Case Involves “Right to Control” Theory to Illicit Access to Bank Accounts Through Evasion of Banks’ AML Controls.  These Cases Will Continue.

In United States v. An, et al., 22-cr-640 (KAM) (E.D.N.Y. May 7, 2024), the Eastern District of New York recently addressed and rejected an argument by defendants that Ciminelli v. United States required dismissal of money laundering charges against them because the government had failed to allege that they had deprived or attempted to deprive banks of “property”. In attempting to harmonize the government’s approach with Ciminelli, the court defined a property interest by the banks in their customers’ accounts that will likely require further refinement by the Second Circuit, and perhaps draw the attention of the Supreme Court.

We previously blogged on the Supreme Court’s decision in Ciminelli, in which Justice Thomas, writing for a unanimous Court, rejected the Second Circuit’s longstanding “right to control” theory of fraud as a basis of liability under the federal wire fraud statute. In that post, we articulated the possible ramifications for the Department of Justice (“DOJ”) and its prosecution of bank fraud cases, because the opinion did not limit itself to wire fraud but instead made frequent and more general reference to “the federal fraud statutes”.  We suggested that the DOJ may have to reconsider its tactic of charging bank fraud, rather than a violation of the Bank Secrecy Act (“BSA”), based upon a defendant’s alleged acts of concealment which impacted victim banks’ ability to comply with the BSA.

The An opinion is complicated, and we summarize here only.  Although the DOJ won the motion at issue, which turned on the face of the indictment, related factual issues remain for trial.  Further, the basic legal issue may produce different outcomes in different courts.

The Indictment

The Ans, a father and daughter, were indicted (along with several government officials of the People’s Republic of China) relating to a scheme to “involuntarily repatriate” an individual to China. The Ans also were charged with money laundering as part of a laundering scheme designed to promote bank fraud.  Specifically, the underlying “specified unlawful activity,” or SUA, that the money laundering scheme was designed to promote was bank fraud.  Thus, the money laundering charges relied on the validity of the government’s bank fraud theory.

The indictment alleged that the money laundering scheme, beginning in 2016, involved millions of dollars in wire transfers from China .to the U.S. in violation of Chinese “capital flight” regulations, which limit such transfers to $50,000 per person per year. The indictment further alleged that the Ans engaged in “deceptive tactics” in order to circumvent U.S. bank anti-money laundering (“AML”) controls – namely, by using numerous third parties in China and the U.S. to avoid exceeding the Chinese transfer limit on any particular transfer, and then misrepresenting to U.S.-based banks the nature of those transfers, as well as “layering” the transactions to obscure the ultimate source of the funds.

The Ans are not alleged to have used the laundered funds to further the “involuntarily repatriation” scheme or any other scheme.  Instead, they allegedly used the money to pay down debt, including residential and commercial mortgages, and to pay taxes.  Before the deadline to file the motion to dismiss, the government clarified that its money laundering theory “‘was not premised on the violation of a foreign government’s laws’ but rather on the Ans’ alleged ‘deceptive tactics designed to frustrate and impede the [AML] controls of the U.S. financial institutions and thereby ‘enjoy control continued access to the U.S.-based bank accounts.’”

The Motion to Dismiss the Money Laundering Charge

The Ans moved to dismiss the money laundering charge, making three arguments – two of which attacked the government’s underlying theory of bank fraud as the SUA.

First, the Ans argued that the indictment failed to allege that the object of the alleged bank fraud was to deprive banks of property; second, that, even if a property interest on the part of the banks had been adequately alleged, the indictment failed to allege in sufficient detail how the Ans’ conduct could have harmed that interest; and third, that the indictment failed to allege the fraud that the alleged money laundering was promoting, as the challenged transactions could not simultaneously promote bank fraud and be the bank fraud itself. The underlying theme in the Ans’ argument, as reflected in the Court’s opinion, was that the government’s case was predicated on the “right to control” theory rejected by the Supreme Court in Ciminelli, and that “continued access” to U.S. bank accounts is not “something of value” and therefore not a “traditional property interest” of which a fraud scheme could deprive a victim under Ciminelli.

The court agreed with the Ans that Ciminelli was relevant to the analysis. The court noted that, although Ciminelli dealt with the wire fraud statute, “the opinion spoke in terms of ‘the federal fraud statutes,’ so its requirement that a fraud scheme deprive the victim of a ‘traditional property interest’ would appear also to apply to the federal bank statute.”

Having tipped its hat to Ciminelli, however, the court went on to declare that the case was “inapposite” in this instance. In Ciminelli, the court explained, the government’s case had relied on “informational harm” as a basis for bank fraud – namely, the “depriv[ation] of ‘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.’”  By contrast, the court stated: “. . . the Indictment in this case frames the harm to the banks as the Ans’ deprivation of deposited funds in accounts held by the victim banks. That distinction matters.”  (emphasis added).  The court noted that the Supreme Court previously had held, in Shaw v. United States, 580 U.S. 63 (2016), that a “plan to deprive a bank of money in a customer’s deposit account” implicated a property interest.

