BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
DIVISION OF BANKING
SUPERVISION AND REGULATION
SR 90-38 (FIS)
December 5, 1990
TO THE OFFICER IN CHARGE OF SUPERVISION
AT EACH FEDERAL RESERVE BANK
SUBJECT: The Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery Act of 1990
On November 29, 1990, the President signed into law the Crime Control Act of 1990 (Public Law 101-647, 104 Stat.4789). Title XXV of this legislation is known as the "Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery Act of 1990" (the "Bank Fraud Act"). The Bank Fraud Act contains several new provisions of law or amendments to existing civil and criminal laws that affect the Federal Reserve's, as well as the other federal financial institutions supervisory agencies', conduct of their regulatory responsibilities and the Department of Justice's criminal law enforcement duties. The following two sections provide, in the first part, a description of the provisions of the Bank Fraud Act that relate to our formal enforcement activities and to the Federal Reserve's supervision of domestic and foreign financial institutions subject to our jurisdiction, and, in the second section, a brief outline of the provisions of the new law that pertain to the Department of Justice's criminal law enforcement responsibilities or to the Federal Deposit Insurance Corporation's ("FDIC") or Resolution Trust Corporation's ("RTC") receivership or conservatorship duties:
The Provisions of the Bank Fraud Act Relating to the Federal Reserve's and the Other Federal Banking Agencies' Enforcement Actions and Supervisory Responsibilities
(1) Written Agreements and Public Hearings Section 2547 of the Bank Fraud Act significantly expands the public disclosure requirements relating to the federal banking agencies' formal enforcement actions. As of November 29, 1990, the effective date of the Bank Fraud Act, any written agreement or other written statement that may be enforced by the agencies-- such as by using a civil money penalty assessment action or a U.S. district court proceeding--will have to be published and made available to the public unless an agency determines, in its discretion, that publication of the written agreement or statement would be contrary to the public interest. This section of the Bank Fraud Act amends section 8(u) of the Federal Deposit Insurance Act, as amended (12 U.S.C. 1818(u)) (the "FDI Act"), which already required the publishing and public availability of all final orders issued by the banking agencies.1
In addition, section 2547 of the Bank Fraud Act requires that all hearings on the record with respect to any notice issued by a federal banking agency will be open to the public, unless the agency determines, in its discretion, that holding a public hearing would be contrary to the public interest.2 Transcripts of all testimony and copies of all documentary evidence relating to public hearings are to be made public as well.3 This section of the new law also requires each of the federal banking agencies to submit a written report to Congress at the end of each calendar quarter regarding any determination by the agency to not publish any order or written agreement or statement or to not hold a public hearing.
Modification to or termination of any order or written agreement made public under section 2547 of the Bank Fraud Act will also have to be made public. This provision of section 2547 modifies a change to the federal banking agencies' public disclosure requirements that was contained in the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). Since the enactment of FIRREA, all terminations of final orders had to be made public, even though the initial issuance of the order itself was not made public. Now, only terminations and modifications of public orders and agreements will be made public.
It must be emphasized that the changes mandated by this section of the Bank Fraud Act will require, in most instances, the holding of public hearings and the public release of most documents introduced into evidence during those hearings, including examiner's work papers, file memorandums, reports of examination and inspection, and correspondence between a problem institution or wrongdoer and the Federal Reserve Bank. Your examination and supervisory staffs should be advised of this change in the law and should take all appropriate actions to ensure, as we routinely already do, that all written documents prepared in connection with any supervisory matter be accurate and free of insupportable conclusions or opinions.4
(2) Retention of Documents Section 2547 of the Bank Fraud Act requires the federal banking agencies to retain for a period of at least six years all public written agreements and statements and orders, as well as any modifications or terminations thereof, and "all informal enforcement agreements and other supervisory actions and supporting documents issued with respect to or in connection with any administrative enforcement proceeding initiated by" a federal banking agency under section 8 of the FDI Act (12 U.S.C. 1818) or any other laws. This new provision of law may require a modification of the document retention procedures used by the Federal Reserve, both here at the Board and at each of the Federal Reserve Banks. Under any circumstances, you should initiate procedures designed to ensure compliance with the new six-year document retention requirement immediately.
