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These notes refer to the Fraud Bill [HL] as introduced in the House of Commons on 29th March 2006
FRAUD BILL [HL]
EXPLANATORY NOTES
INTRODUCTION
1. These explanatory notes relate to the Fraud Bill as introduced in the House of Commons on 29th March 2006. They have been prepared by the Home Office in order to assist the reader of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament.
2. These notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So where a clause does not seem to require any explanation, none is given.
3. The Bill extends to England, Wales and Northern Ireland. The Bill does not extend to Scotland except clause 10(1) which amends the Companies Act 1985.
TERRITORIAL APPLICATION: WALES
4. The Bill applies to Wales as it does to the rest of the jurisdiction. It does not have any particular effect on the National Assembly for Wales.
BACKGROUND
5. The Government's policy on the reform of the criminal law of fraud is largely based on the Law Commission's Report on Fraud (Law Com No. 276, Cm 5560, 2002). The Law Commission's report did not deal with the position in Northern Ireland (because the Law Commission is concerned with the law in England and Wales). Views on the Law Commission's proposals were sought in the Government's consultation paper on Fraud Law Reform (May 2004). The Government's Response to the views expressed in consultations was published on the Home Office website (www.homeoffice.gov.uk/documents/cons-fraud-law-reform) on 24 November 2004. A parallel consultation was also carried out in Northern Ireland and responses were broadly similar to those in England and Wales.
[Bill 166-EN] 54/1
6. The Law Commission's report recommended that conspiracy to defraud should be abolished. The majority of those who responded on this point in the Home Office's consultation were opposed to this on the basis of serious practical concerns about the ability to prosecute multiple offences and the largest and most serious cases of fraud and a desire to see how the new statutory offences worked in practice before abolishing the conspiracy to defraud. There were also concerns that limitations on the scope of statutory conspiracy meant that certain types of secondary participation in fraud might still only be caught by the common law charge. So, in the light of the consultation, the Government concluded that immediate abolition of conspiracy to defraud would create considerable risks for the effective prosecution of fraud cases. The Government proposes to reassess whether there is a continuing need to retain conspiracy to defraud in the light of the operation of the new offences and the Law Commission's impending report on encouraging and assisting crime.
SUMMARY
7. The Bill sets out provisions for a general offence of fraud with three ways of committing it, which are by false representation, by failing to disclose information and by abuse of position. It creates new offences of obtaining services dishonestly and of possessing, making and supplying articles for use in frauds. It also contains a new offence of fraudulent trading applicable to non-corporate traders. This offence parallels the offences in section 458 of the Companies Act 1985 (c. 6) and Article 451 of the Companies (Northern Ireland) Order 1986 (SI 1986/1032 (N.I. 6)), which apply to companies and certain other corporate bodies. The Bill repeals the deception offences in sections 15, 15A, 16, and 20(2) of the Theft Act 1968 (c. 60), sections 15, 15A, 16 and 19(2) of the Theft Act (Northern Ireland) 1969 (c. 16 (N.I.)), sections 1 and 2 of the Theft Act 1978 (c. 31) and Articles 3 and 4 of the Theft (Northern Ireland) Order 1978 (SI 1978/1407 (N.I. 23)).
COMMENTARY ON CLAUSES
Clause 1: Fraud
8. Clause 1 creates a new general offence of fraud and introduces the three possible ways of committing it. The three ways are set out in clauses 2, 3 and 4 and explained below.
9. Subsection (3) sets out the penalties for the offence. The maximum custodial sentence of 10 years is the same as for the main existing deception offences and for the common law crime of conspiracy to defraud.
Clause 2: Fraud by false representation
10. Clause 2 makes it an offence to commit fraud by false representation. Subsection (1)(a) makes clear that the representation must be made dishonestly. This test applies also to clauses 3 and 4. The current definition of dishonesty was established in R v Ghosh [1982] Q.B.1053. That judgment sets a two-stage test. The first question is whether a defendant's behaviour would be regarded as dishonest by the ordinary standards of reasonable and honest people. If answered positively, the second question is whether the defendant was aware that his conduct was dishonest and would be regarded as dishonest by reasonable and honest people.
