[Federal Register Volume 62, Number 87 (Tuesday, May 6, 1997)]
[Rules and Regulations]
[Pages 24562-24567]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-11685]



[[Page 24562]]

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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: Final rule.

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SUMMARY: The Farm Credit Administration (FCA), by order of the FCA 
Board, issues a final rule amending its regulations governing the 
referral of known or suspected criminal violations. The objective of 
this final regulation is to promote consistency, efficiencies, and 
timeliness by Farm Credit System (FCS or System) institutions in 
reporting, investigating, and aiding in the prosecution of known or 
suspected criminal activities. Therefore, the final regulation requires 
System institutions to notify law enforcement agencies of known or 
suspected criminal violations that meet certain reporting thresholds. 
Generally, a criminal violation must be reported under this part if 
there is a reasonable basis to conclude that there was an intent to 
``defraud'' a System institution and the amount of the actual or 
potential loss meets the reporting thresholds.
    The final regulation mandates the continued use of the FCA Criminal 
Referral Form (hereinafter FCA Referral Form), which is located in the 
FCA Examination Manual, for making a criminal referral.

DATES: The regulation shall become effective upon the expiration of 30 
days after publication during which either or both houses of Congress 
are in session. Notice of the effective date will be published in the 
Federal Register.

FOR FURTHER INFORMATION CONTACT:
Eric Howard, Policy Analyst, Regulation Development Division, Office of 
Policy Development and Risk Control, Farm Credit Administration, 
McLean, VA 22102-5090, (703) 883-4498, TDD (703) 883-4444,

       or

Jane Virga, Senior Attorney, Legal Counsel Division, Office of General 
Counsel, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-
4020, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION:

I. 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 could undermine public confidence in the FCS and 
affect the safety and soundness of FCS institutions. 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 (BFWG) was formed to 
address concerns that financial institutions were becoming increasingly 
vulnerable to insider fraud and prosecutions were not keeping pace with 
criminality, and to promote cooperation toward the goal of improving 
the Federal Government's response to white-collar crime in the Nation's 
federally insured and/or regulated financial institutions. The BFWG 
consists 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. The objectives of the 
BFWG were 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 BFWG developed uniform reporting standards and 
processes for filing criminal referrals and developed a model 
regulation.
    Following the BFWG's guidance, the FCA proposed a regulation that 
was published in the Federal Register on October 13, 1992 (57 FR 
46819). The comment period for the proposed regulation amending part 
617 closed on November 12, 1992. Pursuant to the commenters' request, 
the FCA Board agreed to republish the proposed regulation in order to 
afford the public another opportunity to comment. The reproposed 
regulation was published in the Federal Register on June 20, 1994 (59 
FR 31562). The FCA considered and addressed all comments to the 
proposed regulation in the reproposed regulation.
    Following the reproposal, there were several requests that FCA 
staff meet with the commenters to discuss issues and problems that 
arise in the area of criminal referrals. Commenters believed that it 
would provide a better opportunity for them to present their views on 
the reproposed regulation. Hence, after the comment period closed, FCA 
staff met with the commenters in Sacramento, California, on September 
27, 1995. This meeting was held in compliance with the FCA Board's 
Policy Statement FCA-PS-37 published in the Federal Register on April 
1, 1992 (57 FR 11083), which addresses communications with the public 
during the rulemaking process.
    During the meeting, commenters expounded on their written comments. 
After the meeting, several attendees provided written confirmation of 
the meeting discussions. No new substantive comments were made at the 
meeting and, thus, comments made at the meeting are not separately 
described herein. These follow-up letters and minutes of the meeting 
are retained in the FCA's rulemaking file and are available for public 
review.

