OFFICE OF 

INSPECTOR GENER!L 

Farm Credit !dministration’s 

Special Supervision and 

Enforcement Processes 

!-15-01 

!udit Report 

!uditor-in-Charge 

Sonya Cerne 

Issued March 31, 2015 

F!RM CREDIT !DMINISTR!TION 
 

 

 

     

              

             

              

   

       

  

   

                     

                             

                          

                   

                           

                  

                      

                       

                        

                         

             

                               

                          

         

                     

                       

                       

                         

                         

Farm Credit Administration	 Office of Inspector General

1501 Farm Credit Drive 

McLean, Virginia 22102-5090 

March 31, 2015

The Honorable Kenneth A. Spearman, Board Chairman

The Honorable Dallas P. Tonsager, Board Member

The Honorable Jeffrey S. Hall, Board Member

Farm Credit Administration

1501 Farm Credit Drive

McLean, Virginia 22102‐5090

Dear Board Chairman Spearman and FCA Board Members Tonsager and Hall:

The Office of Inspector General (OIG) completed an audit of the FCA’s Special Supervision and

Enforcement Processes. The objective of this audit was to determine whether FCA is following

the special supervision and enforcement processes and monitoring institution compliance

effectively.

During our audit, we found that FCA is generally following the processes and monitoring

compliance. Preliminary decisions, formal decisions made through the Regulatory Enforcement

Committee, and recommendations to the Board are clearly documented. Justifications to

initiate actions are in supporting documentation, and FCA documents the special supervision

and enforcement processes. We also found that the Watch List is effective, identification and

escalation of concerns were appropriate, complexity and length of actions are correlated, and

persistent involvement and communication leads to corrective action.

We would like to highlight the responsive actions the Office of Examination (OE) plans to take

to address opportunities to improve or modify the processes identified during the audit. OE

agreed to the following actions:

1.	 Develop a training program for special supervision and enforcement actions to

ensure the organization has the knowledge to react to the changing FCS

environment.

2.	 Emphasize the requirement of FCA Regulation 612, Subpart B, and provide training

and/or education to examiners on the role and responsibility FCA has regarding the

criminal referral form and to ensure institutions are filing the form as required.
                       

                       

             

                          

                                 

     

   

   

3.	 Address the use of informal ratings and other supervisory letters by either

expanding or changing current directives and/or processes to include when they are

appropriate and how they will be used.

We appreciate the courtesies and professionalism extended to OIG staff by FCA personnel. If

you have any questions about this audit, I would be pleased to meet with you at your

convenience.

Respectfully,

Elizabeth M. Dean
 

Inspector General
 

Enclosure
   

                   

                      

                     

                    

                   

   

                 

             

                    

               

                  

                  

                     

         

          

           

               

           

   

                       

      

               

   

             

                     

         

         

     

   

     

   

             

         

       

       

        

       

         

   

       

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OBJECTIVE:

To determine whether FCA is

following the special

supervision and enforcement

processes and monitoring

institution compliance

effectively.

BACKGROUND:

The mission of the FCA is to

promote a safe, sound and

dependable source of credit

for agriculture and rural

America. FCA is responsible

for regulating and examining

the FCS and the Federal

Agricultural Mortgage

Corporation, the nation’s two

agricultural Government

sponsored enterprises. FCA’s

Office of Examination (OE)

conducts examinations of FCS

banks and associations. If

examiners identify concerns

with institutions through

examination activities, they

may refer the institution to

OE’s Risk Supervision Division

(RSD) for possible supervision

or enforcement actions. The

Farm Credit Act of 1971, as

amended, provides the FCA

with statutory enforcement

authorities. In general, there

are three levels of

supervision used by FCA for

FCS institutions: normal

supervision, special

supervision, and

enforcement. Each level

provides increased

monitoring and involvement

with the institution.

The Farm Credit Administration (FCA) regulates and supervises Farm Credit

System (FCS or System) institutions. When weaknesses or problems arise or

correction is necessary, FCA has a proactive supervisory process to address

issues of concern. These processes have developed through time and

experience and have most often returned problem institutions to healthy

conditions.

We found preliminary decisions, formal decisions made through the

Regulatory Enforcement Committee, and recommendations to the FCA

Board are clearly documented. Justification to initiate the special supervision

and enforcement actions are in Reports of Examination, memoranda, and

communications with the institutions. FCA also documents the special

supervision and enforcement processes through: FCA Board policies, policies

and directives, sections of the Examination Manual, and RSD procedures.

