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Inactive Financial Institution Letters 


[Federal Register: July 24, 1997 (Volume 62, Number 142)]
[Notices]
[Page 39840-39843]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24jy97-76]

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FEDERAL DEPOSIT INSURANCE CORPORATION


Proposed Statement of Policy for Participation in the Conduct of
the Affairs of an Insured Depository Institution by Persons Who Have
Been Convicted or Have Entered Pretrial Diversion Programs Pursuant to
Section 19 of the Federal Deposit Insurance Act

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Proposed policy statement.

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SUMMARY: The FDIC seeks to update its statement of policy concerning
the participation in banking of a person convicted of a crime of
dishonesty or breach of trust or money laundering or who has entered a
pretrial diversion or similar program in connection with the
prosecution for such offense pursuant to section 19 of the Federal
Deposit Insurance Act, 12 U.S.C. 1829. Section 19 was significantly
expanded by the Financial Institutions Reform, Recovery and Enforcement
Act of 1989 ("FIRREA"), Pub. L. 101-73, 103 Stat. 183 (1989), and the
Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery
Act of 1990 ("Crime Control Act"), Pub. L. 101-647, 104 Stat. 4789
(1990) and as a result the two existing statements of policy on this
provision are outdated. The FDIC intends to adopt the new Statement of
Policy and rescind the two existing ones. The FDIC is seeking comments
on the proposed Statement of Policy by issuing this Federal Register
notice.

DATES: Comments must be received on or before September 22, 1997.

ADDRESSES: Send written comments to Robert E. Feldman, Executive
Secretary, Attention: Comments/OES, Federal Deposit Insurance
Corporation, 550 17th Street, N.W., Washington, D.C. 20429. Comments
may be hand-delivered to the guard station at the rear of the 17th
Street Building (located on F Street), on business days between 7:00
a.m. and 5:00 p.m. (Fax number (202) 898-3838; Internet address:
comments@fdic.gov). Comments may be inspected and photocopied in the
FDIC Public Information Center, Room 100, 801 17th Street, NW,
Washington, DC 20429, between 9:00 a.m. and 4:30 p.m. on business days.

FOR FURTHER INFORMATION CONTACT: Jesse G. Snyder, Assistant Director,
Division of Supervision, (202) 898-6915; or Nancy L. Alper, Counsel,
Legal Division, (202) 736-0828, Federal Deposit Insurance Corporation,
550 17th Street, N.W., Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION:

Background

    The Financial Institutions Reform, Recovery, and Enforcement Act of
1989 and the Comprehensive Thrift and Bank Fraud Prosecution and
Taxpayer Recovery Act of 1990 significantly expanded the provisions of
section 19 of the Federal Deposit Insurance Act, 12 U.S.C. 1829. As
amended by FIRREA and the Crime Control Act, section 19 now prohibits,
without the prior consent of the FDIC, a "person" convicted of a
criminal offense involving dishonesty, breach of trust or money
laundering, or who has agreed to enter into a pretrial diversion or
similar program in connection with a prosecution for such offense, from
owning or controlling directly or indirectly an insured depository
institution, becoming or continuing as an institution-affiliated party,
or otherwise participating, directly or indirectly, in the conduct of
the affairs of an insured depository institution. Further, section 19
now provides that conviction for certain enumerated violations of Title
18 of the United States Code pertaining to financial institution-
related crimes precludes the FDIC for ten years from considering or
consenting to an application filed by a person convicted of such an
offense, unless an exception is granted by the sentencing court.

Request for Comments.

    The FDIC has received many inquiries regarding what constitutes
"participation" and who is a "person." This request for comments is
intended to provide an opportunity to comment on the proposal. In
general, the FDIC is interested in comments on the following: the scope
of section 19, including what constitutes "participation, directly or
indirectly, in the conduct of the affairs," what comprises "own or
control, directly or indirectly, any insured depository institution;"
whether the current interpretations of "dishonesty" or "breach of
trust" should be changed or clarified; criteria for determining what
constitutes offenses involving dishonesty, money laundering or breach
of trust; procedures for filing a section 19 application, including
whether a section 19 application should be filed where there is a de
minimis crime (e.g., juvenile offense of theft) and what would
constitute a de minimis crime; what duty to inquire should be imposed
upon insured depository institutions, including what due diligence
should be undertaken by insured depository institutions in determining
what persons come within the parameters of section 19; and the
standards for granting consent to a section 19 application.
    In particular, the FDIC would like comments on the following areas.
First, the FDIC is requesting comments on its longstanding policy of
requiring an insured depository institution to file a section 19
application on behalf of an individual. The rationale for this policy
has been that in determining whether to approve a section 19
application, the FDIC must assess whether the person's participation in
the insured institution constitutes a risk to the safety and soundness
of the institution or whether the person's participation in the
institution threatens to impair public confidence in the institution or
the banking system in general. In making its determination, the FDIC
traditionally has considered the position which the person will occupy
in the institution, the extent of the supervision of the person which
the institution provides, the size and condition of the institution,
and fidelity bond coverage of the person

