Embezzlement

Criminal law
Part of the common law series
Element (criminal law)
Actus reus · Mens rea Causation · Concurrence
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Complicity · Corporate · Vicarious
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Attempt · Conspiracy · Solicitation
Offence against the person
Assault · Battery False imprisonment · Kidnapping Mayhem · Sexual assault Homicide crimes Murder · Felony murder Manslaughter Negligent homicide Vehicular homicide
Crimes against property
Arson · Blackmail · Burglary Embezzlement · Extortion False pretenses · Larceny Receiving stolen property Robbery · Theft
Crimes against justice
Compounding · Misprision Obstruction · Perjury Malfeasance in office Perverting the course of justice
Defenses to liability
Defense of self Defence of property Consent · Diminished responsibility Duress · Entrapment Ignorantia juris non excusat Infancy · Insanity Intoxication defense Justification · Mistake (of law) Necessity · Loss of Control (Provocation)
Other common law areas
Contracts · Evidence · Property Torts · Wills, trusts and estates
Portals
Criminal justice · Law

Embezzlement is the act of dishonestly appropriating or secreting assets by one or more individuals to whom such assets have been entrusted.^[1]

Embezzlement is a kind of financial fraud. For instance, a clerk or cashier handling large sums of money could embezzle cash from his or her employer, a lawyer could embezzle funds from clients' trust accounts, a financial advisor could embezzle funds from investors, or a spouse could embezzle funds from his or her partner. Embezzlement may range from the very minor in nature, involving only small amounts, to the immense, involving large sums and sophisticated schemes.

More often than not, embezzlement is performed in a manner that is premeditated, systematic and/or methodical, with the explicit intent to conceal the activities from other individuals, usually because it is being done without their knowledge or consent. Often it involves the trusted person embezzling only a small proportion or fraction of the funds received, in an attempt to minimize the risk of detection. If successful, embezzlements can continue for years (or even decades) without detection. It is often only when the funds are needed, or called upon for use, that the victims realize the funds or savings are missing and that they have been duped by the embezzler.

In America embezzlement is a statutory offense so the definition of the crime varies from statute to statute. Typical elements are (1) the fraudulent (2) conversion (3) of the property (4) of another (5) by a person who has lawful possession of the property.^[2]

Fraudulent: The requirement that the conversion be fraudulent means simply that the defendant wilfully and without claim of right or mistake converted the property to his or her own use.

Conversion: Embezzlement is a crime against ownership; that is, the owner's right to control the disposition and use of the property.^[3] The conversion element requires a substantial interference with the true owner's property rights (unlike larceny, where the slightest movement of the property when accompanied by the intent to deprive one of the possession of the property permanently is sufficient).^[4]

Property: Embezzlement statutes do not limit the scope of the crime to conversions of personal property. Statutes generally include conversion of tangible personal property, intangible personal property and choses in action. Real property is not typically included.

Of another: A person cannot embezzle her own property.

Lawful Possession: The critical element is that the defendant must have been in lawful possession of the property at the time of the fraudulent conversion and not have mere custody of the property. If the defendant had lawful possession the crime is embezzlement. If the defendant merely had custody, the crime is larceny.^[5] Determining whether a particular person had lawful possession or mere custody is sometimes extremely difficult.

Embezzlement versus larceny

Embezzlement differs from larceny in two ways. First, in embezzlement, an actual conversion must occur; second, the original taking must not be trespassory.^[6] To say that the taking was not trespassory is to say that the person(s) performing the embezzlement had the right to possess, use, and/or access the assets in question, and that such person(s) subsequently secreted and converted the assets for an unintended and/or unsanctioned use. Conversion requires that the secretion interferes with the property, rather than just relocate it. As in larceny, the measure is not the gain to the embezzler, but the loss to the asset stakeholders. An example of conversion is when a person logs checks in a check register or transaction log as being used for one specific purpose and then explicitly uses the funds from the checking account for another and completely different purpose.

It is important to make clear that embezzlement is not always a form of theft or an act of stealing, since those definitions specifically deal with taking something that does not belong to the perpetrator(s). Instead, embezzlement is, more generically, an act of deceitfully secreting assets by one or more persons that have been entrusted with such assets. The person(s) entrusted with such assets may or may not have an ownership stake in such assets.

