Fraud

Terminology

Fraud can be defined as either a civil wrong or a criminal act. For civil fraud, a government agency or person or entity harmed by fraud may bring litigation to stop the fraud, seek monetary damages, or both. For criminal fraud, a person may be prosecuted for the fraud and potentially face fines, incarceration, or both.

Civil law

In common law jurisdictions, as a civil wrong, fraud is considered a tort. While the precise definitions and requirements of proof vary among jurisdictions, the requisite elements of fraud as a tort generally are the intentional misrepresentation or concealment of an important fact upon which the victim is meant to rely, and in fact does rely, to the detriment of the victim. Proving fraud in a court of law is often said to be difficult as the intention to defraud is the key element in question. As such, proving fraud comes with a "greater evidentiary burden than other civil claims". This difficulty is exacerbated by the fact that some jurisdictions require the victim to prove fraud by clear and convincing evidence.

In cases of a fraudulently induced contract, fraud may serve as a legal defence in a civil action for breach of contract or specific performance of a contract. Similarly, fraud may serve as a basis for a court to invoke its equitable jurisdiction. The remedies for fraud may include rescission (i.e., reversal) of a fraudulently obtained agreement or transaction, the recovery of a monetary award to compensate for the harm caused, punitive damages to punish or deter the misconduct, and possibly others.

Criminal law

In common law jurisdictions, as a criminal offence, fraud takes many different forms, some general (e.g., theft by false pretense) and some specific to particular categories of victims or misconduct (e.g., bank fraud, insurance fraud, forgery). The elements of fraud as a crime similarly vary. The requisite elements of perhaps the most general form of criminal fraud, theft by false pretense, are the intentional deception of a victim by false representation or pretense with the intent of persuading the victim to part with property and with the victim parting with property in reliance on the representation or pretense and with the perpetrator intending to keep the property from the victim.

Types of fraud

The falsification of documents, known as forgery, and counterfeiting are types of fraud involved in physical duplication or fabrication. The "theft" of one's personal information or identity, like finding another's social security number and then using it as identification, is a type of fraud. Fraud can be committed through and across many media including mail, wire, phone, and the Internet (computer crime and Internet fraud).

Given the international nature of the web and the ease with which users can hide their location, obstacles to checking identity and legitimacy online, and the variety of hacker techniques available to gain access to PII 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. There have also been fraudulent "discoveries", e.g., science, where the appetite is for prestige rather than immediate monetary gain. A hoax is a distinct concept that involves deliberate deception without the intention of gain or of materially damaging or depriving a victim.

Internal fraud

Internal fraud, also known as "insider fraud", is fraud committed or attempted by someone within an organization such as an employee.

Commodities fraud

The illegal act of obtaining (or the attempt to obtain) a certain amount of currency in accordance with a contract that promises the later exchange of equated assets, which ultimately never arrive, is a type of fraud, known as commodities fraud. Alternatively, the term can relate to the failure of registering in an exchange, the act of deliberately providing falsified information to clients, the action of executing transactions with the sole purpose of making a profit for the payee, and the theft of client funds.

Detection

The detection of fraudulent activities on a large scale is possible with the harvesting of massive amounts of financial data paired with predictive analytics or forensic analytics, the use of electronic data to reconstruct or detect financial fraud. Using computer-based analytic methods in particular allows for the surfacing of errors, anomalies, inefficiencies, irregularities, and biases which often refer to fraudsters gravitating to certain dollar amounts to get past internal control thresholds. These high-level tests include tests related to Benford's Law and possibly also those statistics known as descriptive statistics. High-level 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.

Cost

Participants of a 2010 survey by the Association of Certified Fraud Examiners estimated that the typical organization loses five per cent of its annual revenue to fraud, with a median loss of $160,000. Fraud committed by owners and executives was more than nine times as costly as employee fraud. The industries most commonly affected are banking, manufacturing, and government.

By region

Asia

China

In China, according to the Criminal Law of the People's Republic of China, the Crime of Fraud () refers to the "criminal act of deceiving and obtaining public or private property". According to Article 266 of the Criminal Law:

1. Those who commit fraud involving a "relatively large amount" of public or private property shall be sentenced to fixed-term imprisonment of not more than three years, criminal detention, or injunction control with community correction, and may additionally or solely be fined.
2. If the amount involved is "large" or there are other serious circumstances, the offender shall be sentenced to fixed-term imprisonment of not less than three years but not more than ten years and shall also be fined.
3. If the amount involved is "particularly large" or there are other particularly serious circumstances, the offender shall be sentenced to fixed-term imprisonment of over ten years or life imprisonment and shall also be fined or have their property confiscated.

