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Preamble

Fraud can damage any business.

Usually when it least expects it.

Often by the person or in a way you least expect.

This Article makes no attempt to compete with the many books and more detailed writings on this subject.

However, I have cited cases all of which can be found and read on the internet for those wishing to read more.

What is Fraud?

Most of us when little understand that theft or stealing is wrong.  It is of course the eighth of the ten commandments.

Fraud is its more intelligent and cancerous sibling.

Fraud is infinite in variety.  Sometimes it is godacious and unblushing, sometimes it pays a sort of homage to virtue, and then it is modest and retiring; it would be a travesty itself if it could only afford it”

[Lord MacNaghton in [Reddaway v. Banham [1896] A.C. 99 at 221] or

As a matter of law as in life fraud is wide-ranging and always subject to new ingenuity”

[Lucy Walker and Ross Fenton 2012].

It can appear (a) as a crime and/or (b) as a civil wrong although usually in civil proceedings it carries a number of different names (see below).

In law (a) under the “common law” or (b) under statute.  In criminal cases that means the Fraud Act 2006.  Although apart from the Misrepresentation Act of 1967, and section 57Criminal Justice & Courts Act 2015 it is less easy to spot in civil proceedings.

Whilst it may be devised or thought up by evil men plotting in the backroom of a dark city pub, in fact almost all the cases indicate very different, often far more sophisticated breeding grounds.

Criminal Fraud

The purpose of this article is not to dwell on criminal proceedings.  However, the Fraud Act of 2006 is perhaps a useful way of understanding what fraud can be and how it can hit.  Particularly as so many civil cases start with a compliant to the Police leading perhaps to a criminal prosecution and conviction.

It is still possible for people to be prosecuted for fraud at common law.  However, increasingly it is the Fraud Act 2006 that will be used.

Section (1) of that Act having explained in short what fraud is then sets out to explain how under the Act it can be committed in one of three different ways:

  1. False Representation under Section 2
  2. A failure to disclose information under Section 3
  3. Fraud committed by abusing your position under Section 4

Each of these clauses have separate particles required to create the relevant offence.

Within them and using the Lawyers Latin we have:

  1. The actus reus or factual requirements of proof needed and
  2. The mens rea or guilty mind that needs to be proved.

All three require proof of dishonesty.  The leading case decided by the Supreme Court involved what was regarded as cheating in a casino by using a clever arithmetic calculator in Ivey v. Genting Casino’s [2017] UKSC 6.

Returning to the three different ways under the Act to committing a fraud:

  1. Section 2 False Representation

To be guilty there needs to be proved four particles:

  1. That the accused made a false representation which for this offence is the actus reus.  That was explained in Section 2 (2) (2) (5).  That representation must be false and untrue or misleading.  Under Section 2 (3) representation can be of fact, law or a person’s state of mind and under Section 2 (4) it can be express or implied
  2. The accused needed to know what Section 2 (2) (b) that the representation is or might be untrue or misleading (the mens rea required).  See R v. Augunas [2013] EWCA Crim 2046
  3. The accused must intend making the false representation to make a gain for himself or another or to cause loss to another.   As to expose another the very risk of loss (set out in Section 5)
  4. In so doing the accused must have been acting dishonestly.
  1. Section 3 Failing to Disclose Information

This is in effect the opposite of Section 2.  Sometimes a failure to disclose can be as damaging as representing an open lie.  In this there are three plots:

  1. The accused failing to disclose to another person information which he had a legal duty to disclose
  2. A failing to disclose that the accused intended to make a gain for himself or another or at least cause loss to another and expose that other to loss (the mens rea)
  3. The accused in so doing acted dishonestly
  1. Section 4 Award by Abuse of Position

This is inevitably the most common method of undertaking business fraud. Requiring  four particles:

  1. As the accused must occupy a position in which he is expected to safeguard and not act against the financial interest of another person or his Company (the actus reas)
  2. By doing what he did the accused abused his position which can include by way of in-action (Section 4 (2))
  3. The accused intended by abusing that position to make a gain either for himself or another or cause loss (the mens rea)
  4. The accused was acting dishonestly (mens rea)

The cases below illustrate some of the infinite varieties of fraud, see:

Ivey v. Genting Casino’s [2017] UKSC 67 (rather clever cheating whilst betting in a casino)

R v. Ahmad & Others and R v. Fields 2014 UKSC 36 (a clever “carousel” fraud)

R v. Waya 2012 UKSC 51 (not telling the whole truth on a mortgage application form)

R v. Peter John Sale [2013] EWCA Crim 1306 (gifts made by an employee in the hope of gaining business contracts) and

R v. Harvey [2015] UKSC 73 (using stolen goods but only as part in what otherwise was a legal activity)

In some cases, the accused would not have started believing his/her activity was illegal justifying in my opening the description “cancerous”.

