Embezzlement vs Money Laundering: Key Differences, Legal Risks, and Real-World Cases
The current state of financial crime is getting increasingly complex, and so are the methods used to achieve these illegal objectives. Two of the most commonly used terms for criminal activities are embezzlement and money laundering, but what differentiates these two activities? In this post, we will clarify their key differences, legal risks, real-world cases, and more.
What Is Embezzlement and How Does It Work?
Embezzlement occurs when a person takes or misuses assets or funds that have been entrusted to them for personal gain. This means that it must be conducted by a person with legitimate access such as employees, fiduciaries, and managers.
Examples of Embezzlement
The types of organizations in which embezzlement can occur are very numerous, ranging from small businesses to multinational corporations.
Some common examples include:
- Employees who have access to financial systems or funds divert corporate funds into a personal bank account,
- Financial advisors misusing their clients’ funds for personal gain,
- Fiduciaries manipulating records or systems through fake refunds, shell companies, or fraudulent invoices.
What Is Money Laundering and Why Is It a Global Risk?
Money laundering refers to the act of disguising the origins of funds obtained through illicit activities such as drug trafficking, fraud, or human trafficking in order to make them appear legitimate.
There are typically three main stages of money laundering: Placement, layering, and integration.
The placement: In the first stage, illegally obtained funds are introduced into the financial system often by splitting large amounts of cash into smaller sums to deposit into a bank account, or purchasing monetary instruments such as checks or money orders. Other notable methods are: adding illicit cash to the legitimate resources of a business, false invoicing, smurfing (inserting small amounts of money below the reporting threshold), and hiding the beneficial owner’s identity.
Layering: Then, criminals conduct a series of financial transactions to obscure the source of funds. The funds may be channeled through the purchase and sale of investments, holding companies, or simply moved through a series of accounts at banks around the globe. Some examples of layering tactics are multiple international transfers, use of shell companies, frequent account hopping, converting to and from cryptocurrencies, chain-hopping, investments in complex financial instruments, and structuring large transfers.
Integration: As the last step, integration refers to reintroducing illicit funds into the financial system. Criminals often invest in real estate, luxury assets, or business ventures. There are several integration tactics that can be mentioned such as fake employees, loans to directors or shareholders, or dividends paid to shareholders of companies controlled by criminals.
How Does Embezzlement Differ from Money Laundering?
The most crucial difference stems from where the funds originate. In embezzlement, perpetrators often have legal access to legitimate funds and misuse them. By contrast, in money laundering, criminals directly use illicitly obtained funds.
Can Embezzlement Lead to Money Laundering?
Yes, in order to avoid the detection of stolen funds, offenders may engage in money laundering through methods such as using multiple accounts, shell companies, investments, or purchasing high-value assets.
What Are the Red Flags?
Embezzlement:
- Missing funds and altered records of invoices, receipts, or financial statements
- Staff living above their means, not taking vacations, and extreme secrecy about financial matters
- Payments to unknown vendors and repeated payments just under reporting thresholds
Money Laundering:
- Several small transactions just below regulatory reporting thresholds, a practice known as structuring
- Frequent international transfers, especially with jurisdictions known for weak oversight
- Complex and unnecessary transaction chains involving no clear business purpose, shell companies, and high-value asset purchases
Which Industries Are Most at Risk?
Finance, public sector, non-profits, charities, healthcare, real estate, retail, and hospitality are at high risk of embezzlement due to factors such as employees having direct access to clients’ funds, weak oversight in some agencies, heavy reliance on trust, and cash-heavy environments.
While these sectors are also vulnerable to money laundering, there are also additional industries worth mentioning such as casinos, gambling, luxury goods, cryptocurrency sector, import-export, and professional services due to large cash flows, cross-border activity, and complex ownership structures.
How Are These Crimes Investigated?
Embezzlement:
- Specialists analyze financial records, transactions, invoices, and ledgers to find anomalies, unexplained transfers, and patterns of misappropriation that may indicate fraud
- Interviews and audits with employees, witnesses, and suspects to collect statements
- Investigators obtain legal authority to search premises, seize documents, or issue subpoenas to build a case
Money Laundering:
- Using Suspicious Activity Reports (SARs)
- Law enforcement agencies and financial intelligence units (FIUs) analyze financial transactions and SARs to identify patterns that may indicate money laundering or linked criminal activities
- Investigators use data analytics, artificial intelligence, software tools, and pattern detection to trace funds across accounts and jurisdictions
- Shared intelligence and coordinated investigations by agencies like INTERPOL, FATF, and national FIUs for cross-border operations.
