“NO MAN ought to be able to take advantage of his own false statements.”
That opinion, given in the case of Redgrave v Hurd 1881 involving the reliance on a misrepresentation as an inducement to buy a solicitor’s practice, was followed shortly thereafter in 1889 in the House of Lords in Derry v Peek, which defined fraud.
In Derry v Peek, the term ‘fraud’ was clearly defined and has been used as the leading case in deceit cases where misrepresentation was made to the victim.
Lord Herschell remarked that “...there must be proof of fraud, and nothing by CLIVE HASLOCK FCA FCILA, of Haslocks Forensic Accountants and Claims Consultants short of that will suffice.
Fraud is proven when it is shown that a false representation has been made: i) knowingly, or ii) without belief in its truth, or iii) recklessly, careless whether it be true or false. “To prevent a false statement being fraudulent, there must be an honest belief in its truth...one who knowingly alleges that which is false obviously has no such belief.”
The burden of proof was explored in Thomas Witter Ltd v TBP Industries Ltd 1996, whereby recklessness was deemed to be evidence of fraud – not proof – unless it amounts to a flagrant disregard for the truth and so is also dishonest.
The statutes The Fraud Act 2006 came into force on 15 January 2007, based upon the recommendations of the Law Commission report Fraud published in 2002. The Act repealed all the deception offences of the Theft Act 1968 and 1978, including obtaining property and services by deception, obtaining a money transfer by deception, obtaining a pecuniary advantage by deception, evasion of liability by deception and procuring the execution of a valuable security by deception and suppression, etc, of documents.
In the place of the repealed offences, the Act clarifies a single offence of fraud, which can be committed in three ways.
They are by:
• False representation
• Failure to disclose information where there is a legal duty to do so
• Abuse of position.
The latter method applies where the defendant occupies a position where he was expected to safeguard the financial interests of another person, immaterially whether or not he is successful in his enterprises and whether or not any gain or loss is actually made. Examples include the cloning of software products by an employee for private enterprise or an employee who fails to take up the chance of a crucial contract in order that an associate or rival take it up instead.
The Fraud Act also creates new offences of possession and making or supplying articles for use in frauds, the offence of fraudulent trading by sole traders and the offence of obtaining services dishonestly, among other minor provisions.
The concept of fraud as previously determined by case law has now fundamentally changed.
Under the Fraud Act, in determining whether fraud has been committed, no gain or loss needs actually to have been made. The offence is entirely offender focused, complete as soon as the defendant makes a false representation, provided it is made with the necessary dishonest intent.
A false representation may be express or implied, by words or by conduct (a nod of the head, an email or posting on a website, or by omission) (to a machine (eg bank ATM)), regardless of whether the representation is believed or has any affect whatsoever on the recipient.
The Fraud Advisory Panel The Government estimates that losses from fraud amounted to some £14bn in 2005; how reliable this is, is anybody’s guess.
The Fraud Advisory Panel was formed in 1998 through a public-spirited initiative by the Institute of Chartered Accountants in England and Wales, with a view to promoting the awareness and combat of fraud, specifically to: • Originate proposals to reform the law and public policy on fraud. • Develop proposals to enhance the investigation and prosecution of fraud. • Advise business as a whole on fraud prevention, detection and reporting. • Assist in improving fraud-related education and training in business and the professions, and among the general public. • Establish a more accurate picture of the extent, causes and nature of fraud.
I know from my own experience in fraud investigation there are well-known corporations that demonstrate an extraordinary naivety to the application of common sense checks and balances, often brought about by the imposition of short-term savings in expenditure on overheads.
However, following Enron the imposition of the hard-hitting Sarbanes Oxley rules in the USA and their worldwide subsidiaries has led to a marked improvement in awareness and controls for those companies.
Getting priorities right Resources are strictly limited; it is not uncommon for police forces to have little or no capability to deal with even moderate value, £100,000-size allegations. The concept of a national, co-ordinated force has not found popular support at present; however, I am told that the City of London Police is promoting the formation of a National Fraud Centre to be based in the City of London.
It is difficult to reconcile the serious lack of funding available to the crime detection agencies in regard to moderate losses and the apparent ability of the Crown Prosecution Service to pursue small issues and/or lost causes.
I give below an example of a case brought under Section 17(1)(a) of the Theft Act 1968 prior to the advent of the Fraud Act 2006.
I received a somewhat desperate call from a solicitor saying that he was unable to find an expert willing to defend his legally-aided client on a false accounting charge.
He could not understand why the charges had been brought because his client had never been a cheque signatory and, as best he could tell, no one had lost anything. To cap it all, the figure was extremely small: £3,702 of alleged overstated expenditure. I concluded it was evident that in the interest of justice a defence must be prepared.
The Legal Services Commission pays very low rates which are uneconomic for a Citybased practice such as mine, but even so my quote for the defence exceeded the amount of the allegation. My enquiries determined that:
• The accused was an experienced manager and was contracted on a selfemployed basis (ie as and when time required) to manage a new community help project funded by the EU through a UK local council.
• A budget had been approved by the funder at £50,000 over three years.
• Some £12,000 had been drawn down and paid into a designated bank account. • The bank mandate stipulated two (out of four) signatures on every cheque (they were all senior council employees).
• The accused was not a cheque signatory.
• The accounting requirements of the local authority were that a year-end return should be made showing income and expenditure; there was no requirement of a balance sheet (ie of assets and liabilities). No accounting rules or principles in regard thereto were specified either by the council or the funder.
• The alleged overcharging of £3,702 related to three amounts. None of the amounts had been paid: they were accruals only, recorded as a debit to the income and expenditure account.
• Two of the accruals were supported by proforma invoices for delivery of equipment after the year-end in respect of items in the funders’ approved budget. The third item was a pure accrual based on the approved budget, but no more.
• None of the accruals had actually been paid and therefore the funds remained in the designated bank account.
• The accused had not benefited and could not do so: he was not even a cheque signatory.
• No one had lost; the funds remained in the designated bank account up to the date of the trial.
Having established that nobody had benefited and nobody had lost, it was also particularly interesting to discover that the council manager in charge of the EU funding had written a letter prior to the alleged fraudulent year-end return saying they had EU funds which had not yet been taken up and offering them to all other projects – QED, an invitation to make accruals.
Pretrial, upon receipt of my report, the defence invited the CPS to drop the charges and disclosed my full report. The trial went ahead!
The ‘expert’ accountant for the prosecution (an employee of the council) was a total embarrassment to the prosecution. Prosecution counsel requested leave of the judge to replace after lunch with a witness who had knowledge of accounting. The judge heard the whole of the prosecution case, then into the next day he stopped the trial and invited the jury to find ‘not guilty’ on the grounds that the experienced defence expert was never going to agree with the prosecution and the matter was complex and not capable of resolution by the jury.
The accused was legally a free man with no criminal record, but regrettably in the real world will have a tarnish on any career prospects totally unfounded in the truth; and all in respect of a mere £3,702 – a stark contrast to the inability of investigatory agencies to address far more serious issues and identified fraudsters going without trial.