Wayward Bankers Face Tougher Times in Court

In response to the growing savings and loan industry crisis, Congress enacted the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 and the Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery Act of 1990.

These acts have been widely hailed as accomplishing a long-overdue restructuring of the nation's regulatory system for the banking industry. But few have yet realized the extent to which these new laws will radically alter the prosecution of banking offenses.

FIRREA and the Comprehensive Act have set apart banking crimes from other types of federal prosecutions by substantially increasing penalties and providing greater procedureal advantages for the government.

New Crimes, New Punishments

The new acts create new crimes, while substantially increasing penalties for commission of most banking crimes already on the books.

The Comprehensive Act adds a new crime: the continuing financial crimes enterprise. This new offense carries a mandatory minimum sentence is life, The maximum sentence is life, plus fines of up to $10 million for individual defendants and $20 million for organizations.

This law applies to so-called financial crimes kingpins who organize, manage, or supervise "a continuing financial crimes enterprise" and gross $5 million or more in proceeds during a 24-month period.

The Comprehensive Act also targets "mini-kingpins" for increased punishment. If a defendant grosses more than $1 million in proceeds from certain enumerated offenses, the act requires a baseline sentence of 51 to 63 months.

The Comprehensive Act creates two felonies with punishment provisions including fines and up to five years imprisonment: concealment of assets from the Federal Deposit Insurance Corp. and obstruction of a financial-institution examination.

Stiffer Prison Sentences

FIRREA raised the maximum sentence for listed offenses to 20 years, from five, years and raised the maximum fine for each offense to $1 million, from $5,000 and $10,000 under the former law.

One year later, Congress again used the Comprehensive Act as a means of raising the maximum sentence for these crimes to 30 years, from FIRREA's cap of 20 years.

To make sure that these statutory increases will actually result stiffer sentences, FIRREA directs the Sentencing Commission to amend the sentencing guidelines. These amendments will provide for "a substantial period of incarceration" in cases where the violation "substantially jeopardizes" the financial soundness of a federally insured institutions.

All federal crimes committed after Nov. 1, 1987, are subject to the sentencing guidelines. Unless there are further changes in the guideline section that now covers banking crimes, there will be little change in most sentences.

But this clear statement of congressional intent may make judges more inclined to sentence these defendants at the upper end of the guidelines range.

Connections with RICO Act

Some crimes against financial institutions are now included as predicate offenses under the Racketeer Influenced and Corrupt Organizations Act of 1970. This change can give the government a significant increase in penalties under the sentencing guidelines.

Given the government's recent history of successful RICO prosecutions in the area of securities fraud, it appears that the savings and loan cases fit well within the Justice Department's definition of a racketeering enterprise (a bank, that is), and constitute the tupe of ongoing economic crime that the department finds such an easy target.

To avoid violating the constitutional ban on ex post facto laws, prosecutions should be limited to cases in which at least one predicate act has occurred after the effective date of the current amendment to the RICO Act. For this reason, the impact of this amendment will not be felt immediately.

In addition, FIRREA now authorizes the attorney general to seek civil penalties of up to $1 million for each of these offenses. And, under the Comprehensive Act, proceeds from certain enumerated banking crimes are now subject to new civil and criminal forfeiture proceedings.

The Justice Department has already stated its intention to "cumulate" civil and criminal penalties for the same conduct. The House Judiciary Committee has warned the administration that such a plan may run afoul of the prohibition against double jeopardy if the civil penalties are viewed by the courts as punitive, rather than remedial.

Longer Statutes of Limitations

One of the most significant procedural changes under FIRREA and the Comprehensive Act is the extension of applicable statutes of limitations to 10 years from five yearss.

Because neither act revives prosecutions already barred by the former statutes of limitations, the immediate impact of the extended limitations period will not be significant for banking crimes committed five years or more prior to the enactment of the new laws.

When the effects of the extended statutes of limitations do begin to be felt, the impact will be greatest on the defendants' ability to prepare their cases. It may not be feasible for many defendants to locate necessary witnesses and documentary evidence relating to transactions that occurred 10 years earlier.

In certain situations, defendants may be able to establish a due-process violation by showing that preaccusation delay resulted in actual prejudice and was intentional and improperly motivated.

