The Law of Fraud: An Australian Investigator's Guide

Copyright

1 INTRODUCTION

Fraud investigation in Australia is a relatively new and challenging area of study. The impact of fraud on Australian society is growing in seriousness and complexity. Those who commit fraud exploit and profit from deception, to the detriment of all Australians, both through the severe harm they cause, including financial losses to businesses and individuals, and the impact on our legal system and society.

Fraud has increased through the availability of new information technologies which have enabled crimes to be committed in new ways. However, risk managers, investigators and fraud analysts can also use new technologies to enhance and accelerate fraud deterrence, detection and investigation. As both the fraudsters and those seeking to deter, detect and prevent fraud look to new technologies to enhance their skills, so the game of cat and mouse continues, with the fraudsters currently out in front.

This book offers readers a systematic guide and a comprehensive template for fraud investigation in the context of relevant Australian statutes and case law. In writing this book, I drew on over 25 years of experience in this field and reviewed numerous significant articles and texts on fraud. Case law precedents and legislation are subject to change, however, so those referenced in this book should be cross-checked for currency.

This text is written with practical implementation in mind. I have classified fraud types, investigative actors and perpetrators so that the book applies to a range of fraud classes, and I have provided investigation examples to assist in its application.

When it comes to fraud, there is an endless variety of ways to steal, but with a systematic investigative process, as set out in the book, investigators can improve the effectiveness and consistency of their investigations. Fraud/risk managers will also be able to measure investigator productivity and accelerate investigative training standards in their organisations by following these processes.

2 AUSTRALIAN LEGAL SYSTEM FRAMEWORK

The Australian legal system is based on the English model, which combines statutes and case law (common law) in determining matters. This system is a legacy of Australia’s early British colonial history. Initially, the colonies were separate, and it was not until Federation that Commonwealth powers, which operate for the whole of Australia, came into being under the Constitution.

2.1 Constitution

Australia has a formal, written Constitution, which was an Act of the British Parliament, the Commonwealth of Australia Constitution Act 1900. The Constitution took effect on 1 January 1901. Section 51 of the Constitution gives the Federal Parliament the power to make laws for the peace, order, and good government of the Commonwealth in relation to certain specified matters. For matters not covered by the Constitution, the States and Territories have what is called residual power to make law.

2.2 Jurisdiction

The term jurisdiction refers to the official power to make legal decisions and judgements. It is also used to refer to the territory or sphere of activity over which the legal authority of a court or other institution extends.¹ The Australian legal system is fragmented into multiple jurisdictions.² This is because the states existed, and exercised powers to make and enforce laws before the Commonwealth was created, and the Commonwealth has a limited range of specific powers contained in Section 51 of the Constitution, with all other matters falling to the powers of the states and self-governing territories.

There are six states in Australia: New South Wales, Queensland, South Australia, Tasmania, Victoria and Western Australia. Each state has its own legislature and the Australian Capital Territory and Northern Territory also have powers to pass legislation.

This system of multiple legislatures creates difficulties for fraud investigators when aspects of the act or thing relate to more than one state and those states have different laws.

In New South Wales there is no specific legislative provision for jurisdiction and the common law test applies. The jurisdiction of a court can be applied to offences where a real and substantial link and significant part of the actions alleged took place in the same jurisdiction where the accused is being tried, for example where a loss occurred.

Some other states, however, have specific statutory provisions regarding jurisdiction which must be considered, for example, Criminal Code Act Compilation Act 1913 (WA):

12 Territorial application of criminal law

(1) An offence under this Code or any other law of Western Australia is committed if –

(a) all elements necessary to constitute the offence exist; and

(b) at least one of the acts, omissions, events, circumstances or states of affairs that make up those elements occurs in Western Australia.

(2) Without limiting the general operation of subsection (1), that subsection applies even if the only thing that occurs in Western Australia is an event, circumstance or state of affairs caused by an act or omission that occurs outside Western Australia.

Similarly, Crimes Act 1958 (Vic) in s.80A, provides a statutory statement about jurisdiction in relation to its provisions on fraud and blackmail (ss.81-87):

80A Extra-territorial offences

(1) If—

(a) a person does, or omits to do, an act or thing referred to in sections 81–87 (both inclusive) outside, or partly outside, Victoria; and

(b) there is a real and substantial link within the meaning of subsection (2) between doing, or omitting to do, the act or thing and Victoria—

those sections apply to the act or thing or the omission as if it had been done, or omitted to be done, wholly within Victoria.

