Financial institutions fraud.

• Jurisdiction: United States
• Author: Elbaz, David J.
• Date: 01 January 1997

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

   1. 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

   5. Recent Developments

      1. Trends in Enforcement

      2. New Directions in Enforcement

      3. Legislative Developments

      4. Judicial Developments 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. 1988 Amendment: Sale of Monetary Instruments

      4. 1996 Amendment: 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. Willful Violation

      4. Defenses

   5. Structuring

      1. Legal Duty to Report Structured Transactions

      2. Intent and Willfulness

      3. Defenses

   6. Penalties

1. INTRODUCTION

   This article reviews the development of three federal laws aimed at punishing criminal activity involving financial institutions. First, the Bank Fraud Statute(1) targets fraud against financial institutions. Schemes perpetrated by individuals that are designed to defraud a financial institution of either its assests or assests under its control are covered by the statute.(2) Second, the Financial Institutions Reform, Recovery, and Enforcement Acts ("FIRREA") covers officers, directors, and third-party fiduciaries who fraudulently manage defunct financial institutions.(3) Third, the Bank Secrecy Acts ("BSA") is aimed at preventing deceptive financial transactions that are designed to evade certain reporting requirements.(4)

2. BANK FRAUD: [sections] 1344

   1. Scope

      Section 1344 encompasses a diverse range of offenses including check kiting,(5) check forging,(6) false statements and nondisclosures 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. Also, the Bank Fraud Statute 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 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) and other circumstantial evidence.(30) Knowledge can also be inferred from a showing of "reckless indifference"(31) or "willful blindness"(32) to a scheme to defraud. Such inferences, however, must be reasonable considering all of the circumstances.(33)

         The statute does not require that misrepresentations knowingly be made directly to the bank.(34) Furthermore, the defendant need not have known that the bank would be harmed nor have intended such a result, so long as the attempt was made to obtain bank property fraudulently.(35) The government does not have to show personal inurement to the defendant(36) or an intent by the defendant to steal from or injure the bank.(37)

      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.(38) It is not necessary to show that the scheme succeeded in order to sustain a conviction: when a person knowingly defrauds a bank out of capital on false pretenses, he or she is violating [sections] 1344 even if the money is eventually returned.(39)

         If an indictment states the charge in the alternative--that the defendant executed or attempted to execute a scheme to defraud--the jury must agree unanimously that the defendant did either one or the other.(40) 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 decide unanimously on either.(41)

      3. Scheme or Artifice

         In the context of fraud, "scheme or artifice to defraud" is broadly defined by the courts to encompass any plan, pattern or cause of action, including "any false or fraudulent pretenses or representations intended to deceive others in order to obtain something of value, such as money, from the institution to be deceived."(42) The government need not prove that the scheme actually succeeded(43) or that the bank suffered any financial loss as a result of the scheme.(44) The critical component of a scheme or artifice is simply that it places the financial institution at risk of a financial loss.(45)

         There must be a finding that the misrepresentation made during the course of the scheme was material.(46) Simple concealment is enough to constitute a misrepresenation in a scheme or artifice.(47) The concealment, however, must be of a material fact.(48) A court's determination of materiality may hinge on the defendant's intent rather than on the victimized bank's reliance on false pretenses.(49)

      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.(50) These two prongs are treated disjunctively,(51) so that an act can be criminal under [sections] 1344(1) without also falling under [sections] 1344(2).(52)

         An indictment that refers generally to [sections] 1344 may be read to refer to either clause.(53) 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.(54)

         1. Defrauding a Financial Institution

            Courts have generally agreed with the government's expansive reading of the phrase "a scheme or artifice to defraud,"(55) using the mail and wire fraud statutes as a guide.(56) Section 1344(1) reaches check kiting, which is considered a scheme to defraud a bank of money.(57) Under 18 U.S.C. [sections] 1346, the object of the scheme may also be intangible rights, such as the right to honest services.(58)

         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.(59) The false representation need not have been made prior to a transfer or transaction,(60) but it must be material.(61) A representation is material if it has the tendency or the capacity to influence the decision of a financial institution.(62)

            False or fraudulent pretenses, representations, or promises(63) encompass a wide range of actions,(64) including misrepresentations that induce a bank to make a loan.(65) Misrepresentations may be explicit or implicit.(66) The mere presentation of checks knowingly drawn on insufficient funds, without more, however, is not covered by the language of [sections] 1344(2).(67)

      5. Financial Institution

         The final element of the Bank Fraud Statute requires that the victim or intended victim of the fraud be a federally-insured financial institution.(68) Although the amended version of [sections] 1344 contains no definition of "financial institution," the government applies the definition in [sections] 20(1) of Title 18.(69) With respect to [sections] 1344(2), courts have interpreted the "custody or control" language(70) to mean that the victim or intended victim of the fraud need not be a financial institution, so long as the institution is exposed to a risk of loss or of civil liability.(71) A scheme to defraud a third party of money held in a bank account therefore violates [sections] 1344,(72) unless the account-holder legally withdrew the money from the bank.(73) A bank is considered to have control of funds at the time they are withdrawn from an ATM.(74)

   3. Defenses

      1. Custody or Control

         A common 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.(75)...