FRAUD [2002] EWLC 276(7) (01 July 2002)

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URL: http://www.bailii.org/ew/other/EWLC/2002/276(7).html
Cite as: [2002] EWLC 276(7)

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PART VII

A NEW FRAUD OFFENCE

A fresh approach

As long ago as 1976 this Commission concluded that it should not be an offence for two people to agree to do something which would not be an offence if done by one, and that conspiracy to defraud should be abolished as soon as that could safely be done.

^[1]

and

There are several possible approaches to this problem. The most radical is to reject the suggestion that there are forms of dishonesty which ought not to be criminal, and simply criminalise dishonest conduct per se. At the other extreme is the cautious approach exemplified by the proposals in Consultation Paper No 155 – namely to identify certain specific types of dishonest behaviour as deserving of criminality, and make such piecemeal reforms as are necessary to ensure that those types of behaviour are criminal.

7.3

In the light of our consultation exercises, neither approach now seems to us to be wholly satisfactory. On the one hand, as we explained in Part V, we still think it would be wrong to let the concept of dishonesty "do all the work". On the other, we now accept that it is no longer realistic to continue plugging the gaps in the law of fraud on an ad hoc basis, adding to the array of offences with which this area of the law is already replete. Such a technique is bound to be always lagging behind developments in technology and commerce. It means we can never be confident that conspiracy to defraud is not needed to fill any gaps that may appear. Conspiracy to defraud therefore has to be retained indefinitely – thus frustrating our long-held objective of abolishing it once the necessary reforms have been made to the substantive law.

7.4

We now believe that what is needed is a fresh approach, involving a middle course between these two extremes. We think it is possible to devise a general fraud offence which, without relying too heavily on the concept of dishonesty, would nevertheless be sufficiently broad and flexible to catch nearly every case that would today be likely to be charged as a conspiracy to defraud. Conspiracy to defraud would then be virtually redundant (in practice if not in theory), and could safely be abolished.

7.5

In our view, the key to defining such an offence ought to be the ordinary (non-legal) usage of the word "fraud". At present, the criminality or otherwise of a fraudulent act depends whether it falls within one of a multitude of offences of varying degrees of specificity. The fact that it is fraudulent will not necessarily mean that it is an offence. Most non-lawyers would think this an extraordinary state of affairs. It was therefore a matter of simple common sense for the courts to recognise that "fraud", in the ordinary sense of the word, was an objective which could not be pursued by two or more people in combination without infringing the criminal law.

7.6

The difficulty that we have encountered in seeking to formulate a satisfactory fraud offence, we believe, results largely from the fact that the concept of fraud developed by the criminal courts has in some respects parted company from the word's ordinary meaning. This is not to say that the courts have overtly treated "fraud" as a legal term of art. On the contrary, they have purported to analyse its ordinary meaning, and to apply that meaning for the purposes of conspiracy to defraud and of other offences defined as involving an element of fraud. It does not follow that they have always succeeded in accurately stating that meaning. According to the classic definition in Scott,

^[2]

^[3]

This divergence between the ordinary and legal meanings of fraud has laid a trap for law reformers. We have tended to assume that a fraud offence worthy of the name must inevitably embrace any conduct which the law currently regards as fraud, even if non-lawyers would not so regard it. Yet there is no need for a fraud offence to catch shoplifting, robbery or burglary, because these activities are adequately dealt with by existing statutory offences. To render conspiracy to defraud dispensable, a new fraud offence needs only to catch those kinds of dishonest conduct that an ordinary person would call fraud. The question is: what are the hallmarks of such conduct?

7.8

The classic statement of the nature of fraud is Stephen's:

I shall not attempt to construct a definition which will meet every case which might be suggested, but there is little danger in saying that whenever the words "fraud" or "intent to defraud" or "fraudulently" occur in the definition of a crime two elements at least are essential to the commission of the crime: namely, first, deceit or an intention to deceive or in some cases mere secrecy; and, secondly, either actual injury or possible injury or an intent to expose some person either to actual injury or to a risk of possible injury by means of that deceit or secrecy.^[4]

We note first that Stephen did not say these two elements are sufficient to constitute fraud: he said that they at least are essential. For reasons explained in Part V above, we are now persuaded, contrary to the view we provisionally expressed in Consultation Paper No 155, that the element of dishonesty should be essential to (though not sufficient for) criminal liability for fraud. With the addition of this element, Stephen's definition requires

(1) deceit, intention to deceive or secrecy, and

(2) either

(a) actual or possible injury to another or

(b) an intent thereby to cause injury to another or to expose another to a risk of possible injury,

(3) and dishonesty.

7.10

We have adopted this analysis as our starting point.

7.11

In this Part we discuss first what kinds of conduct should suffice for an offence of fraud. In discussing this first issue we assume

(a) that the conduct in question would be regarded by fact-finders as dishonest according to the Ghosh criteria, and

(b) that it is intended to, and does, cause actual financial loss to another. This kind of consequence is the paradigm, and we think it clear that it should suffice for liability. By assuming that it has occurred, therefore, we hope to focus attention on the different kinds of conduct that may have caused it, and on whether they should or should not suffice.

7.12

We then consider

(1) whether the new offence should also extend to the intentional and dishonest causing, by one of the requisite kinds of conduct, of any consequences other than actual financial loss to another; and

(2) whether a person should commit the offence by engaging in one of the requisite kinds of conduct with the intention of causing one of the requisite kinds of consequence, but without actually doing so.

7.13

Finally we discuss whether the new offence should be subject to any special defences, and what mode of trial and maximum sentence are appropriate.

What kinds of conduct should suffice?

