A basic principle of an offence of fraud is that Prosecution must provide sufficient evidence to indicate that the Defendant was acting dishonestly when they had undertaken the action in question and it is this that is often the most difficult to prove during many Trials involving fraud. An example might be a situation where a Defendant asks a business associate to lend him £30,000, having assured him that his or her business is viable when it was actually near insolvency. The Court would need to be sure that the Defendant was aware of this and that they knew that the request was a dishonest one. The test for dishonesty is usually decided by a Jury and one that must be decided on the facts specific to each case.
The law requires the Jury to be sure beyond reasonable doubt that the Defendant has been dishonest by satisfying both stages of the legal dishonesty test (commonly referred to as the the Gosh test).
The first stage of the test is that the act must be deemed to be dishonest by the standards of reasonable and honest people.
The second stage of the test is that the Defendant must have realised that what they were doing was (by the standards of reasonable and honest people) dishonest.
The second part of this test means that even if someone commits an act to which they believe to be justified (a famous example previously used by a Judge is that of Robin Hood robbing from the rich to give to the poor), if they would have been aware that ordinary people would find it dishonest, then dishonesty is proven. In other words, it is the knowledge of the fact that the public view a type of action as dishonest, not agreement with that view, which proves dishonesty.
How Fraud Allegations Arise
Fraud investigations commonly arise as a result of regulatory investigations or audits by regulatory bodies such as the FSA, although the reality is that allegations more often are the result of a party facing a major loss and reporting it to the authorities. Classic examples of credit card fraud conspiracies, mortgage fraud, Missing Trader (MTIC) or other VAT frauds begin due to a person or persons (in the latter case HMRC) has lost large amounts of money over a suspicious period of time.
The Fraud Act 2006
Major reform in fraud law occurred with the introduction of the Fraud Act 2006. This means that on 15 January 2007 the old general offence of fraud was replaced by parts of the Fraud Act. The Fraud Act includes legislation in relation to these new offences:
- Making a false representation (section 2)
- Dishonestly failing to disclose information (section 3)
- Abuse of position (section 4)
- Obtaining services dishonestly (section 11)
A further offence of conspiracy to defraud still exists and being broad is often used where the Prosecution would have difficulties for technical reasons to get a conviction for one of the new offences, but the prosecution have to show that more than one person was involved.
Fraud Offences under The Theft Acts 1968 and 1978
The Theft Acts 1968 and 1978 created several offences of deception to deal with situations where something was dishonestly obtained by deception. Similarly the offences applied in situations in which liability was evaded in the same way. These offences can be considered to fall under the umbrella of the law of fraud. This is now considered old law, and can now only be used for allegations which date back before January 15th 2007.
The old offences are: (the more common offences are in bold)
- obtaining property by deception
- obtaining a money transfer by deception
- obtaining a pecuniary advantage by deception
- obtaining services by deception
- procuring the execution of a valuable security by deception
- securing remission of an existing liability by deception
- inducing a creditor to wait for or forgo payment
- obtaining exemption from, or abatement of, liability to make a payment
Fraud by False Representation
Section 2 of the Fraud Act 2006 sets out the framework of the classic fraud offence. The offence usually consists of some sort of dishonest statement made to gain something or so that someone else makes a loss. This offence is one that will often apply to an offence committed in business. The four necessary elements that must be proved in order to result in a conviction are:
- A representation must be made
- The representation must be known to be false
- The representation must be dishonestly made
- The person making the representation must intend to gain something, or intend that the person receiving it loses something
Section 2 is not a different offence to section 1 but merely one of the 3 ways that the offence of fraud can be committed under the Fraud Act 2006.
What is a Representation?
- 'Representation' means any representation as to fact or law, including a representation as to the state of mind of-
- The person making the representation, or
- Any other person
- A representation may be express or implied
- For the purposes of this section a representation may be regarded as made if it (or anything implying it) is submitted in any form to any system or device designed to receive, convey or respond to communications (with or without human intervention)
A representation may not necessarily have been made for a fraud to exist. Simply handing over a cheque, for example, is not a promise that there is money in the account at the time of presentation. A stolen credit card, however, is considered a representation of entitlement to use it.
Dishonesty of the Maker at the Time of Making It
The law says that the jury must be sure about whether the defendant has been dishonest by satisfying both stages of the legal dishonesty test (sometimes called the Ghosh test).
The first stage of the test is that according to the standards of reasonable and honest people what was done must have been dishonest.
The second stage of the test is that the defendant himself must have realised that what he was doing was by (the standards of reasonable and honest people) dishonest.
The second part of this test means that even if someone does something which they believe to be justified (an example a judge once famously used is that of Robin Hood robbing from the rich to give to the poor), if they must have known that ordinary people would find it dishonest, then dishonesty is proven. In other words, it is the knowledge of the fact that the public view a type of action as dishonest, not agreement with that view, which proves dishonesty.