11. Subsection (1)(b) requires that the person must make the representation with the intention of making a gain or causing loss or risk of loss to another. The gain or loss does not actually have to take place. The same requirement applies to conduct criminalised by clauses 3 and 4.
12. Subsection (2) defines the meaning of "false" in this context and subsection (3) defines the meaning of "representation". A representation is defined as false if it is untrue or misleading and the person making it knows that it is, or might be, untrue or misleading.
13. Subsection (3) provides that a representation means any representation as to fact or law, including a representation as to a person's state of mind.
14. Subsection (4) provides that a representation may be express or implied. It can be stated in words or communicated by conduct. There is no limitation on the way in which the representation must be expressed. So it could written or spoken or posted on a website.
15. A representation may also be implied by conduct. An example of a representation by conduct is where a person dishonestly misuses a credit card to pay for items. By tendering the card, he is falsely representing that he has the authority to use it for that transaction. It is immaterial whether the merchant accepting the card for payment is deceived by the representation.
16. This offence would also be committed by someone who engages in "phishing": i.e. where a person disseminates an email to large groups of people falsely representing that the email has been sent by a legitimate financial institution. The email prompts the reader to provide information such as credit card and bank account numbers so that the "phisher" can gain access to others' personal financial information.
17. Subsection (5) provides that a representation may be regarded as being made if it (or anything implying it) is submitted in any form to any system or device designed to receive, convey or respond to communications (with or without human intervention). The main purpose of this provision is to ensure that fraud can be committed where a person makes a representation to a machine and a response can be produced without any need for human involvement. (An example is where a person enters a number into a "CHIP and PIN" machine.) The Law Commission had concluded that, although it was not clear whether a representation could be made to a machine, such a provision was unnecessary (see paragraph 8.4 of their report). But subsection (5) is expressed in fairly general terms because it would be artificial to distinguish situations involving modern technology, where it is doubtful whether there has been a "representation", because the only recipient of the false statement is a machine or a piece of software, from other situations not involving modern technology where a false statement is submitted to a system for dealing with communications but is not in fact communicated to a human being (e.g., postal or messenger systems).
Clause 3: Fraud by failing to disclose information
18. Clause 3 makes it an offence to commit fraud by failing to disclose information to another person where there is a legal duty to disclose the information. A legal duty to disclose information may include duties under oral contracts as well as written contracts. The concept of "legal duty" is explained in the Law Commission's Report on Fraud, which said at paragraphs 7.28 and 7.29:
"7.28 ..Such a duty may derive from statute (such as the provisions governing company prospectuses), from the fact that the transaction in question is one of the utmost good faith (such as a contract of insurance), from the express or implied terms of a contract, from the custom of a particular trade or market, or from the existence of a fiduciary relationship between the parties (such as that of agent and principal).
7.29 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."
19. For example, the failure of a solicitor to share vital information with a client within the context of their work relationship, in order to perpetrate a fraud upon that client, would be covered by this clause. Similarly, an offence could be committed under this clause if a person intentionally failed to disclose information relating to his heart condition when making an application for life insurance.
Clause 4: Fraud by abuse of position
20. Clause 4 makes it an offence to commit a fraud by dishonestly abusing one's position. It applies in situations where the defendant has been put in a privileged position, and by virtue of this position is expected to safeguard another's financial interests or not act against those interests. The Law Commission explain the meaning of "position" at paragraph 7.38:
"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. This does not of course mean that it would be entirely a matter for the fact-finders whether the necessary relationship exists. The question whether the particular facts alleged can properly be described as giving rise to that relationship will be an issue capable of being ruled upon by the judge and, if the case goes to the jury, of being the subject of directions."
21. The term "abuse" is not limited by a definition, because it is intended to cover a wide range of conduct. Moreover subsection (2) makes clear that the offence can be committed by omission as well as by positive action. For example, an employee who fails to take up the chance of a crucial contract in order that an associate or rival company can take it up instead at the expense of the employer, commits an offence under this clause.
