As an employer, you want to hire the best people to work for you. Finding out that one of them has possibly been embezzling funds can have both personal and legal ramifications. While it may take some time to recover from the abuse of trust, you have two basic options for dealing with the situation: you can try to handle it internally, or you can report it to law enforcement and let them handle it. Regardless of which path you take, the most important thing is that the embezzled funds are returned to your company's coffers.
Method 1 Handling the Situation Internally
1. If necessary, notify insurance companies. If you have an insurance policy that covers losses caused by employee theft or embezzlement, contact your insurance company as soon as you discover the theft, even if you have no suspects in mind. Your insurance company may require specific documentation of the steps you take to collect evidence and identify the responsible party.
Typically, your policy requires you to file a notice of claim within a certain amount of time after discovering the loss. You may lose the ability to file a claim if you wait too long.
Following the completion of your internal investigation, you will typically file a proof of claim document outlining the amount of the loss as well as the employee or employees you believe are responsible. You may also be required to include documentation of the employee's disciplinary action.
2. Collect as much information as possible. If the evidence linking the theft to the responsible employee is lost or destroyed, proving the case can be difficult. Furthermore, you do not want to accuse an employee unless there is substantial evidence that they are at fault.
While you're gathering evidence and building your case, suspected employees should have no reason to suspect they're being investigated. Otherwise, they may begin to cover their tracks or destroy records that you will need to prove their actions.
If you don't have a specific suspect, think about how the money could be stolen so you can narrow down a list of employees who have access to it. Make certain that any other employees or potential witnesses you interview maintain strict confidentiality.
Consider security measures that can be implemented quietly and allow you to catch the perpetrator in the act. Their method provides evidence that can be used to link them to previous thefts that occurred in the same manner.
3. Inform the board of your concerns. Once you've gathered basic information about the embezzlement and the person you suspect is responsible, notify other owners or board members so that you can take action collectively.
You may need to be more cautious if the person you suspect of embezzling funds is an officer or a member of the board. You can't be certain that others aren't involved in the scheme.
Maintain strict confidentiality throughout this stage of the investigation, especially if your suspicions have been narrowed down to specific employees. Identifying an innocent employer as an embezzler in public may expose you to defamation charges.
4. Conduct an in-depth audit. Engage an independent forensic accountant to audit your company's or organization's books. A thorough investigation will reveal how much money was lost to the embezzler and how long the embezzlement has been going on.
While you may have discovered a recent discrepancy during a routine audit, the embezzlement could have been going on for much longer. Request that the accountant review several years' worth of financial records.
5. If necessary, restrict the suspected employee's access to funds. To limit the scope of the theft, you may want to reassign the employee you suspect is embezzling funds. Generally, you should only do this if you can do it without the employee suspecting they've been caught.
This can also substantiate your suspicions. If you take away the employee's access to funds and the embezzlement stops, you have circumstantial evidence that they were the culprit.
For example, if you suspect your office assistant of stealing from petty cash, you could let them work from home for a few days. While they are at home, keep an eye on the petty cash situation to see if money is still disappearing.
6. Interrogate the suspect employee. When you have enough evidence to link the theft to a specific employee, call a meeting to discuss the situation. Allow them to explain their side of the storey and come forward voluntarily.
Even if you are frustrated with the employee, try to remain calm and open-minded. Provide your evidence to the employee and allow them to explain.
If the employee agrees to repay the money, they may be embarrassed and ashamed, and they may be eager to keep the matter quiet. Make no promises to the employee before consulting with an attorney and your insurance agent (if you filed a claim).
If the employee refuses to admit to the embezzlement voluntarily, you may need to suspend them (with or without pay, as appropriate) while you take further action.
7. Inform the IRS about the asset diversion. Both nonprofit organisations and for-profit corporations must report embezzlement to the IRS. The amount of money embezzled is considered the employee's taxable income.
Avoid reporting the embezzled amounts on a W-2 or a 1099-MISC because these forms are intended to report income you voluntarily paid to an employee who earned that income. Form 3949A should be used instead. The form is available for download at https://www.irs.gov/pub/irs-pdf/f3949a.pdf.
On your company's tax returns, report the embezzled funds as a loss. If you use a tax preparer to prepare your company's returns, notify them of the embezzlement. Keep your audit report as documentation of the loss.
Method 2 Reporting to Law Enforcement
1. Call the police or sheriff's department in your area. Most cases of employee theft are investigated by your local law enforcement agency. To file your report, call a non-emergency number or go to the office in person.
Bring all of your evidence, both of the embezzlement and its connection to a specific employee or employees. Tell the officer who takes your report when you first became aware of the potential theft and what steps you've taken since then.
Obtain a copy of the police report in writing. It might be available right away, or you might have to go back for it. Make duplicates for your business's records. Take down the officer's name and badge number so you can contact them directly if you need to follow up.
2. Notify the FBI if necessary. If the embezzlement occurred in more than one state, or if it violated federal law, any criminal investigation and prosecution is handled by the FBI and the US attorney. In some cases, such as when there is bank or securities fraud, you must report the activity to federal authorities.
Go to https://www.fbi.gov/contact-us/field-offices to find your nearest FBI field office. You can either use the map to find the nearest location or scroll through the alphabetical list.
If you've already filed a report with local law enforcement, let the FBI agent know. They might request a copy of the written police report.
3. Participate in the criminal investigation. Following the filing of your report with law enforcement, they will conduct an investigation into your workplace and possibly interview employees about the embezzlement. Make financial records and files available, and identify potential witnesses for interviews.
The investigator will gather information before referring the case to the prosecutor. The prosecutor's office will most likely contact you for additional information and evidence of the theft.
4. Participate in discussions about restitution. If the prosecutor charges the employee, the employee's attorney will almost certainly try to plea bargain for a lesser sentence. Make certain that any plea bargain includes full restitution for any funds stolen from your company.
If the employee is found guilty after a trial, the judge will almost certainly include restitution in the employee's sentence. If the employee fails to repay the funds as agreed, he or she may face additional prison time.
Method 3 Recovering the Misappropriated Funds
1. Negotiate a deal with the employee. You may decide not to report the incident to law enforcement based on the extent of the embezzlement and personal factors. If the employee agrees to repay the funds embezzled, draught a contract with the assistance of an attorney.
It is usually the simplest way to proceed if an employee immediately confesses and agrees to repay the money. Other methods, such as a criminal or civil trial, are risky and waste time and money.
To ensure that the contract is legally enforceable, have it drafted by an attorney. Include consequences if the employee fails to repay the money by a certain date or fails to make agreed-upon instalment payments.
2. Payments can be obtained through criminal restitution. If you notify law enforcement and the employee is charged and convicted, the court will order the employee to repay the money they embezzled. If the employee must first serve a prison sentence, this may take some time.
In contrast to a voluntary agreement or a civil suit, an employee ordered by a criminal court to make restitution faces jail time if they do not comply.
Another advantage of criminal restitution is that it makes it much more difficult for the employee to flee town and disappear. If an employee signs a voluntary agreement and then disappears, you must find them before you can enforce the contract in court.
3. If you do not receive criminal restitution, sue the employee in civil court. In some cases, you may not be able to recover completely through criminal restitution. In some cases, you may decide not to file any criminal charges at all. Suing the employee in civil court is another option for recovering your money, though it is more complicated and the outcome is not guaranteed.
In a civil case, you have a lower burden of proof than in a criminal case. As a result, even if there was insufficient evidence to convict the employee on criminal charges, you may be able to obtain restitution in a civil trial.
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