By Anand Doobay, Partner in the Fraud and Regulatory Department, Peters & Peters Solicitors

Introduction

1. It was back in 1998 that Jack Straw, the then Home Secretary, asked the Law Commission to examine the law on fraud and whether a general offence of fraud would be an improvement to the body of criminal law. A Law Commission Report, a Government Consultation Paper, the Government's response and eight years later the Fraud Act 2006 finally received Royal Assent on 8 November 2006 and came into force on 15 January 2007.

2. The Act abolishes the deception offences in the Theft Acts 1968 and 1978, namely:

  1. Obtaining property by deception (section 15, TA 1968);
  2. Obtaining a money transfer by deception (section 15A, TA 1968);
  3. Obtaining pecuniary advantage by deception (section 16, TA 1968);
  4. Procuring the execution of a valuable security by deception (section 20(2), TA 1968);
  5. Obtaining services by deception (section 1, TA 1978);
  6. Evasion of liability by deception (section 2, TA 1978).

3. The principal replacement is a new dishonesty based offence of fraud (section 1) which may be committed in the following three ways:

  1. Fraud by False Representation (section 2);
  2. Fraud by Failing to Disclose Information (section 3);
  3. Fraud by Abuse of Position (section 4).

4. The offence is triable either way and carries maximum 10-year sentence or a fine (or both) on indictment.

5. Each limb is a conduct offence, completed when the conduct is performed with the requisite state of mind irrespective of gain to the accused or loss to the victim. It also follows that most conduct that would have amounted to an attempt at a deception offence, constitutes a complete fraud offence.

6. Obtaining services by deception is replaced by a new offence of obtaining services dishonestly (section 11). The Act also creates new offences of possession of (section 6), and the making or supplying of (section 7), articles for use in fraud. By virtue of section 9, the offence of fraudulent trading (section 458 of the Companies Act 1985) will now apply to sole traders, partnerships and others 'carrying on ... a business'. The common law offence of conspiracy to defraud,1 contrary to the Law Commission's recommendation, was not repealed. The principal argument for retention was that abolition might leave an unforeseen lacuna in the law.

7. The Act also introduces a number of important procedural changes. Section 12 provides for personal liability of corporate officers who are party to the commission of an offence by their body corporate under the Act ("committed with the consent or connivance of...").

8. Schedule 1 of the Act amends the part of the Criminal Justice Act 1993 that deals with jurisdiction to make the offences under sections 1, 6, 7, 9, 11 Group A offences for the purposes of the 1993 Act. A person may be indicted for a Group A offence in England and Wales if a "relevant event" in relation to the offence took place in England and Wales. In relation to a section 1 offence the "relevant event" is amended to include the occurrence of any gain or loss intended by the accused. This means that where, for example, a false representation is made abroad with the intention to make gain or cause loss in England or Wales, the section 2 charge will lie but only if there is an actual gain or loss within this jurisdiction.

9. Finally, section 13 amends the scope of the privilege against self-incrimination in civil proceedings. The section is discussed in more detail below.

  1. An overview of the Fraud Act 2006
  1. The new fraud offence

10. Section 1 introduces the offence of fraud which can be committed in three circumstances that are, in the Act's own terms, where a person is in breach of sections 2 to 4. However, no statutory definition of fraud is provided leaving the Act open to criticism on the grounds of generality, open-endedness and potential criminalisation of trivial disputes. It is too early to tell how far prosecutorial discretion can address these criticisms.

Fraud by false representation

11. The broadest form of the fraud offence is in section 2. For this reason it is likely to be the most frequently invoked by the prosecution.

12. A person commits this offence if he:

  1. dishonestly makes a false representation, and
  2. intends, by making the representation –
    1. to make a gain for himself or another, or
    2. to cause loss to another or to expose another to a risk of loss.

13. Section 2 provides that a "representation" means any representation as to fact or law, including a representation as to the state of mind of the person making the representation, or any other person. A representation may be express or implied and can be made in any form. The Explanatory Notes state that this form of the offence will cover the act of "phishing", that is the use of emails to encourage people to provide bank account details.

