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The Law Of Fraud

The Law Of Fraud

You have probably never heard of Hegestratos.  It appears he was a simple sea merchant, living around 300BC in Greece.  The only reason history records him is he has the dubious honour of having committed the first recorded incident of financial fraud.

According to historical records, Hegestratos took out a large insurance policy known as bottomry.  Bottomry (the name refers to the ship's bottom or keel), is a maritime transaction, whereby the owner of a ship borrows money, using the vessel as security.  If the ship sinks during a planned voyage, the creditor will lose out on the loan because the guaranteed security either no longer exists or exists in a damaged way.  However, if the ship returns safely, the lender will get their money back, plus interest.

Our friend Hegestratos cooked up a dastardly plan.  He planned to sell the cargo, sink his boat and keep the loan.  However, he was caught in the act of sabotage and was chased off the ship to his death by his crew.

We all have a conceptual idea of what fraud is.  It is defined as the use of trickery is used to gain a dishonest advantage, which is often financial, over another person or a business.

The law that governs fraud

Statute

The main pieces of legislation that cover fraud are:

  • The Fraud Act 2006
  • The Theft Act 1968

The Fraud Act contains three main fraud offences:

  • Fraud by false representation (section 2).  A representation may be express or implied. It is false if it is untrue or misleading and the person making it knows that this is, or might be, the case.
  • Fraud by failing to disclose information where there is a legal duty to disclose it (section 3).
  • Fraud by abuse of position (section 4). Abuse of position applies where a person occupies a position in which he is expected to safeguard, or not to act against, the financial interests of another person.  A person may abuse that position through an act or omission.

What is common to all these offences is that conviction rests on the Prosecution or Claimant proving that the Defendant acted dishonestly with the intention of gaining an advantage for themselves (or another) or causing loss to the victim.

The Theft Act contains the offences of:

  • False accounting (section 17).
  • False statements by company directors (section 19).

Common law

It is an offence under common law to conspire with one or more people to deprive a person of something which is legally theirs or they are entitled to.  The conspiracy to defraud offence can occur even if the intended fraud is never actually committed.  This makes it a popular choice for prosecutors in situations where there is little evidence to show that fraud actually 

Who investigates and prosecutes criminal fraud in the UK?

Simple cases of fraud are handled by the police or, in cases of tax fraud, by Her Majesties Revenue & Customs (HMRC).

Matters involving serious fraud are managed by the Serious Fraud Office (SFO).  In addition, the Financial Conduct Authority (FCA) has statutory responsibility for reducing financial crime, including fraud.

Police powers are governed by the Police and Criminal Evidence Act 1984 (PACE) and include powers of arrest, detention, search and seizure, and surveillance. The SFO has additional powers to order the handing over of documents or information by a company or individual.

The SFO can investigate and prosecute cases.  Fraud matters investigated by the police or HMRC are prosecuted by the Crown Prosecution Service (CPS).

What are the penalties for fraud?

The Sentencing Guidelines Council has divided fraud into five definitive types – confidence, banking, insurance and credit, and benefit fraud.  

Confidence fraud involves the perpetrator gaining the trust of the victim in order to defraud them, often through scams.  If you are convicted under the Fraud Act, the maximum penalty is a ten-year prison sentence.  If your offence falls under the Theft Act for false accounting, you could face up to seven years’ imprisonment.  Penalties of this length are rare, and usually involve large-scale fraud to the value of £500,000 plus.  If you have been convicted of a one-off incident of fraud that did not involve a vulnerable victim (such as an elderly or disabled person), you may be handed a community-based sentence or perhaps a six-month custodial sentence and/or a fine.

If you are convicted of banking, credit, and /or insurance fraud, the maximum sentence is 10 years’ imprisonment.  Long-planned operations with a financial gain of £500,000 plus is likely to see you face a prison sentence of between four and seven years.  For small-scale offences, the usual sentence is a community order and/or a fine.

Fraud is a serious crime and a successful defence requires an experienced legal team that understands not only your business but the market sector you operate in.  Investing in a specialist team that can support your in-house council can significantly improve your chances of limiting reputational damage and being acquitted of all charges.  Should you be convicted, a robust legal team can put together persuasive evidence to mitigate the sentence imposed.

 

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