Forfeiture definition

Forfeiture is the seizure of any property due to defaults on contractual obligations or due to illegal conduct of the property holder. Under the US federal law, forfeiture can be of the following types: criminal forfeiture, civil judicial forfeiture, and administrative forfeiture.

In this article, we will learn what forfeiture means and read some forfeiture examples to understand its definition better.

What is forfeiture?

Forfeiture has been used as a weapon by governments against criminals for decades. According to Cornell Law School, most forfeiture activity occurs under federal laws and majority of the cases are connected to the traffic in illegal drugs.

Forfeiture in business often occurs when a defaulting party is forced to give up ownership of an asset or revenues generated by an asset as compensation to the concerned party. Forfeiture commonly occurs when an individual or an organisation is unable to pay off debt obligations on time.

In investing, shareholders may be required to forfeit shares if they are unable to pay call money. Call money is a short-term loan, which is payable immediately, made available to stock traders. Forfeiture of shares can also occur when a shareholder sells or transfers their shares during restricted periods.

Another forfeiture example in corporate finance is when an employee of a company is offered employee stock options (ESO) or shares but leaves their job before the ESO matures. In this case, the employee will have to forfeit the company stock that they were allocated.

Forfeiture of property also occurs in real estate contracts which may contain forfeiture clauses. The clause may state the property buyer to make timely instalment payments. Any failure to make payments may lead to the seller ending the purchase agreement and seizing the property.

Forfeiture explained: Types of forfeiture

According to the US Department of Justice, there are three types of forfeiture under federal law:

• Criminal forfeiture - It is a type of forfeiture where action is taken against a defendant with a criminal indictment. A criminal conviction is required for property seizure and the forfeiture is a part of the defendant’s sentence.

• Civil judicial forfeiture - It is a type of forfeiture where action is taken against the property that was used to commit an offence, rather than against a person who committed the offence. According to the US Department of Justice, civil judicial forfeiture allows governments to file cases against properties of criminals located outside the US and permits recovery of assets held by deceased defendants or when a defendant cannot be identified.

• Administrative forfeiture - It is a type of forfeiture which permits governments to forfeit properties without filing a case in federal court. 

“Asset forfeiture is designed to deprive criminals of the proceeds of their crimes, to break the financial backbone of organized criminal syndicates and drug cartels, and to recover property that may be used to compensate victims and deter crime,” said the US Department of Justice.