The federal government can charge Bank Fraud as Embezzlement, Abstraction, Purloining or Willful Misapplication under one of two code sections, Sections 656 and 657 of Title 18, United States Code. These charges will differ mainly in the types of financial institutions to which they apply. 18 U.S.C. § 656 applies to banks, while 18 U.S.C. § 657 applies to credit unions.
Who can be charged?
Officers, directors, agents, employees or whoever is connected in any capacity with any of the designated institutions. This means any person who has such a relationship to the institution that he/she could injure it by committing one or more of the criminal offenses set out in 18 U.S.C. §§ 656 and 657.
Read more about Virginia Embezzlement Law:Embezzlement in Virginia: Felony & Misdemeanor Charges, Penalties & Defenses.
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This article is written by federal defense attorney Marina Medvin, owner of a nationally-revered law firm in Alexandria, Virginia. She represents individuals charged with these crimes in the United States District Court for the Eastern District of Virginia in Alexandria.
The term embezzlement is defined by the courts as the unlawful taking or conversion by a person to his/her own use of the monies, funds or credits which came into that person’s custody or possession lawfully by virtue of his/her office or employment. Unlike Virginia law, Federal law states that the conversion alleged may not be to some third party other than the embezzler himself/herself. Instead, the charges of abstraction or misapplication are appropriate when there is a third-party beneficiary.
Abstraction is defined by the courts as the act of wrongfully taking or withdrawing monies, funds or credits with the intent to injure or defraud the bank or some other person, and without the bank’s knowledge or consent, or that of its board of directors, and converting them to the use of oneself or some other person or entity other than the bank.
Purloining is defined as a species of larceny that fills the gap between the sometimes doubtful common law definition of larceny and the modern criminal code definition of larceny.
Misapplication of Funds
The misapplication of funds proscribed by 18 U.S.C. § 656 occurs when funds are distributed under a record which misrepresents the true state of the record with the intent that bank officials, bank examiners or the Federal Deposit Insurance Corporation will be deceived. Misapplication of funds been defined as a willful and unlawful misuse of monies, funds or credit of the bank made with intent to injure or defraud the bank.
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BANK FRAUD STATUTES
18 USC § 1344 – Bank fraud
Whoever knowingly executes, or attempts to execute, a scheme or artifice—
(1) to defraud a financial institution; or
(2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises;
shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.
18 USC § 656 – Theft, embezzlement, or misapplication by bank officer or employee
Whoever, being an officer, director, agent or employee of, or connected in any capacity with any Federal Reserve bank, member bank, depository institution holding company, national bank, insured bank, branch or agency of a foreign bank, or organization operating under section 25 or section 25(a)  of the Federal Reserve Act, or a receiver of a national bank, insured bank, branch, agency, or organization or any agent or employee of the receiver, or a Federal Reserve Agent, or an agent or employee of a Federal Reserve Agent or of the Board of Governors of the Federal Reserve System, embezzles, abstracts, purloins or willfully misapplies any of the moneys, funds or credits of such bank, branch, agency, or organization or holding company or any moneys, funds, assets or securities intrusted to the custody or care of such bank, branch, agency, or organization, or holding company or to the custody or care of any such agent, officer, director, employee or receiver, shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both; but if the amount embezzled, abstracted, purloined or misapplied does not exceed $1,000, he shall be fined under this title or imprisoned not more than one year, or both.
18 USC § 657 – Lending, credit and insurance institutions
Whoever, being an officer, agent or employee of or connected in any capacity with the Federal Deposit Insurance Corporation, National Credit Union Administration, any Federal home loan bank, the Federal Housing Finance Agency, Farm Credit Administration, Department of Housing and Urban Development, Federal Crop Insurance Corporation, the Secretary of Agriculture acting through the Farmers Home Administration or successor agency, the Rural Development Administration or successor agency, or the Farm Credit System Insurance Corporation, a Farm Credit Bank, a bank for cooperatives or any lending, mortgage, insurance, credit or savings and loan corporation or association authorized or acting under the laws of the United States or any institution, other than an insured bank (as defined in section 656), the accounts of which are insured by the Federal Deposit Insurance Corporation, or by the National Credit Union Administration Board or any small business investment company, or any community development financial institution receiving financial assistance under the Riegle Community Development and Regulatory Improvement Act of 1994, and whoever, being a receiver of any such institution, or agent or employee of the receiver, embezzles, abstracts, purloins or willfully misapplies any moneys, funds, credits, securities or other things of value belonging to such institution, or pledged or otherwise intrusted to its care, shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both; but if the amount or value embezzled, abstracted, purloined or misapplied does not exceed $1,000, he shall be fined under this title or imprisoned not more than one year, or both.
