“Threat, Fraud and Risk Management – What does it Really Mean? – Continuing Series – Part 2 – FRAUD”

“Threat, Fraud and Risk Management – What does it Really Mean?”

“Continuing Series – Part 2”


Published – ©2014 Research Solutions, Inc./Dr. Mark D. Lurie (all rights reserved)Published – ©1978-2014 Dr. Mark D. Lurie (all rights reserved)


The use of the word “Fraud” is easily tossed about, and yet most individuals truly don’t know, let alone understand the meaning of Fraud.

Definitions? There are hundreds of them, but the “core” elements of the definition is quite clear:

Fraud includes any intentional or deliberate act to deprive another of property or money by guile, deception or other unfair means.” 

The definitions found in a plethora of dictionaries are so numerous that they either say the exact same thing (word-for-word) or overlap each other.

The “detailed” definition below gives the history of the word as well as sub-definitions. This is where problems start to arise since some of the definitions can include what is deemed negligence, which is NOT A FRAUD:

Fraud (noun)

[Middle English fraude, from Middle French, from Latin fraud-, fraus]

First appeared 14th Century

1a: DECEIT, TRICKERY; specifically: intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right

1b: an act of deceiving or misrepresenting: TRICK

2a: a person who is not what he or she pretends to be: IMPOSTOR; also: one who defrauds: CHEAT

2b: one that is not what it seems or is represented to be

Synonym used for the word “Fraud” include, but are not limited to:



Fraud cannot be by accident or negligence.

Let there be NO illusion to a Fraud taking place by accident or circumstance unknown to the person committing the fraud.

It is a planned, intentional act.

The following four (4) elements are present in fraud, regardless of whether it is criminal or civil:

A material false statement;

Knowledge of its falsity;

Reliance on the false statement by the victim; and

Damages suffered

The definition of “Fraud” also has “Layers” within the legal community (both domestically and internationally).

These are always “confused” with “types of frauds”.

Layers are the different “classifications” of frauds, NOT the “types.

As an example of a “Layer”, this definition specifically addresses occupational fraud. NOT the types of occupational frauds (which there are thousands of), but the LAYER definition of one of the several dozen Layers that exist under the United States Code (USC).

Many individuals, institutions (even government agencies) don’t truly understand the “Layer” principals that fall under the main title, “Fraud”. These, of course can be found and identified under the United States Code (USC).

The United States Code is a consolidation and codification, by subject matter, of the general and permanent laws of the United States.

It is prepared by the Office of the Law Revision Counsel of the United States House of Representatives.

Such references to the main definition of “Fraud” and the sub-Layers that exist will primarily be found in the U.S.C. Section 18, Par-1, Sections 1-2725).

Yes, there are truly thousands of sections. More important, Section 18 is “fluid” since it is constantly being amended, modified and changed. Keeping up, just with this Section is almost a full-time job “along” with the appendix which can reflect pending changes, challenges in the United States Supreme Court or under appeal.

So going back to the example of a “Layer” of Fraud, under the main heading of Fraud would be “occupational fraud”, which a good definition would be as follows:

“The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.”

It would even include sub-definitions to better-clarify (or sometimes have a reverse effect of confusing). 

“An intentional perversion of truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or to surrender legal right.” “A false representation of a matter of fact whether by words or by conduct, by false or misleading allegations, or by concealment of that which should have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury.” “A generic term embracing all multifarious means which human ingenuity can devise, and which are resorted to by one (or more) individual(s) to get advantage over another by false suggestions or by suppression of truth, and includes all surprise, trick, cunning, dissembling, and any unfair by which another is cheated.

Bad faith” and “fraud” are synonymous, and also synonyms of dishonesty, infidelity, faithlessness, perfidy, unfairness, etc.; however “bad faith” walks on a razorblade of it being truly a fraud or not.

Bad faith can be exceptionally nebulous and making an allegation of Fraud against another party by including “bad faith” does NOT always mean that the issue of “bad faith” is a fraud! Now it gets even more confusing.

Now you know why defense counsels will always establish a defense against a fraud allegation using specific language which will definitely cast a doubt to any jury (or grand jury) to whether or not they are dealing with a fraud, and issue of negligence (please reference our article on “Fraud versus Negligence” (posted July 14th, 2014 on LinkedIn under our webpage, and also found in www.rsi4u.org), or an issue of bad faith.

Some states endorse, within their own State Statutes, the term “Unfair Business Practices or Unfair Business Trade Practices. This may classified as a clear “Tort”.

