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Embezzlement

§ 7.21
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.

1. IN GENERAL

As hard as it may be to believe, embezzlement is a relatively common occurrence in churches. As a result, it is important for church leaders to take this risk seriously.

2. DEFINITION OF EMBEZZLEMENT

The definition of embezzlement varies slightly from state to state, but in general it refers to the wrongful conversion of property that is lawfully in your possession. The idea is that someone has legal control or custody of property or funds, and then decides to convert the property or funds to his or her own personal use.

Most people who embezzle funds insist that they intended to pay the money back and were simply "borrowing" the funds temporarily. An intent to pay back embezzled funds is not a defense to the crime of embezzlement. Most church employees who embezzle funds plan on repaying the church fully before anyone suspects what has happened. One can only imagine how many such schemes actually work without anyone knowing about it. The courts are not persuaded by the claims of embezzlers that they intended to fully pay back the funds they misappropriated. The crime is complete when the embezzler misappropriates the church's funds to his or her own personal use. As one court has noted:

The act of embezzlement is complete the moment the official converts the money to his own use even though he then has the intent to restore it. Few embezzlements are committed except with the full belief upon the part of the guilty person that he can and will restore the property before the day of accounting occurs. There is where the danger lies and the statute prohibiting embezzlement is passed in order to protect the public against such venturesome enterprises by people who have money in their control.

In short, it does not matter that someone intended to pay back embezzled funds. This intent in no way justifies or excuses the crime. The crime is complete when the funds are converted to one's own use—whether or not there was an intent to pay them back.

What if the embezzled funds are returned? The crime of embezzlement has occurred even if the embezzled funds in fact are paid back. Of course, it may be less likely that a prosecutor will prosecute a case under these circumstances. And even if the embezzler is prosecuted, this evidence may lessen the punishment. But the courts have consistently ruled that an actual return of embezzled funds does not purge the offense of its criminal nature or absolve the embezzler from punishment.

Key point. Even if an embezzler is caught or confesses, and then agrees to "pay back" the embezzled funds, church officials seldom know if all embezzled funds are being returned. They are relying almost entirely on the word of a thief.

3. WHY CHURCHES ARE VULNERABLE

Many churches refuse to adopt measures to reduce the risk of embezzlement out of a fear that such measures will reflect a lack of trust in those persons who handle church funds.

Example. Tom has counted the church offering at his church for 25 years. The church board has discussed this arrangement several times, but fails to stop it out of a fear of offending Tom.

4. HOW EMBEZZLEMENT OCCURS

Let's look at a few cases of actual embezzlement of church funds to see how it can occur.

