Common types of fraud and their punishment in law

types of fraud in law

Last modified on March 26th, 2024

In 2023, a business was found to have been defrauded of $4.4m by a former employee. The ex-worker used fake invoices resembling those received from legitimate vendors to direct the money to the fraudster. This is a type of payment fraud that can cost your company dearly. Read on to find out about five other common types of fraud in law and how they are punishable…

Trustpair wipes out B2B payment fraud thanks to ongoing and automated account validation. Request a demo to learn more!

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Criminal vs civil fraud: what are the differences?

In legal terms, fraud refers to false representation, dishonesty, and deceit. It can break civil law and criminal law.

As a quick definition, criminal fraud is when the prosecutors have sufficient evidence to take the case to court. The defendant must be proven guilty beyond a reasonable doubt.

Potential punishment if found guilty of criminal fraud offenses:

  • Imprisonment
  • Fine
  • Restitution order

In comparison, civil fraud tends to be a private action. The claimant, which could be a person or a business, takes the matter to the civil court to recover their losses due to fraud and potentially get compensation too.

There, the standard of proof is less than compared to a criminal fraud case. In civil fraud cases, whether someone is guilty or not is based on probabilities. Basically, the evidence must prove that it’s more probable than not that the fraud occurred.

Potential punishment if found guilty of civil fraud:

  • Restitution order
  • Fine

The 4 elements of fraud

There are four legal elements of fraud:

  1. Intentional misrepresentation of a material fact – a fact stated that is purposely false, and it is significant
  2. Knowledge of falsehood in representation – the offender must have known of the falsity
  3. Reliance on the facts and truth by the victim – the victim was supposed to rely on the truth or fact or did rely on it
  4. Damage as a result of misrepresentation and reliance – this could be financial damage or other damage

 

6 types of fraud

Let’s take a look at some of the types of financial fraud. Financial fraud is a form of white-collar crime – a method of crime that is non-violent and financially motivated.

Internal fraud

This occurs when an employee misuses a business’s property or assets for their own gain or to cause losses to others.

The fraud triangle can be applied to understand why people commit internal fraud. In this theory, the main three motivations are:

  • Pressure/incentive: this could be a personal health issue, an urgent need for money, or pressure from an individual higher up in the business
  • Opportunity: this happens when there’s a process gap or loose internal controls. It’s easier to commit a scam when you know you won’t get caught
  • Rationalization: people who commit internal fraud tend to justify their theft, especially when there’s a personal and urgent need for money.

The risks of internal fraud schemes can be significantly lowered by removing one or more of the elements of the fraud triangle.

To do this:

  • Reduce pressure and know your employees to detect any suspicious change or fraudulent behavior
  • Reduce opportunity with tight internal controls and anti-fraud software
  • Reduce the opportunities for rationalization with fraud awareness training, etc.

In internal fraud cases, an individual may take advantage of their position in the company or ability to take ownership of tasks.

Internal fraud, also known as employee fraud, can look like:

  • Theft of cash
  • Embezzlement of stock
  • Billing schemes
  • Personal use of an organization’s equipment

75% of workers in the United States say they have stolen from an employer at least once before.

To avoid this scenario, operate the 4-eyes principle as a security measure. This segregation of duties means that different employees are involved in an operation’s lifecycle. Therefore, a worker should not be able to commit fraudulent activities and conceal them.

Identity fraud

Identity fraud refers to a fraudster getting hold of an individual’s stolen personal or financial information without permission. It is also referred to as ‘identity theft’.

Identity fraud can have several impacts on the victims:

  • Damage a business’s reputation
  • Financial losses
  • Time lost spent changing details
  • Damage credit status

Vendor fraud

Vendor fraud refers to illegal and unprofessional payments that are made to real and false vendors or suppliers.

Some common types of vendor fraud include:

  • Suppliers being impersonated by fraudsters – the buyer gets told by the cybercriminal that payment details such as an account number have changed and offers new details ahead of a transaction. The fraudster may use an email address similar to the supplier’s actual email (for example @trostpair.com instead of @trustpair.com), this is called phishing.
  • Supplier email being hacked – fraudsters access the email address and send a hacked email to a supplier. This provides new payment details for the scammer to receive the fraudulent transaction
  • An insider – an employee from the payee company may steal a real invoice from a genuine supplier and change the payment details to their own

As these scams are so well-thought-out, it can be several weeks before finance teams become aware of the fraud when the real supplier provides their invoice.

Trustpair’s latest study found that vendor fraud was the second most common type of fraud that companies have been targeted by. Almost half (47%) of businesses have been picked on by cybercriminals trying to commit vendor fraud.

Download the full study for more information!

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Romance fraud

This happens online or on dating apps where fraudsters pose as your ideal partner using a fake profile. They will use pictures of other people and false names and descriptions.

