EMBEZZLEMENT OF FUNDS

A white-collar crime know as embezzlement occurs when an entity or a individual intentionally misappropriates or frauds the assets entrusted to them with a specific purpose. While the assets are acquired legally and they are entitled to hold them, the embezzler uses them the embezzler uses them for unintended purposes.[1][2] Embezzlement would fall under the ambit of intentional and methodical crimes as it blatantly violates fiduciary duties.

Embezzlement is very prevalent in day-to-day life. Instances can be small and large, such as where the cashier at a retail store may accept cash from a customer but fail to ring it up in the register. The cashier will keep the cash, effectively pocketing the money and using it for his personal expenses or when multinational companies fraudulently expense millions of dollars by depositing them into individual accounts.

Some real-life instances include the case of Bernie Madoff[3], who orchestrated one of history’s most significant and impactful Ponzi schemes. Over the span of 17 years, he scammed thousands of creditors out of $65 billion. His actions sent shockwaves through the financial world. In India, Nirav Modi[4] and Mehul Choksi[5] colluded with bank officials to obtain a fraudulent Letter of Undertaking without providing proper collateral. These funds were used for overseas credit and were subsequently siphoned off. Similarly, Vijay Mallya[6] obtained loans based on forged documents and personal guarantees, which were later defaulted.

What Enables Embezzlement?

More often than not, multiple factors enable the embezzlement of funds. Embezzlement is a strategically planned offense driven by individual motivations and opportunities. An individual’s desire for personal gain, greed for more money and material possessions, and mounting financial debts may resort to embezzlement of funds as a clear solution. The circumstances also play a massive role in the scenario wherein the embezzler is trusted and has direct access to the companies’ funds. The lack of oversight and inadequate internal controls create a direct crime scene for them.

How to Legally Prove Embezzlement?

Embezzlement of funds is a punishable offence. Legal proof of embezzlement requires the victim to demonstrate that the offender had a fiduciary duty and that the defaulted asset was possessed through legal relations and reflected the accused’s intention. It can be boiled down to 4 main elements, which include:

2. A fiduciary connection is required between two parties. One of the parties should have reliance on the other party.
3. The asset must be in the defendant’s possession through legal relations.
4. The acts must be deliberate and not the consequence of negligence.
5. The asset must have been destroyed or hidden, transferred to another person, or taken ownership of by the defendant.

If someone embezzles, they may face both criminal and civil penalties. The severity of the offence determines the punishment, which can range from jail time to monetary fines.

In India, embezzlement is addressed through a multifaceted legal framework. The Bhartiya Nyaya Sanhita Sections 314[7] and 316(1)[8] define offenses like dishonest misappropriation of property and criminal breach of trust, with penalties including imprisonment and fines. The Prevention of Corruption Act of 1988[9] targets corruption and misappropriation of public funds by public servants. The Companies Act 2013, along with provisions like Section 447[10] and 448[11], tackles corporate fraud, including embezzlement by company officers. The Banking Regulation Act, 1949[12], and the SEBI Act, 1992[13], also include regulations to prevent financial misconduct within financial institutions and the securities market.

Legal Repercussions

Embezzlement is a very detrimental crime that can lead to prison time, depending on the seriousness of the offense. A person convicted for dishonest misappropriation of property under section 314 is liable for 2 years of prison time. But, if they are convicted under Section 316(4) for criminal breach of trust by a clerk or servant, the sentence is extendable to seven years. In case, the offender comes from a position of responsibility like public servants or those in positions of trust like bankers and merchants, under section 316(5) of BNS, they can be held liable for a 10-year sentence even extendable to life imprisonment. Penalties are imposed by the Prevention of Corruption Act and Companies Act which includes imprisonment based on how grave the offense is, which can extend to ten years under section 447 of the companies act. These statutes illustrate the gravity with which the offense is perceived and the potential legal consequences.

Restitution is an important part of the sentencing process for embezzlement, directing the embezzler to repay the amount that was defrauded .This isn’t a punishment but also compensation for the victim for their losses . The repayment includes the principal amount and interest to be paid along with other additional damages.  For corporate cases, restitution may be returning back the stolen assets or compensating the shareholders. The courts to ensure fair compensation to the affected may seize the assets like freezing back accounts, auctioning property or may other necessary steps required for restoration. These acts not only penalise the offence but reinstate the trust of the victims in judicial system by bring them back into the status before the offence was committed.

In the case of Secretary to Government and another v. K. Munniappan[14], a government employee was accused of embezzling a significant amount of public funds. The Supreme Court upheld the findings and pointed out the complexities of investigating such large-scale financial crimes within government departments.

In the case of Inderjit Singh & Ors. v. State of Punjab & Ors.[15] multiple people were held liable for embezzling funds allocated for various public works project in Punjab.

How Is It Different Frome Other Crimes?

Embezzlement and misappropriation of property are concepts that are often used interchangeably because of their similarities, but there is a difference between them. While under embezzlement the property used for united purposes is entrusted to that person under misappropriation involves theft of property under false pretences. The scope and relationship under which the crime occurs is entirely different. The intention also varies where embezzlement requires a specific intention, and misappropriation of property may not always have fraudulent intent; it can happen negligently as well. In terms of punishment, embezzlement is considered a serious offense, and it attracts harsher punishment as compared to the other.

