What is Embezzlement and How Can Businesses Prevent it?

For example, a company may entrust a staff member with managing some funds. Then the entrusted person may see this as an opportunity to use the funds to attempt to make more money (or accumulate other assets) without telling the company.

Embezzlement is a type of asset misappropriation fraud or property theft. In the UK, it usually involves an offence under the Theft Act 1968 or the Fraud Act 2006, leading to significant penalties for perpetrators who are caught.

While it is a form of corporate theft, embezzlement differs from most thefts as it involves stealing assets from someone who had entrusted them to the person who then committed the crime. For it to be embezzlement, there has to be a relationship or a sense of trust between the perpetrator and the victim. 

How does embezzlement happen?

Embezzlement typically occurs in a situation where there’s a breach of trust. The perpetrator is in a position of authority or responsibility over someone else’s money or property and takes advantage of that authority for their own personal gain. 

Employees in positions like accounting, cashier, or payroll can divert funds for personal use, create fake invoices, alter records, or simply steal cash without everyone noticing to try and cover their tracks. 

They may also inflate or fabricate expense reports to embezzle funds, add ghost employees to the payroll, inflate their hours worked, or divert payroll funds to personal accounts. Embezzlers often justify their actions by believing they will repay the stolen funds or that they deserve the money.

Types of embezzlement 

1. Payroll 

Payroll embezzlement is a type of fraud where an individual misappropriates funds from a company by manipulating the payroll system. Employees often commit payroll embezzlement by falsifying timecards or hours worked, claiming compensation for work not performed, or inflating their pay rates. Those with access to the payroll system might also create fictitious employees, known as “ghost employees,” to receive unauthorised payments.

Employers can also engage in payroll embezzlement by withholding wages or benefits owed to employees. A more recent example is furlough fraud, where employers claimed government support for employees who were not laid off during the COVID-19 pandemic.

2. Kickbacks

A kickback is a form of bribery or corruption where an individual in a position of power receives secret payments or benefits in exchange for providing favourable treatment or information. Kickback schemes typically operate when an individual has the authority to make decisions that impact financial transactions.

For example, a government official might award a contract to a specific company in exchange for a portion of the contract value, or a company employee might steer business to a particular supplier in return for personal benefits. These illicit payments can take various forms, including cash, gifts, or other valuable considerations. 

3. Siphoning 

Siphoning is s where someone who has direct access to money that is paid to their employer takes payment from a customer but does not record this and keeps the money for themselves. This type of embezzlement often involves small, incremental thefts that can be difficult to detect. The perpetrator may manipulate financial records, create false invoices, or exploit loopholes in the accounting system to conceal their actions. Over time, these small amounts can accumulate into significant losses for the victim.

A typical example of siphoning embezzlement is an employee who gradually increases expense reimbursements by submitting fraudulent receipts or inflating costs. Another method involves skimming cash from daily sales before it is recorded in the accounting system.

4. Check Kiting 

Check kiting due to modern online banking systems is rare nowadays, but where cheques are still used, it is a type of fraud where individuals exploit the time it takes for cheques to clear between banks. To execute this scheme, a person typically has multiple bank accounts. They write a check from one account to another, knowing that there are insufficient funds to cover it. However, they rely on the time it takes for the cheque to clear (the “float”) to use the deposited funds for their own benefit.

For instance, someone might write a cheque from Bank A to Bank B, even though there’s no money in Bank A. Before the cheque clears at Bank A, they withdraw the funds from Bank B and deposit them into Bank A. This creates a false appearance of funds availability, allowing the perpetrator to use money they don’t possess.

5. Lapping

Lapping is a sophisticated type of embezzlement where an individual steals money from one source and uses incoming funds from another source to cover up the theft. For example, imagine a cashier who, instead of depositing the money into the register, pockets it. To hide the missing funds, they use the next customer’s payment to cover the previous theft. This process continues, with subsequent payments used to cover previous thefts, creating a “lapping” effect.

6. Ponzi schemes 

​​A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors rather than from profit. It is the money used to pay off old investors comes from new investors. The scheme typically offers high returns with little to no risk, which lures in victims.

The mastermind behind a Ponzi scheme, often called a Ponzi schemer, as they create a false illusion of success by generating consistent returns. However, the scheme is unsustainable as it relies on a constant influx of new investors to keep it running. When the flow of new investors dries up or when a large number of existing investors demand their money back, the scheme collapses.

How can Businesses detect embezzlement?

Embezzlement can be a challenging crime to detect as it often involves carefully planned schemes and multiple high-level employees. Some of the most common signs include financial records that don’t add up, missing funds, unusually high expenses, or employees living beyond their apparent means. 

However, embezzlers often go to great lengths to hide their activities, making detection difficult without careful scrutiny. Strong internal controls in place from day 1 make it easy to detect embezzlement when it happens.