April 20, 2011

What Is Bank Fraud? Inquiring Poker Minds Want to Know!

As debate continues to rage in the poker community about the legal issues raised by the recent DOJ indictments of the Big Three online poker sites (PokerStars, Full Tilt, and UltimateBet / Absolute Poker), it might be helpful to the poker community to have a general idea of what the serious "bank fraud" charges encompass.

A case with some interesting parallels to the Big Three indictment is United States v. Brown, 31 F.3d 484 (7th Cir. 1994). In Brown, the defendant was convicted of bank fraud and money laundering in connection with a scheme related to credit card processing (sound familiar?). Essentially, the scheme revolved around the fact that the Visa/Mastercard network of banks would either not accept credit card transactions from telemarketers (because of the increased risk of fraudulent charges) or would impose higher fees for such transactions. The defendant implemented a scheme where he recruited legitimate businesses with credit card processing accounts to front telemarketing credit card charges, thereby avoiding the banks' bans / limitations on those types of transactions. The defendant was eventually convicted of bank fraud and money laundering leading to his appeal.

On appeal, the Seventh Circuit Court of Appeals first noted that bank fraud "is also one of the predicate offenses specified under the money laundering statute, which prohibits the use in certain financial transactions of the proceeds of certain predicate offenses affecting interstate or foreign commerce". Thus, if the defendant were guilty of bank fraud, he also was guilty of money laundering based on the same set of financial transactions. Next, the court examined the requirements for sustaining a conviction for bank fraud. The court noted that "Section 1344 proscribes any scheme to defraud or obtain money or property from a financial institution by means of false and fraudulent pretenses, representations or promises." The court continued its analysis by stating:

“Whether a scheme to defraud exists is determined by examining ‘whether the scheme demonstrated a departure from fundamental honesty, moral uprightness, or fair play and candid dealings in the general life of the community. The bank fraud statute condemns schemes designed to deceive in order to obtain something of value.’ This broad definition suggests that each individual component of the scheme need not be specifically illegal, so long as the scheme as a whole constitutes fraudulent conduct.

There is ample support in the record for the jury’s conclusion that Brown and Clague agreed to defraud the banks. There is evidence that they knew that banks would not allow third-party processing because of its potential for increased risk. In addition, the defendants encouraged the recruitment of new merchants, they did not reveal their own activities to the banks and they encouraged other alleged participants not to reveal their activities to the banks. In short, neither appellant’s role was limited merely to buying or selling third-party processing services without accompanying fraudulent purposes. While the appellants argue that they did not know that their activities were illegal and that they consulted attorneys, their purported intent only to “bypass” Visa and Mastercard regulations indicates a departure from notions of fundamental honesty and forthright dealings as required under Hammen. Given the wealth of evidence against the appellants, it was perfectly reasonable for the jury to find that Brown and Clague had agreed to defraud the bank.


United States v. Brown, 31 F.3d 484, 489 (7th Cir. 1994) (citations omitted).

Now many commentators (including my friend, the very astute Poker Grump) have indicated some unease or even outright disagreement with charging the Big Three poker sites with bank fraud. The allegations in the indictment against the Big Three include accusations that the poker sites conspired with various payment processors to intentionally miscode credit card transactions to disguise gambling transactions as ordinary commercial sales, to create fictitious non-gaming businesses to provide cover for gambling transactions, as well as efforts to bribe bank officers or even to outright purchase shares of small banks to process gambling transactions barred by the UIGEA. The allegations include accusations that the poker sites trained customer service representatives to cover up the fraudulent transactions when dealing with customers confused by their credit card statements reflecting transactions with fictitious companies.

In looking at the allegations raised in the Big Three indictment, the parallels to the Brown case are striking. In neither case is there any claim that any bank actually lost money. Rather, the fraud occurred because the deception of the defendants tricked the banks into processing payments they otherwise would have denied; the mere attempt to "bypass" federal banking regulations was sufficient deception to support bank fraud charges. Of course, it should be remembered that banks processing gambling transactions have a real risk of liability for violating federal law in the post-UIGEA world. In any event, the Brown case suggests that the Big Three have some significant exposure to bank fraud charges if the allegations of attempts to circumvent federal bank transaction restrictions are in fact true.

