[Federal Register Volume 62, Number 142 (Thursday, July 24, 1997)]
[Notices]
[Pages 39840-39843]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-19550]


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FEDERAL DEPOSIT INSURANCE CORPORATION


Proposed Statement of Policy for Participation in the Conduct of 
the Affairs of an Insured Depository Institution by Persons Who Have 
Been Convicted or Have Entered Pretrial Diversion Programs Pursuant to 
Section 19 of the Federal Deposit Insurance Act

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Proposed policy statement.

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SUMMARY: The FDIC seeks to update its statement of policy concerning 
the participation in banking of a person convicted of a crime of 
dishonesty or breach of trust or money laundering or who has entered a 
pretrial diversion or similar program in connection with the 
prosecution for such offense pursuant to section 19 of the Federal 
Deposit Insurance Act, 12 U.S.C. 1829. Section 19 was significantly 
expanded by the Financial Institutions Reform, Recovery and Enforcement 
Act of 1989 (``FIRREA''), Pub. L. 101-73, 103 Stat. 183 (1989), and the 
Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery 
Act of 1990 (``Crime Control Act''), Pub. L. 101-647, 104 Stat. 4789 
(1990) and as a result the two existing statements of policy on this 
provision are outdated. The FDIC intends to adopt the new Statement of 
Policy and rescind the two existing ones. The FDIC is seeking comments 
on the proposed Statement of Policy by issuing this Federal Register 
notice.

DATES: Comments must be received on or before September 22, 1997.

ADDRESSES: Send written comments to Robert E. Feldman, Executive 
Secretary, Attention: Comments/OES, Federal Deposit Insurance 
Corporation, 550 17th Street, N.W., Washington, D.C. 20429. Comments 
may be hand-delivered to the guard station at the rear of the 17th 
Street Building (located on F Street), on business days between 7:00 
a.m. and 5:00 p.m. (Fax number (202) 898-3838; Internet address: 
[email protected]). Comments may be inspected and photocopied in the 
FDIC Public Information Center, Room 100, 801 17th Street, NW, 
Washington, DC 20429, between 9:00 a.m. and 4:30 p.m. on business days.

FOR FURTHER INFORMATION CONTACT: Jesse G. Snyder, Assistant Director, 
Division of Supervision, (202) 898-6915; or Nancy L. Alper, Counsel, 
Legal Division, (202) 736-0828, Federal Deposit Insurance Corporation, 
550 17th Street, N.W., Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION:

Background

    The Financial Institutions Reform, Recovery, and Enforcement Act of 
1989 and the Comprehensive Thrift and Bank Fraud Prosecution and 
Taxpayer Recovery Act of 1990 significantly expanded the provisions of 
section 19 of the Federal Deposit Insurance Act, 12 U.S.C. 1829. As 
amended by FIRREA and the Crime Control Act, section 19 now prohibits, 
without the prior consent of the FDIC, a ``person'' convicted of a 
criminal offense involving dishonesty, breach of trust or money 
laundering, or who has agreed to enter into a pretrial diversion or 
similar program in connection with a prosecution for such offense, from 
owning or controlling directly or indirectly an insured depository 
institution, becoming or continuing as an institution-affiliated party, 
or otherwise participating, directly or indirectly, in the conduct of 
the affairs of an insured depository institution. Further, section 19 
now provides that conviction for certain enumerated violations of Title 
18 of the United States Code pertaining to financial institution-
related crimes precludes the FDIC for ten years from considering or 
consenting to an application filed by a person convicted of such an 
offense, unless an exception is granted by the sentencing court.

Request for Comments.

    The FDIC has received many inquiries regarding what constitutes 
``participation'' and who is a ``person.'' This request for comments is 
intended to provide an opportunity to comment on the proposal. In 
general, the FDIC is interested in comments on the following: the scope 
of section 19, including what constitutes ``participation, directly or 
indirectly, in the conduct of the affairs,'' what comprises ``own or 
control, directly or indirectly, any insured depository institution;'' 
whether the current interpretations of ``dishonesty'' or ``breach of 
trust'' should be changed or clarified; criteria for determining what 
constitutes offenses involving dishonesty, money laundering or breach 
of trust; procedures for filing a section 19 application, including 
whether a section 19 application should be filed where there is a de 
minimis crime (e.g., juvenile offense of theft) and what would 
constitute a de minimis crime; what duty to inquire should be imposed 
upon insured depository institutions, including what due diligence 
should be undertaken by insured depository institutions in determining 
what persons come within the parameters of section 19; and the 
standards for granting consent to a section 19 application.
    In particular, the FDIC would like comments on the following areas. 
First, the FDIC is requesting comments on its longstanding policy of 
requiring an insured depository institution to file a section 19 
application on behalf of an individual. The rationale for this policy 
has been that in determining whether to approve a section 19 
application, the FDIC must assess whether the person's participation in 
the insured institution constitutes a risk to the safety and soundness 
of the institution or whether the person's pariticipation in the 
institution threatens to impair public confidence in the institution or 
the banking system in general. In making its determination, the FDIC 
traditionally has considered the position which the person will occupy 
in the institution, the extent of the supervision of the person which 
the institution provides, the size and condition of the institution, 
and fidelity bond coverage of the person

