Financial institutions fraud.

• Author: Wohlberg, Brian
• Position: Continuation of III. The Financial Institutions Reform, Recovery, and Enforcement Act D. Double Jeopardy through IV. The Bank Secrecy Act, with footnotes, p. 1143-1170 - Thirtieth Annual Survey of White Collar Crime

1. The Dual Functions of the FDIC

   The enabling legislation of the FDIC endows it with dual roles: (i) governmental regulator of federally-insured financial institutions, and (ii) receiver of failed institutions. (190) In the latter role, it stands in the shoes of the bankrupt institution, acting as a private party vindicating private interests. (191) When an FDIC-insured institution enters receivership, the agency will act as both regulator and receiver for the same institution. (192)

2. Hudson v. United States

   The Supreme Court dispensed with the argument that the Double Jeopardy Clause acted as a barrier to the FDIC pursuing future prosecution in its capacity as receiver in Hudson v. United States. (193) The Court stated that the Fifth Amendment's Double Jeopardy Clause only protects defendants from successive criminal punishments, but sanctions imposed by the FDIC post-receivership are civil. (194) The Court abrogated its previous holding in United States v. Halper, (195) where it bypassed the threshold question of whether the successive punishments were criminal and instead focused on whether the sanction was so grossly disproportionate to the harm caused to be deemed "punishment" for the purposes of double jeopardy. (196) The Hudson Court acknowledged that a civil sanction might constitute criminal punishment when the "clearest proof' indicates that it is so "punitive in purpose or effect as to transform what was clearly intended as a civil remedy into a criminal penalty." (197) However, the Court concluded that such a determination of the sanction's criminal nature must first be established before implicating the Double Jeopardy Clause. (198) The Court also determined that, when a civil sanction has been designed to serve as a deterrent, this purpose does not alone transform civil sanctions into criminal punishment. (199) Thus, prior civil proceedings resulting in sanctions that fail to rise to Hudson's standard for criminality fail to trigger the Double Jeopardy Clause.

   5. Recent Prosecutions and Settlements

      In the wake of the 2007-2008 financial crisis, the federal government significantly expanded its FIRREA enforcement efforts, relying primarily on the statute's substantial civil penalties to remedy certain federal crimes. (200) This is an appealing tactic in part because FIRREA civil actions have a lower burden of proof and longer statute of limitations than most criminal statutes. (201)

      In February 2013, the Department of Justice filed a civil lawsuit against the credit rating agency Standard & Poor's Ratings Services ("S&P"). (202) The government alleged that federally insured financial institutions suffered more than $5 billion in losses in connection with the failure of CDOs rated by S&P from March to October 2007. (203) The government's complaint sought civil penalties under FIRREA based on three forms of alleged fraud by S&P: (i) mail fraud affecting federally insured financial institutions in violation of 18 U.S.C. [section] 1341; (ii) wire fraud affecting federally insured financial institutions in violation of 18 U.S.C. [section] 1343; and (iii) financial institution fraud in violation of 18 U.S.C. [section] 1344. (204)

      In August 2013, the United States tiled a civil lawsuit against Bank of America Corporation and certain affiliates, alleging the defendants defrauded investors, including federally insured financial institutions, by making false statements about the quality and riskiness of residential mortgage back securities sold by the defendants. (205) In August 2014, the Department of Justice reached a settlement with Bank of America for $16.65 billion--the largest civil settlement with a single entity in American history--to resolve a panoply of federal and state claims against it and its former and current subsidiaries, including Countrywide Financial Corporation and Merrill Lynch. (206) As part of the global resolution, the bank agreed to pay a $5 billion penalty under FIRREA, which is the largest FIRREA penalty ever. (207)

      The United States Attorney for the Southern District of New York has also aggressively pursued FIRREA claims. (208) In 2012, the U.S. Attorney filed and simultaneously settled for $158.3 million a lawsuit against Citigroup, Inc. ("Citi") for civil penalties under FIRREA. (209) The complaint alleged Citi submitted false certifications to HUD in violation of 18 U.S.C. [section][section] 1006 and 1014 and sought "civil penalties as authorized under 12 U.S.C. [section] 1833a, in the amount of up to the greater of (i) $1 million per violation, (ii) the amount of loss to the United States, or (iii) the amount of gain to Citi." (210) In 2011, the U.S. Attorney for the Southern District of New York filed a FIRREA complaint against the Bank of New York Mellon seeking the maximum amount of civil penalties authorized under 12 U.S.C. [section] 1833(a) for allegedly defrauding its foreign exchange customers. (211)

      IV. THE BANK SECRECY ACT

      This Section addresses the Bank Secrecy Act's statutory rationales, record-keeping requirements, reporting requirements, and method of structuring offenses.