Misrepresentation

7.14

The paradigm of fraudulent conduct, which can obviously constitute fraud if it is dishonest and causes financial loss, is deception. Clearly deception should be one of the ways in which the new fraud offence can be committed.

7.15

One of the issues we considered in Consultation Paper No 155 was whether the concept of deception was in need of further definition or clarification. We pointed out that deception is commonly thought to require proof of misrepresentation, and argued that this is an unnecessary source of confusion and artificiality. We suggested that the legislation might make it clear that there is a deception where the defendant deliberately or recklessly induces another to believe something that is not true. Whether the defendant does this by misrepresentation or in some other way is, we argued, immaterial. The majority of respondents agreed with our analysis, though some thought the current wording was clear enough.

7.16

One of the defects of the present law identified in Part III above, however, is that the concept of deception arguably implies a belief, on the part of the victim, in the truth of the proposition falsely represented by the defendant. In general such a requirement would present no more difficulty than the requirement in the pre-1968 law that the property be obtained by the false pretence, because if the victim handed over the property despite not believing the pretence to be true then the required causal link would not be present.

^[5]

believing

^[6]

deceived

Charles

^[7]

Lambie

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representing

The concept of fraudulent misrepresentation is well established in both the civil and criminal law. It may be defined as an assertion of a proposition which is untrue or misleading, either in the knowledge that it is untrue or misleading or being aware of the possibility that it might be.

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future

Secrecy

In Part IV we identified various kinds of conduct which can amount to fraud at common law (with the result that persons who agree to engage in such conduct are guilty of conspiracy to defraud), but which are not an offence if engaged in by one person alone, and which would therefore cease to be criminal (even if engaged in by more than one person in concert) if conspiracy to defraud were abolished without replacement. Some of the examples we identified involve misrepresentation, but the authorities on conspiracy to defraud recognise that misrepresentation is not an essential element of fraud. This was established in Scott v Metropolitan Police Commissioner,

^[11]

defraud

We note that in some jurisdictions it has been thought sufficient to create a general fraud offence requiring misrepresentation (or deception). The Law Reform Commission of Hong Kong, for instance, recommended such an offence in 1996.

^[12]

^[13]

only

We think that our definition of fraud should not be confined to misrepresentation – even if it is designed (as we believe it should be) to reflect the ordinary meaning of fraud rather than its wider legal meaning.

^[14]

Fraudulent conduct which does not involve misrepresentation obviously cannot be brought within the reach of the criminal law either by extending the individual deception offences while still requiring proof of deception (as we proposed in Consultation Paper No 155) or by replacing them with a general "fraud" offence requiring such proof (an option that we there considered and rejected). If, however, we are to stop short of criminalising any conduct which causes loss and is deemed by the fact-finders to be dishonest (an option which we considered and rejected both in Consultation Paper No 155 and in Part IV above), we must identify the circumstances in which conduct not involving misrepresentation nevertheless amounts to fraud. Viscount Dilhorne's definition, "to deprive a person dishonestly of something … to which he … might … be entitled", seems too wide: it would allow dishonesty to do all the work. So would Lord Diplock's dictum that "Dishonesty of any kind is enough". In our view Stephen was closer to the truth when he said that fraud requires deceit (or an intention to deceive) or in some cases mere secrecy. We have concluded that there are two further kinds of "secret" conduct, not involving misrepresentation, which can properly be described as fraud and should be sufficient for the new fraud offence. They are (a) non-disclosure, and (b) secret abuse of a position of trust.

Non-disclosure

7.22

Secrecy can be regarded as a kind of deception by omission. One person may deceive another by taking positive steps to create a false impression in the other's mind, or may simply refrain from taking any steps to dispel such an impression. It is arguable (though by no means clear) that simple non-disclosure can constitute deception under the present law, at any rate where there is a legal duty to disclose.

^[15]

In Consultation Paper No 155 we provisionally concluded that mere non-disclosure should not be sufficient for an offence of deception, regardless of whether there is a legal duty to disclose. The majority of respondents who responded on this issue agreed. A substantial minority, however, argued that, from the victim's point of view, a failure to reveal material facts can be just as devastating as, and tantamount to, deception by conduct. Some went further and argued that criminal liability for non-disclosure ought not to depend on the existence of a duty of disclosure in civil law, which might well be difficult to identify.

7.24

The view we expressed in Consultation Paper No 155 related to the definition of deception, for the purpose of offences requiring deception. As we have explained, however, we now believe that a fraud offence ought not to be confined to cases of deception, but should include other kinds of conduct which non-lawyers would regard as fraud. The question is therefore whether the ordinary concept of fraud is wide enough to embrace at least some cases of dishonest non-disclosure. In our view it clearly is – whether or not there is a legal duty to disclose. For example, an antique dealer calls on vulnerable people and buys their heirlooms at unrealistically low prices, making no misrepresentation as to the value of the items but exploiting the victims' trust. There may be no legal duty to disclose the truth, but there is clearly a moral duty to do so. If the dealer's failure to do so is regarded by the fact-finders as dishonest, we see no reason why he should not be guilty of fraud.

7.25

We have considered the possibility of defining deception (or misrepresentation) in such a way as to make it clear that the breach of a moral duty to disclose will suffice. We have concluded, however, that this would not be helpful. In the first place it would perpetuate the artificiality of the present law, under which a defendant who fails to disclose material facts can be convicted (if at all) only on the basis of a positive misrepresentation supposedly implicit in his or her silence. In reality, the antique dealer's dishonesty lies not in any implied representation but in the dealer's failure to provide crucial information which the other party trusts the dealer to provide. We think the legislation should expressly reflect this, by providing for a separate kind of fraudulent conduct which does not masquerade as a form of misrepresentation but is a genuine alternative to it.

