What is embezzlement?
Embezzlement is a type of financial fraud in which a trusted individual — often an employee — misuses their position to steal money or assets from a business or employer, often over a long period.
Embezzlement is a type of theft. However, where typical theft involves someone taking something that doesn’t belong to them without permission, embezzlement specifically involves someone who has been lawfully entrusted with assets misappropriating those assets for personal gain. This breach of trust is the major factor distinguishing embezzlement from other types of theft.
Types and methods of embezzlement
Embezzlement doesn’t always look the same, making it difficult to detect and prosecute. Here are a few examples of what forms it can take:
Fraudulent disbursements. This is the most common type of asset misappropriation. It occurs when an employee manipulates payments for personal gain. Fraudulent disbursements can take the form of fake invoices, payroll fraud, false expense claims, check tampering, or improper cash register reimbursements. For example, so-called “ghost employee fraud" occurs when a fake employee is added to payroll so the fraudster can collect extra wages.
Skimming or siphoning. Employees or even business owners handling cash may embezzle by not recording a transaction and keeping the money instead.
Falsifying overtime. Employees may manipulate time records by clocking in for unworked hours or asking a colleague to do so. Some companies prevent this by using biometric authentication or geolocation.
Lapping. This is when a fraudster misappropriates customer payments by using future payments to cover up missing funds, creating an ongoing cycle of deception.
Misuse of assets. Employees may exploit company resources for personal gain, such as using vehicles for private trips, taking office supplies, or selling company equipment. Minor examples of this may fall under the category of company policy violations and may not meet the threshold for criminal embezzlement.
Embezzlement vs. other types of theft
While general theft involves unlawfully taking someone's property without permission, embezzlement involves somebody with legal and trusted access to assets using those assets without authorisation. This breach of trust is fundamental to the definition of embezzlement.
Embezzlement occurs in all types of situations. It typically involves a premeditated plan and a financial arrangement that allows the embezzler to hide their activities. This crime is often more about manipulating accounting records and less about physically taking money or property. Compared to straightforward theft, it often requires a more sophisticated investigation.
What’s the difference between embezzlement and money laundering?
Embezzlement involves stealing funds or assets from a legitimate source, usually by insiders with direct access. By contrast, money laundering is the process of concealing the origins of illegally obtained money or assets, often carried out by those operating outside regulatory oversight.
Based on those definitions, you won’t be surprised to learn that embezzlement and money laundering can be — indeed, often are — connected. It’s not uncommon for embezzled funds to subsequently be laundered to hide their source. Nevertheless, they are distinct crimes with distinct legal consequences.
Warning signs and red flags: What to look out for
There are a range of warning signs that embezzlement may be happening within your business or organisation. Here are a few, along with pointers about what to look out for.
Financial discrepancies and accounting anomalies
Not every accounting anomaly is a sign of embezzlement, and many of them have perfectly innocent explanations. With that said, it’s worth following up on discrepancies such as:
Missing financial records, including invoices, receipts, or payroll documents that mysteriously disappear.
Suspicious claims from vendors asserting that they’ve not been paid, were underpaid, or received duplicate payments.
Customer payment disputes, where customers insist that they’ve paid but records show overdue balances. (This may be a sign that an employee is pocketing funds.)
Payment irregularities. Frequent duplicate payments or altered transactions could signal embezzlement.
Unusual transactions, including unexpected payments, altered vendor bills, or inconsistent check-clearing times.
Declining profits. Shrinking revenue without a clear explanation is a possible sign of unauthorised payments or fake vendors.
Disappearing cash, such as frequent register shortages.
Suspicious checks made out to employees or to fake vendors.
Employee behaviour
When reviewing an employee’s background and/or current behaviour, personal financial struggles or a suddenly lavish lifestyle (without a clear corresponding source of income) can be warning signs of embezzlement. Likewise, gambling and drug addictions can drive financial desperation, which can lead to risky choices.
Tread carefully here and always respect employees’ rights and privacy. Though possibly concerning, none of the above are cause enough to suspect embezzlement. However, if a dramatic change in an employee’s behaviour is paired with financial discrepancies, the coincidence may be cause for further investigation.
If you’re suspicious of embezzlement, it’s better to focus on behaviours that take place within the workplace and have a direct bearing on the funds in question. These may include:
Testing fraud controls with small, suspicious transactions and/or repeatedly attempting unauthorised access to files or systems.
Insisting on working alone, resisting delegation, or becoming overly possessive of a workspace computer.
Frequently working odd hours when no one else is around, such as late nights, weekends, or holidays — or refusing to take vacations or sick days. This can indicate an effort to prevent others from discovering irregularities in one’s work.
It's important to note that all the above behaviours may be innocent, and simply a sign of a quirky working style. But when paired with missing funds, they could potentially raise alarm bells.
How to prevent embezzlement at your organisation
To mitigate the risk of embezzlement, good processes and a commitment to employee training are key. Clear financial policies, strict expense reporting, and regular mandatory training focused on fraud prevention are important first steps.
To further strengthen protections, consider segregating financial duties so that no single person has full control over transactions. In other words, those who authorise payments should not also be responsible for handling reconciliations.
Conduct regular audits — including surprise inspections — to catch discrepancies early, and use reliable accounting software with strict access controls. Lastly, invest in fidelity insurance to protect against employee theft.
In case something does happen, it’s important to have a channel of communication for employees to report suspicious activity without fear of retaliation. Implementing an anonymous reporting system for whistleblowers can serve as an extra safeguard.
Embezzlement FAQs
What should a business do upon discovering potential embezzlement?
Document suspicious activities. Gather financial records, emails, and other relevant documents while keeping suspicions confidential. Avoid confronting employees prematurely to prevent evidence destruction or legal risks.
Consult legal and financial experts. Engage forensic accountants and legal counsel to ensure proper procedures are followed. Experts can help trace missing funds and determine the best course of action.
Conduct a structured investigation. Develop an investigation plan, interview key employees confidentially, and analyse discrepancies in financial transactions. Ensure interviews are well-documented and follow ethical standards.
Decide on corrective action. Based on findings, determine whether to take disciplinary action, seek financial restitution, or involve law enforcement. A well-documented investigation report should support any decisions made.
Strengthen internal controls to prevent fraud in the future. Finally, conduct a risk assessment, update financial policies, and implement stricter controls such as segregation of duties and fraud response plans, to reduce the chance that a similar thing could happen again.
How is the severity of embezzlement determined in legal proceedings?
The severity of embezzlement in legal proceedings is typically determined by factors such as the value and type of property embezzled, whether any aggravating factors are present, and the defendant's relationship to the victim. Generally, the larger the amount embezzled, the more severe the penalties.
Aggravating factors could lead to harsher penalties, particularly if the defendant stole from a vulnerable person, such as an elderly or disabled individual, or held a position of trust, such as a public servant or a bank employee. In such cases, penalties may be significantly increased. Exact penalties and procedures depend on the jurisdiction.
Can embezzlement occur in non-profits and government agencies?
Nonprofits and government agencies are vulnerable to embezzlement, even with strong internal controls, as new schemes constantly emerge. For these organisations, embezzlement not only depletes funds but also damages trust and reputation, making it harder to achieve the organisation’s mission.