During the audit, we found:

 the Watch List is effective;

 identification and escalation of concerns were appropriate;

 complexity and length of actions are correlated; and,

 persistent involvement and communication leads to corrective

action.

We also identified a few opportunities to improve or modify the processes

through:

 increasing staff readiness;

 ensuring institutions adhere to the criminal referral process

requirements; and,

 expanding or changing current directives and/or processes.

There are three agreed‐upon actions to improve the oversight of special

supervision and enforcement actions.
     

   

         

       

       

             

                             

             

                   

       

         

       

         

                 

         

         

   

TABLE OF CONTENTS

BACKGROUND____________________________________________________________________________ 1
 

Prior OIG Reviews_______________________________________________________________________ 3
 

AUDIT RESULTS___________________________________________________________________________ 4
 

Watch List Effectiveness__________________________________________________________________ 5
 

Identification and Escalation of Concerns____________________________________________________ 5
 

Complexity Correlates with the Length of Time Under Special Supervision and Enforcement Actions ___ 7
 

Persistent Involvement and Communication with Institutions___________________________________ 8
 

Improvements to the Special Supervision and Enforcement Processes ____________________________ 9
 

Staff Readiness______________________________________________________________________ 10
 

Agreed‐Upon Action 1 ________________________________________________________________ 11
 

Criminal Referrals____________________________________________________________________ 11
 

Agreed‐Upon Action 2 ________________________________________________________________ 12
 

Special Supervision and Enforcement Directives and Processes_______________________________ 12
 

Agreed‐Upon Action 3 ________________________________________________________________ 13
 

OBJECTIVE, SCOPE, AND METHODOLOGY_____________________________________________________ 14
 

ACRONYMS _____________________________________________________________________________ 15
 
                             

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contemplated, an attorney from the Office of General Counsel is also assigned to the action.

BACKGROUND 

The Farm Credit Administration (FCA or Agency) is an independent agency in the Executive Branch of the

U.S. Government.  The mission of the FCA is to promote a safe, sound and dependable source of credit

for agriculture and rural America.  FCA is responsible for regulating and examining the Farm Credit

System (FCS or System) and the Federal Agricultural Mortgage Corporation (commonly referred to as

Farmer Mac), the nation’s two agricultural Government‐sponsored enterprises.  FCA’s Office of

Examination (OE) conducts examinations of FCS banks and associations to ensure their safety,

soundness, and compliance with laws and regulations.  Sections 5.25 through 5.38 (12 U.S.C. § 2261‐

2274) of the Farm Credit Act of 1971, as amended, provides the FCA with statutory enforcement

authorities to take action for unsafe, unsound practices or for violations of law, rule or regulation.

FCA examiners utilize the Financial Institution

Rating System (FIRS) to rate, evaluate, and

categorize FCS institutions.  Under FIRS, each

institution receives a composite rating and six

component ratings based on Capital, Assets,

Management, Earnings, Liquidity, and

Sensitivity, collectively known as CAMELS.  The

ratings range from 1 to 5 for each component

and the composite, with a 1 indicating strong

performance and a 5 indicating poor

performance.  Examiners rate institutions each

quarter or any time there is a material change.  

FCA discloses the ratings to the institution

through a letter to the board chairman and

chief executive officer annually and whenever a

composite or component rating is changed.  

Currently, about 95 percent of institutions have

a composite rating of 1 or 2.  The chart to the

right shows the number of institutions rated 1‐

4 for the June 2014, September 2014, and

December 2014 periods, according to OE.  

There are currently no 5 rated institutions and

one 4 rated institution.   

If examiners identify concerns with institutions through examination activities, they may refer the

institution to OE’s Risk Supervision Division (RSD) for possible special supervision or enforcement

actions.  RSD is responsible for managing and administering special supervision and enforcement

processes.  RSD assigns an enforcement examiner to each institution under special supervision and/or

enforcement action.  RSD coordinates with the OE examination division to determine if recommended

actions are needed, and they work in tandem throughout the process.  When an enforcement action is

         

Jun‐14 Sep‐14 Dec‐14

46 43 44

29 33 32

7 4 3

1 1

Current FIRS Ratings of FCS

Institutions

4 Rated 3 Rated 2 Rated 1 Rated
   

                             

                                    

                           

                    

                    

                

                 

            

                     

       

                 

                 

           

           

          

           

         

      

         

                     

                        

                     

                           

                                

                        

                             

                            

                                 

                              

                          

                               

                              

        

   

     

                               

                                  

                                 

                                      

                            

                               

             

             

nt

Special Supervision

Normal Supervision

Enforceme

Supervision Levels

When there are indicators of potential problems or weaknesses within an institution, OE uses proactive

measures as an alert and to increase monitoring in a tiered approach. In general, there are three levels

of supervision of FCS institutions by FCA: normal supervision, special supervision, and enforcement.