(3) Capital Commitments and the Bankruptcy Code Section 2522 of the Bank Fraud Act amends the U.S. Bankruptcy Code to prevent the use of bankruptcy proceedings by bank and thrift holding companies to evade commitments to maintain capital at an insured depository institution made to the Federal Reserve, the other federal banking agencies, and the RTC. The parameters of this new provision of law will have to be determined as we explore the types of commitments subject to the law and examine the bankruptcy proceedings that were recently initiated by troubled bank holding companies.
Section 2522 of the Bank Fraud Act also amends the U.S. Bankruptcy Code to prevent the use of the bankruptcy laws to evade restitution orders issued by federal courts against individuals convicted of criminal offenses involving financial institutions.
(4) Golden Parachutes and Indemnification Payments Section 2523 of the Bank Fraud Act authorizes the FDIC to prohibit or limit, by regulation or order, any golden parachute payment or indemnification payment. Section 2523 contains a complex series of statutory tests that need to be applied by the FDIC when it determines whether a payment is a golden parachute or an indemnification in the first instance and, if it is, whether it is appropriate under the circumstances of the particular institution-affiliated party and his or her financial institution.
For the purposes of this section, the term "golden parachute payment" is generally defined as any payment or any agreement to make a payment by any insured depository institution or depository institution holding company to an institution-affiliated party5 that is contingent on the termination of the party's affiliation with the institution or holding company and is received on or after the date on which (a) the insured depository institution, depository institution holding company or nonbank subsidiary of such holding company is insolvent; (b) a conservator or receiver is appointed for such institution; (c) the institution's appropriate federal banking agency determines that the institution is in a troubled condition; (d) the insured depository institution has been assigned a CAMEL composite rating of 4 or 5; or (e) the insured depository institution is subject to a termination of insurance proceeding initiated by the FDIC.6 It is important to note that section 2523 also provides that payments that would qualify as "golden parachute payments" under section 2523 but for the fact that they were made before the events described above could still be subject to the FDIC's prohibition and limitation authority if the payment or agreement to make the payment was made in contemplation of the occurrence of one of the events described in the preceding sentence. "Golden parachute payments" do not include payments made under certain retirement plans qualified under the Internal Revenue Code, payments made pursuant to bona fide deferred compensation plans or arrangements that the FDIC determines, by regulation or order, are permissible, and all payments made by reason of the death or disability of the institution-affiliated party.
For the purposes of section 2523, the term "indemnification payment" is defined to include any payment or any agreement to make a payment by any insured depository institution or depository institution holding company for the benefit of any person, who is or was an institution-affiliated party, to pay or reimburse such person for any liability or legal expense with regard to any administrative proceeding or civil action initiated by a federal banking agency that results in the issuance of a final cease and desist, civil money penalty assessment, or removal or prohibition order.
Section 2523 details the factors that are to be considered by the FDIC when it determines, by regulation or order, to limit or prohibit a golden parachute or indemnification payment. These factors include whether the institution-affiliated party committed any fraudulent act or engaged in any insider abuse with regard to the institution or holding company that had a material effect on its financial condition; whether the individual is substantially responsible for the insolvency of the institution or holding company or its troubled condition; whether the individual materially violated any applicable federal or state banking law or regulation that affected the condition of the institution or holding company; whether the institution-affiliated party violated one of the criminal statutes applicable to the institution or holding company; whether the individual was in a position of managerial or fiduciary responsibility; and the length of time that the individual was associated with the institution or holding company and whether the payment reasonably reflects compensation earned over the period of employment and the compensation represents a reasonable payment for services rendered.
Section 2523 of the Bank Fraud Act also provides that this new law should not be construed as prohibiting any insured depository institution or depository institution holding company from purchasing any commercial insurance policy or fidelity bond, provided that such policy or bond does not cover indemnification payments in connection with any federal banking agency's administrative proceeding that results in the issuance of a final cease and desist, civil money penalty assessment, or removal or prohibition order.