Court decisions on Embezzlement, Abstraction, Purloining or Willful Misapplication
United States v. Edick, 432 F. 2d 350 – Court of Appeals, 4th Circuit 1970
This appeal is taken from a conviction on a conspiracy count and on numerous substantive counts charging misapplication of bank funds and making false bank entries. Edick’s principal contention is that he was not within the reach of 18 U.S.C.A. §§ 656 and 1005, because he was employed by a service corporation, related to the bank, and not by the bank itself. We conclude that Edick is within the class reached by the literal language of those sections and that his inclusion in the class is clearly required by the congressional purpose.
Edick was manager of the Proof Department of First Service Corporation, a wholly owned subsidiary of First Virginia Bank Shares Corporation. First Virginia Bank Shares is a holding company, which owns a controlling interest in several banks, including Old Dominion Bank, whose deposits are insured by the Federal Deposit Insurance Corporation. First Service had been set up by First Virginia Bank Shares to handle the proofing and bookkeeping for its member banks. Provided with computers and staffed with the necessary personnel, it functioned as the automated, consolidated proofing and bookkeeping department for Old Dominion and the other member banks of the First Virginia Bank Shares group. It was because First Service served such functions that Edick was in a position to divert bank service charges, which should have been credited to Old Dominion’s service charge income 352*352 account, to the personal checking account of Terry Harris, an Old Dominion depositor and Edick’s alleged coconspirator.
Misapplication of the funds of an insured bank by one who is “an officer, director, agent or employee of, or connected in any capacity with” such bank is proscribed by § 656. Because his immediate employer was First Service, a separate corporate entity, not Old Dominion, Edick contends he is not within the defined class, but it seems clear to us that he was “connected in any capacity with” Old Dominion, if he was not its agent. He performed essential work for Old Dominion. Substantively, his relation to Old Dominion’s operations and its records was precisely the same as it would have been if Old Dominion had continued to do its own proofing and bookkeeping and Edick had been the manager of its proofing department. He, with other First Service employees, did all of Old Dominion’s proofing and, at the direction or request of Old Dominion officials, performed all of the related services traditionally performed by a bank’s proofing department. It was because of his intimate relation to the bank’s business and its records, in a position of trust, that he was able to divert its funds and make false entries in its records. Surely, he was “connected” with Old Dominion within the meaning of § 656.
The false entry counts of the indictment were founded upon § 1005, which prohibits the making of false entries in the books of any Federal Reserve Bank, member bank, national bank or insured bank. The prohibition is not limited to any class of person, though there is a practical limitation to those who have access to such records, unless, as Edick contends, the class limitations in § 1005’s proscription against the unauthorized issuance or circulation of notes is imported into the false entry provision. We think the two provisions are independent and that the false entry prohibition is not limited to a defined class.
Section 1005, the text of which is quoted in the margin, makes it a federal crime for one, “being an officer, director, agent or employee” of a federally related bank, without authority from the bank’s directors, to issue or put in circulation notes of the bank. The next clause, without definition of any class, makes it a federal crime for one, without authority from the bank’s directors, to make, draw, issue, put forth or assign a number of obligations. The third clause makes it a federal offense for one to make a false entry in the books of such a bank with intent to defraud. The class, in the third clause, is not restricted to bank officials and employees, and, of course, violation is not dependent upon an absence of authorization by the directors.
