Simply, embezzlement is the fraudulent appropriation or theft of funds entrusted to someone.
Often, this is done by a company employee. Through money laundering, this money is then concealed and made to appear as though it’s from a legitimate source.
Therefore, while embezzlement is an internal problem for the company, once the funds are laundered, they fall under Anti-Money Laundering.
Is embezzlement a crime?
In the UK, embezzlement falls under two different acts: the Fraud Act 2006 and the Theft Act 1968. To understand why this is the case, consider the following factors:
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Breach of trust - the embezzler has legal access but decides to turn criminal. For example, a client account manager uses their bank account details on an invoice rather than the company’s details. The client believes they have paid the company, and, depending on whether the account manager has updated the invoice to display as paid, the company also believes they have been paid. Therefore, both the client and the company have experienced a breach of trust.
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Intentional harm - embezzlement is a premeditated act rather than accidental. This premeditation can include faking records and hiding transactions. If the embezzler plans to keep the assets, rather than hold them on loan, they can be seen as committing theft.
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Economic damage - large-scale embezzlement often targets public funds and harms vulnerable groups. This is because embezzlers often target pensions and charities.
What are the common types of embezzlement?
Before you can screen for Money Laundering as a result of embezzlement, you first have to understand how embezzlement happens.
1. Payroll fraud
In larger companies, perpetrators can create fictitious employees or falsify their work hours to generate unauthorised payments.
For this to occur, the employee must have access to the payroll system and know if there are weaknesses between the payroll system and any verification systems.
2. Fake overtime
Typically, when timekeeping verification systems are inadequate, employees can falsify their hours and claim overtime.
This can be done either individually or with the collusion of approving managers who know what’s happening.
3. Ponzi schemes
To set the scene, a company brings in an investor. When it comes time to pay back the investor, rather than paying them from the company’s profits, they simply bring in another investor and use that investor’s investment to pay the first investor. And so and so forth.
This flow of capital maintains the illusion that the company is profitable and, therefore, able to attract new investors. The scheme eventually faces collapse when the stream of new investors dries up.
4. Charity theft
Funds donated to charities and non-profit organisations are misappropriated, often through being diverted for personal use. This could be seen as fabricated expenses, inflated service contracts, or direct diversion.
5. Siphoning
Have you ever wondered where that £1 has gone? Or have you written it off as “one of those things”? Maybe it was a transaction fee from somewhere, or maybe an employee has siphoned it into their own account.
Embezzlers who use siphoning typically target high-volume transaction environments where it’s unlikely that they’ll be questioned over small, irregular amounts going missing during routine reconciliations.
6. Lapping
Arguably, one of the most complex forms of embezzlement; requiring the embezzler to keep meticulous records.
Imagine an employee stealing a payment from Customer A; to avoid suspicion from Customer A, they assign the payment to their account from Customer B. To avoid suspicion from Customer B, they assign a payment from Customer C and so on.
This cycle of misapplied payments can go undetected for some time and tends to unravel when the employee is away for any period, or until an audit of the accounts.
Why is this important for money laundering?
Embezzlement is an internal crime that can evolve into money laundering when the stolen assets are moved, hidden, or integrated to make them appear legitimate.
MLVerify can help flag those involved through the following -
1. PEP checks
When dealing with large-scale embezzlement, the individual involved is often powerful or high-ranking and knows how to leverage their authority to divert funds.
Knowing whether the individual involved is a PEP (Politically Exposed Person) can give an insight into whether they have been exposed to the power and authority required to embezzle funds on a large scale.
2. Watchlist and sanctions screening
Screening against watchlists and sanctions data helps financial institutions flag clients that may be involved in embezzlement and money laundering.
For example, it could flag that the customer was recently added to a watchlist for embezzlement.
Knowing this information before agreeing to continue services with the individual can help keep your business safe and compliant.
3. Customer risk scoring and ongoing monitoring
After assigning a risk score to your client based on what you know about them. The score can be recalculated based on data changes.
For example, if your low-risk client is added to a watchlist, we’ll let you know so that you can re-check their risk score.