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4000 - Advisory Opinions


"Pre-Trial Diversion Agreements and Other Similar Programs" Language in Section 19 Cases

FDIC--94--29

June 22, 1993

H. Andrea Gribble, Senior Counsel

This responds to ***'s letters dated July 20, 1992 and March 1, 1993 to Senior Deputy General Counsel Douglas H. Jones regarding your concern with the amendment to section 19 of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. 1829, which extended its coverage to persons who have agreed to enter pre-trial diversion or similar programs in connection with their prosecution for any criminal offense involving dishonesty or breach of trust. The FDIC's Legal Division apologizes for the lengthy delay in our response to your original inquiry.

By way of background, section 19 of the Act is a companion provision to section 8(g) of the Act, 12 U.S.C. 1818(g), which pertains to the suspension and removal of institution-affiliated parties who are indicted for certain types of offenses. On August 9, 1989, section 8(g) of the Act was amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), Public Law No. 101--73. Where previously, individuals who were indicted or named in informations or other complaints for crimes involving dishonesty or breach of trust which were punishable by imprisonment for a term exceeding one year could be suspended from office pursuant to section 8(g), and could be permanently barred if ultimately convicted, the FIRREA amendments broadened applicability of the provision regarding permanent 8(g) prohibition orders to include those individuals who have agreed to enter a pre-trial diversion or other similar program.

The Conference Report accompanying the 1989 amendment to section 8(g) indicates that Congress intended that section to apply to a broader class of individuals than those who are actually "convicted." A reference to those who enter a plea of nolo contendere was deleted from draft legislation as unnecessary, because such a plea results in a judgment of conviction. The addition of language which covers situations in which no formal conviction is entered, therefore, indicates that the section clearly was meant to be broadened to cover instances in which no conviction was obtained. On November 29, 1990, in Public Law No. 101--647, Congress, indicating a need for stricter controls over the hiring of individuals who work for and with banks,1 similarly expanded the language in section 19 to cover pre-trial diversion and other similar programs.

We agree with the purpose of these amendments, which is to protect institutions from a wide range of individuals whose criminal history indicates a greater risk of abuse to the institution and its depositors. Individuals who enter pre-trial diversion or other similar programs may or may not be free of culpability for the charges alleged against them, consequently, we are concerned that such individuals may become institution-affiliated parties without our knowledge, and occasionally, without the knowledge of the institution which hires them.

That being said, I hope the following will address some of the specific concerns expressed in ***'s letters.

The July 20, 1992 letter requested clarification as to whether any or all of the following groups of individuals would come within the scope of section 19. The groups and responses are as follows:

1.  Individuals who have been arrested and have a pending charge for a theft or dishonest act.

The pre-trial diversion language of section 19 does not apply to individuals in this category. Only those individuals who have agreed to enter, and who have been accepted into the program, were intended to be covered by this provision. However, section 8(g), 12 U.S.C. 1818(g), addresses individuals who have been "charged in any information, indictment, or complaint" with the commission or participation in crimes involving dishonesty or breach of trust (punishable by imprisonment for a term exceeding one year under State or Federal law) or individuals charged with criminal violation of section 1956, 1957, or 1960 of Title 18 or section 5322 of Title 31 (bank fraud and money laundering related offenses). Under section 8(g), any such individual may be suspended from office, pending trial or other hearing, by the appropriate Federal banking agency if the agency determines that the individual may pose a threat to the interests of depositors or the institution. If the individual is ultimately convicted, or enters into a pre-trial diversion program, the agency may enter an order permanently barring that individual from the bank, or any other insured depository institution, and in the case of the bank fraud/money laundering offenses, the agency is mandated to issue such an order. It is interesting to note that this statute includes a provision which states:

A finding of not guilty or other disposition of the charge shall not preclude the agency from instituting proceedings after such finding or disposition to remove such party from office or to prohibit further participation in depository institution affairs, pursuant to paragraph (1), (2), or (3) of subsection (e) of this section.

See U.S.C. 1818(g)(1)(D)(ii). This could be interpreted as an indicator from Congress that the FDIC look behind dismissal of criminal charges and of conviction records before allowing an individual to be hired and/or continue to serve in an insured depository institution.

2.  Individuals who are currently participating in a pre-trial diversion program for a theft or dishonest act.

These individuals would be covered by the pre-trial diversion provisions of section 19. Before a pre-trial diversion program may be entered into and time served, the participant, the appropriate U.S. or State attorneys' office, the judge, and in many jurisdictions, the victim, must agree that the participant can go into the program. Until agreement between the parties has been reached, the participant's offer to go into such a program is merely that--an offer. Upon agreement of all necessary parties, the individual is then deemed to be participating in the program and is subject to the provisions of section 19.

