Fraud is a deliberate misrepresentation that causes a person or business to suffer damages, often in the form of monetary losses. All of these elements are usually required for an act to be considered fraud; if someone lied about his name, for example, it would not be fraud unless in so doing, the person caused someone else to lose money or suffer some other damage. There are many different types, from identity theft to insurance fraud to falsifying tax information, and making false statements can often be one element of another crime. Although usually prosecuted in criminal court, fraud can also be tried under civil law.
Elements of Fraud
While different jurisdictions may have their own definitions, under common law in the United States, fraud includes the following elements:
- a representation, or statement, of fact;
- the falsity of that representation — the statement must be untrue;
- the statement must be material, meaning that it is important or relevant;
- the speaker must know the statement is false;
- the speaker intends the statement to be relied on;
- the hearer does not know the statement is not true;
- the hearer relies on the truth of the statement to make a decision;
- the hearer's right to rely on the statement — the hearer has no reason to think the statement might not be true; and
- the hearer must suffer some kind of damages.
Put simply, the speaker must tell a lie about something important that he knows is a lie, and which he intends the hearer to believe to be the truth. The hearer must not know that it's a lie, have no reason to think the lie might not be true, and must depend on that lie to make a decision. The hearer's decision to depend on the lie as the truth must then cause some damage to the hearer.
There are many types of fraud, but fraudulent activities can usually be grouped into three basic categories: government, employee, and consumer. Government fraud involves activities designed to deceive the government or a business; tax or insurance fraud would be included in this group. Employee fraud is when a worker defrauds his or her employer, such as through embezzlement or falsifying expense reports. Consumer fraud includes cons and is designed to bilk an individual out of money, such as through telemarketing or investment scams.
Some cases involve complicated financial transactions conducted by so-called white-collar criminals, those business professionals with specialized knowledge and criminal intent. An unscrupulous investment broker may present clients with an opportunity to purchase shares in precious metal repositories, for example. His status as a professional investor gives him credibility, which can lead to his having the trust of potential clients. Those who believe the opportunity to be legitimate may contribute substantial amounts of cash and receive authentic-looking bonds in return. If the investment broker knows that no such repositories exist and still receives payments for worthless bonds, then he can be accused of defrauding his clients.
Fraud as an Element of Other Crimes
In many cases, fraud is just one element of a larger crime that must be proven. For example, someone who steals another person's identity — pretending to be someone else for financial or other gain — might be charged with criminal impersonation or identity theft rather than fraud. In such cases, fraud might be considered the method by which the second crime was committed.
Types of Fraudulent Statements
Generally speaking, a false representation is a statement that is not true. This does not include opinions or boasts, however; a salesperson who claims that one model of television is the best the customer will ever see is not making a statement of fact. The customer should know better than to rely on such a comment, also known as puffery, and thus likely has no case for fraud should a better television be found.
In some cases, a person may be guilty of fraud if he has reasonable suspicion that a statement of fact was not true but did not say anything about it. If an account representative has witnessed events that lead him to believe the insurance policy that he is selling is fraudulent, but he sells it anyway, his silence on the matter could be considered a false statement. In addition, it may be considered fraud if a person has the responsibility to know and disclose some fact to his client, but does not. For example, a real estate agent representing a buyer must disclose if a house he is selling is in a high crime area; if the agent doesn't do the required research to find this out, it may be considered fraud even if he was not aware of the fact, because it was his responsibility to know.
It can be difficult to prove fraud in a court of law. Laws may vary from state to state and from country to country, but several conditions usually must be met. One of the most important things that must be proven is a deliberate misrepresentation of the facts. This involves proving the speaker or seller knew — or had a good reason to believe — that the information was incorrect, the product was defective, or the investment was worthless.
An employee of a large company, for example, may sell a product or offer a service without personal knowledge of a deception. An account representative who sells a fraudulent insurance policy on behalf of an unscrupulous employer may not have known at the time of the sale that the policy was bogus. It is usually necessary for the accuser, therefore, to demonstrate that the accused had prior knowledge of the deceit and voluntarily misrepresented or omitted the facts.
Another important element to prove in such a case is justifiable or actual reliance on the expertise of the accused. A person most likely would walk away from a stranger who approached him or her and asked for money to invest in a vending machine business. That same person is more likely to trust the stranger’s expertise and perceived success if the stranger is a well-dressed man leading an investment seminar in which he mentions his success in the vending machine industry and asks for investors. After a few months have elapsed without further contact or delivery of vending machines, one might reasonably assume the investment is fraudulent. In court, the investor would have to testify that his investment decision was partially based on a reliance on the stranger’s implied expertise and experience.
The Obligation to Investigate
The element of fraud that tends to hamper a successful prosecution is the obligation to investigate. It falls on potential investors and other customers to reasonably investigate a proposal before any money exchanges hands, and a failure to take appropriate measures at the time of the proposal can seriously weaken a resulting court case. The accused can claim that his accuser had every opportunity to discover the potential for fraud and failed to thoroughly investigate the matter. Remorse over terms of the deal in a legally binding contract is not the same as fraud.