One of the most controversial aspects of that controversial organisation, the Church of Scientology, is its financial dealings. The Church's corporate structure is fiendishly complicated, involving scores of entities in dozens of countries, which are supposedly "each totally and legally independent from one another, connected only by ecclesiastical bonds" 1 . The complexity of the structure failed to deter the US Internal Revenue Service from investigating Scientology's financial dealings following the Church's exemption from taxes in 1957. The exemption was revoked in 1967, leading to a 26-year legal battle which was resolved in somewhat peculiar circumstances in 1993, with exemption restored to Scientology and its associated entities. What had the IRS discovered and why did they mount against Scientology what insiders claim to have been the biggest investigation in its history? The answer was simple: Scientology had operated corruptly and fraudulently for years under the cover of a respectable tax-exempt religious institution. 2
The story of Scientology's corruption by its leaders is an extraordinary and unedifying one, but the story really begins many years before Scientology's foundation in 1952. It begins, as does all else in Scientology, with that extraordinary and perplexing man, L. Ron Hubbard.
1930s & 1940s: Bilking the guillible
In 1940, L. Ron Hubbard - the man who was to found Scientology - was a down-at-heel science fiction author whose finances were so tight that, rather than face expensive hospital bills, he had been forced to keep his ailing infant son L. Ron Jr. in a makeshift incubator made from a cupboard drawer lined with blankets and kept warm with an electric light bulb. 3 This helps to explain, though it doesn't excuse, Hubbard's use of classic con techniques to obtain money and goods. During the 1930s he would buy goods on payment from local department stores, without any intention of meeting the payments but secure in the knowledge that it would be months before they got round to repossessing their property, which he could use in the meantime. Similarly, he represented himself as being the proprietor of "Yukon Harbor Marine Ways" - which of course did not exist, but the expensive paper and fancy letterhead enabled him to buy material for his boat wholesale prices. 4
In a more serious vein, Hubbard turned to outright fraud after the Second World War. After the end of the war he had taken up lodgings with Jack (John) Parsons, the brilliant rocket scientist who founded the legendary Jet Propulsion Laboratory but lived an extraordinary double life as a black magician. Hubbard, Parsons and Sara "Betty" Northrup - Parsons' girlfriend, later Hubbard's second wife and willing participant in sex magic ceremonies involving both men - pooled their funds in March 1946 to form a company called Allied Enterprises. It would buy yachts in Florida and sell them for a profit in California. Parsons put up $20,970.80, Hubbard $1,183.91 and Sara nothing (though she was an equal partner). In May 1946, Hubbard and Sara went to Florida to buy boats. Having bought two schooners and a yacht, they then went to ground without any attempt to transport the boats to California for sale. In June, Parsons went to Florida to track down the runaways. In the meantime, one of his associates, Louis Culling, made some enquiries and soon discovered the truth, which he cabled to the infamous English black magician Aleister Crowley:
"As far as I can ascertain, Brother John [Parsons] has put in all of his money . . . Meanwhile, Ron and Betty [Sara Northrup] have bought a boat for themselves in Miami for about $10,000 and are living the life of Riley, while Brother John is living at rock bottom, and I mean rock bottom. It appears that originally they never secretly intended to bring this boat around to the California coast to sell at a profit, as they told Jack, but rather to have a good time on it on the east coast . . ." 5The unfortunate Parsons brought suit in July but only recovered two of the boats, half of his legal costs and a $2900 promissory note from Hubbard. The other boat was sold by Hubbard to clear his own debts. He and Parsons never met again.
It was probably a similar short-term financial shortage which in 1948 landed Hubbard in court for the first and only time in his life, when he was charged and convicted of petty theft by passing forged checks. He was arraigned in San Gabriel on 19th August 1948, where he pleaded not guilty and a trial was fixed for 31st August 1948. When the day came he changed his plea to guilty and was fined $25. Unfortunately the relevant file was destroyed in March 1955 during a routine weeding-out of papers, so the circumstances of the case are not now known. 6
1950-52: Boom and bust
Considering Hubbard's record of financial duplicity during his thin years, it was probably too much to expect perfect propriety when in 1950 his book Dianetics: The Modern Science of Mental Health unexpectedly became a massive success and a nationwide fad in the US. With over 150,000 book sales inside a year, Hubbard soon became a very wealthy man and took full advantage of his newfound status of mental self-improvement guru. At the Dianetic Foundation in Elizabeth, New Jersey, student Dianetic therapists were charged $500 to (as Hubbard put it) "hang around the office and watch what was going on". August 1950 saw him in California lecturing for a month to 300 students at a cost of $500 per head, that event alone bringing in $150,000 - the equivalent of a million dollars or more at 1998 prices. Professional Dianetic therapy ("auditing") was charged at $25 per hour. 7 By the end of 1950, the six Dianetic Foundations were taking in millions of dollars between them, doing a roaring trade despite the high prices charged. The science fiction author A.E. van Vogt, who headed the Los Angeles Foundation, recalled doing little but tear open envelopes and pull out $500 cheques from people who wanted to take an auditor's course. 8
By 1952, however, the Foundations were all bankrupt and Hubbard was being pursued by his creditors. What had gone wrong?
