|
|
|
|
|
The Fraud Act 2006 came fully into force on 15 January 2007. It affects individuals and companies alike, and is part of a wider initiative to combat increasingly widespread and sophisticated ways of committing fraud. This article summarises the new Act and advises companies on how to guard against fraud. |
|
Fraud seems to be accepted as a hazard of modern life. We try to protect our companies’ and our own information against identity thieves and keep track of passwords and PIN numbers, but fraudsters and thieves move fast, inventing ways around each new safeguard. The law has had to adapt to meet these shifting threats, and much has been done in recent years to bring it up to date. For example, the Competition Act 1998, Enterprise Act 2002 and Proceeds of Crime Act 2002 have all helped to modernise this field, particularly in holding individuals involved in illegal business practices accountable. Following extensive consultation, the Law Commission published its report into fraud in 2002, giving rise to the Fraud Act 2006. The new Act simplifies fraud offences, while giving them a broader application so that they can keep up with new technologies. More new legislation is on the cards: the Serious Crime Bill, introduced into the Lords in January, aims to improve law enforcement agencies’ ability to tackle fraud and other serious organised crime; and the controversial Fraud (Trials Without a Jury) Bill, brought from the Commons to the Lords last month, proposes to remove the requirement for juries at complex fraud trials to address concerns about the cost and length of such trials and the ability of a lay jury to follow them. Background The law tackles fraud in a number of ways. On the civil law side, the common law offers remedies in actions for the tort of deceit and fraudulent misrepresentation, while statute provides for numerous remedies and penalties for fraudulent behaviour. For example, insolvency law imposes liability on directors and others involved in running a company for fraudulent trading (¶7443+), and enables insolvency practitioners to avoid the effects of transactions which have defrauded a company’s creditors (¶7826+). In terms of the criminal law, fraud has been dealt with in a piecemeal fashion with offences being created as and when the need arose. As a result, different types of fraud were dealt with in the context of deception, theft, defrauding creditors (¶2577) and cheating the revenue, as well as other more minor offences (e.g. fraudulently dealing with the company’s property or records prior to liquidation, ¶7464+). Anomalously, there is a common law offence of conspiracy to defraud, but no principal offence of fraud. The Law Commission’s report into fraud recommended that this conspiracy offence should be abolished. However, the Government decided to put that recommendation on hold pending an assessment of the new Act and the Law Commission’s report on encouraging and assisting crime, in order to avoid leaving gaps in the law by abolishing the offence prematurely. For the first time, the Fraud Act 2006 introduces a general fraud offence. It is widely drafted, so that various forms of fraud using the internet and new technologies can be caught. It therefore repeals some of the offences in the Theft Act 1968, which were designed to address different types of fraud (e.g. obtaining property or a money transfer by deception) but which in practice proved to be too specific so that they became out of date and were too prone to technical defence. The new Act also makes other changes relevant to companies and those who run them. These offences can be committed by companies as well as individuals. In addition, where a company commits an offence with the consent or connivance of a director or other officer (including persons purporting to be officers) or of a shareholder who manages the company, that person is also guilty of the offence (s 12 Fraud Act 2006). The general fraud offence Fraud can be committed in three ways: » by false representation; » by failing to disclose information; or » by abuse of position. In all cases, the defendant’s dishonesty must be established, using a test already set out in case law (R v Ghosh [1982] QB 1053). The jury must decide whether the defendant’s behaviour would be regarded as dishonest by the standards of reasonable and honest people. If so, it must then decide whether he was aware that his conduct was dishonest and would be regarded as such by reasonable and honest people. To commit fraud by false representation, a person has to dishonestly make a representation which he knows is or might be untrue or misleading in order to (s 2 Fraud Act 2006): » make a gain for any person; or » cause loss to another or expose another to the risk of loss. This brings to mind civil actions for fraudulent representation, but the offence is much wider to encompass a range of situations. The representation can be made expressly or impliedly, and it does not need to be made to the person who suffers or was at risk of suffering loss. Indeed, the person to whom the representation was made does not even have to believe the representation. For example, it includes “phishing”, where a person emails a large number of people claiming to be a bank in order to induce them into revealing their account details and passwords. It is also wide enough to include representations made to machines, such as entering information in a CHIP and PIN machine or using the internet to purchase goods. On the other