22. An employee of a software company who uses his position to clone software products with the intention of selling the products on would commit an offence under this clause.
23. Another example covered by this clause is where a person who is employed to care for an elderly or disabled person has access to that person's bank account and abuses his position by removing funds for his own personal use.
Clause 5: "Gain" and "loss"
24. Clause 5 defines the meaning of "gain" and "loss" for the purposes of clauses 2 to 4. The definitions are essentially the same as those in section 34(2)(a) of the Theft Act 1968 and section 32(2)(b) of the Theft Act (Northern Ireland) 1969. Under these definitions, "gain" and "loss" are limited to gain and loss in money or other property. The definition of "property" which applies in this context is based on section 4(1) of the Theft Act 1968 (read with section 34(1) of that Act) and section 4(1) of the Theft Act (Northern Ireland) 1969 (read with section 32(1) of that Act). The definition of "property" covers all forms of property, including intellectual property, although in practice intellectual property is rarely "gained" or "lost".
Clause 6: Possession etc. of articles for use in frauds
25. Clause 6 makes it an offence for a person to possess or have under his control any article for use in the course of or in connection with any fraud. This wording draws on that of the existing law in section 25 of the Theft Act 1968 and section 24 of the Theft Act (Northern Ireland) 1969. (These provisions make it an offence for a person to "go equipped" to commit a burglary, theft or cheat, although they apply only when the offender is not at his place of abode.). The intention is to attract the caselaw on section 25, which has established that proof is required that the defendant had the article for the purpose or with the intention that it be used in the course of or in connection with the offence, and that a general intention to commit fraud will suffice. In R v Ellames 60 Cr. App. R. 7 (CA), the court said that:
"In our view, to establish an offence under s 25(1) the prosecution must prove that the defendant was in possession of the article, and intended the article to be used in the course of or in connection with some future burglary, theft or cheat. But it is not necessary to prove that he intended it to be used in the course of or in connection with any specific burglary, theft or cheat; it is enough to prove a general intention to use it for some burglary, theft or cheat; we think that this view is supported by the use of the word 'any' in s 25(1). Nor, in our view, is it necessary to prove that the defendant intended to use it himself; it will be enough to prove that he had it with him with the intention that it should be used by someone else."
26. Subsection (2) provides that the maximum custodial sentence for this new offence is 5 years.
Clause 7: Making or supplying articles for use in frauds
27. Clause 7 makes it an offence to make, adapt, supply or offer to supply any article knowing that it is designed or adapted for use in the course of or in connection with fraud, or intending it to be used to commit or facilitate fraud. For example, a person makes devices which when attached to electricity meters cause the meter to malfunction. The actual amount of electricity used is concealed from the provider, who thus makes a loss. Subsection (2) provides that the maximum custodial sentence for this offence is 10 years.
Clause 8: "Article"
28. Clause 8 extends the meaning of "article" for the purposes of clauses 6 and 7 and certain other connected provisions so as to include any program or data held in electronic form. Examples of cases where electronic programs or data could be used in fraud are: a computer program can generate credit card numbers; computer templates can be used for producing blank utility bills; computer files can contain lists of other peoples' credit card details or draft letters in connection with 'advance fee' frauds.
Clause 9: Participating in fraudulent business carried on by sole trader etc.
29. Clause 9 makes it an offence for a person knowingly to be a party to the carrying on of fraudulent business where the business is not carried on by a company or (broadly speaking) a corporate body. This new offence parallels the existing offence that applies in the case of fraudulent businesses carried on by companies and certain other corporate bodies. The existing offence is contained in section 458 of the Companies Act 1985 (for England and Wales and Scotland) or (for Northern Ireland) in Article 451 of the Companies (Northern Ireland) Order 1986. The extension of this criminal liability under the companies legislation to non-corporate traders was recommended by the Law Commission in their Report on Multiple Offending (Law Com No. 277, Cm 5609, 2002). Non-corporate traders covered by the new offence include sole traders, partnerships, trusts, companies registered overseas, etc.
