Financial institutions fraud.

• Author: Anderson, Ross
• Position: III. The Financial Institutions Reform, Recovery, and Enforcement Act C. Criminal Penalties Under 12 U.S.C. s. 1818(j - Twenty-Seventh Annual Survey of White Collar Crime

3. Criminal Penalties Under 12 U.S.C. [section] 1818(j)

   As noted above, 12 U.S.C. [section] 1818(e) provides for the administrative removal of institution-affiliated parties ("IAPs") and prohibits any further participation in the affairs of the institution by those parties, (184) After an IAP has been served with a removal or suspension order under the civil provisions of FIRREA, [section] 1818(j) criminalizes any further participation of the IAP in the affairs of any FDIC- insured institution, absent prior written approval from the FDIC. The criminal penalty applies regardless of whether the underlying offenses, standing alone, would subject the offender to administrative sanctions only. (185)

   1. Scope

      The criminal penalties in [section] 1818(j) apply to bank officers, employees, controlling stockholders and appraisers, attorneys and accountants who: (i) cause financial loss to an FDIC-insured institution; (ii) prejudice the interests of the bank's depositors; or (iii) receive financial gain or other benefit from the violation. (186)

      Before FIRREA, IAPs could escape prosecution by resigning before the federal regulator began removal proceedings. (187) Consequently, Congress closed this legislative loophole by including a provision in FIRREA that allows banking regulators to initiate enforcement of penalties against individuals for six years after termination of their employment. (188)

   2. Elements

      The elements of a [section] 1818(j) criminal violation require that the defendant (i) knowingly participates in the conduct of the affairs of any insured financial institution; 189 (ii) is subject to a suspension order under [section] 1818(e) or an order under [section] 1818 (g) related to criminal activity which prohibits such participation; and (iii) has not received written approval from a regulatory agency prior to such participation. (190)

   3. Penalties

      Section 1818(j) provides that any violator shall be fined not more than $1,000,000, imprisoned for up to five years, or both. (191)

4. Double Jeopardy

   As stated above, FIRREA provides for both criminal and civil sanctions for violations by financial institutions and IAPs. (192) The FDIC's authority to enforce both types of penalties has occasionally produced double jeopardy concerns. (193) This argument, applied to civil and criminal punishments for the same act, usually fails; however, an extreme civil penalty may raise a legitimate double jeopardy concern not foreclosed by rulings to date.

   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. (194) In the latter role, it stands in the shoes of the bankrupt institution, acting as a private party vindicating private interests. (195) When an FDIC- insured institution enters receivership, the agency will act as both regulator and receiver for the same institution. (196)

   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. (197) The Court stated that the Fifth Amendment's Double Jeopardy Clause only protected defendants from successive criminal punishments, but sanctions imposed by the FDIC post-receivership are civil. (198) The Court abrogated its previous holding in United States v. Halper, (199) 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. (200) Although Hudson 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," (201) the Court concluded that such a determination of the sanction's criminal nature must first be established before implicating the Double Jeopardy Clause. (202) The Court also determined that, when a civil sanction has been designed to serve as a deterrent, a deterrence purpose does not alone transform civil sanctions into criminal punishment. (203) Thus, prior civil proceedings resulting in sanctions that fail to rise to Hudson's standard for criminality fail to trigger the Double Jeopardy Clause.

      IV. THE BANK SECRECY ACT

      This Section addresses the Bank Secrecy Act's statutory rationales, examines its record-keeping requirements, discusses its reporting requirements, and analyzes its 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 (204) ("BSA"), to address tax evaders' and organized crime's increasing use of financial institutions to launder unreported income. (205) 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." (206) 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. (207)

   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. The drug traffickers and global terrorism groups rely heavily on financial institutions to integrate and move funds. (208)

   The BSA, as amended, (209) requires financial institutions (210) 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. (211) The BSA imposes civil and criminal penalties on financial institutions, non-financial trades, and businesses. (212)

   In response to the terrorist attacks of September 11, 2001, Congress enacted the USA Patriot Act of 2001. (213) This legislation amended several provisions of the BSA. It broadened the definition of "financial institution;" (214) 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, (215) and correspondent accounts with foreign shell banks; and increased the civil and criminal penalties for certain BSA offenses. (216) The International Money Laundering Abatement and Anti-Terrorist Financing Act is included within Title III of the USA Patriot Act. Its purposes include: preventing, detecting, and prosecuting international money laundering and the financing of terrorism; providing a clear national mandate for subjecting those foreign jurisdictions and financial institutions that pose particular, identifiable opportunities for criminal abuse to special scrutiny; and ensuring potential money laundering reporting requirements to the proper authorities for all appropriate elements of the financial services industry. (217)

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. (218) 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, (219) criminal penalties, or both. (220) 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." (221)

   Each financial institution must retain for not less than five years the records of: (i) certain transactions that exceed $10,000; (222) (ii) the sale or issuance of bank checks, cashier's checks, traveler's checks, or money orders that equal or exceed $3000; (223) and (iii) funds transfers and transmittals that equal or exceed $3000. (224) Additional record-keeping requirements apply specifically to banks, securities brokers and dealers, casinos, and currency dealers and exchangers. (225)

   1. Additional Records to Be Retained by Banks

      The regulations promulgated by the Secretary set forth several record-keeping requirements specifically for banks. (226) 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." (227) 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. (228) In response, the Federal Reserve Board, Federal Deposit Insurance Corporation, Financial Crimes Enforcement Network ("FinCEN"), (229) National Credit Union Administration, Office of the Comptroller of the Currency, Office of Thrift Supervision, and the United States Department of the Treasury issued a rule requiring covered institutions to institute a written Customer Identification Program ("CIP"). (230) Each CIP must at...