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 federal appeals court affirmed an almost eight-year prison sentence for a Catholic priest who embezzled $256,000 between 2012 and 2018 from three South Dakota churches.
He was caught only after one of the churches installed a hidden camera that recorded him stealing from a money bag.
Because the priest failed to report the embezzled money on his tax returns, he was also found guilty of filing a false tax return.
Lavish Purchases, False Tax Returns
The priest filed false tax returns for tax years 2013 through 2017 and used the stolen money to purchase for himself over a dozen gold-plated chalices, numerous bronze statues, a $10,000 diamond ring, a grand piano, Mont Blanc fountain pens, and other items.
The priest was charged with 50 counts of wire fraud, nine counts of money laundering, one count of interstate transportation of stolen money, and five counts of filing false tax returns. A jury found him guilty on all counts, and he was sentenced to nearly eight years in prison. In addition, he was ordered to pay $256,000 in restitution to be split equally between the three churches, plus an additional $46,000 in restitution to the IRS.
Court: Stolen funds must be reported as income
The priest filed an appeal with a federal appeals court challenging his conviction. In particular, he argued that there was insufficient evidence to prove he filed false tax returns by failing to report his deposits of stolen cash offerings to the IRS.
The court disagreed.
A taxpayer files a false tax return when he “willfully [files] any return … which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter.” Stolen funds must be reported as income. Thus, the “intentional violation of a known legal duty” to report stolen income violates the statute. … “Intent may be inferred from conduct such as a consistent pattern of not reporting income or inconsistently reporting income.” Here, a reasonable jury could have found that the priest’s failure to report income was willful because he consistently failed to report his illegitimate income while successfully reporting his legitimate income.
The priest claimed that the IRS failed to prove his underreporting was willful because he did not know he had a legal duty to report illegally acquired cash. Moreover, he argued that because the stolen cash came from “a tax-exempt source” (that is, the church), there was even less reason to believe that he would have to pay taxes on the stolen donations.
Again, the court disagreed.
Here, there was sufficient evidence for a jury to infer that the priest knew about his tax duties. He personally filed his tax returns each year and a fellow priest testified that he was proud of his ability to handle his tax affairs. Further, the duty to report stolen income is well established in law. On this record, a reasonable jury could find that the priest was informed enough to know about his duty to report his income, including income from stolen cash.
What this means for churches
This case is relevant to church leaders for the following reasons:
1. Many church leaders consider embezzlement to be a problem that “couldn’t happen here.” Yet, it is this very attitude that contributes to poor or nonexistent internal controls over cash handling and payment of expenses that makes embezzlement a real threat.
2. How was the priest able to embezzle church funds? In most cases by entering churches late at night and removing bags containing church offerings. Had the church implemented the most basic internal controls, the priest could not have engaged in his numerous acts of embezzlement.
3. Church leaders may not be discharging their fiduciary duties when they fail to implement basic internal controls over cash handling and the payment of expenses. Such a failure can result in a host of negative consequences, including criminal liability to the embezzler.
4. The legal consequences of embezzlement can be severe. In this case, the priest was convicted of a felony and sentenced to a prison term of nearly eight years.
5. Be sure to consult with legal counsel about the application of state law to the use of video technology.
Note: (1) Some states limit or prohibit the use of hidden video cameras in the workplace. (2) The use of hidden cameras may constitute an invasion of privacy under state law. (3) Videos depicting a volunteer or employee embezzling church funds may be inadmissible in a criminal prosecution.
The law often lags behind technological innovation. As a result, it is important for church leaders to be aware of legal developments in their state and at the federal level that directly or potentially affect the use of surveillance technology.
United States v. Garbacz, 33 F.4th 459 (8th Cir. 2022).