A diminishing class restriction is not irrational here. The first clause reaches the unauthorized circulation of notes, an act which might be done by a thief. Congress reasonably could have thought the federal offense should be limited to 353*353 bank officials and employees in positions of trust. The offenses in the first two clauses are dependent upon the absence of authorization, and none of the listed acts would violate any law if done under the authority of the bank’s directors. False entries in a bank’s books stand on a different plane, however. They can hardly be accomplished by anyone except those in positions of trust having access to the bank’s records. Prior authorization or subsequent ratification can not legitimate them. If we are not to import by implication into the third clause the absence of authority condition of the first two clauses, there is no compelling reason to suppose that the class limitations of the first clause should be found by broad implication in the third.
In comparable statutes, when Congress has intended class limitations to carry through to subsequent clauses or paragraphs, it has repeated them. 18 U.S. C.A. §§ 207, 1703 and 1712. Supposedly, it would have done the same thing here had it intended class limitations to apply to the third clause.
Substantively, Edick was clearly within the class to which the false entry provision was directed. Congress surely intended to make it a federal offense for one in charge of the records of a national bank or nationally related bank to make false entries in them. As the use of computers expands, if banks find they can utilize them more effectively by setting up their proofing and bookkeeping departments under separate corporate roofs, there is no real change in the relation of the employees of those departments to the business of the bank and its records. There is a strong federal interest in the protection of the integrity of the records of such banks, and that interest is wholly unaffected by corporate splintering undertaken for unrelated business reasons.
We conclude that Congress meant exactly what it said when it provided that, “[w]hoever makes any false entry in any book” of such a bank is guilty of a federal offense.
Since Edick was within the reach of §§ 656 and 1005 and the indictment charged and the proof showed his diversion of the funds of the bank and his making false entries in its records, he can derive no comfort from United States v. Tornabene, 3 Cir., 222 F.2d 875. There an indictment was held insufficient, but it did not purport to charge a violation of § 1005. The defendants were depositors accused of aiding and abetting a violation of § 656, but the indictment failed to charge any primary violation of that section by any bank official. The defendants there were outsiders; Edick was an insider whose own wrongs are proscribed by §§ 656 and 1005.
Edick also complains that he was not allowed to take the witness stand in the presence of the jury for the limited purpose of testifying about the voluntariness of an oral confession. He was told, quite properly we think, that if he became a witness for that purpose, the court would not disallow impeaching cross-examination. Edick then elected not to testify.
When Edick was first confronted in First Service’s offices by officials of First Virginia Bank Shares and of First Service and by two F.B.I. agents, he was given the Miranda warnings, and he signed a written acknowledgement of them. Orally, he then admitted making false entries in Old Dominion’s records.
At a pretrial suppression hearing, Edick testified on the subject of the voluntariness of his confession. He acknowledged that the warnings were given and that he signed the acknowledgement, but, he said, he was quite upset when the officials came in and that he was unconscious of the writing on the paper he signed, or, at least, could not now remember what it said.
After hearing from the other persons present, as well as Edick, the judge found that the admissions were made voluntarily and denied the motion to suppress. The motion was renewed at the trial, and it was then that he sought to testify, in 354*354 the jury’s presence, with all of the limitations and protection afforded him at the pre-trial hearing.
Edick was entitled to a fair hearing and a reliable determination of the voluntariness of his admissions at some stage in the proceedings. Rogers v. Richmond, 365 U.S. 534, 81 S.Ct. 735, 5 L.Ed.2d 760. Because of the presence of the problem Edick faced in deciding whether or not to become a witness in the presence of the jury, the Supreme Court held that the hearing should be conducted by the judge in the absence of the jury. Jackson v. Denno, 378 U.S. 368, 84 S.Ct. 1774, 12 L.Ed.2d 908.
The proceedings in this case fully met the requirements of Jackson v. Denno and those of our decisions in United States v. Inman, 4 Cir., 352 F.2d 954, and Mullins v. United States, 4 Cir., 382 F.2d 258. In the hearing before the judge, Edick testified fully on the matter of voluntariness of his confession without fear of collateral consequences. The judge, after hearing all of the witnesses, found beyond a reasonable doubt that the admissions had been made voluntarily. The jury was told that it should not consider the admissions unless it found they were made voluntarily, but it, of course, had not heard Edick.
