What is Embezzlement?
Embezzlement is the theft or misuse of property by a person who has been entrusted with that property. Usually, there is a fiduciary relationship between the owner of the property and the embezzler and often this relationship is that of employer and employee, however, there are many other relationships where embezzling also occurs.
The stolen property can vary but money and inventory are most commonly embezzled. These are also the hardest to recover as they can be laundered immediately and transferred instantaneously. However, it should be noted that at times other types of property are also embezzled – such as trade secrets and customer data.
Embezzlement can occur over any period of time – ranging from a single incident to embezzlement spanning a decade or longer. Several well-known incidents of embezzlement span a longer length of time. There is usually a direct and positive correlation between the length of time and the amount of money that is embezzled.
To see some well-known examples of embezzlement, click here.
Common Forms of Embezzlement
Below are some of the most common forms of embezzlement that you can watch out for and fix. Click this link to see a quick video explaining six types of embezzlement.
Form of Embezzlement
Description and Possible Fixes
|Forging Checks||The employee can write company checks to himself or another party to whom the company has no obligation to pay.
Most often this is done because companies use signature stamps. Removal of such signature stamps is the easiest way to solve this.
|Stealing Customer Card Data||Where a customer uses their card to pay and the details are stored on a company system, the employee may take that information and spend the customer’s money.
Such occurrences can be reduced by limiting the number of people who have access to customer card details.
|Cashing in Customer Checks||Where a client owes the company money and they pay through checks, the employee may cash in the check and then take the money.
This can be resolved by limiting access to the checks to only trusted employees. Additionally, checks should be processed together in one go and each should be recorded when they come in and when they are cashed in. Tasks relating to cashing in client checks should be split up so that no single employee can single-handedly steal money.
|Overbilling Customers||Employees may charge clients more than the company’s rate and then keep the difference for themselves.
Regularly checking client billings and employee activity can help to solve this problem as any outliers are often easy to spot.
|Stealing Products or Materials||Employees may steal products that the company sells, material that the company uses, or equipment that the employees use for their job. For example, their work laptop or phone.
To fix this, the company can invest in CCTV to deter the theft of such items. Additionally, important equipment can be locked up or a GPS tracker can be attached to them.
|Falsifying Vendor Payments||Employees may try to pass off the theft of company money as a payment to a vendor. This often includes a fake account made in a name similar to a pre-existing vendor to the company.
To reduce such occurrences, it can be useful to monitor the list of vendors so that no unwanted or suspicious vendors can be paid.
Factors in a Charge of Embezzlement (US)
As with most crimes, there are set factors that need to be met for a successful charge to be brought under the law.
- There must be a fiduciary duty – a relationship that involves responsibility, reliance, and trust.
- The ‘thief’ must have acquired the assets or funds through the relationship.
- The ‘thief’ must have intentionally transferred ownership of the property or taken the property for themselves.
The hardest factor to prove is often intended as there is usually little evidence that is logically probative of intention. Therefore, this is also the most important factor because if the employee genuinely believed that their use was not misused or if they were not doing it intentionally (e.g. an accident/mistake), then any charge against them would fail.
Embezzlement as an offense is often dealt with at the state level so the penalties vary across the US. But commonly, it includes a fine and at times it can include imprisonment. The fine will be proportional to the amount of money that has been embezzled. In addition to the fine, the employee must return all embezzled money and other property to the company. Furthermore, employees can be required to pay any extra costs that the business has incurred due to the embezzlement. For example, court fees or any loss in business that has resulted from the embezzlement.
Finally, where jail time is imposed, it can vary from being as low as one month to as high as ten years.
Examples of embezzlement laws by state:
|California||Embezzlement of money less than $950 is considered a misdemeanor and is punished by a fine of up to $1000 and up to a 6-month jail sentence.
Embezzlement of money over $950 is considered grand theft. Prison time can be for up to 3 years.
|Florida||Embezzlement is a felony crime. It can be classed as a first, second, or third-degree felony and is punishable by up to five years in prison.|
|New York||Penalties are split by the amount that has been embezzled. It ranges from a fine of $1000 and up to one year in jail for embezzling less than $1000 to a fine of up to £30,000 and up to 25 years in jail for embezzling above $100,000.|
|Texas||Similar to New York, penalties are dependent on the amount embezzled. The max sentence is a fine of $10,000 and between 180 days to two years in jail.|
|Washington||Embezzling less than $750 has a fine of up to $5000 or up to one year in jail or both.
Embezzling over $5000 can result in a fine of up to $20,000 or 10 years in jail or both.
To see a full list of penalties by state, see here.
