Financial institutions fraud.

• Jurisdiction: United States
• Author: Gramman, Sandra L.
• Date: 22 March 2000

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 designed to evade certain reporting requirements.(3)

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

   This section describes the Bank Fraud Statute, 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. Purpose and Scope

      Before 1984, persons defrauding financial institutions via check kiting(4) schemes could not be prosecuted under federal laws.(5) Congress, in reaction to the Supreme Court's ruling on this point in United States v. Williams,(6) enacted 18 U.S.C. [sections] 1344. This section's primary purpose was to allow for federal prosecution of check kites, although it also criminalized a variety of schemes directed at federally insured financial institutions.(7)

      As it reads today, the Bank Fraud Statute states that:

      Whoever knowingly executes, or attempts to execute, a scheme or artifice-- (1) to defraud a financial institution; or (2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises; shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.(8) Although the statute does not define "financial institution," the government applies the definition found in [sections] 20(1) of Title 18.(9) The statute targets offenses against financial institutions including check kiting,(10) check forging,(11) false statements and nondisclosures on loan applications,(12) stolen checks,(13) unauthorized use of automated teller machines ("ATM"),(14) credit card fraud,(15) student loan fraud,(16) bogus transactions between offshore "shell" banks and domestic banks,(17) automobile title frauds,(18) and diversion of funds by bank employees.(19) Section 1344, as enhanced by FIRREA(20) and the Crime Control Act of 1990,(21) has thus become the basic provision for prosecuting bank fraud offenses.

      Although broadly written, [sections] 1344 does not reach all crimes relating to financial institutions. Money laundering,(22) bribery of bank officials,(23) and fraud committed by a bank on its customers(24) 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 of the institution when the fraud occurred.(25)

   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 of; (5) a financial institution.(26) Acts committed prior to the statute's enactment date of October 12, 1984, may nonetheless be prosecuted under [sections] 1344 if they are part of a scheme that continued beyond the statute's enactment date.(27)

      1. Knowledge

         The government must prove intent to defraud.(28) 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,"(29) knowledge and intent can be adduced from the totality of the evidence,(30) including evidence of prior similar acts(31) and other circumstantial evidence.(32) Knowledge can also be inferred from a showing of "reckless indifference"(33) or "willful blindness"(34) to a scheme to defraud.

         The statute does not require knowing and direct misrepresentations to the financial institution.(35) The government proves the defendant had fraudulent intent; it need not demonstrate either that the defendant received a personal benefit or knew that the financial institution would be harmed.(36) Additionally, it is not necessary that the defendant knew that the financial institution was federally insured.(37) Finally, the defendant need not conceal his actions from bank employees to find intent to defraud.(38)

      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 financial institution.(39) Success of the scheme is not necessary in order to sustain a conviction; when a person knowingly defrauds a financial institution of capital on false pretenses, she is violating [sections] 1344 even if the money is eventually returned.(40) To convict under an indictment which states the charge as an "either-or" test, the jury must unanimously find that the defendant either executed or attempted to execute a scheme to defraud a financial institution.(41) On the other hand, if the indictment states the charge as a "both-and" test, a defendant may be convicted if a majority of the jury decides against him on each alternative.(42)

      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."(43)

         Section 1344 is based on the mail and wire fraud statutes.(44) Thus, before the Supreme Court's decision in United States v. Wells(45) most courts found materiality to be a required element under [sections] 1344, following the analysis required under the other fraud statutes. A representation is material if it "has [a] natural tendency, or was capable of influencing the decision of [a lending institution],"(46) but it need not induce actual reliance.(47) In Wells, the Supreme Court held that because the element of materiality was not required by the text of 18 U.S.C. [sections] 1014, a statute governing false statements on loan applications, proof of materiality was not necessary for conviction under [sections] 1014.(48) Although Wells concerned 18 U.S.C. [sections] 1014, courts applied its holding to related fraud statutes, including [sections] 1344. Circuit courts reached varying conclusions as to whether the misrepresentation must be material under [sections] 1344.(49)

         This inconsistency among the circuits was finally resolved in July 1999, when the Supreme Court decided United States v. Neder.(50) In Neder, the Court unanimously held that materiality is an element of a scheme or artifice to defraud under [sections] 1344.(51) The Court explicitly stated that "under the rule that Congress intends to incorporate the well-settled meaning of the common-law terms it uses, we cannot infer from the absence of an express reference to materiality that Congress intended to drop that element from the fraud statutes."(52)

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

         The two prongs of [sections] 1344 may be treated disjunctively, so that an act may be criminal under [sections] 1344(1) without also falling under [sections] 1344(2).(55) There are two important distinctions between subsection (1) and (2). First, subsection (2) requires false or fraudulent misrepresentations, which are not required of subsection (1). Second, subsection (2) requires that the defendant deprived the financial institution of monies or property, whereas subsection (1) does not.(56) However the two prongs of [sections] 1344 are not always treated disjunctively. Rather, some courts have required that a defendant charged under both subsections in the indictment be found guilty under both subsections in order to be convicted.(57)

         a. Defrauding a Financial Institution

         Courts have broadly construed the phrase "a scheme or artifice to defraud," using the mail and wire fraud statutes as a guide.(58) This subsection requires that the defendant's scheme attempts to obtain something of value from the financial institution, yet it need not be through false or fraudulent pretenses.(59) Thus, crimes where there is a lack of false representations to a financial institution, such as check kiting, can be prosecuted under [sections] 1344(1) which does not possess such a requirement.(60) Additionally, [sections] 1344(1) encompasses crimes where the scheme defrauds a financial institution of "the intangible right of honest service."(61)

         b. False or Fraudulent Pretenses

         False or fraudulent pretenses, representations, or promises(62) encompass a wide range of actions.(63) Misrepresentations may be explicit or implicit.(64) However, the mere presentation of checks knowingly drawn on insufficient funds, without more, is not covered by the language of [sections] 1344(2).(65) Additionally, the false representation need not have been made prior to a transfer or transaction.(66)

      5. Financial Institution

         The final element of [sections] 1344...