Sean Elson spells out the pros and cons of new UK fraud legislation.
The rise of the internet, on-line shopping and banking has brought an increasing number of opportunities for fraud. In recognition of this threat the UK government has introduced a Fraud Bill, which is currently undergoing parliamentary scrutiny. It aims to provide prosecutors with a modern legislative framework to deal with increasingly ingenious methods of fraud, which often involve the use of sophisticated technology.
How will the law change?
The Bill proposes to replace a number of existing offences that are frequently used to prosecute fraud with a single offence of fraud. The offences that will be replaced can be summarised as those involving obtaining by something deception - whether money, property, or a pecuniary advantage.
The new offence of fraud can be committed in any of three ways.
1. False representation
This type of fraud consists of dishonestly making an implied or explicit representation (including by conduct as well as by words) that is untrue or misleading, where the person making it knows that it is, or might be, false or misleading.
This would apply to any type of false representation made for gain, or to cause loss, or risk of loss, to another. At a corporate level it would include not only making deliberately false or misleading statements to others in a commercial context, but also the overstating of reserves, or deliberately false or misleading statements in a prospectus or other statement to investors. This creates substantial potential for criminal liability, and, although any misrepresentation must be dishonest for an offence to be committed, organisations will need to be clear as to the nature of statements made.
An offence of this nature would also be committed by employees who created false references or massaged their CVs to obtain employment.
Framing the proposed legislation in this way aims to ensure that those who use the internet to perpetrate fraud where the information was given to a machine, for example through phishing, will be covered by the definition of false representation.
2. Failing to disclose information
A fraud will be committed in this way where a person fails to disclose information to another in circumstances where there is a legal duty to disclose and where he or she intends to make a gain or cause a loss, or expose another to a risk of loss.
This has the potential to be interpreted very widely, especially in terms of whether a legal duty to disclose exists. It is intended that the definition of legal duty should be given a wide meaning and could arise either because of a statutory, contractual or fiduciary duty, or simply where there is a particular practice or custom in a trade or industry.
A straightforward example of such an offence would be if insurance cover was obtained without disclosing relevant material as required. It would also cover a situation where an employee had failed to disclose previous convictions when applying for a position. Failing to include these details on an application form might also amount to a false representation, depending on the framing of the form.
In a corporate context, an offence could be committed where a party to a contract failed to disclose information that would allow a claim for damages or for a contract to be rescinded. An example could be where a party was no longer able to fulfil a contract due to the loss of assets or key personnel and that fact is dishonestly withheld from the other party to try and maintain the position.
The offence of fraud by a failure to disclose information would clearly apply where a listed company deliberately withheld market-sensitive information with the intention of ensuring that the share price was maintained, or for securing new sources of capital or borrowings.
3. Abuse of position
The commission of a fraud by an abuse of a person's position will apply where a person occupies a position that means he is expected to protect the financial position of another, or not act against it
The introduction of the concept of abusing a privileged position for the purpose of fraud has a potentially wide application. The stealing of money from an employer could be still be dealt with by the law of theft as well as under this new offence. Other examples of conduct that could be dealt with by this legislation include:
- Procurement offences - these include the use of illegal, hidden payments to staff to secure contracts, or the purchasing of inferior products at the price of more expensive ones with the difference being retained by the employee
- The use of company funds by directors or senior management for personal use
- Shadow working, where a member of staff might set up a business in direct competition, unknown to the employer, and divert potential customers to the parallel business
- Passing on confidential information - this could be for profit, or through malice to cause harm to the employer. The intention is that where a person (including a company) is exposed to the risk of a loss this will be sufficient for an offence to be committed if it is done dishonestly.
The fraud offence will be punishable with a maximum of 10 years imprisonment, which is consistent with the punishment available for the current offences. A new offence will also be created for obtaining services by deception, punishable by a maximum of five years imprisonment.
What will not change?
A number of offences that are currently used to prosecute fraud will remain, and no doubt prosecuting authorities will continue to use them where appropriate. These include theft, corruption, false accounting, forgery and counterfeiting.
The powers granted to courts to seize and confiscate assets of those convicted and to compensate victims for their loss remain in place and are outside the scope of this Bill
Business should be aware that acts of market abuse that constitute the cartel offence within the Enterprise Act 2002 remain unaffected by the Bill as will issues of money laundering and insider trading.
Those trading abroad should be aware that extradition of individuals to certain countries has been streamlined by the introduction of the European arrest warrant and the altered extradition arrangements between the UK and the US.
What will be the impact?
The redefinition of fraud should increase the chances of obtaining a conviction, especially in complex cases, although the great majority of those currently charged with fraud-related offences are already convicted or plead guilty.
The new offences should also prevent difficulties arising in finding the right offence for a sophisticated or technical fraud and remove opportunities for defendants to rely on loopholes in outdated legislation.
A practical example might be that a company sends its account manager overseas to negotiate an order with a major foreign supplier, who agrees two prices for the materials. The highest price appears on the paperwork and results in the money for the order being transferred from the company in the UK to the supplier's bank in Dubai. The second, lower price has been secretly negotiated by the account manager and supplier, with each of them personally benefiting from a share in the difference between the two. The account manager's cut is then transferred electronically to an account in the British Virgin Islands.
The use of the proposed legislation in these circumstances would make any decision to prosecution much more straightforward. There would no longer be a problem as to whether a case could be heard in the UK, and rather than have to consider a number of different potential offences involving corruption, false accounting and electronic money transfers, the focus would be on an offence of fraud by virtue of an abuse of position or false representation.
Greater clarity in the law could result in an increase in the number of those charged with an offence - this is certainly the intention of the Government. However, although the proposed legislation will make it easier to prosecute and secure convictions, this does not mean that individuals or organisations that are the victims of fraud can be guaranteed that their case will result in prosecution. Serious fraud investigations are complex, often last several years and can cost millions of pounds. This Bill does little to remove the need to secure vital complex evidence. The material needed to obtain a conviction in a major fraud is often contained in millions of documents and can involve the interviewing of hundreds of witnesses.
The resources of investigating authorities are limited. Authorities will continue to prioritise their investigations, and a more aggressive pursuit is unlikely. However, the Fraud Bill may lead courts to place a greater emphasis on the importance of dealing with white collar crime and to look again at the level of penalties being imposed. Historically, penalties for those convicted of major fraud have been considered low, especially when compared with sentences seen in US courts.
The impact on business
Theft and fraud by employees have always been relatively straightforward to prove where there has been sufficient evidence to prosecute, but the new legislation will not alter the need for prosecutors to secure sufficient evidence to prove a case 'beyond reasonable doubt'.
There is greater benefit in the creation of a defined offence of fraud by the abuse of position, which will be helpful in a purchasing or procurement situation. The clarification of the law to deal with fraud by the use of computer and IT systems through defining the fraud offence by reference to false representation is also to be welcomed.
If a business wishes to involve the investigating authorities after the discovery of an internal fraud, an early appreciation of the issues and the preservation of potential evidence could help in bringing about a successful outcome. Care must be taken not to do anything that might prejudice a future investigation by the police or other agency. Electronic material can be inadvertently destroyed and the cross referencing of information between potential witnesses can lead to allegations that evidence has become tainted in some way.
If in doubt, always seek professional advice.
- Sean Elson is senior associate, dispute resolution and litigation group, Pinsent Masons, E-mail: firstname.lastname@example.org