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Embezzlement

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Embezzlement is the act of dishonestly appropriating or secreting assets by one or more individuals to whom such assets have been entrusted.[1]

Embezzlement is a kind of financial fraud. For instance, a clerk or cashier handling large sums of money could embezzle cash from his or her employer, a lawyer could embezzle funds from clients' trust accounts, a financial advisor could embezzle funds from investors, or a spouse could embezzle funds from his or her partner. Embezzlement may range from the very minor in nature, involving only small amounts, to the immense, involving large sums and sophisticated schemes.

More often than not, embezzlement is performed in a manner that is premeditated, systematic and/or methodical, with the explicit intent to conceal the activities from other individuals, usually because it is being done without their knowledge or consent. Often it involves the trusted person embezzling only a small proportion or fraction of the funds received, in an attempt to minimize the risk of detection. If successful, embezzlements can continue for years (or even decades) without detection. It is often only when the funds are needed, or called upon for use, that the victims realize the funds or savings are missing and that they have been duped by the embezzler.

In America embezzlement is a statutory offense so the definition of the crime varies from statute to statute. Typical elements are (1) the fraudulent (2) conversion (3) of the property (4) of another (5) by a person who has lawful possession of the property:[2]

Fraudulent: The requirement that the conversion be fraudulent means simply that the defendant wilfully and without claim of right or mistake converted the property to his or her own use.

Conversion: Embezzlement is a crime against ownership; that is, the owner's right to control the disposition and use of the property.[3] The conversion element requires a substantial interference with the true owner's property rights (unlike larceny, where the slightest movement of the property when accompanied by the intent to deprive one of the possession of the property permanently is sufficient).[4]

Property: Embezzlement statutes do not limit the scope of the crime to conversions of personal property. Statutes generally include conversion of tangible personal property, intangible personal property and choses in action. Real property is not typically included.

Of another: A person cannot embezzle his own property.

Lawful Possession: The critical element is that the defendant must have been in lawful possession of the property at the time of the fraudulent conversion and not have mere custody of the property. If the defendant had lawful possession the crime is embezzlement. If the defendant merely had custody, the crime is larceny.[5] Determining whether a particular person had lawful possession or mere custody is sometimes extremely difficult.

Relevance to the Austrian School[edit]

The Austrian School is unique in that it is the only School of economics where its prominent members consider fractional reserve banking to be a form of legalized embezzlement. It is therefore an important aspect in understanding Austrian criticisms of the practice of modern banking and modern finance more generally.

Prominent Austrian economist Murray Rothbard and more recently Austrian economists such as Jorg Guido Hulsmann and Jesus Huerta de Soto have condemned fractional reserve banking as a form of misappropriation or recursive embezzlement. Rothbard strongly opposed central banking and fractional reserve banking under a fiat money system, labeling it as "legalized counterfeiting"[6] or a form of institutionalized embezzlement and therefore inherently fraudulent.[7][8] He characterized the government-enforced prohibition on citizens using commodity currencies as legal tender a compulsory Ponzi scheme, a Ponzi scheme from which no citizen could escape.[8][9]

He strongly advocated full reserve banking ("100 percent banking")[10] and a voluntary, nongovernmental gold standard[11] or, as a second best solution, free banking (which he also called "free market money").[12]

In relation to the current central bank-managed fractional reserve fiat currency system, he stated the following:[13]

Given this dismal monetary and banking situation, given a 39:1 pyramiding of checkable deposits and currency on top of gold, given a Fed unchecked and out of control, given a world of fiat moneys, how can we possibly return to a sound noninflationary market money? The objectives, after the discussion in this work, should be clear: (a) to return to a gold standard, a commodity standard unhampered by government intervention; (b) to abolish the Federal Reserve System and return to a system of free and competitive banking; (c) to separate the government from money; and (d) either to enforce 100 percent reserve banking on the commercial banks, or at least to arrive at a system where any bank, at the slightest hint of nonpayment of its demand liabilities, is forced quickly into bankruptcy and liquidation. While the outlawing of fractional reserve as fraud would be preferable if it could be enforced, the problems of enforcement, especially where banks can continually innovate in forms of credit, make free banking an attractive alternative.

