(Updated June 18, 2018): According to the Association of Certified Fraud Examiners, money lost due to fraud costs businesses and private parties over $3.5 trillion per year. This information, coupled with their assertion that instances of fraud have been dramatically increasing within the last few years, offers an eye-opening revelation not only for business, but all citizens of the United States. Individuals, businesses, and health care providers alike must become more informed on what fraud constitutes. This article intends to help inform readers regarding the irregularity of definition, differences in governmental levels, and the distinguishing characteristics between civil and criminal fraud.
Civil fraud cases are complex and can have substantial effects on your business and on your personal assets. This, however, becomes concerning news upon learning that civil fraud does not have a strictly uniform definition. Generally, fraud is founded upon a willful misrepresentation of past or present fact. Courts have defined fraud as trickery, deceit, intentional misrepresentation, concealment, or nondisclosure for the purpose of inducing another to part with something of value. It also includes false representation of a matter of fact by words or conduct or by the concealment of what should have been disclosed that deceives or is intended to deceive another so he shall act upon it to his legal injury. See In re E.P., 185 S.W.3d 908 (Tex. App. Austin 2006).
I. Common Elements of Civil Fraud:
These elements found in Texas legislation represent most legal definitions of fraud:
- There was a material representation made that was false;
- The person who made the representation knew the representation was false or made it recklessly as a positive assertion without any knowledge of its truth;
- The person who made the representation intended to induce another to act upon the representation; and
- The person to whom the material representation was made actually and justifiably relied on the representation, which caused the injury.
See Ernst & Young, L.L.P. v. Pac. Mut. Life Ins. Co., 51 S.W.3d 573, 577 (Tex. 2001).
Similarly, Virginia offers much of the same structure:
A party alleging fraud must prove by clear and convincing evidence(1) a false representation, (2) of a present, material fact, (3) made intentionally and knowingly, (4) with intent to mislead, (5) reasonable reliance by the party misled, and (6) resulting damage to him. See Thompson v. Bacon, 245 Va. 107, 111 (1993.)
II. Civil Fraud at the State Level:
Nevertheless, courts have broadly defined the elements of civil fraud in various situations and there is no single definition that covers civil fraud entirely. There are laws passed by the legislature that define fraud. Courts of law have provided common law definitions of fraud. There are actions for negligent misrepresentation, a cause of action which is similar to fraud. It then becomes pertinent to mention that fraud by itself is not a fact, but rather a conclusion that is reached after the facts of the relationship or transaction complained of have been reviewed.
It is also important to note that fraud and legislation concerning fraud often vary from state to state. That is to say, certain jurisdictions give way to different interpretations regarding what exactly constitutes civil fraud, such as certain requisites that qualify committed acts as fraud or various burdens of proof needed in a given case. Texas and Virginia (both mentioned above), are both Common Law states, and share similarities in the make-up of their legislation. However, one might observe differences, for example, in Louisiana, where the governing body is guided by Napoleonic code. While certainly not vastly different in content and structure, less uniformity certainly can lead to more room for interpretation, as has been the status quo regarding civil fraud. Though most state legislatures can agree on the above elements of fraud as they apply specifically to the civil sphere, it is vital to recognize that state legislation can indeed vary.
III. Civil Fraud at the Federal Level:
As previously discussed, civil suits regarding fraud centrally focus on restitution on behalf of the victim. At the federal level, the victim is the United States government, and one of the primary methods through which civil suits are filed is through the False Claims Act (FCA). The False Claims Act was enacted by Congress in 1863. Though concerned with the fraudulent practices of suppliers to the Union Army in the Civil War, the FCA is still heavily utilized today and provides relevant information regarding the definition of Civil Fraud holistically. The Department of Justice states:
A person does not violate the False Claims Act by submitting a false claim to the government; to violate the FCA a person must have submitted, or caused the submission of, the false claim (or made a false statement or record) with knowledge of the falsity. In § 3729(b)(1), knowledge of false information is defined as being (1) actual knowledge, (2) deliberate ignorance of the truth or falsity of the information, or (3) reckless disregard of the truth or falsity of the information (DOJ).