30. A person commits the offence of fraudulent trading under the companies legislation if he is knowingly party to the carrying on of a company's business either with intent to defraud creditors or for any other fraudulent purposes. This clause creates a similar offence that applies to persons knowingly party to the carrying on of non-corporate businesses in either of those ways. Fraudulent trading is in effect a general fraud offence, comparable to conspiracy to defraud, but requiring the use of a company instead of the element of conspiracy. The case law has established that:
- dishonesty is an essential ingredient of the offence;
- the mischief aimed at is fraudulent trading generally, and not just in so far as it affects creditors;
- the offence is aimed at carrying on a business but that can be constituted by a single transaction; and
- it can only be committed by persons who exercise some kind of controlling or managerial function within the company.
It is intended that these principles should apply to the new offence in clause 9 too.
31. Clause 9 refers to the case where a business is carried on by a person who is "outside the reach of" section 458 of the Companies Act 1985 or Article 451 of the Companies (Northern Ireland) Order 1986. This is done because although the basic application of section 458 and Article 451 is to "companies" (as defined for the purposes of that legislation), the offence is applied by other legislative provisions to other corporate bodies that are not companies. (Section 718 of the Companies Act 1985 and Article 667 of the Companies (Northern Ireland) Order 1986 are relevant here. There are also regulations that apply these offences to limited liability partnerships and European Economic Interest Groupings.) Moreover, the new offence does not apply in relation to corporate bodies whose businesses could be subject to section 458 or Article 451, but who have been exempted from the application of that section or that Article (see subsection (3)(c) and (4)(c)).
32. The maximum custodial sentence for this new offence is 10 years.
Clause 10: Participating in fraudulent business carried on by company etc.: penalty
33. Clause 10 increases the maximum custodial sentence for fraudulent trading under the companies legislation to 10 years. The Company Law Review, at paragraph 15.7 of its Final Report: Modern Company Law for a Competitive Economy (2001) recommended that the maximum penalty for the fraudulent trading offence in the 1985 Act be aligned with other offences of dishonesty in the Theft Act 1968 (i.e. 10 years). The offence in section 458 of the Companies Act 1985 applies in Scotland as well as in England and Wales and by virtue of clause 15(4) the amendment made by subsection (1) extends to Scotland too. Subsection (2) increases the maximum custodial sentence for the offence in Article 451 of the Companies (Northern Ireland) Order 1986 to 10 years.
Clause 11: Obtaining services dishonestly
34. Clause 11 makes it an offence for any person, by any dishonest act, to obtain services for which payment is required, with intent to avoid payment. The person must know that the services are made available on the basis that they are chargeable, or that they might be. It is not possible to commit the offence by omission alone and it can be committed only where the dishonest act was done with the intent not to pay for the services as expected. This offence replaces the offence of obtaining services by deception in section 1 of the Theft Act 1978 and Article 3 of the Theft (Northern Ireland) Order 1978, though the new offence contains no deception element. Under subsection (3) the maximum custodial sentence for this offence is 5 years.
35. The offence is not inchoate; it requires the actual obtaining of the service. For example, data or software may be made available on the Internet to a certain category of person who has paid for access rights to that service. A person dishonestly using false credit card details or other false personal information to obtain the service would be committing an offence under this clause. The clause would also cover a situation where a person climbs over a wall and watches a football match without paying the entrance fee - such a person is not deceiving the provider of the service directly, but is obtaining a service which is provided on the basis that people will pay for it.
36. Clause 11 also covers the situation where a person attaches a decoder to her television to enable viewing access to cable / satellite television channels for which she has no intention of paying.
Clause 12: Liability of company officers for offences by company
37. This clause repeats the effect of section 18 of the Theft Act 1968. It provides that company officers who are party to the commission of an offence under the Bill by their body corporate will be liable to be charged for the offence as well as the company. By virtue of subsection (2)(a) this offence applies to directors, managers, secretaries and other similar officers of a company. Subsection (3) provides that if the body corporate charged with an offence is managed by its members the members involved in management can be prosecuted too.
