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What Is Fraud?
KEY TAKEAWAYS
Fraud involves deceit with the intention to illegally or unethically gain
at the expense of another.
In finance, fraud can take on many forms including making false
insurance claims, cooking the books, pump & dump schemes, and
identity theft leading to unauthorized purchases.
Fraud costs the economy billions of dollars each and every year, and
those who are caught are subject to fines and jail time.
Fraud Explained
Fraud involves the false representation of facts, whether by intentionally
withholding important information or providing false statements to another
party for the specific purpose of gaining something that may not have been
provided without the deception.
Often, the perpetrator of fraud is aware of information that the intended victim
is not, allowing the perpetrator to deceive the victim. At heart, the individual or
company committing fraud is taking advantage of information asymmetry;
specifically, the resource cost of reviewing and verifying that information can be
significant enough to create a disincentive to fully invest in fraud prevention.
Both states and the federal government have laws that criminalize fraud,
though fraudulent actions may not always result in a criminal trial. Government
prosecutors often have substantial discretion in determining whether a case
should go to trial and may pursue a settlement instead if this will result in a
speedier and less costly resolution. If a fraud case goes to trial, the perpetrator
may be convicted and sent to jail.
Legal Considerations
While the government may decide that a case of fraud can be settled outside of
criminal proceedings, non-governmental parties that claim injury may pursue a
civil case. The victims of fraud may sue the perpetrator to have funds recovered,
or, in a case where no monetary loss occurred, may sue to reestablish the
victim’s rights.
Proving that fraud has taken place requires the perpetrator to have committed
specific acts. First, the perpetrator has to provide a false statement as a material
fact. Second, the perpetrator had to have known that the statement was untrue.
Third, the perpetrator had to have intended to deceive the victim. Fourth, the
victim has to demonstrate that they relied on the false statement. And fifth, the
victim had to have suffered damages as a result of acting on the intentionally
false statement.
ARTICLE SOURCES
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Related Terms
What Is White-Collar Crime? Meaning, Types, and Examples
White-collar crime is a nonviolent crime characterized by deceit to obtain or avoid losing
money, or to gain a personal or business advantage. more
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Mortgage Fraud: Understanding and Avoiding It
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What Is Securities Fraud? Definition, Main Elements,
and Examples
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