   1. Purpose

      In 1970, Congress enacted the Currency and Foreign Transactions Reporting Act, commonly referred to as the Bank Secrecy Act (212) ("BSA"), to address tax evaders' and organized crime's increasing use of financial institutions to launder unreported income. (213) The BSA requires that financial institutions maintain "certain reports or records where they have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism." (214) This enhanced documentation of the deposit, transfer, and exchange of currency can be used to uncover illegal concealment and thus improve the effectiveness of law enforcement. (215)

      The increased interest in and importance of the BSA is due to the recognition of the global scale on which illicit funds enter the flow of commerce through legitimate financial institutions. Drug traffickers and global terrorism groups rely heavily on financial institutions to integrate and to move funds. (216)

      The BSA requires financial institutions (217) to keep certain account records of currency transactions over indicated dollar amounts, to report currency transactions of more than $10,000 into or out of a financial institution, and to disclose certain accounts that United States citizens and residents hold at foreign financial institutions. (218) The BSA imposes civil and criminal penalties on financial institutions, non-financial trades, and businesses. (219)

      In response to the terrorist attacks of September 11, 2001, Congress enacted the USA Patriot Act of 2001. (220) This legislation amended several provisions of the BSA. It broadened the definition of "financial institution;" (221) expanded requirements for financial and certain non-financial trade or business institutions with respect to recordkeeping, reporting, due diligence, anti-money laundering programs, "Know Your Customer" standards, and correspondent accounts with foreign shell banks; (222) and increased the civil and criminal penalties for certain BSA offenses. (223) Title III of the USA Patriot Act also includes the International Money Laundering Abatement and Anti-Terrorist Financing Act. (224)

   2. Title I: Record-Keeping Requirements

      Provisions of the BSA authorize the Secretary of the Treasury ("Secretary") to promulgate regulations requiring banks, securities brokers and dealers, and certain uninsured financial institutions to maintain adequate records of customers' transactions that can be used in criminal, tax, or regulatory investigations and proceedings. (225) Any person who willfully or through gross negligence fails to maintain the requisite records or causes a violation of any of the requirements under the BSA or those prescribed by the Secretary can be subject to civil penalties, (226) criminal penalties, or both. (227) The record-keeping requirements facilitate law enforcement investigations and proceedings as well as "the conduct of intelligence and counterintelligence activities ... to protect against domestic and international terrorism." (228)

      Each financial institution must retain for not less than five years the records of: (i) certain transactions that exceed $10,000; (229) (ii) the sale or issuance of bank checks, cashier's checks, traveler's checks, or money orders that equal or exceed $3000; (230) and (iii) funds, transfers, and transmittals that equal or exceed $3000. (231) Additional record-keeping requirements apply specifically to banks, securities brokers and dealers, casinos, and currency dealers and exchangers. (232)

1. Additional Records to Be Retained by Banks

   The regulations promulgated by the Secretary set forth several record-keeping requirements specifically for banks. (233) Every bank is required to obtain the taxpayer identification number of the customer involved, or of a person having a financial interest in the certificate where there are two or more customers "[w]ith respect to each certificate of deposit sold or redeemed ... [and] each deposit or share account opened." (234) The Secretary is required to prescribe regulations establishing minimum standards for financial institutions and their customers regarding the verification of the identity of the customer opening of an account. (235) In response, the Federal Reserve Board, FDIC, Financial Crimes Enforcement Network ("FinCEN"), (236) National Credit Union Administration, Office of the Comptroller of the Currency, Office of Thrift Supervision, and the United States Department of the Treasury ("Treasury") issued a rule requiring covered institutions to institute a written Customer Identification Program ("CIP"). (237) Each CIP must at a minimum: (i) provide for a system of internal controls to assure ongoing compliance; (ii) provide for...