Clause 13: Evidence
38. This clause is similar to section 31(1) of the Theft Act 1968 and section 29(1) of the Theft Act (Northern Ireland) 1969. Under this clause a person is protected from incriminating himself or his spouse or civil partner for the purposes of offences under the Bill and related offences, while nonetheless being obliged to co-operate with certain civil proceedings relating to property. The clause goes beyond section 31(1) of the Theft Act and section 29(1) of the Theft Act (Northern Ireland) in removing privilege in relation to 'related offences'. "Related offence" is defined in subsection (4) as meaning conspiracy to defraud and any other offence involving any form or fraudulent conduct or purpose.
39. The Bill does not include an equivalent to section 30 of the Theft Act 1968. Section 30 was a positive statement, which went with the repeal of sections 12 and 16 of the Married Women's Property Act 1882. It was aimed at ensuring that a pre-1882 common law rule that husbands and wives could not steal from each other would not be resurrected. It should no longer be necessary to include a provision of this sort, as it seems highly unlikely this rule could be resurrected.
SCHEDULE 1: MINOR AND CONSEQUENTIAL AMENDMENTS
Abolition of various deception offences
Paragraph 1 removes the deception offences which are replaced by the new offences in the Bill.
Visiting Forces Act 1952
Paragraph 2 amends the Schedule to the 1952 Act which defines "offence against property" for the purposes of section 3 of that Act, which restricts the trial by UK courts of offenders connected with visiting forces. It inserts a reference to the Fraud Act 2005, so that all the offences in this Bill will be regarded as offences against property, meaning they cannot in most circumstances be charged against visiting forces.
Theft Act 1968
Paragraph 3 omits section 15B, which is no longer needed, as it is mainly supplementary to 15A which is being repealed by paragraph 1.
Paragraph 4 removes the references in section 18(1) of the 1968 Act (liability of company officers) to sections 15 and 16, which are repealed by paragraph 1. As explained above, the effect of section 18 is reproduced for all the new offences in the Bill by clause 12.
Paragraph 5 removes the reference in section 20(3) of the Act (which defines "deception" for the purposes of the offence - in subsection (2) - of procuring a valuable security by deception) to section 15, which is repealed by the Bill. Section 20(2) of the Act is repealed by paragraph 1, so there is no need for any replacement provision.
Paragraph 6 makes two amendments of section 24 of the Act (scope of offences relating to stolen goods).
- It replaces the reference in section 24(4) to section 15 with a reference to fraud within the meaning of the Bill.
- It adds a new subsection (5) to section 24 which provides that, in section 24(1), the reference to the commencement of the 1968 Act shall be read as a reference to the commencement of the Bill and the reference to offences under section 15 shall be read as a reference to the general fraud offence in clause 1.
Paragraph 7 makes three amendments of section 24A of the Act (on dishonestly retaining a wrongful credit, which was inserted by the 1996 Act as a result of R v Preddy [1996] AC 815).
- It deletes the existing subsections (3) and (4), which deal with the meaning of "wrongful", and replaces them with a new subsection (2A). The effect is
that the existing references to offences under section 15A are replaced by a reference to the general fraud offence in clause 1.
- The second change is consequential on the above - it renumbers as (2A) the existing reference to subsection (4) in subsection (7).
- It replaces the existing subsection (9), which says that 'account' and 'money' shall be construed in accordance with 15B. Although section 15B is repealed in paragraph 3, the substance of subsections (3) to (5) needs to be preserved for the sake of section 24A. This paragraph does this by inserting them as subsections (9) to (11) of section 24A, which is now their more natural home. (But the reference to the euro is dropped - it is no longer needed now that the euro is a currency.) It also expands the definition of "account" to include accounts kept with issuers of electronic money.
Paragraph 8 amends section 25 (going equipped). Section 25 will be replaced as far as its application to fraud is concerned by clauses 6 to 8. Therefore, section 25 needs modifying so that the references to 'cheats' in subsection (1), (3) and (5) are removed because the term 'cheat' is defined by reference to section 15 of the 1968 Act.
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