Each level provides increased monitoring, communication, and involvement

with the institution. FCA uses normal supervision when institutions are

operating in a safe and sound manner. This includes normal

examination activities and monitoring practices. OE also maintains

a Watch List for institutions in normal supervision when

examiners identify concerns that warrant monitoring. Often

the Watch List serves to curtail problems and, as a result,

supervisory actions are minimized.

The next level of supervision is special supervision, which

is an early intervention strategy when the board of

directors and management of an institution

demonstrate willingness and ability to resolve

negative conditions. Special supervision is aimed

at efficiencies by prompting boards and

management to effect meaningful change

before enforcement becomes necessary.

With special supervision, FCA increases

monitoring through the development of institution‐specific supervisory strategies documented in a

supervisory letter. Although FCA can use statutory enforcement actions, OE utilizes special supervision

as an additional approach to get the desired improvement without formal enforcement.

If an institution has severe financial, asset quality, management, or governance weaknesses, FCA may

utilize the highest level of supervision, enforcement. This level of supervision can include a variety of

formal actions. Specifically, the Farm Credit Act of 1971, as amended, promulgated the enforcement

powers including: cease and desist orders, suspension and/or removal of directors and officers, and civil

money penalties. When faced with the potential of a formal enforcement action, most often, an

institution agrees to enter into a written agreement with the FCA to address and correct weaknesses to

avoid the formal cease and desist process or other actions. The written agreement identifies specific

articles detailing actions to induce corrective measures by the institution’s board and management.

There are also instances when an institution may begin in special supervision and FCA elevates the

supervision level to a formal enforcement action. FCA may also elect to have both supervisory letter(s)

and enforcement actions working simultaneously.

Conditions Warranting Actions

OE Directives state that, as a general practice, special supervision is appropriate for any institution with

a 3 or above in composite or component ratings. Special supervision may also be warranted in cases

where the institution receives a 2 rating if conditions are deteriorating or if a specific issue needs

attention. If an institution receives a composite rating of 4 or 5, a referral must be made to the

Regulatory Enforcement Committee (REC) for consideration of action. The REC is a group of designated

individuals that considers, votes, and recommends the use of enforcement actions to the FCA Board and

consults on other actions, as needed.

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The FCA Board designated the Chief Operating Officer as the REC Chair. Other REC members include

Office Directors of OE, Office of General Counsel, and Office of Regulatory Policy. A representative from

the Farm Credit System Insurance Corporation is also invited to participate in REC activities as a non‐

voting member. The REC recommends actions to the FCA Board, which in turn, votes on whether to

initiate actions. The following shows instances in which a referral to the REC must be made according to

FCA’s Board Policy Statement 79:

The institution or person is

deemed unable or unwilling to

address a material: (a) unsafe

or unsound condition or

practice; or (b) violation or

ongoing violation of law or

regulation.

Conditions meet the statutory

criteria for assessing a civil

money penalty and the factors

to be considered in determining

the amount of a civil money

penalty justify the imposition of

the penalty.

The institution or person is

about to engage in a material

unsafe or unsound practice or is

about to commit a willful or

material violation of law or

regulation that exposes the

institution to significant risk.

Conditions meet the statutory

criteria for a suspension or

removal.

Conditions meet the statutory

criteria to place an FCS

institution in conservatorship or

receivership.

An institution or person fails to

comply with an Enforcement

Document or is unwilling or

unable to address a violation of

a condition imposed in writing.

Conditions justify termination or

modification of an existing

Enforcement Document.

Prior OIG Reviews

The OIG conducted an inspection, Farm Credit Administration’s Enforcement Program (I‐06‐01), to

assess the readiness of the FCA to take enforcement actions. The inspection results were:

 readiness and training needed improvement

 the FCA Board’s involvement in the enforcement process needed to be established in policy

guidance and thresholds

The OIG made six recommendations to improve enforcement action readiness. The actions were taken.

The OIG also conducted an audit, FCA’s Use of Enforcement Actions (A‐97‐03), to evaluate FCA’s use of

enforcement actions in obtaining corrective actions in FCS institutions and to document and evaluate

FCA’s organizational structure and process as it pertained to achieving enforcement objectives. The

findings were the enforcement actions had generally been effective, but opportunities existed to

enhance timeliness and efficiency of enforcement actions. The OIG made three recommendations to

improve the enforcement process, and the actions were taken.

