Embezzlement is a financial crime where someone misuses funds or property entrusted to them. It differs from theft as the offender has lawful possession but not ownership. The crime involves a breach of trust and intentional misappropriation for personal gain.

To prove embezzlement, prosecutors must show intent to defraud, conversion of property, and breach of trust. Defenses include lack of intent and claim of right. Penalties can involve restitution, fines, and imprisonment, with severity depending on various factors.

Definition of embezzlement

• Embezzlement is a type of financial fraud that involves the misappropriation of funds or property entrusted to an individual's care
• It is a crime that occurs when a person who has been lawfully entrusted with property or money uses it for their own personal gain without the owner's consent

Elements of embezzlement

• The offender must have been entrusted with the property or money by the owner
• The offender must have acquired the property or money through their position of trust (employee, fiduciary, public official)
• The offender must have intentionally and fraudulently converted the property or money for their own use or benefit
• The conversion must have been done without the owner's knowledge or consent

Lawful possession vs ownership

• Embezzlement differs from theft in that the offender has lawful possession of the property or money but not ownership
• The offender is typically an employee, fiduciary, or someone in a position of trust who has been given access to the property or money for a specific purpose
• The offender does not have the legal right to use the property or money for their own benefit, despite having lawful possession of it

Types of embezzlement

Embezzlement by employees

• Occurs when an employee steals money or property from their employer
• Common methods include:
  • Skimming cash from transactions
  • Falsifying expense reports
  • Manipulating payroll records
  • Stealing inventory or supplies
• Employees in positions of financial responsibility (bookkeepers, accountants) are more likely to have the opportunity to embezzle

Embezzlement by fiduciaries

• Fiduciaries are individuals or entities legally obligated to act in the best interests of another party (trustees, executors, guardians)
• Embezzlement occurs when a fiduciary misappropriates funds or property they are managing on behalf of the other party
• Examples include:
  • A trustee using trust funds for personal expenses
  • An executor of an estate stealing from the estate's assets
  • A financial advisor misusing client funds

Embezzlement of public funds

• Involves the misappropriation of funds by government officials or employees
• Can occur at the local, state, or federal level
• Examples include:
  • A city treasurer diverting tax revenue to personal accounts
  • A government contractor overbilling for services and pocketing the excess funds
  • A public employee using government credit cards for personal purchases

Proving embezzlement

Intent to defraud

• Prosecutors must prove that the offender acted with the intent to defraud the owner of the property or money
• Evidence of intent can include:
  • Attempts to conceal the misappropriation
  • False entries in financial records
  • Use of embezzled funds for personal gain
• Mere negligence or poor accounting practices are not sufficient to prove intent

Conversion of property

• Prosecutors must show that the offender converted the property or money to their own use or benefit
• Conversion can be demonstrated by:
  • Withdrawals from company accounts for personal expenses
  • Use of company credit cards for unauthorized purchases
  • Transfer of funds to personal accounts
• The conversion must be unauthorized and contrary to the owner's interests

Breach of trust

• Embezzlement involves a breach of the trust placed in the offender by the owner of the property or money
• Prosecutors must show that the offender violated their fiduciary duty or the responsibilities of their position
• Evidence of breach of trust can include:
  • Violation of company policies or procedures
  • Abuse of access to financial accounts or records
  • Failure to disclose conflicts of interest

Defenses to embezzlement charges

Lack of intent

• The offender may argue that they lacked the intent to defraud and that the misappropriation was the result of an honest mistake or negligence
• Evidence to support this defense could include:
  • Lack of attempts to conceal the misappropriation
  • Prompt repayment of misappropriated funds upon discovery
  • Cooperation with investigators

Claim of right

• The offender may assert that they had a good faith belief that they were entitled to the property or money
• This defense is more likely to succeed if:
  • There was an agreement or understanding with the owner about the use of the property or money
  • The offender had a reasonable basis for believing they had a right to the property or money
• The claim of right must be genuine and not a mere pretext for theft

Entrapment

• In rare cases, an offender may argue that they were induced to commit embezzlement by law enforcement or government agents
• To succeed, the offender must show that:
  • The idea for the crime originated with the government agents, not the offender
  • The agents used persuasion or coercion to induce the offender to commit the crime
  • The offender was not predisposed to commit embezzlement absent the government's inducement

Penalties for embezzlement

Restitution to victims

• Courts may order the offender to pay restitution to the victims of embezzlement
• Restitution aims to compensate the victims for their losses and restore them to their original position
• The amount of restitution is based on the actual loss suffered by the victims, not the amount embezzled

Fines and imprisonment

• Embezzlement is a felony offense in most jurisdictions and carries significant fines and prison sentences
• The severity of the penalty depends on factors such as:
  • The amount embezzled
  • The duration of the embezzlement scheme
  • The offender's criminal history
  • The impact on the victims
• Fines can range from thousands to millions of dollars, and prison sentences can range from months to decades

Aggravating vs mitigating factors

• Aggravating factors can increase the severity of the penalty and include:
  • Embezzlement of large sums of money
  • Abuse of a position of trust (e.g., a fiduciary or public official)
  • Victimization of vulnerable individuals (e.g., elderly or disabled)
  • Sophistication of the embezzlement scheme
• Mitigating factors can reduce the severity of the penalty and include:
  • Cooperation with investigators
  • Prompt repayment of embezzled funds
  • Lack of criminal history
  • Demonstration of remorse

Embezzlement vs larceny

Differences in elements

• Embezzlement and larceny are both forms of theft but differ in key elements
• Larceny involves the unlawful taking and carrying away of another's property with the intent to permanently deprive the owner
• Embezzlement involves the lawful possession of another's property that is then converted for personal use without the owner's consent

Possession vs custody

• In embezzlement, the offender has lawful possession of the property by virtue of their position or relationship with the owner
• In larceny, the offender does not have lawful possession and must physically take the property from the owner's possession or custody
• The distinction between possession and custody is critical in determining whether an offense constitutes embezzlement or larceny

Embezzlement vs fraud

Abuse of trust

• Embezzlement and fraud both involve deception for financial gain but differ in the offender's relationship to the victim
• Embezzlement involves an abuse of trust, as the offender is typically in a position of trust with the victim (employee, fiduciary)
• Fraud does not necessarily involve a position of trust and can be committed by anyone who makes false representations to obtain money or property

False pretenses

• Fraud involves the use of false pretenses or representations to induce the victim to part with their money or property
• Embezzlement does not require false pretenses, as the offender already has lawful possession of the property by virtue of their position
• The key distinction is that in fraud, the victim voluntarily parts with their property based on the offender's deception, while in embezzlement, the property is entrusted to the offender

High-profile embezzlement cases

Lessons learned

• High-profile embezzlement cases often reveal weaknesses in an organization's financial controls and oversight
• Lessons learned from these cases include:
  • The importance of segregation of duties to prevent any one individual from having too much control over finances
  • The need for regular audits and reconciliations to detect discrepancies
  • The value of employee background checks and monitoring of employee financial activity
  • The necessity of clear policies and procedures governing the handling of funds

Preventative measures

• Organizations can take steps to prevent embezzlement, such as:
  • Implementing a system of checks and balances in financial processes
  • Conducting regular training on financial ethics and fraud prevention
  • Establishing a confidential reporting mechanism for employees to report suspicious activity
  • Purchasing fidelity insurance to protect against losses from employee theft
  • Performing surprise audits to deter and detect embezzlement
• By learning from high-profile cases and implementing preventative measures, organizations can reduce their risk of falling victim to embezzlement