The legislative history relating to this section of the Bank Fraud Act makes it clear that this law does not limit or restrict the Federal Reserve from exercising its existing enforcement authority under section 8 of the FDI Act to prohibit state member banks and bank holding companies and institution-affiliated parties from entering into unsafe and unsound golden parachute or indemnification contracts. Accordingly, we need to understand fully the restrictions contained in this new law as well as the Congressional interest in the Federal Reserve's continuation of its monitoring of this area and develop examination procedures that are adequate to address the new specific, as well as general, constraints on golden parachute and indemnification payments. Board staff is currently in the process of preparing a separate SR letter focusing on these issues.
(5) Salary and Legal Expense Prepayment Restrictions In addition to the provisions of section 2523 of the Bank Fraud Act described above, this section also makes it illegal for any insured depository institution or depository institution holding company to prepay the salary or any liability or legal expense of any of its institution-affiliated parties if such payment is made in contemplation of the insolvency of such institution or holding company or after the commission of an act of insolvency and with a view to, or has the result of, preventing the proper application of the assets of the institution to its creditors or preferring one creditor over another.
Recent experiences with problem banks and bank holding companies and individuals who engaged in the wrongdoing that caused the problem conditions indicate that this new law will be very useful. It will prevent, inter alia, the establishment of trust funds to pay for the legal expenses of wrongdoers on the eve of bankruptcy.
(6) Prejudgment Attachments The Federal Reserve and the other federal banking agencies are now authorized, by section 2521 of the Bank Fraud Act, to apply to a U.S. district court for a restraining order that prohibits any person subject to an administrative enforcement action involving the assessment of a civil money penalty, money damages or a cease and desist order requiring restitution from withdrawing, transferring, dissipating, or disposing of any funds, assets or other property and that appoints a temporary receiver to administer the restraining order. Under this new law, the court is required to issue a restraining order upon a prima facie showing that the money damages, restitution or civil money penalties sought by the agencies are appropriate.7
While the Federal Reserve has not previously initiated an action aimed at seizing an institution-affiliated party's funds or assets in order to satisfy a potential civil money penalty assessment order or cease and desist order requiring restitution, it is important to note that this power now exists and that, in appropriate circumstances, Board staff can initiate, in conjunction with the Department of Justice, the type of U.S. district court action described in this section.
(7) Enforcement Actions Relating to Foreign Financial Institutions and Their Branches and Agencies Section 2596 of the Bank Fraud Act clarifies a discrepancy relating to the Federal Reserve's enforcement powers over foreign financial institutions and their branches and agencies doing business in the United States. Now, section 8(b)(4) of the FDI Act (12 U.S.C. 1818(b)(4)) clearly provides that all of the enforcement powers that the Federal Reserve has against domestic financial institutions and their institution-affiliated parties, such as the authority to initiate cease and desist, civil money penalty assessment and removal and prohibition actions, are applicable to foreign financial institutions and to the persons associated with them.
(8) Foreign Investigations A new subsection "v" of section 8 of the FDI Act (12 U.S.C. 1818(v)) was added by section 2532 of the Bank Fraud Act, and it provides that a federal banking agency8 may request the assistance of any foreign banking authority and maintain an office outside of the United States in connection with any investigation, examination or enforcement action taken under the FDI Act. Section 8(v) of the FDI Act, as amended, now also provides that one of the federal banking agencies may, at the request of any foreign banking authority, assist such authority in conducting an investigation to determine whether any person has violated any law or regulation relating to a banking matter or currency transaction law administered or enforced by the foreign banking authority. Section 2532 details the factors to be considered when a federal banking agency considers a request for assistance from a foreign banking authority, including whether there is reciprocal treatment, and ensures that the provisions of the Right to Financial Privacy Act and its exemptions are applicable to the transfer of information to the foreign banking authority.