3.  Individuals who have entered a pre-trial diversion program for a theft or dishonest act but whose participation has been terminated prior to the completion of the program.

These individuals would also be covered by the "pre-trial diversion" language, and likely by the "conviction" language of section 19 as well. As will be discussed later in this letter, pre-trial diversion agreement programs were created to help address the problem of over-crowded prisons. In many jurisdictions, one of the primary requirements before entry into such a program is accepted is the entry of a guilty plea by the participant which is accepted by the presiding official (usually a judge), and the "conviction" is held in abeyance. The pre-trial diversion program "diverts" such an individual away from the normal sentencing procedures, into the program. Since successful completion of the program is what allows the individual to avoid sentencing and imprisonment, it would seem that failure to successfully complete the program reverts the individual back "on track" to the status of someone who has entered a guilty plea, whose plea has been accepted, and whom the court can, and usually does, immediately pronounce as convicted, and is subsequently sentenced accordingly. The timing of these procedures would seem to be very rapid, if not almost instantaneous. It would seem logical then, that such an individual would be subject to the pre-trial diversion language while the individual is in the program, and subject to the ordinary "conviction" language of section 19 almost immediately upon being dropped from the program.2

4.  Individuals who previously entered a pretrial diversion program for a theft or dishonest act and have successfully completed the program and the charges are dismissed.

These individuals would also be subject to the application of the requirements of section 19, as they are individuals who have "agreed to enter a pre-trial diversion agreement program." The statute provides no relief for individuals who have successfully completed their sentences upon conviction, nor does it otherwise address individuals who have successfully completed a pre-trial diversion agreement program. As will be discussed later, whether or not the charges are ultimately dismissed is irrelevant in such a situation.

I note that the letter of July 20, 1992 indicates that BANC ONE views section 19 as somehow precluding banks from hiring individuals who are subject to its terms. This is simply not the case. Nothing in section 19, or the Act, states that employment should be refused to individuals who have been convicted of crimes involving dishonesty or breach of trust. Section 19 merely requires that any individual convicted of a crime involving dishonesty or breach of trust, including those individuals who have entered into pre-trial diversion agreements or other similar programs for any such crime, must obtain the FDIC's prior written approval before working for a bank. This statutory prior approval requirement would seem to preclude your suggestion to allow banks to hire individuals pending receipt of a response to an exemption request.

While you complain generally about the burden of the exemption process precluding the hiring of covered individuals, we believe the FDIC has been very reasonable in its application of section 19, and has, under appropriate circumstances, granted numerous section 19 applications. By way of example, in 1991, of 73 applications for permission to serve pursuant to section 19, 71 were approved and 2 were denied. Additionally, individuals whose section 19 applications have been denied are not without an opportunity for further due process. FDIC regulations provide for a hearing, if requested, in any case in which an application pursuant to section 19 has been denied. See 12 C.F.R. 308.156-308.160.

Furthermore regarding the statement in the March 1, 1993 letter that it takes several months to receive a response on a request for a section 19 exemption, FDIC records reflect that the average processing time for all section 19 applications nationwide in 1992 was 44 days. I learned from discussions with the FDIC's Division of Supervision that it appears most straightforward section 19 applications take substantially less time than this to process. Unless the section 19 application involves some complex issue, or is in some fashion incomplete, it should not take several months to process.

We do not disagree that the recent statutory amendments to section 19 impose additional burdens on banks to make sure that each and every job applicant, and in fact, each and every bank employee, understands that for depository institutions insured by the FDIC, information relating to criminal indictment, conviction, participation in pre-trial diversion agreements or other similar programs, etc. against that individual must be fully disclosed before the individual can be considered for employment. It is clear, however, that Congress believed that FDIC consideration of the activities of such individuals prior to their employment by an insured depository institution was significantly important to the protection of the industry and outweighed any disadvantages caused by its implementation.3

You also expressed concern regarding state law prohibitions against employers taking adverse actions on the basis of arrest records or dispositions of criminal charges. Specifically, citations were made to the Wisconsin Fair Employment Act (Sec. 111.31-32) and to the Michigan Code (MSA 3.548).4 It is fairly common statutory interpretation that federal law supersedes state law, and it is our opinion that the requirements of section 19 applicable specifically to Federally insured depository institutions would supersede any general state law prohibitions against hiring restrictions.