  • An usher collected offerings each week in the church balcony, and pocketed all loose bills while carrying the offering plates down a stairway to the main floor. Church officials later estimated that he embezzled several thousands of dollars over a number of years, before being caught.
  • The same two persons counted church offerings for many years. Each week they removed all loose coins and currency (not in offering envelopes) and split it between them. This practice went on for several years, and church officials later estimated that the two had embezzled several tens of thousands of dollars.
  • A church left its Sunday offering, along with the official count, in a safe in the church office until Monday. On Monday morning a church employee deposited the offering. The employee ignored the official counts, and deposited the offering less loose coins and currency (which she retained). The deposits were never checked against the offering counts.
  • A church child care director embezzled church funds by issuing herself paychecks for the gross amount of her pay (before deductions for tax withholding). The church withheld taxes and paid them to the government, but her paychecks reflected the gross amount of her pay.
  • A pastor had the sole authority to write checks on the church's checking account. He used church funds to pay for several personal expenses, amounting to thousands of dollars each year, until his actions were discovered.
  • A church bookkeeper embezzled several thousand dollars by issuing checks to a fictitious company. He opened an account in the name of a fictitious company, issued church checks to the company for services that were never performed, and then deposited the checks in the fictitious company's account. He later withdrew the funds and purchased two automobiles which he gave to a friend. A court ruled that the friend had to give the cars back to the church, since they had been purchased with embezzled church funds. The point here, as noted by the court, is that one who acquires property that was purchased with embezzled church funds may be required to transfer the property to the church.
  • A church bookkeeper's responsibilities included managing the church's bank account, maintaining financial records, and handling the church's finances. A few years after she started working at the church, she began to misappropriate church funds by issuing unauthorized checks to herself, her personal creditors, and other individuals. According to the church's investigation, she embezzled nearly $560,000 over an eight-year period. The embezzlement was eventually discovered, and the bookkeeper was arrested and charged with grand theft. She pled guilty to misappropriating the funds and was convicted of grand theft and sentenced to a ten-year prison term. [282] Magpusao v. Magpusao, 265 B.R. 492 (M.D. Fla. 2001).
  • A minister received an unauthorized kickback of 5% of all funds paid by a church to a contractor who had been hired to build a new church facility. The minister received over $80,000 from this arrangement, in exchange for which he persuaded the church to use the contractor. The minister's claim that the $80,000 represented a legal and nontaxable "love offering" was rejected by a federal court that found the minister guilty of several felony counts. This arrangement was not disclosed to the church board, and obviously amounted to an unauthorized diversion of church funds back to the minister.
  • A volunteer church treasurer began using church funds to pay a number of personal debts, including his mortgage, his cell phone bill, a car loan, and other personal expenses. On several occasions, he made the checks payable to himself and indicated "payroll" on the checks. After the end of his two-year term as treasurer, his successor discovered the discrepancies in the church's accounts. It was later determined that 142 checks, worth $82,130, had been "written outside the scope" of the former treasurer's authority and for his personal benefit. The church informed the police, and the former treasurer was charged with five separate counts of embezzlement. [283] Bragg v. Commonwealth, 593 S.E.2d 558 (Va. App. 2004).
  • A church accountant embezzled $212,000 in church funds. This person's scheme was to divert to his own use several designated offerings, and to inflate the cost of equipment that he paid for with his own funds and that the church later reimbursed at the inflated amounts. The interesting aspect of this case was that the accountant was not only found guilty of embezzlement, but he was also convicted for tax evasion because he had failed to report any of the embezzled money as taxable income, and was sentenced to prison.
  • A court ruled that an insurance company that paid out $26,000 to a charity because of an act of embezzlement could sue the embezzler for the full amount that it paid. This is an important case, for it demonstrates that a church employee who embezzles church funds may be sued by the church insurance company if it pays out a claim based on the embezzlement. In other words, the fact that the church decides not to sue the embezzler does not mean that the person will be free from any personal liability. If the church has insurance to cover the loss, the insurance company can go after the embezzler for a full recovery of the amount that it paid out on account of the embezzlement.
  • Two deacons were responsible for collecting offerings from church members, depositing the funds into the church's bank account, and paying for authorized maintenance and repairs to the church building and facilities. Both deacons were authorized to sign checks individually, without the safeguard of requiring two signatories. They were not, however, authorized to make expenditures without the approval of the members, which was determined at meetings held after church services. Over the course of six months, one of the deacons (the "defendant") wrote checks totaling $1,600 to himself, with no documentation showing that he used the funds to pay for expenditures authorized by the congregation. When the other deacon became aware of the defendant's behavior, he notified law enforcement officials. An investigation was initiated that resulted in the indictment of the defendant for embezzlement. The jury found him guilty, and he was sentenced to a ten-year term of imprisonment and ordered to pay restitution in the amount of $2,255. [284] Coleman v. State, 947 So.2d 878 (Miss. 2006) (the verdict was reversed on appeal due to a technicality).
  • A church administrator embezzled over $350,000 from his church. He wrote unauthorized checks to himself and others from the church's accounts, and used the church's credit card on over 300 occasions to purchase personal items. Police officers were called and he made a full confession. The church secured a $1 million civil judgment against him. He was prosecuted and convicted on four felony counts including forgery and theft, and was sentenced to 32 years in prison based on "aggravated circumstances" (the large amount of money that had been stolen, the care and planning that went into the crimes and their concealment, the fact that a great number of checks were stolen and unauthorized credit card charges made, and breach of trust). Several years earlier, the administrator embezzled a large amount from a prior church employer. However, that church chose not to initiate criminal charges, believing that he had learned his lesson. [285] Kemp v. State, 887 N.E.2d 102 (Ind. App. 2008). A state appeals court, calling the offenses "undeniably despicable," reduced the sentence from 32 to 16 years based on the "mitigating factors" of no prior criminal record and a full confession.

