What is Defalcation?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 19 September 2019
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Defalcation is a term that has to do with the mishandling or misappropriation of funds. This mishandling can involve payments from customers, the abuse of resources provided to complete a project, or even the use of company funds for personal use. Many forms of defalcation are illegal, and punishable by imprisonment as well as the imposition of severe fines.

One of the most common forms of defalcation is embezzlement. In this scenario, an employee with access to company funds chooses to steal the funds, while taking steps to prevent the theft from being discovered. The process may involve altering accounting records, or submitting expense reports for expenses that never actually were incurred. This type of misappropriation of funds is an example of activities that can ultimately lead to prison, if the activity is discovered.


Fiduciary negligence is another type of defalcation that is found in the business world. Here, officers or employees that are entrusted with company resources choose to utilize the funds for purposes other than what was intended. For example, an officer may be provided with a specific amount of funds to secure a specific piece of property, but instead use the money for other purposes, such as entertaining clients or making purchases of other assets. Since the funds were not used in accordance with the instructions issued to the employee, he or she is considered negligent. In situations of this nature, termination of employment is often the response once the negligence is made known to others in the company.

Defalcation can also take place in the real estate industry. One example involves the placement of funds into an escrow situation. This is usually done with the understanding that the funds will only be used to arrange the financing for the real estate purchase. If those funds are used for any other purpose, then misappropriation or defalcation has taken place. Depending on the nature and complexity of the activities, the defalcation may be so severe that the debt brought about by the actions cannot be settled through litigation or other legal means.

In most countries, laws and regulations define what is and is not considered criminal defalcation within a given nation. Those same laws also set the guidelines for imprisonment or other punitive actions that may take place if the abuse of resources is discovered and the perpetrator is tried and convicted of the crime. For this reason, it is important to understand what acts are defined as defalcation within a given country, and what actions can be taken against the guilty party.


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