If you have stumbled across worrying signs in your company’s account – from inconsistent records to unexplained losses – you might suspect that funds have been misappropriated.
Embezzlement, misappropriation of funds, fraud… these are all terms we’re familiar with and are examples of white-collar crimes which carry serious consequences including losing your job, company fines, director disqualification and in the most serious cases imprisonment.
But what do these terms mean under law and what can be done about them if your business is impacted?
The truth is all of these terms are related, and we’ll define them below to clarify the subtle differences between them.
Detecting misappropriation of funds can be incredibly complicated, with labyrinthine patterns needing to be drilled down into, but the sooner you start the more likely you are to uncover the truth and apprehend the perpetrator – so let’s dive straight in.
What is misappropriation of funds?
Misappropriation of funds is when money goes missing from financial records. There are various types of fund misappropriation which we’ll go into below.
All examples of misappropriation of funds are constituted as financial crimes, the Financial Services and Markets Act 2000 defines financial crime as any 'offence involving (a) fraud or dishonesty; (b) misconduct in, or misuse of information relating to, a financial market; or (c) handling the proceeds of crime’.
Types of fund misappropriation
KPMG research revealed that in the first half of 2021, the value of alleged fraud reaching the UK courts was just under £140 million.
Theft
Businesses lose approximately £315,000,000 per year from theft and embezzlement combined, the lines between the two can become blurred.
When you think of employees stealing money from their employer, examples such as stealing from a till might come straight to mind. Theft isn’t always such a simple and clear-cut affair, however, and it differs from embezzlement (more on this later) in that those who steal through theft never had the right to access the funds in the first place
Fraud
Like theft, fraud occurs when someone accesses company funds that they should not have permission to access for their benefit
Insider trading
Obtaining or speculating on privileged non-public information is known as insider trading. For example sharing details of upcoming major layoffs, that will influence the stock position of a publicly traded company on the stock market
Money laundering
This is the process of hiding profits of illegal activity to make them look like legitimately generated funds, this can include comingling illegal and legal funds together in the same account.
Money laundering can also include moving money through bank accounts in different countries to avoid a detectable paper trail. Asset tracing is the process by which companies can attempt to counter money laundering operations that affect their operations.
Tax fraud
This happens when businesses or individuals deliberately mislead HRMC by providing it with false information about themselves to benefit from paying less tax. Examples include failing to declare income, overclaiming expenses and claiming illegitimate tax cred
Bribery and corruption
Accepting something of value in return for an action that is illegal or considered unethical.
Director self-dealing
This applies to situations where a director uses company money to repay a personal loan that they have self-guaranteed, meaning they have personal liability to repay the borrowed money. However, by self-dealing a director limits exposure to repay the debt if the company cannot afford to repay it. Also sometimes known as a conflict of interest.
Examples of misappropriation of company funds
We’ve introduced you to some of the most common types of misappropriation of funds, however, those are merely the strategies that may be used. Below, we’ll walk you through some regularly used tactics of people who misappropriate company funds.
One common example is bookkeepers embezzling funds through creative accounting methods that allow them to steal funds from their employers.
In terms of fraud, common examples of this strategy include identity theft, false invoices, such as expense fraud (remember the MP expenses scandal?) and falsifying financial statements.
The receipt of gifts from suppliers, potential suppliers or customers can be considered misappropriation of funds, especially if a business has a clear policy around the acceptance of gifts.
An example of fraud, money laundering and comingling of funds from different sources in one place can be seen through the collapse of the cryptocurrency exchange FTX. Sam Bankman-Fried, the poster boy of cryptocurrency and previously the 41st richest American, was convicted of this triple whammy of financial crimes in December 2023 after cheating customers and investors out of $10 billion.
False accounting can include unlawful tactics such as inflating a company’s share price, concealing losses so that a company continues to receive financial help and obtaining credit or finance to deal with cashflow issues – many businesses dishonestly took out Covid bounce-back loans they didn’t need to take advantage of immediate cash flow with low interest and generous repayment terms.
Reporting false profits is also an example of false accounting as this can artificially inflate a share price which could benefit a business in several ways.
What is embezzlement?