In the case where it is a form of theft, distinguishing between embezzlement and larceny can be tricky.^[7] Making the distinction is particularly difficult when dealing with misappropriations of property by employees. To prove embezzlement, the state must show that the employee had possession of the goods "by virtue of her employment"; that is, that the employee had the authority to exercise substantial control over the goods. Typically, in determining whether the employee had sufficient control the courts will look at factors such as the job title, job description and the particular employment practices. For example, the manager of a shoe department at a store would likely have sufficient control over the shoes that if she converted the goods to her own use she would be guilty of embezzlement. On the other hand, if the same employee were to steal cosmetics from the cosmetic counter the crime would not be embezzlement but larceny. For a case that exemplifies the difficulty of distinguishing larceny and embezzlement see State v. Weaver, 359 N.C. 246; 607 S.E.2d 599 (2005).

North Carolina appellate courts have compounded this confusion by misinterpreting a statute based on an act passed by Parliament in 1528. The North Carolina courts interpreted this statute as creating an offense called "larceny by employee"; an offense that was separate and distinct from common law larceny.^[8][9] However, as Perkins notes, the purpose of the statute was not to create a new offense but was merely to confirm that the acts described in the statute met the elements of common law larceny.^[10]

Methods of embezzlement

Embezzlement sometimes involves falsification of records in order to conceal the activity. Embezzlers commonly secrete relatively small amounts repeatedly, in a systematic and/or methodical manner, over a long period of time, although some embezzlers commonly secrete one large sum at once. Some very successful embezzlement schemes have continued for many years before being detected due to the skill of the embezzler in concealing the nature of the transactions or their skill in gaining the trust and confidence of investors or clients, who are then reluctant to "test" the embezzler's trustworthiness by forcing a withdrawal of funds.

Embezzling should not be confused with skimming which is under-reporting income and pocket the difference. For example, in 2005, several managers of the service provider Aramark were found to be under-reporting profits from a string of vending machine locations in the eastern United States. While the amount stolen from each machine was relatively small, the total amount taken from many machines over a length of time was very large. A smart technique employed by many small time embezzlers can be covered by falsifying the records. (Example, by removing a small amount of money and falsifying the record the register would be technically correct, while the manager would remove the profit and leave the float in, this method would effectively make the register short for the next user and throw the blame onto them)

Another method is to create a false vendor account, and to supply false bills to the company being embezzled so that the checks that are cut appear completely legitimate. Yet another method is to create phantom employees, who are then paid with payroll checks.

The latter two methods should be uncovered by routine audits, but often aren't if the audit is not sufficiently in-depth, because the paperwork appears to be in order. The first method is easier to detect if all transactions are by cheque or other instrument, but if many transactions are in cash, it is much more difficult to identify. Employers have developed a number of strategies to deal with this problem. In fact, cash registers were invented just for this reason.

Some of the most complex (and potentially most lucrative) forms of embezzlement involve Ponzi-like financial schemes where high returns to early investors are paid out of funds received from later investors duped into believing they are themselves receiving entry into a high return investment scheme. The Madoff investment scandal is an example of this kind of high level embezzlement scheme, where is it alleged $65 billion was siphoned off from gullible investors and financial institutions.

Tax consequences

Proceeds of embezzlement must be included in gross income unless the embezzler repays the money in the same taxable year.^[11] Congress has ruled that lawful as well as unlawful gains are includable in gross income^[12] and that it is inconsequential that an embezzler may lack title to the sums he appropriates.”^[13] When the embezzler returns the victim’s funds either directly or indirectly (i.e. restitution) then the embezzler may have a reduction in taxable income.^[14]

However, if a corporate embezzler can show four things,^[15] then they need not include the embezzled funds in income:

"Where a taxpayer withdraws funds from a corporation

1. which he fully intends to repay
2. which he expects with reasonable certainty he will be able to repay
3. where he believes that his withdrawals will be approved by the corporation
4. where he makes a prompt assignment of assets sufficient to secure the amount owed, he does not realize income on the withdrawals under the James test."^[16]

Safeguards against embezzlement

Internal controls such as separation of duties are common defenses against embezzlement. For example, at a movie theater, the task of accepting money and admitting customers into the theater is typically broken up into two jobs. One employee sells the ticket, and another employee takes the ticket and lets the customer into the theater. Because a ticket cannot be printed without entering the sale into the computer, and the customer cannot enter the theater without a ticket, both of these employees would have to collude in order for embezzlement to go undetected. This significantly reduces the chance of theft, because of the added difficulty in arranging such a conspiracy and the likely need to split the proceeds between the two employees, which reduces the payoff for each.

Another obvious method to deter embezzlement is to regularly and unexpectedly move funds from one advisor or entrusted person to another when the funds are supposed to be available for withdrawal or use, to ensure that the full amount of the funds is available and no fraction of the savings has been embezzled by the person to whom the funds or savings have been entrusted.

See also

• FBI
• Fractional-reserve banking
• Fraud
• Fraud deterrence
• IRS
• Madoff investment scandal
• Sponsorship scandal
• White Collar Crime

References