Yet another scam targeting the financial integrity of churches took place in Fort Worth, Texas as police sought a man who used a hard luck story to take close to $5,000 from as many as 10 Tarrant County churches. Illustrating how necessary thorough church fraud detection and church fraud prevention can be, police say the man may have been preying on the financial integrity of churches since at lest 2005.
Affinity fraud is one of the fastest growing crimes in America. For many churches, fraud prevention and detection is a difficult task. Churches are prime targets for scam artists who use their social networks to gain the trust of hundreds of people very quickly. In their wake, churches often find that many of their members have lost thousands of dollars, and that the church community is irrevocably broken.
Fortunately, there are things that clergy and laity can do to protect a church. While fraud services are a good solution, a church can start some fraud prevention and detection on their own. In fact, some fraud prevention services can be as simple as being aware of any new members. Be on the lookout for people who ingratiate themselves very quickly. Good fraud prevention and detection will look closely at members who present themselves as very wealthy and who are making a lot of effort to become very involved with the church.
Church leaders and nonprofit board members need to know how to spot a con artist. Affinity fraud is incredibly damaging to ministries. Con artists are often well polished and smooth. Often, people are surprised after the fraud or con has been committed. Fraud prevention isn’t just for large multinational corporations. Churches and other nonprofit organizations are at an increased risk due to the donations and grants they receive. Listed below are six different warning signs that a person may be a con artist.
Affinity fraud is one of the fastest growing crimes in the United States, and unfortunately it can be one of the hardest to stop. Although it is often called church fraud, affinity fraud can occur within any group of closely related people. Most often, however, scam artists use the pre-built social networks of a church to lend themselves financial integrity and gain the trust of hundreds or thousands of people.
If your church or ministry is finding success and growing, the chances are they will be the target of those who wish to bring them down with fraudulent or deceptive means. Today’s world is seeing many churches, ministries, and non-profit organizations shutting down as a result of not being forewarned about the dangers of financial fraud in the church. Many church leaders and members have fallen prey to financial agreements and contracts that in the end turned out to be “too good to be true”. You may wonder if there are any programs that offer fraud protection to your church. The good news is there is, so let’s take a look at a few of the bestfraud prevention programs out there.
Why do we care about church fraud protection at Weeds In The Garden?
To be honest, well, we love honesty. Church Fraud Prevention is one way to combat a hurtful, damaging form of dishonesty. Why, though, do we love honesty?
Our Fraud Awareness in the Church series continues with part 2 on Fraud Prevention Programs – Fraud Reporting. We asked churches to respond to this statement:
“Our church has established appropriate channels for reporting and resolving sensitive issues like fraud and illegal acts. (Examples include establishing an anonymous fraud hotline, posting notices, etc.)”
Survey Results: Only 40% of the respondents have established any form of fraud reporting mechanism.
KEY: Key Point: Statistics make it clear that the most common method of fraud detection is anonymous tips!
Few churches have the stomach or the nerve to do what businesses and local governments are increasingly doing. For example, A “Report Fraud” link on a school district’s or city’s website gives comfort to most taxpayers. But, the same people would choke if they saw a fraud tip hotline on their church’s website!
One solution I have seen:
A church contracted with an HR services firm to take care of all of their payroll compliance issues such as wage and hour laws, discrimination, workmen’s comp, immigration, etc. The HR company also drafted the church’s personnel manual which included an 800 number hotline. The HR professionals maintain the hotline assuring that all fraud reporting remains confidential.
Our Fraud Awareness in the Church series continues with a two-part series on Fraud Prevention Programs. PSK in cooperation with the National Association of Church Business Administration (NACBA) conducted a survey to determine the extent of fraud awareness in the church environment. We asked churches to respond to these statements:
“Our church has established a formal program for managing fraud risk.”
“Our church has developed an anti-fraud team consisting of members from the leadership team, ministerial staff, congregation and professionals such as CPAs, CFEs, or attorneys. “
“Our fraud risk program includes a routine assessment (at least annually) of the vulnerability of the church to fraudulent activity.”