Typically, statutes of limitations were considered to be the primary safeguards against prejudicial preaccusation delay. However, it is clear that with a 10-year statute of limitation there is greater opportunity for the government to engage in preaccusation delay, which may result in prejudice to the defendant.

Unfortunately, under existing case law the burden on the defendant in establishing actual prejudice is heavy. Furthermore, the defendant must demonstrate that the government intentionally delayed either to gain a tactical advantage or to harass the defendant.

The government's task will not be nearly so burdensome. It will now have the luxury of spending up to 10 years to prepare its case in total secrecy before the defendant ever learns that he is under investigation. The new secrecy provisions will prevent defendants from discovering the need to preserve evidence until after an indictment is returned.

Bounties and Threats

Before FIRREA, grand jury witnesses remained free to discuss their appearances and testimony, but government agents were barred from disclosing evidence presented to the grand jury. FIRREA turns this situation completely around.

In the past, friendly grand jury witnesses often informed white-collar defendants and their counsel, well in advance, of pending indictments. Financial institutions routinely informed customers and targets of investigations when the grand jury had subpoenaed bank records.

While the government always had the means to prevent premature disclosure in individual cases, by obtaining a nondisclosure notice, Congress has now decided that it is a waste of the government's "precious resources" to assess the need to prevent disclosures on a case-by-case basis.

Under FIRREA, even where the party making the disclosure has no specific intent to obstruct the investigation, such disclosures can now lead to a five-year prison sentence and fines or substantial civil penalties.

The stated reason for this prohibition is that premature disclosure "can seriously hamper an investigation or prosecution." But there is nothing in the congressional reports to suggest why the defendant's knowledge would be more threatening to an investigation of a banking violation than to any other type of criminal investigation.

Before FIRREA, prosecutors were forbidden from routinely disclosing evidence presented to the grand jury to other investigative agencies. They were also not allowed to use the grand jury's power to investigate civil cases.

Use of the grand jury as a means for one-sided procurement of evidence prior to trial lets the government bypass the federal rules of civil procedure.

These were designed to ensure the fairness of the discovery process by providing the adverse party with notice of discovery requests, an opportunity to obtain the results of such requests, and the chance to simultaneously conduct its own discovery.

FIRREA now permits the use of grand jury materials in civil and regulatory banking actions. And Congress has sent a strong message to the administration that it wants these formerly secret materials to be shared.

Prosecutors may now disclose any information obtained by a grand jury for use in the newly authorized civil penalties and forfeiture proceedings - without prior court approval. This information can now also be disclosed to regulatory agencies.

FIRREA still does not permit the grand jury to be used as an investigatory tool in civil cases. A great deal of judicial attention is likely to be spent on defining the fine line between sharing grand jury information and actually using the grand jury to conduct a civil investigation.

The Right to Financial Privacy Act of 1978 has also been amended. It now permits greater disclosure of financial records obtained from regulatory agencies, and received by them, outside of the grand jury process.

While an informant can receive up to $100,000 for providing assistance in a civil case or forfeiture proceeding, he won't be paid more than $50,000 for a criminal case.

|Liable Persons' Expanded

FIRREA creates criminal penalties for violations of civil prohibitions or removal orders. If convicted of knowing participation in the affairs of a financial institution, after being issued such orders, an individual may be imprisoned for a maximum of five years, fined up to $1 million, or both.

The possible sentence and fine are a marked increase from the prior laws' provisions of a maximum of one year imprisonment and maximum fine of $5,000.

These FIRREA enforcement provisions may be applied retroactively. "Institution-affiliated parties" are subject to the criminal enforcement provisions for as much as six years after ending participation in the matters of the financial institution. Institution-affiliated parties consist of the following four categories:

* All parties occupying insider roles in financial institutions, such as officers, directors, agents, and controlling stockholders.

* All other individuals who would be required to file a written notice with regulatory agencies before acquiring a financial institution (a change-in-control notice).

* Noncontrolling stockholders, consultants, and joint venture partners, if it has been determined by the regulators that these parties in fact participated in the conduct of the institution's affairs.

The threshold extent of participation in such affairs is not defined under FIRREA and will evolve through case law or regulations.

* Independent contractors: attorneys, appraisers, and accountants.

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