Definition: Intentional deceptions or misrepresentations undertaken to deprive others of money, property, or other valuable assets
Criminal justice issues: Business and financial crime; computer crime; fraud; white-collar crime
Significance: Although frauds are by their nature difficult to identify and quantify, it is clear that fraud constitutes one of the most pervasive and costly crime problems in the United States.
Throughout history, the term “fraud” has undergone a series of transformations. The earliest recorded definition of fraud was made during the early fourteenth century, when it was defined as deceit, trickery, or intentional perversion for the purpose of inducing others to part with something of value. During the eighteenth century, England’s Parliament added the concept of false pretenses to the definition of fraud in cover an area of law previously untouched by larceny statutes. The modern American definition of fraud, as used in the Uniform Crime Reports and local law-enforcement agencies throughout the country, calls it deceitful conversion and the obtaining of money or property by false pretenses. Despite disparities in definitions of fraud, it generally is agreed that four elements must be present for fraud to occur: a material false statement, knowledge of the statement’s falsity, reliance on the false statement by a victim, and damages suffered by the victim.
Prevalence
Collectively, fraud costs Americans hundreds of billions of dollars every year, and fraud, by its very nature, presents difficult challenges for law enforcement. One of the difficulties in countering fraud is that there are no discernible typologies among either its perpetrators or its victims. Perpetrators range from lower- and middle-class persons to corporate titans. In addition, fraud is rarely perpetrated by lone offenders; it generally relies on collusion between two or more parties.
Among victims, the only distinguishable characteristics of victims are age and levels of education. The young, the elderly, and persons with at least some college education are the most likely targets of fraud. The average victim spends in excess of 150 hours and nearly $800 repairing the damage caused by fraud. Most victims are unaware of how perpetrators of the frauds against them get their information about them. However, they generally know a few things about the perpetrators themselves, such as names, addresses, and phone numbers. Law enforcement uses such information to apprehend the perpetrators.
Consumer reporting agencies such as the Federal Trade Commission and Social Security Administration and federal law-enforcement report an estimated 125,000 to 175,000 victims annually. Approximately 15 percent of the victims of fraud have reported that the suspects are persons whom they personally know, such as relatives, friends, neighbors, and coworkers. Roughly the same percentage of victims believe they have been victims of fraud because of lost or stolen purses and wallets, mail theft, or telephone solicitations.
Fraud takes many forms but is generally divided into three basic categories: fraud against the government, corporate and financial fraud, and consumer fraud.
Fraud Against the Government
Among the most common forms of fraud perpetrated against the government are tax fraud, health care fraud, child-support fraud, bankruptcy fraud, social security fraud, and housing and welfare fraud. Of these types, the most important are tax and health care fraud. Simple tax evasion is the most costly type of fraud against the government. It is practiced in a variety of ways—through deliberate underreporting of income, keeping multiple sets of account books, maintaining false records, claiming personal expenditures as business expenses, and concealing assets and income. One of the challenges faced by agencies responsible for combating such frauds is separating honest errors from willful violations. During the first years of the twenty-first century, the Internal Revenue Service estimated that it was losing about $28 billion per year in uncollected taxes.
Since the early 1990’s, health care fraud, which includes frauds against Medicare and Medicaid, has reached epidemic proportions. It usually takes the form of submission of deliberately claims to tax-funded health insurance programs. Several million health insurance benefit transactions every year are believed to be fraudulent.
Examples of health care fraud include billing for medical services never rendered, billing for services or procedures that are more expensive than those actually performed, double billing by misrepresenting uncovered treatments as covered ones, falsifying patient diagnoses, promoting of fraudulent and unproven devices for treatment, and misrepresentations of identity by switching identification cards.
Health care fraud has drawn many criminals away from other types of crime because it is viewed as both safer and more lucrative. After tax evasion, health care fraud is the second most costly white-collar crime in the United States, costing citizens an average of more than $50 billion per year. However, the impact of health care fraud extends far beyond its purely financial costs. Falsifying patient diagnoses and histories for financial gain also poses physical risks to patients as well as theft of benefits for those who have lifetime limits on their insurance. Despite the magnitude of health care fraud on a variety of levels, the government has been reluctant to prosecute this type of fraud, thereby perpetuating the problem.
Corporate and Financial Fraud
A host of subcategories can be identified under the guise of corporate crime. These include securities, mail, wire, bank, mortgage, loan, check, credit card, and private health care fraud. Securities and credit card fraud are the most common types of corporate and financial fraud.
