From bribery to false representation: civil fraud explained

Fraud is the most common offence in the United Kingdom, amounting to over 40 percent of all crime. The UK legal system specifically splits up each instance into either civil fraud or criminal fraud.

Both forms can involve deceit, misrepresentation, or intentional concealment of the truth to gain a dishonest advantage over another party. But they also differ significantly in several respects, including who initiates the legal action, the burden of proof required, and the potential penalties that can be imposed on the defendant.

In the recent Budget, funding was pledged to HMRC that will go some way towards investigating both civil and criminal fraud. When trying to ascertain whether a situation falls under civil fraud or criminal fraud, the below definitions are a useful point of reference:

• In criminal fraud, the person alleged to be responsible is normally prosecuted by the state and, if found guilty, will be punished according to the severity of the offence, by penalties such as a fine or imprisonment.
• In cases of civil fraud, the wronged party may pursue the recovery of funds or assets and seek compensation or damages. The outcome in a civil trial is determined by a judge.

Understanding these nuances can help individuals and businesses better protect their interests and navigate complex legal disputes. 

For practitioners, staying abreast of developments in this area and acting in a timely manner is key to successfully defending clients or recovering lost funds.

Recent developments

In 2023, the government introduced a new act – the Economic Crime and Corporate Transparency Act 2023 - which included changes to compliance with fraud. The failure to prevent fraud offence means a company can now be prosecuted for involvement in fraud where previously, a company could only be prosecuted for a fraud offence where the “directing mind and will” or “senior manager” of the company had some involvement in the offence. This change will mean that it is easier to attribute liability for fraud to organisations and will lead to more prosecutions.

Elsewhere, the rapidly changing technology industry constantly creates new challenges and intricacies for legal teams. The advancement and continued use of AI across industries brings with it the growing sophistication and prevalence of fraud offences. The financial services industry in particular also continues to innovate, throwing up new challenges in fraud through developments in how and where organisations spend money, such as through embedded finance, cryptocurrency and more. 

Finally, instances of fraud are steadily growing, against the backdrop of new economic pressures and challenges. All of this means practitioners have their work cut out to keep pace with any developments in this area of law.

Spotlight on civil fraud

It is important for both individuals and businesses, regardless of their size or structure, to appreciate the general nature of fraud. This helps prevent accidental involvement in fraudulent activities and recognise the signs that they are, or may potentially become, victims of both civil and criminal fraud.

Frauds derived from common law, or torts, rely heavily on ‘case law’ established from previously decided litigation, and which provides guidance for subsequent court proceedings.

In civil law, claims are pursued by the injured party through the appropriate civil court according to the nature, size and importance of the loss claimed to have occurred.

Crucially, anyone who has been a victim of fraud is able to report the matter to the police, which may lead to a criminal prosecution. In addition, the aggrieved party can pursue the appropriate remedy through a civil court. Both criminal and civil cases for the same fraud may be conducted simultaneously, although very careful consideration will be required to determine exactly how and when to proceed.

It is important for all parties to understand the different types of fraud, which are examined in more detail below.

Fraud by false representation

An action for misrepresentation may be brought when one party makes an untrue statement of fact or law which induces another party to enter into a contract that results in a loss.

There are three main types of misrepresentation:

• Fraudulent misrepresentation: where a false representation has been made knowingly, or without reasonable belief in its truth or recklessly as to its truth.
• Negligent misrepresentation: one which is made carelessly in breach of duty to take reasonable care owed by the one party to the other that the representation is accurate.
• Innocent misrepresentation: one made which is neither fraudulent nor negligent.

The general remedies, subject to various limitations, available before a civil court are cancelling or unwinding of the contract, placing the parties in the position they were in before entering the contract, or a sum in respect of damages.

In order to convict an individual of fraud by false representation, the prosecution must prove that the defendant was acting dishonestly rather than through ignorance or making an honest mistake.
 

Bribery

A bribe is an advantage offered to a person with the intent of persuading them to perform a specific action, typically for financial or personal gain of the person offering the bribe.

A bribe might occur when a payment is made during a commercial transaction to an individual acting in the position of an agent, in order to influence the terms of a contract without the knowledge of the other party. In simpler terms, it is a ‘secret payment’ designed to influence an outcome without the knowledge of other interested parties.

A claimant seeking damages arising from such activity does not have to prove the dishonest nature of the bribe as this will be presumed. However, if the payment is regarded as being too small to cause any worthwhile conflict of interest, it will probably not be regarded as being sufficient to have had a significant influence.

Generally, a court will have to consider whether there is a ‘real possibility’ that the bribe amounted to a detrimental conflict of interest, which brought about the alleged damage.

For solicitors, defending bribery charges can involve negotiating with the authorities so no criminal charge is brought, entering into an immunity or plea agreement, or working with a client to mount a robust defence at trial.

Breach of fiduciary duty

A fiduciary is a person who has assumed a position with a high level of trust, and therefore created a relationship of confidence. Fiduciary duties include acting in good faith, avoiding conflicts of interest and not profiting from the privileged position.

For example, a fiduciary might be instructed to conduct a sale of property or a business, manage a portfolio of shares or negotiate a confidential contract.

A fiduciary who has profited from their breach will be liable to account for any profits they have made, regardless of whether the profits would have been made had they not breached their duty.

Where an honest fiduciary finds themselves in breach of their duties, there are two possible defences: relief from liability and fully informed consent of the principal, though these are not viable where dishonesty has been found.

Dishonest assistance

Dishonest assistance arises when a person assists or facilitates the dishonest or fraudulent act of a wrongdoer.

There must be a breach of trust or fiduciary duty by another involving a dishonest act or omission. Such dishonesty may be actual dishonesty or ‘blind eye’ dishonesty, where a person suspects a dishonest act but deliberately avoids ascertaining the true position.

A court will require strong evidence to persuade it to make a finding of fact in relation to ‘dishonesty’, given the serious nature of such an allegation.