Affinity fraud, a type of investment fraud that preys upon members of identifiable groups, is an epidemic that is spreading throughout America’s churches.
Pat Huddleston, former enforcement branch chief for the Securities and Exchange Commission (SEC), points out that “there is an element of the pitch to a Christian that isn’t present in other pitches by scam artists, and that is the proposed shared faith between the person pitching the investment and the eventual victim.”
Of the $40 billion Americans lose to investment fraud every year, Huddleston reports that $1 billion involves fraud against the faithful. He believes megachurches are “especially vulnerable” because of their size and the number of ministries they may offer.
“Typically what happens is the scam artist will join the church [and] serve for a while,” the investor fraud expert explains. “The people who encounter them will be convinced that they are humble servants of Christ, and thereby, they gain the trust of the people they come in contact with.”
Next comes the scam artist’s subtle pitch that may include a casual conversation about what he or she does for a living, which is usually when he or she mentions that a contribution to the church was made possible through an investment. So Huddleston advises people to stay away from any investment pitch, even one that is made through a subtle appeal to a believer’s faith.
“Church An Easy Target for Scam Artists” – Chris Woodward, OneNewsNow
Published: April 20, 2011
Web accessed: April 21, 2011
For the complete story, click on the following link:
http://www.onenewsnow.com/Culture/Default.aspx?id=1332366
Dante DeMiro, age 43, was the founder and managing director of MuniVest Financial Group and MuniVest Services LLC in Southfield, Michigan, where he served as an investment adviser to various municipalities, credit unions, school districts, and trade unions. From at least March 2009 to September 2010, DeMiro falsely promised multiple clients that he would purchase millions of dollars in certificates of deposit (CDs) for investment on their behalf. Among his victims were municipalities, a school district, a bank, and a credit union serving church members, employees and other church related institutions.
Instead of using the clients’ funds to purchase the CDs, DeMiro wrongfully diverted the investments in order to make loans to a local jewelry store and re-pay other prior investors. Yet another Ponzi scheme, replete with con artist and far too many unsuspecting victims. The losses in DeMiro’s scam were initially calculated at approximately $10 million.
A Criminal Complaint was filed against DeMiro on September 15, 2010, and on October 7, 2010, DeMiro was indicted by a federal grand jury in Detroit on charges of bank and wire fraud. He faced a statutory maximum penalty of 30 years in prison and a $1 million fine for bank fraud; and 20 years in prison and a $250,000 fine for the wire fraud.
On April 19, 2011 Dante DeMiro pled guilty to five counts of bank and wire fraud. DeMiro stipulated that the loss caused by his fraud exceeds $7 million, and that he abused a position of trust in his fiduciary capacity as an investment adviser. Sentencing is scheduled for July 12, 2011.
“Michigan Ponzi Scamster DeMiro Pleads Guilty” – Forbes
Published: April 20, 2011
Web accessed: April 21, 2011
For the complete story, click on the following link:
http://blogs.forbes.com/billsinger/2011/04/20/michigan-ponzi-scamster-demiro-pleads-guilty/
Click on the following link to read the news story:
http://www.theaustralian.com.au/news/features/let-us-audit/story-e6frg8h6-1225955788550
On September 9, 2010, St. Petersburg Times reported the following story:
Pastor Pleads Guilty in Embezzlement Case
Gregory S, 38, was an accountant for a staffing company when he was not busy preaching from the pulpit. During his employment with the staffing agency, he was able to write checks totaling $813,142 to his church without the staffing company’s or the church’s knowledge. Earlier this month, he pleaded guilty to theft from an employee benefit plan, he managed. The stolen funds received by his church were then used for personal and other expenses.
All churches are protective of the outflow of funds as most frauds occur during this process. However; the same level of attention, if not more, should be paid to the inflow of funds as well.
It appears that his church did not have a formal gift acceptance policy or if it did, the policy was not being followed. A proper gift acceptance policy and adequate contributions procedures, if followed, would have acted as a safety net and would have caught the fraudulent remittances by the retirement plan from being deposited in the church’s bank accounts.
Every ministry should adopt a policy regarding accepting gifts and contributions as not all gifts and contributions are necessarily beneficial to the organization. An effective gift-acceptance policy should be formalized, in writing, and must achieve the following primary objectives:
First, it should identify the types of assets your ministry will accept (e.g., cash, real estate). Next, it should provide guidelines as to the forms of gifts that are acceptable. Finally, it should define your ministry’s role in administering the gifts.
But that’s not enough. To meet the needs of your ministry and to help protect your resources and reputation, your gift acceptance policy should also:
I. State that your ministry will obtain legal input and advice when appropriate.
II. Specify limits your ministry may want to impose, such as maximums or minimums in regards to charitable gift annuities.
III. Detail any restrictions that donors will be permitted to place on gifts.
IV. Outline the responsibilities that donors have with respect to obtaining appraisals for their own tax purposes.
V. Identify the specific circumstances under which your ministry will obtain an independent appraisal.
VI. Outline how your ministry plans to acknowledge gifts.
VII. Note the time frame for communicating with donors.
VIII. Specify the procedures for amending the gift acceptance policy.
The pastor’s scheme would have been caught instantly, had the church communicated with the donor upon receipt of the first check.
