Financial institutions fraud.

• Author: McLaughlin, T. Christopher
• Position: Thirteenth Survey of White Collar Crime

1. INTRODUCTION

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

2. BANK FRAUD: 18 U.S.C. [sections] 1344

   Part A describes the broad scope of Section 1344; Part B delineates the five elements of the offense; Part C discusses several defenses that have been asserted; Part D presents the sanctions for this statute; and Part E discusses several recent developments, including enforcement trends.

   1. Scope

      Section 1344 targets offenses against financial institutions, including check kiting,(4) check forging,(5) false statements and nondisclosures on loan applications,(6) stolen checks,(7) unauthorized automated teller machine ("ATM") use,(8) credit card fraud,(9) student loan fraud,(10) bogus transactions between offshore "shell" banks and domestic banks,(11) automobile title frauds,(12) and diversion of funds by bank employees.(13) Section 1344, as enhanced by FIRREA(14) and the Crime Control Act of 1990,(15) 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,(16) bribery of bank officials(17) and fraud committed by a bank on its customers(18) fall outside of its scope. Also, [sections] 1344 does not protect a bank customer defrauded of funds legally withdrawn from an account if those funds were no longer under the "custody or control"(19) of the institution when the fraud occurred.(20)

   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.(21) Acts committed prior to, but continuing beyond October 12, 1984 may still be prosecuted under [sections] 1344 if they are part of a scheme that continues beyond the enactment date.(22)

      1. Knowledge

         The government must prove an intent to defraud.(23) 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,"(24) knowledge and intent can be adduced from the totality of the circumstances,(25) including evidence of prior similar acts(26) and other circumstantial evidence.(27) Knowledge can also be inferred from a showing of "reckless indifference"(28) or "willful blindness"(29) to a scheme to defraud.

         The statute does not require that misrepresentations knowingly be made directly to the bank.(30) Furthermore, the government need not demonstrate either that defendant received a personal benefit or knew that the bank would be harmed, so long as there was fraudulent intent.(31)

      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.(32) 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, she is violating [sections] 1344 even if the money is eventually returned.(33)

         If an indictment states the charge in the alternative, i.e., defendant executed or attempted, the jury must agree unanimously that the defendant did either one or the other.(34) On the other hand, if the indictment states the charge in the conjunctive, i.e., defendant executed and attempted, then the jury's decision need not be unanimous for each alternative.(35)

      3. Scheme or Artifice

         The courts have broadly defined "scheme or artifice to defraud" to cover 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."(36)

         As a result of the Supreme Court's 1997 United States V. Wells(37) decision, the circuit courts have reached different conclusions concerning whether the misrepresentation must be material.(38) Although Wells Concerned 18 U.S.C. [sections] 1014, which governs false statements on loan applications, it has been read by some courts to apply to related fraud statutes, including [sections] 1344. Before Wells, most courts found materiality to be a required element under [sections] 1344.(39) A representation is material if it "has the tendency or the capacity to influence the decision of [a financial institution]."(40) A representation may be material without inducing any actual reliance.(41)

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

         The fourth statutory element comprises 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.(42) These two prongs are treated disjunctively.(43)

         An indictment that refers generally to [sections] 1344 may refer to either clause.(44) The Tenth Circuit, however, has required that if charged under both subsections in the indictment, the defendant must be found guilty of both subsections in order to be convicted.(45)

         1. Defrauding a Financial Institution

            Courts have broadly construed the phrase "a scheme or artifice to defraud,"(46) using the mail and wire fraud statutes as a guide.(47) Thus, [sections] 1344(1) reaches check kiting.(48) Alternatively, [sections] 1346 covers fraud involving intangible rights, such as the right to honest services.(49)

         2. False or Fraudulent Pretenses

            False or fraudulent pretenses, representations, or promises(50) encompass a wide range of actions.(51) Misrepresentations may be explicit or implicit.(52) However, the mere presentation of checks knowingly drawn on insufficient funds, without more, is not covered by [sections] 1344(2).(53) The false representation need not have been made prior to a transfer or transaction.(54)

      5. Financial Institution

         The final element of [sections] 1344 requires that the victim or intended victim be a federally-insured financial institution.(55) Although the statute does not define "financial institution," the government applies the meaning found in section 20(1) of Title 18.(56) Courts have interpreted the "custody or control" language in [sections] 1344(2)(57) to mean that the victim or intended victim need not be a financial institution, so long as the bank is exposed to a risk of loss or of civil liability.(58) Therefore, a scheme to defraud a third party of money held in a bank account violates [sections] 1344,(59) unless the account-holder legally withdrew the money from the bank.(60) A bank is considered to have control of funds at the time they are withdrawn from an ATM.(61)

   3. Defenses

      This part describes several defenses which have been asserted against prosecutions under the bank fraud statute: (1) that the defendant did not have "custody or control" of the assets in question; (2) that the defendant was acting in good faith; and (3) that the indictment was multiplicitous.

      1. Custody or Control

         Defendants often argue that the assets were not "under the custody or control" of a federally insured bank at the time of the alleged fraud.(62) However, this defense does not succeed merely by showing that the federally-insured bank's funds were not directly at risk.(63)

      2. Good Faith

         A second potential defense is based on attacking the government's evidence of knowledge and intent by demonstrating the defendant's good faith.(64) Good faith is inconsistent with an intent to defraud.(65) However, the good faith defense does not apply to indifference to the truth.(66)

      3. Multiplicity of the Indictment

         "An indictment is multiplicitous if it charges a single offense in more than one count."(67) Initially, the courts considered each act in execution of a scheme to commit bank fraud as a separate, chargeable offense.(68) This interpretation parallels prosecution under the mail and wire fraud statutes,(69) where each use of the mail or wires "for the purpose of executing such [a] scheme" to defraud is a separate offense.(70) Recently, several circuits have distinguished the mail and wire fraud statutes, and have held that [sections] 1344 imposes punishment only once for each execution of the scheme while the mail and wire fraud statutes punish each act in furtherance of a scheme.(71) However, an increasing number of circuits have held that a single scheme can be executed several times, giving rise to multiple counts.(72)

         The First Circuit has suggested that a "diversity of factors" ire relevant to evaluate multiplicity claims under [sections] 1344, such as how many banks, transactions, and movements of money are involved.(73) This approach appears to reconcile the circuits and provides a means of analyzing other cases dealing with the multiplicity issue as well.(74) One consequence of this shift away from the parallel construction between [sections] 1344 and the mail and wire fraud statutes is that it has profoundly affected the way prosecutors indict bank fraud cases.(75)

         When a double jeopardy defense has been raised regarding charges under both [sections] 1344 and other statutes arising from similar facts, courts generally have examined whether there are different elements to prove or different...