Edick’s dilemma, in the presence of the jury, is the reason for Jackson v. Denno’s requirement of a full hearing out of the presence of the jury. That hearing, admittedly full and fair, satisfied his constitutional right to a full hearing on the matter and a fair determination. He was not entitled to another such full hearing in the presence of the jury, unless, of course, he was prepared to testify subject to the usual rules of cross-examination. He had no right to limit the cross-examination to those favorable facts to which, alone, he wished to testify. Fitzpatrick v. United States, 178 U.S. 304, 315, 20 S.Ct. 944, 44 L.Ed. 1078.
During the trial, debit slips, deposit slips into the account of Terry Harris, computer printouts and master tapes, prepared in the Proof Department of First Service and containing data entered into the computer, were introduced in evidence. Some of these constituted the false entries, and all of them were properly connected to Edick.
These exhibits were admissible under the provisions of 28 U.S.C.A. § 1732(a) as business records.
Edick has had a fair trial, free of error.
United States v. Fulton, 640 F. 2d 1104 – Court of Appeals, 9th Circuit 1981
Randolph Fulton was convicted by a jury of seventeen counts of aiding and abetting embezzlement by receiving and endorsing unauthorized checks in violation of Title 18, United States Code, Section 656 and Section 2. Defendant appeals on two grounds: (1) § 656 does not apply to embezzlement of funds from a mortgage company which is a wholly-owned subsidiary of an insured bank and (2) the district judge erred in not giving defendant’s proposed accomplice testimony instruction. We affirm the judgment of conviction.
Defendant Fulton was charged with aiding and abetting a mortgage company employee in embezzling funds from the mortgage company in violation of 18 U.S.C. § 656. Specifically, Fulton was charged with knowingly receiving and endorsing a number of unauthorized checks from Mrs. Jesse Jones Edwards, an employee of Peoples Mortgage Company.
1105*1105 At trial, Mrs. Edwards testified that, at her husband’s request and without authorization, she issued checks drawn on various escrow accounts of her employer Peoples Mortgage Company. Mrs. Edwards also admitted that she had discussed splitting the proceeds of the checks with defendant and her husband. Another accomplice, Valerie Bassie, testified that she had seen unauthorized checks made out to defendant and was told by him that the scheme was “fool-proof”. Seventeen such checks, made payable to defendant and endorsed in his name, were introduced into evidence. Expert testimony established that the endorsements, as well as fingerprints found on some of the subject checks, were those of defendant.
While Fulton neither testified in his own behalf nor contested the expert testimony, defense counsel vigorously cross-examined both Mrs. Edwards and Valerie Bassie, and challenged the credibility of both accomplices in summation. The district judge instructed the jury on the weight to be accorded accomplice testimony and warned that such evidence should be received with “great caution and care”.
According to the evidence, Peoples Mortgage Company, Mrs. Edwards’ employer, is a wholly-owned subsidiary of Peoples National Bank and the mortgage company handles real estate functions for the bank. Peoples Mortgage Company acts as servicing agent for mortgages obtained through the bank and maintains an estimated eighty escrow accounts for mortgagors’ funds, receiving monthly payments and disbursing the funds as needed for taxes, insurance, etc. Checks of under $1,000.00, drawn on escrow accounts maintained for the bank by the mortgage company, can be issued by certain employees without direct supervision through the use of a check signing machine. Each of the checks made out to defendant by Mrs. Edwards came from one of these escrow accounts, and each was for less than $1,000.00.
II. Embezzlement from a Bank’s Wholly-Owned Subsidiary
On appeal, defendant argues that § 656 does not proscribe embezzlement from a wholly-owned subsidiary of an insured bank. Even assuming he aided and abetted Mrs. Edwards, the embezzling employee, since she worked for a wholly-owned subsidiary of an insured bank, and not for the bank itself, and since the statute does not specifically include a subsidiary corporation in the definition of “insured bank”, defendant contends that no federal offense has been committed.
Title 18, United States Code, Section 656 creates federal criminal liability for any employee or other person “connected in any capacity with” an insured bank who embezzles or wilfully misapplies bank funds. While the definition of “insured bank” does not specify a subsidiary corporation, the statute is directed at persons “connected in any capacity” with an insured bank and not solely to employees of insured banks. Accordingly, the fact that Mrs. Edwards worked for a subsidiary mortgage corporation, instead of the bank itself, will not defeat the application of § 656 as long as Mrs. Edwards is “connected in any capacity” with the bank.
