Fraudster Beware: Your Scheme to Defraud Could be a Federal Crime if it Involves a Bank

December 14, 2016

Normally, a scheme to defraud another individual would be a state crime, prosecuted and sentenced at the state level (leaving aside use of U.S. mail or wires). To be convicted of the state crime of fraud usually requires proof of some combination of a false statement or representation and an actual intent to defraud.

On December 12, 2016, in a remarkably unpretentious opinion by Justice Breyer, the U.S. Supreme Court, in Shaw v. United States, U.S., No. 15-5991, resolved a circuit split by ruling that such a scheme can also constitute federal bank fraud, even if there was intent only to defraud the individual, not the bank itself.

The case stemmed from Shaw's successful efforts to defraud a bank customer of more than $300,000. Shaw was convicted of violating 18 U.S.C. § 1344(1) which makes it a federal crime to "knowingly execut[e] a scheme . . . (1) to defraud a financial institution." Shaw argued that to prove fraud it is necessary to show intent to defraud and he had no intent to defraud the bank – and, in fact, the bank did not lose any money. The Supreme Court affirmed a 9th Circuit opinion that no such proof was necessary to establish the federal crime of bank fraud, on the ground that a bank had a property interest in the use of the money deposited by its customers, even if the bank ultimately suffers no financial loss.

In so holding, the Supreme Court has opened the door wide for federal prosecution under the bank fraud statute for any scheme to defraud that involves a bank -- in effect, any crime beyond street and other pure cash crimes -- and turns every state law scheme to defraud (as long as money is held at a bank) into a federal law violation. Thus, it appears to be a substantial expansion of federal criminal law jurisdiction.

Moreover, by concluding that Shaw here did in fact “knowingly execut[e] a scheme . . . (1) to defraud a financial institution,” even though there was no proof that he actually intended to defraud a financial institution, the Supreme Court gave short shrift to the technical, yet very important, arguments that the statutory language must be interpreted strictly and that the rule of lenity in criminal cases requires that any ambiguity be resolved in the defendant’s favor. Thus, this case will no doubt be used to support future prosecutions that involve applying federal criminal statutes more broadly than supported by a strict reading of their language.