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AUDIT RESULTS 

The objective of this audit was to determine whether the FCA is following the special supervision and

enforcement processes and monitoring institution compliance effectively.  Overall, the FCA is generally

following the processes and monitoring compliance.  We found preliminary decisions, formal decisions

made through the Regulatory Enforcement Committee, and recommendations to the FCA Board are

clearly documented.  Justification to initiate the enforcement and special supervision actions are in

Reports of Examination, memoranda, and communications with the institutions.  FCA documents the

special supervision and enforcement processes through FCA Board policies, policies and directives,

sections of the Examination Manual, and RSD procedures as noted below:     

FCA Board Policies Policies and Directives

•Policy Statement 34‐Disclosure of the Issuance and •Policies and Procedures Manual 504‐Enforcement

Termination of Enforcement Documents Actions

•Policy Statement 53‐Examination Philiosophy •OE Directive 35‐Special Supervision

•Policy Statement 79‐Consideration and Referral of •OE Directive 36‐Enforcement Action

Supervisory Strategies and Enforcement Actions

Examination Manual RSD Procedures

•Section 1.4 Supervision and Enforcement •Enforcement Actions

•Section 1.5 FCA Criminal Referral Form and •Civil Money Penalties

Instructions •Supervisory Filing System

•Supervision‐Related Reporting

•Supervisory Document Processing

During the audit, we found:

 the Watch List is effective;  

 identification and escalation of concerns were appropriate;

 complexity and length of actions are correlated; and,

 persistent involvement and communication leads to corrective action.  

We also identified a few opportunities to improve or modify the processes through:

 increasing staff readiness;  

 ensuring institutions adhere to the criminal referral process requirements; and,

 expanding or changing directives and/or processes.

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Watch List Effectiveness

The Watch List is effective. Within the three levels of supervision, OE uses various forms of review to

monitor the FCS. One of those mechanisms is the OE Watch List, which tracks emerging issues within

the System. If a concern arises with an institution, the examination division coordinates with RSD to

place the institution on the Watch List. We reviewed OE’s monthly Watch List to determine

effectiveness. We analyzed the reasons why institutions were placed on the list, how long they

remained, and whether the institutions were subsequently moved to special supervision or

enforcement.

While there are other factors to consider, utilizing the Watch List allows OE to heighten awareness while

reviewing and gathering information on potential concerns and emerging threats. It also increases

efficiency by curtailing the need for supervisory or enforcement actions and providing ongoing

coordination and communication between examination divisions and RSD.

In one case, an institution notified OE of potentially fraudulent transactions at the institution. The

institution uncovered suspicious activity, but officials were unsure about the depth and impact of the

activities. OE immediately placed the institution on the Watch List while the institution and the Agency

gathered important information. This allowed FCA to discover the extent of the issues and determine a

productive path for correcting issues identified. The institution was on the Watch List for two months

before OE increased the level of supervision.

Another example of how the Watch List creates efficiency involved an allegation received, regarding a

potential improper sale of property to an association employee’s relative. OE placed the association on

the Watch List and conducted onsite work, which included an investigation into the accuracy of the

allegation. Subsequently, the examiners concluded there was no violation. However, the Watch List

allowed OE to track the emerging issue and potential concern without initiating further action.

Developing supervisory actions takes time, precise directions, and the involvement of many staff. Only

one of the eleven institutions reviewed moved from the Watch List, out of normal supervision into

special supervision. In addition, institutions tend to be on the Watch List for a short amount of time.

Nine of the eleven institutions reviewed were on the Watch List for ten months or less. While these

institutions required heightened awareness, most issues were resolved without the need for intensive

special supervision and enforcement actions.

The Watch List also increases communication. The examination division and RSD coordinate at least

once a month. This communication allows RSD to prepare for future, emerging issues and to be

involved from the beginning in instances of potential unsafe and unsound practices or weaknesses.

Identification and Escalation of Concerns

From the 11 institutions under special supervision and enforcement actions we reviewed, concerns were

identified early and increased supervisory measures occurred when needed. We also found the majority

of the institutions under special supervision and enforcement actions had management and asset

quality concerns. We selected institutions that had special supervision or enforcement actions in

process or terminated throughout Fiscal Year (FY) 2014. In total, there were eight institutions under

enforcement and three under special supervision that met this criteria.

