Financial institutions fraud.

• Author: Dodge, George R., Jr.
• Position: Eleventh Survey of White Collar Crime

1. INTRODUCTION II. BANK FRAUD: [sections] 1344

   1. Potential Scope

   2. 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

         1. Defrauding a Financial Institution

         2. False or Fraudulent Pretenses

      5. Financial Institution

   3. Defenses

      1. Custody or Control

      2. Good Faith

      3. Multiplicity of the Indictment

   4. Penalties III. CRIMINAL PENALTIES UNDER 12 U.S.C. [sections] 1818(J)

   1. Scope

   2. Elements

   3. Penalties IV. THE BANK SECRECY ACT.

   1. Purpose

   2. Recordkeeping Requirements

      1. Additional Records to be Retained by Banks

      2. Additional Records to be Retained by Brokers and Dealers in Securities

      3. Sale of Monetary Instruments

      4. Fund Transfers

   3. Reporting Requirements

      1. Domestic Currency Transactions

      2. Foreign Currency Transactions

      3. Transactions with Foreign Financial Agencies

   4. Reporting Requirements for the Export or Import of Currency

      1. Legal Duty to File CMIR

      2. Knowledge of the Reporting Requirement

      3. Willfulness

      4. Defenses

   5. Structuring Offense

      1. Legal Duty to Report Structured Transactions

      2. Mens Rea

      3. Defenses

   6. Penalties

1. INTRODUCTION

   This article reviews three methods by which the federal government may take action to punish criminal activity involving financial institutions. The second section discusses federal prosecutions of financial institutions fraud under [sections] 1344 of Title 18 of the United States Code,(1) the basic provision under which such crimes are charged. The third section explores the framework by which the federal government brings claims against officers, directors and third party fiduciaries who fraudulently manage defunct financial institutions, under 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 by evade the BSA's reporting requirements.

2. BANK FRAUD: [sections] 1344

   This section addresses federal prosecutions of bank fraud under 18 U.S.C. [sections] 1344. Crimes which constitute bank fraud under [sections] 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

      Section 1344 encompasses such diverse offenses as check-kiting,(5) check forging,(6) false statements on loan applications(7) and in negotiations with banks,(8) the sale of stolen checks,(9) unauthorized automated teller machine (ATM) use,(10) credit card fraud,(11) bank mail theft,(12) student loan fraud,(13) bogus transactions between offshore "shell" banks and domestic banks,(14) and automobile title frauds.(15) Section 1344, fortified by FIRREA(16) and the Crime Control Act,(17) has thus become the basic provision for prosecuting bank fraud offenses. Although broadly written, [sections] 1344 does not reach all crimes relating to banks. Money laundering(18) and bribery of bank officials(19) fall outside its scope. Similarly, [sections] 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"(20) of a financial institution when the fraud occurred.(21) Because [sections] 1344 requires that the intended victim be a bank, it does not apply to fraud committed by a bank on its customers.(22)

   2. Elements of the Offense

      To obtain a [sections] 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.(23) Acts committed prior to the initial enactment of the Bank Fraud Statute(24) may nonetheless be prosecuted under [sections] 1344 if they are part of a scheme that continues beyond the enactment date.(25)

      1. Knowledge

         The element of acting knowingly is often proved by showing an intent to defraud.(26) 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,"(27) knowledge and intent can be adduced from the totality of the evidence,(28) including evidence of prior similar acts(29) as well as other circumstantial evidence.(30) Such inferences, however, must be reasonable considering all of the circumstances.(31)

         The statute does not require that the misrepresentations knowingly be made directly to the bank.(32) 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.(33) Thus, the government does not need to prove intent to steal from or to injure the bank.(34)

      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.(35) Success of the scheme is not necessary to sustain a conviction: when a person knowingly deceives a bank into loaning money on false pretenses, he is committing fraud even if the money is eventually returned.(36)

         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.(37) 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.(38)

      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."(39) The government need not prove that the scheme actually succeeded(40) or that the bank suffered any financial loss as a result of the scheme.(41) The critical component of a scheme or artifice is simply that it places the financial institution at risk of a financial loss.(42)

         A misrepresentation by simple concealment is enough to constitute a scheme or artifice.(43) The concealment, however, must be of a material fact.(44) A court's determination of materiality may hinge on the defendant's intent rather than on the victimized bank's reliance on false pretenses.(45)

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

         The fourth statutory element contains two alternative parts. The government may seek a conviction under either [sections] 1344(1), implementing a scheme or artifice to defraud, or [sections] 1344(2), employing false pretenses or promises to obtain property owned, held, or controlled by a financial institution.(46) These two prongs are treated disjunctively,(47) so that an act can be criminal under [sections] 1344(1) without also falling under [sections] 1344(2).(48)

         An indictment that refers generally to [sections] 1344 may be read to refer to either clause.(49) The Tenth Circuit, however, has held that if charged under both subsections in the indictment, the defendant must be found guilty of both subsections in order for a conviction to be sustained.(50)

         1. Defrauding a Financial Institution

            Courts have generally agreed with the government's expansive reading of the term "a scheme or artifice to defraud,"(51) using the mail and wire fraud statutes as a guide.(52) Section 1344(1) reaches check kiting, which is considered a scheme to defraud a bank of money.(53) Under 18 U.S.C. [sections] 1346, the object of the scheme may also be intangible rights, such as the right to honest services.(54)

         2. False or Fraudulent Pretenses

            Section 1344(2) applies to a scheme or artifice to obtain any of the monies, assets, or other securities under the control or custody of a financial institution by false or fraudulent pretenses.(55) The false representation need not have been made prior to a transfer or transaction,(56) but it must be material.(57) A representation is material if it has the tendency or the capacity to influence the decision of a financial institution.(58)

            False or fraudulent pretenses, representations, or promises(59) encompass a wide range of actions,(60) including misrepresentations that induce a bank to make a loan.(61) Misrepresentations may be explicit or implicit.(62) The mere presentation of checks knowingly drawn on insufficient funds, without more, however, is not covered by the language of [section] 1344(2).(63)

      5. Financial Institution

         The final element of the Bank Fraud Statute requires that the victim or intended victim of the fraud must be a financial institution.(64) Although the amended version of [sections] 1344 contains no definition of "financial institution,"(65) the government applies the definition in [sections] 20(1) of Title 18.(66) With respect to [sections] 1344(2), courts have interpreted the "custody or control" language(67) to mean that the victim or intended victim of the fraud need not be the financial institution, so long as the institution is exposed to a risk of loss or of civil liability.(68) A scheme to defraud a

         third party of money held in a bank account therefore runs afoul of [sections] 1344,(69) unless the account-holder legally withdrew the money from the bank.(70) A bank is considered to have control of funds at the time they are withdrawn from an ATM.(71)

   3. Defenses

      1. Custody or Control

         A primary defense to a [sections] 1344 charge is a showing that the assets of which the financial institution was allegedly defrauded were not "under the custody or control" of a federally insured bank at the time of the fraud.(72)

      2. Good Faith

         A second potential defense is to attack the government's...