What had gone wrong was largely the fault of Hubbard himself. Perhaps hung up on memories of his earlier poverty - somewhat ironic, considering that his Dianetic therapy was supposed to eliminate painful memories - he had behaved recklessly with the vast income of the Foundations. The expenditure regime was based on a premise that Dianetics would go on expanding indefinitely. There was no accounting, no organization, no financial strategy or control. One member of the Elizabeth Foundation resigned in protest at this, when one month $90,000 income was received but only $20,000 could be accounted for. There is little doubt that much of the missing money went into Hubbard's pocket, whom early associates described as having "spent money like water". A.E. van Vogt recalled: "One day the bank manager called me. He told me Mr Hubbard was in the front office and wanted to draw a cashier's cheque for $56,000 and was it all right to give it to him. I said, 'He's the boss.' " 9
He was not, however, boss enough to be satisfied. As the Dianetics boom tailed off, the Foundations slipped inexorably into a financial crisis from which there was to be no escape. Hubbard refused to acknowledge his own responsibility for the mess and descended into a paranoid fixation on supposed convoluted plots laid against him by Soviet Russia and the American Psychiatric Association. He began writing rambling letters to the FBI accusing his wife and various Foundation staff of being Communist agents.
The freefall was halted for a while by a millionaire Dianeticist, Don Purcell, and Hubbard's operations moved to the latter's home town of Witchita, Kansas. But it soon became apparent that Hubbard had lost any sense of direction he might have possessed: staff were hired and fired arbitrarily as his attention and enthusiasm flitted from project to project, from one grandiose scheme to another. Dianetics itself was clearly a spent force - a major conference of Dianeticists organized in Wichita at the end of June 1951 only attracted 112 delegates. Hubbard desperately tried to revive income by increasing the price of a package of Dianetics books and tapes from $1,000, to $1,500, to $2,000 and finally to $5,000 within only three months, but to no avail: in February 1952, the Witchita Foundation was wound up. Its final accounts revealed an income of $142,000 and expenditure of $205,000. Hubbard had received fees amounting to nearly $22,000 while salaries for all the remaining staff only accounted for $54,000. The unfortunate Purcell found himself inundated with debts and Hubbard's unpaid bills, some going back as far as 1948.
The foundation of Scientology
Undaunted by the failure of Dianetics, Hubbard moved to Phoenix, Arizona to develop his "science of the mind" into an exotic new form which he called Scientology. Unlike the relatively fragmented Dianetics movement, the new movement was rigidly centralised under Hubbard's absolute control; independent Dianetics/Scientology groups inside and outside the US were ruthlessly crushed out of existence. The new organisation was, at first, avowedly secular, operating under the name of the "Hubbard Association of Scientologists International" (HASI) - no suggestion of it being a "church". But Hubbard evidently saw strong commercial advantages to claiming religious status. Several of his associates, the writer Harlan Ellison and publisher Lloyd Arthur Eshbach amongst them, recalled Hubbard saying on a number of occasions that "if a man really wanted to make a million dollars, the best way to do it would be to start a religion". 10
Religious status carried significant tax benefits, as well as making the organisation more respectable and (so he hoped) less open to criticism. On April 1953, he wrote a long letter to Helen O'Brien, the head of the Philadelphia branch of the HASI, discussing the possibility of setting up a chain of HASI clinics or 'Spiritual Guidance Centers'. They could make 'real money', he noted, if each clinic could count on ten or fifteen students a week, each paying $500 for twenty-four hours of auditing. He had clearly previously discussed the prospect of converting Scientology into a religion. 'I await your reaction on the religion angle,' he wrote. 'In my opinion, we couldn't get worse public opinion than we have had or have less customers with what we've got to sell. A religious charter would be necessary in Pennsylvania or NJ to make it stick. But I sure could make it stick.' 11
In December 1953, Hubbard incorporated three new churches - the Church of American Science, the Church of Scientology and the Church of Spiritual Engineering - in Camden, New Jersey. The signatories of the deed of incorporation were Hubbard, his third wife Mary Sue and his daughter Henrietta. On 18 February 1954, the Church of Scientology of California was incorporated. Its objects, inter alia, were to 'accept and adopt the aims, purposes, principles and creed of the Church of American Science, as founded by L. Ron Hubbard'. Another Church of Scientology was incorporated in Washington DC and throughout 1954 Hubbard urged Scientology organisations around the United States to convert their operations into independent churches. Executives of the Hubbard Association of Scientologists International henceforth described themselves as 'ministers', and some of the more flamboyant even took to wearing clerical collars and pre-fixing their names with 'Reverend'. This become systematic by the mid-1960s, when Scientology was coming under increasing criticism from governments and newspapers; there is a clear correlation between Scientology's claims of religiosity and major outbreaks of criticism of the organisation and its methods.
Scientology had by now spread across the United States, into Europe, Africa and Australasia, often building on established Dianetics groups in the English-speaking countries. Hubbard adopted a McDonalds-style franchising system which proved highly successful. Every aspect of Scientology was rigorously copyrighted and trademarked, even including the name "L. Ron Hubbard". Anyone wanting to use Scientology materials had to obtain them from an approved Scientology franchise - they were later retitled "missions" to play down the overt commerciality of the arrangement - which had purchased a license from Hubbard to use his writings and lectures. Any unauthorised use or adaptation of Scientology met with a strong response, the people responsible being denigrated as "squirrels" or "Suppressive Persons" because they were "a bunch of nuts". Hubbard ordered his followers to harass competitors out of business:
"A person or an organisation using Dianetics or Scientology wrongly or without rights, or a wildcat magazine, is best shut down or shut up by hiring a private detective. Tell the detective 'We don't care if they know you're investigating them for us. In fact, the louder the better.' " 12Having destroyed any potential competitors, Hubbard set about squeezing as much money out of Scientology as possible. The organisation was not large numerically (the Philadelphia Doctorate Course, seventy-two hours of Hubbard lectures which are still sold today, was attended by just thirty-eight people) but the loyalty of its members made it possible to charge high sums - a practice which became increasingly prevalent from the 1970s to the present day. Hubbard, however, was not content with a small but profitable membership; he wanted to lead a mass movement earning millions of dollars. So he turned his mind to the question of recruitment.
