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What Is Self-Dealing?

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  • Written By: Mary McMahon
  • Edited By: Nancy Fann-Im
  • Last Modified Date: 16 September 2016
  • Copyright Protected:
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Self-dealing is a situation where a person in a position of fiduciary responsibility facilitates a transaction that benefits her, breaching her legal duties by potentially disadvantaging a client or other party to the transaction. In a simple example, the head of a charity cannot pay for his vacation out of the charity's funds, as the charity does not exist for his benefit. Likewise, a stockbroker cannot recommend a transaction that would generate a hefty commission when she knows that the client will take a loss.

Fiduciary duty exists in a number of legal relationships. Individuals in this position must think of their clients first, as they act as financial representatives and may directly control assets on behalf of the client. Trustees, money managers, stockbrokers, members of a company's board, and other professionals who make financial recommendations or handle money and assets on behalf of others have a fiduciary duty. They cannot recommend or engage in dealings that would harm their clients, and doing so could expose them to legal penalties.

In self-dealing, transactions benefit the person with fiduciary responsibility, rather than the clients or other parties. Many organizations have strict internal policies to address potential self-dealing, requiring members to carefully log the circumstances of financial transactions and to act transparently to make it clear that transactions confer no personal benefit. Companies may also address conflict of interest concerns with their internal policies to prevent legal tangles.

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The law strictly prohibits self-dealing. Clients who experience financial damages as a result of this practice can sue to recover the amount of these damages, and in cases like those where board members fail to represent their shareholders, it can become a class action lawsuit. Any time individuals with fiduciary responsibility abuse funds for private purposes, recommend decisions that provide personal benefits, or undertake transactions that may provide kickbacks or other benefits, they may be committing self-dealing.

Firm laws surrounding this practice protect members of the public who rely on board members, attorneys, financial consultants, and other professionals to provide fair and accurate services. In cases where self-dealing or other breaches of fiduciary duty are suspected, clients can request detailed records for review to learn more about the situation and determine if they have grounds for legal action. In cases where government officials are involved, the government may sue for damages; for example, legislators using state-provided transport for private purposes are abusing government resources and failing to behave responsibly with respect to public funds.

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