7.26

Moreover, we think it important that the legislation should state when non-disclosure qualifies as fraud, rather than simply permitting the fact-finders to treat it as fraud if they think that disclosure ought to have been made (which would be tantamount to letting dishonesty do all the work). It would clearly be wrong to impose liability for fraud on a private individual who sees a valuable antique on a stall at a car boot sale and offers a very low price for it, which is accepted. Such a person might be guilty of theft, if dishonesty were proved,

^[16]

We have concluded that the dishonest non-disclosure of information should qualify as fraud in two cases.

Legal duty of disclosure

7.28

First, non-disclosure of information should suffice if there is a legal duty to disclose it. Such a duty may derive from statute (such as the provisions governing company prospectuses),

^[17]

For this purpose there is a legal duty to disclose information not only if the defendant's failure to disclose it gives the victim a cause of action for damages, but also if the law gives the victim a right to set aside any change in his or her legal position to which he or she may consent as a result of the non-disclosure. For example, a person in a fiduciary position has a duty to disclose material information when entering into a contract with his or her beneficiary, in the sense that a failure to make such disclosure will entitle the beneficiary to rescind the contract and to reclaim any property transferred under it.

7.30

It is perhaps unlikely that a person might be under a legal duty to disclose information despite being ignorant of the circumstances giving rise to the duty. On principle, however, we believe that the offence should require knowledge that such circumstances exist, or at least awareness that they might exist.

Defendant trusted to disclose

7.31

Secondly, even if there is no legal duty to disclose the information in question, we believe that it should be sufficient if

(1) the other person trusts the defendant to make disclosure of information of that kind, and

(2) the defendant knows that this is the case, or is aware that it might be the case, and

(3) in all the circumstances it is reasonable to expect the defendant to disclose the information which he or she fails to disclose.

7.32

This situation is broadly similar to the existence of a relationship which imports fiduciary duties as a matter of civil law, but it does not depend on the existence of such a relationship.

^[18]

Requirement (3) is additional to requirements (1) and (2), because even if the defendant knows that he or she is trusted to make full disclosure it may nevertheless not be reasonable to expect disclosure of the particular information in question. For example, a dealer buying an antique is guilty of fraudulent non-disclosure if she knows that the seller is trusting her to disclose any marked discrepancy between the price offered and the true value of the item, and it is reasonable to expect her to do so. This is a question of degree. If the dealer knows that she can resell the item for £10,000, but does not disclose this and offers only £2,000, it would be open to a jury to conclude that her failure to disclose the true value was unreasonable. It would be otherwise if she did not expect to be able to resell the item for more than, say, £4,000, because it is not reasonable to expect a dealer to disclose the full extent of the reasonable profit she hopes to make, and such a mark-up would be within the bands of what is reasonable. In such a case we would expect the court to direct an acquittal, on the basis that no reasonable jury could be sure that it was reasonable to expect the defendant to disclose the information in question.

7.34

Whether the defendant is trusted to make disclosure, and if so whether a failure to disclose the information in question is unreasonable, will depend on a variety of factors – for example, whether the defendant is believed by the other to have special expertise, and if so whether the defendant has induced the other to believe this; whether the other has such expertise; the value of the transaction, from the other's point of view; whether the other is in receipt of legal, financial or other advice; and so on. A trial judge would of course remind a jury of any such factor that may have particular relevance to the facts of the case.

Secret abuse of position

7.35

The kind of conduct we have described as "non-disclosure" is broadly analogous to, though in our view distinct from, that of positive misrepresentation which brings about a transfer of property or some other economic consequence. It is in the nature of the situation that the person who trusts the defendant to disclose the information in question will act, or omit to act, in reliance on the defendant's failure to do so.

7.36

In addition to this case, however, we believe that some kinds of conduct can properly be described as fraudulent on the ground that they amount to an abuse of an existing position of trust, even if there is no question of the victim's thereby being induced to act or omit to act. The difference between this case and that of non-disclosure is that in this case the defendant does not need to enlist the victim's co-operation in order to secure the desired result. An example would be the employee who, without the knowledge of his employer, misuses his or her position to make a personal profit at the employer's expense.

7.37

The essence of the kind of relationship which in our view should be a prerequisite of this form of the offence is that the victim has voluntarily put the defendant in a privileged position, by virtue of which the defendant is expected to safeguard the victim's financial interests or given power to damage those interests. Such an expectation to safeguard or power to damage may arise, for example, because the defendant is given authority to exercise a discretion on the victim's behalf, or is given access to the victim's assets, premises, equipment or customers. In these cases the defendant does not need to enlist the victim's further co-operation in order to secure the desired result, because the necessary co-operation has been given in advance.

7.38

The necessary relationship will be present between trustee and beneficiary, director and company, professional person and client, agent and principal, employee and employer, or between partners. It may arise otherwise, for example within a family, or in the context of voluntary work, or in any context where the parties are not at arm's length. In nearly all cases where it arises, it will be recognised by the civil law as importing fiduciary duties, and any relationship that is so recognised will suffice. We see no reason, however, why the existence of such duties should be essential.

^[19]

The abuse of position may be an omission as well as a positive act – for example, where an employee omits to take up a chance of a crucial contract, intending to enable an associate to pick up the contract instead.

7.40

We do not think, however, that dishonest abuse of position per se should be enough to constitute fraudulent conduct. In accordance with Stephen's view that fraud involves either deceit or secrecy, we believe that, in order to qualify as fraud, an abuse of position (in the absence of misrepresentation) should be not only dishonest but also secret – that is, undisclosed to the victim. If the defendant lets the victim know what is happening, in our view the defendant's conduct cannot properly be described as fraud.

