from the Collection Plate: Fraud in Churches and Religious Groups” by Herbert Snyder, Ph.D., CFE; and James Clifton, MA, CFE, CPA, in the November/December 2005 issue of Fraud Magazine.)

SAVING SOULS AND SAVING MONEY AREN’T MUTUALLY EXCLUSIVE

Most congregations don’t have vast savings accounts. Like the majority of not-for-profits, it takes significant effort to raise a religious organization’s operating budget each year. For every dollar that goes to a fraudster, there’s one less dollar to spend on needs that are real to the mission of a religious organization.

Set policies that your religious leader and congregation can live with. Perhaps the policy is to give to any individual one time — no questions asked — but not to exceed a set dollar limit. Establish stringent policies for follow-up giving.

Fraudsters commonly ask for a small amount the first time to see if they can get away with it. If they’re successful, they come back repeatedly to seek more money. Offer to pay bills directly rather than provide cash to the money seeker so your organization can better document the transaction and control the use of cash.

Some congregations have policies of referring aid requesters to community agencies — which they support financially — for the homeless, the poor and those who need food. These referrals can deter those who are hopping from charity to charity while still getting real help to people in need. Congregations don’t devise these policies to judge those who are in need but to achieve the true mission of charitable giving.

In the end, all religious groups should understand that charity doesn’t preclude good stewardship. Members make contributions with the expectation that they will be used to help those in need. However, charity is not the same thing as indiscriminately handing out money. Effective charity — that is, charity that accomplishes the most good — requires a balance between helping only those with legitimate needs and requiring excessive documentation of those needs. As with any other enterprise, the level of control should rise with the value of the assets at risk.  

Herbert Snyder, Ph.D., CFE, is a professor in Accounting, Finance and Information Systems at North Dakota State University and a member of the ACFE Editorial Advisory Committee.

Nancy Emerson, CPA, Educator Associate, is a lecturer in Accounting, Finance and Information Systems at North Dakota State University. 

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