General Practice, Solo & Small Firm DivisionMagazine

Volume 17, Number 6
September 2000



By John K. Villa

Banking-related crime is divided into two groups. The first is composed of traditional banking crimes and their modern cousins that prohibit fraud or other crimes in which the financial institution is the victim. These crimes include bank robbery, false statements to a bank in order to obtain a loan, misapplication or embezzlement of bank funds, false entries in a bank’s books, bank bribery, and bank fraud. These crimes have one common thread: The bank or financial institution is the victim, not the perpetrator, of the criminal conduct.

These traditional crimes are distinguished from the new breed of federal criminal statutes that prohibit and punish the financial institution for allowing itself to be used as the middleman to effectuate or camouflage the criminal conduct of others. Unlike traditional banking crimes, these new crimes focus on the financial institution as the perpetrator, not the victim, of the criminal conduct.

The impetus for criminalizing conduct by financial institutions was the inflow of drug money into the banking system in the early 1980s, which resulted in the money-laundering statutes. These statutes heralded a change in the federal law-enforcement attitude toward financial institutions. Now the government’s law-enforcement goals were not only to protect these institutions but also to punish those that facilitated, even through routine business transactions, the suspected criminal conduct of their customers. The money-laundering statutes have been expanded to prohibit knowingly handling the proceeds of nearly every kind of criminal conduct, to the extent that financial institutions are required to refrain from knowingly doing business with nearly anyone who derives proceeds from any form of illegal activity.

At about the time that the money-laundering statutes app-eared in the mid-1980s, the savings and loan crisis exploded, which led to an overhaul of the federal criminal statutes governing federally insured financial institutions. The two lasting effects were to increase the maximum penalties for banking-related offenses—from five years to 30 years—and to enact the modern bank fraud statute.

One way to analyze the traditional banking criminal statutes is to divide them based on the status of the alleged perpetrator—is the person an insider or not? In some instances, the fraud is perpetrated by an insider working with a non-insider. The lines then become blurred, and the non-insider can be charged with conspiring with or aiding and abetting the insider. Most statutes do not include the term "insider," but the relevant statutes are generally deemed to encompass any director, officer, employee, agent, and (occasionally) lawyer of a financial institution. Any person who conspires with, or aids and abets, an insider generally will also be subject to these statutes. The statutes most often applied to insiders are the bank bribery statute, the misapplication and embezzlement statutes for banks and thrifts, and the false-entry statutes for banks and thrifts.

The bank bribery statute is violated by an insider who solicits or demands, or accepts or agrees to accept for himself or another, a bribe intending to be influenced or rewarded in connection with the business of the bank. Conversely, it also violates the statute for anyone to give, offer, or promise a bribe to a bank insider with the intent to influence or reward the insider in connection with the business of the bank. The pivotal issue in most bribery prosecutions is whether the intent behind the payment was to influence the bank officer.

The misapplication and em-bezzlement statutes have caused problems for the Justice Department. Both embezzlement and misapplication require an intent to injure or defraud the bank. Embezzlement is the fraudulent taking of property by a person to whom the property has been entrusted or into whose hands it has lawfully come. Misapplication is the conversion of bank funds by an insider to his or her own use or that of another, other than the bank, with the intent to injure or defraud the bank. Its ambiguous nature, coupled with the necessity of proving that the defendant intended to "injure or defraud" the bank, proved to be a flaw that was exposed as the S&L crisis developed. Trying to prove a motivation to injure or defraud the bank may be difficult unless the prosecutor can show personal gain or false statements.

Many of the most serious problems uncovered in the S&L crisis involved insiders who phonied the books to make a sick financial institution appear healthy. That was often accomplished by buying uncollectible loans out of the bank with the proceeds of new, and probably equally uncollectible, loans before the bank examiners arrived. While this practice may result in obscuring the extent of the bank’s losses, it arguably does not injure or defraud the bank itself. Many insiders made a plausible argument that their real intent was to help the bank.

The statutes prohibiting false entries in the books of a bank or thrift are the last of the major bank statutes to apply to insiders. Like the misapplication and embezzlement statutes, the key is that the insider must have been motivated by an intent to injure or defraud the bank. Ordinarily, false-statement crimes were committed by insiders to cover up their primary criminal conduct.

The two primary non-insider banking criminal statutes are the false statement statute and the bank robbery statute. The false-statement statute prohibits false statements in loan applications, and providing false information about the collateral for a loan. Most important for business lawyers, the statute could reach representations and warranties in loan agreements and may subject the person making the representation or warranty to criminal liability if it was made with knowledge that the statements were untrue. This statute prohibits false statements and does not require fraud. Even if the bank did not actually rely on the false statement in the loan application, a crime may have been committed. The bank-robbery statute not only prohibits armed robberies, it also extends to entering a bank with the intent to commit a felony.

The bank-fraud statute is patterned after the mail- and wire-fraud statutes. Bank fraud is defined as any scheme or artifice to defraud a financial institution, or to obtain money or property owned by, or under the custody or control of, the financial institution by means of false or fraudulent pretenses. Unlike the mail- and wire-fraud statutes, the government need only show that the victim of the fraud was the financial institution. It applies to insiders, customers, and even vendors to banks.

The following examples identify common fact patterns found in either insider or non-insider bank crime cases:

• False-credit application. The statement can range from misstating the applicant’s current financial condition, denying a poor credit history, inflating the value of the collateral for the loan, or even misstating the purpose for the loan.

• Kickback or bribe.

• "Dead-horse-for-a-dead-cow" or "cash for trash." These involve a form of deferring and hiding weaknesses in loans that may result in greater losses if the financial institution continues to deteriorate.

• Hidden interests, which involve directing transactions between the bank and an outside company that is secretly controlled by the bank insider.

• Embezzlement from customer or trust accounts.


John K. Villa is a partner at Williams & Connolly LLP, in Washington.


This article is an abridged and edited version of one that originally appeared on page 32 of Business Law Today, May/June 2000 (9:5).

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