7.41

Arguably it follows that there should be no liability if, although the victim has no knowledge of the abuse at the time when it occurs, the defendant intends to disclose it in due course. Such an intention could not, however, be a complete defence in all circumstances. No-one would say, for example, that a particular abuse was not fraudulent because the culprit intended to make disclosure many years later, in his memoirs or on his deathbed. We have tried to identify the circumstances in which an intention to disclose ought to be a defence, but have been unable to formulate principled criteria which would not yield arbitrary results. It should be remembered, in any event, that the offence always requires proof of dishonesty. If the defendant is unable to make disclosure (for example, because the victim is uncontactable), but intends to do so at the first opportunity, it is unlikely that dishonesty could be proved. We have therefore decided to recommend simply that, with one exception, the abuse of position must occur without the victim's knowledge, or that of a person acting on the victim's behalf.

7.42

The exception relates to the situation where the defendant thinks that the victim is unaware of the defendant's conduct, but is mistaken. The defendant may, for example, be under police surveillance. Even if the victim's knowledge negatived the defendant's liability for the fraud offence itself, there would still be liability for attempted fraud (on the basis that the defendant would have been committing the fraud offence had the facts been as he or she believed them to be). In the interests of clarity, however, we think it would be better if the defendant's liability in this situation were apparent from the fraud legislation alone, without the need to invoke the law of attempts. Our recommendation is therefore that it should be sufficient, for the full fraud offence, if the defendant believes that the victim is unaware of the abuse of position.

Consequences other than actual financial loss

7.43

We now turn to the question whether it should be sufficient if by misrepresentation, non-disclosure or secret abuse of position the defendant dishonestly and intentionally brings about some consequence other than actual financial loss to another.

Parting with money or other property

7.44

To say that a person has suffered actual financial loss implies that that person's overall financial position has deteriorated. A requirement that the victim of the fraud should have suffered loss in this sense would clearly be too restrictive. It would mean, for example, that, where a person has been induced by misrepresentation to invest in a business venture, it would be necessary to prove not merely that that person would not have made the investment but for the misrepresentation, but also that the investment was objectively a bad one – that the securities bought were actually worth less than the price paid for them. There is no such requirement in the existing offence of obtaining property by deception,

^[20]

Not receiving money or other property

The definition of "loss" in the Theft Act 1968 includes "a loss by not getting what one might get, as well as a loss by parting with what one has".

^[21]

Having one's economic interests put at risk

At common law it is possible to defraud a person by putting his or her financial interests at risk, even if the risk is not expected to materialise and does not in fact do so.

^[22]

Allsop

^[23]

Financial gain without a corresponding loss

The next question is whether it should be sufficient that the defendant (or another) makes a financial gain, or whether it should be necessary that another sustains a loss in one of the senses described above. This issue was not considered in Consultation Paper No 155, because that paper proposed only certain specific extensions to the existing deception offences. In our informal discussion paper, however, we proposed a kind of general deception offence, and for this purpose we proposed that it should be sufficient if by deception the defendant either causes a loss or makes a gain. We explained:

This might go somewhat further than is strictly necessary in order to ensure that the existing offences are superseded. But the offence of obtaining services already applies to most cases where D makes a gain by deception, other than by obtaining property, because a "service" can consist of any act or omission. The only real limitation is that the act or omission must be understood to be paid for. If the new offence extended to the making of any gain by deception, it would catch the obtaining of a valuable service which costs the victim nothing to provide and for which the victim does not expect to be paid. We believe that there is no reason why such conduct should not be criminal, and that the greater simplicity of this approach is ample justification for the marginal widening of liability that it would entail. Defining the offence in terms of gain to the fraudster, without the need to prove a corresponding loss to the victim, would also preclude any argument that no offence has been committed because the victim got value for money and so suffered no "loss".

7.48

Of those who commented on this proposal, 15 supported it

^[24]

^[25]

^[26]

In our view, however, the law should take a robust and realistic line on this issue. It may be that, where a person's dishonest conduct has genuinely caused no harm whatsoever to anyone else, that conduct is not appropriately described as fraud. However, for every case where this is truly so, there will be many where the loss to others is hard to identify but is none the less real. At paragraph 4.15 we set out the facts of the Guinness fraud, in which it was clear that there were many losers, but it would have been very hard to bring evidence of these widely dispersed losses. Similarly, in cases of insider dealing it is clear that market participants suffer as a result of the insiders' actions, but the losses are indirect and diffuse. The fact that the defendant has dishonestly made a gain is not itself the reason for criminalising the defendant's conduct. It is, however, the obvious and visible symptom of conduct which, on closer inspection, proves to be anti-social in less obvious ways.

7.50

Moreover, it is already possible to incur liability for deception without causing loss of any kind. For example, section 20(2) of the Theft Act 1968, which creates the offence of procuring the execution of a valuable security by deception, expressly provides that it is sufficient if the defendant acts with a view to gain or with intent to cause loss. We see no reason why conduct which already falls within a deception offence should be excluded from the new fraud offence.

7.51

For these reasons we believe that it would be unrealistic and artificial to say that the new fraud offence requires proof of loss to others. The dishonest making of a financial gain should suffice.

7.52

On the other hand we also believe that, where the defendant has dishonestly caused financial loss to another, it should not be a defence that the defendant acted out of malice or mischief and not for financial gain. It should be sufficient that the defendant either causes financial loss to another or makes a financial gain (or enables a third party to do so).

