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Affirming convictions for fraud committed on Korean bank, Second Circuit holds that 18 U.S.C. Section 1014 applies to fraudulent loan applications submitted to U.S. agency of foreign bank
Myung Koh ran a number of businesses on whose behalf he submitted several fraudulent applications for letters of credit to the New York office of the Bank of Seoul. Koh’s companies were in fact insolvent.
In two separate trials, a federal court convicted Koh of conspiracy to submit false loan applications to the Bank of Seoul contrary to 18 U.S.C. Section 1014 (“the false statements statute”). Section 1014 provides in part that “Whoever knowingly makes any false statement or report … for the purpose of influencing in any way the action of … a branch or agency of a foreign bank … shall [be guilty of a crime].”
On appeal, Koh contended that Section 1014 does not apply to dishonest loan requests presented to a U.S. agency of a foreign bank that is neither federally chartered nor federally insured. The Second Circuit affirms, however, and rules that Section 1014 does apply to fraudulent loan applications submitted to a U.S. agency of a foreign bank, regardless of whether it is chartered or insured under federal law.
The International Banking Act (IBA) [12 U.S.C. Sections 3101-11] defines “agency” as “any office or any place of business of a foreign bank located in any State of the United States at which credit balances are maintained incidental to or arising out of the exercise of banking powers, checks are paid, or money is lent but at which deposits may not be accepted from citizens or residents of the United States.”
The Court rejects Koh’s argument that Section 1014 applies only to federally chartered or insured banks. “Here, the statute at issue unambiguously applies to a ‘branch’ or ‘agency’ as defined in the IBA. The IBA, in turn, defines branch or agency by the term ‘any,’ with no limitations. Thus, there is no ambiguity in the definition of ‘agency’ or ‘branch’ to justify exclusion of those institutions that are not federally chartered or federally insured. [...] In Section 1014, Congress also made it a crime to submit a false loan application to “�any institution the accounts of which are insured by the Federal Deposit Insurance Corporation.’ … Adopting Koh’s reading would make the addition of references to branches and agencies of foreign banks superfluous if Congress had intended those terms to be limited to institutions already covered by the statute.’” [Slip op. 8-10]
Citation: United States v. Koh, Nos. 99-1034(L), 99-1036(CON) (2d Cir. November 10, 1999).
Filed in: 1999 International Law Update, Issue 11
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Mexican Supreme Court resolves issues of bad loans resulting from 1995 Mexican economic crisis in favor of banks; issues general criteria for loan arrangements and interest accrual
On October 7, 1998, the Mexican Supreme Court held en banc that Mexico’s banks may receive the benefits of loan arrangements more favorable to banks than to creditors. In two related opinions Nos. 31/98 and 32/98, the Supreme Court established “general criteria”� for credit and loan arrangements, interest accrual, and related issues. Some have criticized these lengthy and complex opinions as allowing banks to “charge interest on interest.”�
With these opinions, the Court has resolved a conflict between two Courts that had had diverging opinions [the courts were the "Septimo Tribunal en Materia Civil del Primer Circuito"� (7th Civil Tribunal of the 1st Circuit) and the "Primer Tribunal Colegiado del Decimo Septimo Circuito"� (1st Colegial Tribunal of the 17th Circuit)]. On May 12, 1998, the Court’s President of the First Chamber had requested all Circuits to submit certified copies of decisions involving these bank matters. The Court received 207 decisions. Based on these decisions and various Mexican laws, the Court established inter alia the following rules:
- Additional credit arrangements to cover interest payments are permissible. Contract clauses that oblige the debtors to give advance notice to forego part of the credit for interest payment are valid. Additional credit arrangements in the original loan arrangement to cover interest do not constitute illegal charging of interest on interest.
- A bank’s failure to investigate the economic viability of the project to be financed does not invalidate the loan arrangement.
- Interest rates expressly agreed upon by the parties in the loan arrangement are valid.
With these general rules, the Court did not resolve any particular dispute. Instead, all lower Mexican courts will review the previously submitted cases applying the rules stated by the Court.
This decision belongs in the context of Mexico’s economic crisis in 1995 when interest rates exceeded 80%. The banking practices that the Court reviewed are commonplace in other countries. Mexican bank debtors had reportedly hoped the Court would hold that the banks cannot use “additional credit arrangements”� to account for the substantial interest accrual, a practice decried as unconscionable and “charging interest on interest.”� The debtors had hoped that they would have to pay only the principal and minimum interest on their debts, not on any additional loans used to cover the high interest accrual.
Citation: Corte Suprema de Justicia de la Nacion [Mexican Supreme Court), Expediente Número 31/98 [main opinion] & 32/98 [secondary opinion] (Juventino v. Castro y Castro), Contradiccion de Tesis; Direccion General de Comunicacion Social, Comunicados de Prensa [Mexico], Comunicado Numero 138 (7 de Octubre de 1998). [Both Supreme Court opinions are available on the Court’s website www.scjn.gob.mx; see also New York Times, October 9, 1998, page C2.]