"If you discovered that some group calling itself 'Precept Processing' had set up and established a series of meetings in your area... you would do all you could to make things interesting for them. In view of the fact that the HASI holds copyrights for all such material...the least that could be done...is the placement of a suit against them for using materials of scientology without authority...
The purpose of the suit is to harass and discourage rather than to win. The law can be used very easily to harass, and enough harassment on somebody who is simply on the thin edge anyway, well knowing that he is not authorized, will generally be sufficient to cause his professional decease. If possible, of course, ruin him utterly." 13
"[Members of the breakaway group Amprinistics] are each fair game, can be sued or harassed ...
(2) Harass these persons in any possible way...
(4) Tear up any meeting held and get the names of those attending and issue SP [Suppressive Person] orders on them and you'll have lost a lot of rats." 14
"Promote until the floors cave in"
Scientology's methods of recruiting new members are amongst the more unpleasant aspects of the organisation. This is discussed at length in two separate essays (see "Promote until the floors cave in" and "The Personality Test"), but it is worth touching on briefly to emphasise how Scientology has, from the start, operated on a commercial basis. 15 The British sociologist Roy Wallis provided what is probably the best summation of the way Scientology operates - it is an "enrolment economy" dependent on a constant flow of new members, whom it rapidly turns into "deployable agents" tasked with further recruitment. The emphasis was on gaining more and more members -
"... promote until the floors cave in because of the number of people - and don't even take notice of that, just keep on promoting." 16This, in theory, should have led to exponential growth - during the 1950s, Hubbard claimed that membership was doubling every six months, which may have been true at that time- but in reality Scientology's growth has been hindered by the Church's bad reputation, the gruelling work expected of a staff member and the high costs of auditing, books and equipment. On the Church's own figures (in the 1992 edition of What is Scientology?), almost 50% of members drop out after two years or less, and anecdotal evidence suggests a far higher wastage rate. This necessitates a constant effort to recruit fresh blood - replacements must be found for at least a quarter of the Church's membership each year merely for the organisation to avoid shrinkage.
The methods used have varied from the deeply distasteful to the demonstrably deceitful. In 1956, Hubbard proposed "Three methods of dissemination". These were: placing adverts for "personal counselling" of troubled individuals, making no mention of Scientology, the intention being to steer them into "weekly group processing units"; advertising for polio victims to contact a "research foundation investigating polio" - again, no mention of Scientology; and scouring the newspapers to find accident victims to contact, whereupon the Scientology recruiter would "represent himself to the person or the person's family as a minister whose compassion was compelled by the newspaper story concerning the person." 17 Anyone whose name gets onto a Scientology organisation's records as a possible recruit gets sent numerous leaflets, magazines and handwritten letters. Roy Wallis received one which ended amusingly and revealingly:
"p.s. please excuse the terrible typing but this is the 73rd letter I have typed today and my fingers are aching." 18The most visible recruitment method is the notorious "Personality Test" or Oxford Capacity Analysis (OCA) - a so-called psychological analysis, rigged to produce a plotted curve on a chart which supposedly shows that the testee has a serious psychological problem. This, naturally, can only be cured through Scientology. The vigorous attempts by Scientology recruiters to get people in off the street to undergo the OCA have not done any good for their reputation - people often seem to regard them as a nuisance and the streets near Scientology offices are frequently littered with thrown-away leaflets - but they are undoubtedly effective. Scientology's figures (in What is Scientology?, 1992 ed.) suggest that nearly one in five members are recruited this way, and anecdotal evidence supports this picture.
New recruits to Scientology are quickly given training in recruitment techniques so that they can market the OCA and attract still more people - in Roy Wallis' phrase, they are turned into "deployable agents". It is in this regard that Scientology is most overtly commercialised. The particular method used is called the "Big League Sales Technique", adopted by Hubbard in 1972 from Big League Sales Closing Techniques, a book "written by Les Dane, an experienced US super-salesman" and adapted into a Scientology framework in the "Big League Registration Series" of policy letters. 19
Creaming off the profits
By the late 1950s, Hubbard was in clover again. Scientology's membership was steadily rising into the tens of thousands and income was rising accordingly. Between June 1956 and June 1959, the gross receipts of the Founding Church of Scientology in Washington, D.C. rose from $102,604 to $247,674. More than 90% of this income came from the sales of processing and training services, including sales of E-Meters. Additional income was realized from the sales of examinations and tests, tapes, and books, from minimal donations, and from various other sources. In 1957, the US Internal Revenue Service granted the Founding Church exemption from Federal income taxes, in the belief that Scientology was a corporation "organized and operated exclusively for religious ... or educational purposes, ... no part of the net earnings of which inures to the benefit of any private shareholder or individual ..."
But unknown to the IRS, Hubbard and his family were helping themselves to large quantities of the Church's income. From the inception of the Founding Church in 1954 through to March 1957, Hubbard was paid a modest salary of $125 a week ($6,500 a year). In 1957, with money streaming in, he began to cream off the profits under the euphemistically-named "proportional pay plan", paid in lieu of salary, amounting to 10 percent of the gross income of the Founding Church. Other Scientology groups similarly paid a "tithe", again usually 10 percent. In addition, Hubbard received royalties on his numerous Scientology books, as well as lecture fees and other incidental income. Between June 1955 and June 1959, Hubbard received over $108,000 in royalties from the Founding Church and other Scientology organisations. In total, he was raking in over $250,000 a year - considerably more than the President of the United States. The rest of the family got a cut as well. His wife Mary Sue obtained over $11,000 from the Founding Church in rents and unexplained loans; his son, L. Ron Hubbard Jr, received about $1,500 in loans and expenses; his daughter, Kay, received $3,242 in "salary" and "wages" although there was no record of her ever actually performing work for the Founding Church. 20
The IRS eventually discovered the questionable financial practices in which Scientology was engaged and, in 1967, revoked the tax exemptions of the Founding Church and all other Scientology entities. Three reasons were given: (1) the Church's income was inuring to the benefit of Scientology practitioners; (2) the Church's activities were commercial; and (3) the Church was serving the private interests of L. Ron Hubbard and Scientology practitioners. This set the scene for an epic 26-year battle between the US Federal authorities and Scientology, which involved thousands of lawsuits on both sides, large-scale espionage operations carried out by Scientology against the IRS and other Federal agencies and by the IRS against Scientology, and ultimately ended in a capitulation by the IRS in some rather odd circumstances. (See the "Scientology versus the IRS" pages for more details.)
