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Actual fraud vs. constructive fraud: What’s the difference?

On Behalf of | Sep 14, 2023 | Fraud

Whatever your industry, you have to be on the lookout for fraud. The more money that’s passing through your business, the bigger the chances that someone may try to gain an unfair advantage over another or outright steal.

Fraud can be either actual or constructive. Each can have significant implications for your company’s future, although they differ in their nature. Here’s what you need to know about the two:

Actual fraud

Actual fraud occurs when a party knowingly and willfully engages in deceitful practices with the explicit purpose of defrauding the other party. The elements of actual fraud include:

  • Intent: An essential component of actual fraud is the deliberate intent to deceive. The party committing the fraud must be fully aware of their deceptive actions.
  • Misrepresentation: There must be a false statement and/or a deliberate concealment of information, or some physical act designed to mislead the victim.
  • Reliance: The victim must have reasonably relied on the false statement or act to their detriment.

For example, imagine a scenario where a company’s chief financial officer embezzles company funds and meticulously covers their tracks, all the while knowing that their actions are illegal and harmful to the business. This is a classic case of actual fraud.

Constructive fraud

Constructive fraud doesn’t hinge on a deliberate intent to deceive. Instead, it revolves around certain actions or circumstances that create an overall unfair situation that either disadvantages or actually harms another party. Constructive fraud often arises due to negligence, recklessness or a breach of fiduciary duty.

For example, consider a situation where a corporate officer is entrusted with making impartial decisions in the best interest of the company. If they fail to disclose a significant conflict of interest – like their ties to another company through familial relationships – that could lead to harm to either the company or the shareholders’ interests.

If you believe that you and your business have been victims of actual or constructive fraud, it’s better not to try to handle the situation alone. Learning more about the options you have can help protect your company’s future.

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