II. Analysis of Comments to the Reproposed Regulation and FCA Responses

A. The Need for a New Criminal Referral Regulation

    Several commenters questioned the need for a new criminal referral 
regulation and argued that the existing regulation (found in 12 CFR 
part 617) is adequate to ensure the proper reporting of criminal 
referrals. The FCA disagrees and believes that the existing criminal 
referral regulation should be revised because it is out-of-date and 
fails to reflect the arms-length relationship between the FCA and the 
System.
    The existing regulation, first promulgated in 1982, has no minimum 
reporting thresholds and requires the reporting of all criminal 
violations. Further, the existing regulation does not contain 
procedures adequate to ensure consistent System-wide reporting. A 1982 
interpretative letter from the FCA to the President of each Farm Credit 
Bank introduced procedures not included in the regulation at part 617. 
The letter indicated that dollar-reporting thresholds could be applied 
in certain circumstances and emphasized the significant discretion 
District Bank counsel had in reviewing cases of suspected violations. 
At present, some institutions report all violations and some follow the 
1982 interpretative letter and only report criminal violations 
exceeding certain thresholds, which in some cases is $50,000. This 
final rule supersedes the guidelines provided in the 1982 
interpretative letter and the existing regulation. The final rule 
establishes reporting thresholds that all System institutions must 
follow.

[[Page 24563]]

    The existing regulation established slightly different procedures 
for reporting violations allegedly committed by institution personnel 
and procedures for reporting violations allegedly committed by 
borrowers. The existing regulation specifically requires that criminal 
referrals concerning institution personnel be reported to the Chief 
Examiner of FCA's Office of Examination and that those concerning 
borrowers be reported to the FCA. The regulation also specifies that 
the Chief Examiner is to refer cases concerning criminal law violations 
by institution personnel to the U.S. Attorney, while the general 
counsel of the Farm Credit district is to refer criminal law violations 
by borrowers to the U.S. Attorney and report the referral to the FCA's 
General Counsel. The final regulation makes the reporting procedures 
for institution personnel and borrowers the same. It requires 
institutions to make these referrals directly to the appropriate 
Federal law enforcement authorities and to provide copies of all 
referrals to the FCA's Office of General Counsel. It is the Office of 
General Counsel that, in practice, monitors criminal referrals and has 
primary contact with Federal law enforcement authorities. The final 
regulation reflects that role in addition to bringing greater 
consistency to the referral process.
    In addition, the existing regulation is not consistent with the 
BFWG's recommendations concerning reporting thresholds, which have been 
implemented by the other Federal financial regulatory agencies. The 
BFWG, which included the FCA, established the same thresholds for all 
Federal financial regulatory agencies. The BFWG believed that uniform 
thresholds would enhance the ability of the Federal financial 
regulatory agencies and the law enforcement agencies to detect, 
investigate, and prosecute known or suspected criminal violations. The 
Department of Justice, as a member of the BFWG and oversight agency for 
the Offices of the U.S. Attorneys, assisted in the establishment of the 
thresholds. Therefore, as a participant in the BFWG and in concurrence 
with the Department of Justice's judgment on this matter, the FCA is 
establishing the reporting thresholds as recommended by the BFWG.
    Although the FCA's final regulation has been tailored, as 
appropriate, to address concerns raised by agricultural lending, it is 
patterned on the BFWG's model regulation and the rules promulgated by 
the other Federal financial regulatory agencies. The FCA continues to 
believe that the FCA criminal referral regulation should incorporate 
the core principles of the model regulation.