Embezzlement versus larceny[edit]

Embezzlement differs from larceny in two ways. First, in embezzlement, an actual conversion must occur; second, the original taking must not be trespassory.[14] To say that the taking was not trespassory is to say that the person(s) performing the embezzlement had the right to possess, use, and/or access the assets in question, and that such person(s) subsequently secreted and converted the assets for an unintended and/or unsanctioned use. Conversion requires that the secretion interferes with the property, rather than just relocate it. As in larceny, the measure is not the gain to the embezzler, but the loss to the asset stakeholders. An example of conversion is when a person logs checks in a check register or transaction log as being used for one specific purpose and then explicitly uses the funds from the checking account for another and completely different purpose.

It is important to make clear that embezzlement is not always a form of theft or an act of stealing, since those definitions specifically deal with taking something that does not belong to the perpetrator(s). Instead, embezzlement is, more generically, an act of deceitfully secreting assets by one or more persons that have been entrusted with such assets. The person(s) entrusted with such assets may or may not have an ownership stake in such assets.

In the case where it is a form of theft, distinguishing between embezzlement and larceny can be tricky.[15] 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. For a case that exemplifies the difficulty of distinguishing larceny and embezzlement see State v. Weaver, 359 N.C. 246; 607 S.E.2d 599 (2005).

North Carolina appellate courts have compounded this confusion by misinterpreting a statute based on an act passed by Parliament in 1528. The North Carolina courts interpreted this statute as creating an offense called "larceny by employee"; an offense that was separate and distinct from common law larceny.[16][17] However, as Perkins notes, the purpose of the statute was not to create a new offense but was merely to confirm that the acts described in the statute met the elements of common law larceny.[18]

Methods of embezzlement[edit]

Embezzlement sometimes involves falsification of records in order to conceal the activity. Embezzlers commonly secrete relatively small amounts repeatedly, in a systematic and/or methodical manner, over a long period of time, although some embezzlers commonly secrete 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 or their skill in gaining the trust and confidence of investors or clients, who are then reluctant to "test" the embezzler's trustworthiness by forcing a withdrawal of funds. Very often sophisticated financial embezzlers can escape dedection by openly allowing withdrawal for some clients whilst convincing the bulk of clients that their funds still remain in their accounts. It is only when a large pool of clients seek withdrawal of their funds at the same time does the embezzlement become obvious to all.

Embezzling should not be confused with skimming which is under-reporting 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. A smart technique employed by many small time embezzlers can be covered by falsifying the records. (Example, by removing a small amount of money and falsifying the record the register would be technically correct, while the manager would remove the profit and leave the float in, this method would effectively make the register short for the next user and throw the blame onto them)

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.

Some of the most complex (and potentially most lucrative) forms of embezzlement involve Ponzi-like financial schemes where high returns to early investors are paid out of funds received from later investors duped into believing they are themselves receiving entry into a high return investment scheme. The Madoff investment scandal is an example of this kind of high level embezzlement scheme, where is it alleged $65 billion was siphoned off from gullible investors and financial institutions.

As noted above, some Austrian thinkers such as Murray Rothbard consider the whole central-bank dominated banking system to be a worldwide Ponzi scheme of gigantic proportions - the biggest Ponzi scheme in the history of humanity.

Tax consequences[edit]

Proceeds of embezzlement must be included in gross income unless the embezzler repays the money in the same taxable year.[19] Congress has ruled that lawful as well as unlawful gains are includable in gross income[20] and that it is inconsequential that an embezzler may lack title to the sums he appropriates.”[21] 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.[22]

However, if a corporate embezzler can show four things,[23] 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."[24]

Safeguards against embezzlement[edit]

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.

Many clients concerned about the integrity of a financial intermediary will require their funds to be kept in "allocated accounts". For example, at the London bullion market investors can retain their precious metals in allocated or unallocated accounts. Allocated accounts must have clients' gold (or other precious metals) physically stored on behalf of that individual client. A financial institution permitting this gold to be leased, sold or used by its traders would be guilty of embezzlement.[25] Unallocated accounts simply record the clients' assets as a liability on the books of the financial institution and do not need to be backed by the physical metal. This theoretically allows the financial institution to legally issue multiple claims on its unallocated gold reserves.

