Embezzlement Explained: Definition, Examples, and Prevention Tips

What Is Embezzlement?

Embezzlement, a type of white-collar crime, involves the unlawful misappropriation of assets by an individual or entity entrusted with them. The embezzler gains lawful possession of these assets but subsequently breaches their fiduciary duty for personal gain. Examples range from false expense claims to complex Ponzi schemes. At its core, embezzlement signifies a misuse of trust, with civil and criminal liabilities for those involved.

How Embezzlement Works and Its Implications

Individuals who are entrusted with access to an organization’s funds are expected to safeguard those assets for their intended use. It is illegal to intentionally access that money and convert it to personal use. Such activities can include diverting funds to accounts that appear to be authorized to receive payments or transfers.

However, the account is a front that allows the individual, or a third party they are collaborating with, to take the funding. For instance, an embezzler might create bills and receipts for business activities that never took place or services that were never rendered to disguise the transfer of funds as a legitimate transaction.

An embezzler might collaborate with a partner who is listed as a consultant or contractor who issues invoices and receives payment, yet never actually performs the duties they are charging for.

The nature of embezzlement can be both small and large. Embezzlement can be as minor as a clerk stealing a few dollars from the cash register. On a larger scale, executives may falsely expense millions and transfer funds to personal accounts. Depending on the scale of the crime, embezzlement may be punishable by large fines and time in jail.

Common Methods Used in Embezzlement Schemes

Embezzlement occurs when someone steals or misappropriates what they were entrusted to manage or safeguard. The property or asset need not be of substantial value for embezzlement to occur. Although closely related, it differs from fraud in that the embezzler had authorization to use or oversee the property or funds.1

Embezzlement is sometimes combined with other frauds, like Ponzi schemes. In such cases, the embezzler scams investors to entrust them with their assets to invest on their behalf but instead uses the money for personal gain and enrichment. Maintaining the fraud often includes seeking out new investors to bring in more money to appease prior investors.

Embezzlers may also take assets other than money. An embezzler might claim the real estate, company vehicles, smartphones, and other hardware such as laptops that belong to an organization for personal use.

Government employees may also embezzle by taking local, state, or national funds for themselves. Such instances may occur when funding is disbursed to fulfill contracts or to support projects, and a member of the staff skims some of the money that was earmarked.

People who embezzle can be charged with a criminal offense and/or held civilly responsible for their crimes. Punishment can range from paying monetary damages and restitution to victims to incarceration. White-collar offenses don’t prevent offenders from being prescribed lengthy prison sentences, ones traditionally handed to violent offenders.

Strategies for Preventing Embezzlement in the Workplace

Theft and embezzlement cost businesses about $400 billion annually and cause over 50% of business failures.3 However, employers can develop strategies to combat these white-collar crimes.

Embezzlement starts with the breach of trust of a person endowed with the authority to care for the property or money of another. Reasonably, one of the first steps an employer can take is to carefully vet prospective employees. In addition to conducting thorough background checks, assessing character traits via personality tests could reveal undesirable behaviors.

A security and monitoring program could also deter corporate crime, especially when performed by a dedicated risk management team or an independent, third party. These risk managers can create internal controls that monitor behaviors and allow for the anonymous reporting of suspicious activities, as well as conduct periodic audits that expose misappropriations.

Early detection helps to mitigate losses and protect the company’s reputation and the people it serves. Employers should make clear that they have a no-tolerance policy regarding illegal acts such as embezzling and communicate the consequences of such violations. Every company should promote a culture of honesty and fairness, encouraging its employees to remain vigilant and report instances of wrongdoing.

The Bottom Line

Embezzlement is a serious white-collar crime where individuals misuse assets they are entrusted to manage. It involves a breach of fiduciary duty and can lead to severe legal consequences, including fines and imprisonment. Deterring embezzlement starts with rigorous hiring practices and implementing strong internal controls. These measures, coupled with fostering a culture of honesty and transparency, are essential in protecting organizations from significant financial losses and reputational harm.