Bank Fraud Regulations & Punishments

When it comes to financial crime, most relevant national and international agencies are concerned with three major categories: money laundering, terrorism financing, and financing the proliferation of weapons of mass destruction (WMDs). Though bank fraud isn’t on that list, it’s still a threat that many countries take seriously—and so should financial institutions.

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While many countries don’t put specific anti-bank fraud regulations on FIs as they do for AML, CFT, and CPF, they still often issue hefty punishments for attempting or committing bank fraud. While these can act as a deterrent, FIs should still play an active role in protecting themselves and their customers against bank fraud.

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This article will look at some forms that punishment for bank fraud can take. It will also discuss how and why FIs should defend against bank fraud, even if they’re not legally obligated to do so like they are with some other forms of financial crime.

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First, let’s look at how bank fraud is classified as a crime in the US.

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In the US, bank fraud can be a federal crime under US Code Title 18, Subsection 1344. The code defines bank fraud as knowingly stealing (or attempting to steal) assets owned by a bank, or owned by others and being managed by a bank, through deceptive means. In other words, a bank fraudster is stealing in a way meant to disguise the fact that what they’re doing is a crime. 

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So is bank fraud a felony or a misdemeanor? That can depend on a number of factors, including:

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• Which state the fraud took place in
• Which methods/instruments were used (as bank fraud can be a rather broad term)
• How much the defrauded assets were worth
• Who the target(s) of the fraud were
• Whether the suspect has a criminal history (especially of similar crimes)

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Overall, though, the specific charge of federal bank fraud is almost always a felony.

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Types of financial crime like money laundering, terrorism financing, and WMD proliferation financing can have severe consequences that extend far beyond an individual financial institution or a single country’s financial sector. So many national and international agencies have clear regulations that FIs are legally obligated to follow in order to prevent these types of financial crimes from happening. However, bank fraud often isn’t held to the same standard, and so there usually aren’t any official guidelines with respect to preventing the crime. 

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FIs should still have an interest in stopping bank fraud, though. After all, it can cost them in many ways: assets stolen or used invalidly, resources spent correcting inaccuracies and informing customers of an incident, and trust lost as affiliated parties demand to know how the FI let a problem happen in the first place. FIs repeatedly victimized by fraud may even run into regulatory trouble anyway, as governments and agencies will likely intervene to protect the integrity of larger financial systems.

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So FIs should ideally take risk-based approaches to preventing bank fraud. They should work out how much oversight—both in terms of investment in anti-fraud tools and activity monitoring frequency—they need to give their respective client bases and partner networks. This should be in light of the potential likelihood and impact of fraud, based on factors such as:

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• How many clients the FI and its partners have
• How much identifying information the FI has (or can legally get) on its clients
• Risk indicators of clients (net worth, PEP status, criminal record, etc.)
• What jurisdiction the FI, its clients, and/or its partners are located in
• What types of services the FI offers
• What is required to open an account or purchase a service at the FI

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US federal bank fraud sentencing guidelines are very strict. Though there is no federal bank fraud minimum sentence, the maximum penalty is 30 years in prison and a fine of $1 million US.

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Federal vs. State Law

In the US, bank fraud charges can be laid at the state level (under a similar class or classes of financial institution fraud, if bank fraud isn’t directly applicable) as well as at the federal level. Depending on a particular state’s law, sentencing often considers how the fraud was committed, how much was stolen, who was targeted, and/or whether the accused has an existing criminal record.

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Let’s use Texas as an example. Suppose someone commits bank fraud by forging financial assets or documents. Bank fraud sentencing guidelines typically break down as follows:

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Civil vs. Criminal Law

Bank fraud consequences can also be civil, criminal, or both. In a civil bank fraud case, the plaintiff is usually a financial institution and/or one (or more) of its customers. They first need to prove that the fraud actually happened—the defendant intentionally misrepresented a fact for material gain, and it was plausible for the plaintiff to have believed this false information. The plaintiff must also prove that they suffered some sort of damage as a result of the fraud.

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Civil bank fraud cases do not result in jail time, probation, or community service. However, the defendant may still be ordered to repay the amount they defrauded from the victim(s), along with any incidental expenses (such as legal fees). The defendant may also be ordered to pay punitive damages to the plaintiff(s).

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Criminal cases of bank fraud can result in jail time, probation, and/or community service in addition to fines and/or restitution. Though the burden of proof is higher in a criminal case, the prosecution doesn’t have to demonstrate that the fraud was pulled off successfully or that anyone suffered damages. Conspiracy to commit bank fraud is enough of a charge to bring a criminal case to court. The prosecution must prove the accused willfully misrepresented (or planned to misrepresent) some sort of factual information in order to deceive a financial institution or its customers for material gain.

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Be Proactive Against Bank Fraud and Other Financial Crimes with Help from Unit21

All forms of financial crime are threats to financial institutions, whether there are legal imperatives to guard against them or not. They can undermine trust in FIs, as well as broader financial systems. So even though many jurisdictions have severe penalties for bank fraud, FIs should still be vigilant—proportionate to their operational and client-based risks – in preventing it.

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Like when implementing many other anti-crime controls and regulatory compliance processes, having the right tools can reduce money and time costs considerably. Unit21’s Transaction Monitoring and Case Management solutions provide a comprehensive infrastructure for fighting financial crime. The former is a fraud rules engine that analyzes multiple relevant data sources to score alerts based on likely risk level. The latter is a visual activity analysis dashboard that streamlines—and even automates—reporting suspicious activity to the proper authorities.

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‍Contact us for a demo of how our infrastructure can bolster your FI’s defenses against bank fraud and other financial crimes.

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