This definition sheds light on the similarities of civil fraud at all governmental levels with the unifying factor being the knowledge of the falsehood of an individual’s own statements, claims, etc. The FCA describes the seven types of conduct that result in liability and appear in the act as follows:
(a) LIABILITY FOR CERTAIN ACTS. (1) IN GENERAL.—Subject to paragraph (2), any person who—
(A) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval;
(B) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent;
(C) conspires to commit a violation of subparagraph (A), (B), (D), (E), (F), or (G)
(D) has possession, custody, or control of property or money used, or to be used, by the Government and knowingly delivers, or causes to be delivered, less than all of that money or property;
(E) is authorized to make or deliver a document certifying receipt of property used, or to be used, by the Government and, intending to defraud the Government, makes or delivers the receipt without completely knowing that the information on the receipt is true;
(F) knowingly buys, or receives as a pledge of an obligation or debt, public property from an officer or employee of the Government, or a member of the Armed Forces, who lawfully may not sell or pledge property; or
(G) knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government,
is liable to the United States Government for a civil penalty of not less than $5,000 and not more than $10,000 … plus 3 times the amount of damages which the Government sustains because of the act of that person
See 31 U.S.C. §§ 3729 – 3733
As previously mentioned, the False Claims Act is one of the most effective tools used by the government to combat fraud. It should come as no surprise then that the FCA is primarily targeted at health care providers. In fact, over 80% of the recoveries derived by the FCA come directly from the health care industry. Notably, the private right of action, or qui tam, provisions of the FCA make it one of the most widely used and accessible tools, because private individuals are, such as employees and patients, can bring suit on behalf of the government. FCA litigation is highly complex, with many technical and pleading requirements. For a detailed discussion on the FCA, please see our page titled "Overview of the False Claims Act."
IV. Differences Between Civil Fraud and Criminal Fraud:
Perhaps the most confounding aspect of fraud, distinguishing between civil claims and criminal proceedings offers deeper understanding into how fraud cases are dealt in all variations of government. The following aspects help identify whether a fraud case is civil or criminal, and the accompanying actions that follow both activities.
- Origins of Civil and Criminal Fraud Cases.
The first distinguishing aspects to notice are the manners in which civil and criminal cases are brought about. In Civil fraud cases, claims are often private party disputes. In other words, if an individual is suspected of committing fraud, the alleging party initiates and pursues the case. In the criminal realm, proceedings are brought about by regulatory authorities, the government or extensions of the government, and are tried criminally. Criminal cases can be tried by local, state, or federal prosecutors.
- Level of Success Required for Conviction for Civil and Criminal Fraud.
- Differing Burdens of Proof for Civil and Criminal Fraud.
The most important difference between Civil and Criminal fraud contends primarily with the amount of proof needed to convict within each individual case. As we know, criminal proceedings require prosecutors to prove guilt “beyond a reasonable doubt”. Civil cases however, require a much lower standard to prove an individual’s guilt. In civil law, the burden of proof in trial is known as the “balance of probabilities” or the “preponderance of evidence”. In this scenario, one party’s case only needs to be stronger than the other side. In essence, the alleging party need only cross the fifty percent threshold in order to succeed in conviction.
- Severity of Punishment for Civil and Criminal Fraud.
As one could guess, the outcome of civil and criminal cases produces significantly different results. Civil claims focus largely on recovering monetary compensation on behalf of the victim. Civil claims often do not reach completion within the litigation process due to negotiation from both parties’ counsel. As for criminal proceedings, prosecutors pursue alleged fraudsters on behalf of the state. In other words, those convicted of criminal fraud are subject to incarceration, fines paid to the state, as well as financial compensation to victims. Referencing our previous discussion regarding variations in legislation at the state level, citizens of different states may be subject to harsher penalties based upon where they live. That is to say, the punishment for both civil and criminal fraud offenses is subject to state statutes. The nature of the penalty will often depend on the severity of the crime committed.
One key difference between both types of fraud is that damage must actually occur to the victim in a civil fraud case. The alleging party must be able to demonstrate that they suffered damage as a result of their reliance upon the false representation. In contrast, criminal cases only require that fraudulent activity has occurred with the intent to harm another party. In other words, fraudsters need not succeed in damaging another party, prosecutors only need to establish their intent in doing so.
With the inherent costly and expensive nature of fraud, along with the continued growth of instances of fraud within the United States, it is important not to overlook where and when fraud can occur. State legislation can offer different judicial interpretations based upon the state in which you reside. Beyond the non-uniformity regarding the legal definition of fraud in the United States, fraud cases are complex and can result in significant penalties. This culminates in a difficult area of practice that requires a firm that understands the nuances of state laws concerning fraud and the role of the False Claims Act at the federal level.