14. A representation may also be made if it is submitted in any form to any system or device designed to receive, convey or respond to communications without human intervention. The introduction of this offence, in subsection 5, was encouraged by Re Holmes [2004] EWHC 2020 where the Court held that it was not possible to deceive a machine.

15. A person will make a representation falsely if it is untrue or misleading and the person making it knows that it is, or might be, untrue or misleading.

16. "Gain" and "loss" are defined in section 5 of the Act:

(2) "Gain" and "loss"—

(a) extend only to gain or loss in money or other property;

(b) include any such gain or loss whether temporary or permanent;

and "property" means any property whether real or personal (including things in action and other intangible property).

(3) "Gain" includes a gain by keeping what one has, as well as a gain by getting what one does not have.

(4) "Loss" includes a loss by not getting what one might get, as well as a loss by parting with what one has.

17. To reiterate the point made in the introduction, the offence is wholly conduct- based. There is no need to prove that a victim believed any representation or acted on it. Nor is it necessary to establish that the accused made a gain or caused a loss by his representation.

18. Even if in practice prosecutors may have to call evidence from a victim, since a jury may well expect to hear from someone who suffered as a result of the crime, the fact of the matter remains – as aptly put by Professor David Ormerod – that "this wholly inchoate offence appears to criminalise lying"!

19. There are other practical implications especially in determining blameworthiness and punishment. To use Ormerod's example, if the accused typed an impressive high yield investment prospectus into his computer and emailed it, he seems to have committed an offence under section 2. What sentence is appropriate? The representation might have made millions of pounds from gullible investors, or been universally treated as irritating spam and deleted ((2007) Crim. L. R. p.197).

20. The Sentencing Guidelines Council's Definitive Guideline Sentencing for fraud addresses the problem but only partially. For example, high level of profit from the offence and multiple victims are aggravating factors (para.22). There is no mitigation where no actual loss results. Where no actual loss results the Guideline directs as follows (para.20):

"In such cases a court should use the starting point corresponding to the amount which the offender intended to obtain and adjust the assessment of seriousness to reflect the fact that no loss has resulted."

21. Of how much use is this to a Court faced with the facts presented in the above example?

Fraud by failing to disclose information

22. Section 3 provides that a person commits an offence under this section if he:

  1. dishonestly fails to disclose to another person information which he is under a legal duty to disclose, and
  2. intends, by failing to disclose the information –

(i) to make a gain for himself or another, or

(ii) to cause loss to another or to expose another to a risk of loss.

23. The section contains no definition as to what constitutes "legal duty" necessary to trigger the offence. However, the Law Commission's Report on Fraud commented on the concept of a "legal duty" and could be of assistance:

"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). 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." (paras. 7.28 and 7.29)

Fraud by abuse of position

24. Section 4 provides that the offence will be committed if a person:

  1. occupies a position in which he is expected to safeguard, or not to act against, the financial interests of another person,
  2. dishonestly abuses that position, and
  3. intends by means of the abuse of that position –
    1. to make a gain for himself or another, or
    2. to cause loss to another or to expose another to a risk of loss.

25. Section 4 does not define "abuse" or "position". However regarding the former concept the section states that an omission will be enough for an abuse of position to take place. An example given in the Explanatory Notes is of an "employee who fails to take up a crucial contract in order that an associate or rival company can take it up instead at the expense of the employer".

26. The Law Commission's Report offers some assistance with the "position":

"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." (para.7.38)

B. Obtaining services dishonestly

27. Section 11 provides that the offence will be committed if a person obtains services for himself or another by committing a dishonest act and in breach of subsection 2. A person obtains services in breach of the subsection if:

  1. they are made available on the basis that payment has been, is being or will be made for or in respect of them,
  2. he obtains them without any payment having been made for or in respect of them or without payment having been made in full, and
  3. when he obtains them, he knows –
  1. that they are being made available on the basis described in paragraph (a), or
  2. that they might be,

but intends that payment will not be made, or will not be made in full.

28. The offence carries a maximum sentence of five years.

29. There are a number of significant differences to the offences under sections 2 – 4. First, the offence requires that the service must actually be obtained, in other words, it is not inchoate.

