Financial institutions fraud.

• Author: De Crombrugghe, Ines
• Position: Fourteenth Survey of White Collar Crime

1. 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, which targets fraud against financial institutions.(1) Section III describes the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), which regulates the conduct of officers, directors, and third-party fiduciaries who fraudulently managed now 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 [sections] 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 additional enforcement mechanisms.

   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. Similarly, [sections] 1344 does not protect a bank customer defrauded of funds legally withdrawn from an account if those funds were no longer under the "custody or control"(19) of the institution when the fraud occurred.(20)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 nonetheless be prosecuted under [sections] 1344 if they are part of a scheme that continues beyond the statute's enactment date.(22)

      1. Knowledge

         The government must prove 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 evidence,(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 knowing and direct misrepresentations to the bank.(30) The government need not demonstrate either that the defendant received a personal benefit or knew that the bank would be harmed, so long as the government proves the defendant had 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) Success of the scheme is not necessary in order to sustain a conviction: when a person knowingly defrauds a bank 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, that the defendant executed or attempted to execute a scheme to defraud a bank, the jury must unanimously find that the defendant did either one or the other.(34) 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's decision need not be unanimous for each alternative.(35)

      3. Scheme or Artifice

         The courts have broadly defined `scheme' or `artifice to defraud' as 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)

         However, as a result of the Supreme Court's decision in United States v. Wells,(37) the circuit courts have reached different conclusions as to whether the misrepresentation must be material.(38) A representation is material if it "has the tendency or the capacity to influence the decision of [a financial institution],"(39) but it need not include actual reliance.(40) Although Wells concerned 18 U.S.C. [sections] 1014, which governs false statements on loan applications, some courts have applied it to related fraud statutes, including [sections] 1344.(41) Before Wells, most courts found materiality to be a required element under [sections] 1344, but now there are inconsistent rulings in different circuits.(42)

         At least four circuits have considered the issue of materiality in the context of 18 U.S.C. [sections] 1344 since the Wells decision.(43) The Ninth Circuit in United States v. Nash(44) held that, notwithstanding Wells, materiality is an element of [sections] 1344. Relying on dicta in the Wells decision to the effect that statutory construction should incorporate common law meanings of legal terms wherever appropriate, the court held that, since "[t]he term `representation' has been held to include some notion of materiality at common law" and "[n]othing in section 1344 indicates an intent to deviate from the settled meaning [of the term]," a separate finding of materiality of the underlying false statement is required for conviction under the statute.(45) By contrast, the Eleventh Circuit in United States v. Neder(46) expressly rejected the Nash analysis, stating that it

         ignores that Congress now has employed the terms `material representation' and `material misrepresentation' in other statutes. The fact that Congress uses the term `material' in conjunction with `representation' or `misrepresentation' in some statutes but not in others rebuts any presumption that Congress now intends to make materiality an element under a statute whenever it employs the term `representation' in that statute.(47) The Supreme Court has granted certiorari to Neder, which should help resolve the issue.(48)

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

         However, an indictment that refers generally to [sections] 1344 may refer to either clause.(51) The Tenth Circuit has required that a defendant charged under both subsections in the indictment must be found guilty of both subsections in order to be convicted, raising the bar for conviction.(52)

         a. Defrauding a Financial Institution

         Courts have broadly construed the phrase "a scheme or artifice to defraud,"(53) using the mail and wire fraud statutes as a guide.(54) Thus, [sections] 1344(1) reaches crimes such as check kiting,(55) and alternatively, [sections] 1346 covers fraud involving intangible rights, such as the right to honest services.(56)

         b. False or Fraudulent Pretenses

         False or fraudulent pretenses, representations, or promises(57) encompass a wide range of actions.(58) Misrepresentations may be explicit or implicit.(59) However, the mere presentation of checks knowingly drawn on insufficient funds, without more, is not covered by the language of [sections] 1344(2).(60) Furthermore, the false representation need not have been made prior to a transfer or transaction.(61)

      5. Financial Institution

         The final element of [sections] 1344 requires that the victim or intended victim be a federally insured financial institution.(62) Although the statute does not define "financial institution," the government applies the definition found in [sections] 20(1) of Title 18.(63) Courts have interpreted the "custody or control" language in [sections] 1344(2)(64) 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 civil liability.(65) Therefore, a scheme to defraud a third party of money held in a bank account violates [sections] 1344,(66) unless the account-holder legally withdrew the money from the bank.(67) A bank is considered to have control of funds at the time they are withdrawn from an ATM.(68)

   3. Defenses

      This part describes several defenses that have been asserted against prosecutions under the bank fraud statute and their limitations. The defenses are: (1) that the financial institution 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.(69) However, this defense does not succeed merely by showing that the federally insured bank's funds were not directly at risk.(70)

      2. Good Faith

         A second potential defense is to attack the government's evidence of knowledge and intent by demonstrating the defendant's good faith.(71) Good faith is a...