[Federal Register Volume 59, Number 117 (Monday, June 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-14893]


[[Page Unknown]]

[Federal Register: June 20, 1994]


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FARM CREDIT ADMINISTRATION

12 CFR Part 617

RIN 3052-AB33

 

Referral of Known or Suspected Criminal Violations

AGENCY: Farm Credit Administration (FCA).

ACTION: Proposed rule; resolicitation of comments.

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SUMMARY: The Farm Credit Administration (FCA), by order of the FCA 
Board (Board), reproposes a rule amending its regulations governing the 
referral of known or suspected criminal violations. The proposed 
regulation was originally published in the Federal Register on October 
13, 1992 (57 FR 46819). The objective of this reproposed regulation is, 
in part, to promote efficiencies and timeliness in reporting, 
investigating, and prosecuting known or suspected criminal activities 
within Farm Credit System (FCS or System) institutions. Therefore, this 
reproposed regulation would require System institutions to notify law 
enforcement agencies of known or suspected criminal violations that 
meet the threshold reporting limits. Generally, a criminal violation 
must be reported under this part if the borrower/shareholder or insider 
has an intent to ``defraud'' a System institution.
    The reproposed regulation would also mandate the continued use of 
the existing criminal Referral Form. System institutions should expect 
this form to be replaced with a new FCA Criminal Referral Form in the 
future. The existing criminal Referral Form or any replacement form is 
referred to hereinafter as Referral Form.
    The FCA believes that the regulation should be reproposed due to 
the lapse of time since the proposed rule was originally published in 
the Federal Register (October 13, 1992). Although the reproposed rule 
incorporates many of the comments received in response to the proposed 
rule, the FCA Board also believes that the public should be given 
another opportunity to comment due to the number of changes proposed 
and the level of interest in the issues. To the extent that commenters 
wish to comment on the dollar thresholds for reporting known or 
suspected criminal activities or an institution's cost of complying 
with the regulation, the FCA requests that commenters provide pertinent 
empirical data in support of their comments.

DATES: Comments should be submitted on or before August 19, 1994.

ADDRESSES: Comments should be mailed or delivered (in triplicate) to 
Patricia W. DiMuzio, Associate Director, Regulation Development, Office 
of Examination, Farm Credit Administration, McLean, VA 22102-5090. 
Copies of all comments will be available for examination by interested 
parties in Regulation Development, Office of Examination, Farm Credit 
Administration.

FOR FURTHER INFORMATION CONTACT:

Eric Howard, Policy Analyst, Regulation Development, Office of 
Examination, Farm Credit Administration, McLean, VA 22102-5090, 
(703) 883-4498,
    or
Jane Virga, Senior Attorney, Administrative Law and Enforcement 
Division, Office of General Counsel, Farm Credit Administration, 
McLean, VA 22102-5090, (703) 883-4020, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION:

I. Decision to repropose

    The proposed regulation was published (57 FR 46819) in the Federal 
Register on October 13, 1992. The comment period for the proposed 
regulation amending part 617 closed on November 12, 1992. The FCA 
received two letters on the proposed regulation. The Farm Credit 
Council (Council), on behalf of its membership, provided comments and 
suggestions on the wording and requirements of the proposed regulation. 
The FCA also received a letter from the Farm Credit Bank of Baltimore 
adopting the Council's comments. Many of the commenters' suggestions 
were incorporated to improve clarity.
    The Council requested, among other things, that the FCA Board 
republish the proposed regulation. The FCA Board agrees that the 
proposed regulation should be republished to afford the public another 
opportunity to comment. All comments submitted to date have been 
considered and responded to concerning the proposed regulation. 
Responses to these comments are detailed below, and corresponding 
changes were made to the proposed regulation in many instances. The 
commenters also addressed whether the dollar thresholds for reporting 
known or suspected criminal activities should be increased. One of the 
stated reasons to raise the thresholds was to limit the perceived 
reporting burden that would result from implementation of the proposed 
thresholds. It was believed that if the reporting thresholds were 
increased, the reporting burden would decrease.
    Those commenters who wish to comment again on the dollar thresholds 
are requested to provide any pertinent empirical information that would 
indicate that the thresholds should be increased. Commenters who 
address the cost of complying with the proposed regulation, e.g., time 
and cost of investigating and completing the Referral Form under 
existing thresholds in part 617 and the proposed thresholds, should 
also provide pertinent empirical information in support of their 
comments.