[[Page 39841]]

by the institution's insurance company. Where an individual is filing a 
section 19 without the benefit of bank sponsorship, the FDIC may not 
have information concerning what institution may employ that individual 
when making its determination to approve the section 19 application. 
Further, the FDIC may be put in the position of processing section 19 
applications filed by persons who either may have no prospect of 
employment with a financial institution or have no sincere interest in 
such employment but who are simply seeking certification from an agency 
of the federal government in order to gain employment elsewhere. In 
light of these issues, the FDIC is seeking comments specifically on the 
following: whether a non-bank applicant may file a Section 19 
application and, if so, under what circumstances should it be 
permitted; what the scope of the approval granted in these situations 
should be; and how the FDIC should implement the new procedures in a 
manner to promote the safety and soundness of the insured institution.
    Another area for which the FDIC seeks comments is whether the 
definitions of ``own'' or ``control'' are sufficient. Specifically, the 
FDIC has used the definition of ``control'' as set forth in the Change 
in Control Act, 12 CFR part 225. The FDIC is requesting comments on 
whether the use of this definition is appropriate or whether the 
definition should be expanded. Further, the FDIC seeks comments on how 
to distinguish ``control'' from the definition of ``own'' without 
leading to the absurd result of requiring a convicted person who owns 
one share or ten shares of stock in a large publicly traded insured 
institution from having to divest his or her ownership interest.
    A third area for which the FDIC is requesting comments concerns 
what guidelines should be implemented to determine whether independent 
contractors come within the definitions of indirect participation. For 
example, some independent contractors provide data processing services 
and have access to extremely sensitive bank data but may perform such 
services offsite, while other contractors may be loan brokers who bring 
loans to a bank but do not have any decision making authority about 
obtaining bank approval. A related issue is whether officers and 
directors of a diversified holding company (that is, a company not 
solely involved in financial institution activities) should come within 
the parameters of section 19, and if so, what guidelines should be 
implemented to make such a determination. Elements of this issue may 
involve the relation between the size of the parent holding company and 
the insured depository institution (does the insured institution 
represent one percent of the holding company's business or 75% of the 
business) and where the insured institution fits into the overall 
structural organization of the holding company's business.
    The FDIC recognizes that Section 19 and the proposed Policy 
Statement interpreting Section 19 would impose burdens upon insured 
depository institutions and those parties dealing with the 
institutions. For example, insured institutions would be required to 
determine the criminal backgrounds of temporary employees hired through 
a temporary employment service. The FDIC, however, believes that such 
burdens are compelled by the statutory language of section 19. The FDIC 
is interested in legal analyses which will assist it in devising 
policies which will reduce the burden upon insured depository 
institutions which the FDIC believes is imposed by the statute. The 
FDIC will use the comments and the legal analyses received to develop a 
final statement of policy.
    The Board of Directors of the Federal Deposit Insurance Corporation 
hereby proposes to revise its Statement of Policy regarding 
applications under section 19 of the FDI Act as follows:

FDIC Statement of Policy for Section 19

    Section 19 of the Federal Deposit Insurance Act prohibits, without 
the prior written consent of the Federal Deposit Insurance Corporation 
(FDIC), a person convicted of any criminal offense involving dishonesty 
or breach of trust or money laundering (covered criminal offenses), or 
who has agreed to enter into a pretrial diversion or similar program 
(program entry) in connection with a prosecution for such offense from 
being an institution-affiliated party, owning or controlling directly 
or indirectly an insured depository institution, or otherwise 
participating, directly or indirectly, in the conduct of the affairs 
(collectively, participating in the affairs) of an insured depository 
institution (insured institution).
    Section 19 is a statutory bar to participation. The purpose of an 
application is to provide an opportunity to an applicant to demonstrate 
that, notwithstanding the bar, an individual is fit to participate in 
the conduct of the affairs of an insured institution without posing a 
risk to the safety or soundness of the insured institution or impairing 
public confidence therein. The burden is upon the applicant to 
establish that the application warrants approval. An application may be 
approved because the person will not be in a position to constitute a 
risk to the institution. A person who will occupy clerical, 
maintenance, or service positions, or in some instances, administrative 
or teller positions, generally falls into this category. Such an 
application will not normally require an extensive review. A more 
detailed analysis will be performed in the case of a person who would 
be in a position to control or influence the conduct of the affairs of 
the insured institution.

