Fraud is an ever-constant danger. The sheer variety and increasing complexity of constantly reinventing itself requires a legal remedy and deterrent. This is precisely what the Fraud Act 2006 aims to do. A definition of fraud would need to “include some form of dishonest or criminal aspect, which would cause someone to act in reliance on what has been imparted to them; something designed to deceive, deprive or injure other people; or intended to break or to cause a loss or damage to another person using a manipulative action”.
The definition of fraud must encompass not only an intention to deceive, create an unfavourable effect, and manipulate but also some element of harm or loss to the victim. The aims of the Fraud Act can be seen to encompass a simulacrum of these principles. The Act, nearly twenty years in the making, has become part of a growing legal casuistry since the 1980s, developed rapidly in response to increasing economic crime of a sophistication not envisaged by the underlying framework of criminal and contract law to which it was subjected.
Legislation on fraud was primarily contained in The Theft Act 1978 as amended in The Theft (Amendment Act) 1996 and The Fraud Act 2006, as well as the embezzlement provisions of the Larceny Act 1916 (repealed in January 1969). The principal reason for the upsurge of legal interest in fraud during the 1980s was dissatisfaction with the law's failure to convict high-profile business fraudsters. This led to accusations of an inefficient criminal justice system and a "gentleman's agreement" not to convict fellow businessmen.
Key Definitions of The Fraud Act 2006
A person's commitment to engage in fraudulent activities has significant adverse effects on those who become the targets of the fraudulent practices. The fight against fraud, however, is not solely based on prosecuting the perpetrators of such acts; the law and its application must be apparent to practitioners as well as potential victims of perpetrators. As it pertains to the present Act, fraud is defined as follows:
“a person is said to be guilty of fraudulent activity if that person is capable of committing the offence and believed, upon the commission of the act or acts in question, to be dishonest by that of a reasonable person”.
The Act also provides an interpretation of the term "gain”. In this context, gain would be considered securing a quality, a sum of money, or the desired article itself. The gain was qualified to be good fortune. Contrary to such interpretation, balancing or hoping for such fortune was defined as profit. Lastly, the Act defines the term "loss" as contradicting or being considered bygone instead of gain.
The Act also defines the terms "gain" and "loss," stating that the term "article" means money, personal property, real property, and even intangible property. In general, applying definitions within law effectively manages and mitigates the presence of ambiguity. The definitions of fraud, gain, loss, and article enhance the capability and means to address the definition of such terms expedited.
The True Meaning of Fraud
Throughout history, fraud has been characterised as a deception to obtain unfair or illegal gains. Various legal cases have sought to clarify the distinctions between fraud and misrepresentation. Generally, fraud is perceived as a more severe offence than misrepresentation, as the latter can occur without malicious intent. Both are often categorised as fraudulent misrepresentations and are actionable under fraud laws. Some legal interpretations differentiate between deceit and misrepresentation.
Deceit implies intentional dishonesty, while misrepresentation may not necessarily involve intent to deceive. For instance, a reckless statement could be seen as deceitful, but it may not amount to fraud if the person genuinely believed the statement to be true when making it. Similarly, an art dealer who incorrectly attributes a valuable piece to Rembrandt might be considered fraudulent to some degree. However, in cases that are not commercial, proving fraudulent misrepresentation requires demonstrating actual subjective dishonesty, which imposes a more stringent burden of proof.
The concept of fraud extends beyond mere criminality; it encompasses broader moral and social dimensions with civil repercussions. Determining whether fraud has occurred hinges on the elements of intent and knowledge. Suppose an individual makes a factual representation without reasonable grounds for believing in its accuracy. In that case, fraud is established only if this lack of reasonable grounds is evident in their subjective beliefs and the objective circumstances surrounding the situation.
The Definition of Gain and Loss
The Fraud Act 2006 defines 'gain' using ordinary English, which encompasses obtaining property and other financial advantages. In other words, gain means the same as receiving a benefit or advantage. This benefit or advantage may be either right now or at some time in the future and might not even be very likely if it does not happen simultaneously. This still is 'gain.' Similarly, a right of enforcement may be obtained as part of gaining the outcome for an innocent third party.
The legal definition of 'loss' involves a detriment, or harm, suffered either at once or otherwise due to their actions. It predisposes them to the risk of at least immediate damage. This definition could capture, for instance, a drop in the financial value of shares when insider dealing or misleading statements have been used to purchase them and a breach of a mobile phone contract through a false credit application. This gives a slightly different meaning of gain from that loss, again the benefit being either a financial advantage or another kind.