5. REDUCING THE RISK OF EMBEZZLEMENT

Can the risk of embezzlement be reduced? If so, how? The good news is that there are number of steps that church leaders can take to reduce this risk, and most of them are quite simple. Consider the following:

1. Implement an effective system of internal control. The first and most effective deterrent to embezzlement is a strong system of "internal control." Internal control is an accounting term that refers to policies and procedures adopted by an organization to safeguard its assets and promote the accuracy of its financial records. What procedures has your church adopted to ensure that cash receipts are properly recorded and deposited, and that only those cash disbursements that are properly authorized are made? These are the kinds of questions that are addressed by a church's system of internal control. A table in this chapter addresses a number of common weaknesses in church internal control that increase the risk of embezzlement. The table provides helpful suggestions for responding to these weaknesses.
Key point. The most important point to emphasize is "division of responsibilities." The more that tasks and responsibilities are shared or divided, the less risk there will be of embezzlement.
Key point. Many churches refuse to implement basic principles of internal control out of a fear of "offending" persons who may feel that they are being suspected of misconduct. The issue here is not one of hurt feelings, but accountability. The church, more than any other institution in society, should set the standard for financial accountability. After all, its programs and activities are rooted in religion, and it is funded entirely with donations from persons who rightfully assume that their contributions are being used for religious purposes. The church has a high responsibility to promote financial accountability. This duty is simply not met when the practices described above are followed.
2. Screen persons with financial responsibility. Some churches screen bookkeepers, accountants, and other employees who will have access to funds or be involved in financial decisions. Screening can consist of obtaining references from employers, prior employers, and other churches or charities with which the person has been employed or associated.
3. Annual audits. A church can reduce the risk of embezzlement by having an annual audit of its financial records by a CPA firm. An audit accomplishes three important functions:
  • An audit promotes an environment of accountability in which opportunities for embezzlement (and therefore the risk of embezzlement) are reduced.
  • The CPA (or CPAs) who conducts the audit will provide the church leadership with a "management letter" that points out weaknesses and inefficiencies in the church's accounting and financial procedures. This information is invaluable to church leaders.
  • An audit contributes to the integrity and reputation of church leaders and staff members who handle funds.
Key point. Don't confuse an audit with a more limited engagement that CPAs will perform, such as a "compilation."
Key point. Audits can be expensive, and this will be a very relevant consideration for smaller churches. Of course, the time involved in performing an audit for a smaller church will be limited, which will result in a lower fee. Churches can control the cost of an audit by obtaining bids. Also, by staying with the same CPA firm, most churches will realize a savings in the second and succeeding years since the CPA will not have to spend time becoming familiar with the church's financial and accounting procedures.
Key point. Smaller churches that cannot afford a full audit may want to consider two other options: (1) Hire a CPA to conduct a review, which is a simpler and less expensive procedure. If the review detects irregularities, a full audit may be considered worth the price. (2) Create an internal audit committee if there are accountants or business leaders within the church who have the ability to review accounting procedures and practices and look for weaknesses. These people often are very familiar with sound internal control policies, and will quickly correct weaknesses in the church's financial operations. An added bonus—such a committee will serve as a deterrent to those who might otherwise be tempted to embezzle church funds.
4. Bonding of persons who handle funds. Churches can address the risk of embezzlement by bonding the church treasurer and any bookkeeper or accountant that is on staff. You can also purchase a blanket policy to cover all employees and officers. It is important to note that insurance policies vary. Some require that the embezzler be convicted before it will pay a claim, while others do not. The period of time covered by the policy will also vary. These are important points to be discussed by your church board in consultation with your insurance agent.
Key point. Insurance is not a substitute for implementing a sound system of internal control.

6. RESPONDING TO ALLEGATIONS OF EMBEZZLEMENT

Sometimes a person who has embezzled church funds will voluntarily confess—usually out of a fear that he or she is about to be "caught." But in many cases the embezzler does not confess—at least initially. Discrepancies or irregularities may occur which cause church leaders to suspect this person. Consider the following examples.