II. Background

    Pursuant to the Farm Credit Act of 1971, as amended, the FCA 
regulates and examines FCS institutions for safety and soundness and 
for compliance with Federal laws and regulations. Violations of Federal 
laws and regulations may affect the safety and soundness of FCS 
institutions and could undermine public confidence in the FCS. System 
institutions have the responsibility to establish and maintain 
safeguards to detect, deter, and report criminal activity involving the 
assets, operations, or affairs of the institution. Law enforcement 
agencies need to receive timely and specific information from FCS 
institutions on known or suspected criminal violations to determine 
whether investigations and prosecutions are warranted.
    The Interagency Bank Fraud Working Group (Working Group), a task 
force consisting of the Office of the Comptroller of the Currency, the 
Board of Governors of the Federal Reserve System, the Federal Deposit 
Insurance Corporation, the Office of Thrift Supervision, the National 
Credit Union Administration, the Farm Credit Administration, the 
Federal Bureau of Investigation, the U.S. Secret Service, the 
Department of Justice, and the U.S. Department of the Treasury, was 
formed to facilitate the reporting of criminal activity by financial 
institutions and to enhance the law enforcement agencies' ability to 
investigate and prosecute the matters reported. To accomplish these 
objectives, the Working Group developed uniform reporting standards and 
processes for filing criminal referrals and is in the process of 
developing a uniform criminal referral form.
    Pursuant to the proposed regulation and consistent with the Working 
Group's recommendations, FCS institutions would be required to make a 
criminal referral and file a Referral Form when a criminal violation of 
the United States Code involving the institution's assets, operations, 
or affairs appears to have occurred and one of the circumstances listed 
in Sec. 617.2(a) exists. However, the proposed regulation should not be 
construed as reducing in any way an institution's responsibility to 
otherwise report criminal activities when these circumstances do not 
exist. The referrals would be made to the appropriate investigatory 
and/or prosecuting authorities, whether Federal, State, or local.
    Originally, the FCA proposed the use of a uniform criminal Referral 
Form which was designed by the Working Group. A uniform criminal 
Referral Form was expected to aid law enforcement agencies in 
determining whether investigations and/or prosecutions are warranted by 
standardizing requests for information and documentation. The FCA 
planned to incorporate this form's standards and procedures in its own 
criminal Referral Form. When first published, the proposed regulation 
indicated that the Referral Form, with instructions explaining how to 
complete, file, and distribute the form to the appropriate 
investigatory agency, would be obtained from the FCA's Office of 
General Counsel (OGC) or from the FCA Examination Manual. Due to 
unforeseen circumstances affecting all the Federal financial regulatory 
agencies, the Working Group has not yet promulgated a uniform criminal 
referral form. Consequently, the new Referral Form has not been 
developed. As now contemplated under the proposed rule, System 
institutions would continue to use the existing criminal Referral Forms 
found in the FCA Examination Manual. However, System institutions 
should expect the distribution of the new Referral Form after the 
Working Group completes the standardized uniform criminal referral 
form.

III. Analysis of Changes and Comments by Section

A. Section 617.1--Purpose and Scope

    The Council noted that the proposed regulations did not include a 
sample of the Referral Form and, as a result, it could not determine 
whether System banks would maintain any role in the criminal referral 
process. As previously stated, the FCA did not publish the Referral 
Form with the proposed regulation because the uniform criminal referral 
form, which the FCA intends to incorporate, had not, and has not yet, 
been promulgated by the Working Group. The existing Referral Form, 
which may be obtained from the FCA Examination Manual, does not create 
any substantive requirements, nor will the new Referral Form. The 
Referral Form merely serves as a vehicle for ensuring that System 
institutions report the information necessary to make a criminal 
referral. The new Referral Form is not expected to require System 
institutions to submit any more information than they previously have 
been required to submit using the existing Referral Form. For these 
reasons, the FCA believes even if the new Referral Form were available 
at this time, its publication would not be necessary. If the uniform 
criminal referral form ultimately promulgated by the Working Group 
creates new and previously-unanticipated requirements, the FCA will 
reconsider whether to incorporate it in its entirety into the System's 
Referral Form.

