Embezzlement and Employee Theft

And How to Protect Your Business from Embezzlement

Businessman in handcuffs
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As a business owner, you need to be and how to protect your business from potential embezzlers, because it happens more often than you would like to think.

Hiscox a global specialist insurer, did a survey in 2018 of businesses who had been the victims of embezzlement. They found:

  • 85% of cases were perpetrated by someone at the manager level or above
  • 79% of cases involved more than one perpetrator
  • 70% of cases lasted more than a year
  • 33% of perpetrators worked in the accounting or finance department
  • 39% of embezzled funds were recovered on average, through settlements, restitution, or insurance

Fortunately, the more you understand about embezzlement, the easier it is to recognize the signs and take steps to keep your company's financial assets secure.

What Is Embezzlement? 

Embezzlement is the act of someone wrongfully appropriating funds that have been entrusted to their care but which are owned by someone else. The most common embezzlement is by employees, but others with fiduciary (financial) responsibility can also be charged with embezzlement.

Embezzlement is a specific type of fraud, which is defined as a "knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment." For example, accounting embezzlement is the manipulation of accounting records to hide the theft of funds.

Embezzlement can be prosecuted as criminal fraud or civil fraud. In the case of civil fraud, an employer can bring a lawsuit against the employee. 

What Are the Factors in Embezzlement?

For a charge of embezzlement to be supported, four factors must be present and must be proven:

  • A fiduciary relationship must exist between the two parties; that is, there must be a relationship of trust, responsibility for taking care of the asset (money or property, for example), and reliance by one party on the other. 
  • The defendant must have acquired the asset or taproperty through the relationship, rather than in some other manner. It is sometimes difficult to prove, particularly in the case of embezzlement of cash taken from a bar's cash register, for example. 
  • The defendant must have taken ownership of the property or transferred the property to someone else (called conveyance). 
  • The defendant's actions were intentional. It is also sometimes difficult to prove intent.

What Are the Penalties If Convicted?

The penalties depend upon the amount stolen. If convicted, the embezzler may receive a fine, may be required to do restitution (give back the money). In some cases, a prison sentence might be imposed as well.

Some Examples of Employee Thefts

Examples of embezzlement include the bank teller who pockets deposits, the bookkeeper who takes customer refunds for himself, the attorney who uses the funds in an escrow account for herself, and the payroll clerk who doesn't deposit the correct amount of employment tax, keeping the rest for himself.

According to a report by CNBC, employees in retail businesses have a habit of walking off with merchandise. It is employee theft, called "shrinkage" in the industry. Another common retail employee theft is gift cards. They are easy to put in a pocket and walk away with.

Of course, computer fraud by employees has many facets, many of which involve a fraudulent transfer of funds by an employee. 

What Does an Embezzler Look Like?

The New Jersey Business and Industry Association lists some common characteristics of an embezzler:

  • They are bright and eager to know how everything in the office works
  • They are a rule-breaker, someone who overuses sick time and gets speeding tickets
  • Many embezzlers steal because they believe they've been treated unfairly and they want to even the score
  • They often live a lifestyle not supported by their salary (fancy cars, trips, big houses)
  • They are always there at the office, never taking vacations

How to Protect Your Business From an Embezzler

  1. Start at hire. Screen carefully and do background checks. Check profiles on social media.
  2. Get employees to sign a computer policy, stating that they acknowledge that their computer is the property of your company.
  3. Beef up security and spread out responsibilities. Separate check signing ability from check writing responsibility.
  4. Keep a tight hold on your company credit cards. Put one card in your name and let employees use it and bring it back.
  5. Watch for warning signs. An employee who admits money problems or one who is obviously overspending their income should raise red flags with you. If someone is reluctant to take a vacation, that might be a sign that they are hiding something and don't want to let someone else handle the books.

If You Suspect An Employee of Embezzlement

Document everything you can get your hands on.

Talk to your employment attorney or get one. Don't make any moves without their direction.