Similarly in the case of theft and embezzlement while the latter occurs by someone who is usually related to the company and owes it a fiduciary duty, the former is someone unrelated to the company hacks into the company financial accounts and transfer it into personal accounts.

In the case of money laundering where attempts are made to hide the original source of funds generated to illegal means so that these funds can be spent or transferred legitimately. They use various techniques, such as the creation of shell companies and structuring transactions to avoid detection, etc. At the same time, an embezzler acquired the funds lawfully and then uses them for unintended purposes. Money laundering happens when funds are obtained illegally and used for these kinds of financial crimes and illicit activities.

Preventive Measure For Embezzlement

According to PwC’s Global Economic Crime Survey for 2024,  59% of organizations surveyed in India reported experiencing financial or economic fraud within the past two years. This is much higher than the global average of 41%[16]. In order to prevent embezzlement a multifaceted strategy must be put into place. A combination of newer technology, organizational strategies and techniques and regulatory guided compliance. Up and coming artificial intelligence and machine learning can be used to create safeguards against financial frauds.[17] They can be trained using the vast array of data available to identify anomalies which would help in early detection of suspicious activities. Along with this blockchain technology provides a secured way to record transactions while maintaining transparency.[18] This will create a concrete transaction recording software which cannot be easily altered. Real time operating systems will assist in swift detections. Creating a well-versed surveillance system is the key step to prevent from becoming scapegoats of financial or economic crimes.

Next on the priority list are organisational tactics. Interval part of employee training programmes should be teaching them how to detect frauds that are present in plain eye sight. While this would work out in small firms, in multinational corporations where it isn’t possible to provide direct control using assistance from electronic safeguards will ensure that all activities are always under surveillance. Addition of secondary firewall can also minimise unauthorised access attempts to commit crime.

Regulatory guided compliance can include ID verifications tools to perform a Know Your -Customer (KYC) to identify hidden threats of new clients or staff. Risk analysis becomes even more important, if the organisational can reasonably foresee future threat then they can have a preventive plan put into action to prevent them from happening using predictive analytics based on on-going trends. Active change in the organisational policy to take benefit of the upcoming technology will help improve security and drastically reduced the risk of financial crimes.

To summarise, as understood from above embezzlement is a grave economic offense that has effects not only limited to people, companies or cooperatives but to the society as a whole. It has adverse effects on lives, breaks down trust of people and the consequences more often than not all felt by everyone who are beyond the immediate victims. It is punishable with tenuous prison time and fines. At the same time focus should also be given to the protective and preventive measures. In the current generation reliance on cutting edge technology will create a safe accountable culture making it difficult for economic crimes to succeed. It is our duty to be protected from this serious offence as the world becomes more advanced.

References

• Schillermann, M. K. (2018). Early Detection and Prevention of Corporate Financial Fraud. Walden University Dissertations Collection.
• Abbasi et al. (2012) discussed a meta-learning framework for detecting financial fraud, highlighting its effectiveness over traditional methods like studying financial ratios.
• Alice Johnson, Five Ways to Prevent Embezzlement in Your Small Business, Small Biz Daily (2024).
• John Doe, The Psychology of Embezzlement, 55 J. Crim. L. & Criminology 123 (2015).
• John Smith, Distinguishing Embezzlement from Other Financial Crimes: Theft, Fraud, and Money Laundering, 65 J. Fin. Crime 234 (2022).

[1] Indian Penal Code, 1860, §§ 403, 405.

[2] 18 U.S.C. § 641 (2018) (defining embezzlement under U.S. federal law).

[3] United States v. Madoff, No. 09-cr-213 (S.D.N.Y. 2009).

[4] C.B.I. v. Nirav Modi, (2021) 2 SCC 505 (India).

[5] Union of India v. Mehul Choksi, (2020) 5 SCC 314 (India).

[6] Kingfisher Airlines Ltd. v. Union of India, (2019) 3 SCC 222 (India).

[7] Bharatiya Nyaya Sanhita, 2023, § 314, No. 45, Acts of Parliament, 2023 (India).

[8] Bharatiya Nyaya Sanhita, 2023, § 316(1), No. 45, Acts of Parliament, 2023 (India).

[9] Prevention of Corruption Act, No. 49, Acts of Parliament, 1988 (India).

[10] Companies Act § 447, No. 18, Acts of Parliament, 2013 (India).

[11] Companies Act § 448, No. 18, Acts of Parliament, 2013 (India).

[12] Banking Regulation Act, No. 10, Acts of Parliament, 1949 (India).

[13] Securities and Exchange Board of India Act, No. 15, Acts of Parliament, 1992 (India).

[14] Secy. to Govt. v. K. Munniappan, (1997) 4 S.C.C. 255 (India).

[15] Inderjit Singh & Ors. v. State of Punjab & Ors., A.I.R. 1995 S.C. 4 (India).

[16] PWC, Global Economic Crime and Fraud Survey: India Highlights (2024).

[17] KPMG, The Future of Fraud Detection: AI and Machine Learning in Financial Crimes (2023).

[18] IBM, Blockchain for Fraud Prevention: A New Era of Financial Security (2022).