[[Page 39841]]

by the institution's insurance company. Where an individual is filing a
section 19 without the benefit of bank sponsorship, the FDIC may not
have information concerning what institution may employ that individual
when making its determination to approve the section 19 application.
Further, the FDIC may be put in the position of processing section 19
applications filed by persons who either may have no prospect of
employment with a financial institution or have no sincere interest in
such employment but who are simply seeking certification from an agency
of the federal government in order to gain employment elsewhere. In
light of these issues, the FDIC is seeking comments specifically on the
following: whether a non-bank applicant may file a Section 19
application and, if so, under what circumstances should it be
permitted; what the scope of the approval granted in these situations
should be; and how the FDIC should implement the new procedures in a
manner to promote the safety and soundness of the insured institution.
    Another area for which the FDIC seeks comments is whether the
definitions of "own" or "control" are sufficient. Specifically, the
FDIC has used the definition of "control" as set forth in the Change
in Control Act, 12 CFR part 225. The FDIC is requesting comments on
whether the use of this definition is appropriate or whether the
definition should be expanded. Further, the FDIC seeks comments on how
to distinguish "control" from the definition of "own" without
leading to the absurd result of requiring a convicted person who owns
one share or ten shares of stock in a large publicly traded insured
institution from having to divest his or her ownership interest.
    A third area for which the FDIC is requesting comments concerns
what guidelines should be implemented to determine whether independent
contractors come within the definitions of indirect participation. For
example, some independent contractors provide data processing services
and have access to extremely sensitive bank data but may perform such
services offsite, while other contractors may be loan brokers who bring
loans to a bank but do not have any decision making authority about
obtaining bank approval. A related issue is whether officers and
directors of a diversified holding company (that is, a company not
solely involved in financial institution activities) should come within
the parameters of section 19, and if so, what guidelines should be
implemented to make such a determination. Elements of this issue may
involve the relation between the size of the parent holding company and
the insured depository institution (does the insured institution
represent one percent of the holding company's business or 75% of the
business) and where the insured institution fits into the overall
structural organization of the holding company's business.
    The FDIC recognizes that Section 19 and the proposed Policy
Statement interpreting Section 19 would impose burdens upon insured
depository institutions and those parties dealing with the
institutions. For example, insured institutions would be required to
determine the criminal backgrounds of temporary employees hired through
a temporary employment service. The FDIC, however, believes that such
burdens are compelled by the statutory language of section 19. The FDIC
is interested in legal analyses which will assist it in devising
policies which will reduce the burden upon insured depository
institutions which the FDIC believes is imposed by the statute. The
FDIC will use the comments and the legal analyses received to develop a
final statement of policy.
    The Board of Directors of the Federal Deposit Insurance Corporation
hereby proposes to revise its Statement of Policy regarding
applications under section 19 of the FDI Act as follows:

FDIC Statement of Policy for Section 19

    Section 19 of the Federal Deposit Insurance Act prohibits, without
the prior written consent of the Federal Deposit Insurance Corporation
(FDIC), a person convicted of any criminal offense involving dishonesty
or breach of trust or money laundering (covered criminal offenses), or
who has agreed to enter into a pretrial diversion or similar program
(program entry) in connection with a prosecution for such offense from
being an institution-affiliated party, owning or controlling directly
or indirectly an insured depository institution, or otherwise
participating, directly or indirectly, in the conduct of the affairs
(collectively, participating in the affairs) of an insured depository
institution (insured institution).
    Section 19 is a statutory bar to participation. The purpose of an
application is to provide an opportunity to an applicant to demonstrate
that, notwithstanding the bar, an individual is fit to participate in
the conduct of the affairs of an insured institution without posing a
risk to the safety or soundness of the insured institution or impairing
public confidence therein. The burden is upon the applicant to
establish that the application warrants approval. An application may be
approved because the person will not be in a position to constitute a
risk to the institution. A person who will occupy clerical,
maintenance, or service positions, or in some instances, administrative
or teller positions, generally falls into this category. Such an
application will not normally require an extensive review. A more
detailed analysis will be performed in the case of a person who would
be in a position to control or influence the conduct of the affairs of
the insured institution.

