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Misappropriation of company funds, sometimes referred to as embezzlement, is an offence that is taken quite seriously in Ontario and throughout Canada. Misappropriation of company funds occurs when someone who is trusted with access to a company’s finances takes advantage of those assets for personal, unlawful expenses. This violation of trust and one’s position of authority jeopardizes the company’s financial stability and violates one’s moral and legal obligations.

A number of legal structures, including civil remedies and criminal charges under the Criminal Code of Canada, are used in Ontario to address this misbehaviour. Employees should be aware of the serious repercussions of participating in such activities, and employers must establish rigorous internal controls to prevent and identify such misconduct.

What is Misappropriation of Company Funds?

In Canada, misappropriation of corporate funds refers to the unlawful use, unauthorized use, or theft of a company’s financial assets by a person who has been given access to them. This can involve actions like embezzlement, fabricating expense reports, transferring funds from the firm to personal accounts, or charging personal expenses on company credit cards.

These acts are classified as theft, fraud, or breach of trust under the Criminal Code of Canada, and they can be subject to serious penalties including incarceration. Businesses may also file a civil lawsuit to reclaim the money that was stolen and to obtain damages for any losses they suffered financially as a result of the fraudulent actions. Robust financial controls and frequent audits are important to enable employers to identify and prevent this kind of misconduct.

What are the Legal Consequences of Misappropriating Company Funds?

The legal consequences of misappropriating company funds are severe and can include both criminal and civil penalties. Criminal charges for theft, fraud, or breach of trust can result in significant fines and imprisonment, depending on the severity of the offence and the amount of money involved. Convictions for such crimes can also lead to a permanent criminal record, which can affect future employment opportunities, one’s ability to travel outside of Canada, and personal reputation.

Generally speaking, courts handle cases of company fund misappropriation by employees with a high degree of seriousness, given the breach of trust involved. In criminal cases, courts consider factors such as the amount of money misappropriated, the duration of the misconduct, and the impact on the company as potential aggravating factors. Additionally, the fact that the employee stole from their employer will be considered an aggravating factor. Sentences can include substantial fines and imprisonment, reflecting the severity of the offence.

The company may also choose to sue the perpetrator for losses incurred as a result of the misappropriation. In civil cases, courts focus on compensating the company for the financial losses incurred. This can include an order to the employee to repay the misappropriated funds, along with any additional damages for financial harm and reputational damage. Courts may also award punitive damages to deter similar misconduct by others. Overall, the legal system in Ontario aims to provide both deterrence and restitution in cases of the misappropriation of company funds.

Punishments for Theft Depend on the Value of Property

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How can Companies Prevent the Misappropriation of Funds by Employees?

Businesses can take a number of steps to stop employees from misappropriating money. It is highly important to implement robust and strict internal controls, such as task segregation, to ensure that no single employee has complete authority over financial activities. Frequent financial inspections and audits can assist in the early detection of issues.

In addition, businesses should make sure that all staff members are adequately aware and informed of the exact company policies and processes that the company has implemented for the purposes of financial management.

When hiring new employees, conducting background checks can help identify individuals with a history of financial misconduct, ensuring the protection of corporate assets. Additionally, fostering an ethical and transparent workplace culture is crucial. Providing channels for anonymous reporting of suspicious activity further safeguards against misconduct. Implementing programs that emphasize ethical standards and offer fraud awareness training can be highly effective in preventing the misappropriation of funds. It is important to consult legal counsel to ensure that investigations into misappropriation of company funds do not fall into the territory of defamation or wrongful dismissal. This will help the employer avoid legal issues in the future.

How to Defend Theft Under $5000

What Steps can an Employer take if they Suspect an Employee is Misappropriating Funds?

If an employer suspects an employee of misappropriating funds, they should take reasonably prompt and appropriate steps to address the issue. Initially, the employer will conduct a careful and thorough internal investigation to gather evidence and assess the extent of the misappropriation. Engaging external auditors or forensic accountants can help ensure an unbiased review.

In order to stop the employee from accessing corporate funds going forward, the employer may approach the individual and suspend or terminate them from their job once enough evidence has been gathered. To decide on the best course of action, which can involve making a police report, legal counsel should be engaged. The business might also think about pursuing a civil lawsuit to reclaim the money that was stolen. Maintaining confidentiality and complying to the appropriate processes are essential throughout this process to prevent lawsuits for wrongful dismissal or slander.