30. Secondly, the offence is committed only where the accused failed to pay in whole or in part so that, for example, a person who gains access to a health centre available for use only for local residents by lying about his home address will not commit section 11 offence if he pays the requisite fee for the use of the facilities.

31. Thirdly, the services must not be free of charge. Thus the offence does not cover applications for bank accounts unless the service is to be paid for. Finally, the offence cannot be committed by omission.

32. However, the section 2 offence may be committed in some of these circumstances.

C. Dishonesty

33. As the central mens rea for the offences discussed above, dishonesty merits a brief consideration. Crucially, given the wide scope of the offences, it is expected that dishonesty may act as a significant brake in the expansion of the offences and may assist in sifting out marginal cases.

34. The leading authority is the Court of Appeal decision in Ghosh [1982] QB 1053 where the Court laid down the twofold test:

  1. Was what was done dishonest according to the ordinary standards of reasonable and honest people? If no, the defendant is not guilty.
  2. If yes, did the defendant realise that reasonable and honest people regard what he did as dishonest? If yes, he is guilty; if no, he is not.

35. The Ghosh test has faced sustained academic criticism, with an argument that it lacks legal certainty and is effectively retrospective, because it is left to the jury to consider the defendant's behaviour with the benefit of objective hindsight. Some say the approach is potentially contrary to Article 7 of the European Convention of Human Rights, although the Fraud Act has been confirmed as ECHR compliant by both the Home Secretary and the Attorney-General. For others it allows for the flexibility necessary in a jury system.

D. The possession / supply offences

36. The possession offence carries a maximum sentence on indictment of five years imprisonment, a fine, or both. While the making or supplying offence carries a maximum sentence on indictment of 10 years, a fine, or both.

37. Of the two offences, section 7 is less controversial. The section makes it clear that to be guilty of the offence a person who makes (adapts, supplies or offers to supply) any article for use in the course of or in connection with fraud must do so knowingly or with intention that it will be so used. However the section does not require that the person intend to use the article for fraudulent purpose himself – all that is necessary is that the article will be so used.

38. In contrast section 6 states that "a person is guilty of an offence if he has in his possession or under his control any article for use in the course of or in connection with any fraud". No mens rea is stated in the offence. Given the wide definition of "article" in section 8, which expressly includes "any program or data held in electronic form", section 6 poses serious risk of over-criminalisation. Fortunately the Explanatory Notes make clear that for a person to be guilty of an offence under the section, he must possess an article with the intention to commit fraud. It is hoped that the courts will imply such a mens rea.

E. The privilege against self-incrimination

39. Section 13 provides that a person is not to be excused from answering any question put to him in proceedings relating to property, or complying with any order made in proceedings relating to property on the ground that doing so may incriminate him, his spouse or his civil partner of an offence under the Fraud Act or a related offence. However, such statements or admissions are not admissible in evidence in proceedings under the Act or for a related offence.

40. The definition of a "related offence" is left ambiguously defined as "conspiracy to defraud and any other offence involving any form of fraudulent conduct or purpose". Hence it is not surprising that the scarce case law that has so far emerged under the Act focuses on this concept.

JSC BTA Bank v Ablyazov [2009] EWCA Civ 1124

41. In this case the Court of Appeal had to consider whether section 328 of the Proceeds of Crime Act 2002, which deals with assisting others to retain the benefits of criminal conduct, was a "related offence" within the meaning of section 13(4) of the Fraud Act 2006.

42. By way of background, BTA Bank brought a civil claim against its former chairman, Mukhtar Ablyazov, alleging that he and his associates defrauded the bank of $295 million through a series of questionable transactions. The appellant, Drey Associates Limited, was allegedly a party to these transactions and was controlled by Ablyazov. Some of the defendants also face criminal charges in Kazakhstan.

43. The Court dismissed the appeal.

44. In his judgment, Lord Justice Moses (with whom Sedley and Pill LJs agreed) explained that the important feature of the definition under section 13(4)(b) was that it defined related offence by reference to the quality of the conduct brought within the scope of the charge and not merely by reference to the intention of the alleged offender. Thus it was irrelevant whether the alleged offender knew or suspected that the arrangement would facilitate the acquisition, retention, use or control of criminal property by or on behalf of another person under section 328.

