On June 23, 2014, the U.S. Supreme Court clarified – and arguably expanded – the reach of the federal bank fraud statute. In Loughrin v. U.S., petitioner Kevin Loughrin challenged the lower court’s interpretation of the federal bank fraud statute as not requiring that the government prove that the defendant specifically intended to defraud a bank. The Supreme Court disagreed.
This case originated in the petitioner’s check fraud scheme orchestrated at a Target Store. The petitioner, while pretending to be a Mormon missionary, went door-to-door in a neighborhood in Salt Lake City, where he rifled through residential mailboxes and stole any checks he found. (Why nobody thought it suspicious that a purported Mormon missionary was (1) working a mission project without a partner, and (2) doing so in what is arguably the U.S. city least in need of conversion to the LDS faith, will be left for another day.) The petitioner would then make the checks out to the retailer Target for amounts of up to $250. His modus operandi was to go into a local Target, posing as the account holder, and present the altered check to a cashier to purchase merchandise. After the cashier accepted the check, the petitioner would leave the store and walk back inside to return the goods for cash. In each case, the checks presented to Target were drawn on an account at a federally insured bank.
The petitioner was charged with six counts of committing bank fraud – one for each of the six altered checks presented to Target. The statute that was charged provides: “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 more than 30 years, or both.” 18 U.S.C. § 1344. Against the petitioner’s objections, the trial court instructed the jury that it may convict the petitioner if it found that he had “knowingly executed or attempted to execute a scheme or artifice to obtain money or property from [banks on which the checks were drawn] by means of false or fraudulent pretenses, representations, or promises,” but the court did not instruct the jury, as the petitioner had requested, that the jury must also find that the petitioner acted with “intent to defraud a financial institution.”
The Court granted certiorari to address the question of whether section 1344(2) requires the government to show that a defendant intended to defraud a federally insured bank. The Court concluded that section 1344(2) requires only that the defendant intend to obtain bank property – or property held in the bank’s custody (such as customer deposits) – and intends to do so “by means of” a false statement. According to the Court, to read section 1344(2) as requiring that the defendant have the specific intent to defraud a bank, would ignore Congress’ use of the disjunctive “or” that separates section 1344(1), which does refer to a specific intent to defraud a bank, from section 1344(2), which does not require a showing of intent to defraud a bank.
The petitioner argued that reading section 1344(2) to require only intent to defraud and not intent to defraud a bank, would expand the application of section 1344(2) to every minor fraud in which the defendant happens to pay by check. This, the petitioner argued, would unduly expand the reach of federal criminal law into matters “squarely within the traditional criminal jurisdiction of the state courts.” The Court responded that section 1344(2) requires more than merely a fraudster making a false statement in furtherance of a scheme to obtain money from a bank. “The provision as well includes a relational component: The criminal must acquire (or attempt to acquire) bank property ‘by means of’ the misrepresentation.” According to the Court: “Section 1344(2)’s ‘by means of’ language is satisfied when, as here, the defendant’s false statement is the mechanism naturally inducing a bank (or custodian of bank property) to part with money in its control.” This may occur when a defendant makes a false representation to the bank itself, such as attempting to obtain cash at a teller’s window, or using a counterfeit check as the “means” of obtaining bank funds when a defendant offers the check to a third party, such as Target in this case. Additionally, the Court noted that in order for the crime to be complete, the bank does not necessarily have to suffer a loss.
One problem with the instructive value of the Court’s opinion is its guidance on the connection between the means of committing the alleged fraud and the bank. The Court stated: “§ 1344(2)’s ‘by means of’ language . . . demands that the defendant’s false statement is the mechanism naturally inducing a bank (or custodian) to part with its money.” (emphasis added) And later the Court noted: “[T]he text of § 1344(2) already limits its scope to deceptions that have some real connection to a federally insured bank, and thus implicate the pertinent federal interest . . . . And [the Petitioner’s] own crime, as we have explained, is one such scheme, because he made false statements, in the form of forged and altered checks, that a merchant would, in the ordinary course of business, forward to a bank for payment.” (emphasis added) This notion that a defendant would have to engage in conduct that “naturally” induces, or has “some real connection,” provides a somewhat amorphous standard for judges and juries. The Court noted that section 1344(2) was written broadly and “appears to be calculated to avoid entangling courts in technical issues of banking law about whether the financial institution or, alternatively, a depositor would suffer the loss from a successful fraud.” The standard that the Court has provided in this case appears to create the very technical issues of banking law that the Court suggested the statute was designed to avoid.
In addition to creating confusion for individual defendants facing prosecution under section 1344(2), the Court’s decision may also create some measure of confusion for bank compliance staff and in-house counsel. Under the Bank Secrecy Act, banks must file suspicious activity reports (SARs) when certain activity is detected. One trigger for a SAR filing is where the bank detects a “criminal violation” (generally understood to be a violation of federal criminal law), perpetrated against or through the bank, involving certain specific amounts of funds. For crimes where the suspect is attempting to defraud the bank, it will be clear that section 1344(1) is implicated and a SAR should be filed. However, where the suspect has attempted to defraud a third party using a check drawn on a bank, or a credit card issued by a bank – or where the property at issue is under the custody of a bank (regardless of whether the bank actually possesses it) – the compliance staff or counsel will have to determine whether there is a sufficient link between the bank property sought and the means of fraud utilized.
At the end of the day, the only ones who truly benefit from the Court’s decision in this case are federal prosecutors.
Whether it is compliance with bank regulatory reporting standards, or defending against federal bank fraud charges, engaging a legal team that is experienced in both federal criminal procedures and the labyrinth of banking laws is essential.
Travis P. Nelson is a member of Reed Smith’s Financial Services Regulatory Group, and a co-leader of the firm’s Financial Institutions Enforcement and Investigations Task Force, resident in the Princeton and New York offices. Travis is formerly an Enforcement Counsel with the Office of the Comptroller of the Currency, U.S. Treasury Department, and regularly represents clients in government enforcement actions. Travis is also adjunct faculty at Villanova Law School, where he teaches Financial Institutions Regulation, and is the editor-in-chief of the ABA’s Banking Law Committee Journal.