Understanding embezzlement: mechanisms and warning signs

Each year, billions are unlawfully taken from companies and public organisations by the very individuals entrusted with their management. Embezzlement is not a new phenomenon, but its significance grows with the staggering sums revealed in recent scandals. This issue affects all sectors of the economy, including public enterprises, governmental institutions and cryptocurrency exchange platforms. This article delves into the complexities of embezzlement through real-world examples.

• Embezzlement is the unlawful appropriation of funds or assets by individuals in positions of trust

• It affects both public and private sectors, including businesses, governmental institutions and cryptocurrency platforms

• Key elements include a breach of trust, illegal appropriation and fraudulent intent

• Embezzlement often occurs alongside other crimes, such as fraud, corruption and money laundering

What is embezzlement?

Embezzlement refers to the illegal appropriation of funds or assets by someone in a position of trust or responsibility for personal gain. Three key aspects define it:

• A pre-existing relationship of trustThe perpetrator has legitimate access to the funds due to their role or status, such as a company treasurer, account manager, banker or even a senior executive. This trust is central to the fraudulent scheme.

• Illegal appropriationThe perpetrator exploits their position to unlawfully seize entrusted funds or assets, using methods like transferring money to personal accounts, creating fake invoices or diverting funds for unintended purposes. The result is financial loss for the victim, whether a company, public body, charity or cryptocurrency platform.

• Fraudulent intentEmbezzlement is always intentional, involving a deliberate effort to misappropriate funds that do not belong to the perpetrator. Unlike a simple management error, the act is calculated and concealed.

Though the law views them differently, embezzlement often occurs alongside the misuse of company assets, where leaders use company resources for personal gain. Scandals frequently reveal how embezzlement intertwines with fraud, including financial manipulations without direct misappropriation, or extortion by public officials.

Types of embezzlement

Embezzlement of cash or payment instruments

This involves the theft of cash, forgery or unauthorised use of cheques, and fraudulent use of payment cards or electronic means. These cases often exploit weaknesses in payment security and control systems.

• Examples:A cashier discreetly taking cash from the register

• An accountant issuing unauthorised cheques

• A manager using the company credit card for personal expenses

Embezzlement through document falsification

This involves manipulating or falsifying accounting records and receipts to divert funds. Techniques include fake invoices, inflated expense reports and altered contracts.

• Examples:Collaborating with a supplier to overcharge for services and splitting the surplus

• Claiming personal expenses as business-related reimbursements

Embezzlement via shell companies

Fraudsters may create fictitious entities to simulate services and collect undue payments. These entities are often registered in tax havens, with funds laundered through anonymous accounts.

• Examples:Fake consultancy invoices from non-operational companies

• Kickbacks deposited into offshore accounts, often requiring unethical intermediaries’ assistance

Embezzlement of assets and intellectual property

Beyond cash, fraudsters may steal tangible assets or intellectual property to exploit or sell to competitors.

• Examples:An employee taking stock or supplies for resale

• An engineer selling proprietary designs to a competitor

Embezzlement of public funds and subsidies

Public funds are frequently misappropriated, from misusing subsidies to bypassing public procurement rules through collusion or favouritism.

• Examples:Fake parliamentary jobs to collect salaries

• Manipulated contracts in exchange for kickbacks

High-profile cases in Europe and worldwide

Kiabi embezzlement (France, 2024)

In August 2024, Kiabi, a budget fashion brand, uncovered the disappearance of €100 million deposited with a European bank in 2023. Investigations pointed to their former treasury director, now living luxuriously in Miami, whose arrest exposed a history of fraud against previous employers.

Post-Covid recovery plan embezzlement (Italy, 2024)

Italy mismanaged €600 million from the NextGenerationEU recovery plan between 2021 and 2023. Fake SMEs claimed subsidies, funnelling the money to Austria, Romania and Slovakia via shell companies. Authorities seized luxury properties, cars and cryptocurrency.

1MDB sovereign fund scandal (Malaysia, 2015)

Between 2009 and 2015, $4.5 billion was siphoned from Malaysia’s sovereign fund via offshore accounts and fake companies, involving complicit bankers. The funds financed luxury real estate, artwork and even a Hollywood film.

Bank of China scandal (China, 2001)

Xu Guojun embezzled $482 million from the Bank of China over seven years, laundering the money in the US and Canada. Arrested in Kansas, Xu was extradited and sentenced to life imprisonment in China in 2023.

FTX collapse (USA, 2022)

The bankruptcy of FTX revealed the misappropriation of $11 billion from customer deposits. Founder Sam Bankman-Fried was found guilty of using $3.3 billion to fund a lavish lifestyle and risky cryptocurrency bets via Alameda Research, leaving millions of creditors at a loss.