(9) Restrictions on the Activities of Convicted Persons Section 2502 of the Bank Fraud Act amends section 19 of the FDI Act (12 U.S.C. 1829), which restricts the activities of persons convicted of certain criminal offenses involving dishonesty or breach of trust, without the prior approval of the FDIC. The provisions of FIRREA expanded the powers of the FDIC to control the activities of persons subject to section 19 of the FDI Act. Section 2502 again expands the powers of the FDIC under this statute by explicitly providing that a convicted person cannot be an institution-affiliated party, or own or control, directly or indirectly, an insured depository institution without the FDIC's prior approval.
As you may be aware, Board staff is currently in the process of working with the staff of the FDIC to develop written guidelines concerning the provisions of section 19 of the FDI Act and how it will be applied by that agency, inter alia, to persons associated with bank holding companies and nonbank subsidiaries of such companies. We expect that the FDIC will shortly issue these proposed guidelines for public comment.
The Provisions of the Bank Fraud Act Relating to the Department of Justice, the FDIC or the RTC
(1) Criminal Statutes Made Applicable to Foreign Financial Institutions and Their Branches and Agencies Section 2597 expands the U.S. Criminal Code to cover the activities of the branches and agencies of foreign banks and Edge corporations and the individuals associated with them. Coupled with the aforementioned changes to the Federal Reserve's enforcement authority over foreign entities, the criminal law amendments described below mean that the branches and agencies of foreign banks, as well as Edge corporations, are now subject basically to the same civil enforcement and criminal laws as those applicable to domestic financial institutions.
Section 2597 modifies the U.S. Criminal Code by expanding the general definition of "financial institution" set forth in 18 U.S.C. 20 to include Edge corporations, Agreement companies, and branches and agencies of foreign banks9 and to include such foreign entities in the provisions of sections 212 (offer of loan or gratuity to an examiner), 213 (acceptance of loan or gratuity by a bank examiner), 648 (misusing public funds), 655 (theft by an examiner), 656 (misapplication of bank funds), 1004 (certification of checks), 1005 (false bank entries, reports and transactions), 1014 (false loan application statements), 1030 (e) (4) (computer fraud), 1906 (disclosure of information from an examination report), and 2113 (f) (bank robbery) of the U.S. Criminal Code.
(2) Department of Justice's Report to Congress Concerning Criminal Investigations, Prosecutions, and Civil Fines and Recoveries Section 2546 of the Bank Fraud Act requires the Department of Justice to maintain extensive records concerning its responsibilities over certain statutes that authorize it to assess and collect civil fines and issue restitution orders for some criminal activities at financial institutions and to submit periodic reports to Congress about its functions in these areas.
The recordkeeping responsibilities and reporting requirements set forth in section 2546 involve, inter alia, information about actions taken under section 951 of the U.S. Criminal Code, which empowers the Department of Justice to assess civil money penalties for violations of a variety of criminal statutes relating to financial institutions, including bank fraud, false statements to the government, and the misapplication of bank funds. Board staff and the staffs of the other federal banking agencies and the Civil Division of the Department of Justice have been developing an interagency agreement describing the procedures that will be used to submit criminal referral information to the Department of Justice in order to enable it to investigate and prosecute actions under section 951. This agreement should be executed shortly, and it will require us to forward criminal referrals to the Department of Justice that involve any one of the criminal statues set forth in section 951 and an offense involving over $200,000 or a significant insider. The recordkeeping and Congressional reporting requirements of section 2546 of the Bank Fraud Act and the new interagency agreement should result in more activity by the Department of Justice with respect to civil penalty actions under section 951.10
Section 2546 of the Bank Fraud Act also requires the Department of Justice to report to Congress on the administrative enforcement actions brought by the federal banking agencies against individuals who violate the criminal statutes that can give rise to civil penalty actions under section 951. Since Board staff maintains extensive records regarding all of our enforcement actions, we should be able to provide the Department of Justice with sufficient information in order to enable it to comply with this new requirement.
