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Article Excerpt
I. INTRODUCTION
II. BANK FRAUD STATUTE A. Purpose and Scope B. 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 a. Defrauding a Financial Institution b. False or Fraudulent Pretenses 5. Financial Institution C. Defenses 1. Custody or Control 2. Good Faith 3. Multiplicity of the Indictment D. Penalties. E. Supplemental Enforcement Mechanisms 1. Suspicious Activity Report 2. Civil Sanctions for Insider Fraud a. Applicable Law in Civil Cases under FIRREA i. Atherton v. FDIC ii. Federal Common Law Post-Atherton: 'No Duty' Rule iii. Federal Common Law Post-Atherton: D'Oench Doctrine b. Double Jeopardy i. The Dual Functions of the FDIC ii. Hudson v. United States III. CRIMINAL PENALTIES UNDER 12 U.S.C. [section] 1818(j) A. Scope B. Elements C. Penalties IV. Tim BANK SECRECY ACT A. Purpose B. Title I: Record-Keeping Requirements 1. Additional Records to Be Retained by Banks 2. Additional Records to Be Retained by Brokers and Dealers in Securities 3. Additional Records to be Retained by Casinos 4. Additional Records to be Retained by Currency Dealers and Exchangers C. Title II: Reporting Requirements 1. Money Services Businesses 2. Currency Transaction Reports a. Domestic Currency Transactions b. Foreign Currency Transactions c. Transactions with Foreign Financial Agencies 3. International Transportation of Currency and Monetary Instruments Reports a. Elements of the Offense i. Legal Duty to File ii. Knowledge iii. Willful Violation of the Reporting Requirement b. Enforcement and Penalties c. Defenses i. Excessive Fines ii. Double Jeopardy 4. Structuring Transactions to Avoid Reporting Requirements a. Elements b. Enforcement and Penalties c. Defenses
I. 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 ("BFS"), (1) which targets fraud against financial institutions. Section III reviews the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), (2) which regulates the conduct of officers, directors, and third-party fiduciaries who fraudulently managed now-defunct financial institutions. Section IV examines the Bank Secrecy Act ("BSA"), (3) which prohibits deceptive financial transactions designed to evade certain reporting requirements.
II. BANK FRAUD STATUTE
This Section examines the Bank Fraud Statute, 18 U.S.C. [section] 1344. It addresses the purpose as well as the broad scope of [section] 1344; delineates the five statutory elements of the bank fraud offense; discusses several defenses to a charge of bank fraud; presents the sanctions associated with the statute; and reviews additional enforcement mechanisms.
A. Purpose and Scope
The purpose of the Bank Fraud Statute, 18 U.S.C. [section] 1344, is to protect the interests of the federal government as an insurer of financial institutions. (4) The driving force behind the legislation was the Supreme Court's decision in Williams v. United States, (5) where the Court held that the crime of making false statements to financial institutions did not encompass check-kiting schemes. (6) Congress passed [section] 1344 in reaction to this ruling primarily to give the government the means to prosecute check-kiting. The BFS also criminalized a variety of other schemes intended to defraud federally insured financial institutions. (7)
The BFS covers a variety of offenses against financial institutions, including check-kiting, (8) check forging, (9) false statements and nondisclosures on loan applications, (10) stolen checks, (11) unauthorized use of automated teller machines ("ATMs"), (12) credit card fraud, (13) student loan fraud, (14) bogus transactions between offshore "shell" banks and domestic banks, (15) automobile title frauds, (16) diversion of funds by bank employees, (17) submission of fraudulent credit card receipts, (18) and false statements intended to induce check cashing. (19) Thus, [section] 1344, as enhanced by FIRREA (20) and the Crime Control Act of 1990, (21) has become the basic provision for prosecuting bank fraud offenses.
Although broadly written, [section] 1344 fails to reach all crimes relating to financial institutions. For example, money laundering, (22) bribery of bank officials, (23) fraud committed by a bank on its customers, (24) and schemes to pass bad checks (25) fall outside of the scope of [section] 1344. Similarly, [section] 1344 does not protect a bank customer against "pigeon drop" schemes, (26) where funds are legally withdrawn from an account by the customer and are no longer under the custody or control of the institution when the fraud occurs. (27)
B. Elements of an Offense
To obtain a conviction under [section] 1344 the government must show that the defendant: (i) knowingly, (ii) executed or attempted to execute, (iii) a scheme or artifice, (iv) to either (a) defraud, or (b) through false or fraudulent pretenses, representations, or promises, obtain the monies or other property of, (v) a financial institution. (28)
1. Knowledge
The knowledge element of the BFS requires the government to prove that the defendant had the intent to defraud a financial institution. (29) Such intent "cannot be inferred from the mere presence of a defendant at the scene of the crime or association with members of a criminal conspiracy." (30) However, intent can be adduced from the totality of the evidence, (31) including evidence of prior similar acts (32) and other circumstantial evidence. (33) A showing of "reckless indifference" (34) or "willful blindness" (35) to a scheme to defraud can also support an inference of knowledge.
