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The Developing History of America’s Bank Fraud Crime Control

Updated: Aug 3, 2022

Tan YingMao Financial Law Research Center of Peking University


Before the late 1970s, the US government did not take bank fraud seriously. The laws dealing with bank fraud mainly reflected two aspects: first, a series of laws against bank fraud is formulated in some single-line banking laws. For instance, theft, larceny, burglary, embezzlement, illegal recording, and tampering of account books by insiders, in addition to false statements, etc; secondly, using mail and wire fraud laws to deal with bank fraud crimes. These laws are valid against traditional bank robbery, corruption, embezzlement, fabrication of data to undergo loan fraud, and more. However, with the increase in crimes from white-collar workers through the 1970s, the means of many crimes has already surpassed the specified range of the original laws, and the US has been struggling in controlling bank fraud crimes. The Williams case from the early 1980s has fully proven the flaws in the legislation.

1. There is no law present to deal with Bank Fraud

Williams is the manager of a bank — Bank A. At that time, banks already opened a kind of “empty shell accounts” (dummy accounts), where sometimes, these empty accounts can be used temporarily to help some customers when they have some short-term overdrafts. Williams is in charge of managing these dummy accounts. However, in these three years, he used his authority and wrote several empty checks that were worth around $58,000. To cover the overdrafts and prevent exposure, Williams thought of a way to break the east wall and mend the west wall. He used $4,600 to open an account in Bank B and then wrote a $58,500 check using the new account, giving it to Bank A to cover the loss in his dummy account. But now, Bank B would soon discover that he wrote an overdraft check, so he opened another account at Bank A and wrote a $60,000 check to Bank B. To cover the overdraft that occurred at Bank A, Williams used the same tactic again and opened an account at a third bank, writing a $65,000 check to deposit to his account in Bank A. Like so, successive overdraft checks are being written and circulated between different banks. At last, this check was rejected and returned by that bank. This whole chain broke down and William is sued.

This case is an example of a rather representative type of overdraft check, where perpetrators are performing successive overdrafts in different banks(check-kiting). Under the law during that time, the prosecutor can prosecute both of the acts mentioned above. However, the checks themselves were not cleared by mail and were not fully cleared through wire transfer; thus, there is no way to prosecute the defendant based on mail and wire transfer laws. Therefore, the persecuted prosecuted the defendant for “misrepresentation” under the associated law (18 USC section 1014). During the persecution, this so-called “misrepresentation” was challenged by the judges because it’s appropriate when prosecuting criminals who provided false documents to commit loan frauds, not necessarily for Williams's case. The Supreme court held that: a check is only an order directing the bank to pay a certain amount according to the check and if the bank refuses to pay, then the drawer is responsible for the payment. There are no “right” or “wrong” checks. Thus, even if the defendant wrote some checks without sufficient money in the account, it does not count as “misrepresentation”. The defendant was acquitted.

The Supreme Court has a lot of power in hand, so their decision must be followed, and this situation is extremely detrimental for banks. Several similar cases were about to be prosecuted for the same “misrepresentation” reason, but due to The Supreme Court's ruling, they had to be abandoned. Looking at it now, once these over-drafting tricks reach a certain number, it should be counted as a typical crime. However, 20 years ago, the U.S. law was experiencing lots of empty vacuum against bank fraud and nothing could be done to stop them.

Also, in the early 1980s and onwards, there were lots of crimes committed by workers inside saving and loan institutions(credit and loan); thus, causing the “saving and loan crisis” that shocked the U.S. in the late 1980s, causing American taxpayers to lose tens of billions of money. Looking at some of the legislation during the time, these “saving and loan institutions” did not fall within the legal range and definition of “financial institutions” and couldn't be subject to the existing laws. In addition, in terms of penalties, there were too few applicable laws to serve as a deterrent, so these crimes could not be effectively dealt with.

2. The Introduction and Provision of the Legislation to Control Bank Fraud Crimes

The Comprehensive Crime Control Act of 1984 was approved by the US Congress in 1984 due to the strong call from industry insiders. This act encompassed a broad scope, in which two aspects held great importance. One part of the aspect stood against bank fraud provisions, this part was later known as the “Bank Fraud Act,” codified in the United States Code (section 1344). The other aspect is the “Sentencing Reformation Act,” per this act, the “Federal Sentencing Guideline” was issued.

The introduction of this act had far-reaching significance. For the first time, it lists financial institutions as the object of crime and with this, there is no need to depend on other law provisions to punish the criminals, there is no need to be limited to restrictions from legal texts. It also encompasses savings and credit institutions in its protection range, therefore, becoming an effective tool against bank fraud crimes. Since the introduction of this Act, numerous lawsuits have been filed under provisions involving bad checks, check forgery, loan fraud, ATM card fraud, credit card fraud, embezzlement, theft by bank employees, etc.

“The Federal Sentencing Guidelines” not only increased the sentencing range of bank fraud crimes with 1-year imprisonment for misdemeanors and 5 years for felony crimes but at the same time, specifies how to carry out sentences, which greatly deprives judges of their discretion.

