Bergen Record: Why is it so easy to use Shuls and Yeshivas to Launder Money?

Harvy Lipman of the Record explains why lack of regulation over religious non-profits makes it so easy for shuls and yeshivas to launder money and provide phony IRS receipts.
Law shields religious charities from scrutiny

One of the key elements of the money-laundering case brought Thursday against several leaders of the Syrian Jewish communities in Brooklyn and Deal was the use of charities linked to religious groups as conduits.

According to the federal complaints, checks made out to the charities were sent to Israel, where the funds were run through other entities and returned to money-laundering clients for a fee.

This is not the first time federal authorities have uncovered a scam utilizing religious charities to launder money. In fact, less than two weeks ago, Naftali Tzi Weisz, the grand rabbi of a Brooklyn-based Hasidic sect, agreed to plead guilty to one charge in a case involving charities connected to his group. That scheme involved steering donations to the charities, which would transfer the money through various Israeli banks and organizations and return 80 percent to 95 percent of the funds to the donors.

Thus, a donor who gave $100,000 would get a tax deduction for the full amount, even though only $5,000 to $20,000 of the money went to charity.

Several experts in non-profit law said that federal tax law significantly hampers regulators’ ability to ferret out abuse by charities linked to religious groups. Under the Internal Revenue Code, such organizations are not required to file tax returns as most non-profits are. Of the half-dozen charities named in Thursday’s federal complaints, only one has filed federal tax returns.

“There’s no regular flow of information the way there is with every other form of taxpayer, whether an individual or a tax-exempt entity,” said Marc Owens, a Washington lawyer and former head of the Exempt Organizations Division of the Internal Revenue Service.

“Because of that lack of information, the IRS has a difficult time determining if something irregular is going on. There are no documents to look at.”

Oversight ‘difficult’

Daniel Kurtz, a Manhattan lawyer and former director of the New York Attorney General’s Charities Bureau, said religious groups’ exemption from filing tax returns also hamstrings state regulatory agencies, which rely on the information in the returns.
“Obviously, it makes it tremendously difficult to exercise any level of oversight,” Kurtz said.

He noted that some restraints on government review of religious groups’ activities are warranted under the First Amendment’s guarantee of religious freedom.

“There may be some things that would look unusual at another organization, like spending a lot of money for vestments to clothe a priest, that are none of the state’s business,” Kurtz said. “But the total lack of oversight is troubling.”

Owens said Congress has recently added a section — restricting audits — to the tax code, even further limiting oversight of religious groups.

“There’s a requirement that a high official of the IRS determine that there is a reasonable probability an audit will find information that endangers the church’s tax-exempt status before an audit can be conducted,” he said.

That’s quite different from other non-profits, which can be audited if an IRS examiner sees any reason to suspect a problem.

“You can’t start an audit of a church because an agent drove by a church and saw something suspicious, like a big car parked in the driveway,” Owens said.

Complicating matters, the tax code doesn’t define what constitutes a church.

“There are no regulations, but the issue has been addressed by a series of court decisions over the years,” Owens said. The IRS has developed a set of 14 criteria to decide whether an organization constitutes a religious group that have been endorsed to varying degrees in subsequent court rulings.

Chief among them are whether the organization has a congregation, holds regular services, ordains ministers based on a set of prescribed studies and has its own place or places of worship.

“An organization does not need to meet all of them, but it needs to meet a goodly number,” Owens said.

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