The knowledge element of [section] 1344 does not require the government to prove that the defendant knowingly made direct misrepresentations to the financial institution. (36) Instead, the question turns on what the defendant actually knew about the status of the accounts used. (37) Moreover, if 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. (38) Whether the defendant knew the financial institution was federally insured is irrelevant to establishing knowledge. (39) Finally, the defendant need not conceal his actions from bank employees to find intent to defraud. (40)
2. Executes or Attempts to Execute
Under the BFS, the government must prove that the defendant executed or attempted to execute a scheme to defraud a financial institution. (41) If an indictment includes both the "execute" and "attempt to execute" language, a jury must unanimously find the defendant guilty on only one alternative to convict; that is, find that the defendant either executed or attempted to execute a scheme to defraud a financial institution. (42)
Section 1344 does not specifically define "execution." (43) Thus, courts consider the following factors in determining whether a scheme has been executed: (i) the ultimate objective of the scheme, (ii) the nature of the scheme, (iii) the benefits intended, (iv) the interdependence of the acts, and (v) the number of parties involved. (44) Since it is possible to have more than one execution of the same criminal scheme, courts often must determine if separate acts are independent executions or simply acts in furtherance of one execution. (45) An act constitutes a separate execution if it is intended to put the financial institution at a "separate, distinguishable financial risk from the risk it already undertook." (46)
The BFS does not require that the execution or attempted execution be ultimately successful. A person, who knowingly defrauds a financial institution of capital on false pretenses, is violating [section] 1344 even if the money is eventually returned. (47)
3. Scheme or Artifice
Section 1344 further requires a "scheme" or "artifice" to defraud a financial institution. (48) The courts have liberally construed this language to mean "any plan, pattern or [course] of action ... intended to deceive others to obtain something of value." (49)
A representation is material if it has "a natural tendency to influence, or [is] capable of influencing, the decision of the decision-making body to which it was addressed," (50) but it does not need to induce actual reliance. (51) In Neder v. United States, (52) the Supreme Court unanimously held that materiality is an element of a scheme or artifice to defraud under [section] 1344. (53) The Court explicitly stated: "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." (54) Therefore, materiality is required under [section] 1344, but reliance is not; the scheme "need not have exerted actual influence, so long as it was intended to do so and had the capacity to do so." (55)
Several circuits require that the defendant expose a financial institution to an actual risk of loss to find the scheme to defraud element. (56) However, other circuits have chosen to consider risk of loss as a relevant, but non-essential, element in the determination of scheme to defraud. (57)
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 [section] 1344(1), implementing a scheme or artifice to defraud, or [section] 1344(2), employing false pretenses or promises to obtain property owned, held, or controlled by a financial institution. (58) An indictment that refers generally to [section] 1344 may refer to either clause. Because the clauses are treated independently, an act may be criminal under [section] 1344 without falling under both prongs. (59)
There are two important distinctions between subsection (1) and (2) in [section] 1344. First, subsection (1) does not require false or fraudulent misrepresentations, which is a requirement under (2). Second, subsection (1) does not require the defendant to deprive the financial institution of monies or property, whereas subsection (2) does. (60) Though subsections (1) and (2) are treated independently in most circuits, at least one court has required that a defendant charged under both subsections in the indictment be found guilty under both subsections to be convicted. (61)
a. Defrauding a Financial Institution
Courts have broadly construed the phrase "a scheme or artifice to defraud" using the mail and wire fraud statutes (62) as a guide. (63) Section 1344(1) requires that the defendant attempt to obtain something of value from the financial institution, though it need not be through false or fraudulent pretenses. (64) Thus, crimes which involve no false representations to a financial institution, such as check-kiting, can be prosecuted under [section] 1344(1). (65) Additionally, [section] 1344(1) encompasses crimes where the scheme defrauds a financial institution of "the intangible right of honest service." (66) The principle of "honest service" developed out of the doctrine that the withholding of "the honest and faithful discharge of ... fiduciary duties can constitute a scheme to defraud" even without the loss of money or property. (67)
b. False or Fraudulent Pretenses
The false or fraudulent pretenses prong of [section] 1344 covers a wide range of actions, including forging sale documents, falsifying appraisals, and failure to repay bank loans. (68) Misrepresentations may be either explicit or implicit, (69) and need not have been made prior to a transfer or transaction. (70) However, simply presenting checks knowingly drawn on insufficient funds, without more, may not be covered by the language of [section] 1344(2) since "technically speaking, a check is not a factual statement at all, and therefore cannot be characterized as 'true' or 'false.'" (71)