45. Section 13(4)(b) was wide enough to include an offence which charged conduct which had a fraudulent quality, notwithstanding that it had no fraudulent purpose. The effect of the arrangement is necessarily to conceal from public officials and the public at large the criminal source of the property which in the Lord Justice's view involved deception.

46. The following passage is a fitting illustration of the Court's readiness to adopt a wide interpretation of the section:

"Nor does it seem to me to be relevant that the criminal property might itself not be derived from fraud. Even if the property is, for example, obtained as a result of dealing in drugs, the effect or potential effect of the arrangement into which the offender enters despite his knowledge or suspicion is to conceal the fact that the property is derived from drug-dealing. That element of concealment is, in my view, deceptive and fraudulent, even if the offender was only suspicious when he entered into or became concerned with what I consider to be a deceptive arrangement." (para.24)

47. To this extent the case confirms the expansive approach to interpreting section 13 adopted in an earlier decision on the section in Kensington International Limited v Republic of Congo [2007] EWCA Civ 1128. In that case the Court was prepared to include bribery offences within the definition of "fraudulent" for the purposes of section 13, notwithstanding long settled case law that provided that bribery offences do not involve an element of dishonesty. The risks that can arise are starkly illustrated by the case of R v K [2009] EWCA Crim 1640.

II. Recent trends in investigations and prosecutions

48. Consider some of the recent fraud statistics released by the KPMG Fraud Barometer in July this year. Over 160 cases of serious fraud with charges relating to more than £100,000 came before the UK courts in the first half of 2009 representing the highest number of cases in a six month period in the 21 year history of the Barometer. The cases had a total value of £636m which, if replicated in the second half of the year, would also lead to the highest value of fraud in the Barometer's history (currently £1.2bn in 1995).

49. The more prevalent wrongdoings were reported to be property fraud, such as mortgage fraud, boosted by the £200m investment fraud case involving the attempted fraudulent sale of the London's Ritz hotel; fraud by managers and employees against their companies and organisations; and fraud against the government which was cheated out of £150m, mostly in the form of tax and duty evasion and fraudulent benefit claims. With over a quarter of fraud cases (44) against financial institutions, with a value of £111m, the main victim in terms of number of cases was the financial sector. 

50. The City of London Police Annual Report 2008 (1st April) – 09 (31st March) provides the following figures:

Fraud and Forgery

No. of offences

No. of detections

07/08

08/09

07/08

08/09

Fraud by false representation

257

329

128

152

Failure to disclose information

5

3

5

1

Obtain services dishonestly

7

9

4

7

Articles for use in fraud

31

39

27

31

Other fraud

59

85

69

58

Forgery and counterfeiting

100

73

95

64

Fraudulent use of vehicle excise

16

8

14

7

Abuse of position of trust

13

37

6

26

 

  1. Mortgage Fraud

  2. 51. According to the Barometer there were 18 cases with a combined value of £24m in the first half of 2009, compared to 25 cases worth £36m in the whole of 2008.  The estimated figures on the extent of mortgage fraud are much greater. Last year the Association of Chief Police Officers suggested a £700m a year figure.

    52. The prevalence of mortgage fraud is often linked to the credit crunch and the current recession. Over the last five years, the new model of mortgage lending, whereby banks repackaged retail mortgages and sold them on the bonds markets, improved the banks' ability to finance mortgages. This led to an increase in mortgage lending and, at the same time, reduced the incentive for banks to properly check the mortgages that they were offering.

    53. Somewhat paradoxically, as banks have tightened their lending criteria some are predicting a rise in mortgage fraud. It is suggested that the would-be borrowers who are cut out would try to circumvent the more stringent requirements by inflating their income or not disclosing all of their credit cards or other debts.