(3) New and Enhanced Criminal offenses The Bank Fraud Act created several new criminal offenses related to financial institutions and enhanced other existing criminal statutes. These include:
(a) 18 U.S.C. 656 and 1005--the bank fraud and the false reports and entries statutes are amended by adding references to a depository institution holding company, which makes these criminal offenses applicable to thefts, embezzlements and misappropriation of funds from holding companies as well as banks and to the falsification of bank holding company records in the same manner as they are to bank records. (Section 2595 of the Bank Fraud Act)
(b) 18 U.S.C. 1032--a new criminal offense involving the knowing concealment of an asset from the FDIC, as receiver or the RTC, as conservator, the corrupt impediment of the functions of the FDIC or the RTC in these areas, and the corrupt placement of an asset beyond the reach of the FDIC or the RTC is created. (Section 2501 of the Bank Fraud Act)
(c) 18 U.S.C. 1517--a new criminal offence involving the corrupt obstruction or attempt to obstruct an examination of a financial institution is created. (Section 2503 of the Bank Fraud Act)
(d) 18 U.S.C. 215(a), 656, 657, 1005, 1006, 1007, 1014, 1341, 1343, and 1344--the Bank Fraud Act increases the maximum period of imprisonment from 20 to 30 years for each of these offenses. (Section 2504 of the Bank Fraud Act)11
(e) 18 U.S.C. 225--the organization, management or supervision of a continuing financial crime enterprise (i.e., any of the offenses listed in the preceding paragraph committed by at least four persons acting in concert) and the receipt of $5 million or more from such an enterprise during any 24-month period makes an individual a "kingpin" subject to a fine of not more than $10 million and a prison_term of not less than 10 years. (Section 2510 of the Bank Fraud Act)
(4) Increased Funding for the Department of Justice and Related Agencies The Federal Bureau of Investigation, the offices of the U.S. Attorneys, the Criminal, Civil and Tax Divisions of the Department of Justice, the Internal Revenue Service, and the federal court system are each appropriated significant new funds, pursuant to section 2559 of the Bank Fraud Act, in order to enhance the agencies' and the courts' ability to address financial institution-related criminal activities.
With regard to increased resources for the criminal justice agencies, it should be noted that in another recently enacted law the Attorney General has been authorized to accept, without reimbursement, the services of the attorneys and other employees of the federal banking agencies, the RTC, and the United States Secret Service (the "USSS") and the Internal Revenue Service (agencies within the Department of the Treasury) in order to enhance the Department of Justice's ability to investigate and prosecute criminal activity in or against financial institutions. This law was enacted, among other reasons, because of the USSS had offered to provide its agents to assist the Federal Bureau of Investigation in its bank and thrift fraud investigations, and the offer was rejected due to complications associated with U.S. government personnel policies and questions about the level of control over other agency personnel that could be exerted by the Attorney General and the various U.S. Attorneys. The new law, which was included in the USSS's recent appropriations legislation, clarifies the powers of the Attorney General and sets the framework for cooperative efforts among the various agencies working on criminal matters involving financial institutions.
We expect that the USSS will begin working on bank fraud matters very soon and that the Federal Reserve Banks will be contacted by the USSS concerning its investigatory duties. Similarly, we expect that the Department of Justice and the offices of the U.S. Attorneys will make more requests for the loan of bank examiners in connection with their bank fraud investigations and prosecutions.
(5) Private Actions to Enforce Certain Criminal Statues Sections 2561 through 2594 of the Bank Fraud Act detail and extensive statutory scheme whereby private individuals can, under certain limited circumstances, bring causes of action, on behalf of the government, to enforce certain criminal laws and to uncover assets that are subject to government claims and receive awards for successful prosecutions of their lawsuits.
