Fleecing the shepherds

When houses of worship become victims of fraud


By Herbert Snyder, Ph.D., CFE; and Nancy Emerson, CPA


 MarApr-fleecing-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.”)



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