What is embezzlement?

Embezzlement is a type of financial fraud where someone takes money or assets that were entrusted to them and uses them for a different purpose than for what they were intended. The person or party that is stealing the assets is aware that what they are doing is illegal, but they do it anyway with the intention being to acquire more assets without the company’s knowledge. Embezzlement can occur on a small or large scale, depending on how much is taken, and results in high fines and imprisonment.

This can have many negative effects on a business to include overall loss in assets, a disruption in operations, off-balance in accounting and an erosion of trust. In the end, the company is the one that suffers from this financial crime with the loss of trust possibly having the longest effect of them all. Since trust is the foundation of business and customer relations, once that trust is broken, in any relationship for that matter, it is hard to gain it back. Thus why it is important to truly know your customers and your employees.

What is the difference between embezzlement and money laundering?

It is important to know the difference between embezzlement and money laundering. Though both are financial offenses involving large transactions of assets, the main difference between the two is that the money made through embezzling is made legally and stolen for other purposes, while the money or assets made in money laundering is made illegally and then concealed (Read more about the definition of money laundering).

When embezzlement occurs within a company, the owner may not even be aware it is occurring. Money, that was legally made, is being taken out and used for unintentional or criminal ends. Money laundering, however, is when funds are collected unlawfully and used for possible financial offenses or illegal practices.

How can you detect if embezzlement is occurring?

Warning signs might raise your awareness for possible cases of embezzlement within your company. There are a few possible flags that could draw your attention and would include the following:

Unexplained changes in finances where it might indicate money is going places it shouldn’t.
Employees becoming overprotective at work where they might prefer to work alone or refusal of providing records.
Signs of financial distress where it could show a potential of embezzlement in the future if someone is desperate enough.
Signs of dissatisfaction where there would be potential in feeling justified in taking funds from the company.
Problems with transaction records where receipts have gone missing or possible corruption of files.

These are just a few red flags that should be kept in mind and observed. However, you shouldn’t focus on just one sign, but rather a combination to push you into investigating further. Additionally, a change in behavior is more often a raise for concern than a behavior that has always been there.

How can you prevent embezzlement?

Now that we know what embezzlement is and how to spot it, the most important aspect is how to prevent it. The main key is having a form of security. Knowing your customers (or employees) is top priority. A KYC Check should be put in place in order to have full trust in those involved. Identity is verified through a process of requirements based on the company’s needs.

Additionally, Anti-money laundering (AML) should also be implemented in order to monitor and check activity and transactions in order to prevent the transfer of money and assets from illegal activities into the legal, financial and economic cycle.

Both KYC and anti-money laundering can be combined with the assistance from IDnow’s products. Have full trust in your clients and employees by securely verifying and monitoring who they are and what they do so you stay ahead of any possible unpleasantries.

Read on: Understanding ‘Money Mules’ – an interview with IDnow fraud specialists