5. Financial Institution
The final element of the BFS requires that the victim or intended victim be a federally insured financial institution. (72) Without proving that the financial institution was federally insured, the government cannot obtain a conviction. (73) While the amended statute does not define "financial institution," the government applies the definition found in [section] 20(1) of Title 18. (74)
Under [section] 1344, a financial institution is considered a victim of bank fraud if it is an actual or intended victim; the bank does not have to be the immediate victim of the fraud. (75) Courts typically find banks to be victims of fraud if the bank had "custody or control" of the funds in question, thereby exposing the bank to a risk of loss or civil liability. (76)
A scheme to defraud a third party of money held in a bank account constitutes a violation of [section] 1344. (77) A conviction under [section] 1344 will not stand, however, unless the defendant's scheme to defraud the third party also intended to defraud a federally insured financial institution. (78) Fraudulent ATM transactions, which simultaneously defraud the legal account holder and the financial institution from which the funds are withdrawn, are commonly prosecuted under [section] 1344. (79)
C. Defenses
While opposing prosecution under BFS, the following defenses have been asserted: (i) the financial institution did not have "custody or control" of the assets in question; (ii) the defendant was acting in good faith; and/or (iii) the indictment was multiplicitous. This part will examine these defenses and their respective limitations.
1. Custody or Control
As a defense to [section] 1344, defendants can argue that the assets were not "under the custody or control" of a federally insured financial institution at the time of the alleged fraud. (80) However, this defense will not succeed on a mere showing that the bank's funds were not directly at risk; as long as the funds involved were under the custody or control of the financial institution, then actual loss to the bank is not required. (81) It is also important to note that the "custody or control" requirement has been interpreted broadly to find defendants guilty of bank fraud where a financial institution has any property interest in the funds targeted by the scheme. (82)
2. Good Faith
A second potential defense under [section] 1344 is to attack the government's evidence of knowledge and intent by demonstrating the defendant's good faith. (83) Good faith is a complete defense to bank fraud, as it is inconsistent with an intent to defraud. (84) However, it is important to note that a defendant is not considered to have acted in good faith when an illegal act is performed with a belief that the act was legal. (85) Further, the good faith defense does not apply in situations where the defendant made a deliberate and conscious effort to avoid discovering the details of suspicious activity, (86) or had a belief that the collusion of the defrauded bank's officers in the scheme removed the fraudulent component. (87)
3. Multiplicity of the Indictment
A multiplicitous indictment, one that charges a single offense in multiple counts, (88) creates the risk that a defendant will be punished twice for the same conduct in violation of the Constitutional guarantee against double jeopardy. (89) When a defendant charged with multiple counts, under [section] 1344 and other statutes, raises a double jeopardy defense, courts examine whether the various counts require proof of different elements or factors. (90)
The circuits that have addressed multiplicity in the context of bank fraud have generally agreed that the BFS only imposes punishment for each "execution" of the scheme, unlike the mail and wire fraud statutes, which punish each "act" undertaken in furtherance of a scheme to defraud. (91) Thus, the critical inquiry is whether a defendant executed a "scheme." (92) The answer to that question is often obscure (93) and highly fact-specific. (94) At one extreme, the definition of "execution" closely parallels the definition of "acts in furtherance of a scheme" as applied in the mail and wire fraud statutes. (95) At the other extreme, the definition of "execution" characterizes several acts in aid of a single scheme as a single execution. (96) One commentator has noted that to eliminate the confusion and inconsistency surrounding the term "execution," Congress must strike the term from the statute or the Supreme Court must clarify its specific meaning. (97)
To find a middle ground between these two extremes, an increasing number of circuits have held that a single scheme can be executed several times, giving rise to multiple counts. (98) Prosecutors can avoid the multiplicity defense by carefully crafting bank fraud indictments to allege only one execution. (99)
D. Penalties
Sentences for violations of federal criminal laws are determined with reference to the United States Sentencing Guidelines ("Guidelines"). (100) In 2005, the U.S. Supreme Court severed the provision that made the Guidelines mandatory, rendering them "effectively advisory." (101) The Guidelines are one among a number of factors--including the purposes of punishment and the nature and circumstances of the offense and the history and characteristics of the defendant--to be considered in imposing federal sentences. Accordingly, the Guidelines remain highly relevant despite their advisory nature.