side of the coin, a person can commit fraud by dishonestly failing to disclose information in order to make a gain or cause a loss or the risk of loss (s 3 Fraud Act 2006). An offence can only be committed where the person or company was under a legal duty to disclose the information - the Government considered that the offence would be far too wide and unpredictable if it was not restricted in this way. However, this still covers a huge range of situations which will arise in running a company. Duties to disclose can arise under legislation, regulation, contract (oral as well as written), from the custom of a particular trade or market, or by virtue of a fiduciary relationship between the parties. So, directors who fail to disclose a conflict of interest to their companies, for instance, could be guilty of this offence as well as liable for breach of duty. Companies could be guilty of the offence for withholding information from their prospectuses and announcements or from failing to disclose relevant matters on insurance applications. The third way in which the general offence can be committed is by abuse of position (s 4 Fraud Act 2006). This offence arises where a person is in a position in which he is expected to safeguard (or at least not to jeopardise) the financial interests of another person and he dishonestly abuses that position in order to make a gain or cause loss or the risk of loss. This offence can be used as another avenue of attack against directors who breach their fiduciary duties in the most serious cases where the additional requirement for dishonesty can be proved. Again, this is widely drafted, encompassing omissions as well as acts so that, for example, a director who dishonestly fails to take up the chance of entering into an important contract so that a competitor can do so instead would be guilty of the offence. Other offences The Fraud Act 2006 extends the offence of carrying on a business fraudulently to unincorporated businesses as well as companies (s 9 Fraud Act 2006). It mirrors the Companies Act offence (s 458 CA 1985), covering defrauding any creditors (not just that business’) and carrying on the business for any other fraudulent purpose. It also increases the maximum term of imprisonment for this offence in relation to companies from 7 to 10 years to bring it into line with other dishonesty offences. The Fraud Act 2006 also sets out offences of: » possessing articles for use in frauds; » making or supplying articles for use in frauds; and » obtaining services dishonestly with the intent to avoid payment. The fight against fraud While the creation of a general offence will make prosecution easier, there is still work to be done if fraud is to be successfully fought at all levels. In its 05/06 annual review, The Fraud Advisory Panel estimated that fraud costs the UK economy around £16 billion per annum and it criticised the lack of funding, manpower and priority given to reported incidences of fraud. Attitudes are changing in the wake of high-profile corporate frauds and the sheer ubiquity of the crime. As well as updating the law, law enforcement is changing to tackle increasingly sophisticated fraudsters. The Serious Fraud Office, which prosecutes complex fraud cases, was joined last year by the Serious Organised Crime Agency (SOCA) which is responsible for investigating complex and high value fraud cases, amongst other offences falling within its “organised crime” remit. The Assets Recovery Agency will merge with SOCA this year, so that they can work together more efficiently to combat the effects of fraud. Prosecutions are all very well, but what companies really want to do is avoid falling prey to fraudsters in the first place. An easy way to protect companies from being hijacked is provided by Companies House in its PROOF online filing service. Company hijacks involve fraudsters filing fake paperwork at Companies House to change a company’s registered office and directors. They then use the company to order goods or services on credit which they do not pay for, leaving the company to sort out the aftermath, including correcting the public record. Signing up to PROOF ensures that Companies House only accepts electronic filing (with password authentication) of the forms appointing, terminating or changing particulars of directors and changing the registered office. There are several general measures companies can introduce to minimise the chances of being victims of fraud. As well as common-sense steps such as disposing of sensitive information securely, companies must be alive to the possibility that fraudsters within their organisations could render them liable for fraud. Therefore, they must ensure that they have proper procedures in place to vet prospective employees and officers and ensure that they follow appropriate codes of good practice. Clear delegation of responsibility for the various areas of the business will ensure that there are no gaps in accountability, as well as giving clear reporting lines for employees to bring potentially fraudulent conduct to the management’s attention. Encouraging and protecting whistle-blowers is an important part of an anti-fraud strategy. No business can protect itself 100% from rogue individuals, so having protocols in place to detect and investigate alleged fraud will stand the company in good stead should a prosecution (or, on the flip side, an employment claim) be on the cards. |
|
THE FRAUD ACT 2006 – the latest weapon in the fight against fraud |