A. Scope of Section 19

(1) General
    Upon conviction or program entry without the prior written consent 
of the FDIC, a person is automatically by operation of law prohibited 
from: (i) Becoming or continuing as an institution-affiliated party; 
(ii) owning or controlling directly or indirectly an insured 
institution; or (iii) participating, directly or indirectly, in the 
conduct of the affairs of an insured institution. Additionally, such a 
person employed by an insured institution's holding company or an 
affiliate, subsidiary or joint venture of an insured institution or of 
its holding company may be prohibited from continuing such employment 
without the prior written consent of the FDIC where such person is 
engaged in performing banking or banking related activities on a 
regular and material basis. Person, for purposes of section 19, means a 
natural person and does not include a corporation, firm, or other 
business entity.
(2) Controlling Shareholder or Control Group Member
    A controlling shareholder or a member of a control group of an 
insured institution may not without the prior written consent of the 
FDIC engage in the following conduct: (i) Exercise any voting rights in 
any shares of stock of the insured institution or its holding company; 
(ii) own or control such shares of stock so as to result in owning or 
controlling, directly or indirectly, the largest percentage of shares 
in the insured institution; (iii) control such shares of stock so as to 
result in controlling the management or policies of an insured 
institution; (iv) solicit, procure, transfer, attempt to transfer, 
vote, or attempt to vote any proxy, consent or authorization with 
respect to any voting rights in any insured institution; or (v) modify 
or set aside any voting agreement previously approved by the 
appropriate federal banking agency.

[[Page 39842]]

(3) Independent Contractor
    In determining whether an application is required for an 
independent contractor's participation in the conduct of the affairs of 
an insured institution, an analysis is required of the nature and scope 
of the person's proposed activity. Participation by an independent 
contractor, or an employee of an independent contractor, would occur 
where either is performing banking or banking related activities on 
behalf of, or for the benefit of, an insured institution on a regular 
and material basis so as to be involved in the ordinary course of 
operations of the institution or to be exercising control over such 
operations.

B. Criteria for Evaluating Conduct Requiring a Section 19 Application

    The conviction of or program entry by any adult or minor treated as 
an adult by a court of competent jurisdiction will require an 
application to be submitted to the FDIC for prior written consent 
before engaging in banking activities.
(1) Convictions
    There must be present a conviction of record. Arrests, pending 
cases not brought to trial, acquittals, or any conviction which has 
been reversed on appeal are excluded from the requirements of section 
19. A conviction which is being appealed will require an application 
until or unless reversed. A conviction, which has been expunged or for 
which a pardon has been granted, requires an application.
(2) Pretrial Diversion or Similar Program
    Program entry as determined by federal, state or local law, may be 
formal or informal in nature and is characterized by a suspension or 
eventual dismissal of charges or criminal prosecution upon agreement by 
the accused to treatment, rehabilitation, restitution or other 
noncriminal or nonpunitive alternatives. Included in this definition 
are programs where the accused agrees to authorize a corporate entity 
under his control to plead guilty and the accused may make some 
monetary payment.
(3) Dishonesty or Breach of Trust
    A conviction or program entry includes felonies, misdemeanors, and 
other criminal offenses as determined by federal, state or local law, 
wherein dishonesty or breach of trust or money laundering is involved. 
Dishonesty is defined to mean to directly or indirectly cheat or 
defraud; or to cheat or defraud for monetary gain or its equivalent; or 
to wrongfully take property lawfully belonging to another in violation 
of any criminal statute or code. Acts of dishonesty are further defined 
to include, but are not limited to, such acts which involve want of 
integrity, lack of probity, or involve a disposition to distort, 
defraud, cheat or to act deceitfully or fraudulently. Furthermore, 
dishonesty may also include crimes which by Federal, state, or local 
criminal statutes and codes are defined as dishonest. Breach of trust 
is defined to mean a wrongful act or use, misappropriation, omission 
with respect to any property or fund which has been lawfully committed 
to a person in a fiduciary or official capacity, or the abuse of one's 
official position or fiduciary relationship to engage in a wrongful 
act, use, or omission.
(4) Drug Offenses
    All convictions for offenses concerning the illegal manufacture, 
sale, distribution of or trafficking in controlled substances shall 
require an application. A controlled substance shall mean those so 
defined by federal law whether the conviction is by a federal or state 
court. Conviction of or program entry by any adult or minor for use of 
a controlled substance does not per se constitute crimes involving 
dishonesty or breach of trust or money laundering. However, the 
circumstances of the offense may contain elements of dishonesty or 
breach of trust or money laundering as the FDIC traditionally has 
applied these terms to section 19. The FDIC will determine, on a case-
by-case basis, whether an application is required and whether to 
withhold consent from a person convicted of such an offense.
(5) Youthful Offender Adjudgments
    Adjudgment by a court against a person as a ``youthful offender'' 
under any youth offender law or adjudgment as a ``juvenile delinquent'' 
by any court having jurisdiction over minors as defined by state law 
does not require an application. Such adjudications are not considered 
convictions for criminal offenses.

