Theft, Mortgage Fraud and the Age of Technology

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L.M. Clements, BA, LLM

Copyright © 1997 L.M. Clements.
First Published in Web Journal of Current Legal Issues in association with Blackstone Press Ltd.

Summary

The purpose of this Article is to explore the problems associated with mortgage fraud and related matters following the decisions in R v Halai and R v Preddy, R v Slade and R v Dhillon, particularly in the context of modern technology and banking. This Article examines the reaction of the Law Commission to this problematic area, the response of the legislature in the recent Theft ( Amendment ) Act, 1996 and the likely effect that this Act will have in certain situations in the future.

Introduction

A mortgage fraud typically involves the obtaining of an advance, usually to enable the purchase of real property, by the making of false representations about the borrower's earnings, job or indeed any fact which may be material to the lender's decision to lend on the security of the relevant property. Mortgage fraud is more than merely "anti-social" conduct; yet until recently, this sort of behaviour was considered to be outside the clutches of the criminal law, at least when committed by one person. This state of affairs was of particular concern to banks, building societies and other lending institutions, who were often the victims of such "non-criminal" fraud. From a moral perspective, however, mortgage fraud is no less deserving of reprobation than other forms of obtaining of goods or services by means of deception, the latter already being covered by the Thefts Acts, 1968 and 1978.

The use of modern technology has also caused problems for the criminal law, particularly with such things as "mondex" cards and Internet banking.

The Theft (Amendment) Act 1996 (1) is aimed at removing the problems associated with mortgage fraud. These problems arose because of the decisions in R v Halai [1993] Crim LR 624 and R v Preddy, R v Slade and R v Dhillon [1996] 3 WLR 255. This Article examines those problems and the solutions which have been adopted in the new Act, which, as its name implies, operates by amending the legislation contained in the Theft Acts, 1968 and 1978.

The Background

In R v Preddy the House of Lords ruled that the debiting of a mortgagee's account and the corresponding crediting of the mortgagor's account by reason of the latter's dishonest misrepresentation did not amount to an offence within section 15 of the 1968 Theft Act, since the amount credited did not amount to property "belonging to another". Although the amount electronically or telegraphically removed from the mortgagee's account was "property" i.e. a chose in action, and both the mortgagee's account had been debited and the mortgagor's account credited by the same amount, the amount lost on the one hand and that gained on the other hand was not the same identifiable property. The mortgagee's chose in action was extinguished when the amount was paid into the mortgagor's account and in its place arose a new chose in action, representing an equivalent amount owed by the mortgagor's bank to the mortgagor himself. This was a situation of both the creation and extinction of rights, rather than the transfer of rights, to which, alone, section 15 applied. As Griew has put it (Griew 1995, para 8-08):

A different conclusion had been indicated in R v Halai, in which the accused, by bouncing a cheque on a building society, had caused the building society to have a survey carried out on a property upon which the accused were seeking a mortgage advance. The Court of Appeal ruled that a mortgage advance could not be described as a "service" within the meaning of Section 1 of the Theft Act, 1978, but could properly be charged under Section 15 of the 1968 Act if the facts supported it. But why could not the same facts have given rise to an offence under both sections? The two offences are not necessarily mutually exclusive. The effect of Halai was to greatly limit the practical utility of section 1 of the 1978 Act, and in R v Graham, The Times, October 28, 1996, the Lord Chief Justice, Lord Bingham, declared that the time had come when the ruling in Halai should no longer be followed. This conclusion was supported by the Law Commission in its 1996 Report (Law Com No 243), some years after the Law Commission had already recommended the reversal of Halai in an earlier Report concerned with fraud (Law Com No 228).

In between Halai and Preddy, the Court of Appeal in R v Widdowson [1986] Crim LR 233, had decided that the obtaining of goods on hire-purchase terms was an obtaining of services within Section 1 of the 1978 Act, because it was "paid for" by the payment of interest charges. But what relevant distinction of principle is there between the obtaining of a mortgage advance, upon which interest is to be paid, and the obtaining of goods on credit terms by the same sort of deception? The court attempted to distinguish these two situations in Widdowson by saying that, in its normal form, the hire purchasing of goods could be regarded as the conferring of a benefit because the finance company does so by delivery of the goods or by causing or permitting another (a shop, for example) to do so on the understanding that the hirer has paid or will pay both a deposit and the subsequent instalments under the agreement. However, a mortgage advance is as much an "act", confers a 'benefit' and is certainly to be "paid for" through the instalments to the bank or building society and so would also appear to come within Section 1 of the 1978 Act. Indeed, the Law Commission has commented that the section 1 offence "was clearly intended to extend to any case where the victim is induced by deception to provide the defendant with a benefit for which the defendant is expected to pay...we cannot see why it should be thought to make a difference that the defendant obtains the use of the victim's money rather than (for example) the victim's car" (Law Com No 243, para 3.50).