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For each institution, we reviewed the agreements and/or letters documenting the actions and the

memoranda documenting the reasons for the actions. We also reviewed the historical FIRS ratings and

examination reports for the institutions and each action, including both special supervision and

enforcement, initiated and terminated on the institution. During this audit, we identified the following:

	 Concerns were identified early. In reviewing the FIRS ratings, 9 of the 11 institutions had a

composite rating of 3 when the first action was taken and the remaining two institutions were

rated a 2. No institution’s rating had lowered to a 4 or 5 before supervisory initiation.

	 Increased supervisory measures occurred when needed. Of the eight institutions under

enforcement, six had previously been under special supervision status. When conditions

deteriorated or concerns were not addressed properly, OE moved the institutions to formal

enforcement status.

	 The majority of the institutions under special supervision and enforcement actions had

management and asset quality concerns1

. Specifically, 10 of the 11 institutions had

management issues and 9 of the 11 had asset quality concerns that were specifically identified

as factors needing FCA action. Other themes of concern were earnings, standards of conduct,

and credit administration, as noted below:

Institutions under Special Supervision and Enforcement Actions

Number of Institutions with the Areas of Concern

Action Categories Management Asset Quality Earnings

Standards

of Conduct

Credit

Administration

Special Supervision

and Enforcement

6 5 2 1 1

Enforcement Only 2 1 0 1 1

Special Supervision

Only

2 3 2 0 1

1 The list identifies major themes of issues affecting the institutions. This list is not all‐inclusive of every

issue found at the institutions.

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Complexity Correlates with the Length of Time Under Special Supervision and

Enforcement Actions

In reviewing special supervision and enforcement actions, we found that complexity of the underlying

issues played a pivotal role in the amount of time an institution is under enforcement. Many of the

institutions under enforcement action, with problems needing correction, received multiple supervisory

letters and multiple iterations of written agreements. For example, one institution received five

different supervisory letters and had a written agreement with FCA. Another institution received three

supervisory letters and two different iterations of written agreements, with the second agreement

focusing more on management of the institution.

Complex agreements involve more time and staff allocations. The following chart shows eight

institutions (within this audit scope) under written agreements and the length of time these institutions

were under action, with three currently ongoing:

Institutions under Written Agreements

Institution Length of

Time Under

Written

Agreement*

Number of

Supervisory

Letters

Number of

Written

Agreements

Total

Actions

1 60 months 3 2 5

2 23 months 1 1 2

3 19 months 2 1 3

4 27 months 3 1 4

5 50 months 1 2 3

6 34 months 1 1 2

7 53 months 1 2 3

8 46 months 5 1 6

* Calculations were as of January 2015.

These institutions ranged from one and a half to five years under enforcement with an average of 39

months. Three of the institutions remained in enforcement status for over four years; however, each of

those institutions had at least two written agreements and one supervisory letter. Six of the eight

institutions had three or more actions.

This average can be used internally in evaluating future resource needs. FCA can also use this average

externally when communicating with institutions on typical lengths of time an institution may take to

recover from downturns or operating in an unsafe and unsound manner. The chart also shows the work

completed in 2014. FCA terminated agreements with two of the three institutions exceeding the four‐

year period and three additional agreements during 2014.

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Length of time under an agreement is also important because it is a performance measure for the

Agency.  The measure is tied to the percentage of requirements in supervisory agreements with which

FCS institutions have at least substantially complied within 18 months of execution of the agreements:

Performance Measure   FY 2014

Target

FY 2014

Result

FY 2015‐2016

Target

Percentage of requirements in supervisory agreements

with which FCS institutions have at least substantially

complied within 18 months of execution of the agreements.

> 80%   91%   > 80%  

  

Persistent Involvement and Communication with Institutions

OE worked persistently to address institutions’ issues and design strategies to correct problems and

conditions.  As an example, FCA identified significant problems at one institution.  The Agency and

institution entered into a written agreement.  About seven months later, FCA issued a supervisory letter

due to the institution’s partial noncompliance with the written agreement and continued deterioration.  

Another written agreement was entered into about nine months later.  FCA terminated the agreement,

with the institution now operating under normal supervision.

First Written

Agreement

•FIRS Ratings:  

3/3/3/4/3/3/1

Seven Months Later‐

Supervisory Letter

•FIRS Ratings:

4/4/4/4/4/4/3

Nine Months Later‐

Second Written

Agreement

•FIRS Ratings:  

4/4/4/4/4/4/3

Two Years and Ten

Months Later‐Written

Agreement

Terminated

•FIRS Ratings

2/2/3/2/2/2/2

Current

•FIRS Ratings:  

2/2/3/2/2/2/2

The consistent and firm approach coupled with monitoring guided this institution back to compliance.

