Fraud

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A fraudulent coupon for the US restaurant Taco Bell.

In criminal law, fraud is intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent, and verb is defraud. Fraud is a crime and a civil tort at common law, though the specific criminal law definition varies by legal jurisdiction. Defrauding people or entities of money or valuables is a common purpose of fraud.

A hoax also involves deception, but without the intention of gain or of damaging or depriving the victim. Fraud is a defense in a civil action for breach of contract or specific performance of a contract. Fraud is a basis for equitable jurisdiction.

By region[edit]

United Kingdom[edit]

England and Wales and Northern Ireland[edit]

The Fraud Act 2006 (c 35) is an Act of the Parliament of the United Kingdom. It affects England and Wales and Northern Ireland. It was given Royal Assent on 8 November 2006, and came into effect on 15 January 2007.[1]

The Act gives a statutory definition of the criminal offence of fraud, defining it in three classes - fraud by false representation, fraud by failing to disclose information, and fraud by abuse of position. It provides that a person found guilty of fraud was liable to a fine or imprisonment for up to twelve months on summary conviction (six months in Northern Ireland), or a fine or imprisonment for up to ten years on conviction on indictment. This Act largely replaces the laws relating to obtaining property by deception, obtaining a pecuniary advantage and other offences that were created under the Theft Act 1978.

Serious Fraud Office[edit]

See Serious Fraud Office (United Kingdom) is an arm of the Government of the United Kingdom, accountable to the Attorney-General.

National Fraud Authority[edit]

The National Fraud Authority (NFA) is the government agency co-ordinating the counter-fraud response in the UK.

CIFAS - The UK's Fraud Prevention Service[edit]

CIFAS - The UK's Fraud Prevention Service, is a not-for-profit membership association representing the private and public sectors. CIFAS is dedicated to the prevention of fraud, including staff fraud, and the identification of financial and related crime.

Canada[edit]

Section 380(1) of the Criminal Code of Canada provides the general definition for fraud in Canada:

380. (1) Every one who, by deceit, falsehood or other fraudulent means, whether or not it is a false pretence within the meaning of this Act, defrauds the public or any person, whether ascertained or not, of any property, money or valuable security or any service,

(a) is guilty of an indictable offence and liable to a term of imprisonment not exceeding fourteen years, where the subject-matter of the offence is a testamentary instrument or the value of the subject-matter of the offence exceeds five thousand dollars; or
(b) is guilty
(i) of an indictable offence and is liable to imprisonment for a term not exceeding two years, or
(ii) of an offence punishable on summary conviction,

where the value of the subject-matter of the offence does not exceed five thousand dollars.[2]

In addition to the penalties outlined above, the court can also issue a prohibition order under s. 380.2 (preventing a person from "seeking, obtaining or continuing any employment, or becoming or being a volunteer in any capacity, that involves having authority over the real property, money or valuable security of another person"). It can also make a restitution order under s. 380.3.[3]

The Canadian courts have held that the offence consists of two distinct elements:

  • A prohibited act of deceit, falsehood or other fraudulent means. In the absence of deceit or falsehood, the courts will look objectively for a "dishonest act"; and
  • The deprivation must be caused by the prohibited act, and deprivation must relate to property, money, valuable security, or any service.[4]

The Supreme Court of Canada has held that deprivation is satisfied on proof of detriment, prejudice or risk of prejudice; it is not essential that there be actual loss.[5] Deprivation of confidential information, in the nature of a trade secret or copyrighted material that has commercial value, has also been held to fall within the scope of the offence.[6]

United States[edit]

US government[edit]

The American government's 2006 Fraud Review concluded that fraud is a significantly under-reported crime, and while various agencies and organizations were attempting to tackle the issue, greater co-operation was needed to achieve a real impact in the public sector. The scale of the problem pointed to the need for a small but high-powered body to bring together the numerous counter-fraud initiatives that existed.

To establish a claim of fraud, most jurisdictions in the United States require that each element be plead with particularity and be proved with clear, cogent, and convincing evidence (very probable evidence). The measure of damages in fraud cases is computed using the "benefit of bargain" rule, which is the difference between the value of the property had it been as represented and its actual value. Special damages may be allowed if shown proximately caused by defendant's fraud and the damage amounts are proved with specificity.

Cost[edit]

The typical organization loses five percent of its annual revenue to fraud, with a median loss of $160,000. Frauds committed by owners and executives were more than nine times as costly as employee fraud. The industries most commonly affected are banking, manufacturing, and government.[7]

Types of fraudulent acts[edit]

A fraudulent "work from home" advertisement.

Fraud can be committed through many media, including mail, wire, phone, and the Internet (computer crime and Internet fraud). International dimensions of the web and ease with which users can hide their location, the difficulty of checking identity and legitimacy online, and the simplicity with which hackers can divert browsers to dishonest sites and steal credit card details have all contributed to the very rapid growth of Internet fraud. In some countries, tax fraud is also prosecuted under false billing or tax forgery.[8] There have also been fraudulent "discoveries", e.g., in science, to gain prestige rather than immediate monetary gain.[citation needed]

Anti-fraud movements[edit]

Beyond laws that aim at prevention of fraud, there are also governmental and non-governmental organizations that aim to fight fraud. Between 1911 and 1933, 47 states adopted the so-called Blue Sky Laws status. These laws were enacted and enforced at the state level and regulated the offering and sale of securities to protect the public from fraud. Though the specific provisions of these laws varied among states, they all required the registration of all securities offerings and sales, as well as of every US stockbroker and brokerage firm.[9] However, these Blue Sky laws were generally found to be ineffective. To increase public trust in the capital markets the President of the United States, Franklin D. Roosevelt, established the U.S. Securities and Exchange Commission (SEC). The main reason for the creation of the SEC was to regulate the stock market and prevent corporate abuses relating to the offering and sale of securities and corporate reporting. The SEC was given the power to license and regulate stock exchanges, the companies whose securities traded on them, and the brokers and dealers who conducted the trading.