The Intention to Cause Personal Gain or Loss of Another
The key requirement here is the intention. To give an example, if a former manager of a supermarket believes that the food sold is of a low standard and therefore people should avoid that store for the benefit of their health, so decides to make public allegations of rat infestation at the premises, he cannot be guilty of making a fraudulent misrepresentation. He has made a statement, it is false, and he knows it is so it is probably dishonest, but he appears not to have done it to cause loss to the supermarket or personal gain, rather for some sort of misplaced view of public protection. On the other hand, if he expressly wants that store to lose money and be closed down and that is why he makes the false allegations, he could well be guilty of a fraud by false representation.
It is also important to note that the intention to expose another to a risk of loss is enough - the loss does not have to take place or be a certainty.
Common forms of fraudulent activity covered by Fraud of False Representation
As stated above, any behaviour involving dishonestly making a false statement or indication in the course of any dealings for personal gain or so that someone else suffers loss falls into this category. This of course covers a very wide range of activities; from allegations of collecting money for non-existent charities at one end of the spectrum to major complex conspiracies at the other. However, some common large scale operations are listed below.
- False information about the viability of a company on the balance sheet before a sale
- 'Boiler room' frauds
- 'Ponzi style' frauds (A notable recent example is the Bernard Madoff case, in which the total loss was estimated to be 18 billion USD.)
- So-called '419 scams' and 'phishing', usually internet based
- Any kind of company set up to provide a service that the directors have no intention of carrying out
- Factoring frauds and other business finance related offences
- Mortgage fraud - value of property, owner of property, interests in property (for more info click button on the left hand toolbar)
- Cheque frauds
- False accounting (The actual accounts document offences are covered by the Theft Act 1968, but the Fraud Act covers all the remaining factual background of a false accounting conspiracy).
This list is by no means exhaustive, but could be useful to show the types of case that one should expect a good fraud solicitor to have some experience or knowledge of.
Who is in a position of trust?
This section of the Fraud Act is clearly intended to prevent the dishonest abuse of position by those whom we are entitled to consider above suspicion e.g. a trustee, company director or executor of a will. However, it is not all together clear who will be regarded as falling into the category of being expected to safeguard, or not act against, the financial interests of another person. Employees who use their position to gain something for themselves even though they are not actually stealing property would be caught by this section. A clear example is where catering or bar staff buy in their own goods to sell to customers instead of those of the employers. What about the nurse who is looking after a patient or a less formal carer? In a recent case this section was considered in relation to a young man who persuaded his elderly next-door neighbour to give him the million pounds that he had won on the lottery on the basis of family friendship. It will in all cases come down to a matter of fact and degree as to who is or is not in a position of trust for the purposes of this section.
- A person is in breach of this section if he
- occupies a position in which he is expected to safeguard, or not to act against, the financial interests of another person
- dishonestly abuses that position, and
- intends, by means of the abuse of that position
- to make a gain for himself or another, or
- to cause loss to another or to expose another to a risk of loss
- A person may be regarded as having abused his position even though his conduct consisted of an omission rather than an act
The test for dishonesty in fraud cases is based on the definition in the case of Ghosh. This means that a defendant could be found guilty of Fraud and in particular, Fraud by Abuse of Position even though he genuinely believed himself or another to have a right to the property in question. This would depend on whether a jury decided if the defendant came by the property as dishonest even though they accept that he had a right to it in any event. An example of this might be where a creditor tricks a debtor into paying over an amount which is legitimately owed to him.
This strange position did not seem to be a problem under the law preceding the Fraud Act 2006. But the wording of the new law seems to actively urge the court to look, not so much at the dishonesty of the motive but at the dishonesty of the means. For example, S.2 deals with fraud by dishonestly making a false representation with a view to making a gain, rather than making a false representation with a view to dishonestly making a gain. So, an accountant, retained by a company uses his position to obtain, by a dishonest method, arrears of fees properly owed to him, may be convicted of Fraud by Abuse of Position.
Intent to gain for himself or another or to cause loss to another or expose another to a risk of loss
Fraud Act 2006, s. 5 states:
'Gain' and 'loss'
- extend only to gain or loss in money or other property
- include any such gain or loss whether temporary or permanent and
- 'property' means any property whether real or personal (including things in action and other intangible property)
'Gain' includes a gain by keeping what one has, as well as a gain by getting what one does not have.
'Loss' includes a loss by not getting what one might get, as well as a loss by parting with what one has.
A defendant may act with 'intent to gain' even where he/she seeks to acquire property owing to him/her; and even intent to gain or lose on a temporary basis may suffice, for example, where payment is withheld by an accountant in order to accrue interest or to help cash flow.
Liability by omission
It is clear that this section of the Fraud Act encompasses both action and inaction with intent to cause gain or loss. A company director who intends to get new business for himself personally rather than seek to secure new business on behalf of his company would be within the ambit of this offence. What of the position of an employee who fails to pass on new business leads to the loft conversion company that employs him, diverting them instead to his brother in law who is a builder? Employees are considered in the next paragraph.
The Law Explained
The law relating to articles for use in a fraud is actually an evolution of the old law of 'going equipped to cheat'.
A person is guilty of the new offence if he possesses or has under his control any article for use in the course of or in connection with any fraud. 'Articles' simply means items. An item could be a piece of technical equipment, such as a device for manufacturing credit cards, a computer with software used in an email 'phishing' scam, or even a fake national insurance card. This means that it is not just the person on the front line committing the fraud who is guilty, but all people who possess any of the equipment used in the meantime.
