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February 16, 2017

How the Supreme Court’s Interpretation of Bank Fraud is Useful in Foreign Recoveries

Authored by Eric (Rick) Rein

 in International Asset Recovery & Enforcement

On 12/12/16, the U.S. Supreme Court held that the bank fraud statute does not require proof that the bank suffered a financial loss nor that there was intent for the bank to suffer a loss.
 

The Racketeer Influenced and Corrupt Organizations Act, commonly referred simply as RICO, provides for civil penalties for acts arising from racketeering activities defined as a long list of state and federal crimes, including bank fraud. Oftentimes when a bank is defrauded by its customer, who flees the country or conceals assets offshore, one of the claims that is raised is that the conduct was part of a criminal activity, bank fraud, that gives rise to a civil claim under RICO.

The U.S. Supreme Court in Shaw v. United States, 2016 U.S. Lexis 7431, 137 S. Ct. 462, decided on December 12, 2016, held that the bank fraud statute does not require proof that the bank suffered a financial loss nor that there was intent for the bank to suffer a loss. Rather, knowledge that the defendant would likely harm the bank's property was sufficient to prove bank fraud.   

18 U.S.C. Section 1344 (1) makes it a crime "knowingly (to) execut(e) a scheme…to defraud a financial institution."

The defendant argued that he did not violate the statute because his scheme was designed to obtain property of a bank customer and not the bank's property and that he had no intent to deceive the bank. The Supreme Court identified the flaw in the argument in that the bank, too, had property rights in the bank account. When a customer deposits funds, the bank ordinarily becomes the owner of the funds and consequently has the right to use the funds as a source of loans, although the customer retains the right to withdraw the funds. Thus, the scheme was also a scheme to deprive the bank of its property rights.

Further, the Supreme Court reasoned that the defendant knew the account was at the bank, made false statements to the bank, and did correctly believe that those false statements would lead the bank to release funds from the account ultimately ending up with defendant. Defendant may not have been aware of the "niceties of bank-related property law", but these facts were sufficient to show that defendant knew he was entering into a scheme to defraud the bank. Actual knowledge of the "niceties" of property law was not required.

Finally, defendant argued that the bank fraud statute requires proof of purposeful fraud. The Supreme Court found no relevant authority to support that view.

Thus, the Supreme Court decided:

  1. A deposit account is characterized as bank property
  2. No proof is required that defendant intended that the bank ultimately suffer a monetary loss
  3. The bank fraud statute requires a state of mind equivalent to knowledge, not purpose. "(A) plan to deprive a bank of money in a customer's deposit account is a plan to deprive the bank of 'something of value' within the meaning of the bank fraud statute."
This broad interpretation of the bank fraud statute will be beneficial to civil litigants. 

 

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