B. Section 617.2--Referrals

    The Council questioned whether or not the proposed regulation 
adequately addressed ``borrower transgressions.'' The FCA believes that 
the proposed regulation provides for the referral of all known or 
suspected violations of Federal criminal laws, including both insider 
and borrower transgressions. In Sec. 617.2(a) (2) and (3), the proposed 
regulation specifically addresses borrower transgressions and would 
require a criminal referral when known or suspected criminal activity 
occurs if certain circumstances are met. Section 617.2(a)(2) applies 
when the suspect is not an employee, officer, director, agent, or other 
person participating in the affairs of an institution, i.e., a 
borrower. Section 617.2(a)(3) applies when there is no substantial 
basis for identifying a suspect, which may include a borrower. 
Therefore, no amendment is believed to be necessary. For instance, a 
referral would be required when known or suspected criminal activity 
involving actual or potential losses of $1,000 or more occurs and the 
institution has a substantial basis for identifying a possible suspect 
or group of suspects as a borrower(s). A referral would also be 
required when known or suspected criminal activity involving actual or 
potential losses of $5,000 or more occurs and the institution has no 
substantial basis for identifying a possible suspect or group of 
suspects. In this latter instance, the possible suspect or group of 
suspects could be a borrower(s). Also, Sec. 617.2(a)(1) addresses 
insider transgressions and would require a criminal referral, 
regardless of the amount of an actual or potential loss, where an 
institution employee, officer, director, agent, or other person 
participating in the affairs of the institution is suspected.
    The Council was concerned that the dollar thresholds for reporting 
known or suspected criminal activities as described in Sec. 617.2(a)(2) 
and (3) were too low. It also stated that the respective $1,000 and 
$5,000 thresholds would result in reporting known or suspected criminal 
activities that law enforcement agencies would not prosecute, and that 
the thresholds were a radical departure from prior practice. The 
Council also commented that some district banks have been advised by 
U.S. Attorneys that criminal activities involving collateral conversion 
or misrepresentation of financial information are not prosecuted when 
the diversion or misrepresentation is less than $25,000 to $50,000 or 
if the institution does not incur an actual loss. As a result, the 
Council believes that the thresholds should be increased to higher 
levels.
    The Working Group, which included the FCA, established the same 
thresholds for all Federal financial regulatory agencies. The Working 
Group believes that uniform thresholds will enhance the ability of the 
Federal financial regulatory agencies and the law enforcement agencies 
to detect, investigate, and prosecute known or suspected criminal 
activities. The Working Group also believes that the lower thresholds 
are necessary to ensure the reporting of potential multiple criminal 
violations by one individual at several different institutions. The 
Department of Justice, as a member of the Working Group and oversight 
agency for the Offices of the U.S. Attorneys, assisted in the 
establishment of the thresholds. Therefore, as a participant in the 
Working Group and in concurrence with the Department of Justice's 
judgment on this matter, the FCA continues to support the Working Group 
and proposes the regulation with these thresholds. The FCA will 
reconsider this issue should the Working Group modify the threshold 
levels in the future.
    It is important to note, however, that only a known or suspected 
criminal violation (meeting the dollar threshold requirements of 
Sec. 617.2(a)) must be reported. Generally, a criminal violation that 
must be reported under this part involves a determination that a 
borrower or insider intended to ``defraud'' an institution in violation 
of a Federal criminal statute. Institutions, therefore, must make an 
initial determination of whether a misrepresentation of assets or a 
collateral conversion, for example, was done inadvertently or with the 
intent to defraud the institution. Accordingly, in ascertaining whether 
a criminal referral is appropriate, an institution should consider all 
facts and circumstances, including evidence of intent, to determine 
whether there is a known or suspected criminal violation. If the 
institution is persuaded that there is no evidence of intent and, 
hence, no criminal violation, then it need not make a criminal 
referral. Thus, System institutions are vested with considerable 
discretion. Should they feel the need for guidance in exercising this 
responsibility, they may consult legal counsel.
    Due to expressed concerns about the referral threshold, the FCA 
reviewed the Systemwide criminal referrals for calendar years 1992 and 
1993. In 1992, there were 47 criminal referrals, of which 30 reported 
no dollar loss or an unknown dollar loss. In 1993, there were 53 
criminal referrals of which 30 reported no dollar loss or an unknown 
