SCOTUS rules in favor of government in murky bank fraud case
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Defrauding anyone is bad, but defrauding a bank is particularly bad. 

In 1984, Congress passed the Bank Fraud statute.  Section 1 of the statute makes it a federal crime, subject to imprisonment of up to 30 years, to “knowingly execute … a scheme to defraud a financial institution.”      

Congress, however, cannot anticipate everything, and the words of a statute may be clear in one context but unclear in another. What happens if a fraudster targets a bank customer, not the bank itself, and the customer, but not the bank loses money as a result? 

Is that ordinary theft under state law, or has the fraudster violated a federal law designed to protect financial institutions?

That was the issue in Shaw v. United States, which the Supreme Court decided yesterday.  While working in the United States, a Taiwanese businessman opened an account at a U.S. bank. 

When he returned to Taiwan, he made a costly mistake -- he arranged for the daughter of one of his employees to receive his mail and forward it to him.  Lawrence Eugene Shaw, who lived with the daughter, opened the mail, obtained the businessman’s account and personal information, created false documents, and transferred $307,000 to himself over a five-month period. 

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The customer bore $170,000 of the loss because he failed to notify the bank within 60 days. The bank did not suffer any loss. 

Shaw was, nevertheless, convicted of federal bank fraud, and yesterday the Supreme Court unanimously held that a fraud against the customer could be viewed as a fraud against the bank.

How did the Court reach a result that one who thinks he is defrauding a customer is “knowingly” defrauding a financial institution, which is what the statutory language requires? 

First, the Court pointed out that a bank had an interest in the property that Shaw stole because banks are in the business of lending out the money that customers deposit.  At a minimum, banks have a “possessory” interest in their customers’ deposits. 

Like most thieves, however, Shaw was not a student of banking or property law, and there was no proof that he had any idea that the bank had a property interest in its customers’ deposits.  The fact that the bank had such a property interest did not answer whether Shaw “knowingly” defrauded the bank of the bank’s property interest.

Ultimately, the Court held that the government did not have to prove that Shaw knew he had defrauded the bank of property in which it had an interest.  It was enough that Shaw knew he was making false statements to a bank and that he believed, correctly, that those false statements would lead the bank to release the funds that ended up in his pocket. 

These facts, the Court said, “are sufficient to show that Shaw knew he was entering into a scheme to defraud the bank even if he was not aware of the niceties of bank-related property law.”  In a statement with which we can all agree, the Court said that it would be arbitrary for criminal liability for federal bank fraud to depend on the defendants’ expertise in property law. 

Its prior fraud-related cases, the Court added, asked “only whether the targeted property was in fact property in the hands of the victim, not whether the defendant knew that the law would characterize the items at issue as ‘property.’”

Had it been so inclined, the Court could have reached the opposite result.  For example, it could have found that “knowingly” in the Bank Fraud statute can fairly be read as requiring the defendant to know that the fraud was directed at a financial institution, or held that in a criminal case the “rule of lenity” required that ambiguities in the language of a statute be resolved in the defendants’ favor, or pointed to legislative history suggesting that the Bank Fraud statute was designed to protect financial institutions, not customers.  

Prior to Shaw, some lower courts did just that.  Under those cases, Shaw could still have been prosecuted, but under state anti-theft laws rather than federal banking law.

The Supreme Court, however, chose a different path.  Under Shaw, someone who knowingly deceives a bank to defraud a customer is subject to a possible 30-year prison term, and that’s true regardless of whether the bank loses a penny and even if the fraudster is focused exclusively on the customer.  

 

Jon Eisenberg is a partner at K&L Gates' Washington, D.C. office. He focuses on representing financial institutions and individuals in enforcement matters, litigation and internal investigations.


The views expressed by contributors are their own and not the views of The Hill.