Although the FIRS ratings show improvement was not immediate, the institution showed a positive

trend.  Based on our review, this is a consistent result of persistence and communication.   

Year FIRS Ratings 

Year 1 3/3/3/4/3/3/2 

Year 2 4/4/4/4/4/4/3 

Year 3 3/3/3/3/3/3/2 

Year 4 3/3/3/3/2/2/2 

Year 5 2/2/3/2/2/2/2 

Year 6 2/2/3/2/2/2/2 
                             

                                        

                   

             

      

   

        

   

           

                                  

                               

                          

                                

                      

                            

                         

           

	 	 	 	 	 	

                             

              

Further, of the 11 institutions reviewed, seven had current composite FIRS Ratings that improved from

the composite rating at the time of the first action. One institution began with a 2 rating, declined to a

3, but returned to a 2 with corrective action.

Composite FIRS Ratings for Institutions under Special

Supervision and Enforcement

Composite FIRS

Rating at time of

Special Supervision

Composite FIRS

Rating at time of

Enforcement

Current

Composite FIRS

Rating

3 4 3

N/A 3 2

2 3 3

3 3 2

N/A 3 2

3 3 2

2 3 2

3 3 3

3 N/A 2

3 N/A 2

3 N/A 2

OIG regularly conducts a survey of FCS institutions regarding the quality and consistency of the Agency’s

examination function and the examiners performing the main mission functions. This survey collects

and publishes the results without attribution. In a recent OIG survey of FCS institutions, one response

answered affirmatively that the institution was recently released from a written agreement. The

institution comments were, “FCA staff were very considerate and friendly, but firm.” The response

further stated that the institution “appreciates their assistance and acknowledges their contribution to

our present level of expertise.”

Improvements to the Special Supervision and Enforcement Processes

The audit also revealed improvements or modifications could also be made to the special supervision

and enforcement processes. Areas that could be improved include:

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 staff readiness,

 the criminal referral process, and

 special supervision and enforcement directives and processes.

Staff Readiness

Given the ever‐changing FCS environment, staff readiness for special supervision and enforcement

actions could be improved. The special supervision and enforcement environment has changed over the

last two years. The number of enforcement and special supervision matters has declined. In 2014, FCA

terminated 10 actions2

. In 2013, FCA terminated four supervisory letters; two of those resulting in

increased supervision by undertaking enforcement action. The initiation of formal enforcement actions

(written agreements), has also trended downward since 2012, with no new written agreements in 2014,

as shown below:

     

Initiated Enforcement Actions

5

4

3

2

1

0

2009 2010 2011 2012 2013 2014

Number of Initiated Enforcement Actions

RSD currently has five assigned staff with two staff members also performing additional duties outside

of RSD. Three of the five assigned members of RSD are retirement eligible or near retirement eligible.

While the enforcement and supervision processes are well documented, OE currently does not have a

dedicated training program for enforcement examiners. Based on interviews with RSD staff, additional

expertise in RSD work is acquired from experienced enforcement examiners and on‐the‐job training.

Because of this, it is essential that RSD and OE capture the knowledge of those experienced examiners.

There are also ongoing discussions about how to best utilize RSD examiners during times of decreased

special supervision and enforcement activity. It is not possible to predict needs or changes in the

condition of an institution, which may warrant the need for supervisory attention. By documenting a

training program that could be utilized by all examiners, there can be multiple options for RSD. For

example, with a proper training program, an examiner could become more familiar with supervisory

actions and have the ability to serve in RSD on an as needed basis. OE officials stated that, if needed,

there are a number of staff within OE who have knowledge from their past experiences with special

2 These actions included: one supervisory conditions of merger, five written agreements, and four supervisory

letters.

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supervision and enforcement processes who could assist as enforcement examiners with minimal

additional training under RSD’s oversight.

A recent case within RSD shows the significance and importance of RSD readiness. A large potentially

fraudulent scheme was uncovered at an FCS institution. Because of the significance of the issues and

concerns, it is and will continue to be a large undertaking for RSD and other parts of OE. Because

current staff are knowledgeable and have experience in this area, they were able to react quickly and

efficiently. For the future, it is imperative that OE direct attention to developing a training program so

that examiners understand special supervision and enforcement processes and actions and are able to

react quickly if needed.