Non-economic prejudice

7.53

Fraud is essentially an economic crime, and we do not think the new offence should extend to conduct which has no financial dimension. Thus it would not be fraud (as distinct from a sexual offence) for a man to deceive a woman into having sex with him, even if fact-finders thought this was "dishonest". It would be different if the woman were a prostitute and the deception went to the prospect of payment.

^[27]

^[28]

Fraud as an inchoate offence

Arguably the full offence should not be committed unless the defendant has succeeded in actually causing a loss or making a gain: where the defendant has acted with intent to cause loss or make a gain, but that intent has been frustrated, a conviction of attempt would adequately reflect the criminality of the defendant's conduct. It may sometimes be debatable, however, whether a loss has actually been caused or a gain made, whilst it is clear beyond doubt that the defendant intended to bring about one or both of those outcomes. We think it would be unfortunate if, in such a case, it had to be determined whether there had in fact been gain or loss within the meaning of the Act, when that question had little bearing on the gravity of the defendant's conduct or the appropriate sentence. We think that, as in the case of those offences under the Theft Act 1968 whose definitions employ the concepts of gain and loss,

^[29]

with intent

In the light of this conclusion we have considered whether it should be possible to prosecute for an attempt to commit the new offence. At present, a conviction of attempt is appropriate where, for example, the defendant deceives the victim but fails to obtain the desired benefit, or where the victim sees through the fraud. Under our recommendations there would be no need to charge an attempt in these cases, because the defendant would be guilty of the full offence. The offence would not, however, be committed by a defendant who makes a representation in the belief that it is false when it is actually true, or who does not succeed in making a representation at all (for example because the relevant communication fails to arrive). If these cases are to be covered at all, it can only be done via the law of attempts. It may be arguable that this would be inappropriate, because the resulting liability would be doubly inchoate. On the other hand, these cases would be attempts to obtain by deception under the present law, and we see no reason why they should cease to be criminal. We think that the law of attempts should apply to the new offence as it applies to other indictable offences.

Intended causation

7.56

In Consultation Paper No 155 we asked whether the need to prove a causal link between the deception and the resultant loss or gain gave rise to difficulty. Although some evidential difficulties do arise, a significant number of respondents strongly argued that the nexus between the defendant's act and its consequences is fundamental and should continue to be a vital part of the offence. Since we have concluded that the new fraud offence should be inchoate in character – in other words, that it should not be necessary for any particular event actually to occur after the defendant's fraudulent conduct – there can obviously be no requirement that any such event be caused by the defendant's conduct. The requirement of intent to make a gain or cause a loss, however, implies a requirement of intended causation (as distinct from actual causation). The defendant's intention must be to make a gain or cause a loss by means of his or her conduct.

7.57

In most cases this requirement will cause no difficulty. There may be a theoretical difficulty in the case of the misuse of payment cards, because the prosecution will have to prove both (a) that by using the card the defendant made an implied misrepresentation that he or she was authorised to use it, and (b) that he or she hoped to get the desired property (or services) by means of that misrepresentation. In view of the reasoning in Charles and Lambie

^[30]

by means of

might

knew

Our recommendation

We recommend that any person who, with intent to make a gain or to cause loss or to expose another to the risk of loss, dishonestly

(1) makes a false representation, or

(2) fails to disclose information to another person which

(a) he or she is under a legal duty to disclose, or

(b) is of a kind which the other person trusts him or her to disclose, and is information which in the circumstances it is reasonable to expect him or her to disclose, or

(3) abuses a position in which he or she is expected to safeguard, or not to act against, the financial interests of another person, and does so without the knowledge of that person or of anyone acting on that person's behalf,

should be guilty of an offence of fraud. (Recommendation 1)

Possible defences

Lawful conduct, "claim of right" and "belief in a claim of right"

7.59

In Consultation Paper No 155 we said that we thought it wrong that conduct which is not "actionable" (in the sense of amounting to no civil wrong and giving rise to no civil remedy) should be regarded as a crime of dishonesty. We refer to this possible defence as a "claim of right", to be distinguished from a possible defence of "belief in a claim of right," an example of which is provided by section 2(1)(a) of the Theft Act 1968, which we also consider.

The proper role of the criminal law of dishonesty, in our view, is to provide additional protection for rights and interests which are already protected by the civil law of property and obligations. To apply it to conduct which gives rise to no civil liability is to extend it beyond its proper function.^[31]

7.61

Only a few respondents passed comment on this. Professor G R Sullivan, perhaps the leading academic champion of a general fraud offence, agreed that it was a necessary limitation. Both the CPS and the SFO, however, opposed it. The CPS thought it would make criminal cases more complex if concepts of civil law were introduced. The Law Society thought it would be "confusing".

^[32]

In reaching our provisional conclusion in Consultation Paper No 155 we criticised certain decisions of the Court of Appeal to the effect that theft may be committed by a person who accepts a transfer of property as a valid gift or under an unimpeachable contract, if in all the circumstances the acceptance of the property is dishonest. One of those decisions, Hinks, has since been affirmed by the House of Lords. Lord Steyn said, in a speech with which Lord Slynn of Hadley and Lord Jauncey of Tullichettle agreed:

Counsel for the appellant … pointed out that the law [as the majority held it to be] creates a tension between the civil and the criminal law. In other words, conduct which is not wrongful in a civil law sense may constitute the crime of theft. Undoubtedly, this is so. The question whether the civil claim to title by a convicted thief, who committed no civil wrong, may be defeated by the principle that nobody may benefit from his own civil or criminal wrong does not arise for decision. Nevertheless there is a more general point, namely that the interaction between criminal and civil law can cause problems … The purposes of the civil law and the criminal law are somewhat different. In theory the two systems should be in perfect harmony. In a practical world there will sometimes be some disharmony between the two systems. In any event, it would be wrong to assume on a priori grounds that the criminal law rather than the civil law is defective.^[33]

There were powerful dissenting speeches in Hinks and the case has attracted vigorous academic criticism on a number of points, including this one. Whilst we can see that there may be merit in those criticisms on certain technical aspects of the law of theft, in so far as the passage cited above formulates a general proposition on the interrelationship between civil and criminal liability we respectfully agree with it.