Filed in: 1998 International Law Update, Issue 10
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To liberalize its financial markets, Japan amends Foreign Exchange and Foreign Trade Control Act
The Ministry of International Trade and Industry (MITI) announces that Japan has amended its Foreign Exchange and Foreign Trade Control Act (Gaikoku kawase oyobi gaikoku booeki kanri hoo). The Amendments seek to bring about the liberalization of Japan’s financial markets.
The principal elements of the Amendment are the:
- Removal of restrictions on domestic and cross-border foreign exchange transactions. This entails doing away with the prior system that demanded “prior permission and notification” for foreign exchange transactions through other than authorized foreign exchange banks. For example, previous law required permission (i) to open a deposit account with overseas financial institutions to finance exports and imports, (ii) to make loans to or investments in, and to pay debts owed to overseas entities, (iii) to net claims and obligations with overseas entities in foreign currencies, and (iv) to trade in foreign currencies and to enter into futures contracts in foreign currencies.
- Complete liberalization of the foreign exchange business. The Amendment abrogates the system of “authorized foreign exchange banks” and the “money exchange system.” These date from a time when foreign currency was scarce.
- Creation of an “ex post facto” reporting system for domestic and overseas capital transactions. The Amendment introduces post-transaction reporting requirements for purposes such as compiling balance of payments statistics.
The effective date of the Amendment will be April 1, 1998.
Citation: Gaikoku kawase oyobi gaikoku booeki kanri hoo no ichibu o kaisei suru hooritsu [Amendment to the Foreign Exchange and Foreign Trade Control Act] (No. 59), 1997 Kanpo [Japanese Official Gazette] (May 23, 1997), issue 102, page 1. [A brief English summary is available at MITI's internet site at http:/www.miti.go.jp/report-e/g314001e.html.]
Filed in: 1997 International Law Update, Issue 11
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Germany finalizes substantial new banking law that, among other things, extends supervision to “grey” capital market
On December 18, 1996, the German Federal Government published a new law to implement EU directives on banking and bonds. The law will substantially revise the current Credit Institutions Law [Gesetz über das Kreditwesen (KWG)], and the Securities Trade Law [Wertpapierhandelsgesetz (WpHG)]. In addition to implementing EC directives 93/22/EEC [investment services in the securities field], 93/6/EEC [capital adequacy of investment firms and credit institutions] and 94/26/EEC [BCCI matters], it also contains provisions regarding the so-called “grey” capital market, money laundering, and the liquidity of the currency market. As a result, credit institutions that had previously not been subject to supervision will now be subject to regulation. In particular, the changes include:
- New definitions of credit “institutions” (§ 1).
- Capital reserve requirements (§ 10).
- Major loan regulation (§§ 13-13b).
- Protection of depositors (§ 23a)
- Organizational and management duties of credit institutions (§ 25a KWG).
With this law, Germany has implemented virtually all EU banking directives. The effective date will probably be 1 August 1997.
Citation: Entwurf einer Sechsten KWG-Novelle, 1997 Die Bank, Number 2, page 119. [German text of legislation submitted by Mr. Marcus C. Ehrhart, Attorney at Law, Munich and Berlin, Germany.]
Filed in: 1997 International Law Update, Issue 3
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OCC, Federal Reserve and FDIC rules implement Basel Capital Accord amendment that requires banks to measure market risk according to specified parameters
The U.S. Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (FDIC) have issued a joint final rule that amends their respective risk-based capital standards [12 C.F.R. Part 325]. The risk-based capital standard of the three agencies rests on the “International Convergence of Capital Measurement and Capital Standards” developed by the Basel Committee on Banking Supervision and endorsed by the central bank governors of the so-called Group of Ten (G-10) countries [Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, the UK, and the U.S.].
The joint final rule implements an amendment to this accord. It requires a measure for market risk to cover all positions in an institution’s trading account and foreign exchange, as well as in its commodity positions wherever located. As a result, any regulated financial institution subject to market risk must measure that risk using its own internal value-at-risk model.
Although the effective date is January 1, 1997, regulated institutions have until January 1, 1998 to comply with these requirements.
Citation: 61 Federal Register 47358 (September 6, 1996).
Filed in: 1996 International Law Update, Issue 10
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U.S. Federal Reserve amends Regulation K to bar foreign banks from using U.S. branches to transact through offshore offices in ways that U.S. banks could not do via their foreign branches
The U.S. Federal Reserve has issued a final rule amending Regulation K [see 12 C.F.R. Part 211]. The amendment implements a provision of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 [see Section 7(k)] that amended the International Banking Act of 1978.
The amendment bars foreign banks from using their U.S. branches or agencies to manage types of activities through offshore offices that a U.S. bank could not manage at its foreign or subsidiaries. It applies to those offshore offices that are “managed or controlled” by a foreign bank’s U.S. branches or agencies.
