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Criminal Fraud

What type of activity constitutes fraud?

The elements of the crime of fraud vary between jurisdictions. Consistent with the federal fraud statute, fraud is the unlawful taking of another’s property through the following types of knowing and willful conduct:

• falsifying, concealing, or covering up any trick, scheme, or device;

• making any material false fictitious, or fraudulent statement or representation about a material fact; or

• making or using any false writing or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry.

Related charges, commonly known as “false pretenses” and “theft by deception” generally constitute the following types of conduct:

• intentionally creating or reinforcing an impression that is false;

• failing to correct an impression that is false and that the person does not believe to be true if there is a confidential or fiduciary relationship between the parties;

• preventing another from acquiring information that is relevant to a transaction; and

• failing to disclose a known lien or other legal impediment to property being transferred.

Note: The elements of the above charges are generally common among most jurisdictions, with slight variations in the language or wording.

Discussion: Fraud generally entails wrongfully obtaining resources or benefits from another person by deceptive means. In your opinion, does the fact that the individual voluntarily provides the resources or benefits to the fraudster in any way mitigate or lessen the reprehensible nature of the actions?

Practice Question: Doreen is seeking to borrow funds to run her business. She approaches several wealthy individuals in town and pitches the virtues of her business. She goes further than over representing the strength of her business. She lies about the incomes generated over the past several months. Convinced by her presentation and the business’s strong performance, several individuals make loans to the business of $10,000 or more. Doreen continues operations and uses the funds to pay herself a substantial salary. Ultimately, the business fails and shuts down. Has Doreen committed a crime? If so, what?

How does “good faith” affect fraud?

Fraud requires knowing and willful conduct carried out with the intent to defraud someone. As such, good faith in one’s actions is a defense to the allegations. The defense is that the defendant acted in good faith and did not have the necessary intent to defraud anyone. It does not matter that a person’s statement or belief is wrong, there is no action for fraud unless intent is deceive is present. Further, an individual’s lack of due care in making a statement is not relevant in determining fraud.

Discussion: How do you feel about the mental intent requirement for a charge of fraud? Do you think a person should be able to escape a criminal fraud charge if she is reckless in her actions? What if she recognizes that her assertions are extremely unlikely, but she leads a customer or client to believe that the unlikely result is reasonably certain?

Practice Question: Mitchell owns a baseball card of Mickey Mantle. He believes that the card is an original rookie card. He offers to sell the card to Amy for $1,500. Amy buys the card. No long afterward, she has the card inspected and learns that it is simply a reproduction of the original card and is not worth any money. She is angry at Mitchell and asks your opinion on whether she should report the incident to the police. Has Mitchell committed fraud? Why or why not?

What are some common types of business fraud?

Many examples of business fraud include a scheme or plan designed to take from a person the tangible right of honest services. Below are some common examples of fraud in the business context:

• Mail or Wire Fraud – It is illegal to use the US postal service or electronic means of interstate communication to carry out a scheme to defraud. This is a very broad statute, as it includes any fraudulent conduct employing mail or wire transmission. “To mail” means a communication is sent or received through use of the US Postal Service or any interstate carrier. “Wire transmission” includes the use of radio, television, telephone, Internet, or other wired form of communication.

Securities Fraud – Federal laws defining securities fraud are the Securities Acts of 1933 and the Securities Exchange Act of 1934. Section 17 of the 1933 Act covers fraudulent activity in the issuance of securities. Section 10 and Rule 10(b)(5) of the 1934 Act cover fraud in the purchase or sale of a security.

Insurance Fraud – This is a common state-law crime in which an insured makes a fraudulent claim for benefits under an insurance policy. For example, intentionally setting fire to the building of a failing business to collect the insurance proceeds is insurance fraud.

Healthcare Fraud – Healthcare fraud generally involves making fraudulent claims for payment or reimbursement of healthcare expenses. The common offenders are healthcare providers who make fraudulent claims for reimbursement for services never performed or unnecessary. The prosecution usually falls under the False Claims Act.

Tax Fraud – Tax fraud is the knowing concealment of transactions or property ownership in an attempt to illegally avoid paying federal, state, or local taxes.

Discussion: Do you think there should be varying degrees of fraud? When does in individual’s conscious decision to do a poor job or cut corners amount to a plan or scheme to defraud the individual paying for the services? Could an intentional misstatement amount quality of services or effectiveness of a product amount to fraud? Could it be fraud if an individual misrepresents (or lies about) a work process in order to get hired or win a contract?

Practice Question: Javier opens a personal wealth investment business. He represents to clients that he can generate above-average returns on their investment with minimal risk. He claims to have insider information on many new business ventures that makes them a certain success. He makes up fake disclosure documents for business that do not exist or have no connection with Javier. In reality, Javier is running a Ponzi scheme in which he takes money from investors and uses the funds to pay returns to other investors. He also spends much of the remaining funds soliciting new investors through email and direct-mail advertisements. What crimes, if any, has Javier committed? Why?

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