In January, we blogged on the Southern District of New York sentencing of Danske Bank to three years of probation and a forfeiture of $2.059 billion. As we noted at the time, the bank was charged with bank fraud, rather than violation of the Bank Secrecy Act (“BSA”), even though the “heart of the criminal case” was Danske Bank’s concealment (now acknowledged via plea) of its own AML failures in its dealings with three U.S. banks, thus impacting their own compliance with the BSA.

This was, of course, not the first time that the Department of Justice (“DOJ”) has used bank fraud charges instead of proceeding under the BSA in dealing with a foreign bank.  Indeed, the pending case against Turkish bank Halkbank involves in part bank fraud charges.

But DOJ may be forced to reconsider tactics soon: The Supreme Court’s decision earlier this month in Ciminelli v. United States, et al., which addressed and ultimately voided the Second Circuit’s longstanding “right to control” theory of fraud as a basis for liability under the federal wire fraud statute, could have ramifications for DOJ’s approach using the similarly structured bank fraud statute.

The Ciminelli Decision

Ciminelli dealt with a scheme involving state government lobbyists and a New York construction company owned by Louis Ciminelli (“Ciminelli”), who together worked to ensure that the company received preferential treatment from New York’s “Buffalo Billion” initiative, an investment program administered through a nonprofit affiliated with the State University of New York (“SUNY”) that aimed to invest a billion dollars in upstate development projects. Essentially, Ciminelli’s company allegedly paid to ensure that the lobbyists would tailor any requests for proposal (“RFPs”) issued by the program to Ciminelli’s company’s candidacy, and guarantee it preferred status for development funds.

The individuals involved were indicted on 18 counts, including wire fraud (18 U.S.C. § 1343). The wire fraud statute reads in relevant part: 

Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises[.]

For comparison, importantly, the bank fraud statute (18 U.S.C. § 1344) reads:

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[.]

When prosecuting the case, DOJ relied on the “right to control” theory of fraud enshrined in Second Circuit precedent – allowing a prosecutor to establish wire fraud “by showing that the defendant schemed to deprive a victim of potentially valuable economic information necessary to make discretionary economic decisions.” Consistent with that theory, the jury was provided with two key instructions on application of the statute:

  • that Section 1343’s use of the term “property” “includes intangible interests such as the right to control the use of one’s assets[,]” and that the jury could find that defendants harmed this right if the nonprofit was “deprived of potentially valuable economic information that it would consider valuable in deciding how to use its assets”; and further
  • that “economically valuable information” is defined as “information that affects the victim’s assessment of the benefits or burdens of a transaction, or relates to the quality of goods or services received or the economic risks of the transaction.”

On appeal, Ciminelli argued that the “right to control one’s assets” is not “property” for purposes of the wire fraud statute. The Second Circuit affirmed his conviction, holding that “by rigging the RFPs to favor their companies, defendants deprived [the nonprofit] of potentially valuable economic information.”

The Supreme Court simply wasn’t buying it. Writing for a unanimous Court, Justice Thomas invalidated the right-to-control theory as a valid basis for liability under 18 U.S.C. § 1343. Beginning with the text of the statute, Justice Thomas notes that “[a]lthough the statute is phrased in the disjunctive” – i.e., it seems to distinguish between schemes “to defraud” on the one hand and “for obtaining money or property by means of false or fraudulent pretenses, representations, or promises” on the other – the Court has “consistently understood” the “money or property” requirement as a limitation on the “scheme to defraud” element. Thomas goes on to state that “the fraud statutes” (notably, not cabining this to Section 1343 only) “do not vest a general power ‘in the Federal Government . . . to enforce (its view of) integrity in broad swaths of state and local policymaking[,]’” (quoting Kelly v. United States, 590 U.S. ___, ___ (2020)), but “[i]nstead . . . ‘protec[t] property rights only’” (quoting Cleveland v. United States, 531 U.S. 12, 19 (2000)).

