On October 30, in United States v. Perez-Ceballos, the United States Court of Appeals for the Fifth Circuit reversed the conviction of a defendant who had been convicted at trial of bank fraud based on her defrauding a U.S. bank based solely on her transfer of certain funds to and through an account at that bank. This post will review the key points of that decision and identify several issues of which corporate compliance officers at financial firms should take note.
The defendant, Silvia Beatriz Perez-Ceballos, is the wife of Jose Manuel Saiz-Pineda, who had been Secretary of Finance and Administration for the State of Tabasco in Mexico until his electoral defeat in 2012. Perez-Ceballos and Saiz-Pineda had a securities account with UBS Financial Services (UBS), which was aware that both were Politically Exposed Persons (PEPs) because of his political office. In 2013, after Mexico charged Saiz-Pineda with illegal enrichment, a UBS representative informed Perez-Ceballos that she would need to transfer her and her husband’s assets elsewhere. Perez-Ceballos consulted with an international financial advisor at Chase Investment Services Corporation (Chase Investment), Paul Arnold, about possible investment strategies for her and her husband’s UBS assets.
During that consultation, Perez-Ceballos, who had moved to the United States in May 2013 and opened an account with a Houston branch of J.P. Morgan Chase Bank in June 2013, falsely told Arnold that her primary residence was in Mexico. That statement was material because only non-resident aliens were eligible for the tax-exempt investments that the Chase investment adviser oversaw. Based on her false statement, Arnold recommended that she apply for a brokerage account with Sun Life Financial, an insurance company registered in Bermuda. Neither Chase Investment nor Sun Life were financial institutions that the Federal Deposit Insurance Corporation (FDIC) insured.
In applying for a Sun Life account, Perez-Ceballos made additional misrepresentations to Arnold and Sun Life Financial: (1) she was separated from her husband; (2) she was not a PEP; and (3) she signed the requisite documents in Mexico where they had been mailed to her (as required) when in fact she signed them in Houston after she had sent her brother to retrieve the documents and bring them back to the United States. She also gave the Chase Investment adviser a UBS statement from August 2013, from which she had removed her husband’s name as a joint account holder.
After she had obtained a Sun Life Financial account, in October 2013, Perez-Ceballos liquidated her account at UBS and transferred more than $1.9 million to her Chase Bank savings account. At her direction, Chase Bank wired the $1.9 million to Sun Life. Thereafter, in May 2017 Perez-Ceballos attempted to withdraw funds from Sun Life Financial – likely to return those funds to Chase Bank — and again falsely affirmed that she lived in Mexico. The 2013 UBS-Chase-Sun Life Financial transfer of $1.9 million and the 2017 Sun Life Financial – Chase attempted transfer of $1.9 million “formed the heart of Perez-Ceballos’s bank fraud conviction.”
The key conclusion by the Fifth Circuit panel was that “the government failed to produce sufficient evidence to convict Perez-Ceballos of defrauding Chase Bank. Under 18 U.S.C. § 1344(1), a defendant is guilty of bank fraud if she “knowingly executes, or attempts to execute, a scheme or artifice—(1) to defraud a financial institution.” To sustain a conviction under this statute, the government must prove both intent to defraud and FDIC-insured status.” The court, however, concisely disposed of the government’s theory:
First, the government failed to adduce evidence that Perez-Ceballos made any false statements to Chase Bank. No Chase Bank witness testified at trial. According to the evidence at trial, Perez-Ceballos’s numerous false statements were all made either to Chase Investment (through [the adviser]) or to Sun Life Financial. Neither the government’s briefing nor oral argument cites evidence that clearly established (or even directly alleged) that Perez-Ceballos fraudulently made Chase Bank believe anything.
Second, the government also failed to prove that Perez-Ceballos intended to “obtain money from the victim institution” or otherwise exposed Chase Bank to “risk of loss.” . . . The $1.9 million that Perez-Ceballos transferred to and through Chase Bank was her money, which she had authority to withdraw freely. . . .
Moreover, neither Arnold nor [an HSBC financial adviser who had handled a prior securities account for Perez-Ceballos and her husband] worked for Chase Bank or spoke specifically to the risks that Chase Bank faced from Perez-Ceballos’s misrepresentations. Their testimony focused primarily on the liability their own employers could face from the false statements Perez-Ceballos made to their institutions.
The court concluded (1) that the government failed to prove that Perez-Ceballos defrauded Chase Bank, absent sufficient evidence that she “had made false statements to Chase Bank or that she made false statements to another party while intending to obtain money from Chase Bank in a way that exposed Chase Bank to a risk of loss”; and (2) there was no FDIC-insured victim.
Note: Corporate compliance officers, particularly in financial-sector firms, can take away from the Perez-Ceballos decision certain lessons beyond the narrow legal determination:
- Customer Due Diligence: The decision does not explain why two financial firms apparently did not determine, through their customer due diligence (CDD) processes, that various representations by Perez-Ceballos (e.g., that her primary residence was in the United States and that she was not a PEP) were false. Corporate training on CDD issues can use this case as an example of the importance of consistent adherence to CDD processes, including use of CDD information resources.
- Suspicious Activity Reports: The Fifth Circuit’s decision provides some clear indications of the limits of the federal bank fraud statute’s ambit. Those limits can be factored into a financial institution’s decision process about whether certain conduct warrants the filing of a Suspicious Activity Report (SAR). Of course, a financial institution that is aware of a fact pattern similar to the facts in this case can always use existing statutory authority, beyond the SAR process, voluntarily to notify federal regulators and enforcement agencies of those facts. For example, 12 U.S.C. §3403(c) provides authority for a financial institution to notify a federal government authority “that such institution, or officer, employee, or agent has information which may be relevant to a possible violation of any statute or regulation.”