Civil Fraud

English law does not recognise a single cause of action known as civil fraud.  Instead, what may be described as “fraud actions” cover a multiple of claims operating at common law and in equity”.

Several causes within which fraud by another name is likely to be alleged are:

  1. Deceit.  As alleged in Derry v. Peek [1889] UKHL 1 (the false representation or fraudulent misrepresentation or tort of deceit alleged in the Plymouth tram case)
  2. Misrepresentation whether at common law (Derry v Peek) or under the Misrepresentation Act 1967
  3. Breach of Contract
  4. Breach of Trust or Fiduciary Duty.   What it means by fiduciary duty is set out quite carefully in Bristol & West Building Society v. Mothew 1996 4 AER 698 at p711 to p712.  As an example, see Osteopathic Education and Research Limited v. Purfleet Office Systems Limited [2010] EWHC 1801 (QB).  In which the Defendant persuaded the Claimant to enter into Leases with a third party finance company.  It was the Leases which caused the loss.
  5. Bribery, though in personal injury cases there is more recently dishonesty under,
  6. S 57 Criminal Justice and Courts Act 2015

What is a Tort?

A tort in commonwealth systems is simply a civil wrong.  Usually with a civil fraud this requires:

  1. A Defendant to make a Statement of Fact
  2. It is false
  3. Does he or she knows it to be dishonest
  4. Intending to rely upon that dishonest Statement (see Mead v. Babington [2007] EWCA Civ 518.

And the Test of Dishonesty

It must be established that the Defendants conduct was dishonest by the ordinary standards of responsible and honest people and that he himself realised that by those standards his conduct was dishonest (Lord Hutton in Twinsectra Ltd v. Yardley [2002] AC 164 see also Barlow Clowes International Ltd v. Eurotrust [2006] 1 WLR 1476 and more recently Starglade Properties v. Roland [2010] EWCA Civ 1314).

Contributory Negligence

Normally with civil cases it is possible to reduce a claim by taking into account the Claimants contributory negligence.  In civil fraud claims it is rarely going to be allowed, see Alliance & Leicester Building Society v. Edgestop Ltd [1993] 1 WLR 1482.  Nor if fraud is established in a civil case will usually a Defendant be able to admit in mitigation that there was no intention to cheat or injure the person to whom the false statement was made (Bradford Third Benefit BS v. Borders [1941] 2 AER 205).

Suing for the Wrong

Usually when fraud is found the instant act is for the business to call the Police.  If there is fraud a system of criminal prosecution and conviction may follow.

Alongside that may well be an application under the Proceeds of Crime Act firstly to freeze the accused’s assets, then to seek a judgment under the Proceeds of Crime Act itself. There is a separate article on POCA on this site.

In many cases if the accused is convicted then the conviction may provide powerful evidence to the company in its attempt to seek to recover money or damages for the fraud committed to it.

Such civil proceedings as they allege fraud will usually be issued in the High Court the purpose of which is not merely to punish the accused further but to recover for the loss caused if that is possible.

Sounds Familiar

All fraud cases will be extremely upsetting for those concerned.  In fact, both Claimants and Defendants. You must realise that not everyone accused will be guilty.  In criminal cases some may be prosecuted but found not guilty or the case struck out before a trial. This happened in R v. Evans & Others [2015] EWCH 263 (the Welsh mining case).  A civil case will be just as punishing. For many of those accused they will find their assets arrested or frozen until the conclusion of the case against them. In defending themselves they will need  expert defence and with arrested assets a need to claim legal aid.  The Legal Aid Board itself has a special unit to deal with such defences. A similar restrain system can apply in the civil courts (but explaining will require another article).

The cases above and their interpretation is mine but if you want help please contact me. Like fraud itself each set of facts might produce different points and need distinct application of the relevant law.

David Hassall LLM MSc

[email protected]

6 May 2020

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