Now we have to “peel the Onion” back another Layer in understanding what a “Tort” is:

Farlex® defines a Tort (with supplemental examples) as “A body of rights, obligations, and remedies that is applied by courts in civil proceedings to provide relief for persons who have suffered harm from the wrongful acts of others.

The person who sustains injury or suffers pecuniary damage as the result of tortious conduct is known as the plaintiff, and the person who is responsible for inflicting the injury and incurs liability for the damage is known as the defendant or tortfeasor.”

Three (3) elements must be established in every tort action:

First, the plaintiff must establish that the defendant was under a legal duty to act in a particular fashion

Second, the plaintiff must demonstrate that the defendant breached this duty by failing to conform his or her behavior accordingly.

Third, the plaintiff must prove that he suffered injury or loss as a direct result of the defendant’s breach.

The law of torts is derived from a combination of common-law principles and legislative enactments. Unlike actions for breach of contract, tort actions are not dependent upon an agreement between the parties to a lawsuit.

Unlike criminal prosecutions, which are brought by the government, tort actions are brought by private citizens.

Remedies for tortious acts include money damages and injunctions (court orders compelling or forbidding particular conduct). Tortfeasors are subject to neither fine nor incarceration in civil court.

Peeling “another” Layer of the Onion, there is a “special” type of Tort called an “Intentional Tort”. With the help of Farlex®, an Intentional Tort is defined as:

An intentional tort is any deliberate interference with a legally recognized interest, such as the rights to bodily integrity, emotional tranquility, dominion over property, seclusion from public scrutiny, and freedom from confinement or deception.

These interests are violated by the intentional torts of assault, Battery, trespass, False Imprisonment, invasion of privacy, conversion, Misrepresentation and Fraud.

The intent element of these torts is satisfied when the tortfeasor acts with the desire to bring about harmful consequences and is substantially certain that such consequences will follow. Mere reckless behavior, sometimes called willful and wanton behavior, does not rise to the level of an intentional tort.

Under certain circumstances the law permits individuals to intentionally pursue a course of conduct that will necessarily result in harm to others. The harm that results from such conduct is said to be outweighed by more important interests. Self-preservation is one such interest an disembodied in the right of Self-Defense. Individuals may exert sufficient force in self-defense.

Again, picking up all the pieces of the Onion we have previously peeled, let us use the excellent definition and explanations of “Fraud” (with supplemental examples) from Farlex®:

“A false representation of a matter of fact – whether by words or by conduct, by false or misleading allegations, or by concealment of what should have been disclosed – that deceives and is intended to deceive another so that the individual will act upon it to her or his legal injury.

Fraud is commonly understood as dishonesty calculated for advantage. A person who is dishonest may be called a fraud. In the U.S. legal system, fraud is a specific offense with certain features.

Fraud is most common in the buying or selling of property, including real estate,  Personal Property and intangible property, such as stocks, bonds, and copyrights. State and federal statutes criminalize fraud, but not all cases rise to the level of criminality.

Prosecutors have discretion in determining which cases to pursue. Victims may also seek redress in civil court.

Fraud must be proved by showing that the defendant’s actions involved five (5) separate elements:

A false statement of a material fact;

Knowledge on the part of the defendant that the statement is untrue;

Intent on the part of the defendant to deceive the alleged victim;

Justifiable reliance by the alleged victim on the statement; and

Injury to the alleged victim as a result

These elements contain nuances that are not all easily proved.

First, not all false statements are fraudulent.

To be fraudulent, a false statement must relate to a material fact. It should also substantially affect a person’s decision to enter into a contract or pursue a certain course of action.

A false statement of fact that does not bear on the disputed transaction will not be considered fraudulent.

Second, the defendant must know that the statement is untrue. A statement of fact that is simply mistaken is not fraudulent. To be fraudulent, a false statement must be made with intent to deceive the victim. This is perhaps the easiest element to prove, once falsity and materiality are proved, because most material false statements are designed to mislead.

Third, the false statement must be made with the intent to deprive the victim of some legal right.

Fourth, the victim’s reliance on the false statement must be reasonable. Reliance on a patently absurd false statement generally will not give rise to fraud; however, people who are especially gullible, superstitious, or ignorant or who are illiterate may recover damages for fraud if the defendant knew and took advantage of their condition.

Finally, the false statement must cause the victim some injury that leaves her or him in a worse position than she or he was in before the fraud.

A statement of belief is not a statement of fact and thus is not fraudulent. Puffing, or the expression of a glowing opinion by a seller, is likewise not fraudulent.