Securities frauds include the deliberate falsifying of statements or omission of documents filed with the Securities and Exchange Commission (SEC), insider trading, buying and selling of securities that are not registered with the SEC, and engaging in interstate communications with potential buyers. Securities fraud has been statutorily regulated since the passage of the federal Securities Act of 1933. That law was enacted to prohibit deceit, misrepresentation, and fraud in the sale of securities, and to require that investors receive financial and other information regarding the sale of public securities. The National White Collar Crime Center has estimated that securities and commodities fraud totals $40 billion annually.
Credit card frauds include unauthorized use of credit cards, reproduction of credit card strips, and reproduction of credit cards to utilize the balances for the purpose of obtaining financial gain. In 2005, about 1.2 billion credit cards were in circulation in the United States, and nearly 190 million Americans were credit card holders. Card issuers lose about $1 billion annually to credit card fraud, and merchants lose significantly more.
Consumer Fraud
Consumer fraud’s main components include telemarketing fraud, Internet fraud, and identity theft. The latter two are the most common types of consumer fraud. Consumer Sentinel is an investigative cyber tool, created by various public and private partners to collect and share information pertaining to fraud with all law-enforcement agencies. Its database is maintained by the Federal Trade Commission, which received 516,740 fraud complaints in 2003 alone. Identity theft constituted 214,905 of those complaints. These figures include only the incidents of fraud reported by consumers during that year. Unknown numbers of fraudulent incidents go unreported.
Internet fraud is becoming increasingly common as the World Wide Web emerges as a powerful medium for conducting business. This type of fraud encompasses all schemes using components of the Internet to conduct fraudulent transactions, such as work-at-home schemes, phony credit card offers, fraudulent investment opportunities, electronically mailed advertisements known as “spam,” and the use of legitimate business names to persuade computer users to disclose passwords to obtain financial information.
The single largest category of Internet-related complaints—80 percent—is online auction fraud. This occurs when victims win auctions but either never receive the products for which they pay or find that the quality of the goods they receive has been misrepresented. There are many completely honest dealers on the Internet, but it is almost impossible for buyers to distinguish between them and the criminals who use the Internet for exploitation.
Although current research indicates that incidents of fraud are declining, an important new type of fraud, identity theft, is rapidly expanding. One-half of all fraud complaints reported to the Federal Trade Commission relate to identity theft. A 2003 survey found that over the previous five years, one in eleven people fell victim to identity theft. However, it is difficult to quantify this crime accurately because it is estimated that more than 60 percent of its victims fail to report their bad experiences.
Identity theft involves the taking of personal information to use for some type of financial gain. Such information can be taken from many different sources, ranging from the contents of mailboxes and garbage cans to utility bills and even eavesdropping on conversations. Occasionally, employees of banks, retails stores, and restaurants take account numbers from credit card strip readers. Some perpetrators get information by telephoning their victims and pretending to be representatives of legitimate businesses who are asking to verify information. With the personal information they collect, criminals can apply for credit cards or make withdrawals from bank accounts in their victims’ names.
Investigation
Fraud investigations are both unusually time-consuming and labor-intensive. The nature of frauds and their ability to remain undetected for extended periods post special hurdles to investigators, and partly for this reason, law-enforcement agencies make fraud investigations a low priority and focus their resources on investigations of other types of crime. The reluctance of law enforcement to go after perpetrators of fraud has reinforced the perception among criminals that fraud is safer and more lucrative to practice than other crimes, such as drug trafficking.
According to the Federal Bureau of Investigation’s Uniform Crime Report, the number of arrests for fraud in 2002 was 233,087—up from the previous year’s 211,177 cases. Since these numbers are based upon the numbers of cases that law-enforcement agencies actually report to the FBI, the increase may be due, in part, simply to an increase in the number of agencies reporting fraud. For example, 9,511 agencies reported their arrest rates in 2001, and 10,372 agencies reported their arrest rates in 2002. The majority (54 percent) of fraud offenders in 2002 were men between the ages of 25 and 29. There were no demonstrable differences in race or ethnicity among offenders.
Prosecution
The main law-enforcement agency responsible for protecting U.S. financial institutions is the Federal Bureau of Investigation, which is charged with identifying and disassembling criminal organizations and individuals that target financial institutions. Between 2000 and 2004, FBI investigations led to more than eleven thousand convictions for fraud and more than $8 billion in restitution orders.