Examples
  • The same person has counted church offerings for many years. The pastor inadvertently notices that offerings are always higher when this person is absent (due to illness, business, or vacation).
  • Church officials noticed that a church bookkeeper was living a higher standard of living than was realistic given her income. Among other things, she purchased an expensive home and a luxury car.
  • Church offerings have remained constant, or increased slightly, despite the fact that attendance has increased.
  • A church treasurer notices that a church official with sole signature authority on the church checking account has purchased a number of expensive items from unknown companies without any documentation to prove what was purchased and why.

Church leaders often are unsure how to address suspected cases of embezzlement. The suspected embezzler is almost always a trusted member or employee, and church leaders are reluctant to accuse such a person without irrefutable evidence that he or she is guilty. Seldom does such evidence exist. The pastor may confront the person about the suspicion, but in many cases the individual will deny any wrongdoing—even if guilty. This compounds the frustration of church officials, who do not know how to proceed.

Here is a checklist of steps that church leaders can take to help resolve such difficult cases:

1. Confront the suspected embezzler. The pastor and at least one other church leader should confront the suspected embezzler. Inform the person that the church has evidence indicating that he or she has embezzled church funds. Seek a confession. Inform the person that if no one confesses, the church will be forced to call in a CPA firm to confirm that embezzlement has occurred, and to identify the probable embezzler.
Tip. Embezzlement is a criminal offense. Depending on the amount of funds or property taken, it may be a felony that can result in a sentence in the state penitentiary. This obviously would have a devastating impact on the embezzler, and his or her family. If the evidence clearly indicates that a particular member or employee has embezzled church funds, but this person denies any wrongdoing, inform him or her that the church may be forced to turn the matter over to the police for investigation and prosecution.
Tip. Embezzlers never report their illegally obtained "income" on their tax returns. Nor do they suspect that failure to do so may subject them to criminal tax evasion charges! In fact, in some cases it is actually more likely that the IRS will prosecute the embezzler for tax evasion than the local prosecutor will prosecute for the crime of embezzlement. If the evidence clearly indicates that a particular member or employee has embezzled church funds, but this person denies any wrongdoing, inform him or her that the church may be forced to turn the matter over to the IRS for investigation and possible prosecution.
2. Have a local CPA conduct an audit to establish that embezzlement has occurred, and provide an estimate of how much was embezzled. If the suspected embezzler denies any wrongdoing (or if embezzlement is suspected but it is not clear who is guilty), church leaders should consider hiring a local CPA firm to look for evidence of embezzlement. There is a good possibility that the embezzlement will be detected, and that the perpetrator will be identified.
Tip. CPAs can also help the church establish a strong system of internal control to reduce the risk of embezzlement in the future.

Many church leaders have found that turning the investigation over to a CPA firm is much more acceptable than conducting the investigation internally. The CPA firm is completely objective, and ordinarily will not know the suspected embezzler. Further, few church members will object to the church hiring a CPA firm to detect wrongdoing and help establish a sound system of internal control.

3. Contacting the police or local prosecutor. If the suspected embezzler does not confess, or if embezzlement is suspected but it is not clear who is guilty, church leaders must consider turning the matter over to the police or local prosecutor. This is a very difficult decision, since it may result in the prosecution and incarceration of a member of the congregation.
4. The embezzler confesses. In some cases the embezzler eventually confesses. Often, this is to prevent the church from turning the case over to the IRS or the police, or to a CPA firm. Embezzlers believe they will receive "better treatment" from their own church than from the government. In many cases they are correct. It often is astonishing how quickly church members will rally in support of the embezzler once he or she confesses—no matter how much money was stolen from the church. This is especially true when the embezzler used the embezzled funds for a "noble" purpose, such as medical bills for a sick child. Many church members demand that the embezzler be forgiven. They are shocked and repulsed by the suggestion that the embezzler—their friend and fellow church member—be turned over to the IRS or the police! But is it this simple? Should church leaders join in the outpouring of sympathy? Should the matter be dropped once the embezzler confesses?