It is worth noting that 'items' can include documents and data on computers, so personal details of fraud victims, or fake identification used to access funds illegally could be caught by this law. Even a fake uniform used to gain access to premises where a fraud then takes place could be an 'item' in this sense.
However, it is not just handling or possessing such items which results in a conviction. The prosecution must prove that the defendant intended that either s/he or someone else use the item. If someone has a friend's credit card details, but does not intend to use them for any illegal purpose, then he or she cannot be guilty of an offence.
Making, Adapting, Supplying etc. Articles
Section 7 of the Fraud Act is the offence of making, adapting, supplying or offering to supply an article for use in a fraud. This criminalises anyone who is involved in the manufacture of these items, and anyone who deals in them. This can include people who write software to help them hack into financial databases, or people make skimming devices for use in credit card fraud. It can also include people who trade in such devices and software.
The prosecution have to prove not just that the person was involved in making or supplying the items in question. The jury have to be sure that the person either knew that it was designed a fraudulent purpose or intended that it would be used this way.
Sentences for Possession or Control of Articles
A person guilty for possessing or controlling items for use in a fraud faces a maximum of 5 years in the Crown Court. The maximum sentence is rare, and is usually only applicable to the most serious of cases.
In cases where the fraud that the item is to be used for is serious and well planned, sentences of 6 weeks up to two years in prison are typical, although non custodial sentences may be possible. In a less well planned or less serious fraud, a community order or short prison sentence is the norm.
Sentences for Making, adapting, supplying etc. Articles
The maximum sentence for the more serious offence of making or supplying such items (section 7) is 10 years. This is higher than for simple possession of such items to reflect the fact that it is dealers and makers of these items who create the opportunities for serious and technically advanced frauds to take place.
In cases where the fraud that the item is to be used for is serious and well planned, sentences of 2 - 7 years are possible. In a less well planned or less serious fraud, a high level community order up to a 2 year prison sentence is possible.
The length of sentence handed down can depend on several factors. How much money was to be gained, how much the victims would lose, and whether the victims were vulnerable may all be relevant and result in higher sentences. Whether the offender was a major or minor player may also increase or decrease sentence. Personal mitigation of the defendant may also reduce sentence.
What is Obtaining Services Dishonestly?
Someone is guilty of obtaining services dishonestly if:
- He or she obtains services which he or she knows cost money
- By doing or saying something dishonest
- Then does not pay for the services (in full)
- Having intended not to pay for the services in the first place
The offence could apply to company directors who, for example, order maintenance of property or technology at the business when they know that they are trading insolvently and cannot pay their bills. On the other hand, cases of defendants involved in a long firm fraud could find themselves charged with obtaining services dishonestly alongside the usual fraudulent trading or fraud by misrepresentation charges.
At the less serious end of the spectrum are people who ride on the bus or underground without paying and other smaller scale offences.
How The Law Works
This offence is based upon the old offence of Obtaining Services by Deception under the Theft Act 1978. Like the old offence it relates only to the obtaining of services that are provided in return for payment. Unlike the old offence there does not need to be any deception or fraudulent representation.
The Theft Act 1978 obtaining of services was defined as the conferring of a benefit by doing an act or permitting an act to be done. The terms 'services' and 'obtaining' are not defined in the Fraud Act 2006 but are thought to have the same meaning as under the old law.
A service that would be freely given is not caught by this law even if dishonesty is used to obtain it. Therefore, the fraudulent opening of a building society account would not amount to this offence if no payment is required; neither would a false representation about a disability in order to obtain the services of a home help. Similarly, this law does not apply where a service is obtained in circumstances where the supplier does not intend to perform or grant the benefit of the service. An example might be where a person dishonestly logs on to another person's Wi-Fi network. What are caught by this section are agreements for services for payment which would not be enforceable in a civil court, for instance, to do something illegal.
Questions for the Defence Team in a Prosecution for Obtaining Services Dishonestly
The crucial evidential point in many of these cases is what the state of mind of the accused person was when a transaction was started. In the following situations, a defendant cannot be convicted of the offence:
- Where a defendant honestly believed at the time of asking for the services that he or she would pay for them.
- Where the defendant forgot to pay after the fact.
- Where a genuine dispute over payment arose after the provision for the service.
- Where a company director thought that he would be able to pay later down the line, even if the company did not have the money at the time.
Issues relating to dishonesty of the defendant or the knowledge that a service was going to be charged for can be the major area that the defence team should focus on in these cases to secure a not guilty verdict for the client.
Sentences for obtaining services dishonestly are a maximum of 5 years in prison. Sentences of a shorter amount of time are possible, and for less serious offences the sentence might be a community sentence or a fine.
In a serious case, even when the evidence is overwhelming and the client has to plead guilty, sometimes prison can be avoided if the defence solicitor, barrister, and client work together to present the judge with good mitigation about the client and his case. Of course, there are no hundred percent guarantees, but a proactive approach by the defence team can go a long way.