    54. It is not surprising that the authorities have stepped up their fight against mortgage fraud. In a comment to the Guardian newspaper this August Detective chief superintendent Steve Head, the chief of the City of London's economic crime directorate, said mortgage fraud "has jumped from nothing 18 months ago to being one of the biggest areas of investigation" (Huge increase in mortgage fraud, report police, 30 August 2009). In her response to the FSA banning another mortgage broker this October, Margaret Cole, FSA director of enforcement and financial crime, said:

    "Our work on mortgage fraud continues as a priority in our campaign against financial crime. We have banned nearly 70 mortgage brokers over the last three years and we will continue to name and shame mortgage brokers that knowingly giving false and misleading information to prospective lenders." (FSA press release, FSA/PN/141/2009, 21 October 2009)

    55. Mortgage fraud is a generic term and usually covers (1) application, (2) identity and (3) valuation frauds. The first involves misrepresentation, often by an otherwise legitimate purchaser, as to his or her means or circumstances; the second, hijacking of another's identity in order to make mortgage applications and purchase property; and the third involves intermediaries and professionals – brokers, surveyors or solicitors – one or more of them being in on the dishonest scheme by submitting forged documents with applications or using false valuations of properties.

    56. Although mortgage fraud cases under the 2006 Act are yet to emerge, in a recent appeal by Rahila Kausar against her conviction at the Crown Court of acquiring criminal property contrary to section 329(1)(a) of the Proceeds of Crime Act 2002, Lord Justice Stanley Burnton observed:

    "It can be seen that the case as alleged was a fairly straightforward mortgage fraud. If the appellant had been a knowing party to obtaining a mortgage loan by deceiving the lender in the mortgage application, when she received the proceeds of the mortgage she would have committed what is now the offence of fraud by false representation under section 2 of the Fraud Act 2006 and was at the relevant time the offence of obtaining a money transfer by deception contrary to section 15A of the Theft Act 1968." (Regina v Rahila Kausar [2009] EWCA Crim 2242, para. 5)

    57. The Law Society's Mortgage Fraud Practice Note, issued in April this year, highlights the latest criminal methodologies and the warning signs of mortgage fraud. The Practice Note outlines how lawyers can protect themselves and their firms from being used to commit mortgage fraud and provides guidance on confidentiality and disclosure issues that may arise.2

  3. B. Share Sale Fraud

    58. Also known as the "boiler room" fraud, it typically involves investors cold-called by fake stockbrokers (often based abroad) and persuaded to either buy worthless or non-existent shares, or to buy genuine shares at vastly inflated prices. Unlike most high volume frauds, the aggressive and deceptive sale of bogus shares typically targets specific individuals. These frauds often target people repeatedly, with some criminals passing around what they call 'suckers' lists and deliberately seeking out victims who have already lost money to provide them with false 'make your money back' offers. So much so that the City of London Police had to release a "newsflash" stating that they "do not work in conjunction with, or endorse, any financial companies, legal firms or other organisations to return recovered funds or represent investors".

    59. The extent of the fraud is difficult to estimate. Speaking at the International Boiler Room Fraud Conference in November last year Jonathan Phelan, Head of the FSA's Retail Enforcement, offered the FSA's estimates:

    "about 3,000 victims contact us at the FSA each year and they have lost an average of £20,000 each.  The total known size of the problem is therefore 60 million pounds. This, however, is the tip of the iceberg.  There must be an iceberg under the water; but we don't know how many victims don't report the crime or how much they have lost. Experiences elsewhere tell us that perhaps around 10% of high-value fraud victims report the crime. This indicates that there are perhaps around 30,000 victims in the UK each year. Experience elsewhere also tells us that those who lose smaller amounts of money tend to be the ones who don't report the crime, so average losses are probably somewhat less than the 20,000 pounds that we hear about from the high value victims who contact us. So, if 30,000 victims lose a real average of 5 to 10,000 pounds, we probably have a crime in the region of 150 to 300 million pounds. There are those who may believe it is bigger than that.  And it may well be."

  4. C. Investment Fraud

    60. Following falling asset prices and redemption calls from investors, most hedge funds came under severe financial pressure over the last two years. A few instituted insolvency proceedings. In a number of these, the proceedings revealed potential misconduct. In some cases the misconduct was serious enough for the Serious Fraud Office to commence investigations. Thus in 2009 the Office announced that it was investigating at least three hedge funds (Weavering, Dynamic Decisions and Gilher).

    61. Perhaps the most "spectacular" fraud of 2009 was revealed across the Atlantic but had serious repercussions for investors around the globe.

