Understanding fraud and white collar crime - The origin, definition and elements of fraud

by Janette Minnaar

1. INTRODUCTION

Internal theft and fraud in companies have become endemic. This may be attributed to a number of factors, among others, an increase in financial pressure and a culture of crime in a company.

Many opportunities to commit fraud often exist without the knowledge of management. This situation may be aggravated by a lack of proper supervision of an employee. Many companies feel powerless to fight the scourge of white-collar crime.

I believe that knowledge is one of the few genuine tools against dishonesty. When a manager of a company understands the requirements of criminal law in order to prove fraud and other white-collar offences, he or she will be better equipped to gather evidence against a dishonest employee to ensure a successful prosecution.

There is often confusion about the difference between fraud and white-collar crime. The latter can also be referred to as commercial or economic crime. Although an element of fraud is found in most white-collar schemes, white-collar crimes can go much further to include corruption, forgery, theft and complicated statutory offences.

Fraud is a separate (also called a specific) crime in South African criminal law and can be seen as one of many different types of white-collar offence. Fraud originated from two different crimes in Roman law, namely, stellionatus (fraud) and crimina falsi (fraudulent crime).  The main characteristic of stellionatus was that there had to be a deliberate misrepresentation, which would lead to the prejudice of others. Crimina falsi was a serious crime, committed by way of falsification, and it was not a prerequisite for the actions of the offender to prejudice someone.

The above-mentioned crimes were derived from the Lex Cornelia de falsi and were never combined into one crime. Roman Dutch writers such as Matthaeus, Voet and Van den Linden, however, did not distinguish clearly between stellionatus and crimina falsi.

From the beginning of the twentieth century, South African courts started to combine these two offences, calling them fraud. The merging of stellionatus and crimina falsi into one crime and the incorporation of crimina falsi into fraud had the effect of the ambit of fraud in South African criminal law becoming particularly wide.

2. DEFINITION OF FRAUD

There are almost as many different definitions of fraud as there are South African writers. I shall deal with only two of the most authoritative definitions.

The well-known South African criminal law jurist, C R Snyman, explains fraud as “…the unlawful and intentional making of a misrepresentation which causes actual prejudice or which is potentially prejudicial to another.”  In the case of Myeza, this definition was quoted with approval.

C R Botha, who wrote a doctoral thesis on fraud, gives the definition of fraud as follows: “Fraud is the unlawful, intentional making of misrepresentation which causes actual prejudice to another or holds potential prejudice to another” (own translation).

The latter definition may be accepted as accurate and, in terms of that definition, one should be able to include all forms of fraud.

3. ELEMENTS OF FRAUD
3.1 INTRODUCTION

In order to find an employee guilty of fraud, all the elements of the crime need to be proved simultaneously in court. In this article, the elements of fraud will therefore be discussed briefly, in order to provide the reader with an understanding of how difficult it may be to prove fraud in court.

Even though many writers disagree about the description of fraud, there is generally consensus about the five elements of the crime. These five elements are prejudice, misrepresentation, unlawfulness, causality and criminal intent.

3.2 ELEMENT ONE - PREJUDICE

The prosecutor has to show that the accused caused prejudice to another. In our law, there is confusion about whether ‘prejudice’ means potential or actual prejudice. In the two Roman crimes of stellionatus and crimina falsi (delineated above), potential prejudice was sufficient and actual prejudice was not required.

This implied that an accused could be convicted of completed fraud even if the complainant was never misled by the misrepresentation, or even if the complainant never had the intention to react to the misrepresentation.

C R Botha submits that the position in South African law should not be changed completely from that in Roman times. He suggests, however, that a distinction should be made between a situation in which a real possibility of prejudice exists and a situation in which the potential prejudice is merely fictitious.

In the latter instance, the complainant cannot be prejudiced although others might be. Botha proposes that actual deception of the complainant should be the prerequisite for fraud. An accused should be convicted of attempted fraud only if he made an incomplete misrepresentation, or if a completed misrepresentation does not cause potential prejudice to the complainant.

3.3 MISREPRESENTATION

A misrepresentation is made when X makes a representation to Y implying that a condition or set of conditions exist that, in reality, does not exist. A misrepresentation may be made:
• by way of behaviour (such as nodding your head); or
• by way of an omission (to omit to do something); or
• when there is a misrepresentation regarding a fact.

The element of misrepresentation has also caused problems in our law. It is not a prerequisite for Y to be misled by the misrepresentation of X.

The crime is complete once the misrepresentation has been made. It is irrelevant whether the complainant acted upon the misrepresentation. Misrepresentation by way of an omission is when X omits to reveal a material fact, which causes Y to act to his prejudice. Our courts have found that there is a legal duty to disclose relevant facts.

3.4 UNLAWFULNESS

An accused can be prosecuted for an act or omission only if the act of omission was unlawful in terms of South African law. Compulsion and obedience to an order may both be possible grounds for justification of the offence.

3.5 CASUALITY

The courts sometimes require that there should be a casual connection between the act and the prejudice suffered by the complainant. It is generally accepted, however, that potential prejudice is sufficient for the crime of fraud.

Therefore, it may be deduced that the casual connection has lost its relevance.

3.6 CRIMINAL INTENT

Sometimes, it is said that there is a difference between the intention to deceive and the intention to defraud.  Many of the South African judgements have stipulated that X should not only have had the intention to deceive, but also the intention to defraud.

An intention to defraud is when X tries to convince Y to act to his prejudice on the grounds of X’s misrepresentation. Intention to deceive refers to the misrepresentation, whereas intention to defraud refers to both the misrepresentation and the prejudice.

It is this latter kind of intent that the courts require as a prerequisite for fraud. According to Snyman and Botha, the intention to defraud includes the intention to deceive, but the reverse is not true.

To show that X had the intention to defraud, the State will have to prove that X at least knew that his or her misrepresentation was not the truth. Because it is difficult to prove this, section 245 of the Criminal Procedure Act, no 51 of 1977, was introduced in order to create a presumption that X had the intention to defraud.

The constitutional court, however, has ruled that such a presumption is unconstitutional, because it infringes on the right of the accused to be presumed innocent. The courts will now have to rely on other evidence to prove that the accused had the necessary intention to defraud.

4. CONCLUSION

It becomes apparent from the brief discussion of the definition and various elements of fraud that it is a complicated crime to prove in court. Therefore, the business sector requires a working knowledge of criminal law to ensure that sufficient evidence will be brought against a suspected fraudster. Where necessary, expert legal or investigative assistance should be used.

Published as two separate articles in Management Today, July 2000 (page 38) and August 2000 (page 50)

Written by Janette Minnaar