To avoid this from happening at your church we have created FACT, a web based test which will identify the cracks in your current system and help you prevent fraud in the future.
Give us a call at (817) 664-3000.
News stories about church funds being embezzled by an employee or clergy are common, but embezzlement by someone charged with oversight is rarely reported in the media. A Michigan based news site, www.mlive.com reported the following story on September 16, 2010:
Former Birch Run church leader charged with embezzling more than $100k from congregation
The former church president in Birch Run, Michigan, remains in jail on a $250,000 cash-only bond for allegedly embezzling over one hundred thousand from the ministry.
According to the perpetrator, he “got in deep” and “was trying to get his son out of trouble.” The former church president was able to withdraw funds from the various church bank accounts by writing checks and affidavits of loss and cashing them using his and the signature of the congregation treasurer, without her knowledge.
The church could have easily prevented this from happening.
First, the church president remained in that position for 12 years, allowing him to commit and conceal the fraud for an extended period of time. Positions of oversight i.e. president, treasurer, finance committee membership etc. should be rotated periodically. The term and rotation of the officers should also be documented within the church’s bylaws and constitution.
Second, it appears that the perpetrator had joint custody of the bank account along with the church treasurer but was also responsible for paying bills. Just because an individual serves as the president does not mean that his duties are exempt from oversight and the principle of segregation of duties. He was assigned to approve and sign checks, so the actual function of writing checks, recording disbursements in the general ledger and reconciling bank accounts should have been assigned to someone else. Every organization should put faith in a system, not a person.
And lastly, he had pressure to commit the fraud. In his own words, he was trying to get his son out of trouble. Given the circumstances, anyone in his position would have been tempted to commit the crime.
Obviously, he alone is responsible for the act; however, it was the responsibility of the church’s leaders to implement a system of checks and balances and ensure that authority is not concentrated in one individual’s hands, regardless of his status and reputation within the church and the local community.
To avoid this from happening at your church we have created FACT, a web-based test which will identify the cracks in your current system and help you prevent fraud in the future.
Give us a call at (817) 664-3000.
Every week ministries across the country get several hundred thousand requests for assistance. Some are valid, while others are not. Here are some real life examples of benevolence requests that I have encountered recently in my experience with ministries:
- A church member requests the business office to help with the monthly payments on his vacation home in Colorado
- An employee had a major surgery and the ministry decides to assist with overwhelming medical bills
- A local resident calls the business office and requests helps with the utility payments
- A stranger walks in the door and asks for help because her car ran out of gas
- A local resident requests the ministry to buy him a $2000 suit for an interview so he can land his dream job
- A church member requests assistance with expenses for her daughter’s semester in Spain
Most churches and ministries are sympathetic and want to help and most requests are compelling, especially in this economy. But unfortunately, there are scammers out there that prey upon ministries’ willingness to help and are not afraid to take advantage. For instance, on May 18, 2010, the Columbia Missourian reported the following story:
Columbia Church Reports Possible Money-Wiring Scam
It is relatively easier to tell the difference between a need and want, but not always easy to discern between legitimate and fraudulent requests. So how can a ministry respond to all requests in a compassionate yet tactful manner?
Adopt a written benevolence policy. A well written policy will lay out the foundation for ministry’s benevolence activities and should:
- Specify who is to receive and approve the requests for assistance
- Specify the situations in which assistance may be provided, the type of assistance that will be provided and how it is to be provided
- Eliminate any inappropriate requests for assistance
- Keep the ministry within guidelines set forth in the Internal Revenue Code
- Establish confidence within the ministry and amongst its benefactors that benevolence funds are being administered properly
- Enable the ministry from developing a reputation of an easy target amongst scammers
Over the last two decades churches have responded to the threat of child abuse. One of the key elements of protection has been performing background checks on anyone even remotely involved with child care. Today, it is rare to find a church that does not conduct regular background reviews of potential child care providers.
This article, is a good illustration that background checks should be conducted in other areas of church administration as well. The first few words of the article tell it all; “An Olgeton woman convicted of embezzling from a bank three years ago… This is proof positive that background checks should be performed, not only on child care workers, but also on employees and volunteers given financial responsibility in a church. Perhaps, if this church had only done a little research, much trouble could have been avoided.
To protect themselves against potential fraud, churches should consider conducting two types of background checks:
- A criminal background check can reduce the possibility of hiring a criminal. I have no statistics at hand, but I am fairly certain that a large percentage of church embezzlements are the result of persons with previous experience.
- Churches might also consider obtaining a credit report on potential new hires. Not only might this step uncover individuals with prior arrests, it also makes it more difficult to hire first-time embezzlers. One of the elements of the fraud triangle is PRESSURE. In the context of fraud, pressure involves events in an individual’s life that might compel him or her to take what is not theirs. Common pressures are medical bills, business reversals, addictions such as gambling or substance abuse, and financial difficulties. Being aware of the existence of this type of pressure before hiring can eliminate a great deal of suffering.
Because this is a very sensitive area the best practice is to consult competent legal and risk management assistance prior to implementing a background review plan. Two names I can share are The Church Law Group ( www.churchlawgroup.com ) and MHBT Insurance ( www.mhbt.com ).
