Fraud

SIGNIFICANCE: Although frauds are by their nature difficult to identify and quantify, it is clear that fraud constitutes one of the most pervasive and costly crime problems in the United States.

Throughout history, the term “fraud” has undergone a series of transformations. The earliest recorded definition of fraud was made during the early fourteenth century, when it was defined as deceit, trickery, or intentional perversion for the purpose of inducing others to part with something of value. During the eighteenth century, England’s Parliament added the concept of false pretenses to the definition of fraud in cover an area of law previously untouched by larceny statutes. The modern American definition of fraud, as used in the Uniform Crime Reports and local law-enforcement agencies throughout the country, calls it deceitful conversion and the obtaining of money or property by false pretenses. Despite disparities in definitions of fraud, it generally is agreed that four elements must be present for fraud to occur: a material false statement, knowledge of the statement’s falsity, reliance on the false statement by a victim, and damages suffered by the victim.

Prevalence

Collectively, fraud costs Americans an average of hundreds of billions of dollars every year, and fraud, by its very nature, presents difficult challenges for law enforcement. One of the difficulties in countering fraud is that there are no discernible typologies among either its perpetrators or its victims. Perpetrators range from lower- and middle-class persons to corporate titans. In addition, fraud is rarely perpetrated by lone offenders; it generally relies on collusion between two or more parties.

Among victims, the only distinguishable characteristics of victims are age and levels of education. The young, the elderly, and persons with at least some college education are the most likely targets of fraud. Most victims are unaware of how perpetrators of the frauds against them get their information about them. However, they generally know a few things about the perpetrators themselves, such as names, addresses, and phone numbers. Law enforcement uses such information to apprehend the perpetrators.

Consumer reporting agencies such as the Federal Trade Commission and Social Security Administration and federal law-enforcement report millions of victims annually. Historically, fraud was often committed over the phone, but during the first two decades of the twenty-first century, a significant amount percentage of fraud-based crime shifted to the Internet.

Fraud takes many forms but is generally divided into three basic categories: fraud against the government, corporate and financial fraud, and consumer fraud.

Fraud Against the Government

Among the most common forms of fraud perpetrated against the government are tax fraud, health care fraud, child-support fraud, bankruptcy fraud, social security fraud, and housing and welfare fraud. Of these types, the most important are tax and health care fraud. Simple tax evasion is the most costly type of fraud against the government. It is practiced in a variety of ways—through deliberate underreporting of income, keeping multiple sets of account books, maintaining false records, claiming personal expenditures as business expenses, and concealing assets and income. One of the challenges faced by agencies responsible for combating such frauds is separating honest errors from willful violations. In 2021, citing rising rates of tax evasion, the Internal Revenue Service estimated that it was losing about $1 trillion each year in uncollected taxes.

Starting in the early 1990s, health care fraud, which includes frauds against Medicare and Medicaid, reached epidemic proportions. It usually takes the form of submission of deliberately claims to tax-funded health insurance programs. Several million health insurance benefit transactions every year are believed to be fraudulent.

Examples of health care fraud include billing for medical services never rendered, billing for services or procedures that are more expensive than those actually performed, double billing by misrepresenting uncovered treatments as covered ones, falsifying patient diagnoses, promoting of fraudulent and unproven devices for treatment, and misrepresentations of identity by switching identification cards.

Health care fraud has drawn many criminals away from other types of crime because it is viewed as both safer and more lucrative. Health care fraud is a costly white-collar crime in the United States, costing citizens an average of "tens of billions of dollars a year," according to the FBI. However, the impact of health care fraud extends far beyond its purely financial costs. Falsifying patient diagnoses and histories for financial gain also poses physical risks to patients as well as theft of benefits for those who have lifetime limits on their insurance. Despite the magnitude of health care fraud on a variety of levels, the government has been reluctant to prosecute this type of fraud, thereby perpetuating the problem.

The US government saw a major wave of fraudulent activity in the early 2020s with the onset of the COVID-19 pandemic. Many individuals took advantage of government relief provided through the CARES Act other programs designed to help individuals and businesses affected by the pandemic. In 2021 and 2022 the Justice Department began a nationwide crackdown on this activity, which was estimated to have cost the government hundreds of millions of dollars due to false billings to federal programs and theft from federally funded pandemic assistance programs.

Corporate and Financial Fraud

A host of subcategories can be identified under the guise of corporate crime. These include securities, mail, wire, bank, mortgage, loan, check, credit card, and private health care fraud. Securities and credit card fraud are the most common types of corporate and financial fraud.

Securities frauds include the deliberate falsifying of statements or omission of documents filed with the Securities and Exchange Commission (SEC), insider trading, buying and selling of securities that are not registered with the SEC, and engaging in interstate communications with potential buyers. Securities fraud has been statutorily regulated since the passage of the federal Securities Act of 1933. That law was enacted to prohibit deceit, misrepresentation, and securities fraud, and to require that investors receive financial and other information regarding the sale of public securities.

Sometimes, corporations can be victims of fraud. During the early twenty-first century a number of corporations suffered major data leaks or became victims of hacking. Sometimes, hackers use ransomware, a type of malware, to extort money from corporations in exchange for not releasing confidential information. An estimated 72 percent of global businesses were impacted by ransomware attacks in 2023.

