Posted On Thursday, June 26, 2014
On Monday, Attorney General Eric Holder announced that the Department of Justice’s efforts to investigate and prosecute financial institutions that knowingly facilitate consumer fraud will continue. Mr. Holder’s statements also noted that institutions that merely look the other way will not be spared from investigation and prosecution either. The statements are in furtherance of the DOJ’s recent goal of protecting consumers from scam artists. It appears that the DOJ believes it can cripple the growing scam artist industry by eliminating its ability to move funds from consumers into their own accounts. Financial institutions should beware of Mr. Holder’s statement: “When we uncover evidence of fraud, or intentionally disregarding obligations under federal law – we will not hesitate to act. We will hold them accountable.”
Mr. Holder highlighted the DOJ’s efforts by noting an April settlement with Four Oaks Bank of North Carolina. The DOJ alleged that Four Oaks permitted a third-party payment processor to originate approximately $2.4 billion in debit transactions in exchange for approximately $850,000 in fees paid to the institution. These transactions were permitted despite the third-party processor being reported to Four Oaks as a fraudulent entity. Under the terms of the settlement, Four Oaks was required to pay penalties and forfeitures in excess of a million dollars, and also required to implement safeguards into their banking systems to ensure similar fraudulent transactions would be thwarted in the future.
Despite the positive goals of the DOJ’s efforts, Mr. Holder’s plan has attracted the ire of Capital Hill Republicans and financial industry lobbying groups. The opponents of the DOJ’s efforts note that the investigations and prosecutions have chilled the industry’s ability to engage in lawful business transactions and sky-rocketed their compliance costs. Notably, banks have complained that the DOJ’s efforts have forced them to terminate relationships with lawful and legitimate merchants out of fear that the relationship may lead to an investigation.
Posted On Tuesday, June 24, 2014
This week, in U.S. v. Ganias, the United States Court of Appeals for the Second Circuit addressed whether “the Fourth Amendment permits officials executing a warrant for the seizure of particular data on a computer to seize and indefinitely retain every file on the computer for use in future criminal investigations.”
Ganias, the defendant and a former IRS employee, operated a tax and accounting service in Connecticut that catered to individuals and small businesses. Amongst his clients was an owner of two businesses that contracted with the United States Army to provide maintenance and security to a vacant Army facility. Sometime in August 2003, the Army received a tip from a confidential informant that Ganias’ client was stealing copper wire from the facility and billing the Army for work performed at another site. The informant told the Army that evidence of the theft and fraud would be found in Ganias’ office. Based upon this information, the Army obtained a warrant to seize all of Ganias’ files relating to the specific client. The Army, however, made forensic hard copies of Ganias’ computers, as opposed to seizing only the client’s files, due to the “practical convenience” of copying the entire system rather than piecing through the client’s files at Ganias’ office. The Army’s seizure included files unrelated to the client and included Ganias’ personal financial records. The Army assured Ganias that their search was unrelated to his finances and the system would be purged upon the conclusion of their inquiry into the client. Once the investigation began, however, the Army learned of inconsistencies in Ganias’ tax practices in relation to the client and it began to suspect that Ganias may have underreported his income. After retaining hard copies of Ganias’ personal records for 2 ½ years, the Army turned the files over to the IRS which requested and obtained a new warrant to specifically search Ganias’ records. Ultimately, a jury convicted Ganias of tax evasion. He appealed the decision, arguing that the government’s retention of his personal documents beyond the scope of the warrant and for more than 2 ½ years was unreasonable.
The court held that the unauthorized seizure and retention of Ganias’ documents was unreasonable and a violation of his Fourth Amendment rights. The court noted that the Government’s retention of Ganias’ personal computer records for 2 ½ years deprived him of exclusive control over those files for an unreasonable amount of time. Further, the combination of the government retaining Ganias’ files for an unreasonably long period of time and their retention of documents unrelated to the warrant constituted a meaningful interference with Ganias’ possessory rights. Finally, while not addressing the legality of the government’s decision to make forensic hard copies of Ganias’ entire computer, the court ruled that this matter of convenience did not provide an “independent basis” for retaining Ganias’ files “other than those specified in the warrant.”