It is not without precedent that certain classes of jobs are statutorily deemed to be sensitive enough in nature to permit special inquiries into background prior to employment, despite general prohibitions to the contrary. In fact, it has been our experience that many states having such prohibitions against discrimination in hiring because of possible criminal involvement also include several "carve-outs" to these prohibitions, usually for special classes of jobs which are deemed by the state legislature to require a higher degree of public confidence. Jobs of this nature appear to include police officers, public officials, attorneys, teachers, and some licensed professions, to name a few. For example, immediately following the provisions of Wisconsin law cited by you, is section 111.335 of the Wisconsin Fair Employment Act, entitled "Arrest or conviction record; exceptions and special cases." (a copy of which is attached). This provision seems to indicate that for certain types of jobs, an employer may consider an individual's criminal record. Also included, for your information, is an exception for employment of individuals whose work would require them to be bonded.5

It is further interesting to note that Wisconsin does not disapprove of laws which prohibit the employment of individuals with conviction records when the circumstances of the conviction and/or arrest relate to the circumstances of the particular job or licensed activity. See Law Enforcement Standards Bd. v. Village of Lyndon Station, 305 N.W.2d 89 (1981), which upheld an administrative rule prohibiting employment of convicted felons as law enforcement officers. The Lyndon Station court stated: "Surely, an administrative rule prohibiting persons convicted of felonies from receiving appointments as law enforcement officers is designed to insure that only those who possess proper professional character, education and training are appointed to protect and promote the health, welfare and safety of the people of this state." Id at 96. Could anything less be said with regards to instilling confidence in the banking system? Because of the sensitive nature of banking, and because the nature of the business requires the implicit trust by the public of a bank's employees, there should be little doubt that crimes involving dishonesty or breach of trust as stated in section 19, must be deemed to relate to the circumstances of participating in the conduct of the affairs of a bank.

It does not appear that Wisconsin has a per se formal pre-trial diversion agreement program. I was unable to find any particular statute or policy which provided for such a program. About the only material I did uncover was a fairly old article entitled "Pre-Trial Diversion" by Judge Frederick P. Kessler, which encouraged adoption of such a program, and laid out what the background and criteria for such a program should be. I include a copy of this article with this letter, because I felt you would find the reasons for creating such a program of interest. Pre-trial diversion does seem to exist in some form or fashion in Wisconsin, because it is possible to find case law somewhat obliquely referencing such a program. However, no state case law exists which addresses the particular matters at issue here.

The State of Michigan likewise carves out exceptions to its anti-employment discrimination laws. Included in the same sentence of the statute which prohibits an employer from "making a record of information regarding an arrest, detention, or disposition of a violation of law in which a conviction did not result," is a specific exception for a law enforcement agency of the state and a political subdivision of the state. See Michigan Statutes, Annotated § 3.548(205a).

We hope this response is of assistance to you. If you have any questions, or need any additional information, please feel free to call me at (202) 898-3726.

1As further evidence that Congress is seriously concerned about the backgrounds of individuals who participate in the conduct of the affairs of insured depository institutions, Congress again recently amended sections 19 and 8(g). Amendments to Section 19 added by the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), which was enacted December 19, 1991, included a mandatory ten-year bar for persons who have been convicted (or agreed to enter a pre-trial diversion program) for certain banking-related crimes from applying for permission to participate in an insured depository institution. The 10-year absolute bar to application applies unless the FDIC makes a motion to the original sentencing court to waive the bar.
  Also, in October of 1992, Congress enacted the "Annunzio-Wylie Anti-Money Laundering Act" which, among other things, placed further conditions on hiring individuals and broadened the FDIC's powers and responsibilities with regards to sections 19 and 8(g).
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2Even should a "gap" occur, it should be noted that nothing precludes the appropriate Federal banking agency from suspending and/or barring such an individual pursuant to 12 U.S.C. 1818(e) based on the conduct which was the subject of the pre-trial diversion and/or subsequent conviction, under appropriate circumstances. Go back to Text

3Although not entirely analogous, in somewhat contemporaneous legislation, Congress ensured that all the federal banking agencies must also now be more concerned about the backgrounds of individuals they are considering hiring, and must now be more specific in the questions they ask before hiring an individual. See 12 U.S.C. 1818(e)(7). Go back to Text

4Pursuant to our telephone conversation, I concentrated my research on the two states you selected--Wisconsin and Michigan. Go back to Text

5See: Bear v. City of Wauwatosa, 716 F.2d 1117. (Plaintiff's license to sell guns in city was taken away when plaintiff received felony conviction of second degree sexual assault for consensual sex acts with a 14-year old girl in his gun shop, which had become a teenage hangout, held not to be prohibited discrimination); and Milwaukee County v. Labor and Industry Review Commission, 407 N.W. 2d 908 (Felony conviction for homicide by reckless conduct deemed "substantially related" to circumstances of job as county crisis intervention specialist). Go back to Text


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