Financial institutions fraud.

• Author: Crawford, Daniel A.
• Position: Tenth Survey of White Collar Crime

This article reviews three methods by which the federal government may take action in cases involving financial institutions. The first section discusses federal prosecutions of financial institutions fraud under section 1344 of Title 18 of the United States Code,(1) the basic provision under which such crimes are charged. The second section explores the framework by which the federal government brings claims against officers, directors and third party fiduciaries who fraudulently manage defunct financial institutions. Specifically, this section discusses the application of the doctrine of "adverse domination," which has been used to toll the statute of limitations provided by the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).(2) The final section discusses the role of the Bank Secrecy Act (BSA)(3) in preventing deceptive financial transactions. In particular, this section focuses on methods of preventing individuals from deliberately "structuring" transactions in order to evade the BSA's reporting requirements.

1. Bank Fraud: Section 1344

This section addresses federal prosecutions of bank fraud under 18 U.S.C. [sections] 1344. Crimes which constitute bank fraud under section 1344 require that the perpetrator engage in a scheme to defraud a financial institution of its own assets or of assets within its control.(4)

1. Potential Scope

   Although broadly written, section 1344 does not reach all crimes relating to banks. Money laundering(5) and bribery of bank officials(6) fall outside its scope. Similarly, section 1344 does not protect a bank customer defrauded of funds legally withdrawn from an account if those funds were no longer under the "custody or control"(7) of a financial institution when the fraud occurred.(8) Because section 1344 requires that the intended victim be a bank, it does not apply to fraud committed by a bank on its customers.(9)

   Recent developments further suggest that Congress did not intend section 1344 to cover every kind of banking crime.(10) Although the original version of section 1344 defined a financial institution as a "federally chartered or insured financial institution,"(11) it also contained a catch-all provision suggesting a broader interpretation of the term.(12) The definitional subsection of the original section 1344 was eliminated in the 1989 amendments to section 1344 contained in FIRREA.(13) Although the difference in definitions is largely due to the dissolution of the Savings and Loan Insurance Corporation, FIRREA's version does not include a catch-all provision, which suggests a limitation on the application of section 1344.

2. Legislative History

   Increasing political pressure and concern over white collar crime in general and the savings and loan scandal in particular(14) forced Congress to adopt measures to control bank fraud. When Congress decided to bail out the savings and loan industry, most members of Congress who addressed the causes of the crisis singled out bank fraud as a primary factor.(15)

   While there was vigorous debate concerning many aspects of the $166 billion bailout plan,(16) there was little opposition to a dramatic increase in both civil(17) and criminal(18) penalties for violations of the bank fraud statute. Substantially increasing criminal penalties was one of the principal purposes of FIRREA.(19) Congress took further action one year after FIRREA by passing the Crime Control Act of 1990.(20) The Crime Control Act provided for further increases in penalties(21) and granted substantial new powers to the government to aid in the prosecution of violators.(22)

   Congress also lengthened the statute of limitations for bank fraud and related crimes to ten years.(23) The government now has five more years within which to discover and prosecute bank frauds, adding further to the scope of the amendment.

   The enactment of section 1344 facilitated prosecutions for bank fraud by effecting a unified attack on most types of offenses, which previously had been prosecuted under separate statutes. Section 1344 encompasses such diverse offenses as check-kiting,(24) check forging,(25) false statements on loan applications(26) and in negotiations with banks,(27) the sale of stolen checks,(28) unauthorized automated teller machine (ATM) use,(29) credit card fraud,(30) bank mail theft,(31) student loan fraud,(32) bogus transactions between offshore "shell" banks and domestic banks,(33) and automobile title frauds.(34) Section 1344, fortified by FIRREA(35) and the Crime Control Act,(36) has thus become the basic provision for prosecuting bank fraud offenses.

