Financial institutions fraud.

• Author: Kiessig, Taylor M.
• Position: Twenty-First Annual Survey of White Collar Crime

1. INTRODUCTION II. BANK FRAUD STATUTE A. Purpose and Scope B. Elements of the Offense 1. Knowledge 2. Executes or Attempts to Execute 3. Scheme or Artifice 4. To Defraud or Obtain Monies By False or Fraudulent Pretenses a. Defrauding a Financial Institution b. False or Fraudulent Pretenses 5. Financial Institution C. Defenses 1. Custody or Control 2. Good Faith 3. Multiplicity of the Indictment D. Penalties E. Supplemental Enforcement Mechanisms 1. Suspicious Activity Report 2. Civil Sanctions for Insider Fraud a. Applicable Law in Civil Cases under FIRREA i. Atherton v. FDIC ii. Federal Common Law Post-Atherton: 'No Duty' Rule iii. Federal Common Law Post Atherton: D'Oench Doctrine b. Double Jeopardy i. The Dual Functions of the FDIC ii. Hudson v. United States III. CRIMINAL PENALTIES UNDER 12 U.S.C. [section] 1818(j) A. Scope B. Elements C. Penalties IV. THE BANK SECRECY ACT A. Purpose B. Title I: Record-Keeping Requirements 1. Additional Records to Be Retained by Banks 2. Additional Records to Be Retained by Brokers and Dealers in Securities 3. Additional Records to be Retained by Casinos 4. Additional Records to be Retained by Currency Dealers and Exchangers C. Title II: Reporting Requirements 1. Money Services Businesses 2. Currency Transaction Reports a. Domestic Currency Transactions b. Foreign Currency Transactions c. Transactions with Foreign Financial Agencies 3. International Transportation of Currency and Monetary Instruments Reports a. Elements of the Offense i. Legal Duty to File ii. Knowledge iii. Willful Violation of the Reporting Requirement b. Enforcement and Penalties c. Defenses i. Excessive Fines ii. Double Jeopardy 4. Structuring Transactions to Avoid Reporting Requirements a. Elements b. Enforcement and Penalties c. Defenses I. INTRODUCTION

   This article reviews the development and application of three federal criminal statutes that govern offenses by or against financial institutions. Section II analyzes the Bank Fraud Statute, (1) which targets fraud against financial institutions. Section III reviews the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), (2) which regulates the conduct of officers, directors, and third-party fiduciaries who fraudulently managed now-defunct financial institutions. Section IV examines the Bank Secrecy Act ("BSA"), (3) which prohibits deceptive financial transactions designed to evade certain reporting requirements.

2. BANK FRAUD STATUTE

   This section examines the Bank Fraud Statute, 18 U.S.C. [section] 1344. Part A describes the purpose as well as the broad scope of [section] 1344; Part B delineates the five statutory elements of the bank fraud offense; Part C discusses several defenses to a charge of bank fraud; Part D presents the sanctions associated with the statute; and Part E discusses additional enforcement mechanisms.

   1. Purpose and Scope

      The purpose of the Bank Fraud Statute, 18 U.S.C. [section] 1344, ("BFS" or "[section] 1344") is to protect the interests of the federal government as an insurer of financial institutions. (4) The driving force behind the legislation was the Supreme Court's decision in Williams v. United States, (5) where the Court held that the crime of making false statements to financial institutions, 18 U.S.C. [section] 1014, did not encompass check-kiting schemes. (6) Congress passed [section] 1344 in reaction to this ruling primarily to give the government the means to prosecute check-kiting, however the BFS also criminalized a variety of other schemes intended to defraud federally insured financial institutions. (7)

      The BFS covers a variety of offenses against financial institutions, including check-kiting, (8) check forging, (9) false statements and nondisclosures on loan applications, (10) stolen checks, (11) unauthorized use of automated teller machines ("ATMs"), (12) credit card fraud, (13) student loan fraud, (14) bogus transactions between offshore "shell" banks and domestic banks, (15) automobile title frauds, (16) diversion of funds by bank employees, (17) submission of fraudulent credit card receipts, (18) and false statements intended to induce check cashing. (19) Thus, [section] 1344, as enhanced by FIRREA (20) and the Crime Control Act of 1990, (21) has become the basic provision for prosecuting bank fraud offenses.