A non-financial advantage is insufficiently specified. Indeed, it might take a little or uncertain time to accrue, harm meaning both loss and detriment or damage and some overlap with some of the 'gain' definitions. Such a 'non-pecuniary benefit' or 'not purely financial' advantage might include, for example, a more successful way of living or a potentially remunerative contract. Sections 5, 6, and 7 of the Fraud Act 2006 carve out fraudulent trading and other types of fraud such that substantial financial gain to the fraudster does not bring conviction under the Act.
The Definition of Article
A crucial aspect of the offences under the Fraud Act is the definition of 'article'. This term is broadly defined as 'anything or substance' capable of being 'used, addressed or referred to as a distinct thing'. The definition is broad enough to cover paper, banknotes and coins, coloured discs or other small articles used in automated ticket vending machines, documents and identifiers issued for use as proof of identity. The definition extends to intangible things, making it applicable to gas or water mains or air pressure in machinery, in the absence of which the machinery could not operate.
The breadth of the definition has apparent implications for such offences as forgery, where the use of an article to commit an offence is limited only by the imagination of the accused, such as creating a false profile on a social networking site. The definition also catches counterfeit currency or government documents produced outside of the United Kingdom and later imported into this country: the intention or dishonesty will be sufficiently proved if it is known that the accused intended to cause their victim to believe that these things had official quality.
The legal definition of an article is thus crucial because it impacts the actions that can constitute the relevant offences. Offences involving articles criminalised by the Act involve the 'possession' or 'control' of such 'articles', which in the case of possession is a 'reverse burden' for these offences. A particularly innovative point of this research is examining the meaning behind a software script. It applies the provision that defines 'an article for use in fraud' and demonstrates that fixes are treated as property for the most serious offences, but it calls attention to the definition of computer.
Common Types of Fraudulent Business
The Fraud Act is a crucial legal framework to eliminate deceptive practices aimed at consumers for financial benefit. This legislation addresses a range of fraudulent activities, including those that involve concealing income, as evidenced by recent convictions of a father and son who were found guilty of hiding their earnings while living a lifestyle funded by tax evasion. These cases highlight that the charges extended beyond mere tax evasion and money laundering, encompassing serious allegations of fraudulent trading.
The Fraud Act 2006 delineates various fraud-related offences and establishes corresponding penalties. Specifically, Sections 9-11 of the Act outline the illegal creation or distribution of misleading information or documentation intended for financial gain. This includes deceptive advertisements and the failure to disclose critical information, thereby misleading consumers. The enforcement of these regulations falls under the jurisdiction of designated authorities responsible for upholding the law.
It is essential to recognise that engaging in fraudulent activities encompasses more than just the act of fraud itself. Common fraudulent business practices, such as double ending (when a single entity or agent represents both the buyer and the seller in a transaction), using umbrella organisations, and withholding client funds, are prevalent across various business structures, including sole proprietorships and small to medium enterprises. Early or ongoing involvement in such practices should not be dismissed as minor offences, as they carry significant legal implications and contribute to a broader business dishonesty culture.
The Implications of Fraud for the Sole Trader
The Law Commission defines a sole trader as an individual who operates a business without registering it as an organisation. Unlike partnerships and limited organisations, sole traders do not possess a distinct legal identity; they are synonymous with their organisations. This lack of separate legal status leads courts to exercise caution when imposing additional duties and liabilities on sole traders, recognising their unique position in the legal framework.
To establish a fraud case through false representation, it must be demonstrated that the defendant accepted specific responsibilities and risks linked to their business operations. Given that a sole trader may find it challenging to decline a sale to a consumer, the law emphasises the importance of honesty in commercial transactions. This principle is crucial in criminal law, ensuring business owners or artisans maintain moral accountability for the products they produce or sell.
However, Section 2 of the Fraud Act alleviates many criminal liabilities from the entrepreneurial landscape. In situations where the sole trader is not themselves but rather an agent who interacts directly with consumers, this section becomes largely irrelevant. This distinction highlights the complexities of legal responsibilities in business operations, particularly for those who operate as sole traders.