Shaw was apparently a key case in the government’s briefing, because the court went on to address the Ans’ argument (from their reply brief) that a bank’s property interest as articulated in Shaw “cannot operate against the owner of the account.”  The court first noted that the indictment did not actually allege that the Ans “owned” all the accounts at issue in the case, but rather that they were “initial recipients” of some of the Chinese-origin wire transfers, and that they “controlled the laundered funds.” But, importantly, the court went on to say that, “under Shaw, a bank’s right to deposited funds depends on the nature of the contract between the bank and the customer, and the resulting contractual relationship ‘ordinarily’ makes the bank the ‘owner of the funds.’” (emphasis added).  According to the court, “Ciminelli did not reject the premise that depriving a victim of information in order to induce the victim to part with traditional property can be fraud.  Ciminelli simply rejected the notion that information itself can be property.”  (emphasis in original).  Another recent opinion in the EDNY by another judge, United States v. Motovich, followed An in order to reach the same conclusion in order to reject a similar defense motion to dismiss.  Whether the law and the U.C.C. regards banks as the actual owners of customer funds in depository accounts is a significant issue – with implications in other contexts, including in regards to consumer protection and bank regulatory issues. 

The court went on to cite approvingly a recent high-profile Southern District of New York case – the prosecution of Sam Bankman-Fried – in which that court followed Shaw in denying a motion to dismiss predicated on Ciminelli. In that case – U.S. v. Bankman-Fried, 680 F. Supp. 3d 289, 305 (S.D.N.Y. 2023) – the bank fraud conspiracy charge centered on an alleged “conspiracy to induce a bank to open an account” into which customer deposits were received and from which Bankman-Fried and his co-conspirators made withdrawals. The SDNY court similarly found Ciminelli “inapposite” because the alleged scheme was “to obtain money or property” – even though the money in question was that contained in the defendant’s own account.  Later, the court, stated that “[t]he cryptocurrency cases that the Government cites . . . are also at least somewhat analogous in that they involved bank fraud charges based on the defendants’ fraudulent inducement of banks to open accounts and process deposits and withdraw transactions the banks would not have processed but for the defendants’ misrepresentations.”

The court also rejected the Ans’ related argument that, even if a property interest was implicated, the alleged scheme could not have deprived the banks of any property, because it only resulted in the Ans depositing their own money, from which the banks could profit by maintaining the accounts and processing transactions. The court noted that proof of a scheme to defraud does not require a showing of ultimate financial loss (or even intent to cause such), and that this challenge focused on the sufficiency of proof and was not appropriate at the motion to dismiss stage.

The court rejected the Ans’ argument for dismissal which implicated the government’s overall money laundering theory rather than its bank fraud theory.  The government charged the Ans with transferring funds internationally with the intent to promote the SUA (bank fraud); the Ans argued that this charge is a “circular theory of money laundering” in which “the Ans transferred funds internationally with the intent to promote those very transactions, which they insist is ‘logically impossible.’”  The court agreed with the government that this argument implicated the nature of the government’s trial proofs, rather than the sufficiency of the indictment, but required the government to provide the Ans ahead of trial with information clarifying which transactions the government alleges constitute bank fraud and which transactions the government alleges promote bank fraud, so that the Ans can prepare an adequate defense.

Finally, in a rare victory for the defense, the court granted the Ans’ motion to sever the money laundering charge from the rest of the indictment, thereby ensuring that the Ans will receive separate trials on the money laundering and repatriation scheme charges.  Condensing greatly, the court found that the government’s theory that the two schemes were part of a broader, unified plan by the Ans “to use ‘various methods’ to ‘obtain power and influence’ in the United States and China” was “too far thin a thread to tie these alleged schemes together” under the Federal Rules of Criminal Procedure for the purposes of a single trial on all charges.

Concluding Thoughts

As we anticipated in our prior posts, fraud defendants have seized upon the language of Ciminelli as a basis to challenge their indictments, forcing DOJ to recalibrate its approach. Thus far, as evidenced by An and the contemporaneous cases it cites, reliance on Shaw as defining a bank’s property interest in its customer accounts seems to be a successful approach to surviving a Ciminelli challenge at the district court level. Critically, however, and left unaddressed in the An opinion, the accounts in which the bank held a property interest in Shaw were accounts of defrauded customers, not of fraudsters themselves. It remains to be seen whether the Second Circuit, or the Supreme Court, will bless this arguably contorted application of Shaw in light of Ciminelli.

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