The deceiving individual will chat with you for some time to build your trust and fake a romantic interest in you to forge a relationship with you.

Then, at some point down the line, they will ask for money and may make up a story that they need you to help them financially to get something or pay bills.

In short, they are probably stealing money from you. Alternatively, they could be asking enough questions to get personal information from you to steal your identity.

Health care fraud

Healthcare fraud impacts both individuals and businesses. It involves patients or medical providers who cheat the system to receive illegal payments or benefits.

The National Health Care Anti-Fraud Association (NHCAA) estimates that healthcare fraud has caused financial losses of tens of billions of dollars every year.

For example, in 2023, the federal government forced a lab owner in Atlanta to forfeit more than $187 million of proceeds from a healthcare fraud scandal after his crimes were revealed.

Over three years, the owner of LabSolutions submitted more than $463 million in claims to Medicare. This included thousands of medically unnecessary genetic tests. Medicare paid more than $187 million from the claims.

Payment fraud

Payment fraud occurs when a fraudster illegally creates or diverts payments. Fake or stolen payment information may be used to make purchases.

Some of the ways that payment fraud takes place are:

  • Fake invoices that look like the original
  • Business email compromise (BEC) – a Boston investment firm lost $1.25 million following a BEC scam. An employee had their email hacked by fraudsters who deployed malware to forward emails containing words like ‘invoice’ onto an external email run by the fraudsters
  • Stealing personal details, a credit card or credit cards, or debit cards to buy goods or services
  • Making payments using a stolen identity on the victim’s behalf
  • Intercepting a check, changing the details, and attempting to exploit it
  • Making false customer profiles and attempting fake payments, for example, Union54 experienced an attempted $1.2 billion chargeback fraud case in 2022

Between 2022 and 2023, there was a 71% increase in companies targeted by payment fraud. Nearly 96% of companies were targeted by at least one payment fraud attempt (you can find out more about payment fraud in our latest report).

Trustpair’s service makes you immune to B2B payment fraud. The platform continually checks account information and validates accounts to alert companies of any suspicious activity. This secures your payment chain to avoid one of the types of fraud in business. Keep your business money safe and avoid fraudulent transactions thanks to extensive fraud prevention services.

One of the examples of payment fraud involves both Facebook and Google. They were victims of a phishing campaign that cost them $100 million.

The fraudster impersonated Quanta Computer, a vendor of both companies and sent fake invoices to the companies. These invoices were paid.

After the person pleaded guilty, Facebook and Google retrieved $49.7 million of the stolen money.

 

How are frauds punished in the law?

This usually depends on what the type of fraud was, the scale, and the consequences of fraud.

However, the consequences of the scam for the perpetrator can be a prison sentence, fines, or a restitution order so that the victim is compensated for their losses.

For example, let’s look at the fraud case against the founder of the cryptocurrency exchange platform, FTX. A jury found Sam Bankman-Fried guilty of stealing billions of dollars from FTX and the seven criminal counts against him.

The FTX founder faces a maximum of 115 years in prison for breaking laws.

On the other hand, prison sentences can be avoided and compensation and fines can be enforced depending on the severity of the case.

One of the examples of this can be found in the UK. A rogue trader exploited a member of the public who used her life savings to pay for roofing work services that weren’t needed.

The criminal had to pay financial penalties including £27,500 in compensation, a fine of £6,500, £4,250 towards prosecution costs, and a £190 victim surcharge.

Recap

There are many different types of fraud in law. They include internal fraud, identity fraud, vendor fraud, romance fraud, health care fraud, and payment fraud. Depending on whether it’s a criminal fraud case or a civil law case, this can depend on the punishment. Trustpair stops B2B payment fraud thanks to ongoing and automated account validation.

FAQ

The two basic types of fraud are criminal and civil. Criminal fraud involves a case where this is enough evidence to take the case to court. The defendant must be proven guilty beyond a reasonable doubt. Civil fraud tends to be private action where the evidence must prove it’s more likely than not that fraud occurred.

The most common ways that frauds are identified tend to be tips and audits. Tips can allow officers to understand what is going on and where. Types of fraud in auditing can be identified. An audit can present frauds like internal fraud and asset misappropriation.

Investing in fraud detection software can also help. This type of system based on machine learning can detect criminal transactions before they are executed, by constantly monitoring vendor data. In case of a scam or a fraudulent payment, the system raises the alert, blocking any financial loss.

Our fraud prevention software secures your business’s money by constantly monitoring vendor data and transactions. That means no fraudulent payment can go through to the wrong people. It also helps you comply with international AML laws and regulations.

Internal fraud schemes or vendor fraud are wiped out and your business’s money is preserved. Our services also include detailed fraud analytics, extensive customer support, and a scam alert when a risky situation is detected.

Manage the risks related to corporate treasury.

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