The federal Bank Fraud statute – 18 U.S.C. § 1344 – was designed to criminalize complex “schemes to defraud” banks and other financial institutions. Today, § 1344 has become a hugely popular tool for the government in white collar criminal cases, and generated far more attention than its older sister, 18 U.S.C. § 1014, which was designed to criminalize a less outwardly sinister variety of criminal conduct.
To obtain a conviction under § 1014, the government must prove first that the defendant made a “false statement or report,” and second that he did so “for the purpose of influencing in any way the action of [a described financial institution] upon any application….” The government need not prove that the false statement was material.
Like the Bank Fraud statute, § 1014 carries a maximum fine of $1,000,000 and a maximum prison term of 30 years. However, unlike the Bank Fraud statute, in recent years we have seen § 1014 increasingly applied in cases where the bank suffers no financial loss, and the only financial service obtained by the defendant is a checking account. While the issue seems simple, § 1014 cases often involve highly complex facts and circumstances, not necessarily about the misstatements made to the banks, but rather about the general circumstances in which the bank and customer find themselves.
First, banks are typically conservative and tightly regulated, and carefully choose the types of business they serve. Consequently, most banks avoid doing business with whole classes of businesses deemed to be “high risk.” Most banks believe that the compliance cost and reputation risk avoided by refusing to work with “high risk” companies outweighs whatever financial gain the banks would realize by taking in such companies.
However, simply because a business is deemed to be “high risk” by a bank, it does not necessarily follow that the business is a criminal enterprise or is operating unlawfully. Instead, without ever being afforded due process, it typically means that some government agency has determined that the business presents a heightened money laundering risk, and in many cases banks have been outright barred from doing business with them. For instance, the National Credit Union Administration (NCUA) recently barred the North Dade Community Development Federal Credit Union of Miami Gardens from doing further business with money services businesses (MSBs), a large class of businesses including money transmitters, check cashers, currency exchangers, providers of prepaid access, issuers of digital currency, and a variety of others. But the North Dade case was hardly unique. It happens often, and regulators rarely distinguish between compliant and non-compliant MSBs.
Because money is the MSB’s inventory, the MSB has no way to operate without a bank account. So, knowing that banks will not do business with them, many MSBs have lied (or at least obfuscated the truth) during the account opening process and told the bank that they are engaged in “import/export,” “consulting,” or some other vague term which they believed the bank wouldn’t investigate. And in many cases the MSB was right – the bank did not perform a due diligence during the account opening process. But eventually the lie was revealed, the feds were called in, and the otherwise compliant MSB became the target in a § 1341 (fraud) investigation.
Lack of access to banking is common for lawful businesses operating on the fringe. In one case, we represented an international seller of online pornography that was fully compliant with U.S. law, but had extraordinary difficulties maintaining bank accounts due to the nature of its business. So, before we were engaged, the company established a shell U.S. company and obtained an operating account for the shell at a small bank in the South. Soon after the account was opened, the bank realized the actual nature of the client’s business and called in the federal government. The client avoided criminal charges, but a fair amount of money was forfeited following the ensuing investigation.
We have also seen this issue play out for casas de cambio operating in Argentina and Venezuela. Due to strenuous currency controls, those businesses desperately need access to U.S. dollars and U.S. bank accounts. Knowing how unlikely it is that a U.S. bank will open an account for them, the casa de cambio will open a shell company in the U.S. and establish a bank account for the shell. In some cases, the casa de cambio will close the account before the bank catches on, but in other cases the lie is revealed and the criminal investigation ensues.
State-sanctioned marijuana dispensaries are experiencing this issue today. Even though they are perfectly lawful under state law, the federal government deems them to be “high risk,” and banks are refusing to do business with them. In a recent Bloomberg article addressing the issue, an expert gave this advice: “As long as the bank doesn’t find out, you should be safe.” It is easy to understand why this advice is so bad. Several members of Congress are currently sponsoring legislation designed to allow state-sanctioned dispensaries to obtain bank accounts, and hopefully new laws will help dispensaries avoid the worst case scenario.
While we recognize the critical importance of bank accounts, we urge people to be truthful and complete during the account opening process. There are legitimate ways around this problem, and no matter how valuable the account may be, it is nowhere near as valuable as your freedom.