B. Reporting Threshold Limits

    The dollar amount that would trigger the requirement to make a 
criminal referral has been a matter of some controversy. The proposed 
and reproposed regulation established reporting thresholds of $1,000 
and $5,000 for known and unknown suspects, respectively, and $0 for 
institution personnel. (The term ``unknown suspect'' is used where a 
criminal violation has occurred but no reasonable basis exists for 
identifying the perpetrator.) Although commenters supported the $0 
reporting threshold for institution personnel, they argued that the FCA 
should adopt higher reporting thresholds for borrowers. The commenters' 
principal objection to the $1,000 and $5,000 thresholds was that few 
investigations or prosecutions by Federal law enforcement authorities 
result from referrals unless the amount at issue is substantial. 
Several commenters suggested that a $50,000 reporting threshold for 
borrowers would be appropriate. One commenter suggested that reporting 
thresholds should be the same for borrowers and unknown suspects. 
Another commenter stated that if the FCA was not mandating the use of a 
Uniform Criminal Referral Form it should not mandate the use of uniform 
reporting thresholds.
    The BFWG first recommended reporting thresholds of $1,000 for known 
suspects and $5,000 for unknown suspects. The BFWG subsequently revised 
the thresholds and recommended reporting thresholds at $5,000 for 
borrowers and $25,000 for unknown suspects. The BFWG has not changed 
its recommendation of $0 for institution personnel. The Federal law 
enforcement authorities that are part of the BFWG, including the 
Department of Justice, believe these revised reporting thresholds are 
appropriate and have specifically stated that they want to receive all 
criminal referrals meeting these thresholds.
    In the final regulation reporting thresholds for institution 
personnel will remain at $0, so that any criminal act by institution 
personnel will be reported. After careful evaluation of the BFWG's 
recommendations and the commenters' concerns, the Agency also believes 
that the reporting thresholds should be increased for both known and 
unknown suspects. Thus, the FCA is increasing the threshold for known 
suspects from $1,000 to $5,000. The threshold for unknown suspects is 
also increased from $5,000 to $25,000. This action responds to the 
commenters' requests for higher thresholds. It also is consistent with 
the BFWG's revised recommendations on reporting thresholds, which the 
BFWG raised in response to commentary after the model regulation was 
first proposed.
    The use of uniform reporting 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. Therefore, the final regulation establishes 
reporting thresholds of $0 for institution personnel, $5,000 for known 
suspects, and $25,000 for unknown suspects.

C. Compliance Costs

    Many of the commenters expressed concern about the cost of 
compliance with the regulatory requirements for making a criminal 
referral. The commenters were concerned that criminal referrals are 
costly and time-consuming, yet rarely result in investigations, much 
less prosecutions. For example, one commenter indicated that it took 40 
hours of an employee's time to investigate an allegation and complete a 
criminal referral form. Another commenter indicated that legal counsel 
was necessary to evaluate the sufficiency of evidence or the 
appropriateness of making certain criminal referrals.
    The FCA recognizes that System institutions will incur costs to 
comply with the final regulation just as they currently incur costs to 
make a criminal referral. The FCA believes that the benefit of timely 
and consistent reporting of criminal referrals at the new, higher 
reporting thresholds will outweigh the expense of compliance. Also, the 
regulation will standardize the reporting process and ensure that 
institutions apply uniform standards to all affected parties 
(borrowers, employees, officers, and directors). However, compliance 
costs can be minimized. For instance, an institution is not required to 
conduct an exhaustive investigation of every reported violation. 
Rather, an institution is only required to conduct an inquiry 
sufficient to complete the FCA Referral Form.

D. Defining Potential Loss

    Several commenters believed that the FCA's discussion of 
``potential loss'' in the preamble to the reproposed regulation needed 
further clarification. The preamble indicated that potential loss would 
always equal the amount of the collateral conversion or financial

[[Page 24564]]

