Fraud - Which Way to Go? by Andrew Marshall

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Fraud is a huge concern for individuals and businesses who are constantly having to review their systems and measures to protect themselves as fraudsters regularly find new ways to obtain an advantage. Fraud occurs on a daily basis and the way it is reported in the media could cause someone to believe fraud is only one type of action.

Fraud can be pursued in the criminal courts or the civil courts and sometimes both, depending on the circumstances.

On 1 November 2017, the Island enhanced its criminal legislation with the introduction of the Fraud Act 2017 (“the Act”). The Act repeals all of the deception offences in the Theft Act 1981, and replaces them with a single offence of fraud which can be committed by:

• Making a false representation;
• Failing to disclose information when there is a legal duty to do so;
• Abuse of position.

For each of the offences, it must be proven that the defendants’ conduct was dishonest and intended to make a gain or the risk of loss to another. There is no need for there to have been an actual gain or loss.

The Act includes additional offences such as being in possession or control of articles for use in frauds; making or supplying articles for use in frauds; participating in fraudulent business; obtaining services dishonestly; conspiring to commit fraud outside the Island; and aiding and abetting fraud outside the Island.

The Act also captures any acts carried out by an Isle of Man resident in a country or territory outside the Island, if such an act would constitute an offence if committed on the Island. The legislation allows proceedings to be taken against the Isle of Man resident in the Island.

In the civil jurisdiction, fraud is not a single cause of action. Fraud, in civil terms, includes a number of claims which require a claimant to prove different elements. These will include claims for certain breaches of fiduciary duty, conspiracy, bribery, certain breaches of trust, deceit and fraudulent misrepresentation, inducing a breach of contract. Under the companies’ legislation there are also fraud actions, for example in relation to fraudulent trading.

If you believe you have become a victim of a fraud, it is important to act quickly and determine a strategy to achieve your desired outcome. Depending on the type of the fraud, a question that will be discussed is whether a criminal complaint should be made with a view to there being a criminal investigation (and the matter proceeding before the criminal courts), or whether you should commence an action in the civil courts. You could be in a position which allows you to pursue both options.

There are, of course, many differences between the civil and criminal procedures. A civil fraud action is commenced by the victim of the fraud filing a claim in the civil courts seeking to recover the misappropriated funds or assets and/or compensation/damages. The matter will follow the civil procedure which will involve both sides filing court documents to plead their respective positions and exchanging documentation and evidence. The claim will be determined by a Judge following a trial.

A criminal fraud action requires the victim to make a complaint to the police. The police will then decide whether to carry out an investigation. If the police decide to investigate, it is likely the alleged fraudster will be required to answer questions in a police interview. Provided there is sufficient evidence, the alleged fraudster will be charged and the matter will be handed over to the Attorney General’s Chambers to prosecute in the criminal courts. The alleged fraudster will be required to attend court and enter his/her plea. If the alleged fraudster pleads not guilty, there will have to be a trial. If he/she pleads guilty or is found to be guilty, the defendant will be sentenced and is likely to receive a fine and/or imprisonment.

A further difference between civil and criminal fraud is the “standard of proof”. In civil proceedings, the claimant must prove the elements of the civil fraud claim “on the balance of probability” (i.e. 51%), whereas in criminal proceedings the prosecution must prove the elements of the criminal fraud “beyond reasonable doubt”. In other words, there is a higher threshold to achieve in the criminal courts.

If both criminal and civil actions are available to a victim, the victim may wish to pursue both avenues. The victim does not have to choose between a civil and criminal action. However, as you would expect, each course of action has its own advantages.

The main advantages of bringing civil proceedings are:

• The claimant can maintain complete control of the case and determine the appropriate strategy. In a criminal action, a victim is handing over the matter to the police and Attorney General’s Chambers who will make the decisions, and one of those decisions might be to not proceed;
• The civil procedure will allow a successful claimant to recover his/her loss and/or receive compensation. In criminal proceedings, the victim is less likely to receive any financial compensation;
• Following the commencement of proceedings, the claimant can apply for interim relief such as freezing injunctions and search orders. This is crucial if there is a real risk of the fraudster dissipating his ill-gotten gains;
• The civil procedure is designed to enable parties to reach a settlement before a trial takes place; and
• The standard of proof is lower than in criminal proceedings.

Ultimately, the decision whether or not to pursue criminal or civil proceedings (or both) will depend upon the victim’s desired outcome. If the victim wishes to recover the misappropriated assets or funds, the victim will need to commence civil proceedings.

There are, however, advantages of criminal proceedings such as:

• The victim will not be required to fund the proceedings, whereas in civil proceedings the victim is required to pay an advocates’ legal fees and any other associated costs. In civil proceedings, a successful claimant is likely to obtain an order requiring the defendant to pay the claimant’s costs, but those costs will be assessed which means that the successful claimant will not recover the entirety of his/her costs;
• The police and investigating authorities will be able to gain access to information and documentation a lot quicker than an advocate in civil proceedings. For example, the police will be able to quickly gain access to a suspect’s bank accounts to identify any fraudulent activity;
• If a defendant is found to be guilty, he will have a criminal record and is likely to be faced with a fine and/or a custodial sentence. A criminal conviction might lead to disciplinary proceedings by regulatory bodies. For example, a fraudulent advocate is likely to be struck off or a fraudulent director can be disqualified from acting as a director for a certain period of time. Although this does not benefit a victim, it can provide a victim with comfort that the fraudster will not be able to carry out a fraud in his/her previous capacity;
• In complex multi-jurisdictional frauds, the prosecuting authorities from the various jurisdictions can easily co-operate with each other, something which greatly assists in the evidence gathering stage. In civil proceedings, it can become a costly process having to ask a foreign court for assistance to obtain evidence in that foreign jurisdiction.

Fraud actions are rarely straightforward and it is important a victim of a fraud acts quickly to maintain any chance of recovering the misappropriated funds/assets. Strategic decisions need to be made in every case, whether the matter involves one transaction and individual, or whether the fraud has taken place over many years and involves a variety of jurisdictions and individuals/companies.