dollar loss. In addition, the FCA received 7 criminal referrals in 1992 
and 17 criminal referrals in 1993 reporting dollar losses over $50,000. 
Of the criminal referrals received, there was a total of four insider 
transgressions in 1992 and 1993. It appears from these statistics that 
System institutions may already be reporting criminal referrals 
consistent with the proposed thresholds and that the thresholds are not 
a radical departure from current practices. Accordingly, the FCA 
proposed regulation contains the same thresholds as originally 
contemplated. Commenters who continue to have concerns that the 
thresholds are too low are requested to provide empirical data 
indicating to what extent the thresholds would result in a departure 
from their current reporting practices.
    The Council remarked that the proposed regulation did not 
adequately define ``potential'' loss. In further explanation of the 
proposed regulation, it should be noted that the regulation (and 
Federal law) does not require that an institution sustain an actual 
loss; the potential for a loss satisfies the regulation (and Federal 
criminal law). Furthermore, the proposed regulation specifically states 
that the loss or potential loss is to be determined before 
reimbursement or recovery. In other words, whether or not the loan is 
adequately collateralized has no bearing on the determination of 
whether there is a loss or potential loss. For example, if a borrower 
with a loan that appears to be adequately collateralized converts 
$10,000 of secured property or makes a false statement by omitting a 
$10,000 liability from a financial statement, the institution would be 
required to report this known or suspected criminal violation to the 
appropriate authorities. This is necessary because the institution has 
a potential loss of $10,000 before it receives actual payment on the 
loan or recovers on the secured property. Although the loan may appear 
to be adequately collateralized notwithstanding the conversion of 
$10,000, the institution nonetheless has a potential loss before 
reimbursement or recovery. The loss need not actually have occurred for 
a reportable violation to exist. The FCA believes the foregoing 
explanation should adequately address the potential loss concept. It is 
further noted that, in attempting to clarify this section, the language 
of Sec. 617.2(a)(2) and (3) has been amended to clarify that a 
situation involving a potential loss could arise through the use of a 
false statement or other fraudulent means.
    The Council further commented that the proposed regulation did not 
adequately address criminal acts that do not specifically require a 
monetary loss, e.g., false statements under 18 U.S.C. 1014. As 
discussed above, such a criminal act has a potential for monetary loss 
and should be reported in all situations where the threshold is met and 
it is reasonable to believe that a criminal act occurred. The proposed 
regulation has been amended to clarify that a referral would be 
required when there is a false statement that meets the threshold 
amounts.
    The Council expressed concern that the standard for reporting 
noninsider transgressions was vague and difficult to apply. The Council 
noted that determining when a substantial basis exists for identifying 
a suspect can be complex and raises questions as to whether criminal 
intent can be inferred. The Council suggested that this determination 
should be vested in System general counsels or their attorney 
designees. The FCA expects that, in reporting noninsider 
transgressions, an institution will often be able to use its own 
judgment in determining whether it appears that a criminal violation 
has occurred. In complex cases, however, institutions should continue 
to feel free to obtain advice, legal or otherwise, as necessary. A 
System association may always consult with its affiliated district bank 
during consideration of all the facts and circumstances to determine 
whether it is more probable than not that a criminal activity occurred.
    The Council also commented that an institution should have 
discretion on whether to report known or suspected criminal activities 
of State criminal laws to State law enforcement authorities. In 
response to this comment, the proposed regulation was amended to 
provide that nothing in this part shall be construed as reducing, in 
any way, an institution's general responsibility to report criminal 
activities to the appropriate investigatory and/or law enforcement 
agencies, whether Federal, State or local. Therefore, institutions 
would have to be cognizant of, and take the necessary steps to comply 
with, State reporting requirements. The appropriate law enforcement 
agency would then decide whether or not such acts constitute a 
violation of a criminal statute.
    The Council was concerned that the proposed regulation did not 
identify whether a Farm Credit Bank (FCB) or a Federal land bank 
association (FLBA) would report known or suspected criminal activities 
when the FLBA services the loans of the FCB. Due to this concern, the 
FCA amended Sec. 617.2(a) to clarify that an FCB would have the 
