The Crime of Bank Fraud, and the Question of Intent

Nkansah and his coconspirators perpetrated a scheme whereby they stole personal information from real people and used that information to submit tax returns with falsified income and address information. As a result, they received tax refund checks made out to the names of the individuals whose identities they had stolen. Then, the conspirators used forged identifications to open bank accounts in their names, falsely endorsed the checks in the names of the payees, deposited them into the bank accounts, and withdrew the proceeds.

Without question, the conduct in Nkansah was criminal. Similarly, there is no question that Nkansah had an intent to defraud when he and his coconspirators opened bank accounts with stolen identities and deposited fraudulently obtained checks into those accounts. But Nkansah argued on appeal that there was insufficient evidence that he had the required specific intent to defraud the banks, and the Second Circuit agreed.

The court held that the government failed to prove that the defendant intended to expose the banks to losses; absent such proof, the bank fraud convictions must be vacated. Interpreting Second Circuit precedent, the court stated that without direct proof of fraudulent intent to harm the banks, the government could rely on circumstantial evidence that Nkansah intended to victimize the banks. In this case, the government identified two categories of such evidence, but the court rejected both.

First, it held that evidence that the defendants discussed which banks would be least likely to detect the scheme was insufficient to establish intent. As the court observed, wishing to evade detection by the banks did not establish that the defendants wished to harm the banks; it merely showed that they wished to avoid discovery of their crime.

Second, the court rejected the bank's claimed exposure to potential losses as sufficient proof. In this regard, it concluded that the specifics of whether the banks would ultimately bear any loss from the scheme or whether any loss would fall entirely on the United States Treasury was too murky to constitute proof of the defendants' intent. Because the court focused strictly on whether Nkansah specifically intended to expose the bank to losses, it rejected the circumstantial proof offered because there was “no clear, much less well-known, exposure of the banks to loss.” Thus, this case was distinguished from those where defendants fraudulently sought to cause a bank to pay out to the defendant some of a depositor's account in that bank (e.g., by cashing a forged check), where the court believed “the direct legal exposure to losses is sufficiently well-known.” In other words, the court ruled that “the widely understood exposure of a bank in such a case is only a fact sufficient to support an inference of the requisite state of mind. Someone may well forge a check believing that only the account holder will suffer a loss. The inference is, therefore, not mandatory, but permissible. Such a permissible inference cannot be extended to cases in which the evidence of the state of mind is absent and the actual exposure of a bank to losses is unclear, remote, or non-existent.”

Conclusion

The upshot of the Second Circuit's holding is that the critical focus remains on the defendant's state of mind with respect to who he believes will be harmed by his crime, with the exposure of the banks to loss assuming a less important role. That position is somewhat controversial and not intuitive, because prosecutors and courts often reject a defendant's attempt to rely on an innocent state of mind in favor of circumstantial evidence of fraudulent intent. What comes to mind is the hypothetical defendant who insists that he did not intend to harm a bank by a forgery or false statement because he intended to take action to rectify his fraud or cover the exposure before the bank could experience a loss. At first blush, that defense seems specious and unlikely to succeed; by placing such emphasis on the actual intent of the defendant and deemphasizing the importance of the bank's exposure to loss, however, the Second Circuit seems to leave the window open to similar possible defenses.

Perhaps for this reason, Judge Gerard E. Lynch wrote separately in a vigorous concurrence, conceding that reversal was required by the Second Circuit's prior holdings, but heatedly arguing that the court's interpretation was “predicated on an unwarranted and unwise judicial injection of an offense element that has no basis in the statute enacted by Congress.” The concurrence pointed out that the requirement that the defendant specifically intend to harm the bank that he deceived into paying him is nowhere to be found in the statutory language itself. And it also observed that it is unsurprising that proof of specific intent to harm the bank was lacking in Nkansah, because, as with many bank-fraud schemes, Nkansah's intent was to profit by obtaining money from the bank rather than to inflict loss on any particular victim.

