embezzlement

embezzlement

[em-bez-uhl]
embezzlement, wrongful use, for one's own selfish ends, of the property of another when that property has been legally entrusted to one. Such an act was not larceny at common law because larceny was committed only when property was acquired by a "felonious taking," i.e., when the act was committed with respect to property that was at the time in the legal possession of the owner. Consequently, unfaithful servants, employees, agents, trustees, or guardians who misappropriated another's property could be sued only in the civil courts, on the grounds that although the defendant had legally come into possession of the property, he had breached his trust by wrongfully misappropriating it to his own use. To remedy this situation statutes were passed in England and the United States that either made embezzlement a distinct crime or enlarged the definition of larceny in such a way as to include all cases of misappropriation of property in the lawful possession of the wrongdoer. In most states of the United States embezzlement is a felony. Under acts of Congress, stealing of letters by postmasters, clerks, and letter carriers is considered embezzlement.

Crime of fraudulently appropriating property entrusted to one's care and converting it to one's own use. It occurs when a person gains possession of goods lawfully and then misappropriates them. It thus stands in contrast to larceny, the taking of goods from another without the latter's consent. The most widely adopted embezzlement statutes cover custodians of public funds. Many laws subject public servants to severe penalties, even if funds are lost through improper administration rather than a clear attempt to steal. Seealso fraud, theft.

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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).

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.

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.

Tax consequences

Proceeds of embezzlement must be included in gross income unless the embezzler repays the money in the same taxable year. Congress has ruled that lawful as well as unlawful gains are includable in gross income and that it is inconsequential that an embezzler may lack title to the sums he appropriates.” 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.

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.”

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.

References

See also

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