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Relevant Cases

York University v. M.M, 2016 ONSC 3718

This case involves M.M., a former senior executive at York University, who was found guilty of misappropriating university funds. The university uncovered that M.M. had engaged in fraudulent activities, resulting in substantial financial losses.

In his role of trust and authority, M.M. misused university funds for personal gain, including unauthorized purchases of luxury items, personal services, and other non-business-related expenses. The fraudulent actions were detected during an internal audit, which revealed significant discrepancies in the financial records and unauthorized transactions.

The court proceedings highlighted the extent of the misappropriation and the breach of fiduciary duty by M.M. As a senior executive, M.M. was entrusted with the responsible management of university resources in the institution’s best interest. However, his actions demonstrated a blatant disregard for these responsibilities, resulting in the misuse of substantial funds.

York University sought legal action to recover the misappropriated funds and hold M.M. accountable for his misconduct. The legal process involved presenting evidence of unauthorized transactions and personal benefits derived from the misappropriated funds. The Court found M.M. liable for financial misconduct and ordered restitution to the university.

This case underscores the importance of internal controls and oversight in financial management within organizations. It also highlights the severe legal and ethical consequences of misappropriating funds, especially for individuals in positions of trust and authority. The decision served as a stern warning to other institutions and executives about the potential legal repercussions of financial misconduct and the necessity of maintaining integrity and transparency in financial affairs.

R.M. v. R.L., 2016 ONCA 903

In this case, the Ontario Court of Appeal (ONCA) addressed allegations of misappropriation of funds within the context of a consulting agreement. The appellants, R.M. and The Mitchell Consulting Group, had entered into an agreement with Global Learning Group Inc. (GLGI) and its leading figure, R.L. The appellants claimed that GLGI failed to pay amounts owed under the consulting agreement and alleged that R.L., along with GLGI, had entered into an oral trust agreement, later formalized in writing, to hold certain properties in trust as security for the owed funds.

However, they alleged that R.L. fraudulently converted these funds for personal use.

Initially, the Superior Court of Justice dismissed most of the appellants’ claims, allowing only the breach of contract claim against GLGI and the breach of trust claim against R.L. concerning the specific properties held in trust. The Court found that other claims, including those for fraud, fraudulent misrepresentation, conversion, and conspiracy, were inadequately detailed and primarily consisted of bald allegations without substantial supporting facts.

On appeal, the ONCA examined whether the lower court had correctly limited the appellants’ claims. The appellants argued that their allegations of fraudulent diversion of funds and unjust enrichment against R.L. were sufficient to justify claims for personal liability and piercing the corporate veil. The appeal court agreed, stating that the motions judge had applied too narrow a view of piercing the corporate veil. The ONCA clarified that this remedy is not confined to sham or fraudulent corporations but can also be applied when there is evidence of fraudulent or improper conduct by those controlling the company.

The ONCA concluded that the allegations of fraudulent diversion of funds, if properly detailed, could support a claim against R.L. personally. Consequently, the court allowed the appellants one last opportunity to amend their statement of claim to include detailed allegations of fraudulent diversion and misappropriation of funds, potentially holding R.L. personally liable for the misappropriated funds.

This decision emphasizes that corporate veils can be pierced under Ontario law not only when corporations are fraudulent entities but also when individuals misuse corporate structures for fraudulent purposes. The Court emphasized the necessity of detailed pleadings to substantiate claims of fraud and misappropriation, thereby holding individuals accountable for corporate misconduct. This case illustrates the legal principles surrounding personal liability in corporate fraud and the rigorous standards required for such claims to proceed.

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About the Author

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Jordan Donich

Jordan Donich has been a Lawyer for over 10 years and is a trusted legal analyst by Canadian Media. He is as a leader in Canada’s tech sector for lawyers and developer of Law Newbie. Jordan is a Black Belt with the Japan Karate Association and trained in Krav Maga. He won a Gold Medal at 2004 Canadian National Championships and was published in the National Newspaper Awards.

Jordan has been featured in Forbes and is a member of DMZ Angels in Toronto.