“Our church has created “ownership” of fraud risk management by assigning the responsibility of managing fraud risks to a member of senior ministerial staff or the leadership team.”
Survey Results: Approximately 40% of respondents stated that they had a formal fraud prevention program in place. Although I wished the number would be higher, it settled in about where I expected. What I didn’t expect were the low compliance rates for the next three questions.
These responses indicated a very low compliance rate in three elements that SHOULD be included in a fraud prevention program. The low numbers also indicated that the formal fraud prevention programs in place are probably not very thorough and as a result, not a very strong defense against fraud occurring in the church.
Only 10% reported having an anti-fraud team in place. This begs the question, “Is the Administrator having to do this all alone?”
Only 25% reported conducting an annual assessment of their church’s fraud preparedness. This begs the question, “How do you know your prevention measures are effective, if you really don’t know what they are to begin with?”
Finally, only 25% of the churches reported had actually assigned responsibility of fraud management to an accountable staff member. This begs the question, “Who’s in charge here?”
KEY: Fraud prevention does not happen by accident!
Our Fraud Awareness in the Church series continues as we look at Individual Payments: Contractors and Benevolence. We asked churches to respond to these statements:
“Before paying an individual as an independent contractor, our church applies IRS compliant tests to determine if the payee qualifies as an independent contractor.”
“Our church has written a policy to direct benevolence payment activity.”
With two notable exceptions, tax-exempt organizations are not to transfer assets or make payments to individuals. The two exceptions are Contractor payments — reasonable compensation for services provided the organization, and Benevolence payments — to individuals who are the target of the organization’s exempt purpose (rent assistance, etc.). Outside of these two exceptions, all other payments are looked upon with a degree of skepticism by the IRS.
Survey Results: Surprisingly, 40% of the respondents do not go through a formal employee vs. contractor test.
Key: Embezzlers tend to shy away from reporting their theft to the Government. If ALL payments to contractors are screened and a 1099 prepared, a fraud loophole is closed.
Another area particularly vulnerable to fraud is benevolence. Again, 40% of the churches do not operate under a written benevolence policy.
Key: Benevolence funds are one of the few accounts where payments to individuals are not suspicious. (Fraudsters are very aware of this fact.)
Double Key: Part of the benevolence policy should be to NEVER give funds directly to the people being helped. Make payments directly to 3rd parties. (Utility company, landlord ,etc.)
Our Fraud Awareness in the Church series continues as we look at Information Technology Security. We asked churches to respond to these statements:
“Our church has a formal information technology security plan.”
“Our church financial secretary or accountant/bookkeeper has access to all modules of the church’s software system.”
Churches struggle to keep up with the challenges of the rapid change in information technology. Even when they want to address the issues in the two questions above, the workload crush of most churches makes it very difficult to stop the train long enough to develop a good IT plan. This is clearly (to me) reflected in the:
Survey Results: Only 50% of the participants have implemented a formal information technology security plan.
In another indicator of the impact workload pressure has on fraud protection, a whopping 80% of the churches surveyed confessed that their accountant/bookkeeper had access to ALL of their church’s software applications.
In the vast majority of churches this large degree of “trust” is placed in the hands of very good people and a problem never arises. But if, just once, a church employs an individual given to theft and gives him or her this much access…trouble is probably just around the corner.
In PSK’s Faith Based Accounting Blog I posted an article titled “Taking IT for Granted”, where I addressed this issue. The following are a few questions each church should ask itself when developing strong IT controls:
- Does our church have a formal Information Technology security plan?
- Do any individuals at our church have access to all modules of the church’s software system?
- Does our church partition its computer applications so that employees and volunteers have access only to files necessary to perform their duties?
- Does computer access require passwords that are confidential and unique?
- Are our passwords changed periodically?
- Are passwords complex including alpha, numeric and case sensitive characters?
- Do we have backup procedures that are performed regularly that include off-campus storage?
- Do we have measures in place to protect the church from malware?
- Do we train our employees to avoid accepting email from unknown locations?
- Do we have a download policy?
- Do we maintain separate public and private wireless networks?