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[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provision are outdated.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