Multiagency task forces have been established in the hope that collaborative efforts will aid in capturing, prosecuting, and punishing fraud offenders. Operation Continued Action, created in 2004, marked the beginning of the largest nationwide law-enforcement initiative in history. The program was initiated by the FBI and involved the U.S. Attorney’s Office, as well as many federal, state, and local law-enforcement agencies. Its main goal was to counter financial frauds, such as mortgage and loan fraud, identity theft, check kiting, insider trading, and internal theft.
Another effort to foster national cooperation among law-enforcement entities is the Internet Fraud Complaint Center (IFCC). This came about as part of the initiative by the U.S. Department of Justice in combating the problem of Internet fraud. This joint venture between the FBI, Internal Revenue Service, and Postal Inspection Service was designed to provide law enforcement with a single point of contact for identifying Internet fraud schemes. As strides in technological advancements continues, Internet fraud is expected to continue to soar.
Punishment
The Department of Justice prosecutes cases of identity theft under a wide array of federal statutes, including the Identity Theft and Assumption Deterrence Act of 1998. In most instances. identity theft convictions carry maximum sentences of fifteen years imprisonment, fines, and forfeiture of any personal property used to commit the offenses. It should be noted that identity theft is often coupled with violations of other forms of fraud, including computer, mail, wire, and financial fraud. Those offenses are felonies, and convictions can carry penalties as high as thirty-years prison sentences.
In 1996, the Health Insurance Portability and Accountability Act made health care fraud a federal criminal offense. In addition to substantial fines, convictions for this crime can carry sentences to federal prisons of up to ten years. Moreover, the sentences can be doubled when fraudulent acts result in harm to patients. When patients die as a direct result of health care fraud, offenders can be sentences to life in prison.
Lisa Landis Murphy
Further Reading
Abagnale, Frank. The Art of the Steal: How to Protect Yourself and Your Business from Fraud, America’s Number-One Crime . New York: Broadway, 2002. Authoritative guide to fraud prevention by the former check forger and hoaxer whose career was dramatized in the 2002 film Catch Me If You Can , in which Leonardo DiCaprio played Abagnale.
Albrecht, W. Steve, and Chad Albrecht. Fraud Examination and Prevention . Mason, Ohio: South-Western Educational Publishing, 2003. Examination of methods of detecting, investigating, and preventing fraud.
Anastasi, John. The New Forensics: Investigating Corporate Fraud and the Theft of Intellectual Property . Hoboken, N.J.: John Wiley & Sons, 2003. Using actual case studies, Anastasi describes the use of computer forensics to detect and prosecute a multitude of different types of fraud.
Friedrichs, David O. Trusted Criminals: White Collar Crime in Contemporary Society . 2d ed. Belmont, Calif.: Wadsworth, 2004. Comprehensive overview of ways to control white-collar crime, including fraud.
Identity Theft: How to Protect Your Name, Your Credit Card, Your Virtual Information, and What to Do When Someone Hijacks Any of These . Ada, Ohio: Silver Lake Publishing, 2004. Combines law-enforcement and security personnel interviews with case studies to provide practical advice on avoiding identity theft.
Pickett, K. H. Spencer, and Jennifer Pickett. Financial Crime Investigation and Control . Hoboken, N.J.: John Wiley & Sons, 2002. Useful handbook for law-enforcement personnel involved in financial crime investigations.
Swierczynski, Duane. Complete Idiot’s Guide to Frauds, Scams, and Cons . Indianapolis, Ind.: Alpha Books, 2003. Simplified and entertaining guide to the elements of confidence games, consumer scams, and popular frauds.
Wells, Joseph. Corporate Fraud Handbook: Prevention and Detection . Hoboken, N.J.: John Wiley & Sons, 2004. Examines an array of fraud schemes and provides insights on prevention and detection.
_______. Principles of Fraud Examination . Hoboken, N.J.: John Wiley & Sons, 2004. Employs the use of actual case studies to examine fraud schemes by employees, owners, managers, and executives, and how to develop preventive measures.
See also Bigamy and polygamy; Computer crime; Consumer fraud; Embezzlement; Forgery; Identity theft; Insurance fraud; Tax evasion; Telephone fraud; Theft; Voting fraud; White-collar crime.