Agreed‐Upon Action 1

In order to improve the future readiness of RSD, OE agreed to:

1.	 Develop a training program for special supervision and enforcement actions to ensure the
 

organization has the knowledge to react to the changing FCS environment.
 

Criminal Referrals

At times, FCA can and does initiate special supervision and/or

enforcement actions based on potential violations of laws, regulations, or

rules. This may include actions taken by certain individuals that involve

suspected fraudulent activities affecting the institutions. As part of the

audit, three institutions under special supervision or enforcement where

potential criminal activity had taken place were judgmentally selected to

ensure the criminal referral process was followed. FCA regulations require

institutions to file a criminal referral form for known or suspected criminal

violations.

Two of the three institutions reviewed had not filed criminal referrals.

Institutions are required to complete the FCA Referral Form within 30

calendar days of determining that a known or suspected criminal violation

has occurred. A copy of the referral form must be provided at the same

time to FCA’s Office of General Counsel. For the first institution reviewed,

we found RSD initiated timely actions that included specific instructions to one institution about filing

the criminal referral. In fact, RSD responded to the institution with the instruction only six days after the

institution notified FCA of an alleged fraudulent activity. Subsequently, the institution filed two

separate criminal referral forms, as required.

In the other two cases reviewed, we found that the institutions did not submit a criminal referral. One

case involved misconduct and numerous instances of standards of conduct violations by a director. FCA

initiated enforcement actions against the director; however, a criminal referral was not filed.

In the last case reviewed, FCA directed an institution to have an independent third‐party investigation of

a large charge off. FCA directed the institution to identify any known or suspected criminal activities and

complete the criminal referral if these activities were identified. The investigative report concluded

there was no evidence of funds diversion or collateral conversion. However, the report noted other

11
 

FCA Regulation § 612.2301 

Referrals 

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.
                                 

                          

           

                               

                                  

                            

                                  

                              

                          

                        

                       

                            

                             

                          

                             

                               

                          

                              

                           

	 	

                     

                         

                           

                      

	 	 	 	 	 	

                               

                      

                              

           

                       

                       

                    

                              

                     

                              

                          

                            

                     

                      

                               

items such as a misrepresentation by the borrowers, comingling of assets and liabilities, a lack of audited

financial statements, and appraisals with serious deficiencies. Despite these findings, the institution did

not file a criminal referral.

The FCA Criminal Referral Regulation 612, Subpart B, is written to require any known or suspected

criminal activity to be reported. This regulation is a clear mandate to report to the appropriate law

enforcement agency. In both cases where the criminal referrals were not filed, the institutions hired

private firms to investigate and report back to the institutions. However, both firms were limited in the

reviews. For example, in both investigations, the prime individuals involved in the activities were not

interviewed and financial records reviewed were limited. While these investigations are important to

the institutions, they are not a substitute for an independent law enforcement inquiry. Criminal

referrals are especially important when an institution is under special supervision and/or enforcement

actions. Because criminal activities can impact the safety and soundness of the institution, the

institutions should be cognizant of, and closely adhere to, all requirements relating to the criminal

referral activities. Further, FCA should ensure once the enforcement decisions are made and actions

taken, the institutions are still also mindful of the obligation to report “suspected” criminal activity.

FCA has placed the criminal activity referrals and related internal controls on the Spring 2015 Regulatory

Projects Plan. Specifically, the purpose is to consider whether the current regulatory guidance regarding

internal controls to prevent, identify, and monitor fraud and criminal activity needs revision. The plan

also states they will review the processes for referring known or suspected criminal violations.

Agreed‐Upon Action 2

In order to improve the criminal referral process, OE agreed to:

2.	 Emphasize the requirement of FCA Regulation 612, Subpart B, and provide training and/or

education to examiners on the role and responsibility FCA has regarding the criminal referral

form and to ensure institutions are filing the form as required.

Special Supervision and Enforcement Directives and Processes

As noted in this report, OE has thorough policies, procedures, and directives to document the special

supervision and enforcement processes. These documents set forth specific, detailed directions for

examiners to follow. We identified two areas where directives did not reflect current practices and

could be improved as noted below:

	 According to OE Directive 36, Enforcement Action Procedures, the examination division is

responsible for evaluating compliance with the enforcement action and assigning a preliminary

compliance rating. Then, an RSD enforcement examiner reviews the compliance evaluations

and assigns a final rating, which is communicated to the institution. We found three instances

where an enforcement examiner completed an informal compliance rating analysis, which

included some proposed changes to the compliance ratings. This is an action not addressed in

the directive. OE officials indicated the documents were not meant to result in a

communication to the institution to formally change the ratings. Instead, the process was to

document internal analyses to assess the institution’s compliance before considering additional

Agency action, such as termination of an enforcement action. Although the examiners

annotated the ratings as “informal” or as “part of workpapers,” the existence of these ratings in

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OE’s records may create confusion as to the intent of the informal ratings or compliance with OE

Directive 36.

