What Is Fraud?

Fraud happens when one party lies to deprive another party of funds or property. It can be both a civil and criminal wrong. Intent is one of the key differences between fraud and a simple misunderstanding.

Examples of fraud include:

• Faking documentation to win government contracts
• Hiding income to avoid taxes
• Submitting false invoices for reimbursement
• Using someone else’s personal data for financial gain

Civil vs. criminal fraud

The same act of fraud can be treated as both a civil and criminal matter. Courts handle civil and criminal fraud cases differently.

• Criminal fraud is a charge a government makes against a perpetrator. Government prosecutors must prove beyond a reasonable doubt that the accused is guilty of the action. The guilty party might face punitive actions such as fines or jail time.
• Civil fraud cases generally happen between two parties, whether individuals or entities. Civil cases have a lower burden of proof called “the preponderance of evidence.” The responsible party in a civil fraud case usually faces monetary damages paid to a plaintiff.

Perpetrators use several types of fraud that involve many actions. Some fraudsters prey on individuals while others target organizations such as businesses and governments. Let’s explore targets and the fraudulent actions perpetrators use against them.

Fraud targets

These are some common targets and actions of fraud schemes.

• Corporations (Corporate fraud): Fraudulent actions by either an organization or individual acting on the organization's behalf. Examples include accounting irregularities, falsified earnings and insider trading.
• Governments (Government fraud): A type of fraud in which a government agency is a victim. An example is false claims for public benefits or contracts.
• Individuals (Individual fraud/consumer fraud): Targets individuals in fraud schemes. Common examples include bad checks, credit card misuse, debt collection scams, gift card schemes, identity theft, online scams, and phishing scams.

Categories of frauds

Perpetrators have come up with a wide variety of potential schemes, with some methods overlapping.

• Wire fraud: Using phone calls, emails, or other electronic means to commit fraud. Phishing, fraudulent online auctions, hacked emails, and investment scams are examples.
• Mail fraud: Committing fraud through postal services, including the U.S. Postal Service, FedEx and other delivery services. Examples include fake job offers, government benefit scams, fake charity appeals, counterfeit bills, and money-transfer schemes.
• Document fraud: Forging, altering, or fabricating paperwork such as identification or travel documents. Some examples include forging passports, altering drivers’ licenses, or getting genuine documents under a false name.

The fraud triangle is a model that experts use to identify and prevent fraud. Donald Cressey, a sociologist, first conceptualized the three pillars of the fraud triangle:

• Financial pressure: The perpetrator has a financial need.
• Opportunity: The perpetrator notices procedural weaknesses that will allow them to take funds without being noticed.
• Rationalization: The perpetrator justifies their actions.

Whistleblowers are people who report possible fraud to authorities. They have saved or recovered billions of dollars for victims. Whistleblowers are often employed in roles where they might observe signs of fraud, although it is not always necessary that they be an “insider” at the company.

In a 2007 study, experts found that whistleblowers reported 43 percent of the fraud exposed at private corporations. On the other hand, professional auditors only detected 19 percent of fraud cases. In qui tam cases, whistleblowers report fraud against the government, saving taxpayers billions of dollars.

But whistleblowing can be risky. They face potential retaliation, including termination, demotion, or lawsuits. Fortunately, the U.S. has strong whistleblower protection laws. In some cases, whistleblowers can also receive a portion of the funds they help recover.

Whistleblowers may be able to file claims under laws such as:

• The Dodd-Frank Act
• The False Claims Act
• The IRS Whistleblower Program

Fraud red flags

Fraud investigators have noticed behavioral patterns with people accused of corporate fraud. They include:

• Changes in behavior: Stress from illegal actions can lead to sudden defensive or aggressive behavior
• Financial difficulties: Perpetrators might engage in fraud because of personal financial problems
• Ethical issues: Devious business behavior can indicate a willingness to participate in fraud
• Lack of transparency: Suspects might try to work alone to avoid others detecting their fraudulent behavior
• Living beyond their means: Suspects may seem more affluent than expected for their income
• Unusually close links with customers or vendors: Close ties could indicate collusion

What’s the difference between fraud and theft?

Fraud involves deceit or trickery, while theft usually involves taking something directly. Theft is often easier to notice because there are often visible signs of missing property. Detecting fraud often requires specialized knowledge and tools.

Is fraud always a federal crime?

No, fraud is not always a federal crime. It often becomes a federal crime when the scope of the activity crosses state lines or when perpetrators use mail or electronic communication to commit crimes. Typically, state and federal agencies will work together to decide whether state or federal courts will have jurisdiction. Also, the victim may be a factor. For example, a perpetrator who harms a federal official carrying out their duties might be charged with a federal crime.

What is wire fraud?

Wire fraud uses some form of electronic communication with the intent to deceive a victim and deprive them of property. In wire fraud, the perpetrator might use electronic devices such as telephones or email. Courts treat wire fraud and mail fraud as the same offense.

What is tax fraud?

Tax fraud is when a taxpayer intentionally tries to evade paying taxes they owe. Individuals and businesses can both attempt tax fraud. Reporting tax fraud may lead to a whistleblower claim.

What is insurance fraud?

Insurance fraud is the crime committed when someone lies or misrepresents facts to deny or obtain insurance benefits. This is considered a felony. An act of insurance fraud is complete when the perpetrator knowingly makes a false claim with intent to obtain funds fraudulently. They don’t need to collect the money to have committed a crime.

In some cases, fraudsters fake or create a loss to get money from insurance companies. Another type of insurance fraud is when a policyholder has a legitimate claim, but they inflate the value or items they lost or claim items they did not own.

Motley Rice attorneys have advocated for many whistleblowers. We prioritize protecting their rights and helping them navigate the legal process.

Learn more about our whistleblower litigation experience.