As far as Hubbard's financial fortunes were concerned, though, it made little difference. Scientology operations in the US had been divided amongst a complexity of corporations and fronts, the lead one of which was the Church of Scientology of California (CSC, which also wholly owned and operated Scientology operations in the United Kingdom). In 1966, Hubbard established a motley fleet of ships in the Mediterranean and "resigned" as President and Executive Director of the Church, though - significantly - this was not filed with the English Registrar of Companies until 1969. However, Scientology organisation charts continued continued to place him in the top position. He also held the rank of Commodore, the highest rank in the Sea Organization, which was an elite fraternity of Scientologists. He kept control over the Church policy by authoring numerous policy letters; no policy was valid unless he approved it. He made numerous administrative decisions and was closely involved in the Church's intelligence operations against critics of Scientology and various governments in Europe, Africa and North America.
Most strikingly of all, he retained total control over Scientology's financial affairs and continued to use its income for his own advantage. He was a signatory on all Churches of Scientology bank accounts. His approval was required for all financial planning. He decided to open Swiss bank accounts for the Church of Scientology of California and to put them in the name of Operation Transport Corporation Ltd (OTC), a Panamanian company judged by the US courts to be "a sham corporation"; millions of dollars were transferred between OTC's accounts, Hubbard's personal accounts and his personal safe aboard the Sea Org flagship Apollo.
Scientology had become big business, and the sums of money involved were very considerable indeed. The profits of CSC alone amounted to $1,494,617.53 in 1970, $881,131.18 in 1971, and $1,707,287.17 in 1972; its gross income averaged about twice that. L. Ron and Mary Sue Hubbard likewise profited. CSC paid them salaries totalling $20,249.27 in 1970, $49,647.61 in 1971, and $115,679.76 in 1972. In addition, all the living expenses of the Hubbard family were paid for by CSC - $31,720 in 1970. Then there were the royalty payments due from sales of books and E-meters, paid on a weekly basis and priced according to a formula devised by Hubbard himself - the minimum sale price was to be five times the printing cost plus two times the cost of postage to the church furthest from the American-based printers. (The formula has since been revised, presumably upwards given the increasing cost of Scientology materials). Royalty payments netted Hubbard $104,618.27 in 1972 alone. "Creative accounting" also appears to have played a part. Sir John Foster's 1971 inquiry into Scientology in Britain highlighted the curious fact that while directors' salaries between 1965-1968 averaged only about £2,800, payments of between £70,000-80,000 were made annually to cover "expenditure of United States Mailing List and Promotion." The nature of this expenditure was never explained. 21
On top of all of that, when L. Ron Hubbard "resigned" in 1966, he told the press that he had forgiven the Church a $13 million debt. However, behind the scenes, an "LRH Finance Committee" had been established to determine how much Scientology organisations needed to pay back to Hubbard. The $13 million "debt" included £2 million (then $4.8 million) for Saint Hill Manor in England. But in April that same year he had told the UK Inland Revenue that Saint Hill Manor was worth only £17,707.7/6 (then $42,494), i.e. less than 1% of the sum which he was being "repaid". Other so-called debts mysteriously included the purchase price of the yacht Magician in which Hubbard had sailed to Alaska in 1940, long before the appearance of Scientology and Dianetics. 22
Despite the fact that such debts had supposedly been waived by Hubbard, from around the time of his "resignation" the practice of tithing 10% of gross Scientology income to him was systemised under the euphemisms of "LRH Debt Repayment" or "Founding Debt Repayment" (sometimes also called 'LRH RR' or "LRH 10%"). A 1968 letter from the Flag division (headquartered aboard Hubbard's flagship, Apollo) to the Advanced Org Los Angeles (AOLA) discussed the need to build up cash reserves aboard the Apollo to repay L. Ron Hubbard quickly. Each Scientology organisation had a Flag Banking Officer (FBO) to supervise the organisation's finances; FBO correspondence in March 1969 concerned ways to send loan repayment tithes from AOLA to L. Ron Hubbard, then on board the Apollo, in a negotiable form other than dollars to avoid possible losses from a feared devaluation of the dollar.
The actual amount of money involved is unclear but certainly amounted to tens, probably hundreds, of thousands of dollars annually. Financial records for the period October 9, 1972 to December 28, 1972 indicate that payments designated either 'LRH Repayments,' 'Founding Debt Payment,' or 'Per HCO Policy Letter 7 Sept. 72,' totalling $19,324.41 were made during this six-week period. John McLean, one of the witnesses called by the IRS in support of its revocation of Scientology's tax exemption, testified in court that the average weekly income of U.S. Scientology organizations controlled by Flag was about $1 million and ranged as high as $1,400,000 during that year, implying an annual income of between $50-70 million - far in excess of anything declared to the US tax authorities. Statistics were posted aboard the Apollo each week showing the amount of weekly payments to L. Ron Hubbard. These ranged between $7,000 to $22,000 per week. It was not surprising that Hubbard quickly became a millionaire many times over.
