Family Member Stealing from Business

The best way to reduce the chance of embezzlement from a family business is to provide education to all employees, implement strict rules about how the company’s assets and funds can be used, and put in place controls that will spot wrongdoing immediately. By acknowledging the unfortunate reality that embezzlement can happen, and by planning how to prevent it, a family business can keep itself strong and successful.

Brad Nakase, Attorney

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Family Member Stealing from Business, Example

Bob is the owner of Bob’s Vineyard & Wine, a family business that has been running successfully for fifty years. Bob has employed many members of his family to work in the shop, including his son, Edward. Recently, Bob has noticed that money has gone missing from the register, and every month a large amount of the business’ funds disappears from the company’s bank account. Bob also observes that his son Edward has recently purchased a sports car and designer clothes. With great sadness, Bob realizes that his own family member may be stealing from the business. He wonders how best to handle such a delicate situation without ruining his relationship with his son.

While people may not be surprised to hear about embezzlement in a public company, perhaps in their favorite newspaper, it is always shocking to hear about embezzlement taking place in a family business. People may wonder, “how could someone steal from their own family?” It may seem inconceivable that someone would purposefully harm their own relatives in the pursuit of personal wealth and greed.

While the thought of embezzling from a family member is horrifying and unsavory to think about, it is more common than people would like to think. The kind of thievery that results in jail time is fairly rare, but more minor instances of it happen on a regular basis.

How does this kind of embezzlement happen to a family business? There are many reasons why someone may steal from his or her own family, including the following situations:

  • Constant financial difficulty
  • A sense of family entitlement
  • Lack of internal company controls
  • The perception of being underpaid and overworked

Though it may be hard to believe, it often happens that the embezzler does not comprehend that was they are doing is wrong or unlawful.

The following situation is an example showing how embezzlement can start small and quickly become a big problem:

Freddie, the son of a business owner, decides to fill up his car with gas every Thursday using his family’s business account to pay for it. While he knows that the gas will mostly be used for personal reasons, such as driving to the bowling alley or going to the beach, he justifies his actions by claiming that he fills the tank on his own sometimes and uses his “own gas” on Monday and Tuesday. He also takes vacation days whenever he wishes, not bothering to mark them as paid time off. Whenever he is in need of pocket money, Freddie dips into the business cash register for fifty dollars, assuming that no one will notice or mind. He figures that because his father does not pay him as much as a competitor would, it all evens out in the end. Freddie also knows that other family members, such as his cousin Janine, do the same kinds of things. Thus, these actions become part of the company culture, and therefore not embezzlement.

This abuse of company time, assets, and funds grows more serious and rampant. When Freddie’s father hires a non-family member to join the business as an employee, the problems quickly become apparent to the new hire. He does not know who to tell about the thievery that he observes on a daily basis.

Though it may start out small and seemingly innocent, embezzlement in a family business can develop into a serious issue that harms the business, damages non-family employee morale, and ruins trust among the family members.

How to deal with embezzlement in a family business?

It may seem challenging to confront stealing within a family business. One must take action in a careful, thoughtful way. It may be a good idea to start out with a meeting between the company’s main leaders without the presence of the suspect family member. Together, these leaders should address the following questions:

  • Are there clear, obvious facts that can be verified?
  • Who will be present at the meeting to establish the facts?
  • Will the courts become involved?
  • If the suspect family member stays in the business, will their role change?
  • How will this news be communicated to the rest of the family and other employees?
  • How did the company contribute to this problem?
  • What steps can be taken to ensure the company does not contribute to this kind of problem in the future?
  • Has this family member had financial problems?
  • How can the company be protected from future abuse of company assets or funds?
  • How will the whistleblower be protected?
  • Is there an internal whistleblower program, and are employees trained?
  • Does the family openly talk about how to financially protect and care for company funds and assets?
  • Is there a non-compete clause in the employment contracts in the event the family member must be forced from the business?
  • Is a background check run on applicants?
  • How should the family member be dealt with if forced out? Will security be needed, or bank account access protection?
  • Will a corporate attorney need to be involved?

Once a business owner knows the answers to these questions, he or she should schedule a second meeting, this time with the suspect family member. During the meeting, proceedings should be kept at the level of discovery. This means that one should present the known facts and ask the family member their version of what happened. It is important to listen to their perspective because, again, some family members genuinely do not realize that they are embezzling from the company. If this instance is a first offense, and if the stealing is not serious, then education may be the solution. However, if one believes the family member knew precisely what they were doing and may do it again, or if the embezzlement was serious, then termination may be the correct and only option.

During the meeting, one should keep in mind what they would do if the family member was a regular employee. Would they be able to trust the individual again? This objectivity will help clarify the best course of action.

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