C. General Procedures To Be Followed By An Insured Institution and 
Person With Respect To A Section 19 Application

    Section 19 imposes a duty upon the insured institution to make a 
reasonable inquiry into whether a person has a conviction or program 
entry with respect to a covered criminal offense. Reasonable inquiry 
requires the insured institution to take steps appropriate under the 
circumstances, consistent with applicable law, to avoid hiring or 
permitting participation in its affairs by a person who has a 
conviction or program entry for a covered criminal offense. In certain 
circumstances, an insured institution may believe that undertaking a 
minimal inquiry is not necessary. The FDIC believes that at a minimum 
each insured institution should establish a screening process which 
provides the insured institution with information concerning any 
previous or present convictions or program entries that a job applicant 
may have.
    For example, a reasonable inquiry that would satisfy the 
requirements of Section 19 and is consistent with industry practices 
includes the following: (1) The completion of a written employment 
application which requires listing any and all previous convictions or 
program entries; (2) the fingerprinting and processing of fingerprints 
of any person prior to his or her participation in the affairs of an 
insured institution; and (3) periodic inquiry to determine whether a 
person is the subject of a conviction or program entry. This is not a 
requirement imposed by the FDIC and alternatives may be employed. 
However, the FDIC will look at the circumstances of each situation to 
determine if the inquiry is reasonable. Upon notice of a previous or 
present conviction or program entry for a covered criminal offense, the 
insured institution must seek the consent of the FDIC prior to the 
person's participation, or the person's continued participation.
    When an application is required, forms and instructions should be 
obtained from and the application filed with the appropriate FDIC 
Regional Director. The application must be filed by an insured 
institution on behalf of the person, except where the person is a 
shareholder seeking to exercise voting rights and the insured 
institution has refused to file an application on his behalf. If a 
person currently employed by an insured institution is discovered to 
have a conviction or program entry, upon request, the Regional Director 
may in his discretion grant a conditional approval pending the 
processing of the application.

D. Criteria for Evaluation of Section 19 Applications

    The essential criteria in assessing an application for consent are: 
(1) Whether the person has demonstrated his or her fitness to 
participate in the conduct of the affairs of an insured institution; 
and (2)(i) whether the affiliation, ownership, control, or 
participation by the person in the conduct of the affairs of the 
insured institution may constitute a threat to the safety or soundness 
of the insured institution or the interest of its

[[Page 39843]]

depositors; or (ii) whether the affiliation, ownership, control, or 
participation may threaten to impair public confidence in the insured 
institution.
    Important considerations in determining the risk to the insured 
institution are the following factors: (i) The conviction or program 
entry for a covered criminal offense and the specific nature of the 
offense involved and the circumstances surrounding it; (ii) the 
evidence of rehabilitation since the date of the conviction, parole, or 
suspension of sentence, including the reputation of the person since 
the conviction, the age of the person at the time of the conviction, 
and the time elapsed since the conviction; (iii) the position to be 
held by the person in the insured institution and/or the type of 
participation to be engaged in directly or indirectly in the conduct of 
the affairs of the insured institution by the person; (iv) the amount 
of influence and control the person will be able to exercise over the 
affairs and operations of the insured institution; (v) the ability of 
management at the insured institution to supervise and control the 
activities of the person; (vi) the level of ownership which the person 
will have at the insured institution; (vii) the applicability of the 
insured institution's fidelity bond coverage to the person; (viii) the 
opinion or position of the primary Federal and/or state regulatory 
agency; and (ix) any additional factors in the specific case that 
appear relevant.
    These criteria will also be applied by the FDIC to determine 
whether the interests of justice are served in seeking an exception in 
the appropriate court when an application is made to terminate the ten-
year ban prior to the expiration date for a person convicted for the 
commission of, or the conspiracy to commit, one of the enumerated 
violations of Title 18 set forth in section 19.
    Approval orders in section 19 cases will generally be subject to 
the condition that the person shall be bonded to the same extent as 
others in similar positions. When deemed appropriate, approval orders 
may also be made subject to the condition that the prior consent of the 
FDIC shall be required for any proposed significant changes in the 
duties and/or responsibilities of the person. Such proposed changes may 
in the discretion of the Regional Director require a new application. 
In situations where a person has been approved under a section 19 
action for participation in one insured institution and subsequently 
seeks to participate in another insured institution, approval does not 
automatically follow. In such cases, another application must be 
submitted to the FDIC to determine whether approval should be granted.

    By order of the Board of Directors.

    Dated at Washington, DC, this 24th day of June 1997.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 97-19550 Filed 7-23-97; 8:45 am]
BILLING CODE 6714-01-P