misstatement. A number of commenters disagreed with this 
interpretation. They pointed out that in some instances a lender may 
reasonably expect the potential loss to be smaller or even zero. This 
could occur, for example, if a financial misstatement, although in 
excess of $5,000, was insignificant in light of the borrower's overall 
financial position. Similarly, a lender might reasonably expect no loss 
on a loan, despite a conversion of collateral worth more than $5,000, 
if the remaining collateral well exceeded the lender's requirements and 
no other obstacle to full repayment existed. Finally, the commenters 
argued that if a lender discovered a financial misstatement or 
collateral conversion only after the loan was repaid as agreed, the 
absence of any actual loss should take precedence over any 
retrospective view of potential loss.
    The final rule continues to state that lenders must refer crimes 
when the ``actual or potential loss'' exceeds the applicable 
thresholds, but the parenthetical ``(before reimbursement or 
recovery)'' has been deleted. Nevertheless, the FCA continues to 
believe that when an institution experiences an actual loss, the 
reporting thresholds in Sec. 617.2 govern whether a referral is 
required and are to be applied before reimbursement or recovery. The 
fact that a borrower reimburses the institution after the fact or that 
the converted collateral is recovered is irrelevant in determining 
whether a criminal referral is required. However, when the amount of 
any actual loss is not yet known, the FCA has concluded that the lender 
should make a reasonable assessment of the amount of the potential loss 
at the time of discovery of the criminal activity and use that amount 
to determine if a referral is required. The lender may base this 
assessment on the amount of the collateral conversion or financial 
misstatement, or on the reasonable estimate of loan loss attributable 
to the conversion or misstatement, or another method that is reasonable 
under the circumstances. When an estimate of potential loss is 
expressed as a range, a referral is required if any part of the range 
exceeds the applicable threshold.
    To further clarify, System institutions are advised that where 
criminal intent is not suspected, no criminal referral need be made 
because, in most circumstances, there would be no criminal violation 
regardless of the actual or potential loss. If it is clear that an act 
was merely negligent and there was no criminal intent, a referral would 
be inappropriate. Nor is a criminal referral required if there is clear 
intent to defraud but no actual or potential loss results. A loss (or 
potential loss) over the threshold amount and the requisite intent must 
coincide before a criminal referral is required.
    Some commenters suggested that extenuating circumstances might 
argue against prosecution in a situation where a criminal referral is 
required. An institution may always express its view on whether 
prosecution does or does not appear to be warranted to the Federal 
authorities, including a U.S. Attorney or investigatory agency. A well-
reasoned recommendation against prosecution in appropriate cases should 
address any perceived inequities in the criminal referral process 
without undermining the uniformity that the criminal referral 
regulations seek to promote.
    There may also be situations where a System institution wishes to 
refer a suspected criminal violation involving a dollar amount under 
the threshold amount. System institutions should be aware that the 
final regulation does not affect, in any way, an institution's 
discretion to make a criminal referral that is below the reporting 
thresholds to the appropriate law enforcement authorities. Indeed, a 
System institution should always bear in mind its obligation to uphold 
the integrity of the Farm Credit System and practice sound credit 
management. Thus, for example, the repeated conversion of collateral or 
the conversion of large amounts of collateral should be reported even 
where the actual or potential loss does not meet the threshold 
requirements.

E. Discretion To Make a Criminal Referral

    The preamble to the reproposed regulation attempted to clarify the 
extent of an institution's discretion to make a criminal referral. 
Commenters requested that the substance of the preamble discussion on 
discretion or the language in the current Sec. 617.7160 be included in 
the final regulation. Current Sec. 617.7160 provides that ``it shall be 
the function of the general counsel of the Farm Credit district * * * 
to determine if there is substantial evidence that a violation * * * 
has occurred * * *.'' The commenters also believed that further 
discussion on discretion is necessary in the preamble to the final 
regulation to avoid unnecessary referrals.
    In response to the commenters' request, the FCA has incorporated 
guidance on discretion in the regulatory text as well as in the 
preamble. The final regulation incorporates language on discretion in 
new Sec. 617.1(d), which provides that a System institution is 
responsible for determining whether there appears to be a reasonable 
basis to believe that a criminal violation has occurred and, if so, to 
report the violation to the proper law enforcement authorities. The FCA 
did not adopt the language in current Sec. 617.7160 because the term 
``substantial evidence'' may suggest a higher evidentiary standard than 
may be warranted in determining whether a criminal violation may have 
occurred.
    The FCA reiterates that, generally, a criminal violation that must 
be reported under this part involves a determination that there is a 
reasonable basis to believe that a borrower or institution personnel 
intended to ``defraud'' an institution through violation of a Federal 
criminal statute. Institutions, therefore, must seek to determine 
whether a misrepresentation of assets or a collateral conversion, for 
example, was done inadvertently or with the intent to defraud the 
institution. This determination involves the exercise of considerable 
discretion. In ascertaining whether a criminal referral is appropriate, 
an institution should consider all facts and circumstances, including 
those that go to the question of intent. 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. However, an 
institution should adequately document the basis for its determination 
that there was no criminal intent, especially when the institution 
suffers a loss. While System institutions are not required to consult 
legal counsel in determining whether an activity involved criminal 
intent, they may prefer to do so in close cases.