responsibility to refer known or suspected criminal activities 
identified by the servicing FLBA to the appropriate law enforcement 
agency.
    The Council commented that the proposed criminal referral 
regulation appears to make the criminal referral process burdensome 
because the institution lacks the discretion not to refer known or 
suspected criminal violations above the threshold amounts. At this 
time, it appears that any additional burden would be slight and offset 
by the regulation's benefits, such as the promotion of efficiency and 
timeliness in reporting, investigating, and prosecuting known or 
suspected criminal activities. Also, the regulation would standardize 
the reporting process and ensure that all individuals, including 
borrowers, employees, officers and directors, are treated equally. It 
is believed that the proposed regulation, which conforms to those 
proposed and final regulations of other financial regulatory agencies, 
would improve the law enforcement agencies' response to System 
institutions' reports of criminal activities. However, commenters may 
want to provide empirical information on the cost of compliance, as 
requested above.
    The Council questioned the institution's role or ability to make a 
recommendation concerning prosecution. The Council suggested that 
reporting ``minor'' violations could hamper System relationships with 
the U.S. Attorney as well as with its customers. While the regulation 
establishes threshold referral levels, an institution is free, 
nonetheless, to express its view on whether prosecution does or does 
not appear to be warranted to the Federal authorities, including a U.S. 
Attorney or other investigatory agency. A well-reasoned recommendation 
against prosecution in appropriate cases should go far toward 
addressing the Council's concern without undermining the uniformity 
that the referral requirements seek to promote.
    The Council commented that the 14-day period to report criminal 
activity was insufficient to investigate, document, review, and submit 
referral information. On further reflection, the FCA agrees. To ensure 
thorough documentation and reporting by System institutions, the FCA 
has amended the proposed regulation, increasing the reporting period to 
30 calendar days from the date of discovery of the known or suspected 
criminal violation. Nonetheless, System institutions would be 
encouraged to submit a criminal referral report as soon as possible 
following the discovery of a reportable known or suspected criminal 
activity.
    The Council commented that it was uncertain as to when the period 
for reporting a criminal referral begins. Upon further consideration, 
the proposed regulation was amended to address this concern. The 
reporting period would begin when management has discovered that there 
is a known or suspected criminal activity. In the alternative, the 
reporting period would begin when management should have discovered 
that there was a known or suspected criminal activity. This amendment 
is believed to be appropriate because management must ensure the 
institution's safety and soundness and should be diligent in the 
exercise of their attendant duties, e.g., the timely identification and 
reporting of known or suspected criminal activity, and in the adequate 
investigation and documentation of such criminal activity.
    The Council commented that Sec. 617.2(c) (now Sec. 617.2(b)) should 
define ``management'' as senior management of the institution or the 
institution's criminal conduct officer/coordinator. The proposed 
regulation would require that management make the criminal referral. 
The board of directors of a System institution, which is responsible 
for the safe and sound operations of that institution, should establish 
appropriate policies and internal controls for management to comply 
with these regulations. However, the board would have the discretion to 
implement the regulation in a manner suited to its institution and 
could require senior management or the criminal conduct officer/
coordinator to make the criminal referral.
    The Council suggested eliminating Sec. 617.2(d), which requires 
prompt notification, by telephone or other expeditious means, to the 
appropriate law enforcement agency of situations requiring immediate 
attention or of ongoing reportable violations. In coordination with 
other Federal financial regulatory agencies, the FCA included this 
section to provide for circumstances in which direct telephone or other 
expeditious communications with the appropriate law enforcement agency 
would be necessary or appropriate, even though an institution would 
have begun the referral process required by Sec. 617.2(a). While a 30-
day notification period may be adequate in many situations, immediate 
notification would be considered essential when the safety and 
soundness of an institution may be threatened by potential fraud, 
losses, or an ongoing criminal activity, when there is a likelihood a 
suspect will flee, or when key institution personnel are involved. For 
the foregoing reasons, it does not appear that this section would 
impose any unnecessary burden on System institutions.