Penalties may also vary depending on the property stolen – again, this is dependent on the laws of individual states. For example, there is further provision for stealing a religious item that is valued above $100 in New York.
Protecting Your Business from Embezzlement
The most important factor in protecting your business is figuring out who to trust. Employees who are trusted more, inevitably gain more responsibility and access within the company. So, it is unsurprising that the employees who are most likely to steal are those who are trusted more. Below you will find some tips that will help to secure your business from embezzlement or employee theft. But note that these are merely tips and if you are operating in an industry where embezzlement is a particular problem or threat then you should seek further advice.
Identify trustworthy employees and those who require access to company property. Limit access to the company property to a few people who have been identified as trustworthy. The restriction is not just for access to cash but also for other things such as company supplies, client lists, intellectual property, and data.
Perform background checks on all employees – especially criminal background checks. Other checks may also be appropriate depending on your industry. References from prior employees may also be useful in determining an employee’s level of trustworthiness.
Follow this link to find more information on conducting employee background checks.
It is also important to fully know employees before trusting them with company property. When assessing employees, look out for the following activity:
- Addictions and abuse – particularly alcohol, gambling, or drugs
- Quickly rising up the ranks at work or suddenly obsessing overwork or a particular aspect of their job
- Opposing changes to or increases in the company’s security or embezzlement protection
- Relationships to suspicious individuals
- Taking part in illicit activities
Noticing some of these can be tell-tale signs that an employee should not be trusted immediately and given access to company property. In these cases, further examination of the employee may be necessary before full access to company property is granted.
Keep Track of All Property
This includes keeping track of cash as well as company inventory. For example, business supplies and merchandise. They should all be counted and constantly tracked. Preferably, this should be done automatically through a computer system but where that is not possible, employees should be reminded to track and count inventory manually.
Accurate Record Keeping
Make sure that employees keep accurate records whenever a transaction takes place or when company property is being handled or transferred. This will ensure that the company can track company property to a specific employee or to a specific transaction at all times. It includes recording things such as refunds, adjustments, or transfers.
Create Clear Procedures
When handling company property, it can be useful for there to be a clearly laid out policy and procedure (e.g. a checklist of things to do). This ensures that employees act in a set manner so that inconsistencies can be avoided. One procedure could be that whenever company property is handled, a manager has to sign off on it. This will ensure that there is adequate supervision of employees and no single employee can embezzle from the company
Divide Functions and Responsibilities
Divide functions across several employees so that one single employee cannot single-handedly misuse company property. Primarily, it is important to split up the process of making a payment from the company. For example, one person could prepare any payments on instruction from other employees. Later, a separate employee could authorize such payments. A final person could be instructed to check company payments on occasion to ensure that no money has been embezzled.
Physical and Digital Security
Physical security can be crucial in many small to medium-sized businesses. For example, a safe to store cash or valuable property. This allows for the company to choose who has access to the safe and its contents. Further security can be in the form of locks, RFID tags, or even hired security personnel where necessary. It is also good to have digital security through CCTV and digital passwords and locks where appropriate. However, digital security is often more expensive than physical security and a cost-benefit analysis may be useful. When using physical and digital security, it is important to update passwords/combinations and change the locks every so often to reduce the chance of theft.
Hire an independent third-party company to perform annual audits on your business to identify any irregularities. This can also help to ensure that all employees are following your written procedures when handling company property. Furthermore, if everything is done as it should be, audits have the added advantage of inspiring confidence in your business to the outside world.
Implement Mechanisms to Allow Co-workers to Report Embezzlement
One of the most important mechanisms in stopping embezzlement and deterring embezzlers is a mechanism to allow co-workers to report an employee who they think is embezzling. However, creating such a policy can be averse to company morale and may sometimes create hostilities within the workforce. So, it’s important to be sensitive when creating the mechanism. More importantly, all reports need to be backed up by thorough investigations. However, you should note that improper investigations or investigations that yield no fruit can lead to opening the company up to prosecution.
Periodically Review and Assess All Policies
It is pertinent that the company reviews its policies every so often as needs can change over time. Changes can also occur to the types of property that the company keeps – for example, a change from cash to digital currencies. During this process, it can be valuable to ask employees for their opinion and whether they recommend making any changes. As they have the most contact with the existing policies, their experience can help to guide new policies.
What to Do If Someone Is Embezzling From Your Company?
There is no procedure that is set in stone and often, what you do will depend on your company’s policies and your individual circumstances. Nevertheless, you will find below a list of things that may be helpful for you to do.
While this guide should act as a starting point to help you understand embezzlement, if you believe that your company is affected by an employee embezzling money, it is best to seek further advice from local professionals. They will be able to advise you further on the matter as well as applicable local laws.