Slush Fund

What is a slush fund?

In accounting, a slush fund is a type of general ledger account containing money not designated for a particular purpose.

Slush funds are mostly unaccounted for by financial institutions and the government, giving the account owner flexibility and freedom to use the fund in whatever way they see fit.

Although slush funds can be used for legal purposes or transactions that deal with legitimate products and services, they are prone to oversight and thus have a negative connotation. For this reason, slush funds may also be known as “black funds” when used illegally to keep certain financial records off the books.

Slush funds are useful for individuals and businesses looking to have an auxiliary account for spare expenses during emergencies or as reserve funds to save up for bigger costs.

Managing slush funds and other account types is made easy with accounting software. This technology benefits professional services, accountants, and non-profit organizations, depending on the scale and requirements of the financial process.

Applications of slush funds

Having assets or reserve money stored in a slush fund is not always illegal. Often, sums of money are set aside to deal with uncertainties and contingencies without violating any laws or regulations. However, slush funds are infamous for their applications in unlawful activities.

Since they are relatively unaccounted for and don’t require information disclosure, slush funds have become synonymous with unethical and fraudulent financial transactions.

Setting up and maintaining slush funds, in this case, is valid for events such as last-minute vacations and expensive impulse purchases such as television sets or gaming systems.

Companies commonly use legitimate slush funds in business to pay for expenses such as incidentals and entertaining potential clients. The funds can also be used for corporate perks like employee bonuses, gifts, team outings, staff lunches, urgent business conferences, or car rentals for executives.

Certain companies take advantage of the nature of slush funds to stash money for illegal activities like manipulating financial records, siphoning money from pension funds, hiding miscellaneous profits, and bribing political representatives.

Even organizations like charitable firms have been found guilty of turning company funds into personal slush funds for luxury items and needless expenses that cannot be tracked in their financial statements.

When used legitimately, slush funds back contributions in politics and help influence people indirectly through networking, fundraising, and crowdfunding events.

Politicians are also known to use slush funds for illegal purposes, such as rewarding wealthy donors and lobbyists, buying favors, maintaining an expensive lifestyle, and other bribing practices.

Banks and financial institutions also create slush funds to lend money to criminal organizations, terrorist groups, sanctioned foreign governments, and other parties that cannot work with banks publicly and legally.

How to create a slush fund

When created and used legally, slush funds act like regular bank accounts. However, they are mostly unaccounted for, cannot be tracked, and are hidden from public view for illegal purposes.

Persons or businesses can set up an illegal slush fund in several ways, including:

• Opening an account under a fake name and providing false information
• Hiding funds in foreign financial institutions
• Depositing money in a secret account
• Creating fake jobs to pay “salaries” into slush funds

Slush fund advantages

When managed legally and properly, slush funds serve as a way to save extra money for unforeseen circumstances. Sometimes slush funds are also used as a savings account that holds about 20% of an individual’s paycheck every month.

Funds stored away enable individuals to purchase items that may not be easy to account for. As long as the money in a slush fund is accounted for when calculating taxes, the expenses are on the books. Tools such as disclosure management software consolidate information and track documents required to run a slush fund legally.

Slush fund disadvantages

While slush funds help in emergencies, they are dangerous to maintain in the long run. Hiding and stashing money increases the probability of overlooking tax payments. 

Failure to pay applicable taxes leads to recurring fees and penalties when the fund is discovered. This can lead to further investigation, reputation damage, and financial and legal sanctions.