A. Scope of Section 19

(1) General
    Upon conviction or program entry without the prior written consent
of the FDIC, a person is automatically by operation of law prohibited
from: (i) Becoming or continuing as an institution-affiliated party;
(ii) owning or controlling directly or indirectly an insured
institution; or (iii) participating, directly or indirectly, in the
conduct of the affairs of an insured institution. Additionally, such a
person employed by an insured institution's holding company or an
affiliate, subsidiary or joint venture of an insured institution or of
its holding company may be prohibited from continuing such employment
without the prior written consent of the FDIC where such person is
engaged in performing banking or banking related activities on a
regular and material basis. Person, for purposes of section 19, means a
natural person and does not include a corporation, firm, or other
business entity.
(2) Controlling Shareholder or Control Group Member
    A controlling shareholder or a member of a control group of an
insured institution may not without the prior written consent of the
FDIC engage in the following conduct: (i) Exercise any voting rights in
any shares of stock of the insured institution or its holding company;
(ii) own or control such shares of stock so as to result in owning or
controlling, directly or indirectly, the largest percentage of shares
in the insured institution; (iii) control such shares of stock so as to
result in controlling the management or policies of an insured
institution; (iv) solicit, procure, transfer, attempt to transfer,
vote, or attempt to vote any proxy, consent or authorization with
respect to any voting rights in any insured institution; or (v) modify
or set aside any voting agreement previously approved by the
appropriate federal banking agency.

[[Page 39842]]

(3) Independent Contractor
    In determining whether an application is required for an
independent contractor's participation in the conduct of the affairs of
an insured institution, an analysis is required of the nature and scope
of the person's proposed activity. Participation by an independent
contractor, or an employee of an independent contractor, would occur
where either is performing banking or banking related activities on
behalf of, or for the benefit of, an insured institution on a regular
and material basis so as to be involved in the ordinary course of
operations of the institution or to be exercising control over such
operations.

B. Criteria for Evaluating Conduct Requiring a Section 19 Application

    The conviction of or program entry by any adult or minor treated as
an adult by a court of competent jurisdiction will require an
application to be submitted to the FDIC for prior written consent
before engaging in banking activities.
(1) Convictions
    There must be present a conviction of record. Arrests, pending
cases not brought to trial, acquittals, or any conviction which has
been reversed on appeal are excluded from the requirements of section
19. A conviction which is being appealed will require an application
until or unless reversed. A conviction, which has been expunged or for
which a pardon has been granted, requires an application.
(2) Pretrial Diversion or Similar Program
    Program entry as determined by federal, state or local law, may be
formal or informal in nature and is characterized by a suspension or
eventual dismissal of charges or criminal prosecution upon agreement by
the accused to treatment, rehabilitation, restitution or other
noncriminal or nonpunitive alternatives. Included in this definition
are programs where the accused agrees to authorize a corporate entity
under his control to plead guilty and the accused may make some
monetary payment.
(3) Dishonesty or Breach of Trust
    A conviction or program entry includes felonies, misdemeanors, and
other criminal offenses as determined by federal, state or local law,
wherein dishonesty or breach of trust or money laundering is involved.
Dishonesty is defined to mean to directly or indirectly cheat or
defraud; or to cheat or defraud for monetary gain or its equivalent; or
to wrongfully take property lawfully belonging to another in violation
of any criminal statute or code. Acts of dishonesty are further defined
to include, but are not limited to, such acts which involve want of
integrity, lack of probity, or involve a disposition to distort,
defraud, cheat or to act deceitfully or fraudulently. Furthermore,
dishonesty may also include crimes which by Federal, state, or local
criminal statutes and codes are defined as dishonest. Breach of trust
is defined to mean a wrongful act or use, misappropriation, omission
with respect to any property or fund which has been lawfully committed
to a person in a fiduciary or official capacity, or the abuse of one's
official position or fiduciary relationship to engage in a wrongful
act, use, or omission.
(4) Drug Offenses
    All convictions for offenses concerning the illegal manufacture,
sale, distribution of or trafficking in controlled substances shall
require an application. A controlled substance shall mean those so
defined by federal law whether the conviction is by a federal or state
court. Conviction of or program entry by any adult or minor for use of
a controlled substance does not per se constitute crimes involving
dishonesty or breach of trust or money laundering. However, the
circumstances of the offense may contain elements of dishonesty or
breach of trust or money laundering as the FDIC traditionally has
applied these terms to section 19. The FDIC will determine, on a case-
by-case basis, whether an application is required and whether to
withhold consent from a person convicted of such an offense.
(5) Youthful Offender Adjudgments
    Adjudgment by a court against a person as a "youthful offender"
under any youth offender law or adjudgment as a "juvenile delinquent"
by any court having jurisdiction over minors as defined by state law
does not require an application. Such adjudications are not considered
convictions for criminal offenses.

