Hastert Indictment: How the Bank Secrecy Act Can Criminalize Otherwise Lawful Activity

On May 28, 2015, former Speaker of the United States House of Representatives Dennis Hastert was indicted and charged with one count of making false statements to a federal law enforcement officer in violation of 18 U.S.C. § 1001(a)(2), and one count of structuring to evade currency reporting requirements in violation of 31 U.S.C. § 5324. Both charges relate to a series of cash withdrawals Hastert made in order to complete a series of payments to on unidentified person who had accused Hastert of sexually assaulting him more than 30 years earlier. As explained by Jeffrey Toobin in his article for The New Yorker, the case against Hastert is a prime example of how conduct which itself may not be criminal in nature can become criminal through the failure to comply with the Bank Secrecy Act. A copy of the indictment can be read on the Chicago Tribune’s website here.

Generally speaking, the Bank Secrecy Act (“BSA”), 31 U.S.C. 5311-5330, and its implementing regulations, found at 31 C.F.R. Chapter X, require financial institutions to keep records of certain financial transactions and report these transactions to the federal government. The BSA was designed to prevent financial institutions from being used as part of illicit activity such as money laundering, drug trafficking, tax evasion, and terrorist financing.

In particular, 31 U.S.C. § 5313 (a) requires domestic financial institutions, including banks, which are involved in a transaction for the payment, receipt, or transfer of United States currency in an amount greater than $10,000.00, to file a currency transaction report (“CTR”) for each cash transaction with the IRS. Additionally, pursuant to31 C.F.R. § 1010.313(b) “multiple currency transactions shall be treated as a single transaction if the financial institution has knowledge that they are by or on behalf of any person and result in either cash in or cash out totaling more than $10,000 during any one business day.”

Occasionally, depositors will “structure” their transactions so that multiple cash deposits are made each under $10,000, sometimes over the course of several days or at multiple braches of a bank, in an effort to avoid the reporting requirements of the BSA. Such activity is known as “structuring” and is prohibited by federal law. 31 U.S.C. § 5324 makes it a crime for an individual to: a) “cause or attempt to cause a domestic financial institution to fail to file a report under § 5313(a);” b) “cause or attempt to cause a domestic financial institution to file a report required under § 5313(a) that contains a material omission or misstatement of fact;” or c) “structure or assist in structuring, any transaction with one or more domestic financial institutions” for the purpose of evading the reporting requirements of § 5313(a). More information on the BSA can be found on FinCENs website.

In Hastert’s case, paying money to an alleged victim of previous conduct which is most likely non-prosecutable because of a running of the statute of limitations is not criminal in and of itself. As the Toobin article notes, had Hastert simply paid the alleged victim by check, no violation of law would have occurred. Here however, once Hastert made the decision to make cash payments, he was under an obligation to comply with the reporting requirements of the Bank Secrecy Act. As alleged in the indictment, once Hastert realized CTRs were required to be filed for his withdrawals over ten thousand dollars, Hastert proceeded to structure his withdrawals such that he would make several smaller transactions under the ten thousand dollar reporting requirement in an effort to avoid reporting. As a result, Hastert transformed legal conduct into illegal conduct and faces criminal prosecution.

The Hastert case is a prime example of how even perfectly legal financial transactions can lead to criminal liability when they are executed with the aim of evading or circumventing the BSA As another example, as we previously reported, despite the wishes of clients, attorneys are under an obligation to maintain their trust accounts in compliance with the BSA. Thus, attorneys cannot structure trust account deposits and withdrawals in an effort to shield client identity.

Another example may be found in the burgeoning marijuana industry. There, despite changing state legislation, the federal government still lists marijuana as a Schedule I controlled substance under the Controlled Substances Act (“CSA”) 21 U.S.C. § 801 et seq, and the possession, use, and distribution of marijuana remains criminal under federal law. With regards to banking for marijuana related businesses and the BSA, FinCEN has explained:

Because federal law prohibits the distribution and sale of marijuana, financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity. Therefore, a financial institution is required to file a SAR on activity involving a marijuana-related business (including those duly licensed under state law), in accordance with this guidance and FinCEN’s suspicious activity reporting requirements and related thresholds.

(emphasis added). See FinCEN, FIN-2014-G001, BSA Expectations Regarding Marijuana-Related Businesses, (February 14, 2014), available here. Thus, because the sale of marijuana remains prohibited under federal law, financial institutions are placed in a position where, if they agree to service marijuana dispensaries, they would be required to report any transaction regardless of State law. (More information on marijuana related BSA requirements can be found in our previous report here.).

As a result of these reporting requirements, many legal marijuana businesses have resorted to all cash operations. With the rigorous reporting requirements in place, dispensaries are looking for “creative” ways to engage in banking including: 1) establishing shell companies to disguise marijuana proceeds; 2) funneling marijuana derived profits into accounts of other legitimate businesses; and 3) placing marijuana derived profits into bank accounts of family members or personal accounts. However, generally speaking, the use of shell companies or other accounts to mask the profits derived from the sale of marijuana could subject the owner of a dispensary to a wide variety of federal criminal penalties, including bank fraud 18 U.S.C. § 1344, wire fraud 18 U.S.C. § 1343, and money laundering 18 U.S.C. § 1956. (More information on marijuana-related business banking difficulties can be read here.).

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of administrative law, anti-money laundering, tax law and litigation, constitutional law, white collar criminal defense and litigating against the U.S. Department of Justice. If you are a financial institution or if you seek further information regarding the steps which your business must take to remain compliant, you can reach an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690