      Although broadly written, [section] 1344 fails to reach all crimes relating to financial institutions. For example, money laundering, (22) bribery of bank officials, (23) fraud committed by a bank on its customers, (24) and schemes to pass bad checks (25) fall outside of the scope of [section] 1344. Similarly, [section] 1344 does not protect a bank customer against "pigeon drop" schemes, (26) where funds are legally withdrawn from an account by the customer and are no longer under the custody or control of the institution when the fraud occurs. (27)

   2. Elements of the Offense

      To obtain a conviction under [section] 1344 the government must show that the defendant: (i) knowingly, (ii) executed or attempted to execute, (iii) a scheme or artifice, (iv) to either (a) defraud, or (b) through false or fraudulent pretenses, representations, or promises, obtain the monies or other property of, (v) a financial institution. (28)

      1. Knowledge

         The knowledge element of the BFS requires the government to prove that the defendant had the intent to defraud a financial institution. (29) Such intent "cannot be inferred from the mere presence of a defendant at the scene of the crime or association with members of a criminal conspiracy." (30) However, intent can be adduced from the totality of the evidence, (31) including evidence of prior similar acts (32) and other circumstantial evidence. (33) A showing of "reckless indifference" (34) or "willful blindness" (35) to a scheme to defraud can also support an inference of knowledge.

         The knowledge element of [section] 1344 does not require the government to prove that the defendant knowingly made direct misrepresentations to the financial institution. (36) Instead, the question turns on what the defendant actually knew about the status of the accounts used. (37) Moreover, if the government proves the defendant had fraudulent intent, it need not demonstrate either that the defendant received a personal benefit or knew that the financial institution would be harmed. (38) Whether the defendant knew the financial institution was federally insured is irrelevant to establishing knowledge. (39) Finally, the defendant need not conceal his actions from bank employees to find intent to defraud. (40)

      2. Executes or Attempts to Execute

         Under the BFS, the government must prove that the defendant executed or attempted to execute a scheme to defraud a financial institution. (41) If an indictment includes both the "execute" and "attempt to execute" language, a jury must unanimously find the defendant guilty on only one alternative to convict; that is, find that the defendant either executed or attempted to execute a scheme to defraud a financial institution. (42)

         Section 1344 does not specifically define "execution." (43) Thus, courts consider the following factors in determining whether a scheme has been executed: (i) the ultimate objective of the scheme, (ii) the nature of the scheme, (iii) the benefits intended, (iv) the interdependence of the acts, and (v) the number of parties involved. (44) Since it is possible to have more than one execution of the same criminal scheme, courts often must determine if separate acts are independent executions or simply acts in furtherance of one execution. (45) An act constitutes a separate execution if it is intended to put the financial institution at a "separate, distinguishable financial risk from the risk it already undertook." (46)

         The BFS does not require that the execution or attempted execution be ultimately successful. A person, who knowingly defrauds a financial institution of capital on false pretenses, is violating [section] 1344 even if the money is eventually returned. (47)

      3. Scheme or Artifice

         Section 1344 further requires a "scheme" or "artifice" to defraud a financial institution. (48) The courts have liberally construed this language to mean "any plan, pattern or [course] of action ... intended to deceive others to obtain something of value." (49)

         A representation is material if it has "a natural tendency to influence, or [is] capable of influencing, the decision of the decision-making body to which it was addressed," (50) but it does not need to induce actual reliance. (51) In Neder v. United States, (52) the Supreme Court unanimously held that materiality is an element of a scheme or artifice to defraud under [section] 1344. (53) The Court explicitly stated: "under the rule that Congress intends to incorporate the well-settled meaning of the common-law terms it uses, we cannot infer from the absence of an express reference to materiality that Congress intended to drop that element from the fraud statutes." (54) Therefore, materiality is required under [section] 1344, but reliance is not; the scheme "need not have exerted actual influence, so long as it was intended to do so and had the capacity to do so." (55)

         Several circuits require that the defendant expose a financial institution to an actual risk of loss to find the scheme to defraud element. (56) However, other circuits have chosen to consider risk of loss as a relevant, but non-essential, element in the determination of scheme to defraud. (57)

      4. To Defraud or Obtain Monies By False or Fraudulent Pretenses

         The fourth statutory element, to defraud or obtain monies by false or fraudulent pretenses, comprises two alternative parts. The government may seek a conviction under either [section] 1344(1), implementing a scheme or artifice to defraud, or [section] 1344(2), employing false pretenses or promises to obtain property owned, held, or controlled by a financial institution. (58) An indictment that refers generally to [section] 1344...