A consideration of civil and criminal fraudulent activity and consequences arising from a civil claim or criminal prosecution

February 2022  |  SPECIAL REPORT: CORPORATE FRAUD

Financier Worldwide Magazine

February 2022 Issue

Civil fraud incorporates a variety of civil torts and applies to businesses and individuals. A tort is a civil wrong which causes loss or harm to a person who is entitled to seek redress against the person responsible for the tortious act.

By way of example, tortious acts, in the civil fraud sense, encompass such activity as fraudulent misrepresentation, deceit, breach of fiduciary duties, unlawful means conspiracy, dishonest assistance and knowing receipt, unjust enrichment, wrongful and fraudulent trading, and breach of contract involving bribery and corruption.

In Barclays Bank v Cole (1966), Lord Denning, giving judgment for the Court of Appeal, summarised civil fraud in the following terms: “In law, ‘fraud’ is proved when it is shown that a false representation has been made knowingly, or without belief in its truth, or recklessly, careless whether it be true or false.”

All levels of the court system in England and Wales are designed to deal with actions relating to civil fraud. The choice of court, whether County or High Court, will depend on the complexities and value of the remedies being sought. The greater the value or the more complex the fraud, the matter is likely to be dealt with by the High Court.

To assist claimants in uncovering fraud, they have at their disposal several interim remedies. By way of example, claimants may apply to courts for freezing injunctions, including Worldwide Freezing Injunctions, Search Orders, Norwich Pharmacal Orders and Bankers Trust Orders, General Disclosure Orders and Receivership Orders.

The burden of proof. A party, known as ‘the claimant’, pursuing a claim through a court is obliged to prove to that court that the claim is justified and should attract the remedy being sought.

In order to establish that claim in a civil court, the ‘burden of proof’ with which the court must be satisfied is that ‘on the balance of probabilities’ the defendant committed the alleged fraud or was a knowing party to the same.

In Three Rivers District Council v Bank of England (2001), Lord Millet said: “It is well established that fraud or dishonesty...must be distinctly alleged and as distinctly proved; that it must be sufficiently particularised; and that it is not sufficiently particularised if the facts pleaded are consistent with innocence… This means that a plaintiff [now claimant] who alleges dishonesty must plead the facts, matters and circumstances relied on to show that the defendant was dishonest and not merely negligent, and that facts, matters and circumstances which are consistent with negligence do not do so.”

Criminal fraud

Fraudulent activity can be conducted in many ways resulting in varying offences being charged against a defendant. Criminal proceedings are generally prosecuted by various prosecuting authorities including the Crown Prosecution Service, the Financial Conduct Authority and the Serious Fraud Office. The Crown Prosecution Service deals as part of its remit with investigations conducted by HMRC, the National Crime Agency and the police. In the event that such an agency decides not to conduct a prosecution, in certain circumstances, a private prosecution may be pursued by an individual or corporation in the criminal courts against a defendant.

Fraud Act 2006. In view of the numerous offences that constituted criminal fraud, the Fraud Act 2006 was introduced to simplify matters. For example, eight deception offences contained within the Theft Acts of 1968 and 1978 were replaced.

Section 1 of the Fraud Act 2006 provides for one offence of fraud to be committed in three ways. First, fraud by false representation by a person who dishonestly makes a false representation and intends, by making that representation, to make a gain for themselves or another or cause a loss to another or expose another to risk of loss.

Second, fraud by failing to disclose information by a person who dishonestly fails to disclose to another person information which they are under a legal duty to disclose and intends, by failing to disclose the information, to make a gain for themselves or another, or to cause loss to another or expose another to a risk of loss.

Third, fraud by abuse of position, by a person who occupies a position in which they are expected to safeguard, or not to act against, the financial interests of another person and who dishonestly abuses that position intending to make a gain for themselves or another or to cause loss to another or expose another to a risk of loss.

Penalties for breach

Upon conviction, a defendant may, in the Magistrates’ Court, receive a fine not exceeding the statutory maximum, a maximum prison sentence of six months, or both. In the Crown Court, a defendant may receive a fine or a maximum prison sentence of 10 years, or both.

VAT fraud

Deliberately filing an incorrect VAT return is a criminal offence. Section 72 of the Value Added Tax Act 1994 states that “a person is liable who, with intent to deceive, produces, furnishes or sends for the purposes of this Act or otherwise makes use for those purposes of any document which is false in a material particular, or, in furnishing any information for the purposes of this Act makes any statement which he knows to be false in a material particular or recklessly makes a statement which is false in a material particular”. 3)

Penalties for breach. Upon conviction, a defendant may, in the Magistrates’ Court, receive a fine to the statutory maximum of £20,000 or three times the VAT evaded, whichever is the greater, and/or a maximum of six months imprisonment. In the Crown Court, a defendant may receive an unlimited fine and/or a maximum prison sentence of seven years.

Cheating the public revenue. Cheating the public revenue can be prosecuted as a common law offence which can be committed without any positive steps having been undertaken. A failure to act can amount to cheating the public revenue, such as failure to submit a VAT return or pay VAT due.

The common law offence is prosecuted alongside offences created by statute and, while there is an overlap between the common law offence and the statutory offences, the common law offence is often used for the most serious of tax offences, such as carousel fraud or substantial tax fraud not specifically covered by statute.

Cheating the public revenue is a ‘conduct offence’ in which no actual loss to the public revenue needs to be proved by the prosecution and it can only be tried in the Crown Court.

Penalties for breach

Upon conviction, a defendant may face life imprisonment, hence the reason for the charge being generally prosecuted in only the most serious offences.

Income tax evasion. Section 106A (1) of the Taxes Management Act 1970 provides that a person commits an offence if that person is knowingly concerned in the fraudulent evasion of income tax by that person or any other person. The offence can be heard in either the Magistrates’ Court or the Crown Court and conviction can result in similar sentences to those handed down for VAT evasion.

New frauds

With the onset of the coronavirus (COVID-19) pandemic and the availability of a range of government financial assistance, new forms of fraudulent activity have emerged arising from ‘Bounce Back Loans’, the Coronavirus Job Retention Scheme (CJRS), the Self- Employment Income Support Scheme (SEISS) and the Eat Out to Help Out scheme. HMRC figures suggest that in relation to the CJRS, SEISS and Eat Out to Help Out schemes, there are estimated losses to fraud or error exceeding £5.8bn.

Criminal offences and sanctions

As well as criminal offences that may be charged in relation to such offences, there are other consequences that may follow for directors and managers of businesses making any fraudulent claims on government schemes.

Proceedings commenced by the Insolvency Service could result in company directors being disqualified for up to 15 years, for fraudulently receiving bounce back loans and receiving bankruptcy restrictions may also be imposed.

Civil actions. Actions for fraud are aimed at recovering any losses suffered in addition to seeking compensation and damages for those losses and a civil court will provide remedies such as repayment of funds, recission of any contract, recovery of assets, and damages and compensation.

 

John Veale and Tim Thompson are senior solicitors at Kangs Solicitors. Mr Veale can be contacted on +44 (0)121 449 9888 or by email: jveale@kangssolicitors.co.uk. Mr Thompson can be contacted on +44(0)20 7936 6396 or by email: tthompson@kangssolicitors.co.uk.

© Financier Worldwide

BY

John Veale and Tim Thompson

Kangs Solicitors

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