Benevolence Funds and Money Laundering

A court affirmed a pastor’s conviction for grand theft and money laundering as a result of his use of a church benevolence fund to pay more than $100,000 in personal expenses.

Key point 7-21.
Embezzlement refers to the wrongful conversion of funds that are lawfully in one's possession. Embezzlement is a common occurrence in churches because of weak internal controls.

A Florida court affirmed a pastor's conviction for grand theft and money laundering as a result of his use of a church benevolence fund to pay more than $100,000 in personal expenses.

The pastor served as pastor of a local congregation from 1995 until 2009. The church received donations from various sources, and the donations were divided among four bank accounts: the mortgage account, the operating account, the scholarship account, and the benevolent account. Parishioners could designate which account their contributions should be deposited, and each account had a dedicated use. As to the benevolent account, the funds were to be used solely to help those in need in the community, and the church gave the pastor sole control over the use of that account. As to the other accounts, the pastor had no more than joint control; however, while the church required two signors on every check, the banks where the accounts were held did not.

Between 2007 and 2009, the pastor paid numerous personal bills with money from the benevolent account, so much so that it amounted to his essentially using the account as an extension of his personal checking account. To avoid detection of his use of the funds, he manipulated the benevolent and mortgage accounts so as to conceal many of the improper transactions. For example, he would write a check from the mortgage account and deposit that check into the benevolent account, which was kept at another bank. He then would write a check from the benevolent account to himself or to petty cash and then cash that check and "pocket" the proceeds by depositing them into his personal account at another bank. The evidence at trial showed that the pastor managed to pilfer approximately $115,204 in church funds over two years, and approximately $29,180 of that total resulted from the disguised transactions between the mortgage and benevolent accounts.

In 2009, after the church treasurer discovered certain irregularities in its books, the church contacted the police. The state then conducted its own forensic accounting investigation and charged the pastor with one count of scheme to defraud, one count of grand theft of $100,000 or more, and four counts of money laundering. The jury found the pastor guilty on all counts, and he was sentenced to a prison term of eight years. However, the trial court reduced the pastor's sentence on the ground that the church's need for restitution (which would not be possible if the pastor was serving an eight-year prison sentence) outweighed the need for his incarceration.

A state appeals court affirmed the pastor's conviction, and rejected the trial court's reduction in the pastor's sentence.

Money Laundering

Florida law defines money laundering as entering into a financial transaction knowing that the funds involved are the proceeds of unlawful activity and that the transaction is designed to conceal or disguise the nature of the proceeds of the specified unlawful activity. The court affirmed the jury's finding that the pastor had committed the crime of money laundering:

Here, the evidence presented at trial was sufficient to establish the required elements of both a specified unlawful activity and concealment. To prove that the pastor committed a specified unlawful activity, the state presented evidence that he repeatedly wrote checks to himself from the benevolent fund, a fund intended for the needy in the community, which he—with his Jaguar, salary, and church-funded travel account—clearly was not. With these improper and unauthorized acts, his theft was completed, thereby satisfying the "specified unlawful activity" element of the money laundering statute.

The court rejected the pastor's defense that his transfer of the church's funds cannot constitute money laundering because the funds themselves were not "the proceeds of some form of unlawful activity." Instead, they were lawful donations to the church. The court concluded:

The pastor misunderstands the focus of this charge … . He improperly and without authorization converted money intended to pay the church's mortgage by transferring it into an account holding funds intended to help the needy and then converted the funds again to satisfy his own personal needs. This evidence was sufficient to establish the "specified unlawful activity" element of the offense of money laundering.

As to the concealment element of its case, the court noted that the state presented evidence that the pastor

wrote checks from the mortgage account to the benevolent account and then wrote checks from the benevolent account to himself. He then cashed the checks and deposited the cash into his personal account. These multiple transactions involving three different banks served to disguise the original ownership of the money, thereby satisfying the concealment requirement under the money laundering statute … . And the fact that he directed all of the stolen funds through the benevolent account—the account over which he had sole discretion—served to further cloud detection.

Reduced Prison Sentence

The court acknowledged that state law lists several circumstances under which a downward departure of a prison sentence may be appropriate. For example, a court may reduce a sentence when "the need for payment of restitution to the victim outweighs the need for a prison sentence." But the court concluded that the pastor had failed to present evidence of the church's need for restitution. Instead, his evidence consisted of the testimony of several church members who asked the court to have mercy on the pastor, not because the church needed restitution, but because the church elders themselves had forgiven him and did not want him to face additional hardship. In addition, there was evidence that other pastors from the community indicated that they would help the church recover its stolen funds through fundraisers regardless of the pastor's fate.

What this means for churches

This case illustrates the risk of theft and money laundering that arise when churches use a benevolence fund that allows a pastor to unfettered discretion in the distribution of the fund. Such funds should never be used without adequate safeguards, including the following:

• the church gives a minister discretion to distribute the fund only for specified purposes (such as relief of the needy) that are consistent with the church's exempt purposes;

• the church prohibits (in a written policy) the minister from distributing any portion of the fund for himself or herself or any family member;

• all distributions from the fund must be approved by the church board, and validated by dual signatures; and

• the church or its governing board retains administrative control over the fund to ensure that all distributions further the church's exempt purposes.

Some pastors insist on secrecy in their distribution of discretionary account funds. They claim that they alone are aware of some needs, and need the flexibility to respond quickly without waiting for board approval. While these considerations are important, they are superseded by the need for transparency and accountability.

Discretionary funds create another risk—the recognition of taxable income to the pastor having sole, unfettered authority to distribute the funds as he or she sees fit. Pastors who have the authority to distribute discretionary or benevolence funds to anyone they wish may be deemed to have realized taxable income under the "constructive receipt" doctrine. This important doctrine is addressed fully in chapter 4 of Richard Hammar's annual Church & Clergy Tax Guide ( Hardie v. State, 162 So.3d 297 (Fla. App. 2015).

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