Detection[edit]

A fraudulent Manufacturer's Suggested Retail Price on a speaker.

For detection of fraudulent activities on the large scale, massive use of (online) data analysis is required, in particular predictive analytics or forensic analytics. Forensic analytics is the use of electronic data to reconstruct or detect financial fraud. The steps in the process are data collection, data preparation, data analysis, and the preparation of a report and possibly a presentation of the results. Using computer-based analytic methods Nigrini's wider goal is the detection of fraud, errors, anomalies, inefficiencies, and biases which refer to people gravitating to certain dollar amounts to get past internal control thresholds.

The analytic tests usually start with high-level data overview tests to spot highly significant irregularities. In a recent purchasing card application these tests identified a purchasing card transaction for 3,000,000 Costa Rica Colons. This was neither a fraud nor an error, but it was a highly unusual amount for a purchasing card transaction. These high-level tests include tests related to Benford's Law and possibly also those statistics known as descriptive statistics. These high-tests are always followed by more focused tests to look for small samples of highly irregular transactions. The familiar methods of correlation and time-series analysis can also be used to detect fraud and other irregularities. Forensic analytics also includes the use of a fraud risk-scoring model to identify high risk forensic units (customers, employees, locations, insurance claims and so on). Forensic analytics also includes suggested tests to identify financial statement irregularities, but the general rule is that analytic methods alone are not too successful at detecting financial statement fraud.[10]

Notable fraudsters[edit]

Related[edit]

Apart from fraud, there are several related categories of intentional deceptions that may or may not include the elements of personal gain or damage to another individual:

See also[edit]

References[edit]

  1. ^ The Fraud Act 2006 (Commencement) Order 2006 - SI 2006 No. 3200 (C.112) ISBN 0-11-075407-7
  2. ^ Criminal Code, Section 380
  3. ^ Criminal Code, Sections 380.2 - 380.3
  4. ^ Tony Wong. "The Law of Fraud and White Collar Crime in Canada". Blake, Cassels & Graydon LLP. Retrieved 2012-04-22. 
  5. ^ R. v. Olan et al., [1978] 2 S.C.R. 1175. Full text of Supreme Court of Canada decision at LexUM
  6. ^ R. v. Stewart, [1988] 1 S.C.R. 963. Full text of Supreme Court of Canada decision at LexUM
  7. ^ Report to the Nations on Occupational Fraud and Abuse. Association of Certified Fraud Examiners. 2010. Archived from the original on July 7, 2011. 
  8. ^ "Tax Fraud and the Problem of a Constitutionality Acceptable Definition of Religion". BJ Casino. American Criminal Law. Rev., 1987
  9. ^ Blue Sky Laws
  10. ^ Nigrini, Mark (June, 2011). "Forensic Analytics: Methods and Techniques for Forensic Accounting Investigations". Hoboken, NJ: John Wiley & Sons Inc. ISBN 978-0-470-89046-2. 
  11. ^ "Largest Health Care Fraud Case in U.S. History Settled; HCA Investigation Nets Record Total of $1.7 Billion" (Press release), U.S. Department of Justice, June 26, 2003, retrieved April 11, 2011 
  12. ^ "Farberfinancial.com". Farberfinancial.com. Retrieved 2012-02-14. 
  13. ^ Kokenes, Chris (March 19, 2009), "N.Y. lawyer arraigned in alleged $700M fraud", CNNMoney.com, retrieved April 10, 2011
  14. ^ Lugli, Massimo (March 15, 2002), "'Dominio di Melchizedek' Stato Fantasma Sull" ("'Dominion of Melchizedek' Ghost State"), La Republica, Rome Section: p. 5, "una trappola di lusso per le vittime di una delle piu diaboliche truffe internazionali mai escogitate negli ultimo anni" ("a trap of luxury for the victims of one of the most diabolical international scams ever devised in recent years")
  15. ^ Knight, James (February 17, 2000), "Cyber Nations with Real Repercussions", Asia Times Online
  16. ^ Lozano, Juan A. (17 October 2006). "Judge vacates conviction of Ken Lay". CBS News. Associated Press. [dead link]
  17. ^ Michael O’Keeffe (2013-10-10). "Bill Mastro admits cutting T206 Honus Wagner card, pleads guilty to mail fraud". NY Daily News. Retrieved 2013-10-29. 
  18. ^ Nicole Muehlhausen, BIO: Tom Petters, KSTP.com, September 24, 2008. Retrieved October 8, 2008.
  19. ^ Tom Petters Resigns As Petters Group CEO[dead link], WCCO.com, September 29, 2008. Retrieved October 8, 2008.
  20. ^ Hughes, Art (December 2, 2009). "UPDATE 2-Tom Petters found guilty of Ponzi scheme fraud". Reuters (Thomson Reuters). Retrieved December 10, 2009. 

Further reading[edit]

External links[edit]