The Fraud Act 2006 in the UK - Essay Example

The Fraud Act 2006 in the UK Frauds can be done in many forms, and a fraud can be explained as any demeanour through which one individual attempts to gain a fraudulent benefit over another. Frauds include the following diverse acts like embezzlement, extortion, unfair competition, forgery, white-collar crimes and commercial espionage. Further serious fraud includes the gravest types of frauds like organised crimes, long firm frauds, embezzlement and insider trading1. In fraud, greed is the motivating factor, and concealment is an important element of most extensive, continuous frauds, and this includes manipulation or misrepresentation. (Farrell & Swigert 1985:83-94). In UK, the Fraud Act 2006 came into force during January 2007, and it substituted the deception crimes included in the Theft Acts 1968-1996 with a more general offence of fraud, which can be done in the following ways namely fraud by failing to divulge information, fraud by dishonesty or deceitful representation and fraud by misuse of position and authority. The offence under the Frauds Act 2006 is punishable if charges are proved with a fine or with an imprisonment of ten years or with both. It is punishable by a fine not in excess of the statutory maximum or sentence for a period of not exceeding six months or with both. Under tort of deceit, a person may claim damages if the fraud committed is resulted in injury to the affected party. On the ground of fraudulent misrepresentation, a contract may be voidable if it has been obtained by fraud. (Law & Martin 2009:240). Courts in England have not yet prepared to prescribe exactly what can be regarded as fraud. It is to be noted that the Serious Fraud Office (SFO) which was formed on the recommendation of the Roskill Report in 1984 had not taken into account the offence of fraud but recognised on an evocative manner, many fraud crimes which UK’s Home Office employs even today. (Ramage 2005:4). As on date, in UK, there exists no statutory offence of fraud and the Home Office of UK has set out some kind’s criminal activities that can be regarded as offences of fraud in “Counting Rules for Recording Crime.” According to a publication made by the Home Office in April 2003, describing the following as offences of “forgery and fraud.” Frauds by an individual include common law offence of conspiracy to defraud, under the Proceeds of Crime Act 2002, fraudulent misappropriation of funds, obtaining a money transfer through credit card or cheque fraud under section 12 of the Theft Act 1987. (Ramage 2005:104).In Cronos Containers NV v Palatin, the defendants were Klamath Enterprises SA and Mr. and Mrs. Palatin. The shares of Klamath were owned by Mr. Palatin. In 1994, Mr.Palatin deceived the plaintiff by making five different payments from one of the Plaintiff’s clients, and the same were credited into Barclays bank account owned by Palatins. Then, such defrauded sums were employed by the defendants to renovate a property held by Klamath. (Ramage 2005:4). Conspiracy to Defraud Under Common Law It falls under consent to divest deceitfully somebody’s right or to abuse somebody’s property privilege. In Scott v Metropolitan Police Commissioner2, S agreed with workers of a cinema theatre to take copies of cinema screened in that theatre without the approval of the owner with an objective of commercial distribution held to be a conspiracy to defraud under common law. In Wai Yu-tsang v R3, A acted in concert with bank employees to camouflage in the bank accounts the fact about dishonouring of cheques which the bank had already purchased so as to prevent a bankruptcy by the bank, and A was held for the guilty of conspiracy to fraud. According to Lord Goff , conspiracy to fraud does not restrict to the notion of divesting somebody with something of value, but it also falls under deceit and fraud and if somebody may be discriminated in any way by the deceit or fraud. (Fionda & Bryant2000:154). Constructive Knowledge A person can be said to have “constructive knowledge “of fraudulent activity if he has probably had acted in concert or have extended his cooperation in such fraudulent activity. The term “constructive knowledge “connotes where somebody can be said to be able or have to infer, knowledge from the available facts on the subject. In Agip (Africa) Limited v.Jackson & others4, a chartered accountants firm though claimed that they did not aware the clients’ fraudulent nature, were construed under the law to be “willingly helping in the persistence of a fraudulent infringement of trust by assisting them to cover up money in an apprehensive background. High Court found the firm to be accountable for losses claimed by the client’s employer. High Court was of the view that the chartered accountants had not indulged in inquiring where the honest man ought to have made to convince himself that whether they are encouraging a fraud or deceit. (Turner 2007:22). In Eagle Trust Plc v. SBC Securities Limited, misappropriation of funds by the