Ponzis, Pyramids, and Other Investment Scams

Keep your donations secure.

The United States Securities and Exchange Commission (SEC) lists four common investment scams that are perpetrated on religious organizations—pyramid schemes, Ponzi schemes, Nigerian investment scams, and prime bank scams. The SEC provides the following warning signs of fraudulent bank-related investment schemes:

Excessive guaranteed returns. These schemes typically offer or guarantee spectacular returns of 20 to 200 percent monthly, absolutely risk free! Promises of unrealistic returns at no risk “are hallmarks of prime bank fraud.”

Fictitious financial instrument . Despite having credible-sounding names, the supposed “financial instruments” at the heart of any prime bank scheme simply do not exist. Exercise caution if you’ve been asked to invest in a debt obligation of the “top 100 world banks,” Medium Term Bank Notes or Debentures, Standby Letters of Credit, Bank Guarantees, an offshore trading program, a roll program, bank-issued debentures, a high yield investment program, or some variation on these descriptions. Promoters frequently claim that the offered financial instrument is issued, traded, guaranteed, or endorsed by the World Bank or an international central bank.

Extreme secrecy. Promoters claim that transactions must be kept strictly confidential by all parties, making client references unavailable. They may characterize the transactions as the best-kept secret in the banking industry, and assert that, if asked, bank and regulatory officials would deny knowledge of such instruments. Investors may be asked to sign nondisclosure agreements.

Exclusive opportunity. Promoters frequently claim that investment opportunities of this type are by invitation only, available to only a handful of special customers, and historically reserved for the wealthy elite.

Claims of inordinate complexity. Investment pitches frequently are vague about who is involved in the transaction or where the money is going. Promoters may try to explain away this lack of specificity by stating that the financial instruments are too technical or complex for “non-experts” to understand.

You should be especially watchful for prime-bank related schemes promoted over the Internet.

Responsibilities of board members

Officers and directors have a legal duty to exercise due care in the investment of church funds. Just as importantly, they have a moral duty to be prudent in their investment decisions. No officer or director wants to explain to church members at an annual business meeting how some of their contributions were lost due to poor investments. Two points to consider before making investment decisions:

Avoid investing in companies or programs in which a board member has a personal interest.

Such investments are not always inappropriate. But they demand a higher degree of scrutiny. A church’s investments should be reviewed at every board meeting. This ensures that all investments will be continuously monitored, and that necessary adjustments can be made.

Trustees have a higher duty.

Sometimes church board members are designated as the trustees of a charitable trust. For example, a member dies leaving a large sum to the church for a specific purpose and designates the church board as the trustee of the fund. Trustees are held to an even higher degree of care in the investment of trust funds than officers or directors of a corporation.

However, the Revised Model Nonprofit Corporation Act specifies that “a director shall not be deemed to be a trustee with respect to the corporation or with respect to any property held or administered by the corporation, including without limit, property that may be subject to restrictions imposed by the donor or transferor of such property.”

In other words, a church officer or director is not automatically deemed to be a “trustee” of church funds. Officers and directors generally are held to the higher legal standard applicable to trustees only if they are designated as trustees in a legal instrument that creates a trust fund.

Church officers and directors must take steps to inform themselves about any investment decision involving church funds. They can rely on a number of safeguards, including their own research, the recommendations of an investment committee, and common sense.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations." Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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