After reviewing the evolution of the right-to-control theory, Justice Thomas declares that it “cannot be squared with the text of the federal fraud statutes” (again, not limiting the declaration to wire fraud) “which are ‘limited in scope to the protection of property rights.’” Ciminelli, slip op. at 6 (quoting McNally v. United States, 483 U.S. 350, 360 (1987)). Justice Thomas concludes by quoting DOJ’s concession as the nail in the coffin of the theory: “[if] the right to make informed decisions about the disposition of one’s assets, without more, were treated as the sort of ‘property’ giving rise to wire fraud, it would risk expanding the federal fraud statutes beyond property fraud as defined at common law and as Congress would have understood it” – a statement which Justice Thomas says displays agreement that the right-to-control theory “is unmoored from the federal fraud statutes’ text.” Ciminelli, slip op. at 7. Again, given the opportunity to confine his critique of the theory to the statute at issue, Thomas instead chooses to refer to the fraud statutes collectively.

Broader Implications?

The parallels with the theory of harm underlying the Danske Bank plea should be apparent. In concealing its AML failures in its (successful) efforts to obtain correspondent bank accounts at major U.S. banks, Danske Bank did not fraudulently obtain moneys or other actual property from those banks; instead, it deprived those banks of information that “affect[ed] [the banks’] assessment of the benefits or burdens of a transaction, or relate[d] to . . . the economic risks of the transaction” – namely, that going into business with Danske Bank was exposing those banks to potential BSA liability.

There are, to be sure, some significant distinctions between Section 1343 and Section 1344. Perhaps most importantly in light of Ciminelli’s stated concerns about excessive federalization of criminal law regarding fraud, Section 1344 deals with “some real connection to a federally insured bank, and thus implicates a pertinent federal interest.” Loughrin v. United States, 573 U.S. 351, 366 (2014). Indeed, Justice Kagan noted in Loughrin that “Congress passed the bank fraud statute [in 1984] to disapprove prior judicial rulings and thereby expand federal criminal law’s scope[.]” Id. at 360 (emphasis in original).

The context of the statute’s drafting also would lead to a very different original public meaning analysis than that conducted by Justice Thomas in Ciminelli; prosecutors could make a compelling argument that, by the 1980s, the public understanding of “schem[ing] to defraud” a bank extended to more sophisticated operations than a fraudster simply trying to acquire its funds.  Further, Section 1344(1) seperately breaks out the “scheme to defraud” prong from the “money or property” prong in Section 1344(2), thereby suggesting that Congress intended Section 1344(1) to have a broader meaning.

As an example, the Model Criminal Jury Instructions for the Ninth Circuit regarding Section 1344(1) define a “scheme to defraud” as follows (emphasis added):

[A]ny deliberate plan of action or course of conduct by which someone intends to deceive or cheat a financial institution and deprive it of something of value. It is not necessary for the government to prove that a financial institution was the only or sole victim of the scheme to defraud. It is also not necessary for the government to prove that the defendant was actually successful in defrauding any financial institution. Finally, it is not necessary for the government to prove that any financial institution lost any money or property as a result of the scheme to defraud.

Under Ciminelli, may the “something of value” include complete and accurate information from the defendant to a bank regarding the full AML risks related to conducting business with the defendant, so that the bank may run an adequate and risk-based BSA compliance program – consistent with the goals of the federal government to protect the U.S. financial system?  Or, must the “something of value” involve property?  Or, will DOJ now try to construct arguments that banks somehow suffer tangible property loss as a consequence of being misled as to AML risks?  In the absence of regulatory fines imposed upon a bank, that argument may be difficult to maintain.

The Court’s emphasis in Ciminelli on property rights as the foundation of the fraud statutes, and its unwillingness to consider the deliberate deprivation of potentially valuable economic information as a violation of those rights, has created a new repository of troublesome (and eminently quotable by appellants) case law for federal prosecutors seeking to go after future bad actors in the Danske Bank mold. DOJ will need to prioritize analysis of the merits and pitfalls of continuing in this strategic approach to financial crime enforcement, versus testing the jurisdictional limits of the BSA with regard to foreign banks.

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