C. Section 617.3--Notification of Board of Directors and Bonding 
Company

    The Council commented that the regulatory reporting requirement 
concerning criminal referrals should be left to the discretion of each 
board of directors, rather than requiring a report to the board of 
directors by their next scheduled meeting. The intent of this section 
is to keep the board of directors informed when a known or suspected 
crime has been committed against the institution. In response to the 
Council's comment, this section has been amended to require that the 
board of directors be notified promptly of the filing of any Referral 
Form by the institution's management. Reporting ``promptly'' to the 
board of directors means reporting the criminal referral at a regularly 
scheduled meeting, or earlier if the estimated loss is of such 
magnitude that it would have a significant impact on the safety and 
soundness of the institution. Alternatively, reports involving 
insignificant losses may be summarized and reported periodically at a 
regularly scheduled meeting of the board. Because violations of Federal 
criminal statutes may affect the safety and soundness of FCS 
institutions and/or undermine public confidence in the FCS, a board of 
directors should be promptly notified of all known or suspected 
criminal activities. Furthermore, boards of directors should treat this 
information with the same degree of care and confidentiality as other 
similar types of information are treated.
    Additionally, the proposed regulation was amended to provide some 
discretion in the event a member of the board of directors is the 
subject of a criminal referral. In this instance, it may be appropriate 
to seek guidance from legal counsel or other appropriate sources.

List of Subjects in 12 CFR Part 617

    Criminal referrals, Criminal transactions, Defalcations, 
Embezzlement, Insider abuse, Institutions of the Farm Credit System, 
Money laundering, Theft.
    For the reasons stated in the preamble, part 617 of chapter VI, 
title 12 of the Code of Federal Regulations is proposed to be revised 
to read as follows:

PART 617--REFERRAL OF KNOWN OR SUSPECTED CRIMINAL VIOLATIONS

Sec.
617.1  Purpose and scope.
617.2  Referrals.
617.3  Notification of board of directors and bonding company.
617.4  Institution responsibilities.

    Authority: Secs. 5.9, 5.17 of the Farm Credit Act (12 U.S.C. 
2243, 2252).


Sec. 617.1  Purpose and scope.

    (a) This part applies to all institutions of the Farm Credit System 
as defined in section 1.2(a) of the Act (12 U.S.C. 2002(a)) including, 
but not limited to, associations, banks, service corporations chartered 
under section 4.25 of the Act, the Federal Farm Credit Banks Funding 
Corporation, the Farm Credit System Financial Assistance Corporation, 
the Farm Credit Leasing Services Corporation, and the Federal 
Agricultural Mortgage Corporation (hereinafter, institutions). The 
purposes of this part are to ensure the reporting of known or suspected 
criminal activity, the safety and soundness of the institution, and 
public confidence in the Farm Credit System, thereby reducing potential 
losses to institutions. This part requires that institutions use the 
Farm Credit Administration Criminal Referral Form to notify the 
appropriate Federal authorities when any known or suspected Federal 
criminal violations of the type described in Sec. 617.2 are discovered 
by an institution.
    (b) The specific referral requirements of this part are limited to 
known or suspected criminal violations of the United States Code 
involving the assets, operations, or affairs of an institution. This 
part prescribes procedures for referring those violations to the proper 
Federal authorities and the Farm Credit Administration.
    (c) Nothing in this part should be construed as reducing in any way 
an institution's responsibility to report known or suspected criminal 
activities to the appropriate investigatory or prosecuting authorities, 
whether State or Federal, even if circumstances required for a report 
under Sec. 617.2 are not present.
    (d) Each referral required by Sec. 617.2(a) shall be made on the 
Referral Form in accordance with the Referral Form Instructions 
relating to its filing and distribution and the requirements of 
Sec. 617.2 (b) and (c).