This content is presented to inform and protect. Stay vigilant by understanding the mechanisms behind embezzlement and its warning signs.

Sanctions for fraudsters in different countries

Fraud-related sanctions differ across countries, reflecting local legal frameworks. Below is a summary of the legal classifications, prison sentences, financial penalties and legal bases in selected countries:

• FranceLegal classification: Abuse of trust

• Prison sentence: Up to 7 years

• Penalties for individuals: €750,000

• Penalties for companies: Up to €3.75 million

• Legal basis: Penal Code

Germany

• Legal classification: Untreue (abuse of trust)

• Prison sentence: Up to 10 years

• Penalties for individuals: Proportional to illicit gains

• Penalties for companies: Up to 10% of annual turnover

• Legal basis: StGB (German Penal Code)

United Kingdom

• Legal classification: Fraud

• Prison sentence: Up to 10 years

• Penalties for individuals: Unlimited

• Penalties for companies: Unlimited, with the option of Deferred Prosecution Agreements (DPAs)

• Legal basis: Fraud Act 2006

United States

• Legal classification: Wire fraud / mail fraud

• Prison sentence: Up to 20 years

• Penalties for individuals: Up to $5 million or more, depending on the damages caused

• Penalties for companies: Fines calculated as triple the damages caused

• Legal basis: Federal Sentencing Guidelines

Switzerland

• Legal classification: Unfaithful management

• Prison sentence: Up to 5 years

• Penalties for individuals: Determined by daily fine system

• Penalties for companies: Up to CHF 5 million

• Legal basis: Swiss Penal Code

Each country adjusts sanctions based on the severity of the offence and its national laws.

Country-specific details

France

In French law, embezzlement is classified as abuse of trust. Sanctions include up to 7 years in prison and €750,000 in fines. Additional measures may include bans on managing companies, asset confiscation or recovery of stolen funds, and publication of the judicial ruling. Companies face up to €3.75 million in fines and possible exclusion from public tenders.

Germany

In Germany, Untreue is the primary offence related to embezzlement. Sentences depend on factors such as the stolen amount, the perpetrator’s role, aggravating circumstances (e.g. premeditation, concealment) and the duration of misconduct. Companies are held accountable through administrative law (Ordnungswidrigkeitengesetz), which permits fines proportional to turnover.

United Kingdom

The Fraud Act 2006 modernised the UK’s fraud legislation. The Serious Fraud Office (SFO) has extensive investigative powers, including conducting searches without prior judicial approval, demanding document production and negotiating DPAs. DPAs allow companies to avoid prosecution in exchange for significant fines.

United States

The US takes a stringent approach, involving federal criminal charges (wire/mail fraud), civil actions by the SEC, state-level lawsuits and class actions by victims. Fines follow Federal Sentencing Guidelines, using multipliers based on damages. Corporate fines can exceed $1 billion, reflecting the gravity of fraud cases.

How companies protect themselves against embezzlement

Internal controls

Internal controls focus on separating incompatible tasks to prevent excessive control over financial processes by one individual. Key practices include:

• Segregating duties related to authorisation, transaction recording and asset handling

• Implementing dual sign-off for sensitive transactions above certain thresholds

• Conducting unannounced audits of cash, inventory and equipment

At Bitpanda, employee access to wallets and transactions is strictly fragmented, adhering to rigorous authorisation procedures.

Access management for key software

Fraudsters often exploit vulnerabilities in information systems. Companies enforce strict access management policies following the principle of least privilege, ensuring users only access what is essential for their work.

Best practices include:

• Securing passwords and promptly revoking access for departing employees

• Reconciling accounting entries with bank statements monthly

• Regularly auditing suppliers and service providers

Promoting a culture of vigilance and ethics

Studies show that employees are often the first to detect signs of embezzlement. Fostering a safe environment where whistle-blowers feel protected is essential. Quick and fair handling of reports builds trust and strengthens internal oversight.

Conclusion

Embezzlement often involves more than theft; stolen money must be laundered to be usable. As seen in major cases like Xu Guojun’s casino accounts, Sam Bankman-Fried’s investments, or the 1MDB sovereign fund, embezzlement is typically accompanied by other crimes such as extortion, corruption and threats.

The laundering process is well-trodden: funds flow through shell companies, are converted into luxury goods or digital assets, and eventually reintegrated into the legitimate economy. Despite enhanced regulatory measures, this sophisticated cycle continues to challenge authorities worldwide.

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