    62. The Criminal Information filed in March this year with a District Court in New York states that from at least as early as the 1980s through to December 2008 Bernard Madoff perpetrated a scheme to defraud the clients of Bernard L. Madoff Investment Securities (BLMIS) by soliciting billions of dollars of funds under false pretences, failing to invest investors' funds as promised, and misappropriating and converting the funds to his own benefit without the knowledge or authorisation of the investors.

    63. In particular, Madoff marketed to clients a "split strike conversion" investment strategy whereby the fund would invest into 35 – 50 S&P 100 stocks that would mimic the movement of the S&P Index. The strategy would opportunistically time the purchases and invest funds into Treasury bills when out of the market. To hedge the risks of the investments the fund would trade options related to the stocks invested in. To induce new and continued investments Madoff promised certain clients annual returns of up to 46% per annum.

    64. Contrary to his promises most of the investors' funds were either used to meet periodic redemption requests of other investors or to support proprietary trading businesses of BLMIS, from which Madoff and others received millions of dollars.

    65. On 29 June 2009, Bernard L. Madoff was sentenced to 150 years in prison after pleading guilty in federal district court in New York to perpetrating a massive (the word used by the SEC) Ponzi scheme since the early 1990s that made about $21 billion cash losses and victimised thousands of investors. Madoff pleaded guilty to 11 criminal counts including securities fraud, investment adviser fraud, and providing false documents and testimony to the SEC. Frank DiPascali, the former chief financial officer in Madoff's investment advisory business, also pleaded guilty to 10 felony counts and awaits his sentence. David Friehling, Madoff's auditor, entered a guilty plea earlier this November.

  5. D. Employee Fraud

    66. The KPMG Fraud Barometer reports that the insider threat to companies and organisations remains prevalent. Its figures demonstrate that managers and employees account for over a third of cases (63 between them).  However, it is managers that are able to inflict far greater damage, with their 32 cases amounting to £150m of fraud compared to employees who in 31 cases cost their employers only £24m.

    67. PriceWaterhouseCoopers' Global Economic Crime Survey released this November surveyed 3,037 corporate respondents of which 229 were from the UK. The UK responses indicated that 50% of fraud was perpetrated internally.

    68. Middle management accounted for 47% of internal frauds, compared to 32% in the 2007 survey. In contrast senior management were responsible for only 4% of internal frauds reported by respondents in the UK. This measure was 14% globally, and 17% in the UK in the 2007 survey. The Survey suggests the difference may be due, in part, "to the effectiveness of increased penalties for senior management involvement in frauds, including the irreparable damage to the reputations of those who are caught, proving to be an effective deterrent".

    69. Asset misappropriation and accounting fraud were the two most common types of fraud reported by the respondents.

    Lexi Holdings Plc (In Administration) v Luqman [2009] EWCA Civ 117

    70. This was a civil case brought by administrators against Lexi's two former directors for equitable compensation or damages for failing to prevent dishonest misappropriation of the company's funds by a fellow director. The facts provide a useful illustration.

    71. Lexi was engaged in the business of providing bridging finance for property buyers. A syndicate of banks provided Lexi with the funds. Between October 2002 and November 2006 Shaid Luqman, Lexi's managing director, dishonestly misappropriated £59,607,498 by making payments for the benefit of several recipients including Luqman's close family members and companies owned or controlled by him. Luqman was committed to prison in October 2007 and was debarred from defending the action for breach of a number of orders.

    72. The Court of Appeal overturned Briggs J's decision and held the two directors liable in the sum of £41,968,294 and £36,968,988 each. The Court observed that directors had the ability to remove Luqman and given "both that power and the knowledge they are deemed to have had, proper performance of their duty must have involved the imposition of external controls on [Luqman] or his removal altogether so that, in either event, the subsequent misapplications would not have occurred." (para.52)

    73. Interestingly, Luqman had several previous convictions for fraud. In 1993 he was convicted on five counts of obtaining or attempting to obtain property by deception and again in 1997 for attempting to obtain property by deception and was sentenced to 21 months of imprisonment in the first instance and 2 years in the second.

    74. Recently Credit Industry Fraud Avoidance System (CIFAS) set up a Staff Fraud Database, a data-sharing scheme which enables employers to file identified cases of staff fraud in order to prevent the perpetrator moving unchallenged to a new employer and committing further fraud.

