• Embezzlement is the misuse of funds by someone who was entrusted with managing it.
  • Embezzlement schemes usually start out with small amounts and snowball into larger sums of money over time.
  • Embezzlement is only a felony if the embezzler stole over $1,000 dollars, which can result in a maximum of 10 years in jail.

The way our money is circulated is very often built on trust. We trust that the people investing money on our behalf are actually doing what they say they're doing. Businesses trust that the people overseeing business operations are working in the business's best interest. There is literally a type of financial agreement called a "trust."

The fiduciary duties that these people hold shouldn't be taken for granted. When it is, that creates a window of opportunity for those people to embezzle that money. 

What is embezzlement?

Embezzlement is the misappropriation of funds for personal gain. While embezzlement is a form of theft, the key difference between embezzlement and larceny is that the money taken through embezzlement was initially entrusted to the embezzler through legal channels. Only after the money is obtained, does the perpetrator take the money for themselves.

These schemes can take on several forms. One way that embezzlement takes form is the Ponzi scheme. These schemes involve a central operator, often someone with a fiduciary duty like a hedge fund manager or a broker, who collects money from investors with the promise of high returns and dividends.

Instead of investing that money, they use it for their personal expenses. Since no investing is actually taking place, the operator relies on a steady stream of income from new investors to pay older investors, often called "robbing Peter to pay Paul." When the operator can't find new investors, the Ponzi scheme collapses as the operator runs out of money to pay dividends. 

How does embezzlement work?

While Ponzi schemes attract a lot of attention, most embezzlement schemes aren't as well-orchestrated or as thought out. "It's not generally, in my opinion, some mastermind that planned it all together and knew they were gonna steal X amount over a period of time," says Sarah Santos, a banking and commercial litigation lawyer and co-founder of Davis & Santos PLLC. "Generally, it starts small, right? You do it out of some kind of necessity first."

Usually, an embezzlement scheme takes the form of an employee of a company skimming off the top in small increments, usually for some specific reason like an upcoming payment that they don't immediately have the funds for. So they take some money out and promise themselves they'll pay it back later. When those embezzled funds go undetected, Santos says "they see how easy it is, and then it always snowballs into what it eventually becomes."

Over a long period of time, these embezzling schemes can amount to large sums of money. Santos recalls one case where the chief financial officer of a big car dealership would add a random, unspecified line item onto their bills. That money would get siphoned off into an account for him. "Over 30 years, it ended up being $20 million dollars," Santos says.

Embezzlers can go undetected for years by taking control of checks and balances within the company, so there's nobody who would be able to find any discrepancies. Santos provides another example of a chief financial officer who fired the accounting firm that did the company's taxes so they couldn't identify the funds he was embezzling. Instead, he did all of the company's taxes himself because he had a CPA license. 

How is embezzlement prosecuted? 

At one point or another, an embezzlement scheme gets discovered. A 2022 study from the Association of Certified Fraud Examiners (ACFE) found that the median occupational fraud scheme lasts 12 months before being detected, causing $117,000 in losses. Of these schemes, 86% of them involve asset misappropriation, causing $100,000 in losses per case, though the longer the scheme, the more a company stands to lose. 

Santos says that these cases often come to light when the company reaches a point where its policies and procedures get switched up, such as a merger or a change of management. The channels that the embezzler went through are now blocked, which prevents further embezzlement. This may trigger a sudden pattern shift when the money that was regularly being siphoned suddenly appears on the books out of nowhere.

Embezzlers often don't take any time off because obscuring these schemes from prying eyes is a full-time job. If an embezzler is out of the office when someone begins wondering where a certain amount of money went, there's nobody there to cover it up. "Every company should force employees to go on vacation and disconnect. Because that's when all of a sudden, if you're not there to cover up something, then it comes to light," Santos says.

Once an embezzlement scheme is out in the open, a case can be taken to both criminal and civil court. Embezzlement can have several legal causes of action, which are the grounds on which legal action is pursued for a specific action. For civil cases, this comes in the form of breach of fiduciary duty or breach of contract. These cases are often launched by victims who are trying to recover money from an embezzler. 

The steps to prove embezzlement depend on the legal cause of action that the lawsuit was based on. In a criminal embezzlement case, the government must prove four things: 

  1. There was a fiduciary relationship between the defendant and the organization, private or public, that was allegedly defrauded.
  2. The defendant acquired the property through their employment.
  3. The defendant's actions regarding the property constituted a fraudulent conversion or appropriation to their personal use.
  4. The defendant acted with the intent to deprive the owner of the use of this property.  

What to do as a victim of embezzlement

The specific steps that you should follow as a victim of embezzlement will depend on who you are as a victim. If you're an individual investor, your priorities are going to be different than if you are a business owner. Regardless of who you are, the priority in these embezzlement cases is recovering as much money as possible. Here are some starting points in embezzlement cases: 

Lawyer up: You should evaluate your situation and determine if a lawyer is necessary. For something small like $100, an attorney might not be necessary. For $100,000, you should probably find yourself some representation. 

Notify insurance company: If your business is a victim of embezzlement, hopefully you have some kind of theft insurance. You should contact your insurance company immediately since many of these policies have a clause that requires you to report these incidents to your provider within a certain period of time. Aside from recovering money directly from the embezzler, this is your best bet for recuperating lost money.

Archive information: You should physically save all correspondence you've had with the embezzler, which means printing out all emails and texts. If you operate a business, freeze all emails and lock down your server. Many cases revolve around a smoking gun in the form of an incriminating email or text, which can prove an embezzler's intent. 

Freeze the embezzler's assets: Recovering as much money as you can from an embezzler is your surest bet for recovering stolen money. Even if you successfully sue an embezzler for the entire sum they stole from you, if they don't have the money to pay you back, there's not much you can do.
Paul Kim
Paul Kim is a Personal Finance fellow at Insider where he writes explainers and how tos that help readers understand how to better manage their money. A recent NYU graduate, Paul has spent the majority of his journalism career at his student-run newspaper Washington Square News, where he wore a number of hats. Most recently, he helped rebuild the newspaper in the spring of 2021 as its managing editor after nearly all the staff resigned the previous semester over issues of editorial independence.When he's not writing, Paul loves cooking and eating. He hates cilantro. Direct tips to pkim@insider.com and family recipes to @PaulKimWrites on Twitter.