The decision in Halai therefore looked highly suspicious. In Teong Sun Chuah [1991] Crim LR 463, Lord Lane CJ described the Court of Appeal's decision in Halai as "having all the hallmarks of per incuriam" and it was considered in some quarters as not to have definitely closed the door on prosecution under section 1 for obtaining services by deception.(2) However, later prosecutors were not brave enough to attempt this and preferred instead the alternative suggested path of charging a section 15 offence in relation to mortgage fraud. Preddy unfortunately closed the door on this avenue, leaving mortgage fraudsters outside the criminal law in many circumstances. The decision also had the effect of decriminalising many fraudulent bond and security transfers in so far as these are indistinguishable from money transfers. It is, of course, possible to charge, in some circumstances, with conspiracy to defraud; but this presupposes that two or more people are involved in the mortgage fraud and this will not always be the case.

The decision in Preddy revealed a serious gap in the law and soon lead to widespread calls for legislative reform from the Serious Fraud Office, financial institutions and others (see Mason 1996; Gibb 1996; Newton 1996). The Law Commission responded very quickly by proposing remedial legislation (Law Com No 243) which has become the 1996 Act.

The real problem in Preddy is that when one writes out a cheque, no funds are actually paid out from a specific bank account and then transferred over to the payee. Instead, an instruction is given to the paying bank to reduce the amount standing to the credit of the one account and to increase, by a corresponding amount, the credit standing to the payee's account. In each case, the bank account is merely a record of the amount that the customer has the right to call for payment upon from the bank. This process may be carried out by either payment of a cheque, or by telegraphic transfer or electronic transfer as between banks, but in neither case does one bank customer receive the property of the other. Electronic credit transfers involve payments being sent direct to a customer's account held in this country by one of two transfer systems, namely BACS (Bankers Automated Clearing Services) or CHAPS (Clearing House Automated Payments System). BACS handles large amounts of payments made direct by customers, such as wage and salary payments credited to a customer's account, whilst CHAPS handles payments between the banks' own computers. From what has been said previously, it becomes evident that there is no "belonging to another" involved as between the holders of the two respective accounts when a credit is electronically transferred. The same is true of the other methods of transfer or payment. Any property that 'belongs to another' is in reality that of the bank. This result is all the more obvious when one account from which a debit is to be made is actually overdrawn, because all that happens is that the bank increases the customer's overdraft and thereby increases the debt which the customer owes to the bank. The Law Commission considered that it would be possible in circumstances like Preddy to charge with alternatives to an offence under section 15 of the 1968 Act, but it also concluded that none of the existing alternatives provided a satisfactory alternative and for that reason proposed the new legislation (Law Com No 243). The 1996 Act therefore aims at plugging up the holes in the earlier Theft Acts by, in substance, giving effect to the Law Commission's proposals.

The 1996 Act

The 1996 Act is quite brief; it contains 5 provisions, creates two new offences and extends section 1 of the 1978 Act. It is not exclusively concerned with making mortgage fraud an offence, although that was its main impetus.

Section 1 of the 1996 Act amends Section 15 of the 1968 Act by introducing, as section 15A, the new offence of obtaining a money transfer by deception. This section is not retrospective in that it does not apply to anything done before the date on which the Act was passed.

The new offence involves a money transfer, which it defines as occurring when a debit of money is made to one account, a credit of money is made to another and the two transactions are causally linked. It is declared to be immaterial in particular whether the amount credited and the amount debited are the same, whether or not there is a delay in the process by which the money is transferred, whether either of the accounts involved is overdrawn before or after the money transfer is effected and whether the money transfer is by cheque or by any other method. Whilst deceiving another into drawing a cheque was already an offence under section 20(2) of the 1968 Theft Act, this offence refers to the paper document ; it was considered, however, that there should be another offence which refers to the funds obtained, not merely the document by which they are obtained; hence the reference in the new Act to the irrelevancy of the means in this context of obtaining the funds i.e. by 'cheque or by another method'.(3)