According to the "Interpretation on Several Issues Concerning the Specific Application of the Law in Handling Criminal Cases of Fraud" () issued by the Supreme People's Court and the Supreme People's Procuratorate in 2011, for cases of fraud involving public or private property with a value ranging from 3,000 yuan to 30,000 yuan, from 30,000 yuan to 500,000 yuan, and over 500,000 yuan, they should be respectively deemed as "relatively large amount", "large amount", and "particularly large amount" as stipulated in Article 266 of the Criminal Law.

India

In India, the criminal laws are enshrined in the Indian Penal Code, supplemented by the Criminal Procedure Code and Indian Evidence Act.

Europe

United Kingdom

Since 2007, fraud in England and Wales and Northern Ireland has been covered by the Fraud Act 2006. The Act gives a statutory definition of the criminal offence of fraud, defining it in three classes: fraud by false representation, failure to disclose information, and by abuse of position. It provides that a person found guilty of fraud is liable to a fine or imprisonment for up to six months on summary conviction, 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.

As of 2025, the UK has a number of government agencies and services for the detection, prevention and management of fraud, working with a variety of private and public sector bodies to share information and formulate policy. These include the primary enforcement authorities: the National Crime Agency, HM Revenue and Customs, the Financial Conduct Authority, the Serious Fraud Office and the Crown Prosecution Service, together with agencies such as the UK Financial Intelligence Unit, City of London Police, the National Fraud Intelligence Bureau, and the National Cyber Crime Unit. The National Economic Crime Centre exists to coordinate the UK’s response to economic crime overall.

Statistics

Scotland

In Scots law, fraud is covered under the common law and a number of statutory offences. The main fraud offences are common law fraud, uttering, embezzlement, and statutory fraud. The Fraud Act 2006 does not apply in Scotland.

North America

Canada

Section 380(1) of the Criminal Code provides the general definition of 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.|}}

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. 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.

The Supreme Court of Canada has held that deprivation is satisfied on proof of detriment, prejudice or risk of prejudice; there does not have to be actual loss. 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.

United States

Criminal fraud

The proof requirements for criminal fraud charges in the United States are essentially the same as the requirements for other crimes: guilt must be proved beyond a reasonable doubt. Throughout the United States fraud charges can be misdemeanours or felonies depending on the amount of loss involved. High-value fraud can also trigger additional penalties. For example, in California, losses of $500,000 or more will result in an extra two, three, or five years in prison in addition to the regular penalty for the fraud. The U.S. 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 cooperation 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.

Civil fraud

Although elements may vary by jurisdiction and the specific allegations made by a plaintiff who files a lawsuit that alleged fraud, typical elements of a fraud case are that:

1. Somebody misrepresents a material fact in order to obtain action or forbearance by another person
2. The other person relies upon the misrepresentation
3. The other person suffers injury as a result of the act or forbearance taken in reliance upon the misrepresentation.

To establish a civil claim of fraud, most jurisdictions in the United States require that each element of a fraud claim be pleaded with particularity and be proved by a preponderance of the evidence, meaning that it is more likely than not that the fraud occurred. Some jurisdictions impose a higher evidentiary standard, such as Washington State's requirement that the elements of fraud be proved with clear, cogent, and convincing evidence (very probable evidence), or Pennsylvania's requirement that common law fraud be proved by clear and convincing evidence.

The measure of damages in fraud cases is normally computed using one of two rules:

• The "benefit of bargain" rule, which allows for recovery of damages in the amount of the difference between the value of the property had it been as represented and its actual value;
• Out-of-pocket loss, which allows for the recovery of damages in the amount of the difference between the value of what was given and the value of what was received. Special damages may be allowed if shown to have been proximately caused by the defendant's fraud and the damage amounts are proved with specificity. Some jurisdictions may permit a plaintiff in a fraud case to seek punitive or exemplary damages.

Anti-fraud provisioning

Beyond legislation directed at preventing or punishing fraud, some governmental and non-governmental organizations engage in anti-fraud efforts. 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 U.S. stockbroker and brokerage firm; however, these Blue Sky laws were generally found to be ineffective. To increase public trust in the capital markets, 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.

Statistics

Rate of fraud per capita for individual countries as reported by United Nations Office on Drugs and Crime is shown below for the last available year. Definitions of fraud and fraction of unreported fraud might differ for each country.

References

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