MADRID AUDITORIO NACIONAL DE MÚSICA

fraud would be committed where, with intent to make a gain or to cause loss or to expose another to the risk of loss, a person dishonestly (1) makes a false representation, (2) wrongfully fails to disclose information, or (3) secretly abuses a position of trust.

Section 1 of the Fraud Act 2006 introduced a new general offence of fraud and three ways of committing it:

• Fraud by false representation requires: dishonesty;

an intent to make gain or cause loss;

the person who makes the representation knowing that it is or might be false or misleading. • Fraud by failing to disclose information requires:

dishonesty;

an intent to make gain or cause loss;

failure to disclose information where there is a legal duty to disclose. • Fraud by abuse of position requires:

dishonesty;

an intent to make gain or cause loss;

abuse of a position where one is expected to safeguard another person’s financial interests.

Perhaps recognising that legal concepts and constructs can be difficult for the lay person, the UK’s national fraud reporting centre (Action Fraud) has a simpler, practical definition of fraud:

Fraud is when trickery is used to gain a dishonest advantage, which is often financial, over another person.

2.2

The Difference Between Fraud and Money Laundering

Learning Objective

2.1.4 Know the relationship between fraud and money laundering and how they differ

Money laundering is the movement, concealment and/or conversion, of the proceeds of crime, including the proceeds of offences of fraud. Since the purpose of most frauds is acquisition of wealth or property, it may be expected that the perpetrator will attempt to disguise illicitly obtained assets and funds.

Similarly, in order to undertake money laundering, the perpetrator may possibly undertake a fraud, such as misrepresentation to a bank, as to both their identity and the source of funds, in order to provide a legitimate front for money laundering.

Both are concerned with acquisitive crime, but the main difference between the two is that fraud is, by definition, a financial crime concerned with the illicit acquisition of assets, whereas money laundering is the process that seeks to conceal the source of such assets arising from a range of both financial and non-financial crimes such as drugs, human trafficking and corruption. Fraud is just one of the predicate offences for ML, which include many other offences generating substantial proceeds.

2.3

Fraud Classification Systems

Learning Objective

2.1.5 Know the practical application of fraud classification systems

Fraud classification systems are an attempt to structure offences by various factors – such as victim, perpetrator, type, volume, value and occurrence – so that a more systematic approach can be made to the allocation of responsibility, the level of resources and the types of sanctions that may be imposed, as well as to the wider issues of cross-sector or activity fraud and precursor fraud (ie, what types of fraud may be indicative of facilitating other types of fraud or crime).

Classifying frauds also helps with risk assessment, improving detection and prevention systems, reporting, measuring losses and auditing. Such systems may be used by regulators or central banks, law enforcement, or the private sector and the nature of the classification will reflect the nature of the bodies using it and their purpose.

There are many examples of fraud classification systems. For public authorities, it is important to understand the scale and extent of fraud in order to focus anti-fraud efforts. For example, a UK report noted:

There are no reliable data on the scale and extent of fraud. Some elements of fraud have been measured reasonably accurately. A number of estimates of overall fraud have been made by various research organisations but none of these studies is considered reliable and comprehensive by anyone, including their own authors. This is a serious handicap to analysis and policy formulation because we do not know either the amount of harm that fraud causes to the economy and society or where it is most prevalent. Without this information it is difficult to devise options that would improve the response to fraud. It is also difficult to decide the relative importance of tackling fraud compared with other crime or where to target resources. A proper holistic approach to fraud and a national fraud strategy to deliver such an approach would start from a proper exercise to measure the problem.1

In response, the Association of Chief Police Officers (ACPO) in the UK commissioned research and produced a typology that classified fraud by victim sector and sub-sector2_:

• Private sector: financial services/non-financial services/individuals.

• Public sector: national bodies/local bodies/international (but affecting the public) bodies.

Central banks and regulators may ask financial institutions to record and report fraud, either internally or to them, in order to ensure that losses are understood and proper controls are implemented. Consistent categorisation of such reporting is important to obtain meaningful data. For example, the Reserve Bank of India has the following classification of frauds based mainly on the provisions of the Indian Penal Code3_:

1 Interim Fraud Review (2006). London: Attorney-General’s Office, p.19

2 ACPO (2007). The Nature, Extent and Economic Impact of Fraud

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