    III. Issues for lawyers

    75. In November 2009, two solicitors were among 14 arrested in one of the UK's largest mortgage fraud probes to date. North East Property Buyers and Newcastle Home Loans became subjects of a major fraud probe earlier this year after police were alerted by the FSA. The solicitors are suspected of being involved in a significant number of North East Property Buyers' 2,000 mortgage applications under scrutiny.

    76. Detective Chief Inspector Jim McAll from Northumbria Police's Economic Crime Unit said:

    "A complex mortgage fraud cannot be perpetrated without the assistance of professionals such as solicitors and surveyors. Often these professionals will be acting in good faith, but if we get evidence to suggest that they are complicit then we will treat them as criminals in their own right. The investigation focuses on an organised crime group who have allegedly fraudulently obtained some 2,000 mortgages from various lenders and we believe that several local solicitors and surveyors have been involved". (reported in The Journal on 6 November 2009)

    77. There are additional repercussions for solicitors for involvement in fraud. Malcolm Graham, one of the solicitors in the probe, was suspended from practicing law by the SRA and is awaiting a tribunal hearing that will determine the future of his career.

    78. Even in the absence of dishonesty, disciplinary action may follow. On 19 November 2009 the SDT fined a solicitor £15,000 and ordered her to pay £52,000 costs despite not finding any dishonesty on her part. The SDT found a very large number of breaches for which she was responsible including using mortgage monies for her own purposes in circumstances when she was not entitled to them. The Tribunal stated that this was "a very serious matter, albeit with no dishonest intent".

    79. The SDT took into account that she had accepted complete responsibility for her actions and had apologised to all her colleagues about the circumstances that she had found herself in. In addition there was an exceptional circumstances in her case and the SDT took into account the medical evidence provided by her general practitioner (SDT Application 9948-2008).

    Financial Services Authority v Fox Hayes [2009] EWCA Civ 76

    80. Fox Hayes, Leeds-based solicitors, approved 34 financial promotions for five unauthorised, unregulated overseas companies between 2003 and 2004. Using the approved promotional material as the first point of contact, the overseas companies were able to illegally sell shares to 670 UK investors for about US $21 million.

    81. The Court of Appeal overturned a ruling by the Financial Services and Markets Tribunal appealed by the FSA. As well as finding that Fox Hayes broke FSA rules by approving material that allowed boiler room fraudsters to target UK investors, the Court of Appeal also increased the level of penalty imposed by the Tribunal against the solicitors' firm from £146,000 to £954,770. The revised penalty included a £454,770 commission made by former senior partner at Fox Hayes.

    Commenting on the outcome, Margaret Cole, FSA director of enforcement, said:

    "This decision supports our view that firms that assist boiler room operators should be brought to task for their role in perpetrating boiler room fraud and share scams. We hope this will send a strong message of deterrence to other firms and individuals that may turn a blind eye to the legitimacy of their clients in exchange for fees or commission."

    The Proceeds of Crime Act 2002

    82. Solicitors may be targeted to help legitimise a transaction or because money passed through the firm's accounts will be viewed as 'clean' by other organisations.

    83. Part 7 of POCA creates a number of offences that solicitors should be aware about. In particular section 327 creates the offence of concealing, disguising, converting or transferring criminal property or removing it from the United Kingdom. Section 328 creates the offence of entering into or becoming concerned in an arrangement in respect of criminal property and section 329 creates the offence of acquiring, using or processing criminal property.

    84. It should be noted however that there are other offences in part 7 – particularly section 330 offence of failing to disclose that another person is engaged in money laundering for those in the regulated sector. Section 333 creates the "tipping off" offence which is committed where a person knows or suspects that a disclosure under sections 337 or 338 were made and makes a disclosure which is likely to prejudice any investigation which might be conducted following sections 337, 338 disclosures.

    85. The 2007 Money Laundering Regulations apply to "relevant persons" including independent legal professionals and impose various record keeping and customer due diligence. Non-compliance carries a maximum penalty on indictment to imprisonment for a term not exceeding two years or a fine (or both).

