Hello, and welcome to Legal Lad’s Quick and Dirty Tips for a More Lawful Life. I’m your host, Adam Freedman.
But first, your daily dose of legalese: This podcast does not create an attorney-client relationship with any listener. In other words, although I am a lawyer, I’m not your lawyer. In fact, we barely know each other. If you need personalized legal advice, contact an attorney in your community.
Is this Embezzlement?
This week: embezzlement. Eric writes that his business partner “doesn’t think that the money he “borrowed” is embezzlement,” but Eric obviously thinks otherwise, and asks me to shed some light on the topic.
Eric, I’ll be happy to do that. But I have to ask you a question: why are you still in partnership with this guy? Oh well, none of my business I guess. The short answer is that if your partner is taking company money for his own use without proper authorization, he may be embezzling, even if he thinks it’s only a “loan” and even if he hopes to pay the money back some day.
What Is Embezzlement?
Embezzlement is the dishonest misappropriation of money or property by a person who gained access to the money or property by virtue of his employment. In other words, it’s a fancy legal term to describe the phenomenon known as “dipping into the till.” The word embezzlement comes from the old Anglo-French word enbesiler, meaning “to carry off”.
Believe it or not, the law of embezzlement was originally aimed at light-fingered servants in English country houses. There had been a gap in the law: “larceny,” which was the traditional law of theft, required that the thief obtained the goods illegally. But theft by a servant did not fit the technical definition of larceny because the servant did not initially gain possession of the goods illegally. The butler, for example, was perfectly entitled to handle the silver for the purpose of polishing it. Unfortunately, he did not always put it back.
In the modern business world, embezzlement covers hundreds of situations, from the cashier skimming off the top, to the executive who diverts millions to an offshore account.
Embezzlement Laws
There are certain federal embezzlement laws, but more often the crime is covered by state laws. There are, of course, variations among state and federal laws, but generally, to prove embezzlement, a prosecutor has to show that the employee had possession of the goods or funds because of the employee’s position, or that the employee had the authority to exercise substantial control over the goods or funds.
Courts determine the question of substantial control by considering the employee’s job title, job description, and the practices of that particular company.
A Case of Embezzlement?
That’s why a lot depends on what Eric means when he says that his partner “borrowed” money. Let’s say Eric is using the word “borrowed” purely ironically and there was no loan agreement. If the partner had access to company money for legitimate purposes, but then started skimming the money for his own personal use, then the partner may well be embezzling.
On the other hand, if the partner gained possession of company money through some trick or deception, then he might be liable for a slightly different crime known as fraudulent conversion.
On the third hand -- so to speak -- if the partner actually has a loan agreement with the company and he’s simply falling behind on his payments, that’s not embezzlement. In fact, it’s not even a crime. In the United States, we got rid of debtors’ prisons in the 19th century so, generally speaking, you can’t get locked up for failing to repay a loan. Good news, I’m sure, for many of us. But frustrating, nonetheless, to many creditors.
But wait. Let’s say that the partner did enter into a loan with the company but Eric thinks he can prove that the partner never intended to repay the loan -- in other words, the whole thing was a sham. Well, now we may be back to fraudulent conversion, or, depending on the state, it might just be plain old fraud.
Needless to say, criminal law is serious business. If you think that a crime is being committed, you should consult with a lawyer and/or law enforcement officials in your state or city.
What Does the IRS Have to Do With Embezzlement?
One interesting point about embezzlement. As far as the IRS is concerned, embezzled funds constitute taxable income to the embezzler. Thus, if Eric’s partner has been siphoning off funds without proper authorization from the company, then he should have been reporting it as income. And for these purposes it doesn’t matter if the partner intends to pay back the money someday. If there isn’t an actual loan agreement then the IRS considers any money skimmed off the company as embezzled funds. If the employee does pay back the money someday, then he or she can put in for a tax refund.
Thank you for listening to Legal Lad’s Quick and Dirty Tips for a More Lawful Life.
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