What if My Company Benefits from Shareholder Embezzlement or Fraud?
Often a minority owner becomes suspicious that their partner is stealing from the company. But what if your business partner is stealing from or defrauding third parties to benefit your company? Should you report it? Must you report it?
Such wrongdoing could take many forms. Your partner could be falsifying documents to vendors or customers. The information given could be merely misleading, or it could be blatant criminal fraud. In one instance vendors needed certain representations about the ability to carry out a contract, so they needed the company to make several financial representations. Those representations turned out to be completely false. The minority owner didn’t find out till months later.
By then, of course, it was too late; the contract had already been performed. But it got the minority owner thinking: if my business partner would lie to a client and falsify financial statements for him, would he do that to me?
His suspicions were not misplaced; everything was falsified. Bank accounts existed that he didn’t even know about. For years, transfers had been made from the company to the majority owner’s other company – one the minority partner didn’t even know about.
Other wrongdoing could include uncovering that your partner has been committing tax fraud to benefit your company. Not declaring cash is a tactic that owners often disagree over. (It may “benefit” everyone financially in the short term, but it puts the company at substantial risk.) What to do about such wrongdoing when it is uncovered can be tricky. You will need the help of an experienced attorney to help you sort through these issues. In some cases, you really have no choice but to report certain things to the authorities, or you might have to come clean to a vendor. Of course, these financial improprieties may also be front-and-center in business divorce litigation.
Usually, when you have suspicions, it can’t hurt to follow them through. If you find nothing untoward, you get peace of mind. On the other hand, if you find your suspicions well founded, you have protected yourself, and especially your company.
If you suspect a shareholder of embezzlement, are interested to learn more about this topic, or want to discuss any related business law matters, please feel free to contact me at dcroberts@norris-law.com.