With such large sums of money pouring into his own pocket, it was probably no coincidence that in 1972 Hubbard revised the governing policy of Scientology. In a statement which is still official Scientology policy today, he listed the twelve key points of Scientology's financial affairs:
"A. MAKE MONEYStashing the cash
B. Buy more money made with allocations for expense (bean theory).
C. Do not commit expense beyond future ability to pay.
D. Don't ever borrow.
E. Know different types of orgs and what they do.
F. Understand money flow lines not only in an org but org to org as customers flow upward.
G. Understand EXCHANGE of valuables or service for money (P/L Exec Series 3 and 4).
H. Know the correct money pools for any given activity.
I. Police all lines constantly.
J. MAKE MONEY.
K. MAKE MORE MONEY.
L. MAKE OTHER PEOPLE PRODUCE SO AS TO MAKE MONEY.
A small sack of beans will produce a whole field of beans. Allocate only with that in mind and demand money be made ..." 23
At the same time, Hubbard was obsessed with the danger of Scientology's income being cut off by governments being manipulated, so he believed, by a shadowy conspiracy of Communists, neo-Nazis and psychiatrists. In a policy still followed today, "Sea Org Reserves" were established to provide a fallback fund to enable Scientology to continue operating even having suffered a total cut-off of income. Hubbard ordered:
"If a management unit such as a Bureaux, a Continental Liaison Office, an OT-Liaison Office or any agent thereof such as a Guardian or FBO or Flag Rep is any good, THE NEAREST SERVICE ORG WILL MAKE AMPLE MONEY TO PAY the managing unit and HAVE LOTS LEFT OVER TO SWELL SO Reserves." 24These reserves were defined as follows:
"SO RESERVES: Often miscalled 'Flag Reserves' or 'Management Reserves' which they are NOT. SO Reserves are: The amount of money collected for the corporation over and above expenses that is sent by various units (via FBOs and the Finance Network) to the corporation's Banks. It is used for purposes assigned by the BOARD OF DIRECTORS and for NO OTHER PURPOSE. These are normally employed for periods of stress or to handle situations. They are NOT profit. It is NOT support money for 'Flag' or 'Management.' It is NOT operating money (Examples: Huge sums were required to cover WW when under attack and to catch the PUBS 1970 crash.)" 25A number of Sea Org Reserve Accounts were set up under the name of OTC, the bulk being in Zurich with the Swiss Bank Corporation; sizeable sums were also deposited with the Banque Marocaine du Exterieur, Banco de Vizcaya, Banco Unquijo and Banco Espirito Santo e Comercial de Lisboa. In all, there were 16 active bank accounts. The sums stashed away grew prodigiously. The year-end balances on these accounts were $1,772,981.72 in 1970, $2,042,832.04 in 1971, and $2,561,688.98 in 1972.
Sea Org Reserves continue in existence today, though they appear to be rather more sophisticated now. The leaked secret agreement between the IRS and Scientology which ended their tax war in 1993 reveals the existence of two companies, SOR [Sea Org Reserves] Services (UK) Ltd and SOR Services Ltd. (Cyprus). The former does not appear to exist in English company records, though its purpose is described rather opaquely in the records of a related Scientology entity as being to "provide bookkeeping services". Its non-appearance in the records suggests that it is based in one of the UK's offshore tax havens - the Channel Islands or the Isle of Man, which hold separate company records. Cyprus certainly has a reputation as a tax haven, albeit one tainted by a lot of mafia money from eastern Europe and Russia. The amount of money in the reserves is not publicly known, but given the public admission in 1993 of assets of about $400 million and an annual income of $300 million reported by 18 out of 30 US-based Scientology entities, it is likely that the sum is in the hundreds of millions. Rumours of billion-dollar reserves are not totally implausible, but it is unclear how much profit is made on that $300 million income and therefore how much is diverted to the reserves. 26
During the 1970s, Scientology also accumulated huge sums in the United States Churches of Scientology Trust, which supposedly had originated in 1962 but was not actually established formally by a Declaration of Trust until June 23, 1973. That year, financial statements about the Trust rather belatedly emerged in South Africa, revealing that the funds had grown at a rate just as prodigious as those of the Sea Org Reserves. In 1970, the Trust had $812,134.51; in 1971, $930,400.08; in 1972, $1,307,237.26; in 1973, $1,998,343.08. The sole signatories of this fund were none other than L. Ron and Mary Sue Hubbard, plus a UK Scientology official named Denzil Gogerly. All Scientology churches in the United States, plus, for a while, the UK Church, tithed 10% of their income to the Trust. In 1972, a Hubbardian panic over Swiss exchange rates led 4,222,015 Swiss francs ($1,119,678) to be withdrawn withdrawn from the Trust accounts in Switzerland and brought to the Apollo, where it was locked in Mary Sue's filing cabinet until 1975; she had the only key. Despite the fact that the Trust's declared purpose was the defence of Scientology, between 1970 and 1972 only $9,290.47 was disbursed for this purpose. None of the money was invested, but seems simply to have been hoarded in Swiss bank accounts. 27
Interestingly, the 1993 Scientology-IRS closing agreement lists as "Scientology-related entities" a number of trust funds - Church of Scientology Expansion Trust, Church of Scientology Religious Trust, Scientology Endowment Trust, Scientology Defense Fund Trust, U.S. IAS Members' Trust, Scientology International Reserves Trust, Flag Ship Trust, International Publications Trust, Author's Family Trust B, United States Parishioners Trust and the Trust for Scientologists. Author's Family Trust B was the recipient of most of L. Ron Hubbard's estate and has been run by Norman Starkey (aka "Commander Right Arm Norman Starkey, Executor and Trustee of L. Ron Hubbard's estate" - International Scientology News issue 15, 1988).
