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Analysis: U.S. turns to thrift-era fraud law to tackle money laundering

One hundred dollar notes are seen in this photo illustration at a bank in Seoul January 9, 2013. REUTERS/Lee Jae-Won
One hundred dollar notes are seen in this photo illustration at a bank in Seoul January 9, 2013. REUTERS/Lee Jae-Won

By Aruna Viswanatha

WASHINGTON (Reuters) - The Justice Department is again testing the reach of a once-dormant civil fraud law, applying it to money laundering after reviving it recently for cases tied to the financial crisis.

The Financial Institutions Reform, Recovery and Enforcement Act, passed in 1989 in response to the savings-and-loan crisis, covers fraud that "affects" federally insured financial institutions, a broad category that is increasingly useful to government lawyers.

Ignored for a time after the cleanup of the thrift crisis, FIRREA has in recent years been used to pursue allegations of misconduct in making government-insured loans and even charges that rating agency Standard & Poor's misled investors.

A case involving a small Delaware bank has pointed to yet another use for FIRREA - battling money laundering.

The Justice Department is "actively trying to use FIRREA in a variety of creative contexts," said Andrew Schilling, a partner at the law firm BuckleySandler who previously led the civil division in the Manhattan U.S. Attorney's office.

The law combines the broad nature of certain criminal statutes with the lower burden of proof needed for civil charges, giving the government ammunition to bring cases on the preponderance of the evidence, without needing to prove fraud beyond a reasonable doubt.

In November, the Justice Department brought its first money-laundering case using FIRREA, in a lawsuit against the First Bank of Delaware.

The U.S. Attorney's office in Philadelphia accused the bank of violating FIRREA by processing withdrawals on behalf of fraudulent merchants and ignoring obligations to report suspicious activity. The law essentially allows the Justice Department to bring civil wire fraud cases, and in this case, the government accused the bank of engaging in wire fraud by processing transactions it knew, or was willfully blind to knowing, were based on fraud against consumers.

The bank denied the allegations but agreed to pay a $15 million penalty and created a $500,000 account to refund customers who had funds withdrawn from their accounts by the merchants. Its directors also decided to close the institution.

In a speech last month, Michael Bresnick, who heads the Justice Department-led financial fraud enforcement task force, pointed to the First Bank of Delaware case as a model. "Right now within the Civil Division there are attorneys and investigators who are investigating similar unlawful conduct, and they will not hesitate to act when they see evidence of wrongdoing," Bresnick said.

BANKS OBJECT

Banks, such as Bank of New York Mellon Corp , Bank of America and Wells Fargo are pushing back against the use of FIRREA, saying the government is warping the law to serve its current interests.

Bank of America, for example, which has been accused of violating FIRREA and other laws when it caused taxpayers more than $1 billion in losses by selling toxic mortgage loans to Fannie Mae and Freddie Mac, has described the Justice Department's reading of the law as "wildly expansive."

The government invoked FIRREA on behalf of federally insured financial institutions that were preferred Fannie and Freddie stockholders, who suffered losses as a result of the loans, an interpretation Bank of America described in court papers as "limitless and absurd."

But at a hearing last week in a case against Bank of New York Mellon Corp, accused of overcharging clients for trading currencies, a federal judge said he was sympathetic to the government's use of the FIRREA. [ID:nL2N0CK1U1]

On BNY Mellon's motion to dismiss the case, U.S. District Judge Lewis Kaplan in Manhattan said: "I am unpersuaded by the defense arguments on FIRREA, and you can expect I will deny the motion to that extent."

Defense lawyers cautioned that since the Delaware case resulted in a settlement and other FIRREA cases have not yet produced major decisions by judges, it was unclear to what extent the Justice Department will be able to use FIRREA for money-laundering enforcement.

"I think this is another attempt to use the statue in an aggressive way, and is an additional effort by the department to expand its enforcement power," said Adam Lurie, a former federal prosecutor who is a partner at the law firm Cadwalader, Wickersham & Taft.

Susan Bricklin, the assistant U.S. attorney who handled the Delaware case, said the government turned to FIRREA as a way to bring a civil fraud case that doesn't directly involve fraud against the government. "We do need a jurisdictional basis," she said.

"It seemed like the only appropriate statute to bring this case under," Bricklin said in an interview last month.

(Reporting by Aruna Viswanatha; Editing by Karey Van Hall and Tim Dobbyn)

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