Violators of [section] 1344 face maximum penalties of one million dollars in fines or thirty years imprisonment, or both, (102) and are sentenced under section 2B1.1 of the Guidelines. (103) The base offense level under the Guidelines is seven. (104) If the loss at issue exceeds $5,000, the offense level is increased by an amount indicated in the loss table. (105) In situations where the wrongdoer's gross receipts from the crime exceed $1 million, the court should apply a level increase of two, (106) unless the fraud "substantially jeopardized the safety and soundness of a financial institution," in which case a level increase of four is warranted, regardless of the amount of gross receipts. (107) If the offense level remains below twenty-four after this increase, then the offense level will be adjusted upward to twenty-four. (108)
In October 1998, the Sentencing Commission amended the Guidelines (109) to provide for an increase in offense level by two for fraud "committed through mass-marketing." (110) The revised Guidelines also increase the offense level by two for fraudulent schemes (1) committed from outside the United States; (111) (2) relocated to another jurisdiction to evade prosecution; (112) or (3) that "involved sophisticated means." (113) In these cases, if the offense level is less than twelve after the two level increase, it increases to twelve. (114)
In applying the Guidelines, courts are not bound by an overly strict standard when calculating the damage done by a defendant. (115) While courts must use accurate information in applying the Guidelines, they are not required to rely on exact figures. (116)
E. Supplemental Enforcement Mechanisms
In addition to the criminal sanctions prescribed by the BFS, the federal government has established a comprehensive network of supplemental enforcement mechanisms to deter insider fraud, mainly in response to the financial institution failures of the 1980s. (117) Among these mechanisms are (i) suspicious activity reporting and (ii) administrative sanctions designed to protect federally insured financial institutions after the detection of fraudulent activity.
1. Suspicious Activity Report
To assist with the detection of illegal activities and suspicious financial transactions, the Department of the Treasury, the Office of Thrift Supervision, the Office of the Comptroller of the Currency ("OCC"), the Federal Reserve, and the Federal Deposit Insurance Corporation ("FDIC") created the Suspicious Activity Report ("SAR") by joint regulation in 1996. (118) An institution subject to the SAR requirement (119) must submit a report "when it detects a known or suspected violation of federal law, or a suspicious transaction related to money laundering activity or a violation of the Bank Secrecy Act." (120) More specifically, banking agencies are required to file SARs with the Financial Crimes Enforcement Network (FinCEN) in the following situations:
(i) whenever there is known or suspected insider abuse, regardless of the amount of money involved;
(ii) following any crime or attempted crime against or through a financial institution involving $5,000 or more when a suspect can be identified;
(iii) whenever a financial institution suspects a crime involving $25,000 or more, even without knowledge of the suspects;
(iv) following any transaction through the Banking Institution of $5,000 or more if the financial institution has reason to suspect money laundering;
(v) whenever there is suspicion that a transaction is designed to avoid BSA reporting requirements;
(vi) in the event of a "transaction [which] has no business or apparent lawful purpose or is not the sort of transaction in which the particular customer would normally be expected to engage and the bank has no reasonable explanation for the transaction after confirming the available facts...." (121)
Depository institutions must submit SARs to FinCEN, (122) which then distributes the SARs to the appropriate enforcement agencies. This compilation of the reports provides information on SAR trends and patterns to supplement law enforcement, to furnish tips on improving reporting, and to create an industry forum. (123)
Computer related crimes are the newest areas of crime to use the SAR to track and detect patterns of criminal activity. (124) The federal government now advises that financial institutions also use the SAR to report cases of suspected cyber-crimes. (125) SARs are also critical in the fight against the funding of international terrorism. (126)
2. Civil Sanctions for Insider Fraud
The federal government has also instituted various civil sanctions as a supplemental enforcement mechanism to combat banking fraud. All of the federal bank regulatory agencies of the FDIC and the OCC have administrative authority to protect federally insured institutions after the exposure of fraud. Section 1818 of Title 12 (127) authorizes civil penalties (128) and the removal and prohibition of insiders and other affiliated parties from participating in the affairs of an insured institution. (129) The sanctions apply not only to insured institutions, but also to all "institution-affiliated parties" (IAPs). (130)
