Source: http://www.fca.gov/preambles_historical.nsf/4da2e7d1cb5aee2a852565a8006489ba/2af31ba311b5d801852568270063eb12?OpenDocument
Timestamp: 2013-12-08 09:52:07
Document Index: 130060428

Matched Legal Cases: ['art 617', 'art 617', 'art 617', 'art 617', 'art 617', 'ART 617']

59 FR 31562
Title:	PROPOSED RULE; RESOLICITATION OF COMMENTS--Referral of Known or Suspected Criminal Violations--12 CFR Part 617	Issue Date:	06/20/1994
Federal Register Cite:	59 FR 31562
12 CFR Part 617 RIN 3052-AB33 Referral of Known or Suspected Criminal Violations ACTION: Proposed rule; resolicitation of comments. [*31562] SUMMARY: The Farm Credit Administration (FCA), by order of the FCA Board (Board), reproposes a rule amending its regulations governing the referral of known or suspected criminal violations. The proposed regulation was originally published in the Federal Register on October 13, 1992 (57 FR 46819). The objective of this reproposed regulation is, in part, to promote efficiencies and timeliness in reporting, investigating, and prosecuting known or suspected criminal activities within Farm Credit System (FCS or System) institutions. Therefore, this reproposed regulation would require System institutions to notify law enforcement agencies of known or suspected criminal violations that meet the threshold reporting limits. Generally, a criminal violation must be reported under this part if the borrower/shareholder or insider has an intent to "defraud" a System institution.
The reproposed regulation would also mandate the continued use of the existing criminal Referral Form. System institutions should expect this form to be replaced with a new FCA Criminal Referral Form in the future. The existing criminal Referral Form or any replacement form is referred to hereinafter as Referral Form.
The FCA believes that the regulation should be reproposed due to the lapse of time since the proposed rule was originally published in the Federal Register (October 13, 1992). Although the reproposed rule incorporates many of the comments received in response to the proposed rule, the FCA Board also believes that the public should be given another opportunity to comment due to the number of changes proposed and the level of interest in the issues. To the extent that commentors wish to comment on the dollar thresholds for reporting known or suspected criminal activities or an institution's cost of complying with the regulation, the FCA requests that commentors provide pertinent empirical data in support of their comments. DATES: Comments should be submitted on or before August 19, 1994. ADDRESSES: Comments should be mailed or delivered (in triplicate) to Patricia W. DiMuzio, Associate Director, Regulation Development, Office of Examination, Farm Credit Administration, McLean, VA 22102-5090. Copies of all comments will be available for examination by interested parties in Regulation Development, Office of Examination, Farm Credit Administration. FOR FURTHER INFORMATION CONTACT:
Eric Howard, Policy Analyst, Regulation Development, Office of Examination, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4498,
Jane Virga, Senior Attorney, Administrative Law and Enforcement Division, Office of General Counsel, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703) 883-4444. SUPPLEMENTARY INFORMATION:
I. Decision to repropose
The proposed regulation was published (57 FR 46819) in the Federal Register on October 13, 1992. The comment period for the proposed regulation amending part 617 closed on November 12, 1992. The FCA received two letters on the proposed regulation. The Farm Credit Council (Council), on behalf of its membership, provided comments and suggestions on the wording and requirements of the proposed regulation. The FCA also [*31563] received a letter from the Farm Credit Bank of Baltimore adopting the Council's comments. Many of the commentors' suggestions were incorporated to improve clarity.
The Council requested, among other things, that the FCA Board republish the proposed regulation. The FCA Board agrees that the proposed regulation should be republished to afford the public another opportunity to comment. All comments submitted to date have been considered and responded to concerning the proposed regulation. Responses to these comments are detailed below, and corresponding changes were made to the proposed regulation in many instances. The commentors also addressed whether the dollar thresholds for reporting known or suspected criminal activities should be increased. One of the stated reasons to raise the thresholds was to limit the perceived reporting burden that would result from implementation of the proposed thresholds. It was believed that if the reporting thresholds were increased, the reporting burden would decrease.
Those commentors who wish to comment again on the dollar thresholds are requested to provide any pertinent empirical information that would indicate that the thresholds should be increased. Commentors who address the cost of complying with the proposed regulation, e.g., time and cost of investigating and completing the Referral Form under existing thresholds in part 617 and the proposed thresholds, should also provide pertinent empirical information in support of their comments.
Pursuant to the Farm Credit Act of 1971, as amended, the FCA regulates and examines FCS institutions for safety and soundness and for compliance with Federal laws and regulations. Violations of Federal laws and regulations may affect the safety and soundness of FCS institutions and could undermine public confidence in the FCS. System institutions have the responsibility to establish and maintain safeguards to detect, deter, and report criminal activity involving the assets, operations, or affairs of the institution. Law enforcement agencies need to receive timely and specific information from FCS institutions on known or suspected criminal violations to determine whether investigations and prosecutions are warranted.
