"Embezzler" redirects here. For the 1914 film, see The Embezzler. Embezzlement is the act of dishonestly appropriating goods, usually money, by one to whom they have been entrusted. For instance, a clerk or cashier can embezzle money from his or her employer, or a civil servant can embezzle funds from the government. Embezzlement may range from the very minor, involving only small amounts, to the immense, involving large sums and sophisticated schemes.
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 originally the embezzler had the right to possess the property in question, and that he subsequently converted the property to his own use. Conversion requires that the theft seriously interfere with the property, rather than just relocate it. As in larceny, the measure is not the gain to the thief, but the loss to the true owner.
Historically, the crime of embezzlement was created by statute to deal with situations where theft could occur while the thief himself 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.
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.
Methods of embezzlement
Embezzlement sometimes involves falsification of records in order to conceal the theft. Embezzlers commonly steal relatively small amounts repeatedly over a long period, although some embezzlers steal 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.
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.
Tax consequences
Proceeds of embezzlement must be included in gross income unless the embezzler repays the money in the same taxable year.[1] Congress has ruled that lawful as well as unlawful gains are includable in gross income[2] and that it is inconsequential that an embezzler may lack title to the sums he appropriates.”[3] 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.[4]
However, if a corporate embezzler can show four things,[5] 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.”[6]
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
- ^ James v. United States, 366 U.S. 213 (1961).
- ^ Id. at 218, also see Income Tax Act of 1913.
- ^ Id. at 216.
- ^ Id. at 220
- ^ Gilbert v. C.I.R, 552 F.2d 478 (1977).
- ^ Id. at 481.
See also
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