Embezzlement is the most common form of fund misappropriation. According to Investopedia:
Embezzlement refers to a form of white-collar crime in which a person or entity intentionally misappropriates the assets entrusted to them.
In embezzlement, a person, typically someone working for a company, legally has access to assets and has the right to possess and manage them as part of their job, however, they then use the assets for unintended purposes.
Embezzlement specifically accounted for £15.9 million worth of losses through 26 cases up from £8 million and 15 cases in 2020. One eye-opening case saw a company secretary imprisoned for the theft of £1.7 million from her employer to fund a horse-buying habit she claimed as being “more addictive than drugs”.
As mentioned, another common example of embezzlement is a bookkeeper who steals money from their company’s funds.
Embezzlement vs misappropriation of funds
There is a subtle difference between embezzlement and misappropriation of funds. While both involve the wrongful use of someone else’s funds in their care, misappropriation of funds primarily refers to the misuse of finances, rather than property.
Embezzlement can refer to both property and finances. Misappropriation of funds refers specifically to finances and not other forms of property.
As mentioned, misappropriating funds is the wider description for a range of financial crimes including embezzlement, fraud, corruption and money laundering.
Who is likely to commit misappropriation of funds?
As we’ve pointed out anyone who has access to company funds under the right set of circumstances may be tempted to misappropriate them for their ends.
Indeed, directors and others with the most power and authority, therefore opportunity, are often the most likely to misuse funds.
What action can be taken against someone who has misappropriated corporate funds?
We’ve hinted at some of the consequences of misappropriating funds. In the UK fund misappropriation can be punished under the following criminal offences:
Theft
Fraud
False accounting
The consequences of these crimes will depend on the severity of the perpetrator’s unlawful activity. They may include fines, loss of employment and even imprisonment.
What are the consequences of misappropriation of funds?
For a company, penalties can include loss of directors, fines and damage to the reputation. In the most serious cases, these crimes can lead to company insolvency and civil debt recovery action from creditors.
The type of penalty an individual or business will get depends on the severity of the offences committed.
Below are some of the pieces of legislation that apply to white-collar financial crimes:
How can misappropriation of funds be prevented?
Security and monitoring are two of the most beneficial strategies for detecting and identifying corporate crimes.
This can include camera monitoring in the workplace, which is legal as long as employees have been told they’re being monitored and know how this is being carried out. The likelihood that monitoring will catch bad actors in the act is increased when it is carried out by a dedicated risk management team, and even more so when they are independent and unbiased.
Risk managers can create internal monitoring techniques, educate staff on financial crimes and their consequences and allow for anonymous reporting procedures and platforms that make it easy to report concerns. Regular audits can also be carried out to confirm everything is above board.
Monitoring is important as damage can be limited by early detection and losses reduced. This includes financial and reputational losses – which can often be more costly than a mere fine or damage to yearly profits.
Employers should have clear policies as well as regularly educate staff on the consequences of financial crimes.
Is misappropriation of company funds considered fraud?
The misappropriation of funds can take shape as fraud. Misappropriation of funds is simply an umbrella term for financial crimes which can include fraud. Fraud is one way that someone can misappropriate funds.
Fraud can be defined as “wrongful or criminal deception intended to result in financial or personal gain”.
Legal defences for misappropriation allegations
There are various common defences used when someone is faced with allegations of misappropriation:
Lack of intent – someone claims they didn’t know they were misusing funds or they didn’t mean to;
Permission – the owner or controller of the money allowed them to use the money as they saw fit, or they were under the impression they were allowed to use the money in such a way;
Believed they were the owner – someone might believe they had rightful ownership or free use of funds;
Not enough evidence – to prove wrongful use, or the evidence is inadmissible in court due to how it was collected.
Get help with misappropriation of funds from a corporate solicitor
Whether you are looking for strategies to defend yourself against a false allegation of misappropriation of funds, or your company has been impacted in whatever way by a financial crime our solicitors can help.
Acting sooner rather than later is your strongest defence and our solicitors can arm you with an array of legal strategies to protect yourself or your company.
We offer a free case assessment to understand your circumstances, for you to get to know us and for us to let you know how we can help. Get in touch today.