F. Probability of Prosecution

    Several commenters urged the FCA to include in the final regulation 
a provision that would allow System institutions to make a referral 
determination based on the probability of prosecution of the subject of 
the criminal referral. Commenters asserted that some U.S. Attorneys 
have established informal dollar thresholds for prosecution that are 
much higher than the reporting thresholds established by the BFWG. The 
commenters stated that in their experience some U.S. Attorneys will not 
prosecute violations in amounts below these informal thresholds.
    The Department of Justice, a participant in the BFWG and the 
oversight agency for the Office of the U.S. Attorneys, helped establish 
and fully supports the thresholds. While it is true that prosecution 
for low dollar amounts is rare, the FCA believes that the new reporting 
thresholds are

[[Page 24565]]

appropriate and that law enforcement agencies should have the chance to 
determine whether a criminal referral above these amounts is 
investigated and prosecuted. Thus, the FCA has decided not to 
incorporate this proposal in the final regulation.

G. Discovery of a Criminal Violation

    Several commenters correctly noted an inconsistency in the language 
of reproposed Sec. 617.2(a) and (b). Reproposed Sec. 617.2(a) required 
System institutions to refer criminal activity after a 
``determination'' that a violation has occurred. Reproposed 
Sec. 617.2(b) required forwarding an FCA Referral Form to the FCA after 
a System institution ``has discovered (or should have discovered)'' a 
violation. Commenters also requested that the FCA limit its references 
to due diligence in the final regulation. Specifically, several 
commenters requested that the FCA delete the language ``(or should have 
discovered)'' from Sec. 617.2(b).
    The FCA agrees that the due diligence standard is already 
established in Sec. 617.2(a) and therefore applies to all aspects of an 
institution's criminal referral process. Consequently, the FCA is 
deleting Sec. 617.2(b) and moving the requirement that an FCA Referral 
Form be forwarded to the FCA's Office of General Counsel to 
Sec. 617.2(a).
    These changes make it clear that the obligation to make a criminal 
referral arises when management has determined that there is a known or 
suspected criminal activity, not when management ``has discovered (or 
should have discovered)'' a violation.

H. Time Limit To Make a Criminal Referral

    Several commenters requested that the 30-day period during which a 
System institution must make a criminal referral be amended to reflect 
the varying complexity of some criminal referrals. Although the FCA 
recognizes System concerns, the Agency does not believe a change is 
warranted. The final regulation continues to provide that referrals 
must be made within 30 days of determining that a criminal violation 
appears to have occurred. The FCA believes that in the great majority 
of situations it is reasonable to expect that System institutions will 
be able to make a criminal referral within 30 days of determining that 
a violation has occurred. In unusual situations involving complicated 
facts, a System institution may need more than 30 days to make a 
complete criminal referral detailing all relevant information to law 
enforcement authorities. If so, System institutions should make a 
preliminary criminal referral to the appropriate law enforcement 
authorities and follow up as soon as possible to ensure that a complete 
accounting of the facts and circumstances are reported to the law 
enforcement authorities. Finally, a System institution should not delay 
making a complete and accurate criminal referral because it is involved 
in a sensitive workout with a borrower or the borrower is under 
bankruptcy protection.

I. Transferring Responsibility for Making Criminal Referrals

    Several commenters queried whether the final regulation would allow 
System institutions that have primary responsibility for making 
criminal referrals to transfer this activity to their supervising bank. 
While the institution retains the ultimate accountability for 
exercising due diligence to ensure the discovery, appropriate 
investigation, and reporting of criminal activity as required by 
Sec. 617.2(a) and for ensuring that the criminal referral is made, a 
criminal referral can be made on the institution's behalf by a 
supervising System bank. This may be done pursuant to a formal 
agreement whereby the System bank making the referral is acting as an 
agent for the institution with primary responsibility.