Now, it should be noted that the area of bank fraud and money laundering is subject to a great deal of case law, with different standards imposed depending upon the federal circuit where a defendant is tried. The mere existence of the Brown case is no guarantee that a federal court in New York (part of the Second Circuit) will apply the same legal analysis of the relevant statutes. Nonetheless, Brown is an interesting application of the bank fraud and money laundering statutes that is uncomfortably close enough to the Big Three's alleged misconduct that those charges should be regarded with a certain degree of gravity many poker commentators have thus far eschewed. Still, the Big Three's defense attorneys will certainly have a number of defenses to these charges.

Of course, as I like to say, "There's always a better place to get it in bad."

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ADDENDUM (23 April 2011):  Jacob Sullum, a regular writer on the excellent libertarian blog "Reason.com Hit & Run", linked to this post recently in his post, "Online Poker Update". Reason.com and the Hit & Run blog are must-reads for anyone who enjoys smart, informative, and accessible opinions on a variety of personal liberty topics.

6 comments:

  1. Why is contract law inadequate; necessitating federal remedy?

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  2. In the Brown case, the banks would have denied the transactions due to their perceiving higher risk of monetary loss. In this case the banks would have denied the transactions due to their perceiving a violation of UIGEA, but unlike Brown they suffered not merely no actual monetary loss, but no imputed loss due to increased monetary risk. This alleged crime is truly victimless.

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  3. @ Anon (4/20/2012; 10:10):

    I agree there is no direct financial risk in the poker processing case. However, the banks did face a risk of serious financial penalties if they were caught processing gambling funds. The poker payment processors also illicitly obtained the services of the banks & their employees, which has some value. Whether any of this is sufficient to sustain a bank fraud charge will be the subject of intense litigation.

    The allegations related to an attempted takeover of a bank(s) to process payments and the bribery of a bank officer seem cut from a different cloth, and feel much more troubling (if true; I've seen a denial from the bank re the purchase of shares by the poker sites).

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  4. In the article it is stated that the Brown and the poker case are comparable with respect to the question of whether any loss of money was incurred by the banks involved:

    "In neither case is there any claim that any bank actually lost money."

    However, doesn't the following description of the actions in the Brown case show this is incorrect?

    "Essentially, the scheme revolved around the fact that the Visa/Mastercard network of banks would either not accept credit card transactions from telemarketers (because of the increased risk of fraudulent charges) *or would impose higher fees for such transactions*." (emphasis added)

    In order words, in the Brown case, the banks would indeed have been defrauded out of money, namely the additional transaction fees they would otherwise have levied against the transactions had the type of those transactions not been hidden by the defendants. Whether this difference alone would be considered enough to argue the Brown case is not applicable to the poker case or not I don't know, but surely it is incorrect to claim this aspect of the case is on point?

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  5. @ Anon (4/22/2011):

    The Brown left the impression that most banks refused telemarketing transactions outright. These banks would be directly analogous to banks who were conned into processing gambling charges they otherwise would have rejected. In both situations, there does not seem to be any allegation that banks lost money on the transaction.

    However, to the extent any of the banks in
    Brown would've processed the telemarketer charges but at a higher rate, I agree that's a potentially important distinction in terms of what is required to prove a "loss" under the statute. Unfortunately, the Brown court really doesn't analyze that distinction (likely because it wasn't a fighting point for the parties). There are quite a number of cases out there, however, that do analyze the "loss" issue, and there is some authority that the poker defendants may find helpful. Perhaps I need to devote a follow up post to that issue,

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  6. As an addendum to my prior comment, I have seen in a couple of articles the claim that many banks will process LEGAL gambling transactions, but at a higher transaction fee, because those transactions are at a higher risk of being challenged or reversed. This, of course, requires the correct coding for the transaction, and pretty much puts the current facts squarely in line with the Brown case.

    HOWEVER, I have not yet been able to verify the bank coding / fee correlation asserted by these other articles, so I'm not willing to post that as a definitive part of my analysis of the bank fraud issue. I will keep looking for that information, and I'm sure the DOJ and the Big Three will be litigating that point if it becomes critical to the case.

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