Fraud is a broad legal term referring to dishonest acts that intentionally use deception to illegally deprive another person or entity of money, property, or legal rights.
Unlike the crime of theft, which involves the taking of something of value through force or stealth, fraud relies on the use of intentional misrepresentation of fact to accomplish the taking.
Fraud: Key Takeaways
- Fraud is the intentional use of false or misleading information in an attempt to illegally deprive another person or entity of money, property, or legal rights.
- In order to constitute fraud, the party making the false statement must know or believe that it is untrue or incorrect and intended to deceive the other party.
- Fraud may be prosecuted as both a criminal and civil offense.
- Criminal punishments for fraud can include a combination of prison, fines, and restitution to victims.
In proven cases of fraud, the perpetrator-a person who carries out a harmful, illegal, or immoral act-may be found to have committed either a criminal offense or a civil wrong.
In committing fraud, perpetrators may be seeking either monetary or non-monetary assets by deliberately making false statements. For example, knowingly lying about one's age to obtain a driver's license, criminal history to get a job, or income to get a loan may be fraudulent acts.
A fraudulent act should not be confused with a “hoax”-a deliberate deception or false statement made without any intention of gain or of materially damaging another person.
Perpetrators of criminal fraud may be punished by fines and/or imprisonment. Victims of civil fraud may file lawsuits against the perpetrator seeking monetary compensation.
To win a lawsuit claiming civil fraud, the victim must have suffered actual damages. In other words, the fraud must have been successful. Criminal fraud, on the other hand, can be prosecuted even if the fraud failed.
In addition, a single fraudulent act may be prosecuted as both a criminal and civil offense. Thus, a person convicted of fraud in criminal court may also be sued in civil court by the victim or victims.
Fraud is a serious legal matter. Persons who believe they have been the victim of fraud, or have been accused of committing fraud, should always seek the expertise of a qualified attorney.
Necessary Elements of Fraud
While the specifics of laws against fraud vary from state to state and at the federal level, there are five essential elements necessary to prove in court that a crime of fraud has been committed:
- A misrepresentation of a material fact: A false statement involving a material and pertinent fact must be made. The gravity of the false statement should be adequate to substantially affect the victim's decisions and actions. For example, the false statement contributes to a person's decision to purchase a product or approve a loan.
- Knowledge of falsehood: The party making the false statement must know or believe that it is untrue or incorrect.
- Intent to deceive: The false statement must have been made expressly with the intent of deceiving and influencing the victim.
- Reasonable reliance by the victim: The level to which the victim relies on the false statement must be reasonable in the eyes of the court. Reliance on rhetorical, outrageous, or clearly impossible statements or claims may not amount to “reasonable” reliance. However, persons known to be illiterate, incompetent, or otherwise mentally diminished may be awarded civil damages if the perpetrator knowingly took advantage of their condition.
- Actual loss or injury suffered: The victim suffered some actual loss as a direct result of their dependence on the false statement.
Statements of Opinion vs. Outright Lies
Not all false statements are legally fraudulent. Statements of opinion or belief, since they are not statements of fact, may not constitute fraud.
For example, a salesman's statement, “Madam, this is the best television set on the market today,” while possibly untrue, is an unsubstantiated statement of opinion rather than fact, which a “reasonable” shopper might be expected to disregard as mere sales hyperbole.
Fraud comes in many forms from many sources. Popularly known as “scams,” fraudulent offers may be made personally or arrive through regular mail, email, text messages, telemarketing, and the internet.
One of the most common types of fraud is check fraud, the use of paper checks to commit fraud.
One of the main goals of check fraud is identity theft-the gathering and use of personal financial information for illegal purposes.
From the front of every check written, the identity thief can get the victim's: name, address, phone number, bank name, bank routing number, bank account number, and signature. In addition, the store may add more personal information, such as date of birth and driver's license number.
This is why identity theft prevention experts recommend against using paper checks whenever possible.
Common varieties of check fraud include:
- Check theft: Stealing checks for fraudulent purposes.
- Check forgery: Signing a check using the actual drawer's signature without their authorization or endorsing a check not payable to the endorser, both usually done using stolen checks. Counterfeit checks are considered the equivalent of forged checks.
- Check kiting: Writing a check with the intent of accessing funds that have not yet been deposited in the checking account. Also referred to as “floating” a check, kiting is the misuse of checks as a form of unauthorized credit.
- Paper hanging: Writing checks on accounts that are known by the perpetrator to have been closed.
- Check washing: Chemically erasing the signature or other handwritten details from checks to allow them to be rewritten.
- Check counterfeiting: Illegally printing checks using information from the victim's account.
According to the U.S. Federal Reserve, American consumers and businesses wrote 17.3 billion paper checks in 2015, four times the number written in all of the countries of the European Union combined that year.
Despite the trend toward debit, credit, and electronic payment methods, paper checks remain the most often-used way of making large payments for expenses like rent and payroll. Clearly, there is still plenty of opportunity and temptation to commit check fraud.
Through the United States attorneys, the federal government prosecutes and punishes various types of fraud specifically identified under federal statutes. While the following list includes the most common of these, there is a wide range of federal, as well as state, fraud crimes.
- Mail fraud and wire fraud: Using regular mail, or any form of wired communications technology, including telephones and the internet as part of any fraudulent scheme. Mail and wire fraud are often added as charges filed in other related crimes. For example, since the mail or telephone are typically used in attempting to arrange bribes of judges or other government officials, federal prosecutors may add charges of wire or mail fraud in addition to charges of bribery and corruption. Similarly, wire or mail fraud charges are often applied in the prosecution of racketeering and RICO Act violations.
- Tax fraud: Takes place whenever a taxpayer attempts to avoid or evade paying federal income taxes. Examples of tax fraud include knowingly underreporting taxable income, overestimating business deductions, and simply not filing a tax return.
- Stock and securities fraud: Typically involves the selling of stocks, commodities, and other securities through deceptive practices. Examples of securities fraud include Ponzi or pyramid schemes, broker embezzlement, and foreign currency fraud. The fraud usually occurs when stockbrokers or investment banks convince people to make investments based on false or exaggerated information, or on “insider trading” information not available to the public.
- Medicare and Medicaid fraud: Usually takes place when hospitals, health care companies, or individual health care providers try to collect illegitimate repayments from the government by overbilling for services, or by performing unnecessary tests or medical procedures.
Potential penalties for conviction of federal fraud typically involve prison or probation, stiff fines, and repayment of fraudulently-acquired gains.
Prison sentences can range from six months to 30 years for each separate violation. Fines for federal fraud can be very large. Convictions for mail or wire fraud can bring fines of up to $250,000 for each violation.
Frauds that harm large groups of victims or involve large sums of money can result in fines of tens of millions of dollars or more.
For example, in July 2012, drugmaker Glaxo-Smith-Kline pleaded guilty to falsely branding its drug Paxil as being effective in treating depression in patients under age 18. As part of its settlement, Glaxo agreed to pay $3 billion to the government in one of the largest health-care fraud settlements in U.S. history.
Recognizing Fraud in Time
The warning signs of fraud vary according to the type being attempted. For example, telemarketing calls from unknown callers telling you to “send money now” to take advantage of a special offer or claim a prize may be frauds.
Similarly, random requests or demands for a Social Security or bank account number, mother's maiden name, or a list of known addresses are often signs of identity theft.
In general, most offers from companies or individuals that sound “too good to be true” are signs of fraud.
- ."Legal Dictionary: fraud" Law.com.
- ."Basic Legal Concepts / Fraud" Journal of Accountancy
- "Fraud-Burden of Proof: Washington Civil Jury Instructions.” Westlaw