The Interagency Bank Fraud Working Group (Working Group), a task force consisting of the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the National Credit Union Administration, the Farm Credit Administration, the Federal Bureau of Investigation, the U.S. Secret Service, the Department of Justice, and the U.S. Department of the Treasury, was formed to facilitate the reporting of criminal activity by financial institutions and to enhance the law enforcement agencies' ability to investigate and prosecute the matters reported. To accomplish these objectives, the Working Group developed uniform reporting standards and processes for filing criminal referrals and is in the process of developing a uniform criminal referral form.
Pursuant to the proposed regulation and consistent with the Working Group's recommendations, FCS institutions would be required to make a criminal referral and file a Referral Form when a criminal violation of the United States Code involving the institution's assets, operations, or affairs appears to have occurred and one of the circumstances listed in � 617.2(a) exists. However, the proposed regulation should not be construed as reducing in any way an institution's responsibility to otherwise report criminal activities when these circumstances do not exist. The referrals would be made to the appropriate investigatory and/or prosecuting authorities, whether Federal, State, or local.
Originally, the FCA proposed the use of a uniform criminal Referral Form which was designed by the Working Group. A uniform criminal Referral Form was expected to aid law enforcement agencies in determining whether investigations and/or prosecutions are warranted by standardizing requests for information and documentation. The FCA planned to incorporate this form's standards and procedures in its own criminal Referral Form. When first published, the proposed regulation indicated that the Referral Form, with instructions explaining how to complete, file, and distribute the form to the appropriate investigatory agency, would be obtained from the FCA's Office of General Counsel (OGC) or from the FCA Examination Manual. Due to unforeseen circumstances affecting all the Federal financial regulatory agencies, the Working Group has not yet promulgated a uniform criminal referral form. Consequently, the new Referral Form has not been developed. As now contemplated under the proposed rule, System institutions would continue to use the existing criminal Referral Forms found in the FCA Examination Manual. However, System institutions should expect the distribution of the new Referral Form after the Working Group completes the standardized uniform criminal referral form.
III. Analysis of Changes and Comments by Section
A. Section 617.1-Purpose and Scope
The Council noted that the proposed regulations did not include a sample of the Referral Form and, as a result, it could not determine whether System banks would maintain any role in the criminal referral process. As previously stated, the FCA did not publish the Referral Form with the proposed regulation because the uniform criminal referral form, which the FCA intends to incorporate, had not, and has not yet, been promulgated by the Working Group. The existing Referral Form, which may be obtained from the FCA Examination Manual, does not create any substantive requirements, nor will the new Referral Form. The Referral Form merely serves as a vehicle for ensuring that System institutions report the information necessary to make a criminal referral. The new Referral Form is not expected to require System institutions to submit any more information than they previously have been required to submit using the existing Referral Form. For these reasons, the FCA believes even if the new Referral Form were available at this time, its publication would not be necessary. If the uniform criminal referral form ultimately promulgated by the Working Group creates new and previously-unanticipated requirements, the FCA will reconsider whether to incorporate it in its entirety into the System's Referral Form.
B. Section 617.2-Referrals
The Council questioned whether or not the proposed regulation adequately addressed "borrower transgressions." The FCA believes that the proposed regulation provides for the referral of all known or suspected violations of Federal criminal laws, including both insider and borrower transgressions. In � 617.2(a) (2) and (3), the proposed regulation specifically addresses borrower transgressions and would require a criminal referral when known or suspected criminal activity occurs if certain circumstances are met. Section 617.2(a)(2) applies when the suspect is not an employee, officer, director, agent, or other person participating in the affairs of an institution, i.e., a borrower. Section 617.2(a)(3) applies when there is no substantial basis for identifying a [*31564] suspect, which may include a borrower. Therefore, no amendment is believed to be necessary. For instance, a referral would be required when known or suspected criminal activity involving actual or potential losses of $ 1,000 or more occurs and the institution has a substantial basis for identifying a possible suspect or group of suspects as a borrower(s). A referral would also be required when known or suspected criminal activity involving actual or potential losses of $ 5,000 or more occurs and the institution has no substantial basis for identifying a possible suspect or group of suspects. In this latter instance, the possible suspect or group of suspects could be a borrower(s). Also, � 617.2(a)(1) addresses insider transgressions and would require a criminal referral, regardless of the amount of an actual or potential loss, where an institution employee, officer, director, agent, or other person participating in the affairs of the institution is suspected.
The Council was concerned that the dollar thresholds for reporting known or suspected criminal activities as described in � 617.2(a)(2) and (3) were too low. It also stated that the respective $ 1,000 and $ 5,000 thresholds would result in reporting known or suspected criminal activities that law enforcement agencies would not prosecute, and that the thresholds were a radical departure from prior practice. The Council also commented that some district banks have been advised by U.S. Attorneys that criminal activities involving collateral conversion or misrepresentation of financial information are not prosecuted when the diversion or misrepresentation is less than $ 25,000 to $ 50,000 or if the institution does not incur an actual loss. As a result, the Council believes that the thresholds should be increased to higher levels.