Defendant argues, however, that there is insufficient evidence of Mrs. Edwards’ connection with the insured bank which owned the mortgage company to establish the underlying § 656 offense. We disagree.
1106*1106 In United States v. Dreitzler, 577 F.2d 539 (9th Cir. 1978), we discussed the sufficiency of evidence connecting the alleged embezzler and the insured bank. In that case, defendant a bank officer, was convicted of embezzling bank funds; we found sufficient evidence to support his conviction, concluding that a violation of § 656 is shown where “… bank funds were misapplied by virtue of the fact the defendant was connected in some capacity with a bank which enables him to gain access to bank funds.” Id. at 547.
In cases where the defendant is not directly employed by the insured bank, courts have focused on the relationship between the employing entity and the bank’s business in deciding whether there is a sufficient “connection” for purposes of the statute. For example in United States v. Edick, 432 F.2d 350 (4th Cir. 1970), a case we relied upon in Dreitzler, supra, the court affirmed a conviction under § 656 of a defendant who worked for a subsidiary corporation of a holding company, where that holding company owned a controlling interest in a federally insured bank, and defendant’s position as manager of the subsidiary enabled him to divert bank funds.
In Edick, the court found a sufficient “connection” between the employee and the bank based on the fact that the subsidiary corporation employing defendant performed bookkeeping and proofing services traditionally handled by the bank itself.
“Substantively, his [Edick’s] relation to … [the bank’s] operations and its records was precisely the same as it would have been if … [the bank] had continued to do its own proofing and bookkeeping and Edick had been the manager of its proofing department …. It was because of his intimate relation to the bank’s business and its records, in a position of trust, that he was able to divert its funds …”. Id. at 352.
In the instant case, Peoples Mortgage Company, a wholly-owned subsidiary of Peoples National Bank, handled all the real estate functions traditionally performed by a bank’s escrow department: the mortgage company acted as a servicing agent for some eighty escrow accounts opened through the bank, receiving payments and disbursing funds as necessary. While Mrs. Edwards was not a “manager” as was the defendant in Edick, she handled the escrow accounts, had access to company checks, and was able to issue checks for less than $1,000.00 without obtaining supervisory authorizations. Although Mrs. Edwards was not given unlimited discretion in dealing with the escrow accounts, she was employed in a position of trust which “enabled (her) to gain access to bank funds” managed by the mortgage company.
We affirm Fulton’s conviction based on two factors: 1) The connection between Peoples Mortgage Company and the insured bank, whereby the subsidiary performed functions traditionally handled by the bank itself; and 2) the close connection between Mrs. Edwards and the bank’s business which stemmed from her position of trust with the subsidiary in handling the bank’s escrow accounts.
III. Adequacy of the Instruction
The district court admonished the jury that accomplice testimony should be received with “great caution and care”. Defendant argues that the court erred by not giving his proposed instruction which warned that such testimony should “… be received with caution and weighed with greater care than the testimony of an ordinary witness”.
The trial court is afforded a certain amount of discretion in instructing the jury 1107*1107 on accomplice testimony. See, e. g., United States v. Ketola, 478 F.2d 64 (9th Cir. 1973); United States v. Marsh, 451 F.2d 219 (9th Cir. 1971). Rejection by the trial court of more strongly worded instructions has been upheld in other circuits. See, e. g., United States v. Falange, 426 F.2d 930, 933 (2d Cir. 1970), cert. den. 400 U.S. 906, 91 S.Ct. 149, 27 L.Ed.2d 144 (words “close and searching” scrutiny not required); United States v. De Larosa, 450 F.2d 1057, 1061 (3d Cir. 1971), cert. den. 405 U.S. 927, 92 S.Ct. 978, 30 L.Ed.2d 800 and 405 U.S. 957, 92 S.Ct. 1188, 31 L.Ed.2d 235 (1972) (warning that testimony came from a “corrupt and polluted source” not required).
Accordingly, we find that the instruction given by the trial court was adequate and that no error was committed.