After introducing this Act, the US issued again the famous “Financial Institution Reform, Recovery, and Enforcement Act of 1989,” this act primarily targets people from savings and credit institutions for crimes. In the late 1980s, many savings and credit institutions closed down due to crimes committed by insiders, causing a loss of around 50 to 140 billion dollars. In response, the Bank Fraud Act was perfected. (1) Under this act, investigation and prosecution of bank fraud have greatly strengthened. The government has also distributed 75 million dollars to enhance the investigation and prosecution agency and added 200 FBI agents and 118 judicial officers. (2) The original Bank Fraud Act had a relatively low sentence, with a fine of no more than 1,000 yuan and a prison term of no more than 5 years, while the new law has increased the range of sentencing, increasing the maximized fine to 1 million yuan. The maximum time for imprisonment has been increased to 20 years, and in correspondence, the Federal Sentencing Guidelines have been revised to have a more detailed regulation on sentencing. (3) The criminal activities carried out by managers, directors, and other people responsible for the mismanagement of the bank are also regulated. Originally, these people could escape responsibility for bank failure due to mismanagement, but after the promulgation, even if these staff has resigned, they can be held accountable.

Not even a year later, Congress legislated the “Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery Act of 1990”, and enacted the corresponding “Sentencing Guidelines.” Under the bill, in general circumstances, the maximum sentence has been increased from 20 to 30 years. At the same time, the "Sentencing Guidelines" specify that, at the time of sentencing, for every $1 million increase in the amount of fraud, the sentence will increase by 51-63 months. Furthermore, the bill also specifically stipulates that if the crime involves more than 4 people and the amount defrauded reaches $5 million within two years, the minimum sentence is 10 years and the maximum can be life imprisonment. In addition to imprisonment and confiscation of property, further fines can be imposed on criminals.

3. The precaution, regulation, and law enforcement of bank fraud

Since the enactment of these laws, the main task of the U.S. government has been to implement these laws and go against various financial fraud activities since the 1990s. According to the act, the U.S. government took a series of actions. Firstly, encouragement to report, if individuals testified in court and brought criminals to justice, then this individual can receive a reward of up to $100,000. In the meantime, informants could be rewarded based on the final confiscation amount of criminals’ property. Up to 30% for amounts under one million dollars, 20% for amounts between two and four million dollars, and 10% for amounts between five and ten million dollars. That is to say, if ten million dollars of criminals’ property was confiscated, the informant could receive rewards ranging from $850,000 to 1.6 million dollars.

Given that the U.S. government remains severely understaffed, the act also allows private prosecution or allows private lawyers that were hired by the Department of Justice, to assist the government with relevant cases in the form of charging the contingent fee, which can be up to 30%. Besides, the Department of Justice, which is responsible for executing procuratorial and prosecution works, established “the Office of Special Counsel on Financial Institution Fraud”, it was established in 1990 until its closure in 1995, this office was responsible for prosecuting criminal cases that are related to fraud of financial institutions. Among these financial frauds, 30% of the cases involved the internal bank staff. Among the prosecuted bank executives and directors, 97.5% of them were convicted. Of the prosecuted bank general managers and presidents, 95.1% of them were convicted, property worth 2.9 billion dollars was recovered, and 44 million dollars were fined.

In the aspect of precaution and regulation, regulatory agencies gradually shifted their focus from punishment to precaution and regulation in advance. In 1996, the U.S. treasury, Federal Reserve Board, Federal Deposit Insurance Companies, and five other agencies responsible for bank regulations jointly published a rule requiring banks to report suspicious activities using a uniform “Suspicious Activity Report.” At the same time, the Financial Crime Enforcement Network was established under the Treasury Department, to which every bank submits its reports. According to different situations, the network would distribute the reports to associated agencies. However, this rule does not apply to bank insider fraud; thus, the Office of Comptroller of Currency designed and assigned the “Fast Track Enforcement Program”, specifically focusing on crimes committed by bank insiders that the prosecution system does not or will not prosecute. Thereby, if a bank worker, manager, director, or majority shareholder commits an act within a bank and there is substantial evidence showing that the act elevates to a level of crime, then, the Bureau of Currency Control can bring up charges and seek restitution from them. On the other hand, if the person admits their responsibility for the crime, the bank lost $5,000 or more, and the prosecutor did not file the case, in this circumstance, the U.S. Office of Comptroller may also take the measures listed above.

Even in a country with a well-established judicial system like the US, there are still loopholes in the legislation. From the very beginning, the laws of criminal practice were lagging, and there are many legal vacuums, making it impossible to rely on when dealing with bank crimes. At the same time, we also noticed that the legislation is constantly being improvised with the development of situations, there is no perfect legal system that can be achieved in just one night. The US issued the “Bank Fraud Act” in 1984, however, the failure of America’s “Saving and Loan Association” caused an enormous loss to American taxpayers. In this circumstance, it is necessary to adjust the existing laws, increase the range of sentencing, and expand targets, especially to punish those bank managers that are directly responsible for the failures of the “Savings and Credit Institution,” therefore, the US promulgated the “Financial Institutions Reform, Restoration, and Enforcement Act” again in 1989, allowing the legislation to adapt to the development of situations.

In terms of law enforcement, there is a bank regulator on one side to take preventative measures at implementing timely monitors, timely processing, and establishing a special prosecution agency against bank frauds; it should be said that these measures are more effective. As seen now, these new technological advancements and the popularity of computer and internet technology have brought out new problems. The U.S. federal banking regulators have issued several mechanisms for making adjustments regarding banks opening businesses on the internet to prevent new fraud. However, some institutions other than banks open bank-like businesses online, which again, there is a regulatory vacuum, and it is really easy for criminals to exploit these loopholes. In addition, some international scammers falsify relevant documents, and certificates and participate in international fraudulent activities; these have raised the challenge of international cooperation and joint prevention of bank fraud. Listed above are the two currently emerging issues in the U.S. regarding bank fraud, but it also pushes the U.S. bank fraud legislation, law enforcement, and judicial aspects to continue to improve and develop with the changing situations.

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