According to US federal law, bank fraud is knowingly committing or trying to commit some deceitful scheme to…
1. Defraud a financial institution; or
2. Obtain funds, assets, credits, etc., under the control or custody of a bank or financial institution
through fraud, misrepresentation, or false promises.
The maximum penalty for bank fraud is $1 million. The maximum punishment is 30 years. The court may mete out one or the other or both.
Not Necessarily a Bank
Although the crime is called “bank fraud”, it’s a mistake to assume that the law applies only to fraud against banks or financial institutions. The second subsection of the law also includes funds that are in the “control or custody” of the bank. So the bank need not be the loser in the fraudulent act.
For instance, a perpetrator engages in fraud that results in victims mailing him checks, which he cashes at a bank and pockets. The perpetrator could be charged with bank fraud. Forging checks (or the endorsements on them) could also be subject to charges of bank fraud.
Making False Statements
Federal prosecutors often charge perpetrators of bank fraud with making false statements to financial institutions. Making such false statements is defined as
1. Knowingly making a false statement, or overvaluing property
2. To influence in any way
3. The action of a bank or financial institution.
This is also a federal crime and carries the same maximum penalties as bank fraud.
Insider Bank Fraud
There are seven bank fraud schemes commonly perpetrated by persons operating within a financial institution. These are
1. Demand draft fraud – Typically perpetrated by a corrupt bank employee who makes a demand draft payable at some distant location without debiting any account. It’s cashed at the remote branch.
2. Forging or making fraudulent documents – Usually done to conceal a theft
3. Identity theft – A corrupt bank employee may give personal info to an identity thief who could obtain credit under the victim’s name.
4. Making fraudulent loans – A bogus company or one that soon declares bankruptcy takes out a loan with the collusion of a corrupt bank officer.
5. Rogue trading – Perpetrated by a highly placed bank exec, rogue trading involves using the bank’s funds to make speculative investments to make a quick profit. If the speculation pays off, the rogue trader pockets the profits. If losses come one after another, a scandal may ensue, and/or the bank may collapse.
6. Uninsured deposits – Some banks are not licensed to operate and are therefore uninsured (or vice versa). For instance, in 2002, a Washington bank called Chase Trust Bank was found to have no license after it was exposed to be unrelated in any way to New York’s Chase Manhattan Bank.
7. Wire fraud – Banks use wire networks to conduct business among themselves. Wire transfers are nearly impossible to undo and are thus vulnerable to corrupt insiders.
Outsider Bank Fraud
Following are a dozen common schemes perpetrated by people who are usually outside the financial institution, but nonetheless charged with bank fraud:
1. Accounting fraud
2. Booster checks, where un-cleared checks are credited to boost a credit balance
3. Check kiting, where cash that’s in transit (i.e., nonexistent) is stolen
4. Duplicating or skimming card data, copying magnetic stripe info off a card for duplication
5. Forgery or altering checks
6. Fraudulent loan applications
7. Identity theft
8. Internet fraud
9. Money laundering
10. Prime bank fraud
11. Stealing checks
12. Stealing payment cards