These are questions that each church will have to answer for itself, depending on the circumstances of each case. Before forgiving the embezzler and dropping the matter, church leaders should consider the following points:

(1) A serious crime has been committed, and the embezzler has breached a sacred trust. The church should insist, at a minimum, that the embezzler must:
  • disclose how much money was embezzled
  • make full restitution by paying back all embezzled funds within a specified period of time, and
  • immediately and permanently be removed from any position within the church involving access to church funds
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 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. The embezzler should be informed that the embezzled funds must either be returned within a specified time, or a promissory note must be signed promising to pay back the embezzled funds within a specified period of time. The embezzler should be informed that failure to agree to either alternative will force the church to issue him or her a 1099 (or a corrected W-2 if the embezzler is an employee) reporting the embezzled funds as taxable income. Failure to do so will subject the church to a potential penalty (up to $10,000) for aiding and abetting in the substantial understatement of taxable income under section 6701 of the tax code.
Tip. An embezzler's biggest problem ordinarily will not be with the church or even with the local prosecutor. It will be with the IRS for failure to report taxable income. There are only two ways to avoid trouble with the IRS: (1) the embezzler pays back the embezzled funds, or (2) the church reports the embezzled funds as taxable income on a 1099 or corrected W-2.
(3) 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 a local attorney for legal advice.

7. THE CONSEQUENCES OF EMBEZZLEMENT

Persons who embezzle church funds face a number of consequences. Some of them may come as unpleasant surprises. Here are four of them.

  • Felony conviction. Embezzling church funds is a felony in most states, and conviction can lead to a term in a state penitentiary. The definition of embezzlement varies slightly from state to state, but in general it refers to the wrongful conversion of property that is lawfully in your possession. The idea is that someone has legal control or custody of property or funds, and then decides to convert the property or funds to his or her own personal use.
Key point. It does not matter that the embezzler intended to pay back the embezzled funds. This intent in no way justifies or excuses the crime. The crime is complete when the funds are converted to one's own use—whether or not there was an intent to pay them back.
Key point. Sometimes an embezzler, when caught, will agree to pay back embezzled funds. This does not alter the fact that the crime of embezzlement has occurred. Of course, it may be less likely that a prosecutor will prosecute the case under these circumstances. And even if the embezzler is prosecuted, this evidence may lessen the punishment. But the courts have consistently ruled that an actual return of embezzled property does not purge the offense of its criminal nature or absolve the embezzler from punishment for his or her wrongdoing. Also, note that church officials seldom know if all embezzled funds are being returned. They are relying almost entirely on the word of the thief.
  • Tax evasion. In many cases the embezzler's biggest concern is not the possibility of being prosecuted for the crime of embezzlement. Rather, it is the possibility of being prosecuted by the IRS for tax evasion. Embezzlers never report their illegally obtained "income" on their tax returns. Nor do they suspect that failure to do so may subject them to criminal tax evasion charges. In fact, in some cases it is actually more likely that the IRS will prosecute the embezzler for tax evasion than the local prosecutor will prosecute for the crime of embezzlement.
Example. A church accountant embezzled $212,000 in church funds. His scheme was to divert to his own use several designated offerings, and to inflate the cost of equipment that he paid for with his own funds and that the church later reimbursed at the inflated amounts. The accountant not only was found guilty of embezzlement, but he was also convicted of tax evasion because he had failed to report any of the embezzled money as taxable income. He was sentenced to a 2-year prison term, followed by 2 years of probation.
  • Recovery of property purchased with embezzled funds. Here's a real shocker—persons who receive property purchased by the embezzler with embezzled funds may be required to return the property to the church!
Example. A church bookkeeper embezzled several thousand dollars by issuing checks to a fictitious company. He opened an account in the name of a fictitious company, issued church checks to the company for services that were never performed, and then deposited the checks in the fictitious company's account. He later withdrew the funds and purchased two automobiles which he gave to a friend. A court ruled that the friend had to give the cars back to the church, since they had been purchased with embezzled church funds. The point here, as noted by the court, is that one who acquires property with embezzled church funds may be required to transfer the property to the church.
  • Insurance company lawsuits. As if the three consequences summarized above are not enough, embezzlers face an additional consequence—they may be sued by an insurance company that pays a claim based on the embezzlement. Many churches purchase insurance to cover financial losses due to theft or embezzlement. Insurance companies that pay out claims based on such losses are free to sue the persons responsible.
Example. A court ruled that an insurance company that paid out $26,000 to a charity because of an act of embezzlement could sue the embezzler for the full amount that it paid. Such cases illustrate an important point—a church employee or volunteer who embezzles church funds may be sued by the church insurance company if it pays out a claim based on the embezzlement.

