Finding Bank Fraud Without Defrauding Bank – Supreme Court Grapples with Reach of Federal Criminal Bank Fraud Statute

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On June 23, 2014, the United States Supreme Court in Loughrin v. United States unanimously rejected the petitioner’s argument to narrow the federal criminal law against bank fraud by reading into that statute’s second clause a requirement of proof of intent to defraud a financial institution. Although the Court ruled unanimously, it split on the reasoning, which means that questions may persist in future cases as to the limits on federal bank fraud prosecutions.

Petitioner Kevin Loughrin stole checks that he altered and used to purchase goods from Target, which he then returned to Target for $1,184. Loughrin never went to a bank or engaged a bank in any way, although the checks he altered were or would have been drawn on bank funds. He was convicted of bank fraud under the second clause of the federal bank fraud statute, 18 U.S.C. § 1344, which provides 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.

At issue on appeal were the elements required to satisfy the second clause of § 1344. All parties agreed that the second clause required that a defendant execute or attempt to execute a scheme or artifice with two elements: (i) intent to obtain money or property of a financial institution, and (ii) that the obtaining of property occur by means of false pretenses. However, Loughrin contended that the government must prove a third element – that the defendant intended to defraud a bank. The Court faced a challenge: not to read into the second clause an additional element, but not to extend the federal bank fraud statute to every fraudulent transaction involving payment by check, as every check reaches a financial institution.

The Court relied in part on the statutory text in ruling that the intent to defraud a bank is not an element of the second clause. It noted that the whole substance of the first clause is the requirement that a defendant intend to defraud a financial institution. Reading that same intent into the second clause would make the second clause merely a subset of the first clause, which the Court ruled was not a correct construction of the statute.

The Court also noted that the failure to read into the second clause of the bank fraud statute an intent to defraud would not extend the statute to every fraud happening to involve payment with a check. In the absence of a clear statement from Congress, the Court historically has not been quick to assume that Congress meant to effect a significant change in the relationship between federal and state criminal jurisdiction, such as the change that would result from an overly expansive reading of the second clause of the statute. Moreover, the second clause limits the reach of the statute by requiring the criminal to acquire bank property by “means of the” misrepresentation. This may be satisfied only in certain types of fraud, for example, when a forged check results in the acquisition of bank money or property, and not in others, such as when a seller misrepresents the value of an item and accepts payment on the fraudulent transaction by check.

Pepper Points

  • Although the Court explained at length that its interpretation of the federal criminal bank fraud statute does not extend the statute to all fraudulent transactions involving checks, it remains to be seen how federal courts will draw distinctions among those fraudulent transactions that can be prosecuted under the federal criminal bank fraud statute, and those that cannot.
  • In declining to endorse the petitioner’s interpretation of the statute to include the “intent to defraud” language, the Court ensured that the federal bank fraud statute will remain a powerful charge for prosecutors to levy against individuals, with penalties that are typically harsher than those of similar state laws.
  • Violations of the bank fraud statute, 18 U.S.C. § 1344, can serve as a predicate offense for Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) actions that impose severe civil money penalties on anyone committing a crime affecting a financial institution. The Court’s decision not to dramatically limit the scope of the bank fraud statute means that the statute remains a powerful weapon for the government to use in support of FIRREA actions.

 

Topics:  Bank Fraud, Banks, FIRREA, Fraud, SCOTUS

Published In: Criminal Law Updates, Finance & Banking Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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