Upon entering the business realm, regardless of its scale, the owner assumes the critical duty of fulfilling all legal requirements. Noncompliance with these obligations can result in severe consequences, such as revoking a trading license or potential legal proceedings, which could ultimately lead to financial ruin. The ambiguity that sometimes exists between ethical practices and unlawful activities heightens the sole trader's responsibility, particularly towards consumers, as every product or service offered has a corresponding market.
Business owners must recognise their legal responsibilities are paramount when establishing their enterprise. The repercussions of neglecting these duties can be dire, including the loss of the right to operate or facing litigation, which may culminate in bankruptcy. The challenges in distinguishing between ethical conduct and criminal behaviour further amplify the accountability of sole traders, emphasising their obligation to consumers, as there is always a market for the goods and services they provide, regardless of their size.
Culpability - Regulating the Conduct of Organisations
Regulating corporate behaviour presents a more significant challenge than addressing individual fraud. Corporations' inherent structure allows them to perpetrate fraudulent activities through their employees or representatives, often at limited oversight levels. Despite this, accountability tends to be diffused due to the hierarchical nature of management and the distribution of authority within the organisation. Therefore, the onus of responsibility falls on corporate governance, which must establish robust systems of accountability and compliance.
Effective prevention hinges on implementing internal compliance mechanisms designed to detect and address suspicious activities alongside a firm stance against any form of criminal behaviour. While some may argue that corporate governance has effectively fostered a culture of ethical conduct, leading to a perception that only a few individuals may act unethically, the reality is more nuanced. Fraud can arise not only from individual malfeasance but also from systemic issues within the corporate structure.
Organisations may engage in fraudulent schemes rationalised as being in the organisation's best interest, such as misleading investors or artificially inflating market valuations to meet regulatory expectations. The complexities of corporate fraud highlight the need for vigilant oversight and a commitment to ethical practices at all levels of an organisation.
Maintaining an Ethical Stance in Business
It is essential to recognise that the potential for fraud exists at the individual level and within the corporate framework. As such, a proactive approach to corporate governance, emphasising transparency and accountability, is crucial in mitigating the risks associated with fraudulent activities. By fostering an environment where ethical behaviour is prioritised and misconduct is actively discouraged, organisations can better safeguard their integrity and maintain the trust of their stakeholders.
Establishing an ethical culture within a corporation is the most effective deterrent against corporate fraud. Additionally, the government needs to strengthen corruption laws to encompass the moral standards of corporations. For individuals engaging in fraudulent activities, the ability to evade detection by internal or external audits and law enforcement can be advantageous. Consequently, organisations must prioritise transparency, particularly in their financial reporting practices.
A strong internal audit and control framework is crucial in safeguarding against fraudulent behaviour. While it is essential to acknowledge that no system reliant on human oversight is entirely infallible, these frameworks significantly discourage potential misconduct. Employees are less inclined to partake in fraudulent actions when they believe they are part of an organisation with adequate internal controls to identify irregularities.
The deterrence argument, rather than merely fearing legal repercussions, truly protects against fraud. When individuals perceive that they are working within an organisation that emphasises strong ethical standards and robust internal controls, they are less likely to engage in unethical behaviour. This proactive approach to fostering an ethical environment is essential for minimising the risk of corporate fraud.
Obtaining Services Dishonestly
The Fraud Act 2006 defines the crime of dishonestly acquiring services. This offence occurs when an individual obtains goods or services, fully or partially, without making the necessary payment, which is the offender's explicit intention, through deceptive means. A typical example of this is the dishonest engagement of a service provider to avoid payment. However, the scope of this offence extends beyond mere misrepresentation; it can encompass more intricate scenarios, including elaborate scams and the exploitation of stolen information through social engineering techniques.
Various industries are susceptible to dishonesty in service acquisition, including telecommunications, healthcare, insurance, energy, transport, retail, and real estate transactions. Reports indicate that an estimated 15% of telecommunications services are fraudulently obtained before network operators detect the wrongdoing. The actus reus of this offence requires that an individual either secures services for themselves or facilitates a third party in obtaining services on their behalf, highlighting the importance of intent in these actions.
The necessity for an individual to acquire services through another party is critical in establishing the offence. This principle also applies when a third party fraudulently secures services on behalf of the offender, as it can lead to charges of aiding and abetting the primary offences. Such legal implications underscore the seriousness of fraudulent activities and the need for vigilance in various sectors to combat these deceptive practices effectively.