7.64

Whilst it is likely that the vast majority of cases covered by the new offence will involve civil liability, we cannot be sure that this will always be the case. For example, in the absence of misrepresentation or a legal duty of disclosure, the dealer who dishonestly buys an antique at a gross undervalue is protected in civil law by the rule of caveat vendor, but this would not in itself be a defence to the new fraud offence (just as, under Hinks, it is not a defence to a charge of theft). Moreover, the concept of constructive trust and restitutionary relief for unjust enrichment or undue influence is still developing and is unpredictable.

7.65

We have, in our definition of the offence, carefully set out a series of conditions which must be satisfied before the conduct or omission described may be said to be potentially criminal by being, in addition, dishonest. We are satisfied that if such conduct or omission is proved and if it is dishonest then the label "criminal" would be entirely proper. Further, we would be very surprised were such conduct, if proved, not to attract a civil remedy in all save the rarest of cases. Indeed, we suspect that on the facts of Hinks there may well have been a civil remedy. The absence of civil liability might, of course, be a factor relevant to, and perhaps, in the view of the jury, conclusive of, the issue of dishonesty. What we think it is important to avoid, however, is explicitly tying criminal consequences to the establishment of a civil wrong. The criminal law should be free standing, particularly where the civil law is complex and, perhaps, to some extent unpredictable. Thus, we do not think that the absence of a civil wrong should be a defence in itself, and we make no such recommendation. If this results, in a very small number of cases, in a want of congruence between criminal and civil sanctions then that would be unfortunate but a price worth paying to avoid the criminal courts becoming embroiled in arguments over civil liability.

7.66

We do not therefore recommend that a "claim of right" should be a complete defence to the offence of fraud, nor do we recommend that "belief in a claim of right" should be a complete defence. However, we believe that in the vast majority of such cases the requirements of Ghosh dishonesty will suffice to ensure that justice is done, and that the civil and criminal law are kept closely in line with each other.

7.67

The first limb of the Ghosh test requires the jury to consider, on an objective basis, whether the defendant's actions were dishonest. If the defendant may have believed that she had a legal right to act as she did, it will usually follow that the jury will be unable to conclude that they are sure that she was dishonest, on an objective basis. In appropriate cases we believe it would be proper for a judge to direct the jury to the effect that if that is the case then an acquittal should follow, without their having to consider the second limb of the Ghosh test.

7.68

In some exceptional cases it may be important for the judge in summing up to emphasise to the jury that the "belief in a claim of right" should be considered in the context of the first limb of the Ghosh test, rather than the second limb. Such cases may arise where a defendant recognises that "reasonable and honest" people might consider his actions dishonest, despite also believing that he had a legal right to act as he did. For example, D works for V plc as a shop manager, and has accrued many hours of overtime. V plc has failed to pay him for his overtime, despite D's repeated requests and complaints. D feels that he cannot sue the company for the money, because he would risk being sacked, but on the other hand he cannot afford to let the matter drop. Eventually D uses his position as a manager to take cash from V plc's account. Knowing that he is not authorised to take money from the account to pay himself, he falsifies the documentation. D states in evidence that he genuinely believed that he had a legal right to the money, that he was only taking that which he believed was already his by the only means available to him, but he concedes that he also believed that most reasonable, honest people would consider his actions dishonest. Although he would, on his own admission, have fallen foul of the second limb of the Ghosh test, if the jury were not satisfied that his actions were in fact dishonest, on the ordinary standards of reasonable and honest people, it would be wrong for them to convict D merely on the basis that he erroneously believed that reasonable, honest people would find his actions dishonest.

7.69

We think it likely that using the Ghosh approach as a means of analysing cases of "belief in a claim of right" would ensure that defendants who genuinely believe that they have a claim of right will be acquitted. However, it would not operate as an automatic and complete defence as it does to theft by reason of section 2(1)(a) of the Theft Act 1968. We believe that this is right, as a matter of policy, not only because we are seeking to ensure that the criminal law is not tied to the civil law, but also because there may be cases where a belief in a claim of right should not lead to an acquittal. For example a "Robin Hood" defendant could seek to exploit legal "loopholes" in order to redistribute property in a way, not amounting to theft, which she believes to be morally right, but which she knows most reasonable, honest people would consider dishonest. She may then argue that she genuinely believed that she had a legal right to act as she did, despite knowing that most reasonable, honest people would categorise her actions as dishonest. If there were a complete "belief in a claim of right" defence, such a defendant would have to be acquitted. Under the Ghosh test, however, it would be for the jury to decide whether her exploitation of legal loopholes was in fact dishonest, on the ordinary standards of reasonable, honest people.

7.70

It is conceivable that there might be a case involving a belief in a claim of right which would be decided differently depending on whether the offence charged is theft or fraud, because section 2(1)(a) will only apply to the former. That this is likely to be rare in the extreme is reflected in the authorities which we cite below. In the light of our conclusion, however, it is possible that at some point in the future we may re-visit the interaction between section 2(1)(a) and Ghosh, in the context of the law of theft.