client’s chief executive along with a firm of stock-market underwriters who had absolved their sub underwriters’ liabilities from the misappropriated funds provided by the chief executive. It was argued that the underwriters ought to have identified or ought to have inquired into whether the money really owned by the client. By not making proper enquiry, they connived with the chief executive and the company and thus infringed the provisions of section 151 of the Companies 1985 as this section prevented any financial help from being extended by a corporate to fund its own shares. (Turner 2007:22). The issue before the court in this case was that whether underwriters could be held accountable as beneficial trustees as they had deliberately helped in the fraud. Applying the ratio decendi applied in the Agip case, the court viewed that in the absence of any knowledge that would not have been ascribed to a reasonable and honest man or probity or dishonesty on the part of the underwriting firm. It was observed by the court that the underwriters could not have been logically anticipated to inquire into the demeanours of the chief executive of their client and hence the action initiated against underwriting firm to hold them responsible for connivance was failed. (Turner 2007:22). Gross Misconduct An employee can be dismissed by an employer if he is found to indulge in gross misconduct. Thus, dismissal of an employee can be found to be potentially fair if there is a gross misconduct on the part of an employee. An employer must demonstrate that there exists a proper reason for dismissal of an employee as the employee may claim that the misconduct was not the real reason for the dismissal. In East Lancahsire Coachbuilders v Hilton, on the grounds of misconduct, a director was dismissed and however, a tribunal observed that there was no connection between dismissal and misconduct. In UK Coal Mining Ltd V Ruby , one of the two employees who was caught fighting while at work was dismissed, and the other was not and difference in treatment was justified as one who was not dismissed was acting in self-defence and also he had a good past track record whereas other was not. Gross misconduct is different from misconduct as the perpetrator of gross misconduct can be dismissed immediately without serving any notice. In case of gross misconduct, dismissal will normally be a fair sanction and offences like dishonesty or violence will be regarded very serious. In Patel v General Medical Council,5 an appeal by a doctor was dismissed by Privy Council against the decision arrived at by the General Medical Council’s to remove him from the rolls after it found that he had duped and claimed locum fees dishonestly despite the fact that he had a good track record and also repaid such money. (Scrope & Barnett 2008:209). Whether Bank has to act without Negligence? When an account is opened with the bank by a customer, a contract is said to be created between the bank and the customer as held in “Commissioner for taxes v English, Scottish and Australian Bank”6. In Headley Byrne v. Heller & Partners Ltd,7 the bank had given a misleading reference to the plaintiff, and he had acted on it and sustained losses. It was observed that the law imposes a duty of care when a customer asking for some reference on another party and expects the bank to exhibit due care, and the bank should have known that confidence was imposed upon the bank for such information. In this case ,the third party on whom the bank had given information had no contract with the bank but still bank was held for liability under tort.( GB Law Commission :58). As per section 47 of the Banking Act 1979, banks can avail contributory negligence as a defence in case there is a charge against a bank for acting negligently provided the bank had acted with due care and diligence. Further, if there is a proceeding against a banker under section 4 of the Cheques Act 1957, if there exists the proof of absence of negligence on the side of a banker, then the banker would be exonerated. Further ,if there is a charge of contributory negligence on the banker , if there exists an absence of negligence , a defence will also available under above section to the banker despite the provisions of s 11(1) of the Tort Act 1977.( O.Donovan 2005:392). It was held by the Privy Council in “Tai Hing Cotton Mills Ltd v Liu Chong Hing Bank Ltd”8 that a bank should adhere to its client’s legitimate orders and not on any forgery of those orders. In Henderson v Merrett Syndicates, the House of Lords found no bar to the presence of contractual duties and concurrent tortuous commitments.9(O’Donovan 2005:397). Trust and Equity In Morphitis v Bernasconi, it was held that an officer of a company can be held liable if he indulged in misappropriation or misapplication of the company’s assets or funds. In Foskett v McKeown10 , it was held that if funds were misused by a trustee, then, it falls under breach of fiduciary duty or trust. (Birks et al 2002:339). In El Ajou v Dollar Land Holdings Plc11 which also dealt with the breach of fiduciary duty under trust and equity , it was held that the defendant company’s non-executive director can be said to have knowledge of fraudulent dealing with the property of Plaintiff, which was enough to inflict liability as a constructive trustee on the defendant company.