What Are the Penalties?
As expected, the penalties differ considerably depending on the jurisdiction and the amount of misused money. However, offenders typically face prison sentences, heavy fines, and mandatory restitution or asset confiscation. For example, in major jurisdictions such as the US and Europe, sentences for money laundering and embezzlement can go up to multiple decades of imprisonment, unlimited fines, and asset seizures. The strictness of repercussions is also not very different in other parts of the world such as Asia, Latin America, and the Middle East due to the impact on economies, trust, and financial stability.
What Are Some Notable Real-World Cases?
In this section, we have listed a few embezzlement cases to better illustrate the risks and repercussions of both money laundering and embezzlement.
Embezzlement:
Bernard Madoff Scandal: In 2008, it was revealed that Bernard “Bernie” Madoff, a well-known financial investor, used money from new investors to pay returns to earlier ones. As the market conditions further tightened, the scheme collapsed and exposed massive losses. After an extensive FBI investigation, Madoff was convicted and sentenced to a 150 years in prison. Furthermore, several associates also received prison terms due to the role they played in the scheme.
Tyco Case: According to the Guardian, former Tyco chiefs Dennis Kozlowski and Mark Swartz were sentenced to between 8 and 25 years in prison and ordered to pay a total of $134M in restitution back in 2005. Prosecutors stated that Mr. Kozlowski used company money to pay for a $2M birthday party for his wife, an $18M New York apartment, and gifts for a former marketing manager with whom he was having an affair.
Money Laundering:
Danske Bank Scandal: According to Reuters, around $227B in payments flowed through the non-resident portfolio of Danske Bank’s Estonian branch between 2007 and 2015 due to inadequate anti-money laundering controls of the bank. A huge portion of this money was money-laundered cash flowing illegally out of Russia, the UK, and the British Virgin Islands. In December 2022, Danske Bank pled guilty and agreed to a $2 billion fine. However, the repercussions weren’t limited to this: Ten former employees of the bank were arrested, the Estonian branch was closed, the CEO Thomas Borgen resigned, and the value of Danske Bank shares was halved.
HSBC Scandal: According to BBC, in 2012, the U.S. authorities revealed that the bank had failed to implement adequate controls to detect transactions worth billions of dollars linked to drug cartels, terrorist organizations, and sanctioned countries. Furthermore, investigations showed that HSBC ignored warning signs and maintained weak monitoring systems. In the end, HSBC agreed to pay a record $1.9B settlement to the U.S. authorities.
How Can Businesses Prevent These Crimes?
Strong Internal Controls and Compliance Systems: One of the most important things that a business can do is to implement segregation of duties, which means no single person can initiate or approve a transaction alone. This is particularly important for addressing internal theft such as embezzlement.
Regular Internal and External Audits: Audits are incredibly helpful when it comes to identifying weaknesses early and reinforcing accountability. Allowing independent reviews of accounts and transactions makes it much more efficient to catch the misuse of funds.
Anti-Money Laundering Programs: Today, these programs are not a prerequisite only for financial services, various businesses in other sectors, as we have mentioned in the previous parts, must also implement AML programs including Know Your Customer (KYC), Ongoing Monitoring, Customer Due Diligence (CDD), and more.
A Culture of Ethical Behavior: Regular training sessions, clear policies, and whistleblower channels encourage employees to report suspicious activity and understand consequences more clearly.
What Tools Help Detect and Prevent These Crimes?
Automated Monitoring and Analytics Software: Tools such as transaction monitoring, anomaly detection, and pattern recognition help flag unusual activity that could indicate embezzlement or laundering.
For example, Sanction Scanner’s transaction screening software screens customer transactions and stops the transactions and records them for investigation if it detects a suspicious transaction, which helps reduce false positives by up to 96.99% and reduce workload by up to 80%.
Forensics: Forensic software allows businesses to trace fund flows, reconstruct transaction histories, and uncover any kind of manipulation of records that may signal embezzlement or money laundering.
Name Screening, Know Your Customer (KYC) and Customer Due Diligence (CDD): These verify the identity of clients, assess risk profiles, and screen them against sanctions lists and politically exposed person (PEP) lists. Therefore, the risk of onboarding individuals or entities linked to criminal activity is reduced.
For example, Sanction Scanner’s modules allow the screening of customers and businesses against more than 3,000 data points consisting of global sanctions lists, PEP lists, and adverse media data from more than 220 countries.