As noted in the concurrence, there has been much litigation about the intent requirement of the bank fraud statute, and the federal courts do not agree about its interpretation. Some circuits, like the Second Circuit, hold that an intent to harm the bank (or at least expose it to risk) is required. See, e.g., United States v. Odiodio, 244 F.3d 398, 401 (5th Cir. 2001); United States v. Davis, 989 F.2d 244, 246-47 (7th Cir. 1993). One court has held that an intent to defraud (but not to harm) is required. United States v. Kenrick, 221 F.3d 19, 26-29 (1st Cir. 2000). Another has required intent to victimize (where the bank is the target of deception) but not an intent to harm. United States v. Leahy, 445 F.3d 634, 647 (3d Cir. 2006). The Sixth Circuit focused more on the fraud element, and held that it is sufficient if in the course of committing fraud on someone (not necessarily the bank) a bank is caused to transfer funds under its control. United States v. Everett, 270 F.3d 986, 990 n.3 (6th Cir. 2001).

Obviously, the precise parameters of the intent requirement are in dispute. In fact, the concurrence in Nkansah directly invites the U.S. Supreme Court to resolve the circuit conflict and reject the Second Circuit's rule.

Until a resolution, the application of the bank-fraud statute in any particular case is debatable, even when the conduct is undeniably criminal. The lack of clarity leaves room for defendants to avoid bank-fraud charges even when they utilize banks in fraud schemes. In light of this uncertainty, prosecutors may turn to federal mail- and wire-fraud charges, either instead of, or in addition to, bank-fraud charges in order to insulate against these attacks. It remains to be seen whether creative arguments will be made to somehow extend the concept from the bank-fraud cases ' regarding the specific intent directed at the banks ' to the mail and wire elements of these other statutes.

Laura Grossfield Birger, a member of this newsletter's Board of Editors, is a partner in the New York office of Cooley LLP.

White-collar crimes tend to turn on issues of knowledge and intent. The question is rarely whether a particular e-mail was sent or a transaction occurred; it is whether an individual intended to defraud someone in the process. For that reason, the question of precisely what kind of fraudulent intent is necessary for a prosecution is particularly important. Frequently, prosecutors rely on circumstantial proof of general fraudulent intent. Thus, proof of deceptive or evasive conduct is often offered ' and is deemed sufficient ' to meet the prosecution's burden.

In a recent case, however, the U.S. Court of Appeals for the Second Circuit underscored that plainly fraudulent conduct is not always sufficient to satisfy the strictures of particular federal statutes. In the case of bank fraud, the Second Circuit has previously interpreted the federal statute to require specific intent to harm a financial institution. That holding was put to the test recently in United States v. Nkansah , 699 F.3d 743 (2d Cir. 2012).

United States v. Nkansah

Nkansah and his coconspirators perpetrated a scheme whereby they stole personal information from real people and used that information to submit tax returns with falsified income and address information. As a result, they received tax refund checks made out to the names of the individuals whose identities they had stolen. Then, the conspirators used forged identifications to open bank accounts in their names, falsely endorsed the checks in the names of the payees, deposited them into the bank accounts, and withdrew the proceeds.

Without question, the conduct in Nkansah was criminal. Similarly, there is no question that Nkansah had an intent to defraud when he and his coconspirators opened bank accounts with stolen identities and deposited fraudulently obtained checks into those accounts. But Nkansah argued on appeal that there was insufficient evidence that he had the required specific intent to defraud the banks, and the Second Circuit agreed.

The court held that the government failed to prove that the defendant intended to expose the banks to losses; absent such proof, the bank fraud convictions must be vacated. Interpreting Second Circuit precedent, the court stated that without direct proof of fraudulent intent to harm the banks, the government could rely on circumstantial evidence that Nkansah intended to victimize the banks. In this case, the government identified two categories of such evidence, but the court rejected both.

First, it held that evidence that the defendants discussed which banks would be least likely to detect the scheme was insufficient to establish intent. As the court observed, wishing to evade detection by the banks did not establish that the defendants wished to harm the banks; it merely showed that they wished to avoid discovery of their crime.

