Embezzlement is the act of dishonestly appropriating or secreting assets, usually financial in nature, by one or more individuals to whom such assets have been entrusted. For instance, a clerk or cashier can embezzle money from his or her employer, a civil servant can embezzle funds from the government, or a spouse can 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.
Embezzlement differs from larceny in two ways. First, in embezzlement, an actual conversion must occur; second, the original taking must not be trespassory. 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.
Historically, embezzlement was created by statute to deal with situations where secretion could occur while the perpetrator him or herself was innocent of larceny typically because of the "lawful possession" element. That is, embezzlement fills in the blanks where larceny laws do not apply. The first general embezzlement statute was enacted in England in 1799. The statute was passed in reaction to the decision of King v. Bazeley, 2 Leach 835, 168 Eng. Rep. 517 (Cr. Cas. Res. 1799). In Bazeley, a customer of a bank had given a teller a note to be deposited to the customer's account. The teller immediately pocketed the note. The appropriation was soon discovered and the teller was charged with larceny. The issue before the court was whether the actions of the teller constituted larceny. The court held that that the actions did not constitute larceny because the teller had lawful possession of the note at the time of the conversion. Bazeley's demonstrates the unreasonable limitations in the scope of common law larceny. In Bazeley, had the clerk placed the note in the till before deciding to steal it then the crime would have been larceny since by placing the note in the till the bank acquired constructive possession of the note and the subsequent appropriation of the note by the teller would constitute a trespassory taking.
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) enstrusted with such assets may or may not have an ownership stake in such assets. A common example of this is Marital Embezzlement, where the spouse performing the secretion may have a joint or partial ownership stake in such assets.
In the case where it is a form of theft, distinguishing between embezzlement and larceny can be tricky. 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 between larceny and embezzlement see State v. Weaver, 359 N.C. 246; 607 S.E.2d 599 (2005).
One of the most common methods of embezzlement is to under-report 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.
A very common form of embezzlement is the secretion of funds in a marital partnership, known as Marital Embezzlement, where one spouse falsifies or misrepresents the use or purpose of marital assets, while then using those assets for ulterior purposes, such as transfer to hidden accounts or purchases that are hidden to the other partner.
However, if a corporate embezzler can show four things, 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.”