Not much is known about the rest. Under the closing agreement, the last four were to be wound up and their assets transferred to other corporate entities (chiefly the Church of Spiritual Technology). It is not known whether this has been done. Scientology trust funds exist overseas, as well. The International Scientology Religious Trust (based at Messrs. Whitman & Ransom, 11 Waterloo Place, London SW1), has mortgaged virtually every Scientology property in England, including the London, Manchester and Plymouth orgs and Saint Hill Manor itself. The value of the 1988 mortgage was an impressive $4,645,000; it followed a rather peculiar $4 million mortgage of the same properties to Church of Scientology of California, seven days after that entity's dissolution in the UK on 31 December 1981.
Greed is good
Why did L. Ron Hubbard cream off so much money from Scientology?
The answer appears to lie in Hubbard's own sense of self-importance. This had been remarked upon many times by many people. Back in February 1942, the US Naval Attaché in Melbourne had reported succinctly that "... he is garrulous and tries to give impressions of his importance. He also seems to think he has unusual ability in most lines." One certainly gets that impression from Hubbard's writings, in which he makes numerous statements ranging from the merely boastful to the outright megalomaniacal. An example is the letter which he wrote to President J. F. Kennedy on 13 August 1962, to advise the President that Scientology techniques were peculiarly applicable to space flight and that the perception of an astronaut could be increased far beyond human range and stamina to levels hitherto unattained in human beings. To establish his bona fides, Hubbard claimed to have coached the 'British Olympic team', producing unheard-of results. (This was, of course, untrue). He concluded his letter with a stirring declaration:
"Man will not successfully get into space without us . . . We do not wish the United States to lose either the space race or the next war. The deciding factor in that race or that war may very well be lying in your hands at this moment. and may depend on what is done with this letter...Scientology is, of course, not the only religious organisation to regard itself as special or a privileged group. But the degree to which it marks itself as "élite" is perhaps rather unusual; outsiders are derided as "wogs" and examples of "Homo Sap" (the emphasis being on "Sap"). This sense of distinction was created and fostered by Hubbard himself, who quite clearly continued to believe in his own superiority and extended that belief to his followers.
L. Ron Hubbard." 28
As Scientology began to turn an increasingly large profit through the 1950s, Hubbard underwent what could only be described as gentrification. Out went the loud American clothes; in came grey tweed suits and silk shirts, many of which are still hanging in his closet at Saint Hill Manor in East Sussex. The purchase of the Manor in 1959 set the seal on Hubbard's transformation into a country squire. Photographs appeared in the local newspaper of Hubbard standing on the steps of the building, wearing an expensive suit and leather gloves. Seven years later, during an abortive trip to Rhodesia to establish Scientology there, he represented himself as a 'millionaire-financier' interested in pumping money into the crippled economy of the country and stimulating the tourist industry.
The 1967 launch of the Sea Organisation and its motley fleet of ships - a yacht, a trawler and an Irish Sea cattle ferry - was perhaps the high point of Hubbard's self-fulfilment. Not only was he back at sea, but he was in command of not just one ship but a whole fleet, without any awkward superiors to puncture his aura of confident leadership. And although the fleet's presence in international waters put it out of reach of "suppressive" governments, Hubbard was able to keep a tight rein on the global Scientology empire. Between forty and fifty feet of telex messages arrived every day from Scientology offices around the world and he received weekly reports detailing every org's statistics and income. Loyal members of the Sea Org, who were paid $10 a week, believed the Commodore drew less than they did, because that is what he told them. In an issue called "What Your Fees Buy" ("Fees" later became "Donations"; the document is still distributed today), Hubbard told Scientologists that he did not benefit financially from Scientologists and had donated $13½ million, as well as subsidising his own research. He claimed that he had not been paid for his lectures and had not even collected author's royalties on his books. Scientologists could take his word for it that none of the money they paid to the Church went to him.
The reality was that Hubbard was receiving $15,000 a week from church funds through the Hubbard Explorational Company and that huge sums of money were being creamed from 'desk-drawer' corporations and salted away in secret bank accounts in Switzerland and Liechtenstein. He was obsessively concerned with the well-being of his money, as one of his aides, Kima Douglas, later recalled:
While we were in the Bahamas, a story came out that the Swiss were going to change the tax laws in some way that would affect the money we held there. The old man went crazy. I heard him screaming and yelling and ran upstairs to find what was wrong. He was pacing up and down and shouting at the top of his voice, "Do you know what they're doing? Everything's gone. Gone! Gone! We're going to lose everything."' When he had calmed down a little, Kima suggested that perhaps the money should be moved. Three hours later, she was on a plane to Zurich, with two other Scientologists, carrying handwritten instructions from Hubbard authorizing the transfer of all his assets to a bank in Liechtenstein.But what did he actually spend the money on? He was not an obvious high-spender, though he certainly enjoyed a luxurious lifestyle. Saint Hill Manor is an extremely plush building on which Hubbard spent considerable sums, buying smart clothes from Saville Row, four-poster beds and electric organs which he used to "revolutionise music". The Church of Scientology today preserves it as a sort of memorial to Hubbard. Aboard the Apollo, he and Mary Sue each had their own state-rooms in addition to a suite on the promenade deck comprising an auditing-room, office, an elegant saloon and a wood-panelled dining-room, all off-limits to students and crew. Hubbard had a personal steward, as did Mary Sue and the Hubbard children, who all had their own cabins. Meals for the Commodore and his family were cooked in a separate galley by their personal chef, using ingredients brought by couriers from the United States. This was in considerable contrast to the rest of the ship's crew, who lived in cramped, smelly, roach-infested dormitories fitted with bunks in three tiers that left little room for personal possessions. And it was all paid for by the Church of Scientology of California, as that body's accounts showed.
