Legal Definitions - lapping

Lapping refers to a fraudulent scheme, typically committed by an employee, where money received from one customer is stolen, and the theft is concealed by applying a subsequent payment from a different customer to cover the first customer's account. This creates a continuous cycle where payments from newer customers are used to cover the theft from older customers, making it appear as though all accounts are being paid, albeit with delayed application of funds.

• Example 1 (Small Business Accounting): A bookkeeper at a local plumbing company receives a $750 cash payment from Customer A for services rendered. Instead of depositing it, the bookkeeper pockets the cash. A week later, when Customer B pays their $750 invoice, the bookkeeper applies Customer B's payment to Customer A's account in the company records. Then, when Customer C pays, their money is used to credit Customer B's account, and so on. This creates a continuous chain of misapplied funds to hide the initial theft.

  Explanation: This illustrates lapping because the bookkeeper is using new customer payments (Customer B, then Customer C) to cover the theft of an earlier customer's payment (Customer A), creating a rolling fraud that delays detection.

• Example 2 (Property Management): A property manager collects rent checks from tenants. The manager steals a $1,500 rent payment from Tenant X. To avoid Tenant X being flagged as delinquent, the manager later takes a $1,500 rent payment from Tenant Y and records it as coming from Tenant X. This pattern continues, with each new tenant's payment being used to cover the previous tenant's payment that was diverted.

  Explanation: Here, the property manager engages in lapping by using subsequent rent payments from other tenants to conceal the theft of an earlier tenant's payment, maintaining the illusion that all accounts are current.

A lapse occurs when a right, privilege, or gift legally terminates or becomes void. This often happens because a specific condition was not met, a required action was not taken within a deadline, or a particular event did not occur.

• Example 1 (Insurance Policy): A homeowner forgets to pay their monthly premium for their home insurance policy. After the grace period specified in the policy also passes without payment, the insurance company sends a notice that the policy is no longer in effect.

  Explanation: The home insurance policy lapses because the policyholder failed to fulfill the condition of timely premium payment, causing their coverage to terminate.

• Example 2 (Real Estate Option): A potential buyer enters into an agreement with a landowner, giving the buyer an "option" to purchase a specific parcel of land within 60 days. The buyer fails to notify the landowner of their intent to purchase or complete the transaction within that 60-day period.

  Explanation: The option to purchase the land lapses because the buyer did not exercise their right within the agreed-upon time limit, and they no longer have the legal ability to buy the property under that agreement.

• Example 3 (Wills and Estates): A woman's will specifies that her antique watch collection should go to her niece. However, the niece tragically passes away six months before the woman herself dies.

  Explanation: The gift of the antique watch collection to the niece in the will lapses because the intended beneficiary (the niece) died before the person who made the will (the testator). Unless the will provides an alternative beneficiary or an anti-lapse statute applies, the gift cannot be fulfilled as originally intended.