7.71

In Woolven

^[34]

Ghosh

… any direction based on the concept of claim of right as set out in section 2(1)(a) [of the Theft Act 1968], or otherwise, would have added nothing to what the learned judge in fact said. Indeed a direction based on Ghosh seems likely to us to cover all occasions when a section 2(1)(a) type direction might otherwise have been desirable.

This statement was approved by a more recent judgment of the Court of Appeal.

^[35]

Ghosh

Public interest

Commenting on our informal discussion paper, the Newspaper Society pointed out that responsible investigative journalism can occasionally require subterfuge, and that this is supported by the Press Complaints Commission's Code of Practice. They argued that a general deception offence might criminalise legitimate undercover journalism, and called for an explicit public interest defence.

7.74

In Consultation Paper No 150, where we provisionally proposed that it should be an offence to use or disclose another's trade secret without authority, we recognised the force of this argument and proposed that the new offence should not extend to

(1) the use, or the disclosure to an appropriate person, of information for the purpose of the prevention, detection or exposure of

(a) a crime, a fraud or a breach of statutory duty, whether committed or contemplated;

(b) conduct which is in the nature of a fraud on the general public; or

(c) matters constituting a present or future threat to the health or welfare of the community; or

(2) any use or disclosure of information which, under the law of confidence, would be justified on grounds of public interest.^[36]

Of the respondents who commented on this proposal, the vast majority agreed that such a defence was necessary. The DTI and FSA both reported that whistleblowing was a valuable source of information in the investigation of companies and that such disclosure must be protected. We have not yet formulated final recommendations on this subject.

7.76

In our 1998 report on corruption, on the other hand, we rejected the Newspaper Society's call for a public interest defence:

We have considered whether it would be appropriate to have a public interest defence in the law of corruption so that a defendant could argue, for example, that the purpose of the alleged bribe was to cause an agent to expose his or her principal's criminal activities.^[37] We have decided against recommending such a defence. It may indeed be the case that an agent should be protected if he or she discloses information for the benefit of the public and not for personal gain. Where an advantage is conferred by one party on another, however, we fear that a public interest defence would positively encourage a climate of corruption.^[38]

We think that similar considerations apply to misrepresentation, non-disclosure and abuse of position. Under the existing law, investigative journalists in search of evidence of wrongdoing may well engage in conduct which is itself prima facie criminal.

^[39]

^[40]

Mode of trial and sentence

The majority of the existing offences of dishonesty, including all the deception offences, are triable either summarily or on indictment. Conduct falling within the new offence might range from the extremely serious to the comparatively minor, and we think it clear that the offence should be triable either way. If Lord Justice Auld's recent recommendation of a third, intermediate, level of criminal court were adopted,

^[41]

On conviction on indictment, the maximum sentence for obtaining property or a money transfer by deception is ten years.

^[42]

We recommend that fraud should be triable either way, and on conviction on indictment should be punishable with up to ten years' imprisonment. (Recommendation 2)

Note 1    Report on Conspiracy and Criminal Law Reform (1976) Law Com No 76.    [Back]

Note 2    Scott v Metropolitan Police Commissioner [1975] AC 819, 839, per Viscount Dilhorne.    [Back]

Note 3    See paras 2.5 – 2.6 above.    [Back]

Note 4    History of Criminal Law (1883) vol 2, pp 121 – 122.    [Back]

Note 5    For our approach to the issue of causation, see paras 7.53 – 7.54 below.    [Back]

Note 6    See para 3.29 above.    [Back]

Note 7    [1977] AC 177; see para 3.31 – 3.33 above.    [Back]

Note 8    [1982] AC 449; see para 3.31 – 3.33 above.    [Back]

Note 9    Section 15(4) of the Theft Act 1968 reflects these alternatives by saying that a deception may be “deliberate or reckless”. The word “reckless”, however, is somewhat problematic. In other contexts, such as criminal damage, it has been construed as denoting a culpable state of mind falling short of actual awareness of risk, namely where the defendant gives no thought to the possibility of a risk even though it is obvious: Caldwell [1982] AC 341. It cannot mean this in the context of fraud, because if the defendant is unaware of the possibility that what is asserted may be untrue then the requirement of dishonesty cannot be satisfied, even if any reasonable person in the defendant’s position would have thought it obvious that the assertion was likely to be untrue. Nevertheless, we think it is less confusing to avoid the word “reckless” and to refer simply to an awareness that the assertion might be untrue or misleading. This also has the advantage of not imposing a separate requirement that the risk in question should have been such as to make it unreasonable in all the circumstances for the defendant to take it. Such a requirement is implicit in both the objective and the subjective concept of recklessness. We do not believe that the defendant should be convicted of fraud merely because he or she was aware of a small risk that the representation in question might be untrue, if in all the circumstances that was a reasonable risk to take; but under our recommendations such a defendant could expect to be acquitted on the ground that such conduct is not dishonest. We see no need for a separate rule that the taking of the risk be unreasonable, and we believe that the law would be simpler without such a rule.    [Back]

Note 10    The pre-1968 concept of “false pretence” did not include a misrepresentation as to the defendant’s state of mind: Dent [1955] 2 QB 590. Such a misrepresentation is sufficient for the tort of deceit, however (Edgington v Fitzmaurice (1885) 29 Ch D 459), and section 15(4) of the Theft Act 1968 expressly provides that “deception” includes a deception as to the present intentions of the person using the deception or any other person. Clause 2(3) of our draft Bill similarly provides, for the avoidance of doubt, that, for the purpose of the new fraud offence, “representation” includes a representation as to the intentions of (a) the person making the representation or (b) any other person.    [Back]