When they arrived, they were taken down into the vault of the bank and shown the money. Kima Douglas, who thought she could no longer be surprised by anything in Scientology, was awestruck. 'Everyone's eyes widened. There was a stack, about four feet high and three feet wide, of dollars, marks and Swiss francs in high-denomination notes. I couldn't begin to guess how much was there, but it was certainly more than the three of us could carry.'
It took nearly two weeks to make arrangements to move the cash to a bank in Liechtenstein and then the serial numbers - the first and last note of each bundle - had to be noted. When the mission returned to the Bahamas, Kima had to describe to the Commodore the exact size of the various piles of money. 'He was very pleased,' she said. 'He thought he'd outdone the Swiss.' 29
During the late 1960s and 1970s, Hubbard also enjoyed the use of high-quality rented villas and apartments in Tangier in Morocco, Marseilles in France, Las Palmas in the Canary Islands, New York City, Dunedin in Florida and Hemet in California. He had a collection of cameras and equipment reckoned to be worth over a million dollars. The final years of his life were spent in a half-million dollar caravan parked on a ranch at Creston, California. Again, these were funded at Church expense.
When the Sea Org finally came ashore in the mid-1970s, Hubbard went to ground in Hemet, California to evade the scrutiny of the media and Federal authorities. He had been out of the country for so long that contemporary innovations such as shopping malls were a revelation to him and he would spend hours wandering around them, buying plastic trinkets. Although he never spent much when he was out shopping, he was investing huge sums in stocks, precious stones and gold. Michael Douglas had been appointed the Commodore's 'finance officer' and was managing an enormous portfolio of stocks running into millions of dollars. There were bags of gold coins and diamonds stuffed in two safes at the Hemet apartments and more jewels were lodged in the vaults of a local bank. 30 They would have been of little immediate use because of the need to first turn them into more spendable assets, but would have served to reassure Hubbard that he would not be left penniless if the worldwide economic collapse which he had frequently predicted did in fact occur. The valuables effectively were a bulwark against a paranoid fear.
Hubbard went into hiding in February 1980, a few months after his wife Mary Sue was jailed for five years for her part in the espionage plot against the US Internal Revenue Service and other Federal agencies. In his absence, an internal coup saw control of the Church pass to an 18-year-old Hubbard aide, David Miscavige, who today continues to lead Scientology. Miscavige had presided over a radical reorganisation of the Church's corporate structure (under the title of "Mission Corporate Category Sort-out" or MCCS). The aim of this reorganisation was twofold: to proof Scientology against the US Internal Revenue Service's inquiries into the Church's unpaid taxes, and to hide evidence of the huge sums still being channeled to L. Ron Hubbard. The US courts minced no words in describing the purposes of the MCCS:
The partial transcripts [of two tape-recorded MCCS meetings] demonstrate that the purpose of the MCCS project was to cover up past criminal wrong-doing. The MCCS project involved the discussion and planning of future frauds against the IRS ... The figures involved in MCCS admit on the tapes that they are attempting to confuse and defraud the U.S. Government. 31Mysteriously, the investigation into the apparently fraudulent nature of the MCCS appears to have been dropped when Scientology buried the hatchet with the IRS three years later. But the MCCS's objectives were very much in keeping with Hubbard's 1967 directive on Scientology's tax affairs:
"The real stable datum in handling tax people is NEVER VOLUNTEER ANY INFORMATION .... The thing to do is to assign a significance to the figures before the government can .... I normally think of a better significance than the government can. I always put enough errors on a return to satisfy their bloodsucking appetite and STILL come out zero. The game of accounting is just a game of assigning significance to figures. The man with the most imagination wins." 32Evidently the new leadership had a lot of imagination. A plethora of new organisations were established, including Bridge Publications, Church of Scientology International, Religious Technology Centre and Author Services Incorporated (amongst many, many others). ASI was the body responsible for handling Hubbard's works of fiction; it had originated as "R Accounts", Hubbard's personal finance department, staffed by Sea Org members. Between 1982-1987, Miscavige was its CEO and later Chairman. ASI's former Treasury Secretary, Howard Schomer, has testified that money was being channeled frantically into Hubbard's bank accounts during 1982. Schomer was in a position to know, since he made the transfers. He has said that during his six months at ASI, about $34 million was paid into Hubbard's accounts. Schomer says this money came mostly from the Church, rather than from book royalties. Yet again Scientology was billed retroactively by Hubbard. Orgs were charged for their past use of taped lectures and Hubbard courses. Schomer says there was a target figure of $85 million by the end of 1982. If this figure was achieved, there would be fat bonuses for ASI staff. 33
Hubbard's death in January 1986 put an end to the continued inurement of Scientology proceeds to his personal accounts. Suspicions lingered on, however, that the Church's new leadership was continuing to profit from Scientology's income. Is this actually the case?
