Self-Dealing - Explained
What is Self-Dealing?
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Table of ContentsSelf-Dealing DefinitionA Little More on What is Self-DealingExamples of Self DealingsIRS Law on Self Dealing and Non-ProfitsAcademic Research
Back To: BUSINESS ENTITIES, CORPORATE GOVERNANCE, & OWNERSHIP
What is Self-Dealing?
Self-dealing is an illegal conduct where a fiduciary takes advantage of his position and acts in his own best interest rather than that of his client or beneficiary. Self-dealing is an illegal act as it represents a conflict of interest, and can lead to penalties, termination of employment, and litigation in most cases. While self dealt can occur in different forms, the most popular occurrence is when the trustee or any other fiduciary attempts to benefit from a transaction that is placed on behalf of the beneficiary or client.
How Does Self-Dealing Work?
Fiduciaries like trustees, corporate and board members, financial advisors, and personal attorneys can involve in self-dealing as they are supposed to provide enough support to an entity in its interest. Self-dealing is easily identified by the actions carried out in transactions. When an individual seeks to enrich himself to the detriment of the entity which he has vowed to provide service to, then that individual is said to be engaging in self-dealing. There are different ways in which this can occur. A fiduciary might decide to use the personal or allotment funds of an entity to give himself a treat, or he can ignore his duty to loyalty to his employer in order to get an opportunity that favors only him. Also, financial advisors can trade company funds on stocks using insider information. However, the risk of the information being incorrect is very high and can lead to loss of capital. It is important to note, however, that most cases of self-dealing might not be directed at enriching the involved fiduciary.
Examples of Self Dealings
A perfect example of self-dealing is a case where a financial advisor suggests that a client invests in a security that is unsuitable for him just to earn a bigger commission. As we stated above, self-dealing is not wholly focused on enrichment in most cases. We have taken a look at some of the examples of self-dealing below:
- When a broker sells their own stock before a clients stock after receiving a sell order from him
- When a party in a business partnership pursues a venture that is meant for both parties solely by himself without informing the other.
- Where a person in position refuses to award a contract to a company unless they (the company) were to provide employment to one of his family or friends.
- A case where an editor-in-chief or a content strategist of a website outsources a task to their personal agency at a higher-than-normal rate without informing the management prior to his action.
IRS Law on Self Dealing and Non-Profits
The Internal Revenue Service (IRS) is permitted to impose a 5% tax on any occurrence of self-dealing by a disqualified individual with a private foundation as specified in the United States Code (26 USCA & 4941). This individual can be a trustee, a corporate officer, an attorney, or any important contributor to the foundation. This law, however, prevents the IRS from charge this amount on loans, leases, sales and exchanges, compensations, and any asset transfer to the disqualified fiduciary.
- What standards govern the actions of the board of directors?
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