(6) Office of the Special Counsel and the Senior Interagency Group Sections 2536 through 2539 of the Bank Fraud Act create, for a period of five years, a Financial Institutions Fraud Unit within the Office of the Deputy Attorney General in the Department of Justice, assign an individual to be known as the "Special Counsel" to head the unit, and establish the Senior Interagency Group, comprised of officials from the federal banking agencies, the Department of Justice, the Department of the Treasury, and the RTC, to enhance the interagency coordination of investigations and prosecutions of financial institution-related fraud.12
(7) A National Commission The National Commission on Financial Institution Reform, Recovery, and Enforcement , which is to be composed of representatives appointed by the President, the House of Representatives, and the Senate, is established by sections 2551 to 2558 of the Bank Fraud Act. The National Commission, which has broad subpoena powers, is required to study various aspects of the thrift crisis and make findings and various aspects of the thrift crisis and make findings and recommendations to Congress concerning the causes of the problem and steps that can be taken to prevent reoccurrences withing the thrift and banking industries.
In the event that you have any questions concerning any of the matters described herein, please contact Herbert A. Biern, Assistant Director, at (202) 452-2620.
Frederick M. Struble
1. We note that the violation of "any condition imposed in writing by [the Federal Reserve and the other federal banking agencies] in connection with the granting of any application or other request by" a financial institution could subject an institution or an institution-affiliated party to a cease and desist, removal or civil money penalty assessment action under sections 8(b), (e), or (i) of the FDI Act (12 U.S.C. 1818 (b), (e), or (i)). Accordingly, written conditions imposed in connection with applications or other regulatory requests and, under certain circumstances, commitments made by applicants may be consider to be "written statements" that may be enforced by the agencies and, thus, subject to the publication and public release requirements, of this section of the Bank Fraud Act. In the event that a written condition is imposed or a commitment is made in connection with an application approval and it is not already part of a public order or document, please contact Board staff to discuss the possible application of this new law. Return to text
2. Section 2547 refers only to a "notice of charges", which, as you are aware, is issued only in connection with a cease and desist proceeding. However, it appears that Congress intended to include all notices issued by the Federal Reserve and other federal banking agencies, such as notices of assessment of civil money penalties and notices of intent to remove from office and of prohibition, because section 2547 also amends section 8(h) of the FDI Act (12 U.S.C. 1818 (h)) and eliminates the agencies' option to hold private hearings in connection with any type of formal enforcement action initiated by them. Return to text
3. Under this provision, the federal banking agencies may file any document or part of a document under seal during the course of a public hearing; but, it must prepare a written report concerning a determination to undertake such a non-public filing. Return to text
4. During the course of any public hearing and discovery related to a contested enforcement action, we expect that the standard exemptions from disclosure, such as the attorney-client privilege and the government deliberative process privilege, will be applicable. Nevertheless, care needs to be taken with regard to all written documents that may be publicly released notwithstanding these privileges. Return to text
5. It should be noted that for the purposes of this section of the Bank Fraud Act the term "institution-affiliated party" is defined in section 3 (u) of the FDI Act (12 U.S.C. 1813 (u)), which covers only an insured depository institution's institution-affiliated parties, such as the bank's officers and directors. Return to text
6. The term "payment" includes for the purposes of this section of the Bank Fraud Act, inter alia, not only direct transfers of funds, but also the segregation of assets that could be liquidated for future payments. Return to text
9. Section 2597 of the Bank Fraud Act also expands the definition of a "financial institution" for the purposes of the provisions of Title 18 of the U.S. Code to include a Federal Reserve Bank. Return to text
10. It should be noted that section 2596 of the Bank Fraud Act amends section 951 of the U.S. Criminal Code and makes the section retroactive to offenses that occurred on or after August 10, 1984. This amendment will, in all likelihood, require the Department of Justice to review thousands of previous criminal referrals in order to determine whether a civil money penalty action under section 951 is now warranted. This review may involve additional contacts between the Department of Justice and the Federal Reserve Banks concerning older offenses that were not prosecuted by U.S. Attorneys. Return to text
11. Section 2507 of the Bank Fraud Act also modifies the federal sentencing guidelines to increase the numerical value of these offenses in the event that the offender derived more than $1 million from his or her criminal activity. Return to text
12. Several months ago, the Department of Justice created the position of Special Counsel within its Office of the Deputy Attorney General and organized the Senior Interagency Group, which has met on many occasions over the past months. Return to text
SR letters | 1990