There is no evidence to support such a conclusion (though it must be noted that lack of proof does not necessarily disprove a proposition). Documents filed with the Internal Revenue Service in 1993 state that David Miscavige was paid $12,683.50 in 1991. His wife, Michele, was paid $31,359.25. This is a fraction of what other religious organisations pay their leaders; the United Methodist Church pays its leadership up to $85,932, plus housing. Many of Miscavige's relatives, including his mother, father, stepmother, brother, sister, brothers-in-law and sister-in-law, are listed either as being on the payroll or earning commissions as fund-raisers. It has not been reported whether Scientology pays benefits in kind to the Miscaviges (along the lines of the Church of Scientology of California's subsidisation of Hubbard's accomodation and living expenses). 34
What is clear, however, is that the Scientology leadership's financial accountability appears to be negligible. The Church continues to be very secretive about its financial status; it insisted on secrecy for the agreement which it concluded with the IRS in 1993 (this was eventually leaked at the end of 1997) and the accounts which it submits in Britain do not provide much information on income or expenditure, apart than the bare figures. The UK accounts of the Church of Scientology Religious Education College International (COSRECI, the main UK Scientology organisation) show a pattern of increasing payments of "amounts due to associated churches", the sums in question often exceeding the entire yearly income by as much as a third. However, the associated churches in question and the reason for these payments are not given anywhere in the records. This is typical of Scientology's minimalist approach to financial disclosure.
Minimalist it may be, but the annual returns of Scientology entities still give more information than Scientology provides to its own members. There appear to be no statements of accounts distributed to members, indeed no financial information provided at all, other than the 20-year-old leaflet "What Your Donations Buy". There is certainly no consultation with the membership over large capital projects. Thus the quixotic building of a replica clipper ship in the California desert in the mid-1980s was accomplished at a cost of $585,000, but without any apparent consultation with the Church members whose money was being spent. Likewise, tens of millions of dollars were spent on building three atomic bomb-proof vaults in which Hubbard's writings are stored, the doors of each vault costing $7 million; the project was carried out in complete secrecy and only became public when a newspaper reporter received a tip-off, presumably from one of the contractors.
The lack of transparency in Scientology's financial affairs is such that it would put a Communist dictatorship to shame. Where transparency is lacking, the possibility exists of corruption taking place away from scrutinising eyes. There seems little prospect of unauthorised corruption happening at lower levels in Scientology; the leadership exercises ferociously strong control over financial affairs, through the "International Finance Police" under the control of the memorably-named International Finance Dictator. But (at least from the outside) there appears to be little restraint or outside scrutiny of the financial and management decisions made by the people at the top of the Scientology organisation. There is no compelling evidence of wrongdoing, but until and unless Scientology is more open about its financial affairs, suspicions must inevitably remain.
2 According to US and French courts. The latter in 1973 convicted Scientology founder L. Ron Hubbard of fraud and sentenced him in absentia to a four-year jail sentence. He never served it, thereafter avoiding any countries from which he might be extradited to France.
3 Russell Miller, Bare-Faced Messiah (1987), chapter 4, pp. 64-65
4 ibid., chapter 4, pp. 71, 73
5 Archives of the Ordo Templi Orientalis, New York City
6 FBI memo dated 13th April 1967, obtained via FOIA.
7 Jon Atack, A Piece of Blue Sky (1992), pp. 112-13
8 A.E. van Vogt, interview with Russell Miller, Los Angeles, 22 July 1986
10 Scientology has claimed that it was in fact George Orwell who said this and that the quote has been misattributed to Hubbard. Orwell certainly did say this; however, the multiple independent accounts of Hubbard saying it suggest that he himself may have been quoting Orwell. At any rate, it was not an original saying at the time in question.
11 Russell Miller, Bare-Faced Messiah (1987), chapter 12, p. 213
12 L. Ron Hubbard, Manual of Justice, pp. 5-6
13 L. Ron Hubbard, "The Scientologist: A Manual on the Dissemination of Material", Ability Major, no. 1 (early 1955), pp. 5, 7
14 L. Ron Hubbard, "Amprinistics", HCO Executive Letter, September 27, 1965
15 This is not to say that Scientology is not a religion - it certainly shares many characteristics with mainstream religions, as a variety of sociologists and theologists have observed. However, it is probably unique in the degree in which it conducts religious activities on a commercial basis (though again most mainstream religions do have varying elements of commerciality).
16 L. Ron Hubbard, Organization Executive Course, Vol. 0, p. 83
17 L. Ron Hubbard, "Three methods of dissemination", Professional Auditor's Bulletin, no. 73 (28 February 1956)
18 Letter to Roy Wallis, reprinted in The Road to Total Freedom (1973), p. 160
19 L. Ron Hubbard, "Big League Registration Series No. 1 - Use of Salesmanship Tech & Skills", Board Policy Letter, 2 November 1972.
20 Founding Church of Scientology v. The United States, US Court of Claims, July 16, 1969
21 Sir John Foster, Enquiry into the Practice and Effects of Scientology (1971), p. 37
22 Church of Scientology of California v. Commissioner of Internal Revenue, US Tax Court, September 24, 1984; Jon Atack, A Piece of Blue Sky (1992), p. 167
23 Church of Scientology of California v. Commissioner of Internal Revenue, US Tax Court, September 24, 1984
24 L. Ron Hubbard, "Finance Series No. 11 - Income Flows and Pools - Principles of Money Management", HCO Policy Letter, March 9, 1972
26 "Scientologists Report Assets of $400 Million", New York Times, 22 October 1993
27 Church of Scientology of California v. Commissioner of Internal Revenue, US Tax Court, September 24, 1984
28 Russell Miller, Bare-Faced Messiah (1987), chapter 14, p. 245
29 ibid., chapter 19, p. 329
30 ibid., chapter 22, p. 370
31 U.S. v. Zolin, U.S. 9th Circuit Court of Appeals, 20 June 1990
32 L. Ron Hubbard, Organization Executive Course, Vol. 3, p. 63
33 Jon Atack, A Piece of Blue Sky (1992), p. 289. See also "Piercing the corporate veil".
34 "Scientologists Report Assets of $400 Million", New York Times, 22 October 1993