Note 11    [l975] AC 819.    [Back]

Note 12    The Hong Kong report.    [Back]

Note 13    Theft (Amendment) Ordinance 1999.    [Back]

Note 14    See para 7.6 – 7.7 above.    [Back]

Note 15    See para 2.22 above.    [Back]

Note 16    See para 2.11 above.    [Back]

Note 17    Financial Services and Markets Act 2000, s 90.    [Back]

Note 18    See para 7.62 – 7.68 below for our views on the relationship between the civil and criminal law.    [Back]

Note 19    See para 7.62 — 7.68 below for our views on the relationship between the civil and the criminal law.    [Back]

Note 20    Similarly, the Theft Act 1968 creates several offences of which one element is an intent to cause loss to another (viz false accounting, suppression of documents, procuring the execution of a valuable security by deception, and blackmail), and “loss” is defined for this purpose by s 34(2)(a) as any loss, temporary or permanent, in money or other property. According to Sir John Smith, “D intends P to suffer a loss if he intends him to be deprived of particular money or property, though he may also intend that P be fully compensated in economic terms”: Smith on Theft, para 10-18. Clause 5 of our draft Bill is framed in similar terms.    [Back]

Note 21    Section 34(2)(a).    [Back]

Note 22    See paras 4.20 — 4.25 above.    [Back]

Note 23    (1976) 64 Cr App R 29.    [Back]

Note 24    Including the CPS, the SFO, the Criminal Bar Association and the Law Society.    [Back]

Note 25    Including the North Eastern Circuit and Liberty.    [Back]

Note 26    This conception of fraud as being confined to the defrauding of others, rather than the making of dishonest gains for oneself, was also advanced in our work on the law of corruption. In Legislating the Criminal Code: Corruption, Consultation Paper No 145 we argued (at paras 1.23 – 1.30) that this is why corruption is not in essence, and should not be treated as, an offence of fraud, although in practice it usually does cause loss to others. Some respondents argued that corruption is an offence of dishonesty (see Legislating the Criminal Code: Corruption (1998) Law Com No 248, para 5.127), but there was general agreement that it is not an offence of fraud (ibid, n 134).    [Back]

Note 27    Eg Linekar [1995] QB 250, where the defendant paid a prostitute with a worthless cheque.    [Back]

Note 28    Clause 5(2).    [Back]

Note 29    The expression used in the Theft Act is “with a view to gain … or with intent to cause loss …” (italics supplied). Strictly speaking, a view to gain is probably a kind of purpose, whereas a defendant can intend to cause loss where he or she does not wish to do so but knows that that is an inevitable side-effect of the making of the desired gain. But it is hard to imagine a person intending to make a gain without having a view to the making of a gain, and for simplicity the draft Bill abandons the distinction.    [Back]

Note 30    See paras 3.31 – 3.33 above.    [Back]

Note 31    Consultation Paper No 155, para 5.28.    [Back]

Note 32    The Law Society also thought that such a defence was unnecessary because the defendant would not be dishonest within the Ghosh test. But this is clearly not the case, as Hinks shows (see para 7.65 below).    [Back]

Note 33    [2001] 2 AC 241, 252.    [Back]

Note 34    (1983) 77 Cr App R 231.    [Back]

Note 35    Wood [1999] Crim LR 564. The full judgment is available on the Smith Bernal Casetrack website, in which Beldam LJ is quoted as saying that “Whilst there has been academic discussion whether a direction based on Ghosh is sufficient to cover all cases of claim of right, this Court has said that it is likely to do so.” He then citesWoolven. (No page or paragraph numbers are provided in the Casetrack judgment.)    [Back]

Note 36    Consultation Paper No 150, para 6.54.    [Back]

Note 37    Although article 10(1) of the ECHR gives everyone the right “to receive and impart information and ideas without interference by public authority”, we doubt that this provision would afford the “bribing” investigative journalist with a defence to a charge of corruption. Not only has the right to receive information been interpreted as “basically prohibit[ing] a Government from restricting a person from receiving informationthat others wish or may be willing to impart to him” (Leander v Sweden (1987) 9 EHRR 433, 456 (italics added)), but article 10(2) provides a broad list of public interest purposes which will justify public interference with freedom of expression: it may be circumscribed “in the interests of national security, territorial integrity or public safety, for the prevention of disorder or crime, for the protection of health or morals, for the protection of the reputation or rights of others, for preventing the disclosure of information received in confidence, or for maintaining the authority and impartiality of the judiciary”. (Footnote in original)    [Back]

Note 38    Legislating the Criminal Code: Corruption (1998) Law Com No 248, para 5.152.    [Back]

Note 39    Eg Shannon [2001] 1 WLR 51, where a journalist posing as an Arab sheikh had induced the defendant to supply him with prohibited drugs. The journalist would appear to have been guilty of an offence.    [Back]

Note 40    See the Code For Crown Prosecutors, sections 4 and 6 (http://www.cps.gov.uk). It should be noted however that, in accordance with our conclusions in Consents to Prosecution (1998) Law Com No 255, we do not recommend that the consent of the DPP or the Law Officers should be required before proceedings can be brought. Private prosecutions would therefore be possible.    [Back]

Note 41    Lord Justice Auld, Review of the Criminal Courts of England and Wales (October 2001),p 275    [Back]

Note 42    Theft Act 1968, ss 15(1) and 15A(5).    [Back]

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You are here: BAILII >> Databases >> The Law Commission >> FRAUD [2002] EWLC 276(7) (01 July 2002) URL: http://www.bailii.org/ew/other/EWLC/2002/276(7).html Cite as: [2002] EWLC 276(7)