Federal Misapplication Criminal Statute

Misapplication is a criminal offense, specifically addressed by federal law 18 U.S.C. §§ 656, 657 that is commonly used in bank fraud federal prosecutions. Shortly, the crime of criminal misapplication of funds of a financial institution is committed when the defendant willfully converted the funds to his or her own use, benefit or gain, or the use, benefit or gain of a third party.

The law (in Section 656) provides for several elements of this statute that need to be in existence before government may obtain conviction. First, the accused has to be an officer, director, agent or employee of, or connected in any capacity with, a bank or one of certain enumerated entities. Second, the bank be a member of the Federal Reserve System, a national bank, a federally-insured bank, a Federal Reserve bank, a depository institution holding company, an insured bank, branch, agency of a foreign bank, or a foreign subsidiary of a United States bank or an Edge corporation. Third, the accused must willfully misapply moneys, funds or credits of the bank or entity or moneys, funds, assets or securities intrusted to the custody or care of the bank or entity. Finally, the accused acted with the intent to injure or defraud such bank or entity.

Section 657, applies to officers, agents or employees of a federally-insured savings association or credit union, or one of certain enumerated government entities.

Punishments provided by federal misapplication law are truly draconian. If the amount willfully misapplied exceeds $100, a violation under section 656 or section 657 is punishable by a fine of up to $1 million, or imprisonment of not more than 30 years, or both.

Misapplication, a crime, is closely situated with maladministration, which, while accomplishing a similar result (the institution losing money), is not a crime per se but rather a violation of banking statutes and internal policies. . The difference between them is whether the accused acted with intent to injure or defraud the institution. Intent is a necessary element of the crime of misapplication and the accused must have acted with intent to defraud in order to have criminal culpability.

Although sections 656 and 657 apply to insiders, other participants in an alleged misapplication may be charged with misapplication under principles of accessorial liabilities. However, there must be proof of a causal connection between the officer and the defendant.