	 OE Directive 35, Special Supervision Procedures, sets forth procedures for initiating, monitoring,

terminating, and administering special supervision. In three instances, OE issued supervisory

letters but each institution remained under “normal supervision.” OE also identified the

communication as a “supervisory letter” and reported the items to the Board as “other

supervisory actions.” We understand OE has a variety of tools for communicating with and

monitoring institutions. However, using the letters for both normal supervision and special

supervision may be confusing.

OE procedures do not address how informal ratings are to be used, when they are appropriate, or how

they will be relied upon. The procedures thoroughly discuss the supervisory letter process for special

supervision status. However, the procedures do not address initiating a supervisory letter when the

supervision level does not change but remains normal.

Agreed‐Upon Action 3

In order to improve the processes, OE agreed to:

3.	 Address the use of informal ratings and other supervisory letters by either expanding or

changing current directives and/or processes to include when they are appropriate and how

they will be used.

13
 
The objective of this audit was to determine whether FCA is following the special supervision and

enforcement processes and monitoring institution compliance effectively.  We conducted fieldwork at

FCA’s Headquarters in McLean, VA from November 2014 through February 2015.  We limited our scope

to actions initiated or in process in FY 2014.

The following steps were taken to accomplish the objective:

 Reviewed the Farm Credit Act, as amended, for mandates on special supervision and

enforcement actions.  

 Reviewed FCA, OE, and RSD policies and procedures related to special supervision and

enforcement actions.

 Obtained background information for special supervision and enforcement actions.

 Interviewed OE management and selected examiners on internal policies and procedures.

 Reviewed documentation from the Enterprise Documentation and Guidance system and the

Enforcement and Supervision databases.  

 Reviewed special supervision and enforcement actions initiated or in process during FY 2014,

and determined why FCA placed the institution under special supervision or enforcement.   

 Analyzed historical information in the Supervisory History Database maintained by OE for

actions taken since 2007.

 Analyzed actions for potentially fraudulent activities and reviewed files for criminal referral

forms.  We judgmentally sampled three activities based on the reasons behind certain actions

and activities conducted by the institution.  Because our sample was judgmental and not

statistically sampled, we cannot project our findings to the entire population.   

 Reviewed compliance ratings for institutions under enforcement actions.   

 Reviewed and analyzed the watch list for identification, length of time on the list, and escalation

to special supervision or enforcement.   

This audit was performed in accordance with the Generally Accepted Government Auditing Standards.  

Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence

to provide a reasonable basis for our findings and conclusions based on our audit objective.  We

assessed internal controls and compliance with laws and regulations to the extent necessary to satisfy

the objective.  Because our review was limited, it would not necessarily have disclosed all internal

control deficiencies that may have existed at the time of our audit.  We assessed the computer‐

processed data relevant to our audit objective and determined that the data was sufficiently reliable.  

Overall, we believe the evidence obtained provides a reasonable basis for our conclusions based on our

audit objective.   

OBJECTIVE, SCOPE, AND METHODOLOGY 

14
             

       

         

           

       

          

           

       

         

   

ACRONYMS 

CAMELS

FCA

FCS

FIRS

FY

OE

OIG

REC

RSD

15

Capital, Assets, Management, Earnings, Liquidity, and Sensitivity

Farm Credit Administration

Farm Credit System

Financial Institution Rating System

Fiscal Year

Office of Examination

Office of Inspector General

Regulatory Enforcement Committee

Risk Supervision Division
                             

   

       

              

      

  

      

       

       

  

REPORT

Fraud | Waste | Abuse | Mismanagement

FARM CREDIT ADMINISTRATION
 

OFFICE OF INSPECTOR GENERAL
 

Phone: Toll Free (800) 437‐7322; (703) 883‐4316
 

Fax: (703) 883‐4059
 

E‐mail: fca‐ig‐hotline@rcn.com

Mail: Farm Credit Administration
 

Office of Inspector General
 

1501 Farm Credit Drive
 

McLean, VA 22102‐5090