Sec. 617.2  Referrals.

    (a) Each institution and its board of directors shall exercise due 
diligence to ensure the discovery, investigation, and reporting of 
criminal activity. Within 30 calendar days of determining that there is 
a known or suspected criminal activity, the institution shall refer 
such criminal violation of the United States Code involving or 
affecting its assets, operations, or affairs to the appropriate 
regional offices of the United States Attorney and either or both the 
Federal Bureau of Investigation or the United States Secret Service, 
using the Referral Form. In the event that a Farm Credit Bank makes a 
loan through a Federal land bank association which services the loan, 
the Farm Credit Bank has the responsibility to refer known or suspected 
criminal violations under this section. A report is required in 
circumstances where there is:
    (1) Any known or suspected criminal activity (e.g., theft, 
embezzlement), mysterious disappearance, unexplained shortage, 
misapplication, or other defalcation of property and/or funds, 
regardless of amount, where an institution employee, officer, director, 
agent, or other person participating in the conduct of the affairs of 
such an institution is suspected;
    (2) Any known or suspected criminal activity involving an actual or 
potential loss (before reimbursement or recovery) of $1,000 or more, 
through false statements or other fraudulent means, where the 
institution has a substantial basis for identifying a possible suspect 
or group of suspects and the suspect(s) is not an employee, officer, 
director, agent, or other person participating in the conduct of the 
affairs of such an institution;
    (3) Any known or suspected criminal activity involving an actual or 
potential loss (before reimbursement or recovery) of $5,000 or more, 
through false statements or other fraudulent means, where the 
institution has no substantial basis for identifying a possible suspect 
or group of suspects; or
    (4) Any known or suspected criminal activity involving a financial 
transaction in which the institution was used as a conduit for such 
criminal activity (such as money laundering/structuring schemes).
    (b) A copy of the completed Referral Form, accompanied by any 
relevant documentation, shall be provided to the Farm Credit 
Administration's Office of General Counsel no later than 30 calendar 
days after the institution's management, has discovered (or should have 
discovered) a known or suspected criminal violation.
    (c) In circumstances where there is also a known or suspected 
violation of State or local criminal law, the institution shall also 
notify the appropriate State law enforcement authorities.
    (d) In addition to the requirements of paragraph (a) of this 
section, the institution shall immediately notify by telephone the 
offices specified on the Referral Form upon discovery of cases 
involving known or suspected criminal violations requiring urgent 
attention or where a referable violation is ongoing. Such cases 
include, but are not limited to, those where:
    (1) There is a likelihood that the suspect(s) will flee;
    (2) The magnitude or the continuation of the known or suspected 
criminal violation may imperil the institution's continued operation; 
or
    (3) Key institution personnel are involved.


Sec. 617.3  Notification of board of directors and bonding company.

    (a) Unless the criminal referral involves a member of the board of 
directors, the institution's board of directors shall be promptly 
notified of any criminal referral by the institution.
    (b) If the criminal referral involves a member of the board of 
directors, discretion shall be exercised in notifying the board of 
directors of such a criminal referral.
    (c) In any event, if any losses can be recovered under a surety 
bond or other contract for protection against losses, the institution 
involved shall promptly make all required notifications.


Sec. 617.4  Institution responsibilities.

    Each institution shall establish effective policies and procedures 
designed to ensure compliance with this part, including, but not 
limited to, adequate internal controls.

    Dated: June 13, 1994.
Curtis M. Anderson,
Secretary, Farm Credit Administration Board.
[FR Doc. 94-14893 Filed 6-17-94; 8:45 am]
BILLING CODE 6705-01-P