In particular, as for the management of shell branches, the amendment provides that “(1) A state licensed branch or agency shall not manage, through an office of the foreign bank which is located outside the United States and is managed or controlled by such state licensed branch or agency, any type of activity that a bank organized under the laws of the United States or any State is not permitted to manage at any branch or subsidiary of such bank which is located outside the United States.” [Section 211.24]
The amendment also specifies that the types of activities that a branch office may manage through an office located outside the U.S. include the types of activities authorized to a U.S. bank by state or federal charters, regulations, and other U.S. banking laws.
The effective date of the amendment is August 28, 1996.
Citation: 61 Federal Register 39052 (July 26, 1996).
Filed in: 1996 International Law Update, Issue 9
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Federal Reserve Board amends Regulation K to relax restrictions on mergers of U.S. subsidiaries of foreign banks and to require foreign banks to designate “home state” by June 30, 1996
In the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Act), congress allowed free interstate banking for foreign banks effective September 29, 1995. For the first time, the Act also required certain foreign banks without U.S. deposit-taking offices to select a “home state.”
Accordingly, the Board of Governors of the U.S. Federal Reserve System has updated Regulation K dealing with interstate banking operations of foreign banks (see 12 C.F.R. Part 211). The amended Regulation requires foreign banks to select a home state by June 30, 1996 (or the Board will assign one). It also removes outdated restrictions on certain mergers by U.S. subsidiaries of foreign banks outside the home state of the foreign bank, as well as obsolete provisions of Regulation K as to home state selection.
Citation: 61 Federal Register 24439 (May 15, 1996).
Filed in: 1996 International Law Update, Issue 6
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U.S. Department of Treasury revises regulations on international operations of U.S. and foreign banks
As part of the Regulation Review Program of the Office of the Comptroller of the Currency (OCC), the U.S. Treasury Department has streamlined its provisions regarding international banking operations of U.S. and foreign banks through Federal branches and agencies of the U.S. [see 12 C.F.R. Parts 5, 20, 28].
The new rule consolidates into a single comprehensive regulation the substantive requirements for international banking operations supervised by the OCC. The rule relocates and incorporates the current subpart B of Part 20 regarding international lending supervision, which will become subpart C of Part 28. The procedural requirements of 12 C.F.R. Part 5 continue to apply to Federal branches and agencies, unless otherwise provided.
The effective date is July 1, 1996.
Citation: 61 Federal Register 19524 (May 2, 1996).
Filed in: 1996 International Law Update, Issue 5
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Federal Reserve amends Regulation K on operations of foreign banks to specify criteria for evaluating their activities in U.S.
The Board of Governors of the Federal Reserve System has amended Regulation K (12 C.F.R. Part 211) regarding activities of foreign banks in the United States. The amended rule provides criteria for evaluating the operations of foreign banks that are not subject to comprehensive supervision or regulation on a consolidated basis by their home country supervisor. A Board determination that a foreign bank is not subject to such regulation may lead to termination of the bank’s lending activities.
Some examples of the sixteen criteria for making such a determination are:
The proportion of the foreign bank’s total assets and total liabilities that are found or “booked” in its home country, and the distribution and location of its assets and liabilities that are located or booked elsewhere.
The extent to which the operations and assets of the foreign bank are subject to supervision by its home country supervisor.
The managerial resources of the foreign bank, including the competence, experience and integrity of the officers and directors, as well as the integrity of its principal shareholders.
The scope and frequency of external audits of the foreign bank.
The foreign bank’s record of compliance with relevant laws.
The rule was set to enter into force on March 25, 1996.
Citation: 61 Fed.Reg. 6918 (February 23, 1996).
Filed in: 1996 International Law Update, Issue 4
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Federal Deposit Insurance Corporation (FDIC) amends regulation on reporting of known or suspected criminal activities to curb money laundering and other criminal activity
The FDIC has amended 12 C.F.R. part 353 on Suspicious Activity Reports (SARs) dealing with the reporting of known or suspected criminal activities by insured state nonmember banks. The SAR instructions require a bank to file a report on transactions involving $5,000 or more when the bank knows or suspects that they involve money laundering, or evasion of regulations, or the bank has no reasonable explanation for the transactions.
The rule streamlines the requirements by providing that a state nonmember bank can file a new SAR with the FDIC and federal enforcement authorities by sending a single SAR to the Treasury Department’s Financial Crimes Enforcement Network.
There is international consensus that SARs deter and reduce money laundering. The SAR requirements of the regulation comply with the recommendations of multinational organizations, including the OAS, the Financial Action Task Force of the G-7 nations, as well as the EC through its Directive on preventing money laundering through financial institutions.
Citation: 61 Federal Register 6095 (February 16, 1996).
Filed in: 1996 International Law Update, Issue 3
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