J. Referrals to State and Local Authorities

    One commenter urged the FCA to amend the final regulation so that 
System institutions are merely encouraged to file copies of the FCA 
Referral Form with State and local authorities rather than be required 
to make such a criminal referral. The FCA never intended to require 
that System institutions use the FCA Referral Form to refer State and 
local violations to State and local authorities or to inform State and 
local authorities of Federal violations. Rather, Sec. 617.2(b) 
(formerly Sec. 617.2(c) in the reproposed regulation) requires a System 
institution to notify the appropriate State or local law enforcement 
authorities when there is a known or suspected violation of State or 
local criminal law. The FCA continues to believe that this is a 
reasonable requirement that will help ensure the safety and soundness 
of the institution and the System without imposing an undue burden. A 
System institution may use whatever means it deems appropriate to make 
the referral. If a System institution thinks it appropriate, it can 
recommend that the State or local authorities not pursue a criminal 
investigation and prosecution.

K. Adding a Section Incorporating the Language of Current Sec. 617.7140

    One commenter requested that the language of Sec. 617.7140 of the 
existing regulation be incorporated in the final regulation. Section 
617.7140 outlines the two most common types of malfeasance that System 
institutions encounter--conversion and false financial statements--and 
cites the statutory sources in the Federal criminal code. The FCA does 
not believe that this information needs to be included in the final 
regulation because it is included in the FCA Referral Form.

L. FCA Referral Form

    Commenters expressed some general concern about whether System 
institutions would be using the FCA Referral Form found in the FCA 
Examination Manual or a Uniform Criminal Referral Form developed by the 
BFWG. System institutions were concerned that a Uniform Criminal 
Referral Form would not be appropriate for reporting violations arising 
from agricultural lending, such as collateral conversions of 
agricultural products.
    The FCA concludes that System institutions should continue to use 
the FCA Referral Form found in the FCA Examination Manual rather than a 
Uniform Criminal Referral Form developed by the BFWG. The FCA believes 
that the FCA Referral Form is more closely tailored to the types of 
crimes most often encountered in agricultural lending. It has been 
designed to be easy to use and to ensure the proper reporting of all 
required information. The form itself contains instructions and a brief 
summary of statutory provisions pertaining to criminal violations that 
most often occur in the context of agricultural lending. Thus, the 
final regulation requires System institutions to continue to use the 
FCA Referral Form for all criminal referrals. The FCA will review the 
FCA Referral Form periodically as part of its ongoing effort to ensure 
that System institutions have access to the best guidance possible.

M. Civil Liability for Making a Criminal Referral

    Several commenters expressed concern that System institutions and 
institution personnel did not have immunity from civil liability for 
making a criminal referral. The FCA's reproposed regulation did not 
address this issue and no provision has been provided in the final 
regulation as this matter has been addressed by a statutory amendment.
    The Farm Credit System Reform Act of 1996 amended the Farm Credit 
Act of

[[Page 24566]]

1971 to provide System institutions and their personnel with immunity 
from civil liability for making a criminal referral. See 12 U.S.C. 
2219e. Now, FCS institutions and their personnel who disclose to a 
government authority information proffered in good faith that may be 
relevant to a possible violation of any law or regulation are not 
liable to any person under any law of the United States or of any State 
for the disclosure or for any failure to notify the person involved in 
the possible violation.
    As a result of this statutory change, FCS institutions and their 
personnel enjoy immunity similar to that of the other financial 
institutions and their personnel. See 12 U.S.C. 3401, 3403; 31 U.S.C. 
5312, 5318. See also 31 CFR part 103, subpart B.

