What is fraud? Fraud is intentional deception to secure unfair or unlawful gain or deprive a victim of a legal right. Fraud can violate civil law or criminal law. It may cause no loss of money, property, or legal right but still be an element of another civil or criminal wrong. The purpose of fraud may be monetary gain or other benefits.
What Is Fraud?
A hoax is a distinct concept involving deliberate deception without the intention of gaining or materially damaging, or depriving a 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. Proving fraud comes with a greater evidentiary burden than other civil claims. This difficulty is exacerbated by some jurisdictions requiring the victim to prove fraud with clear and convincing evidence.
The remedies for fraud may include rescission of a fraudulently obtained agreement or transaction and the recovery of a monetary award to compensate for the harm caused. In cases of a fraudulently induced contract, fraud may serve as a defense for breach of contract or specific contract performance. Similarly, fraud may serve as a basis for a court to invoke its equitable jurisdiction.
The elements of fraud as a crime vary. The requisite elements are the intentional deception of a victim by false representation to persuade the victim to part with property and with, the victim parting with property in reliance on the representation and with the perpetrator intending to keep the property from the victim.
Understanding Fraud
Fraud is the intentional withholding of important information or the provision of false statements to another party for the purpose of obtaining something that would not have been provided without the deception.
The perpetrator of fraud is frequently aware of information that the intended victim is not, allowing the perpetrator to deceive the victim. At its core, a fraudster exploits information asymmetry; specifically, the resource cost of reviewing and verifying that information can be significant enough to create a disincentive to fully invest in fraud prevention.
Both states and the federal government have laws that criminalize fraud, though not all fraudulent actions result in a criminal trial. Government prosecutors frequently have significant discretion in deciding whether a case should go to trial and may instead pursue a settlement if it results in a faster and less expensive resolution. If a fraud case goes to trial, the perpetrator may be found guilty and imprisoned.
Legal Considerations
While the government may decide that a case of fraud can be settled outside of criminal proceedings, non-governmental parties who have been harmed may file a civil suit. Victims of fraud may sue the perpetrator to recover funds or, in the absence of monetary loss, to reestablish the victim’s rights.
To establish that fraud occurred, the perpetrator must have committed specific acts. To begin, the perpetrator must make a false statement as a material fact. Second, the perpetrator must have been aware that the statement was false. Third, the perpetrator must have had the intent to deceive the victim. Fourth, the victim must show that they relied on the false statement. Fifth, as a result of acting on the intentionally false statement, the victim must have suffered damages.
Types Of Financial Fraud
Identity theft and income/asset falsification are common individual mortgage fraud schemes, while industry professionals may use appraisal fraud and air loans to defraud the system. The most common types of investor mortgage fraud schemes are property flipping, occupancy fraud, and the straw buyer scam.
Fraud occurs in the insurance industry as well. Given the size of the claim, a thorough review of an insurance claim may take so many hours that an insurer may decide that a more cursory review is warranted. Knowing this, a person may file a minor claim for a loss that did not occur. Because the claim is minor, the insurer may decide to pay it without conducting a thorough investigation. Insurance fraud was committed in this case.
Securities Fraud
Securities fraud is defined by the Federal Bureau of Investigation (FBI) as criminal activity that includes high yield investment fraud, Ponzi schemes, pyramid schemes, advanced fee schemes, foreign currency fraud, broker embezzlement, pump-and-dumps, hedge fund related fraud, and late-day trading. In many cases, the fraudster attempts to mislead investors and manipulate financial markets in some way. These crimes are distinguished by the provision of false or misleading information, the withholding of critical information, the purposeful offering of bad advice, and the offering or acting on inside information.
Consequences Of Financial Fraud
Fraud can be extremely damaging to a company. A massive corporate fraud was discovered at Enron, a U.S.-based energy company, in 2001. Executives used a variety of techniques to conceal the company’s financial health, including deliberate revenue obfuscation and earnings misrepresentation. After the fraud was discovered, share prices fell from around $90 to less than $1 in just over a year. Employees’ equity was wiped out and they lost their jobs after Enron declared bankruptcy. The Enron scandal was a major driving force behind the Sarbanes-Oxley Act, which was passed in 2002.
Final Thoughts
Fraud is defined as an intentionally deceptive action intended to provide the perpetrator with an unlawful gain or to deny a victim’s right. Tax fraud, credit card fraud, wire fraud, securities fraud, and bankruptcy fraud are all examples of fraud. Fraudulent activity can be committed by a single person, a group of people, or an entire business.