The OCC's Fast Track Enforcement Program supplements these efforts to prevent insiders guilty of low level violations from remaining employed in the banking industry. (131) The program enables the agency to investigate improper activities by IAPs mentioned in SARs, to seek restitution for losses caused by insider fraud, and to prohibit certain IAPs from serving in financial institutions. (132)
The program selection criteria include: (i) subject must be a bank employee, officer, director or principal shareholder of a national bank; (ii) subject has engaged in "a criminal act involving dishonesty or breach of trust" against said institution; (iii) "unqualified evidence" of the offense at issue exists, or the subject admits responsibility; (iv) at least $5,000 was lost by the bank or involved in the transaction; and (v) "prosecution of the person was declined by federal law enforcement agencies" or the subject has entered a pre-trial diversion program. (133) If the "criteria are not met in only a minor way, the OCC is required to see if additional information would allow the criteria to be met." (134)
a. Applicable Law in Civil Cases under FIRREA
i. Atherton v. FDIC
The administrative actions taken by the FDIC have lead to significant questions concerning conflicts between federal and state common law. In Atherton v. FDIC, (135) the Supreme Court resolved a circuit split concerning whether federal or state law supplies the rules of decision in civil prosecutions brought by the FDIC against former principals of failed federally chartered financial institutions. (136) The Court in Atherton held: (i) federal common law does not provide a standard of care for officers and directors of federally insured savings institutions, and (ii) the relevant federal statute, (137) which requires gross negligence for the director and officer liability, does not preclude states from enacting stricter standards making principals liable under a lesser standard of negligence. (138)
The Supreme Court addressed two questions: (i) whether the federal interest in a FIRREA prosecution is sufficiently strong to justify application of a federal common law tort standard, (139) and (ii) how to reconcile the differences between the statutory standard and the controlling state common law standard. (140)
On the first question, the Court held the FDIC's interest in defining the standard of liability in a FIRREA prosecution did not present one of the "few and restricted instances" warranting a federal override of the standards of care established by state common law. (141) In the Court's opinion, state law posed no significant conflict with, or threat to, a federal interest in this situation. (142)
With respect to the second question--the effect of [section] 1821(k)'s gross negligence standard on the common law duty of care borne by bank officers and directors--the Court characterized the provision not as a displacement of common law standards, but rather as a statutory floor. (143) On this point, the Third Circuit had expressed concern that if the gross negligence standard of [section] 1821(k) (which applies after a bank has entered receivership) displaced the common law ordinary negligence standard, bank principals could effectively shield themselves from the consequences of negligent behavior by allowing their banks to go insolvent. (144) The Supreme Court allayed this concern by reading the statute's standard of care as "only a floor--a guarantee that officers and directors must meet at least a gross negligence standard. It does not stand in the way of a stricter standard that the laws of some states provide." (145) Section 1821(k) further provides that "[n]othing in this paragraph shall impair or affect any right of the corporation under other applicable law," (146) which the Court read to embrace state law as well as other federal statutes. (147) Thus, state law provides the duty of care owed by principals of federally chartered institutions, provided it is not more lenient than [section] 1821 (k). (148)
ii. Federal Common Law Post-Atherton: "No-Duty" Rule
The Court in Atherton resolved the question of the standard of care owed by principals of federally chartered institutions; however, the decision left unresolved the issue of whether the duty of care owed by the FDIC following receivership is controlled by federal common law in the face of conflicting state law.
In FDIC v. Healey, (149) the district court rejected the bank principals' affirmative defenses (permitted by Connecticut state law) of contributory negligence and failure to mitigate damages--both based entirely on post-receivership conduct of the FDIC--on the ground that federal common law permits no duty of care to be placed on the FDIC following receivership of a failed financial institution. (150) In response to the contention that Atherton does not allow federal common law to control where state law supplies a standard of care, the court distinguished Atherton both factually and in terms of legal principle. First, the court noted that Healey concerns post-receivership conduct of the FDIC, while Atherton concerns pre-receivership conduct of bank officials; bank failure and...
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