Second, the court rejected the bank's claimed exposure to potential losses as sufficient proof. In this regard, it concluded that the specifics of whether the banks would ultimately bear any loss from the scheme or whether any loss would fall entirely on the United States Treasury was too murky to constitute proof of the defendants' intent. Because the court focused strictly on whether Nkansah specifically intended to expose the bank to losses, it rejected the circumstantial proof offered because there was “no clear, much less well-known, exposure of the banks to loss.” Thus, this case was distinguished from those where defendants fraudulently sought to cause a bank to pay out to the defendant some of a depositor's account in that bank (e.g., by cashing a forged check), where the court believed “the direct legal exposure to losses is sufficiently well-known.” In other words, the court ruled that “the widely understood exposure of a bank in such a case is only a fact sufficient to support an inference of the requisite state of mind. Someone may well forge a check believing that only the account holder will suffer a loss. The inference is, therefore, not mandatory, but permissible. Such a permissible inference cannot be extended to cases in which the evidence of the state of mind is absent and the actual exposure of a bank to losses is unclear, remote, or non-existent.”

Conclusion

The upshot of the Second Circuit's holding is that the critical focus remains on the defendant's state of mind with respect to who he believes will be harmed by his crime, with the exposure of the banks to loss assuming a less important role. That position is somewhat controversial and not intuitive, because prosecutors and courts often reject a defendant's attempt to rely on an innocent state of mind in favor of circumstantial evidence of fraudulent intent. What comes to mind is the hypothetical defendant who insists that he did not intend to harm a bank by a forgery or false statement because he intended to take action to rectify his fraud or cover the exposure before the bank could experience a loss. At first blush, that defense seems specious and unlikely to succeed; by placing such emphasis on the actual intent of the defendant and deemphasizing the importance of the bank's exposure to loss, however, the Second Circuit seems to leave the window open to similar possible defenses.

Perhaps for this reason, Judge Gerard E. Lynch wrote separately in a vigorous concurrence, conceding that reversal was required by the Second Circuit's prior holdings, but heatedly arguing that the court's interpretation was “predicated on an unwarranted and unwise judicial injection of an offense element that has no basis in the statute enacted by Congress.” The concurrence pointed out that the requirement that the defendant specifically intend to harm the bank that he deceived into paying him is nowhere to be found in the statutory language itself. And it also observed that it is unsurprising that proof of specific intent to harm the bank was lacking in Nkansah, because, as with many bank-fraud schemes, Nkansah's intent was to profit by obtaining money from the bank rather than to inflict loss on any particular victim.

As noted in the concurrence, there has been much litigation about the intent requirement of the bank fraud statute, and the federal courts do not agree about its interpretation. Some circuits, like the Second Circuit, hold that an intent to harm the bank (or at least expose it to risk) is required. See, e.g., United States v. Odiodio , 244 F.3d 398, 401 (5th Cir. 2001); United States v. Davis , 989 F.2d 244, 246-47 (7th Cir. 1993). One court has held that an intent to defraud (but not to harm) is required. United States v. Kenrick , 221 F.3d 19, 26-29 (1st Cir. 2000). Another has required intent to victimize (where the bank is the target of deception) but not an intent to harm. United States v. Leahy , 445 F.3d 634, 647 (3d Cir. 2006). The Sixth Circuit focused more on the fraud element, and held that it is sufficient if in the course of committing fraud on someone (not necessarily the bank) a bank is caused to transfer funds under its control. United States v. Everett , 270 F.3d 986, 990 n.3 (6th Cir. 2001).

Obviously, the precise parameters of the intent requirement are in dispute. In fact, the concurrence in Nkansah directly invites the U.S. Supreme Court to resolve the circuit conflict and reject the Second Circuit's rule.

Until a resolution, the application of the bank-fraud statute in any particular case is debatable, even when the conduct is undeniably criminal. The lack of clarity leaves room for defendants to avoid bank-fraud charges even when they utilize banks in fraud schemes. In light of this uncertainty, prosecutors may turn to federal mail- and wire-fraud charges, either instead of, or in addition to, bank-fraud charges in order to insulate against these attacks. It remains to be seen whether creative arguments will be made to somehow extend the concept from the bank-fraud cases ' regarding the specific intent directed at the banks ' to the mail and wire elements of these other statutes.

Laura Grossfield Birger, a member of this newsletter's Board of Editors, is a partner in the New York office of Cooley LLP.