(2) For the purposes of subsection (1), there is a real and substantial link with Victoria—

(a) if a significant part of the conduct relating to, or constituting the doing of the act or thing, or the omission, occurred in Victoria; or

(b) where the act or thing was done, or the omission occurred, wholly outside Victoria, if the act or thing was done, or omitted to be done, with the intention that substantial harmful effects arise in Victoria and such effects did arise.

Establishing jurisdiction is essential so you can bring the right action in the right forum. For example, New South Wales and Western Australia have create financial disadvantage fraud offences, where Victoria only has obtain financial benefit. The evidence that needs to be gathered to prove these two different types of fraud offences is significantly different.

Furthermore, from a practical perspective, the ability of local police to investigate outside of their state or territory is severely limited, especially with frauds below one million dollars. Suspects who reside in a different jurisdiction from the investigating police have a far higher chance of never being interviewed or prosecuted by law enforcement authorities in Australia, and they know it.

In the High Court of Australia case of Lipohar v R (1999) 200 CLR 485, jurisdiction was considered in a conspiracy to defraud case. The facts of the case demonstrate a complicated deception and the actions that can take place in fraud cases.

Gleeson CJ outlined³ the facts of the case:

…The appellants and others devised a fraudulent scheme, the object of which was to induce the company to make a large incentive payment to a sham tenant. The scheme involved activity, or supposed activity, in Indonesia, Thailand, Queensland, Victoria, and, in respects that will appear, South Australia. The appellants and others agreed to form a Queensland company which was represented to be associated with an Indonesian company. They negotiated with the letting agents of the company for a lease of part of the Collins Street premises, seeking to obtain a cash incentive ultimately agreed at $6.5 million. They were made aware that any such payment would require the approval of the SGIC Board in Adelaide. They were required to provide security for the obligations of the proposed lessee. They falsely represented that the Krung Thai Bank would provide such security in the form of a promissory note. (In truth the bank had no knowledge of the transaction.) There was a meeting in Brisbane between representatives of the SGIC and the conspirators to discuss the proposed security. Following that meeting, a document was sent by facsimile transmission from Thailand to the office of the company's solicitors in Adelaide. The document, which was a sham, purported to confirm that the bank would provide a promissory note, in a certain form, as security for the tenant's obligations under the lease. Clearly, this was for the purpose of procuring advice to be given, in Adelaide, to the SGIC Board, and a decision to be made, in Adelaide, approving the lease incentive payment. The circumstance that the facsimile was sent to Adelaide was no mere accidental, or incidental, feature of the events. It reflected a fact which is of more fundamental importance. The central control and management of the intended corporate victim of the fraud was in South Australia, and it was there that the decisions necessary for the effectuation of the fraud were to be taken…

The conspiracy went no further. Some people involved in dealings with the bank were arrested, and, when news of that came out, the negotiations for the lease and the incentive payment were terminated. Subsequently the South Australian authorities prosecuted the appellants…

"…The elements of a common law conspiracy to defraud were considered in Peters v The Queen [6], where McHugh J said [7] that, in most cases, a conspiracy to defraud arises when two or more persons agree to use dishonest means with the intention of obtaining, making use of or prejudicing another person's economic right or interest, or inducing another person to act or refrain from acting to his or her economic detriment. To that proposition, in its application to the present case, there should be added a significant rider. The fact that an offence of conspiracy is complete does not mean that it has come to an end [8]. Parties can join, or leave, a conspiracy after it has been formed, and acts done in furtherance of a conspiracy will constitute continuing performance, as well as evidence, of the unlawful agreement. An agreement formed in one territorial area may be aimed at people in another area or other areas, or may reach into such other area or areas in the course of its performance. It is this aspect of criminal conspiracy that has made it difficult to relate to the theory of territoriality which has had so much influence upon common law rules concerning the administration of criminal justice…"

"…Where a crime is created by statute, which normally describes the crime without making any particular reference to territorial locality, and where the nature of the crime is such that elements may occur in a number of territories, the resolution of questions of jurisdiction and justiciability may involve both questions of statutory construction, and the application of common law principles according to which courts decide where, out of a number of competing possibilities, a crime has been committed. An example is provided by the common law rule by which courts in England, and Australia, decide where the statutory offence of obtaining property by false pretences has been committed [16]. According to the preponderance of authority, the offence is committed in the place where the property is obtained [emphasis added] which may be different from the place or places where the deception occurred. Discussion of the rule usually proceeds upon the assumption that the offence is committed in only one place. That assumption is not a logical necessity, and whether it should be revised is a question that may be addressed in some future case…"