C. General Procedures To Be Followed By An Insured Institution and
Person With Respect To A Section 19 Application

    Section 19 imposes a duty upon the insured institution to make a
reasonable inquiry into whether a person has a conviction or program
entry with respect to a covered criminal offense. Reasonable inquiry
requires the insured institution to take steps appropriate under the
circumstances, consistent with applicable law, to avoid hiring or
permitting participation in its affairs by a person who has a
conviction or program entry for a covered criminal offense. In certain
circumstances, an insured institution may believe that undertaking a
minimal inquiry is not necessary. The FDIC believes that at a minimum
each insured institution should establish a screening process which
provides the insured institution with information concerning any
previous or present convictions or program entries that a job applicant
may have.
    For example, a reasonable inquiry that would satisfy the
requirements of Section 19 and is consistent with industry practices
includes the following: (1) The completion of a written employment
application which requires listing any and all previous convictions or
program entries; (2) the fingerprinting and processing of fingerprints
of any person prior to his or her participation in the affairs of an
insured institution; and (3) periodic inquiry to determine whether a
person is the subject of a conviction or program entry. This is not a
requirement imposed by the FDIC and alternatives may be employed.
However, the FDIC will look at the circumstances of each situation to
determine if the inquiry is reasonable. Upon notice of a previous or
present conviction or program entry for a covered criminal offense, the
insured institution must seek the consent of the FDIC prior to the
person's participation, or the person's continued participation.
    When an application is required, forms and instructions should be
obtained from and the application filed with the appropriate FDIC
Regional Director. The application must be filed by an insured
institution on behalf of the person, except where the person is a
shareholder seeking to exercise voting rights and the insured
institution has refused to file an application on his behalf. If a
person currently employed by an insured institution is discovered to
have a conviction or program entry, upon request, the Regional Director
may in his discretion grant a conditional approval pending the
processing of the application.

D. Criteria for Evaluation of Section 19 Applications

    The essential criteria in assessing an application for consent are:
(1) Whether the person has demonstrated his or her fitness to
participate in the conduct of the affairs of an insured institution;
and (2)(i) whether the affiliation, ownership, control, or
participation by the person in the conduct of the affairs of the
insured institution may constitute a threat to the safety or soundness
of the insured institution or the interest of its

[[Page 39843]]

depositors; or (ii) whether the affiliation, ownership, control, or
participation may threaten to impair public confidence in the insured
institution.
    Important considerations in determining the risk to the insured
institution are the following factors: (i) The conviction or program
entry for a covered criminal offense and the specific nature of the
offense involved and the circumstances surrounding it; (ii) the
evidence of rehabilitation since the date of the conviction, parole, or
suspension of sentence, including the reputation of the person since
the conviction, the age of the person at the time of the conviction,
and the time elapsed since the conviction; (iii) the position to be
held by the person in the insured institution and/or the type of
participation to be engaged in directly or indirectly in the conduct of
the affairs of the insured institution by the person; (iv) the amount
of influence and control the person will be able to exercise over the
affairs and operations of the insured institution; (v) the ability of
management at the insured institution to supervise and control the
activities of the person; (vi) the level of ownership which the person
will have at the insured institution; (vii) the applicability of the
insured institution's fidelity bond coverage to the person; (viii) the
opinion or position of the primary Federal and/or state regulatory
agency; and (ix) any additional factors in the specific case that
appear relevant.
    These criteria will also be applied by the FDIC to determine
whether the interests of justice are served in seeking an exception in
the appropriate court when an application is made to terminate the ten-
year ban prior to the expiration date for a person convicted for the
commission of, or the conspiracy to commit, one of the enumerated
violations of Title 18 set forth in section 19.
    Approval orders in section 19 cases will generally be subject to
the condition that the person shall be bonded to the same extent as
others in similar positions. When deemed appropriate, approval orders
may also be made subject to the condition that the prior consent of the
FDIC shall be required for any proposed significant changes in the
duties and/or responsibilities of the person. Such proposed changes may
in the discretion of the Regional Director require a new application.
In situations where a person has been approved under a section 19
action for participation in one insured institution and subsequently
seeks to participate in another insured institution, approval does not
automatically follow. In such cases, another application must be
submitted to the FDIC to determine whether approval should be granted.

    By order of the Board of Directors.

    Dated at Washington, DC, this 24th day of June 1997.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 97-19550 Filed 7-23-97; 8:45 am]
BILLING CODE 6714-01-P
Last Updated 11/9/2011 communications@fdic.gov