For example, a car dealer may represent that a particular vehicle is “the finest in the lot.” Although the statement may not be true, it is not a statement of fact, and a reasonable buyer would not be justified in relying on it.

The relationship between parties can make a difference in determining whether a statement is fraudulent.

A misleading statement is more likely to be fraudulent when one party has superior knowledge in a transaction ,and knows that the other is relying on that knowledge, than when the two parties possess equal knowledge.

For example, if the seller of a car with a bad engine tells the buyer the car is in excellent running condition, a court is more likely to find fraud if the seller is an auto mechanic as opposed to a sales trainee.

Misleading statements are most likely to be fraudulent where one party exploits a position of trust and confidence, or a fiduciary relationship.

Fiduciary relationships include those between attorneys and clients, physicians and patients, stockbrokers and clients, and the officers and partners of a corporation and its stockholders.

A statement need not be affirmative to be fraudulent. When a person has a duty to speak, silence may be treated as a false  statement. This can arise if a party who has knowledge of a fact fails to disclose it to another party who is justified in assuming its nonexistence.

For example, if a real estate agent fails to disclose that a home is built on a toxic waste dump, the omission may be regarded as a fraudulent statement. Even if the agent does not know of the dump, the omission may be considered fraudulent.

This is constructive fraud, and it is usually inferred when a party is a fiduciary and has a duty to know of, and disclose,particular facts.

Fraud is an independent criminal offense, but it also appears indifferent contexts as the means used to gain a legal advantage or accomplish a specific crime.

For example, It is fraud for a person to make a false statement on a license application in order to engage in the regulated activity. A person who did so would not be convicted of fraud. Rather,fraud would simply describe the method used to break the law or regulation requiring the license.

Fraud resembles theft in that both involve some form of illegal taking, but the two should not be confused. Fraud requires an additional element of False  Pretenses created to induce a victim to turn over property ,services ,or money.

Theft, by contrast, requires only the unauthorized taking of another’s property with the intent to permanently deprive the other of the property. Because fraud involves more planning than does theft, it is punished more severely.

Federal and state criminal statutes provide for the punishment of persons convicted of fraudulent activity. Interstate fraud and fraud on the federal government are singled out for federal prosecution.

The most common federal fraud charges are for mail and wire fraud. Mail and wire fraud statutes criminalize the use of the mails or interstate wires to create or further a scheme to defraud (18 U.S.C.A. §§ 1341, 1342).

Tax fraud against the federal government consists of

the willful attempt to evade or defeat the payment of taxes due and owing (I.R.C. § 7201).

Depending on the defendant’s intent, tax fraud results in either civil penalties or criminal punishment.

Civil penalties can reach an amount equal to75 percent of the underpayment.

Criminal punishment includes fines and imprisonment. The degree of intent necessary to maintain criminal charges for tax fraud is determined on a case-by-case basis by the Internal Revenue Service and federal prosecutors.

There are other federal fraud laws as well:

For example, the fraudulent registration of Aliens is punishable as a misdemeanor under federal law (8 U.S.C.A. §1306). The “victim” in such a fraud is the U.S. government.

Fraud violations of banking laws are also subject to federal prosecution (18 U.S.C.A. §§ 104 et seq.).

The Federal Sentencing Guidelines recommend consideration of the intended victims of fraud in the sentencing of fraud defendants. The guidelines urge an upward departure from standard sentences if the intended victims are especially vulnerable.

For example, if a defendant markets an ineffective cancer cure, that scheme, if found to be fraudulent, would warrant more punishment than a scheme that targets persons generally, and coincidentally happens to injure a vulnerable person.

Federal courts may require persons convicted of fraud to give notice and an explanation of the conviction to the victims of the fraud (18 U.S.C.A. § 3555).

All states maintain a general criminal statute designed to punish fraud. In Arizona, the statute is called the fraudulent scheme and artifice statute. It reads, in pertinent part, that[any person who, pursuant to a scheme or artifice to defraud, knowingly obtains any benefit by means of false or fraudulent pretenses, representations, promises or material omissions “is guilty of a felony (Ariz. Rev. Stat. Ann. § 13-2310(A)).

States further criminalize fraud in a variety of settings, including trade and commerce,  Securities, taxes, real estate, gambling, insurance, government benefits, and credit.

For example, in Hawaii, fraud on a state tax return is a felony warranting a fine of up to $100,000 or three years of imprisonment, or both, and a fraudulent corporate tax return is punished with a fine of $500,000 (Haw. Rev. Stat. § 231-36).