Therefore, in order to establish jurisdiction, it is necessary for the investigator/prosecutor to prove that the money, (valuable thing, or financial advantage) was obtained in the jurisdiction where the matter is prosecuted.⁴ Crimes Act 1958 (Vic) does not include the offence of causes any financial disadvantage as contained in s.192 E(1)(b) of Crimes Act 1900 (NSW). Therefore, applying the jurisdiction test above, that offence would apply in cases where the financial disadvantage (loss) took place in New South Wales, but not in cases where it took place in Victoria.

Another example of determining where an offence occurred relates to emails and communications which originated in Victoria, but where the recipient of the false documentation was in New South Wales. The test that would be applied is where the significant part and substantial loss occurred. Further extending the example:

if a person, based on a false representation, provided his or her home as security on a loan; and

the home was located in New South Wales; and

the victim signed and created a security as a consequence of the false representation;

even though those false documents were created in Victoria

a significant part of the offence was committed within New South Wales.

This is a grey area of law, and investigators need to determine where the significant part of the crime, including the real and substantial steps (deceptions) took place, as well as determining where the loss was suffered, to establish jurisdiction and consequently which offences apply to the investigation. As discussed above, different Australian jurisdictions have different offence provisions with different elements for an investigator to prove. Investigators need to be mindful of identifying the right offences and providing corresponding proofs of those offences in their investigative report and brief of evidence.

In civil cases, as opposed to criminal ones, there is no similar jurisdictional issue. Section 5 of the Jurisdiction of Courts (Cross Vesting) Act 1987 (Cth) and legislation of the same name in each Australian state and territory was introduced in 1987 to establish a uniform scheme for the cross-vesting of civil proceedings in Australia.

2.3 Common Law

Common law comprises principles, including definitions, which derive from previously decided cases. Those cases are known as precedents. The source of the law is, in effect, the judge/judges determining the case.

Precedents can be applied across jurisdictions, even across countries sharing the common law system. In some areas of law, precedents established decades ago, even centuries ago, are still relevant.

2.4 Statutes (Acts of Parliament)

Statutes are statements of law which have been enacted by the process applicable to the relevant State or Federal Parliament. In Australia, federal statutes, for example, are passed by the House of Representatives and the Senate, and then receive formal Royal Assent by the Governor-General, as the representative of the Australian Head of State, Queen Elizabeth II.

Even where there is an Act of Parliament, common law precedents may be used to provide definitions, or otherwise in the application of the statute to a particular case.

2.5 Uniform legislation

In some areas of law, to achieve consistency across the whole of Australia, the States and Territories have passed uniform legislation: identical Acts passed by each State or Territory legislature. This is a way of overcoming differences from one State to another where there is no federal legislation, and cannot be any, because the matter is not one where the Constitution gives power to the Federal Government to make law.

In many areas, however, State and Territory laws on the same general topic are not uniform, and it becomes critical to establish which legislation will apply. This is known as determining jurisdiction [see above 2.2 Jurisdiction].

2.6 Privacy legislation

Investigators need to be aware of the provisions of Privacy Act 1988 (Cth), an Australian law that regulates the handling of personal information about individuals. It defines personal information in s.6 as:

6 Interpretation

personal information means information or an opinion about an identified individual, or an individual who is reasonably identifiable:

(a) whether the information or opinion is true or not; and

(b) whether the information or opinion is recorded in a material form or not.

Schedule 1 of the Privacy Act includes thirteen Australian Privacy Principles (APPs) which apply to most government agencies and some private sector organisations. These are collectively referred to as APP entities, and include:

most Australian Government agencies

all private sector and not-for-profit organisations with an annual turnover of more than $3 million

all private health service providers

some small businesses.

The APPs are legally binding principles which are the cornerstone of the privacy protection framework in the Privacy Act. The APPs set out the standards, rights and obligations in relation to the handling, holding, accessing and correcting of personal information. Typical examples of personal information include an individual’s name, signature, address, telephone number, date of birth, medical records, bank account details, and employment details, as well as commentary or opinion about a person.

While the APPs are quite broad, each APP entity needs to consider how the principles apply to its situation. The principles cover:

the open and transparent management of personal information, including having