Difference Between Embezzlement and Money Laundering

What is Embezzlement?

It is a white-collar crime in which a person or an entity deliberately misappropriates the funds or assets that are entrusted to them. Though they have legal permission to use these funds and assets but an embezzler misuses these for illicit and unlawful activities.

What is Misappropriation of Funds?

Misappropriation of funds refers to a criminal activity in which a person’s or an entity’s money is misused without his consent by another person or entity. It is similar to Embezzlement in terms that both crimes are committed after the authorized use of funds.

Embezzlement Vs Fraud: How they are linked?

As explained above, embezzlement is the misappropriation or theft of funds that are entrusted to an individual or an entity. Fraud on the other hand is a deceptive criminal practice to gain unfair advantage of anyone for monetary gains. Fraud causes monetary harm to unaware individuals known as victims. It includes concealment, misrepresenting, and manipulation of facts. Fraud has various forms like ATO Fraud, insurance schemes, fake lucky draws, and investment scams.

However, Embezzlement is a type of fraud that involves a trusted person (who is actually not trustworthy) misusing his authority or control over financial assets. He uses the money for illegal activities. Overall, both are classified as different crimes.

Also Read: Detecting Collusion Fraud: Red Flags and Warning Signs

Examples of Embezzlement

Mainly, the following types of Embezzlement are commonly observed:

1 Payroll Embezzlement

It is a criminal activity in which a fictitious employee is created by managers of a firm to claim wages and payroll on his behalf. The money is then distributed among the involved parties.

2 Siphoning

It is a type of embezzlement in which the trusted employees have direct access to the payments made to the company or employer. For example, a waiter receives a bill directly from a customer in the restaurant. Waiters might not register a few of the payments that can go unnoticed and keep the money.

3 Manipulation Of Overtime Records

When employees of a firm manipulate the working hour records for claiming falsified overtime through unethical means. Usually, workers in factories do this with the help of co-workers who punch in overtime on their behalf and claim the embezzled wages.

4 Cheque Kiting

It is an illegal activity in which an owner of multiple bank accounts covers a bad cheque in different banks. Since the processing of cheques takes multiple days in a single bank, thus it gives an illegal way for the embezzler to deposit unlawful and non-existent amounts through a bad cheque in multiple accounts.

5 Charity Embezzlement

When an employee of a volunteer of a charity fund misuses the funds entrusted to him for unauthorized payments, Charity embezzlement is common in NGOs and religious organizations.

6 Lapping

When an employee steals cash and deposits it in an altered account to hide it. It is different from siphoning as the money is stolen away from the customer rather than the customer paying the money himself.

What is the Difference Between Embezzlement and Larceny?

Embezzlement and Larceny are different terms as Larency mainly refers to theft in its original definition. Larceny is depriving someone of his or her property through unlawful means. Whereas, embezzlement is known as the misuse of funds authorized to someone.

Also Read: A Guide To Money Service Business & Anti-Fraud Management

What is Money Laundering?

So far, we have explained embezzlement and how it is different from fraud and larceny. In this section, we will shed light on Money Laundering and explain the main differences between the two.

Money Laundering is another financial crime in which illegal money is injected into the legitimate financial cycle. Money Laundering is done mostly by highly-risky criminals and influential political figures known as Politically Exposed Persons (PEPs).

How Embezzlement and Money Laundering are different?

Both of these activities have one common factor of being illegal and criminal activity. Rest, both activities are different in nature of the crime and procedures. Money Laundering is far more dangerous than Embezzlement as Money Laundering is difficult to detect. Comparatively, Embezzlement is easy to identify and track.

What can be done to Prevent Embezzlement and Money Laundering?

Above all, ethical and moral training of employees, workers, and managers is mandatory to invoke the value of lawful earnings. Then, a robust KYC and AML compliance system and its ongoing training can mitigate the risk of Money laundering as well as Embezzlement.

Final Words

Embezzlement and Money Laundering are serious and punishable crimes but Money Laundering is considered to be more complex and challenging for regulators and law enforcement. Intricate schemes and high-level manipulations are involved in the concealment of illicit funds and injecting them into the legal system. Therefore, to combat Money Laundering, legal frameworks, financial regulations & technological advancements are needed as continuous efforts.
Globally, Governments and financial institutions have been actively strengthening their Anti-Money Laundering (AML) policies and Know Your Customer (KYC) procedures to make the financial security system, sophisticated and robust enough to identify anomalies and suspicious transactions.