In the Debates in the House of Lords on the Bill, Lord Donaldson had put forward an amendment to Clause 1 of the Bill by which, instead of "money", the offence would involve the obtaining by deception of "value". The objective behind this proposal was to include not just money, but also bonds and securities. However, this amendment was withdrawn after Baroness Blatch had pointed out that the Bill was intended to deal very quickly and specifically with the problems arising after Preddy , that the Law Commission would be asked to look into the complex issues raised by Lord Donaldson as a matter of urgency and that this was really work for another day. In fact, the Law Commission had briefly considered the issue in its 1996 Report, after the Commissioner of the City of London Police had pointed out that the City of London and other financial institutions are frequently involved in the electronic transfer from accounts within and between institutions of shares, derivatives and other negotiable instruments. The Bill, it was said, would not cover the situation where, in circumstances similar to Preddy, the parties to the fraud did not hold accounts at either a bank or a financial institution; for example, where the fraud involved inter-company accounting within a large group of companies. The Bank of England had also pointed out that the Bill proposed by the Law Commission would not necessarily extend to frauds involving stored value payment cards (e.g. the 'Mondex' card, used as a means of payment for cash or services in the physical market place or a service in the virtual market place) or internet banking ( such as the Security First Network Bank, which offers checking, money market accounts and certificates of deposit, paying above average rates). However, the Law Commission decided that the new section 15A should refer to an account kept with a bank or a person carrying on a deposit-taking business within the meaning of section 35 of the Banking Act, 1987 ( the offence of fraudulent inducement to make a deposit ) and this is essentially what subsections (3) and (4) of 15B achieve.

'Mondex' cards may, however, be covered by section 1 of the Theft Act, 1968. If D obtains a 'mondex' or any other prepayment card from another, and uses up all its value, then it would seem that D commits the offence of theft, even if D later returns the card to its rightful holder.(4) This is based on the provision in section 6(1) of the 1968 Act, which refers to the intention to permanently deprive being satisfied if the defendant treats the thing as his own to dispose of regardless of the other's rights and of 'borrowing'. However, if D merely uses some of the value of the card before returning it, a charge of straight theft may be more difficult to prove, since it will be more difficult to convince a court that the 'value' of the thing has been used to such an extent that the circumstances come within section 6(1) of the 1968 Act. As Griew has put it (Griew 1995): "At what point does borrowing become 'equivalent to an outright taking'?" Since there is some doubt here, this is one area that should be considered in the future for inclusion in an amended Theft Act.

Section 4 of the new Act amends section 1 of the Theft Act, 1978, concerning obtaining services by deception. It introduces a new subsection (3), which now includes, as an obtaining of a service, circumstances where another 'is induced to make a loan, or to cause or permit a loan to be made on the understanding that any payment...will be or has been made in respect of the loan.'

This is the provision which comes directly from an earlier Law Commission Report (Law Com No 118) and reverses the effect of Halai. In the future, it will amount to an offence of obtaining services by deception, contrary to section 1 of the Theft Act, 1978, to induce a building society by means of any deception to provide a loan secured on a mortgage of real property. This does not, however, cover the obtaining by deception of non-cash payments other than loans and this is what the new section 15A aims to cover.

Section 2 provides for a new offence of dishonestly retaining a wrongful credit, which becomes section 24A of the 1968 Act. A person will be guilty of this offence if he or she knows, or believes that a wrongful credit has been made to his or her account or to an account in which he or she has an interest ( for example, a joint bank account ) and dishonestly fails to take action to cancel that credit. This new offence has some relationship to handling stolen goods, except that the new offence applies where the accused does not receive property belonging to another. This fills another gap in the law after Preddy. Before Preddy, the Court of Appeal had held in Attorney-General's Reference (No. 4 of 1979) [1981] 1 WLR 667, that if a person dishonestly accepted a transfer of stolen funds from another account into his or her own account, that could amount to the handling of stolen goods. However, Preddy would have prevented such a charge from succeeding.

It is made clear that a credit is only "wrongful" if it derives from a dishonest source i.e. stolen goods, blackmail, theft or the new section 15A offence. In the latter case, a credit side of a money transfer is regarded as "wrongful" if that transfer is obtained in circumstances amounting to the new offence under section 15A. So someone who, through a bank error, is credited an amount to an account, realises the mistake and does nothing about it will not be guilty of the new section 24A offence. Such conduct would not amount to an offence under the Theft legislation unless the taking of advantage of another's mistake in these circumstances can amount to theft contrary to section 1 of the 1968 Act. Clearly, if D knowingly pockets excess change in a supermarket handed to her because of an assistant's error, then that can amount to theft from the supermarket due to section 5(4) of the 1968 Act; but here the property, the excess change, "belongs to" the supermarket. In the case of the credit transfer, however, Preddy makes it clear that the property does not "belong to" the person, V, from whose account the amount is debited but instead belongs in essence to the bank who operates that account; so it would seem that there is no section 1 theft offence as against V, the customer.