8. CONFIDENTIALITY AND PRIVILEGED COMMUNICATIONS

Sometimes ministers learn of embezzlement through a confession by the embezzler in the course of confidential counseling. This presents the minister with a dilemma—either protect the confidentiality of the confession and refuse to disclose it, or ignore confidentiality and disclose the confession. This dilemma is compounded by the fact that some ministers have been sued for disclosing confidential information without the consent of the other person. Embezzlers may claim that they confessed their crime to their minister in confidence and in the course of spiritual counseling, with no thought that the minister would disclose the information to others.

Tip. Ministers who disclose confidential information without permission risk being sued for breaching their duty of confidentiality. When an employee or volunteer approaches a minister and confesses to embezzling church funds, there normally will be an expectation that the minister will keep that information in confidence. There is no sign above the minister's desk that says, "Warning: confessions of criminal activity will be promptly shared with the board or with the civil authorities."[286] See Lightman v. Flaum, 687 N.Y.S.2d 562 (Sup. 1999), in which the court observed: "It is beyond peradventure that, when one seeks the solace and spiritual advice and guidance of a member of the clergy, whether it be a priest, rabbi or minister, on such sensitive, personal matters as those involved in our case, this is not done as a prelude to an announcement from the pulpit." Ministers who violate this expectation need to understand that they face potential legal liability for doing so—unless they have the employee's permission, in writing.

Ministers who receive a confidential confession of embezzlement from a church employee or volunteer should not disclose this information to others, including the church board, without the person's written permission. If the embezzler does not consent to the disclosure of the confession, and refuses to meet with the board, the minister should not disclose the information to any other person. Disclosure under these circumstances could result in a lawsuit being brought against the minister and church.

Does this mean that the minister should drop the matter? Not necessarily. The minister is free to gather independent evidence that embezzlement occurred, so long as this is done without disclosing the confession. For example, the minister could persuade the church board to hire a CPA to conduct an audit of the church's financial records. Such a procedure may reveal that embezzlement has occurred. The minister also should attempt to persuade the embezzler to confess to the board.

Key point. Closely related to the concept of confidentiality is the clergy-penitent privilege. Ministers cannot be compelled to disclose in court the contents of confidential communications shared with them in the course of spiritual counseling.
Example. Late one night, a church treasurer arranged a meeting with her priest after informing him that she "had done something almost as bad as murder." The treasurer, after requesting that their conversation be kept confidential, informed the priest that she had embezzled $30,000 in church funds. The priest, with the permission of the treasurer, sought the assistance of the church board. The board decided that the embezzlement had to be reported to the local police. The treasurer was later prosecuted for embezzling church funds, and she was convicted and sentenced to 4 months in jail despite the fact that she fully repaid the church prior to her trial. She appealed her conviction on the ground that it had been based on her confidential statements to the priest which, in her opinion, were "penitential communications" that were privileged against disclosure in court. The appeals court concluded that the statements made by the church treasurer to the priest were not privileged since they involved a "problem-solving entreaty" by the treasurer rather than "a request to make a true confession seeking forgiveness or absolution—the very essence of the spiritual relationship privileged under the statute." That is, the treasurer sought out the priest not for spiritual counseling, but to disclose her embezzlement and to seek his counsel on how to correct the problem. The court also emphasized that the treasurer had "released" the priest from his assurance of confidentiality by consenting to his disclosure of the facts of the case to the church board members.

9. INFORMING THE CONGREGATION

Church leaders often refuse to disclose to the congregation any information about an incident of embezzlement for fear of being sued for defamation. This concern is understandable. However, serious problems can occur when the pastor or church board dismisses a long-term employee or volunteer for embezzlement and nothing is disclosed to the membership. Church leaders under these circumstances often are accused of acting arbitrarily, and there is a demand for an explanation. Refusal to respond to such demands may place the church leadership in an even worse light.