N. Miscellaneous Clarifications

    1. Section 617.2(a) was amended to clarify the FCA's intent that, 
although in the exercise of due diligence it is the direct lender's 
responsibility to make a criminal referral involving a loan it has 
made, when a Federal land bank association services a loan made by a 
Farm Credit Bank, the association must notify the Bank of any known or 
suspected criminal violation involving that loan.
    2. Section 617.2(c) was amended to specify that System institutions 
must notify both the appropriate Federal law enforcement authorities 
and the FCA offices in those instances requiring urgent attention.
    3. Former Sec. 617.3(a) and (b) were combined for brevity and 
renumbered as Sec. 617.3(a). That section provides that if a criminal 
referral involves a member of the board of directors, discretion may be 
exercised in notifying such member of the criminal referral. The FCA 
intends the term ``exercise of discretion'' to mean that the 
institution must determine whether, under the circumstances, only those 
members of the board of directors not involved in the criminal 
violation should be notified of the criminal referral.
    4. Former Sec. 617.3(c) has been renumbered as Sec. 617.3(b) and 
amended to provide that a System institution shall make all required 
notifications under a surety bond or other contract. A System 
institution is no longer required to make an initial determination of 
whether there is a loss prior to notification.

List of Subjects in 12 CFR Part 617

    Banks, banking, Criminal referrals, Criminal transactions, 
Embezzlement, Insider abuse, Insvestigations, Money laundering, Theft.

    For the reasons stated in the preamble, part 617 of chapter VI, 
title 12 of the Code of Federal Regulations is 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 Farm Credit Act of 1971, as 
amended, (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 
public confidence in the Farm Credit System, to ensure the reporting of 
known or suspected criminal activity, to reduce potential losses to 
institutions, and to ensure the safety and soundness of institutions. 
This part requires that institutions use the Farm Credit Administration 
Criminal Referral Form (hereinafter FCA 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 institutions.
    (b) The specific referral requirements of this part apply 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. No specific 
procedural requirements apply to the referral of violations of State or 
local laws.
    (c) Nothing in this part should be construed as reducing in any way 
an institution's ability to report known or suspected criminal 
activities to the appropriate investigatory or prosecuting authorities, 
whether Federal, State, or local, even when the circumstances in which 
a report is required under Sec. 617.2 are not present.
    (d) It shall be the responsibility of each System institution to 
determine whether there appears to be a reasonable basis to conclude 
that a criminal violation has been committed and, if so, to report the 
matter to the proper law enforcement authorities for consideration of 
prosecution.
    (e) Each referral required by Sec. 617.2(a) shall be made on the 
FCA Referral Form in accordance with the FCA Referral Form instructions 
relating to its filing and distribution.


Sec. 617.2  Referrals.

    (a) Each institution and its board of directors shall exercise due 
diligence to ensure the discovery, appropriate investigation, and 
reporting of criminal activity. Within 30 calendar days of determining 
that there is a known or suspected criminal violation of the United 
States Code involving or affecting its assets, operations, or affairs, 
the institution shall refer such criminal violation to the appropriate 
regional offices of the United States Attorney, and the Federal Bureau 
of Investigation or the United States Secret Service or both, using the 
FCA Referral Form. A copy of the completed FCA Referral Form, 
accompanied by any relevant documentation, shall be provided at the 
same time to the Farm Credit Administration's Office of General 
Counsel. In the event that a Farm Credit bank makes a loan through a 
Federal land bank association which services the loan, the Federal land 
bank association must inform the Farm Credit bank of any known or 
suspected violation involving that loan and the Farm Credit bank shall 
refer the violation to Federal law enforcement authorities 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 of $5,000 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 institution 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 of $25,000 or more, through false

[[Page 24567]]

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) In circumstances where there is a known or suspected violation 
of State or local criminal law, the institution shall notify the 
appropriate State or local law enforcement authorities.
    (c) In addition to the requirements of paragraph (a) of this 
section, the institution shall immediately notify by telephone the 
appropriate Federal law enforcement authorities and FCA offices 
specified on the FCA Referral Form upon determining that a known or 
suspected criminal violation of Federal law requiring urgent attention 
has occurred or 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) The institution's board of directors shall be promptly notified 
of any criminal referral by the institution, except that if the 
criminal referral involves a member of the board of directors, 
discretion may be exercised in notifying such member of the referral.
    (b) The institution involved shall promptly make all required 
notifications under any applicable surety bond or other contract for 
protection.


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: April 25, 1997.
Floyd Fithian,
Secretary, Farm Credit Administration Board.
[FR Doc. 97-11685 Filed 5-5-97; 8:45 am]
BILLING CODE 6705-01-P