(Ramjohn 1995:447). In Black v S Freedman & Co12 , it was observed by O’ Connor J that where there was stolen money, the thief should hold it as trust money and he is not change the character of the money stolen. In Westdeutsche Landesbank Girozentrale v Islington London Borough Council13, it was held by the House of Lords, that banks were having the right to recoup the money which they have paid wrongly. (Burrows et al 2006:363). In HIH Casualty and General Insurance Ltd v Chase Manhattan Bank, it was observed by Lord Bingham that “fraud disentangles all: fraus omnia corrumpit... it invalidates contracts , verdicts and all dealings whatever.” (Birds 2010:81). Patricia Against Patricia, SPT Ltd has the following remedy. Patricia has abused her position as a legal advisor to the company and involved in embezzlement by asking Frank to pay £10,000 from SPT’s account at Bigbank to Rachel. Thus, Patricia was indulged in deceitful representation and fraud by misuse of position and authority under the Fraud Act 2006. Frauds committed by Patricia include common law offence of conspiracy to defraud, under the Proceeds of Crime Act 2002, and fraudulent misappropriation of funds, obtaining a money transfer through credit card or cheque fraud under section 12 of the Theft Act 1987. Patricia can be punished as per the principles laid down in Cronos Containers NV v Palatin, Scott v Metropolitan Police Commissioner, and in Yu-tsang v R. (Fionda & Bryant2000:154). Abuse of position as legal consultant by Patricia is also punishable under section 4 of the Fraud Act 2006. Since, Patricia was indulged in gross misconduct; she can be immediately dismissed from the service even without serving notice. Thus, I strongly advise the management of SPT Ltd to dismiss Patricia immediately as held in Patel v General Medical Council. Even repayment of £10,000 either by Patricia or by Rachel would not exonerate them from the offences as in Patel v General Medical Council. (Scrope & Barnett 2008:209). Under equity and trusts, Patricia can be held accountable as held in Morphitis v Bernasconi, El Ajou v Dollar Land Holdings Plc and in Foskett v McKeon. (Birks et al 2002:339). Both Patricia and Rachel should understand that as held in HIH Casualty and General Insurance Ltd v Chase Manhattan Bank, it was observed by Lord Bingham that “fraud disentangles all: fraus omnia corrumpit... it invalidates contracts , verdicts and all dealings whatever” and hence , they are liable to remit back the money obtained fraudulently under equity and trust. (Birds 2010:81). Rachel Rachel can be said to have “constructive knowledge “of fraud as she would have been able or to have to infer, knowledge from the available facts on the subject when her mother Rachel was elusive about the facts of money received by her from SPT Ltd under the pretext of tax avoidance. When Rachel received a letter from Frank asking for clarification about the tax avoidance scheme, she would have replied that it was not meant for that and should have refunded the same immediately. She kept quiet and spent the balance £5000, even after she had a suspicion about the payment to her was related to an illegal tax evasion scheme. . Frauds committed by Rachel include common law offence of conspiracy to defraud, under the Proceeds of Crime Act 2002, and fraudulent misappropriation of funds, obtaining a money transfer through credit card or cheque fraud under section 12 of the Theft Act 1987. (Ramage 2005:4). Under equity and trust, Rachel can be held liable for restitution of the money spent by her which obtained through fraud committed by Patricia as held in Black v S Freedman & Co. (Burrows et al 2006:363). Bigbank Law imposes a duty of care when a customer asking for some reference on another party and expects the bank to exhibit due care, and the bank ought to have known that confidence was imposed upon the bank for such information. Rachel received no reply from Bigbank when she enquired the Bigbank and asked for further information about the payment. Even though, Rachel is not a customer to the bank, when there is a suspicious transaction and when the bank is enquired about that, it is the duty of the Bigbank to take adequate precautions. The Bigbank can be preceded by SPT Ltd under section 47 of the Banking Act 1979, as the Bigbank could be liable under contributory negligence, as the bank had acted without due care and diligence as held in Henderson v Merrett Syndicates. .14(O’Donovan 2005:397). As held in Westdeutsche Landesbank Girozentrale v Islington London Borough Council, Bigbank is entitled to recoup the money which they have paid wrongly to Rachel. (Burrows et al 2006:363). 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