The first of two federal trials accuses a former assistant treasurer of the diocese of conspiring with the CFO in an overpriced outsourcing arrangement for accounting and computer services that included kickbacks to the CFO. But when the CFO was found out, he went to work for the Columbus diocese. The defense claims that these arrangements were business as usual in Cleveland.
Even the New York Times (Christopher Maag) picked up the story of a couple of federal trials in Cleveland that accuse the former CEO and former employees of the Cleveland diocese of diverting funds to themselves during the tenure of Bishop Anthony M. Pilla, who resigned unexpectedly in 2006.
And although the Times quotes Prof. Charles Zech of Villanova (author of a study on internal controls in Catholic dioceses) saying that this kind of thing is more common in parishes than at the diocese level, less than a year ago we reported on a similar exaggerated billing scheme in the New York archdiocese.
The indictment in US v. Joseph H. Smith and Anton Zgoznik lays out the case better than the news reports (of course and indictment is just an accusation, not proven fact). The diocese CFO, Mr. Smith, encouraged Mr. Zgoznik to set up an outsourced accounting department which would eventually include IT services as well. It started modestly, but by performing more services to the diocese, its cemetery association, and schools, the outsourcing operation received over $3.7 million a year by 2003. During the period 1997-2003 the outsourcing company also paid about $112,000 a year to JHS Enterprises and Tee Sports, Inc., enterprises run by Mr. Smith. Though the contracts increased, the payments remained largely constant, except for a $193,000 payment in 2000. Although the invoices said the payments were for services rendered, the accusation is that they were mere kickbacks.
And in addition, Mr. Smith enjoyed access to a $270,000 account that was agreed to by the former Financial and Legal Secretary for the diocese, a Rev. John Wright. The indictment claims that this additional lump sum payment was to be in lieu of any raises (other than cost of living adjustments).
The defense is arguing that these arrangements were just the way business was conducted at the diocese, and that Mr. Smith's account was similar to an account controlled by Bishop Pilla. In a motion filed in February, they sought a long list of documents from the diocese that they claimed would establish their contention that the outsourcing arrangement was approved and that there were other off-the-books accounts. What appears to be a copy of the motion is available on the blog of Matt C. Abbott, a pro-life columnist who writes on Alan Keyes' RenewAmerica web site.
In advance of the trial, current Bishop Richard Lennon (who was formerly the administrator of the Boston archdiocese after the resignation of Cardinal Bernard Law in 2002) sent a letter to the priests of the diocese, a copy of which was published on the Commonweal web site. Bishop Lennon asserts that the diocese of Cleveland is not on trial, rather it is the victim. He also says that the diocese has cooperated fully with the Department of Justice in releasing documents (although it does not say that the diocese cooperated with requests from the defense lawyers). There is also the notable comment that "it is difficult to protect against fraudulent conduct."
It may not be that difficult. An editorial in the National Catholic Reporter (EIN 43-0815211 Form 990) back in March (available without subscription at least for August and September), opens with a quote from an unnamed archbishop saying to an NCR reporter, “But it’s impossible to control everything—we know a lot of the pastors still have their little kitties.”
It also lists some other open secrets about governance in Catholic dioceses [quoting]:
- Bishops take gifts, sometimes very expensive gifts, from those who seek business from the church.
- Family members and friends of church officials can unduly benefit from their connections.
- The vast majority of U.S. Catholics have no idea how their $6 billion in annual donations are spent (or misspent) because diocesan and parish financial reporting, if it exists at all, is generally designed to obscure, to confuse, and not to enlighten.
And the editorial mentions the stunning outcome of the discovery of the payment scheme in Cleveland. Joseph H. Smith left there and was hired as the CFO of the Columbus diocese. He only resigned there after he was indicted.
The editorial suggests that the solution is for Catholic bishops and dioceses to drop the secrecy and adopt:
- a policy of full financial transparency
- a robust internal audit function and
- establishment and enforcement of conflict of interest policies at the diocese and parish levels.