Embezzlement remains a serious threat to businesses in 2025, especially small and medium-sized enterprises that often lack the controls, oversight, and technology used by larger organizations. Embezzlement occurs when an employee or trusted insider misappropriates company funds or assets for personal gain. This article explains what embezzlement is, why it poses such a significant risk, why SMEs face higher exposure, and what lessons can be learned from notable cases affecting smaller businesses across various industries.

{{snippets-guide}}

What Is Embezzlement?

Embezzlement is a form of financial fraud in which an employee, contractor, or trusted insider wrongfully appropriates assets that were entrusted to them. Unlike external fraud, embezzlement is an internal threat. The perpetrator typically has authorized access to the money or property in question, which allows them to divert funds without immediately triggering standard fraud alerts.

Common examples include:

• altering financial records to hide unauthorized transfers
  
  
• creating fake vendors or phantom employees
  
  
• misusing company credit cards
  
  
• diverting client payments into personal accounts
  
  
• manipulating payroll systems
  
  

According to the Association of Certified Fraud Examiners (ACFE), internal fraud and embezzlement schemes often continue for an average of 12 to 18 months before being detected, primarily because the perpetrators exploit trust and weak internal controls.

Why Embezzlement Is a Serious Threat to Businesses

Embezzlement poses financial, operational, and reputational risks. While large companies may absorb losses more easily, SMEs often lack the financial resilience to withstand long-term theft. Even a modest embezzlement scheme can lead to severe liquidity issues, loss of investor confidence, regulatory penalties, or the collapse of the business.

The threat is amplified by three major factors:

Embezzlement Is Often Conducted by Highly Trusted Insiders

Most embezzlement cases involve employees who have held their position for years and are seen as dependable. This trust creates an environment where fraudulent behavior remains undetected. When fraud is committed by someone with access to accounting records, financial systems, or client payments, detection becomes more challenging.

Long-Term Schemes Cause Significant Damage

Embezzlement often occurs over long periods. Unlike cyberattacks or external fraud, which may create immediate and visible losses, embezzlement grows slowly. By the time it is detected, the cumulative amount may be catastrophic. ACFE data shows that schemes involving billing fraud, payroll manipulation, and skimming tend to last more than a year before discovery.

Embezzlement Undermines Internal Morale and External Reputation

When embezzlement becomes public, customers and partners may lose trust in the business. Employees may feel unsafe or betrayed, and investors may question governance standards. In severe cases, regulators or auditors may scrutinize operations, leading to compliance issues far beyond the initial fraud.

Why SMEs Are More Vulnerable to Embezzlement in 2025

Small and medium-sized enterprises face unique structural and operational challenges that increase their exposure to embezzlement. These vulnerabilities stem from resource limitations, operational pressures, and cultural factors within smaller organizations.

SMEs Often Lack Robust Internal Controls

Many SMEs operate without formal segregation of duties. For example, one person may be responsible for invoicing, receiving payments, reconciling accounts, and maintaining financial records. This lack of separation creates a perfect environment for embezzlement because a single employee can manipulate multiple steps in the financial process without detection.

Studies from the ACFE and various national fraud agencies consistently show that weak controls contribute to more than half of embezzlement cases in small businesses. In 2025, as SMEs adopt remote work and digital payment platforms, these gaps can become even wider.

Limited Budgets for Compliance and Fraud Prevention

SMEs rarely have dedicated compliance departments or forensic accountants. Many rely on basic accounting software without advanced fraud detection capabilities. Without automated anomaly detection, internal audits, or real-time monitoring, embezzlement schemes are significantly harder to identify.

Technology can help, but cost barriers remain. Larger companies may implement AI-driven monitoring tools that detect unusual transaction patterns, but SMEs often depend on manual reviews, which are both time-consuming and susceptible to human error.

High Levels of Trust in Long-Term Employees

Smaller businesses typically operate with close-knit teams where staff have long-standing, personal relationships. This culture of trust, while valuable, also presents a risk. Owners may hesitate to question or audit loyal employees, inadvertently creating opportunities for fraudulent behavior.

In many embezzlement cases, the perpetrator is a long-term employee who gained increased responsibility over time without adequate oversight.

Limited Oversight From Boards or External Auditors

Large enterprises often have audit committees, compliance teams, external auditors, and independent directors who provide oversight. SMEs, on the other hand, may undergo only minimal annual reviews or rely on small local accounting firms. This lighter oversight allows embezzlement schemes to operate undetected for longer periods.

Rapid Growth Outpacing Internal Control Development

Fast-growing SMEs may expand their customer base, revenue, and operations without updating their control systems. As transaction volume increases, manual processes become less effective, leaving blind spots that fraudsters can exploit.

