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What are Embezzlements, and How Does It Happen?
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What Is Embezzlement?
Embezzlement is a type of theft that happens when someone is trusted with another person’s money or property and then uses it for themselves. It most commonly happens in employer–employee situations, for example when an employee handles cash, payments or accounts, but it can also occur in partnerships or other relationships where one person is trusted to manage assets.
- Property:The case involves money or property that belonged to someone else. This can include cash, checks, inventory, or financial access (like control over accounts or transfers).
- Entrustment:The accused person had lawful possession or authority to handle the property because of a role or relationship (such as an employee, contractor, bookkeeper, trustee, partner, or sometimes a spouse).
- Criminal Conversion: The person used, transferred, or kept the property in a way the rightful owner did not authorize—effectively depriving the owner of it.
- Intent to defraud:The person acted deliberately and dishonestly, intending to take or benefit from the property rather than return it or use it as allowed
Is Embezzlement a Felony?
Embezzlement can be charged as a felony or a misdemeanor, depending on the amount of money involved and the laws of the state or federal jurisdiction. In many cases, embezzlement becomes a felony when large sums of money are taken or when the crime is part of an ongoing scheme. Smaller amounts may be treated as misdemeanors, but penalties can still include fines, restitution, and jail time.
Is Embezzlement a Federal Crime?
Embezzlement can be a federal crime if it involves federal funds, federal agencies, banks, or activities that cross state lines. Cases that include large amounts of money, financial institutions, or organized schemes may be investigated and charged under federal law. In other situations, embezzlement is usually handled at the state or local level rather than in federal court.
Methods of Embezzlement
Embezzlement can take many forms, ranging from simple cash theft to complex accounting schemes. Below are some of the most common methods:
Stealing Money
This is usually where an employee will just take cash that has come into the business and not report the full amount of the sale while keeping the remainder for themselves.
Undercharging
Undercharging occurs when employees sell a good that is for a lower price than it is supposed to be. This can happen when employees give discounts to friends or family.
Stealing Office Supplies
If an employee is provided witha laptop or cellphone and they resell it for cash, then that is embezzling as well.
Kickbacks
Kickbacks can happen as embezzlement where one of the vendors of a company may give an employee a portion of the profit of the sale that is off the books that should be really going to the company.
Fake Refunds
Fake refunds happen when a cashier processes a fake refund and then keeps the cash for themselves.
Fake Expense Reports
Creating fake expense reports can be a form of embezzlement when an employee claims they spent $5,000 and they only spent $200. If they keep the residual money they are reimbursed from their company; then it is a form of embezzlement.
Lapping Schemes
Lapping schemes are more complex; however, the person that is running them needs to be involved in the finances of a company. If employee A pays the individual committing fraud $500 and they take $100 for themselves and then employee B pays the individual committing fraud $900, they would use the original $100 to satisfy the prior theft. Lapping Schemes, if they continue, can be devastating to an organization before they are detected.
Payroll Fraud
There are three types of payroll fraud that include timesheet fraud, misclassification of employees or ghost employees. Timesheet fraud occurs when the employee fills out their timesheet incorrectly on purpose in order to gain extra hours or to be eligible for overtime. Ghost employees occur when an individual creates a fake employee and then cashes their paycheck for themselves. A misclassification of employees occurs when an employee is designated as an independent contractor rather than a full-time employee to avoid payroll taxes.
Fictitious Bad Debt
Fictitious bad debt can happen when an employee receives a check from a customer, cashes the check, and keeps the check’s balance for themselves. Afterward, the employee writes the check off as a bad debt, which is damaging to their company’s finances.
Check Kiting
Check kiting transpires when an employee will take advantage of writing a bad check in order to inflate their wealth. An example of this would be when an employee steals $500 of the check that will bounce in order to open their own separate bank account.
Fake Loans
A fake loan can occur when an employee creates a fake vendor and claims the company owes that vendor money in the form of an installment loan. The company then pays the money to the employee rather than the vendor to satisfy the fake loan’s obligations.
When to Report Suspected Embezzlement?
Reporting embezzlement requires a strategic approach to ensure that the investigation is handled legally. Follow these steps to report the crime effectively:
- Gather Documentation: Before taking action, ensure you have physical or digital proof of the misconduct. Having documented evidence is vital not only for the investigation but also to protect yourself against potential claims of defamation or wrongful accusation.
- Follow Internal Protocols: Start by notifying your company’s Internal Audit, Legal, or Human Resources department according to the company’s whistleblower policy.
- Determine the Reporting Agency: The appropriate authority often depends on the severity of the theft. Typically, embezzlement involving amounts under $950 should be reported to your local police department. For more significant cases where the amount exceeds $950, it is recommended to report the crime to the FBI, as larger sums often trigger federal oversight or involve complex wire fraud.
- Maintain Confidentiality: Avoid confronting the suspect directly. Maintaining discretion ensures that the individual cannot destroy evidence or alter financial logs before authorities arrive.
How to Formally Report Embezzlement
Reporting financial fraud requires a discreet and structured approach to protect the organization and yourself. Following the proper chain of command ensures that the investigation is handled legally and that evidence remains admissible in court.
- Gather and Secure Evidence: Before notifying anyone, secure copies of relevant documents such as canceled checks, bank statements, or digital logs. Do not confront the suspect directly, as this gives them the opportunity to delete files or alter physical evidence.
- Use Internal Whistleblower Channels: Check your company’s internal policy. Most large organizations have a "Fraud Hotline" or a specific protocol for reporting to the Internal Audit Department or Human Resources.
- Notify Legal Counsel: Consult with the company’s attorney or a private legal expert. They can guide the investigation to ensure it doesn't violate labor laws or compromise insurance claims.
- File a Police or Federal Report: If the theft is significant, you should contact local law enforcement. If the fraud involves banks, federal funds, or wire transfers across state lines, you may need to report the crime to a federal agency like the FBI or the IRS Whistleblower Office.