U.S. v. Reasor, 541 F.3d 366 (5th Cir. 2009)
Background. A woman (the "defendant") was employed as a church's office manager from 1993 until 2000. During that period, she misused church funds for her personal gain, using checks from the church's general fund account and the pastor's discretionary account on which she was a signatory. The defendant forged signatures and falsified endorsements on checks. She also made out checks to herself, and various individuals and entities, which she cashed. Many of the checks were cashed at a supermarket next door to the church. The defendant also misused the church's funds and the pastor's name in other ways for her financial benefit. Her activities enabled her to misappropriate $450,000 of church funds.
The defendant's misconduct was eventually discovered, and she was charged with several crimes. She pled guilty to 28 counts of forgery; three counts of mail fraud; one count of bank fraud; and one count of making a false statement on a credit application. She received a sentence of 15 years, which included an upward adjustment (pursuant to federal sentencing guidelines) for misrepresenting that she was acting on behalf of her church.
Federal sentencing guidelines allow for an upward adjustment in a sentence if the offense "involved … a misrepresentation that the defendant was acting on behalf of a charitable, educational, religious, or political organization, or a government agency." The official explanation for this adjustment notes: "Use of false pretenses involving charitable causes … enhances the sentences of defendants who take advantage of victims' … generosity and charitable motives …. Defendants who exploit victims' charitable impulses or trust in government create particular social harm."
The defendant appealed, claiming that the upward adjustment in her sentence was inappropriate since there was no evidence that she misrepresented her authority when cashing checks or that she represented that she was acting to obtain a benefit for the church. A federal appeals court disagreed, and affirmed her sentence.
The court's ruling. In affirming the defendant's enhanced sentence the appeals court noted:
[The defendant] does not dispute that she was employed as the church's bookkeeper or that she used the supermarket and her bank to cash checks drawn on the church's accounts. Although she did not misrepresent her authority to act on behalf of the church, she did misrepresent that she was acting wholly on behalf of the church in her fraudulent conduct, which is all that is required to be subject to [sentencing] enhancement. That she did not exploit the charitable impulses of the victims or misrepresent her authority is of no moment. We hold, therefore, that the district court did not err by adjusting her offense level for misrepresenting that she was acting on behalf of the church. U.S. v. Reasor, 541 F.3d 366 (5th Cir. 2009)
Relevance to church leaders. This case is instructive for church leaders for several reasons, including the following.
1. It illustrates the seriousness of the crime of embezzlement. The trial court handed down a sentence of 15 years for the embezzlement of $450,000 in church funds.
2. The case illustrates that under federal sentencing guidelines church employees who misappropriate church funds by misrepresenting that they are acting on behalf of the church are subject to an upward adjustment in their sentence.
3. This case demonstrates that in some cases church leaders decide to turn cases of embezzlement over to the civil authorities for investigation and prosecution rather than resolving the matter internally. Such decisions are often difficult, since church leaders often believe that involving the civil authorities is somehow incompatible with the virtues of mercy and grace. These are questions that each church will have to answer for itself, depending on the circumstances. Before forgiving an embezzler and dropping the matter, however, church leaders should consider the following points:
(1) A serious crime has been committed, and the embezzler has breached a sacred trust. It is worth noting that the federal sentencing guidelines provide for enhanced prison sentences for persons who misappropriate church funds. The civil government's recognition of the severity of this crime is a sobering reality that should be duly considered by church leaders in deciding how to respond.
TIP. Closely scrutinize and question the amount of funds the embezzler claims to have taken. Remember, you are relying on the word of an admitted thief. Is it a realistic amount? Is it consistent with the irregularities or discrepancies that caused church leaders to suspect embezzlement in the first place? If in doubt, consider hiring a local CPA, or a certified fraud examiner, to review the amount the embezzler claims to have stolen.
(2) In many cases the embezzler will insist that he or she is not able to pay back the embezzled funds. The embezzled funds already have been spent. This presents church leaders with a difficult decision, since the embezzler has received unreported taxable income from the church. If the full amount of the embezzlement is not known with certainty (which is usually the case) then church leaders have the option of filing a Form 3949-A ("Information Referral") with the IRS. Form 3949-A is a form that allows employers to report suspected illegal activity, including embezzlement, to the IRS. The IRS will launch an investigation based on the information provided on the Form 3949-A. If the employee in fact has embezzled funds and not reported them as taxable income, the IRS may assess criminal sanctions for failure to report taxable income. In some cases, filing Form 3949-A with the IRS is a church's best option when embezzlement is suspected.
(3) Recharacterizing embezzled funds as a loan. In some cases, church leaders will try to resolve a case of embezzlement by characterizing the embezzled funds as a loan. There are several problems with this approach, including the following:
- If the church enters into a loan agreement with the embezzler, this may require congregational approval. Many church bylaws require congregational authorization of any indebtedness, and this would include an attempt to reclassify embezzled funds as a loan. Of course, this would have the collateral consequence of apprising the congregation of what has happened.
- Any "below market interest rate" loan of $10,000 or more triggers taxable income in the amount of the interest that would have accrued at the "applicable federal rate" of interest. In addition, if the imputed income is not reported as taxable income, and the recipient of the "loan" is an officer of director of the church (or a relative of such a person) it may constitute an "automatic excess benefit" under section 4958 of the tax code that will expose the recipient to an excise tax of up to 225 percent of the amount of the unreported income. Board members who approved the arrangement will be exposed to an excise tax of up to 20 percent of the amount of the unreported income (up to a maximum, collectively, of $20,000).
- One of the requirements for tax-exempt status under section 501(c)(3) of the Internal Revenue Code is that none of a church's assets can "inure" to the benefit of a private individual other than as reasonable compensation for services rendered. The IRS, and the courts, have ruled in a number of cases that low or no interest loans constitute prohibited inurement which results in the loss of a charity's tax-exempt status.
- State nonprofit corporation laws generally prohibit the making of loans, even at commercially reasonable rates of interest, to an officer or director.
(4) Church leaders must also remember that they owe a fiduciary obligation to the church and that they are stewards of the church's resources. Viewing the offender with mercy does not necessarily mean that the debt must be forgiven and a criminal act ignored. Churches are public charities that exist to serve religious purposes, and they are funded entirely out of charitable contributions from persons who justifiably assume that their contributions will be used to further the church's mission. These purposes may not be served when a church forgives and ignores cases of embezzlement.
TIP. The federal Employee Polygraph Protection Act prohibits most employers from requiring or even suggesting that an employee submit to a polygraph exam. Employers also are prevented from dismissing or disciplining an employee for refusing to take a polygraph exam. There is an exception that may apply in some cases-an employer may require that an employee take a polygraph exam if the employee is suspected of a specific act of theft or other economic loss and the employer has reported the matter to the police. However, the employer must follow very strict requirements to avoid liability. A church should never suggest or require that an employee submit to a polygraph exam, even in cases of suspected embezzlement, without first contacting an attorney for legal advice.
4. It seems inconceivable that the defendant in this case could have misappropriated nearly a half a million dollars in church funds. While this may seem unbelievable, it is entirely possible in any church that lacks an adequate system of internal control.
Additional Assistance with Embezzlement Issues
For a full consideration of the topic of embezzlement, see chapter 7 in Richard Hammar's Pastor, Church & Law. Chapter 7 addresses the following topics:
- Definition of embezzlement
- Why churches are vulnerable
- How embezzlement occurs
- Reducing the risk of embezzlement
- Responding to allegations of embezzlement
- The consequences of embezzlement
- Confidentiality and privileged communications
- Informing the congregation
- Avoiding false accusations
- The Employee Polygraph Protection Act