Credit card frauds include unauthorized use of credit cards, reproduction of credit card strips, and reproduction of credit cards to utilize the balances for the purpose of obtaining financial gain.According to the Federal Trade Commission, credit card fraud accounted for more than 40 percent of all identity thefts in the United Sates in 2023.

Consumer Fraud

Consumer fraud’s main components include telemarketing fraud, Internet fraud, and identity theft. The latter two are the most common types of consumer fraud. Consumer Sentinel is an investigative cyber tool, created by various public and private partners to collect and share information pertaining to fraud with all law-enforcement agencies. Its database is maintained by the Federal Trade Commission, which received 2.6 million fraud complaints from consumers in 2023 with losses estimated at over $4.6 billion. These figures include only incidents reported by consumers during that year. Unknown numbers of fraudulent incidents go unreported.

Internet fraud is becoming increasingly common as the World Wide Web emerges as a powerful medium for conducting business. This type of fraud encompasses all schemes using components of the Internet to conduct fraudulent transactions, such as work-at-home schemes, phony credit card offers, fraudulent investment opportunities, electronically mailed advertisements known as “spam,” and the use of legitimate business names to persuade computer users to disclose passwords to obtain financial information.

Online auction fraud is another prevalent type of fraud. This occurs when victims win auctions but either never receive the products for which they pay or find that the quality of the goods they receive has been misrepresented. There are many completely honest dealers on the Internet, but it is almost impossible for buyers to distinguish between them and the criminals who use the Internet for exploitation.

Identity theft has expanded rapidly in the digital age. According to the Consumer Sentinel Network, identity-theft complaints rose steadily between 2001 and 2014 from 86,250 to 332,646. It expanded even more through the end of the 2010s and into the 2020s; in 2023 more than 1 million Americans reported being victims of identity theft.

Identity theft involves the taking of personal information to use for some type of financial gain. Such information can be taken from many different sources, ranging from the contents of mailboxes and garbage cans to utility bills and even eavesdropping on conversations. Occasionally, employees of banks, retails stores, and restaurants take account numbers from credit card strip readers; by the 2020s some new developments, such as tap-and-go payment for credit cards, reduced the risk of this type of scam. Some perpetrators get information by telephoning their victims and pretending to be representatives of legitimate businesses who are asking to verify information. With the personal information they collect, criminals can apply for credit cards or make withdrawals from bank accounts in their victims’ names.

Investigation

Fraud investigations are both unusually time-consuming and labor-intensive. The nature of frauds and their ability to remain undetected for extended periods post special hurdles to investigators, and partly for this reason, law-enforcement agencies make fraud investigations a low priority and focus their resources on investigations of other types of crime. The reluctance of law enforcement to go after perpetrators of fraud has reinforced the perception among criminals that fraud is safer and more lucrative to practice than other crimes, such as drug trafficking. While the first decades of the twenty-first century saw the US and many other countries step up their efforts to fight cybercrime, including fraud, it remained challenging to investigate.

Prosecution

The main law-enforcement agency responsible for protecting US financial institutions is the Federal Bureau of Investigation, which is charged with identifying and disassembling criminal organizations and individuals that target financial institutions. The US Department of Justice is also involved in investigating and prosecuting fraud; in 2021 the Justice Department helped convict 329 individuals on a range of fraud-related charges. In addition to US agencies, some international law enforcement agencies, such as Interpol, are involved in efforts to combat fraud. For example, between 2019 and 2020, an Interpol-led initiative against phone and internet fraud resulted in over 21,000 arrests.

Multiagency task forces have been established in the hope that collaborative efforts will aid in capturing, prosecuting, and punishing fraud offenders. Operation Continued Action, created in 2004, marked the beginning of the largest nationwide law-enforcement initiative in history up to that point. The program was initiated by the FBI and involved the US Attorney’s Office, as well as many federal, state, and local law-enforcement agencies. Its main goal was to counter financial frauds, such as mortgage and loan fraud, identity theft, check kiting, insider trading, and internal theft.

Another effort to foster national cooperation among law-enforcement entities is the Internet Fraud Complaint Center (IFCC). This came about as part of the initiative by the Justice Department in combating the problem of Internet fraud. This joint venture between the FBI, Internal Revenue Service, and Postal Inspection Service was designed to provide law enforcement with a single point of contact for identifying Internet fraud schemes.

Punishment

The Department of Justice prosecutes cases of identity theft under a wide array of federal statutes, including the Identity Theft and Assumption Deterrence Act of 1998. In most instances, identity theft convictions carry maximum sentences of fifteen years imprisonment, fines, and forfeiture of any personal property used to commit the offenses. It should be noted that identity theft is often coupled with violations of other forms of fraud, including computer, mail, wire, and financial fraud. Those offenses are felonies, and convictions can carry penalties as high as thirty-years prison sentences.

In 1996, the Health Insurance Portability and Accountability Act made health care fraud a federal criminal offense. In addition to substantial fines, convictions for this crime can carry sentences to federal prisons of up to ten years. Moreover, the sentences can be doubled when fraudulent acts result in harm to patients. When patients die as a direct result of health care fraud, offenders can be sentences to life in prison.

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