{{snippets-case}}

Case Studies: Real-World Examples of Embezzlement Affecting SMEs

The following cases illustrate how embezzlement impacts small and medium-sized businesses and highlight patterns that compliance officers should pay attention to. All examples are supported by verified, publicly available sources.

Case Study: Vermont Ski Resort CFO ($3 Million Embezzlement)

 A small ski resort in Vermont experienced a multi-year embezzlement scheme conducted by its Chief Financial Officer. Over several years, the CFO diverted millions of dollars by routing company funds into accounts he controlled. Because he managed financial reporting, reconciliations, and vendor payments, no one questioned the irregularities until cash flow issues became severe. The resort nearly collapsed due to the financial impact.

This case demonstrates how SMEs that place too much trust in a single financial officer are especially vulnerable.

Case Study: Small Medical Practice ($1 Million Payroll Fraud)

FA CV Consultants P.C. and its owners, Drs. Fadi El-Atat and Sarah Abdul-Sater, concluded with a civil settlement of $1 million to resolve allegations of healthcare fraud. The core of the accusation, brought forward by whistleblower Jennifer Jean under the False Claims Act, was that the practice knowingly sought reimbursement from Medicare and Medicaid for a variety of medically unnecessary services, including specific balance, pulmonary, allergy, and cardiology tests performed between 2013 and 2022. The U.S. government pursued the lawsuit based on these contentions, emphasizing the use of the False Claims Act as a potent tool against healthcare fraud.

Government programs like Medicare and Medicaid typically operate on a "pay and chase" model. They first process the payment (pay the claim) quickly to keep the system running, and then retrospectively audit or investigate suspicious patterns (chase recovery). Unless the billing is extremely brazen, it can take years for data analytics to identify subtle, systematic abuse patterns.

Case Study: Restaurant Bookkeeper (£150,000 Fraud) 

​​A former accounts employee, Nicola Nightingale, defrauded The Hardwick restaurant in Abergavenny of over £150,000 between 2018 and 2020, abusing her trusted position to make unauthorised payments to her and her husband's bank accounts, inflate wages, and take out business loans without the owner's knowledge. Her dishonesty, which involved her husband, Simon Nightingale, only came to light when the restaurant's owner, Stephen Terry, examined the finances after the Covid-19 pandemic forced the business to shut. This significant theft left the business massively in debt at a critical time, and Terry expressed the devastating impact on his business and his lack of confidence in the justice system following the case.

Despite Nicola and Simon Nightingale receiving suspended prison sentences earlier this year for fraud and acquiring criminal property, a subsequent investigation under the Proceeds of Crime Act found no realisable assets to recover the stolen money. 

‍

How SMEs Can Protect Themselves From Embezzlement

Embezzlement prevention requires a combination of internal controls, technology, staff awareness, and strong governance. While SMEs face limitations, practical measures can significantly reduce risk.

Implement Segregation of Duties

Even small businesses can separate responsibilities such as payment approval, account reconciliation, and vendor creation. When one employee cannot control every step of a financial process, it becomes much harder to commit fraud without detection.

Use Automated Financial Monitoring Tools

Modern accounting software includes affordable fraud detection features that flag unusual transactions, duplicate invoices, or unauthorized vendor accounts. Some platforms offer AI-enhanced monitoring that identifies anomalies in real time.

Conduct Regular Internal and External Audits

Even annual reviews can uncover longstanding embezzlement schemes. SMEs should engage independent auditors to review financials, payroll, vendor lists, and expense patterns. Internal audits conducted quarterly or semi-annually strengthen oversight.

Limit Access Privileges

Access control is one of the simplest and most effective defenses. Employees should only have access to the systems and data necessary for their roles. Periodic reviews ensure that former employees or transferred staff do not retain unnecessary privileges.

Provide Training and Foster a Speak-Up Culture

Employees often notice signs of fraud but remain silent due to fear or lack of knowledge. Training staff on spotting suspicious behavior, combined with anonymous reporting channels, helps detect issues earlier.

Conclusion

Embezzlement is one of the most damaging internal threats faced by small and medium-sized businesses. Limited oversight, constrained budgets, high levels of trust, and inadequate controls create an environment where insiders can divert funds without early detection. By examining real-world cases, strengthening internal controls, adopting technology, and improving oversight, SMEs can significantly reduce their vulnerability. 

In 2025, protecting the business from embezzlement is not optional; it is an essential component of financial crime risk management.

sanctions.io is a highly reliable and cost-effective solution for real-time screening. AI-powered and with an enterprise-grade API with 99.99% uptime are reasons why customers globally trust us with their compliance efforts and sanctions screening needs.

‍

To learn more about how our sanctions, PEP, and criminal watchlist screening service can support your organisation's compliance program: Book a free Discovery Call.

‍

We also encourage you to take advantage of our free 7-day trial to get started with your sanctions and AML screening (no credit card is required).

‍