When the Fraud Act 2006 came into force, it had the effect of widening the scope of the offence to the extent that some commentators have suggested that it has, in effect, criminalised lying. Although company directors already have many duties and obligations – for example to the company, to its shareholders and to Companies House – the Act has the effect of placing further restrictions on their conduct.
The new fraud offences can be committed in three different ways, but in each case there must be the intention to make a gain or to induce a loss, or a risk of loss, as well as dishonesty on the part of the offender. None of the offences requires a ‘victim’ for the offence to be committed. In a corporate setting, establishing the first element (intention to make a gain) is unlikely to prove difficult, which means that if a statement made by, or on behalf of, the company is knowingly inaccurate, or if false or misleading information is given or relevant information omitted, this could amount to an offence under the Act.
There are three ways in which the new classifications of fraud can be committed:
Making a False Representation
This offence occurs when a person dishonestly makes a false representation, knowing that what they are saying is not, or may not be, true. As previously stated, there must also be the intent to make a gain or to cause another to suffer loss or a risk of loss. The offence is committedregardless of whether or not anyone is deceived, whether there are in fact any gains or losses and whether or not anyone is aware of the deception.
A ‘representation’ can be made in a wide variety of ways: expressly; by words, written statement, body language or conduct; or by omission, such as by failing to mention derogatory information or not correcting a false impression.
Failing to Disclose Information
If a person is under a legal duty to disclose information and dishonestly fails to do so, in order to make a gain or cause a loss, he or she will be guilty of fraud. The ‘legal duty’ could be contractual, arise out of a fiduciary duty or be a statutory duty. There is no requirement for a person to have been deceived or for there to have been any actual gains or losses. Ignorance or incompetence is not a defence, so if the prosecution can establish the requisite dishonesty, the offence will be proven. For example, a director who fails to disclose an interest in a contract at a full board meeting could be committing fraud. Likewise, a director who does not share knowledge with the company but uses it for his own benefit could also be guilty of this offence.
Abuse of Position
If a person acts in a position that requires them to safeguard the interests of another person and they dishonestly abuse that position, in order to make a gain or to cause another a loss, this is an offence of fraud by abuse of position. Again, there is no need to prove an actual loss or gain.
Such a position could exist where the relationship is between director and company, between partners, between employee and employer, agent and principal or trustee and beneficiary, amongst others. The potential offences are numerous and could include, for example, the breach of fiduciary duties of a director to a company if the director is personally involved in and benefits from a substantial property transaction between himself and the company.
As a result, it is very important for company directors and the boards of companies to have a sound understanding of the offences created by the Act and all businesses should ensure they have a well-drafted anti-fraud policy in place to address these new offences.
To discuss how to implement an anti-fraud policy or to clarify your obligations under the Fraud Act, contact us for specialist advice.