Another obvious method to deter embezzlement is to regularly and unexpectedly move funds from one advisor or entrusted person to another when the funds are supposed to be available for withdrawal or use, to ensure that the full amount of the funds is available and no fraction of the savings has been embezzled by the person to whom the funds or savings have been entrusted.

See also[edit]

References[edit]

  1. ↑ Definition of "embezzlement" from Legal Explanations
  2. ↑ Singer and Lafond, Criminal Law, 4th ed. (Aspen 2007) 261
  3. ↑ Singer & LaFond, Criminal Law (Aspen 1987) at 213.
  4. ↑ Singer & LaFond, Criminal Law (Aspen 1987) at 213.
  5. ↑ inger & LaFond, Criminal Law (Aspen 1987) at 261
  6. ↑ The Case for a 100% Gold Dollar, Murray Rothbard
  7. ↑ "It should be clear that modern fractional reserve banking is a shell game, a Ponzi scheme, a fraud in which fake warehouse receipts are issued and circulate as equivalent to the cash supposedly represented by the receipt." Rothbard, Murray. The Mystery of Banking, pp. 96-97, 89-94
  8. ↑ 8.0 8.1 What is Money?, Gary North
  9. ↑ Rothbard, Murray. The Mystery of Banking, pp. 96-97, 89-94
  10. ↑ The Case Against the Fed, Murray Rothbard: 'A gold-coin standard, coupled with instant liquidation for any bank that fails to meet its contractual obligations, would bring about a free banking system so β€œhard” and sound, that any problem of inflationary credit or counterfeiting would be minimal. It is perhaps a β€œsecond-best” solution to the ideal of treating fractional-reserve bankers as embezzlers, but it would suffice at least as an excellent solution for the time being, that is, until people are ready to press on to full 100 percent banking.'
  11. ↑ See also these Rothbard articles: What Has Government Done to Our Money?, The Case for the 100% Gold Dollar; The Fed as Cartel, Private Coinage, Repudiate the National Debt; Taking Money Back, Anatomy of the Bank Run, Money and the Individual
  12. ↑ Rothbard, Murray. The Mystery of Banking, Ludwig von Mises Institute. 2008. p. 111, 278
  13. ↑ Rothbard, Murray. The Mystery of Banking, p. 261
  14. ↑ Singer & LaFond, Criminal Law (Aspen 1997) at 213.
  15. ↑ In their book Criminal Law, Singer and LaFond provide an excellent analytical method for making these distinctions.Singer & LaFond, Criminal Law (Aspen 1997) at 221.
  16. ↑ N.C. Gen. Stat. Β§ 14-74 provides in part: If any servant or other employee, to whom any money, goods or other chattels, . . . by his master shall be delivered safely to be kept to the use of his master, shall withdraw himself from his master and go away with such money, goods or other chattels, ... with intent to steal the same and defraud his master thereof, contrary to the trust and confidence in him reposed by his said master; or if any servant, being in the service of his master, without the assent of his master, shall embezzle such money, goods or other chattels, ... or otherwise convert the same to his own use, with like purpose to steal them, or to defraud his master thereof, the servant so offending shall be guilty of a felony . . .
  17. ↑ For cases interpreting the statute, See State v. Canipe, 64 N.C. App. 102, 103, 306 S.E.2d 548, 549 (1983); State v. Brown, 56 N.C. App. 228, 229, 287 S.E.2d 421, 423 (1982).
  18. ↑ Perkins, Criminal Law 2d ed. (1986) at 286.
  19. ↑ James v. United States, 366 U.S. 213 (1961).
  20. ↑ James v. United States, 366 U.S. at 218 (1961). also see Income Tax Act of 1913.
  21. ↑ James v. United States, 366 U.S. at 216 (1961).
  22. ↑ James v. United States, 366 U.S. at 220 (1961)
  23. ↑ Gilbert v. C.I.R, 552 F.2d 478 (1977).
  24. ↑ Gilbert v. C.I.R, 552 F.2d at 481 (1977).
  25. ↑ Bank Client Battles to get Silver, King World News

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