    86. All of these offences clearly have implications for solicitors in general.

    87. Increasingly solicitors are also becoming party to insider dealing offences under the Criminal Justice Act 1993. This is not surprising since the nature of daily work for many solicitors involves being privy to the information not available to the markets.

    R. v Christopher McQuoid [2009] EWCA Crim 1301

    88. The appellant, a solicitor and former General Counsel of TTP Communications Plc, became party to inside information about a proposed takeover by Motorola Plc in the course of his employment. He passed the information to his father – in – law who purchased just under 154,000 shares in the company at 13 pence per share on 30 May 2006. The sum paid in total was £20,310.60.

    89. On 1 June 2006 the takeover was made public to the market. The offer price stood at 45 pence per share. Accordingly the profit on the purchase of the shares was £48,919.20. On 1 September 2006 the father-in-law gave McQuoid a cheque for £24,459.60 (precisely half that amount) with the payee left blank. The appellant filled in his own name as the payee and the cheque was paid into his bank account.

    90. On 27 March 2009, McQuoid was convicted of a single count of insider dealing and was sentenced to eight months' imprisonment. Subsequent proceedings have resulted in a confiscation order in the sum of £35,000 and an order that he pay £30,000 towards the costs of the prosecution.

    91. The Court of Appeal dismissed Mcquoid's appeal against his sentence stating:

    "Those who involve themselves in insider dealing are criminals: no more and no less. The principles of confidentiality and trust, which are essential to the operations of the commercial world, are betrayed by insider dealing and public confidence in the integrity of the system which is essential to its proper function is undermined by market abuse. Takeover arrangements are normally kept secret. Very few people are permitted to have advance knowledge of them. Those who are entrusted with advance knowledge are entrusted with that knowledge precisely because it is believed that they can be trusted. When they seek to make a profit out of the knowledge and trust reposed in them, or indeed when they do so recklessly, their criminality is not reduced or diminished merely because they are individuals of good character."

    "We therefore emphasise that this kind of conduct [insider dealing] does not merely contravene regulatory mechanisms. If there ever was a feeling that insider dealing was a matter to be covered by regulation, that impression should be rapidly dissipated. The message must be clear: when it is done deliberately, insider dealing is a species of fraud; it is cheating. Prosecution in open and public court will often, and perhaps much more so now than in the past, be appropriate."

    92. Finally, there is always the civil liability risk for solicitors. The risk that is arguably higher following section 13 removal of the privilege against self-incrimination.

    Lexi Holdings v Pannone and Partners [2009] EWHC 2590 (Ch)

    93. The case arises from the facts of the Luqman case described above. Lexi Holdings applied for a summary judgment for an order of equitable compensation or damages against Pannone. Pannone, while retained as Lexi's solicitors, upon receipt of redemptions payments of customer bridging loans in the solicitor's client account, rather than making payments to Barclays, complied with Luqman's instructions and paid the monies elsewhere, including to an account in his name.

    94. Lexi claimed that the payments made had been in breach of the company's obligations to Barclays and had been made without its authority. Moreover, the solicitors could not rely on the director's ostensible authority since they knew, or should have known, that the director was not permitted to give instructions to pay company monies other than into the Receipts Account. Otherwise the payments would place the company in breach of its Facility Agreement with Barclays.

    95. The court rejected the application. However, although it was held that giving instructions to the company's solicitors as to the destination of monies in the client account was within the usual authority of the company's managing director and that there was no general duty upon solicitors to make any inquiry as to the reasons or judgment behind any such instruction, there was a triable issue as to whether the solicitors knew, or should reasonably have known, that the instructions were for payments for the director's personal benefit.

    96. This case is very likely to be of concern to many law firms especially those that act for borrowers in relation to loan facilities.

    Footnotes

    1. Scott v Metropolitan Police Commissioner [1975] AC 819 provides the modern expression of conspiracy to defraud. The offence is committed where two or more persons agree to dishonestly prejudice the rights of another. This can arise where the persons agree either to prejudice a person's economic interests or to prejudice a person's right to properly discharge his duty.

    2. The Practice Note is available at http://www.lawsociety.org.uk/productsandservices/practicenotes/mortgagefraud.page .

    The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.