It has been suggested, however, that a section 1 offence might be charged in circumstances like Preddy, since D has a dishonest intention to deprive the victim, V, and does deprive him of a portion of his bank account, a thing in action; the only problem is whether there has been an 'appropriation' of V's 'property', which depends on whether the bank officials who effect the transfer are acting as V's agents.(5) Arguably there is no section 1 offence committed as against V in the circumstances mentioned earlier; and since no deception is involved in a mistaken transfer, there is no section 15A offence involved here either. At most, it could be said that the person who knowingly receives a mistaken credit transfer and who retains it commits a section 1 theft offence against the bank, since the definition of "appropriation" in that section is wide enough to cover the dishonest retention of a chose in action, i.e. the right to a sum of money from the bank, which was initially obtained innocently. Under section 5(4), the 'property' could be regarded as 'belonging to another', namely, the bank, which would be entitled to restoration. The subsequent spending of the money, insofar as it can be directly attributed to the credited amount, could then also amount to a further theft. However, there are real difficulties even with this analysis, as Professor Griew has pointed out in a slightly different context involving deception.

A person who dishonestly handles cash drawn from an account which has been credited in circumstances amounting to an offence under section 24A can be convicted of handling stolen goods; section 24(8) now states that references to stolen goods includes money withdrawn in the above circumstances to the extent that the money derives from the credit.

Section 3 deals with the jurisdictional problem that arises when a relevant event occurs abroad, such as when the deception which results in a money transfer is practised in this country, but where the actual transfer is obtained outside the jurisdiction. Under the previous law, a person could not be convicted of an offence of securing a particular result by deception in England and Wales unless the elements of the offence took place inside the jurisdiction; hence deception practised in England which resulted in an obtaining abroad could not be tried in England. The new section adds to the Group A offences in the Criminal Justice Act 1993, section 1(2)(a), both section 15A and 24A, introduced by the 1996 Act. The effect is to enable English courts to exercise jurisdiction in the above circumstances.

Examples of how the Act will apply

It is suggested that the new legislation will have effect in the following examples:-

If D1 were to obtain a transfer of funds from another's, V's, account by practising deception, e.g. by forging a cheque, then not only will D1 be guilty of forgery, but also of obtaining a money transfer by deception, contrary to section 15A of the 1968 Act. If D1 retains the amount in his account, he also commits the offence of dishonestly retaining a wrongful credit, contrary to section 24A. If D1, instead of using forgery, were to practice blackmail on V, as a result of which V were to transfer funds from his own into D1's account, D1 would be guilty of both blackmail and of dishonestly retaining a wrongful credit.

Suppose that D1 has been given authority to draw on V's account for certain limited purposes, but instead he abuses this authority by getting money transferred from V's account into his own. D1 may, on one argument, be guilty of both theft (from the bank) and also of the section 24A offence.

In all of the above circumstances, if, instead of getting the money transferred into his own account, D1 were to transfer the funds into D2's account, D2 could be guilty of the section 24A offence if he or she knew or believed the credit in the account to be wrongful but nevertheless failed to take reasonable steps to cancel or return it.

Conclusion

The 1996 Act has successfully tackled the immediate problems posed by both Halai and Preddy, but has not addressed all the issues raised by the fact that the law relating to dishonesty has failed to keep abreast of the constantly changing face of technology in the field of banking, stock markets and commerce. Although important changes have been made, the law of theft is not yet quite at the 'cutting edge' in this context. However, the 1996 Act was intended to deal with only a fairly limited agenda, namely, the filling of the lacuna where there is a transfer of funds between bank accounts and other accounts of a similar kind. At least it appears successfully to have tackled that area. The remaining problems relating to investments will no doubt be tackled by the Law Commission in due course.

Bibliography

Law Commission No 243, Offences of Dishonesty: Money Transfers (London: HC 690) .

Mason, J (1996) "Lords ruling may hinder fight against fraud" Financial Times, 25 July.

Newton, R (1996) "Bank vaults wide open to fraudsters" Sunday Telegraph, 4 August.

Footnotes

(1) The Act received the Royal Assent on December 18, 1996, and is to apply to England and Wales, but may be extended to Northern Ireland. Back to text.

(2) 'Deception' is given the same meaning as in section 15 of the 1968 Act. Back to text.

United Kingdom Journals

Theft, Mortgage Fraud and the Age of Technology

L.M. Clements, BA, LLM

Summary

Contents

Introduction

The Background

The 1996 Act

Examples of how the Act will apply

Conclusion

Bibliography

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