Other fraud felonies include fraud in the manufacture or distribution of a controlled substance (§ 329-42) and fraud in government elections (§ 19-4).

Fraud in the application for and receipt of public assistance benefits is punished according to the illegal gain: fraud in obtaining over $20,000 in food coupons is a class B felony;

Fraud in obtaining over $300 in food coupons is a class C felony; and

All other public assistance fraud is a misdemeanor ( § 346-34).

Alteration of a measurement device is fraud and is punished as a misdemeanor( § 486-136).

In civil court, the remedy for fraud can vary. In most states, a plaintiff may recover “the benefit of the bargain.” This is a measure of the difference between the represented value and the actual value of the transaction.

In some states, a plaintiff may recover as actual damages only the value of the property lost in the fraudulent transaction. All states allow a plaintiff to seek Punitive Damages in addition to actual damages.

This right is exercised most commonly in cases where the fraud is extremely dangerous or costly. Where the fraud is contractual, a plaintiff may choose to cancel, or rescind the contract. A court order of Rescission returns all property and restores the parties to their pre-contract status.

Fraud is also penalized by administrative agencies and professional organizations that seek to regulate certain activities. Under state statutes, a professional may lose a license to work if the license was obtained with a false statement.

One particularly well-publicized area of fraud is Corporate Fraud.

Corporate fraud cases are largely governed by the Securities Exchange Act of 1934 (15 USCA §§ 78 et seq.), along with other rules and regulations propagated by the Securities and Exchange Commission (SEC).

These laws were a response to the market turmoil during the 1930s and well-publicized corporate fraud cases.

The Securities Exchange Act and the SEC regulate anything having to do with the trading or selling of securities ands tocks. They govern fraudulent behavior ranging from stock manipulation to insider trading. They also provide for civil and criminal penalties for corporate fraud.

Despite the act and the SEC, in the early part of the twenty-first century, corporate fraud began to seem endemic. Such well-known companies as energy trader Enron, Telecommunications company WorldCom, cable provider Adelphia, and other lesser-known firms went into Bankruptcy as a result of corporate fraud.

In light of these events, Congress decided to tighten up corporate fraud requirements with the passages of the Sarbanes-Oxley Act of 2002(U.S.P L107-204).

Among other features, Sarbanes-Oxley required expanded and more frequent disclosure by public companies of their finances to prevent fraud. It created a Public Company Accounting Oversight Board to register and regulate accounting firms and accounting practices.

It also enhanced the SEC’s power to monitor and investigate compliance with securities laws, adding stiff  penalties for fraudulent behavior by corporations, their officers, and their accountants. (credit given to Farlex® with a major thank you).

With all the pieces of the Onion presently peeled back, we know that elements for “fraud” include false representation of a present or past, action in reliance thereupon and damage resulting from such misrepresentation. As distinguished from negligence, fraud is always positive intentional. It comprises all acts, omissions, and concealments involving a breach of a legal or equitable duty and resulting in damage to another.

Further, fraud includes anything calculated to deceive, whether it be a single act or combination of circumstances, whether the suppression of truth or the suggestion of what is false, whether it be by direct falsehood or by innuendo, by speech or by silence, by word of mouth, or by look or gesture.

Fraud, as applied to contracts, is the cause of an error bearing on a material part of the contract, created or continued by artifice, with design to obtain some unjust advantage to the one party, or to cause an inconvenience or loss to the other. “Actual fraud” consists in deceit, artifice, trick, design, some direct and active operation of the mind; it includes cases of the intentional and successful employment of any cunning, deception, or artifice used to circumvent or cheat another.

It is something said, done, or omitted by a person with the design of perpetrating what he knows to be a cheat or deception.

Constructive fraud.

“Constructive fraud” consists in any act of commission or omission contrary to legal or equitable duty, trust, or confidence justly reposed, which is contrary to good conscience and operates to the injury of another. Or, as otherwise defined, constructive fraud is an act, statement or omission which operates as a virtual fraud on an individual, or which, if generally permitted, would be prejudicial to the public welfare, and yet may have been unconnected with any selfish or evil design. Or, constructive frauds are such acts or contracts as, though not originating in any actual evil design or contrivance to perpetrate a positive fraud or injury upon other persons, are yet, by their tendency to deceive or mislead other persons, or to violate private or public confidence, or to impair or injure the public interests, deemed equally reprehensible with actual fraud.