There is a possible answer to this dilemma. Many states recognize the concept of "qualified privilege." This means that statements made to others concerning a matter of common interest cannot be defamatory unless made with malice. Statements are made with malice if they are made with a knowledge that they are false, or with a reckless disregard as to their truth or falsity. In the church context, this privilege protects statements made by members to other members concerning matters of common interest. Such communications cannot be defamatory unless malice is proven. Church leaders who decide to disclose why an embezzler was dismissed can reduce the legal risk to the church and themselves by following a few basic precautions:

  • Only share information with active voting members of the church—at a membership meeting or by letter. The qualified privilege does not apply if the communication is made to non-members.
  • Adopt procedures that will confirm that no non-member received the information.
  • Limit your remarks to factual information and do not express opinions.
  • Prepare in advance a written statement that is communicated with members, and that is approved in advance by an attorney.
Key point. In some cases, it is helpful to obtain a signed confession from an individual who has been found guilty or who has confessed. If the individual consents to the communication of the confession to church members, then you can quote from the confession in a letter that is sent to members of the congregation, or in a membership meeting. Be sure that this consent is in writing.
Key point. One court ruled that a church could be sued for defamation for sharing suspicions regarding a church treasurer's embezzlement with members in a congregational meeting. The court concluded that the treasurer should have been investigated and dismissed by the board, without informing the congregation. While no other court has reached a similar conclusion, this case suggests that church leaders should disclose cases of embezzlement to the church membership only if (1) absolutely necessary (for example, to reduce congregational unrest), and (2) an attorney is involved in making this decision.

10. AVOIDING FALSE ACCUSATIONS

In some cases it is not certain that embezzlement has occurred, or that a particular individual is guilty. A church must be careful in how it proceeds in these cases to avoid possible liability for defamation or emotional distress.

Example. A church's senior pastor believed that certain members of the church board (including the chairman) had diverted $94,000 of church funds earmarked for a remodeling project to other uses. He expressed his concerns at meetings of the church board, and to the entire congregation at a special business meeting. He informed the congregation that he wanted an "accounting" of the funds to determine if they had been used improperly, and he insisted that the board chairman resign his position. The chairman claimed that the pastor's acts amounted to a "false accusation" that he and other board members had embezzled church funds. The pastor retained an attorney who wrote the board chairman a letter demanding that he "immediately cease and desist from [his] unlawful threats, harassment, blackmail and extortion of the pastor." The attorney's letter continued:
It is a disgrace that a man who holds himself out to be a Christian engages in such conduct. You are upset that the pastor has requested an accounting of the church monies which you have controlled for years and, rather than provide the information, you have launched a personal attack on him. The only conclusion one can reach from such behavior is that you have, in fact, embezzled money from the church. The pastor has referred this matter to the appropriate church board as well as governing bodies. We are confident that they will pursue actions against you to recover all church property.
The deposed board chairman sued the church for defamation. A trial court dismissed the lawsuit and a state appeals court affirmed the trial court's ruling. It noted that the pastor's expressing concerns about the use of designated church funds was not defamatory, and the attorney's letter that accused the board chairman of "embezzlement" was not defamatory since it was protected by the "litigation privilege" (good faith statements made in contemplation of litigation generally cannot be defamatory). Miller v. Second Baptist Church, 2004 WL 1161653 (Cal. App. 2004).
[287] Miller v. Second Baptist Church, 2004 WL 1161653 (unpublished decision, Cal. App. 2004).
Example. A church convened a special business meeting at which the church treasurer was accused of embezzling church funds. Following this meeting the treasurer was shunned by church members who viewed her as guilty. This case is tragic, since the treasurer had been a long and devoted member of the church. Her life was ruined by the allegation, and she had to leave the church. It was later proven that she was completely innocent. She later filed a lawsuit, accusing the pastor and members of the church board of defamation. A court agreed with her, and awarded her a substantial verdict. The court pointed out that the accusation of embezzlement was based on flimsy evidence and could have easily been refuted with any reasonable investigation. The court concluded that church leaders are liable for defamation if they charge a church worker with embezzlement without first conducting a good faith investigation. The court also pointed out that the charges should not have been disclosed to the congregation, but rather should have been discussed among the church board and a decision made at that level on whether or not to dismiss the treasurer.

This case provides church leaders with very helpful guidance in handling suspicions of embezzlement. Do not rush to judgment. Conduct a deliberate and competent investigation, and let the church board resolve the issue without involving or informing the congregation, if possible. In some cases, congregational outrage may occur following the dismissal of an embezzler by the pastor or church board, especially if nothing is communicated to the congregation about the basis for the action. In these cases the board may decide that the membership must be informed. If so, refer to the above discussion on "informing the congregation."