   The legislative history of the original version of section 1344 makes clear that Congress intended to plug "serious gaps" in the law protecting federally chartered or insured financial institutions in the wake of Supreme Court decisions which limited the reach of the federal mail fraud(37) and false statement statutes.(38) These limitations impeded the government, which had been forced to prosecute bank fraud under such statutes. Congress accordingly passed section 1344 to override these decisions.(39) Congress also enacted section 1344 to address the limitations of the general bank theft statute,(40) which fails to reach schemes to defraud in which no property is taken.(41) Section 1344 aids prosecution of these non-theft offenses by creating a "unitary provision aimed directly at the problem of bank fraud."(42)

3. Elements of the Offense(43)

   To obtain a section 1344 conviction, the government must show that the defendant: (1) knowingly (2) executed or attempted to execute (3) a scheme or artifice (4) to either (a) defraud, or (b) through false or fraudulent pretenses, representations, or promises, obtain the monies or other property (5) of a financial institution.(44) The government must not only plead these statutory elements of the scheme to defraud, but also must allege sufficient facts to support the charge.(45) Acts committed prior to the initial enactment of the Bank Fraud Statute(46) may nonetheless be prosecuted under section 1344 if they are part of a scheme that continues beyond the enactment date.(47)

   1. Knowledge

   The element of acting knowingly is often proved by showing an intent to defraud.(48) Although "[g]uilt cannot be inferred from the mere presence of a defendant at the scene of the crime or mere association with members of a criminal conspiracy,"(49) knowledge and intent can be adduced from the totality of the evidence,(50) including evidence of prior similar acts(51) as well as other circumstantial evidence.(52) Such inferences, however, must be reasonable considering all of the circumstances.(53)

   The statute does not require that the misrepresentations knowingly be made directly to the bank.(54) Furthermore, the defendant need not either have known that the bank would be harmed or have intended such a result, so long as the attempt was made to obtain bank property fraudulently.(55) Thus, the government does not need to prove intent to steal from or to injure the bank.(56) In fact, when a person knowingly deceives a bank into loaning money on false pretenses, he is committing fraud even if the money is eventually returned.(57)

   2. Executes or Attempts to Execute

   Under the Bank Fraud Statute, the government must prove that the defendant executed or attempted to execute a scheme to defraud a bank.(58) If an indictment states the charge in the alternative - that the defendant executed or attempted to execute a scheme to defraud - the jury must unanimously find that the defendant did either one or the other.(59) On the other hand, if the indictment states the charge in the conjunctive - that the defendant executed and attempted to execute the scheme to defraud - then the jury need not unanimously decide specifically upon either.(60)

   A troublesome issue is the avoidance of multiplicity in indicting offenses under section 1344.(61) The question is whether a single scheme that requires several separate actions for execution constitutes a single violation of section 1344 or whether each act performed to execute the scheme is a separate violation.

   Initially, the courts considered each act in execution of a scheme to defraud as a separate, chargeable offense.(62) This interpretation parallels that given the mail and wire fraud statutes(63) where each use of the mail or wires "for the purpose of executing such [a] scheme" to defraud is a separate offense.(64) The Fifth Circuit, however, has distinguished the mail and wire fraud statutes from the bank fraud statute on this point.(65)

   A number of courts have attempted to reconcile the two approaches to show that there is not a circuit split on the issue.(66) The First Circuit has suggested that a "diversity of factors" are relevant to evaluate multiplicity claims under section 1344, such as how many banks, transactions, and movements of money are involved.(67) This approach appears to reconcile the circuits and provides a means of analyzing other cases dealing with the multiplicity issue as well.(68) Despite this method of dealing with potentially multiplicitous charges, the shift away from the parallel construction between section 1344 and the mail and wire fraud statutes has profoundly affected the way prosecutors indict bank fraud cases.(69)

   3. Scheme or Artifice

   In the context of fraud, the terms "scheme" and "artifice" are broadly defined by the courts to encompass "any plan, pattern or cause of action, including false or fraudulent pretenses that deceives others to obtain something of value, such as money."(70) The government need not prove that the scheme actually succeeded(71) or that the bank suffered any financial loss as a result of the scheme.(72) The critical component of a scheme or artifice is simply that it places the financial institution at risk of a financial loss.(73)

   A misrepresentation by simple concealment is enough to constitute a scheme or artifice.(74) The concealment, however, must be of a...