Constructive fraud consists in any breach of duty which, without an actually fraudulent intent, gains an advantage to the person in fault, or any one claiming under him, by misleading another to his prejudice, or to the prejudice of any one claiming under him; or, in any such act or omission as the law specially declares to be fraudulent, without respect to actual fraud. Constructive fraud consists in any act of commission or omission contrary to legal or equitable duty, trust, or confidence justly reposed, which is contrary to good conscience and operates to the injury of another.

Or, as otherwise defined, it is an act, statement or omission which operates as a virtual fraud on an individual, or which, if generally permitted, would be prejudicial to the public welfare, and yet may have been unconnected with any selfish or evil design. Or, constructive frauds are such acts or contracts as, though not originating in any actual evil design or contrivance to perpetrate a positive fraud or injury upon other persons, are yet, by their tendency to deceive or mislead other persons, or to violate private or public confidence, or to impair or injure the public interests, deemed equally reprehensible with actual fraud.

Fraud in the execution.

Misrepresentation that deceives the other party as to the nature of a document evidencing the contract.

Fraud in the inducement.

Fraud connected with underlying transaction and not with the nature of the contract or document signed.

Misrepresentation as to the terms, quality or other aspects of a contractual relation, venture or other transaction that leads a person to agree to enter into the transaction with a false impression or understanding of the risks, duties or obligations she has undertaken.

Intrinsic fraud.

That which pertains to issue involved in original action or where acts constituting fraud were, or could have been, litigated therein. Perjury is an example of intrinsic fraud. Fraudulent concealment.

The hiding or suppression of a material fact or circumstance which the party is legally or morally bound to disclose.

The employment of artifice planned to prevent inquiry or escape investigation and to mislead or hinder the acquisition of information disclosing a right of action; acts relied on must be of an affirmative character and fraudulent.

Fraudulent intent.

Such intent exists where one, with a view of benefiting oneself or misleading another into a course of action, makes a represents which one knows to be false or which one does not believe to be true. Fraudulent misrepresentation.

A false statement as to material fact, made with intent that another rely thereon, which is believed by other party and on which he relies and by which he is induced to act and does act to his injury, and statement is fraudulent if speaker knows statement to be false or if it is made with utter disregard of its truth or falsity.

Fraudulent or dishonest act.

One which involves bad faith, a breach of honesty, a want of integrity, or moral purpitude.

Fraudulent pretense consists of a false pretense, obtaining property of value thereby, and an intent to cheat and defraud.

Fraud is defined as any illegal acts characterized by deceit, concealment or violation of trust. These acts are not dependent upon the application of threat of violence or of physical force.

Frauds are perpetrated by individuals and organizations to obtain money, property or services; to avoid payment or loss of services; or to secure personal or business advantage (The Professional Practices Framework, January, 2002).

Deceptive Trade Practices.

As mentioned beforehand, the term used as “Unfair Business Trade Practices”, “Unfair Business Practices” and “Deceptive Trade Practices” can all fall under, depending upon the degree and conditions that is was performed under Section § 17.46.

§ 17.46.  DECEPTIVE TRADE PRACTICES UNLAWFUL (defined): (a) False, misleading, or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful and are subject to action by the consumer protection division under Sections 17.47, 17.58, 17.60, and 17.61 of this code. (b) Except as provided in Subsection (d) of this section, the term “false, misleading, or deceptive acts or practices” includes, but is not limited to, the following acts: Sub-Section 24): Failing to disclose information concerning goods or services which was known at the time of the transaction if such failure to disclose such information was intended to induce the consumer into a transaction into which the consumer would not have entered had the information been disclosed.

In summary, the types of frauds can be almost unlimited; however it must clearly fall under one of the above “Layers” as defined by the USC or its State Counterparts (and/or specific government regulatory agencies that have the authority to regulate such issues that may or may not be fraudulent).

With our next Series Section, we will address a number of the “types” of frauds that can be defined as well as an explanation of their functionality, purpose, targeting methodology and end-game.

Please remember there is no physical way to address all the “known” frauds since we are not going to have several telephone-book-sized volumes which would perpetually require amendments thereto.

Our Articles and lectures are designed address enough information for the reader to clearly understand the typical frauds and then some of the more complex / interesting ones.

At the same time, this Onion has many, many “Layers” which only a “FEW” have truly been addressed. The USC, the definitions and the State Code counterparts are immense and constantly being updated, challenged, overturned, amended and appealed. We will do our best to present the “current“ picture to you, our readers.

As always, our pleasure,

Research Solutions, Inc.

(References given from the USC, State Code of Arizona, State Code of Hawaii and finally a MAJOR thank you given to Farlex®)






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