11. THE EMPLOYEE POLYGRAPH PROTECTION ACT

The federal Employee Polygraph Protection Act (EPPA) prohibits employers from requiring or requesting any employee or job applicant to take a lie detector test, or from discharging, disciplining, or discriminating against an employee or prospective employee for refusing to take a test or for exercising other rights under the Act.

However, the Act contains limited exemptions where polygraph tests (but no other lie detector tests) may be administered, subject to certain restrictions. One exception allows employers to ask employees to submit to a polygraph exam if they are suspected of theft and there is an ongoing investigation. Here are the details of this exception:

[This Act] shall not prohibit an employer from requesting an employee to submit to a polygraph test if—
(1) the test is administered in connection with an ongoing investigation involving economic loss or injury to the employer's business, such as theft, embezzlement, misappropriation, or an act of unlawful industrial espionage or sabotage;
(2) the employee had access to the property that is the subject of the investigation;
(3) the employer had a reasonable suspicion that the employee was involved in the incident or activity under investigation; and
(4) the employer executes a statement, provided to the examinee before the test, that—(A) sets forth with particularity the specific incident or activity being investigated and the basis for testing particular employees, (B) is signed by a person (other than a polygraph examiner) authorized to legally bind the employer, (C) is retained by the employer for at least 3 years, and (D) contains at a minimum—(i) an identification of the specific economic loss or injury to the business of the employer, (ii) a statement indicating that the employee had access to the property that is the subject of the investigation, and (iii) a statement describing the basis of the employer's reasonable suspicion that the employee was involved in the incident or activity under investigation.[288] 29 U.S.C. § 2006(d).
Tip. Know the details of the "ongoing investigation" exception. Under very limited circumstances, you can request that an employee take a polygraph exam if you suspect the employee of theft and you are conducting an ongoing investigation. Do not rely on this exception without fully complying with all of the requirements quoted above. Also, consult with legal counsel to be sure the exception is available to you.
Examples
  • A church board suspects the church's volunteer treasurer of embezzling several thousands of dollars of church funds. The treasurer is called into a board meeting, and is told "you can clear your name if you submit to a polygraph exam." Does this conduct violate the Employee Polygraph Protection Act? Possibly not. The Act only protects "employees," and so a volunteer treasurer presumably would not be covered. However, if the treasurer receives any compensation whatever for her services, or is a "prospective employee," then the Act would apply. Because of the possibility that volunteer workers may in some cases be deemed "employees," you should not suggest or request that they take a polygraph exam without the advice of legal counsel.
  • Same facts as the previous example, except that the church suspects a full-time secretary of embezzlement. Can it suggest that the secretary take a polygraph exam? Only if all the requirements of the "ongoing investigation" exception apply. These include: (1) the test is administered in connection with an ongoing investigation involving economic loss or injury to the employer's business, such as theft or embezzlement; (2) the employee had access to the property that is the subject of the investigation; (3) the employer had a reasonable suspicion that the employee was involved in the incident or activity under investigation; and (4) the employer executes a statement, provided to the examinee before the test, that—(A) sets forth with particularity the specific incident or activity being investigated and the basis for testing particular employees, (B) is signed by a person (other than a polygraph examiner) authorized to legally bind the employer, (C) is retained by the employer for at least 3 years, and (D) contains at a minimum—(i) an identification of the specific economic loss or injury to the business of the employer, (ii) a statement indicating that the employee had access to the property that is the subject of the investigation, and (iii) a statement describing the basis of the employer's reasonable suspicion that the employee was involved in the incident or activity under investigation.
The EPPA provides that an employer that violates the Act is liable to the employee or prospective employee for "such relief as may be appropriate, including, but not limited to, employment, reinstatement, promotion, and the payment of lost wages and benefits." A court may also award damages based on "emotional distress," and punitive damages.
Key Point. Damages awarded for violating the Employee Polygraph Protection Act may not be covered under a church's liability insurance policy. This is another reason for church leaders to assume that the Act applies to their church, and to interpret its provisions prudently.
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