While embezzlement and money laundering are both financial offenses that often involve the movement of large sums of money, the terms are far from interchangeable. According to the United Nations Office on Drugs and Crime (UNODC), between two and five percent of global GDP is laundered annually – amounting to approximately $800 billion to $2 trillion. While both money laundering and embezzlement threaten the stability of the legitimate global economy, embezzlement can have a more localized impact. In Hiscox’s Embezzlement Survey, it was noted, “Companies [that fell] victim to embezzlement lost far more than money: they lost customers, had more difficulty attracting new customers, and lost business partners.”
This article will help to explain the major differences between money laundering and embezzlement and consider the potential consequences for white-collar criminals engaging in either.
What is Embezzlement?
Embezzlement is a white-collar crime where an individual or organization intentionally misuses the assets entrusted to them for personal financial gain.
Examples of embezzlement include:
- An accounting employee steals money from their employer’s bank accounts and creates false invoices and payments to hide the theft.
- An employee submits claims for work expenses they never incurred.
- A worker steals paper and pens from the office stationery cupboard.
- A finance director buys a car for themselves using the company credit card.
- Ponzi schemes where investors are persuaded to place large amounts of their cash into a high-return investment that eventually collapses because there aren’t enough new investors coming on board, and the embezzler cannot afford to continue paying out.
What is Money Laundering?
Money laundering is also a white-collar crime where a person or organization attempts to hide the original source of funds – often those generated as the proceeds of crime – so that the funds can be spent or transferred legitimately.
Money laundering operations typically involve three stages to obfuscate the original source of the cash:
- Placement – Dirty cash is introduced into the financial system, such as using fake payments in a cash-only business.
- Layering – The cash is moved through legitimate channels to obfuscate the original source. This may be as simple as shifting funds between different bank accounts or through the faked investments by a holding company.
- Integration – Now clean, the money is placed back into the legitimate economy where it can be used by the “owner”.
Some money laundering examples can include:
- A major drug dealer purchases a series of retail businesses to hide the source of their wealth by intermingling licit money from customers with money acquired through the sale of drugs.
- A company profiting from illegal logging in the Amazon rainforest invests its money in a series of untested crypto assets in order to move it internationally outside of the regulated financial system.
Effective money laundering operations may involve thousands, if not millions, of dollars. As a result, it is not unusual to sacrifice up to 50 percent of funds during the laundering process – but this significant loss is considered to be just part of the cost of “doing business”.
Differences Between Embezzlement and Money Laundering
Embezzlers have a legal right to manage or move funds around, but they misappropriate them for personal gain. Money launderers, however, move money they have obtained illegally to distance the funds from their source before returning them to themselves or their clients.
Penalties for these activities
Just as definitions of these white-collar crimes differ between jurisdictions, so do the penalties. For example, in the United States, for example, crimes are assessed according to the sums of money involved. Any case where embezzled funds total more than $1000 becomes a federal offense with a minimum jail term of 10 years and a $15,000 fine – assuming there are no aggravating factors.
The penalties for money laundering are also considered in terms of the money involved. US courts can hand down prison sentences of up to 20 years. This is accompanied by a fine of $500,000 – or double the amount laundered by the defendant, whichever is greater.
Similarly, harsh punishments are applied to embezzlement and money laundering elsewhere in the world.
It is worth noting that any financial intermediaries involved in money laundering, even unwittingly, also face penalties. Most developed countries expect banks to operate effective anti-money laundering (AML) compliance programs designed to identify and report suspicious activity to the relevant authorities. Failure to meet these compliance obligations also carries heavy penalties – $13.74bn worth of fines were issued to financial bodies in 2021 for failing to properly discharge their anti-money laundering (AML) duties.
Prevent Embezzlement and Money Laundering
Financial institutions have an obligation to reduce money laundering, with the fines for failing to actively assist in AML activities carrying heavy penalties.
To meet their regulatory obligations, banks need systems that allow them to accurately analyze account activity to highlight potentially suspicious transactions. Given the vast number of movements and settlements that occur every minute, firms need to employ artificial intelligence (AI) powered analytics, as humans simply cannot keep pace.
Using the ComplyAdvantage REST API, firms can monitor transactions and screen customers in real-time to detect financial crimes. Incoming and outgoing payments can be checked against sanctions and watchlists, PEP registers. And adverse media, with potential risks being flagged so analysts can determine whether a transaction should be blocked or can proceed.
Risks relating to embezzlement, or other money laundering predicate offenses, may also be flagged by solutions that utilize machine learning algorithms, as they can be programmed to detect activity inconsistent with an account’s risk profile.