The Working Group, which included the FCA, established the same thresholds for all Federal financial regulatory agencies. The Working Group believes that uniform thresholds will enhance the ability of the Federal financial regulatory agencies and the law enforcement agencies to detect, investigate, and prosecute known or suspected criminal activities. The Working Group also believes that the lower thresholds are necessary to ensure the reporting of potential multiple criminal violations by one individual at several different institutions. The Department of Justice, as a member of the Working Group and oversight agency for the Offices of the U.S. Attorneys, assisted in the establishment of the thresholds. Therefore, as a participant in the Working Group and in concurrence with the Department of Justice's judgment on this matter, the FCA continues to support the Working Group and proposes the regulation with these thresholds. The FCA will reconsider this issue should the Working Group modify the threshold levels in the future.
It is important to note, however, that only a known or suspected criminal violation (meeting the dollar threshold requirements of � 617.2(a)) must be reported. Generally, a criminal violation that must be reported under this part involves a determination that a borrower or insider intended to "defraud" an institution in violation of a Federal criminal statute. Institutions, therefore, must make an initial determination of whether a misrepresentation of assets or a collateral conversion, for example, was done inadvertently or with the intent to defraud the institution. Accordingly, in ascertaining whether a criminal referral is appropriate, an institution should consider all facts and circumstances, including evidence of intent, to determine whether there is a known or suspected criminal violation. If the institution is persuaded that there is no evidence of intent and, hence, no criminal violation, then it need not make a criminal referral. Thus, System institutions are vested with considerable discretion. Should they feel the need for guidance in exercising this responsibility, they may consult legal counsel.
Due to expressed concerns about the referral threshold, the FCA reviewed the Systemwide criminal referrals for calendar years 1992 and 1993. In 1992, there were 47 criminal referrals, of which 30 reported no dollar loss or an unknown dollar loss. In 1993, there were 53 criminal referrals of which 30 reported no dollar loss or an unknown dollar loss. In addition, the FCA received 7 criminal referrals in 1992 and 17 criminal referrals in 1993 reporting dollar losses over $ 50,000. Of the criminal referrals received, there was a total of four insider transgressions in 1992 and 1993. It appears from these statistics that System institutions may already be reporting criminal referrals consistent with the proposed thresholds and that the thresholds are not a radical departure from current practices. Accordingly, the FCA proposed regulation contains the same thresholds as originally contemplated. Commentors who continue to have concerns that the thresholds are too low are requested to provide empirical data indicating to what extent the thresholds would result in a departure from their current reporting practices.
The Council remarked that the proposed regulation did not adequately define "potential" loss. In further explanation of the proposed regulation, it should be noted that the regulation (and Federal law) does not require that an institution sustain an actual loss; the potential for a loss satisfies the regulation (and Federal criminal law). Furthermore, the proposed regulation specifically states that the loss or potential loss is to be determined before reimbursement or recovery. In other words, whether or not the loan is adequately collateralized has no bearing on the determination of whether there is a loss or potential loss. For example, if a borrower with a loan that appears to be adequately collateralized converts $ 10,000 of secured property or makes a false statement by omitting a $ 10,000 liability from a financial statement, the institution would be required to report this known or suspected criminal violation to the appropriate authorities. This is necessary because the institution has a potential loss of $ 10,000 before it receives actual payment on the loan or recovers on the secured property. Although the loan may appear to be adequately collateralized notwithstanding the conversion of $ 10,000, the institution nonetheless has a potential loss before reimbursement or recovery. The loss need not actually have occurred for a reportable violation to exist. The FCA believes the foregoing explanation should adequately address the potential loss concept. It is further noted that, in attempting to clarify this section, the language of � 617.2(a)(2) and (3) has been amended to clarify that a situation involving a potential loss could arise through the use of a false statement or other fraudulent means.
The Council further commented that the proposed regulation did not adequately address criminal acts that do not specifically require a monetary loss, e.g., false statements under 18 U.S.C. 1014. As discussed above, such a criminal act has a potential for monetary loss and should be reported in all situations where the threshold is met and it is reasonable to believe that a criminal act occurred. The proposed regulation has been amended to clarify that a referral would be required when there is a false statement that meets the threshold amounts.
The Council expressed concern that the standard for reporting noninsider transgressions was vague and difficult to apply. The Council noted that determining when a substantial basis exists for identifying a suspect can be complex and raises questions as to [*31565] whether criminal intent can be inferred. The Council suggested that this determination should be vested in System general counsels or their attorney designees. The FCA expects that, in reporting noninsider transgressions, an institution will often be able to use its own judgment in determining whether it appears that a criminal violation has occurred. In complex cases, however, institutions should continue to feel free to obtain advice, legal or otherwise, as necessary. A System association may always consult with its affiliated district bank during consideration of all the facts and circumstances to determine whether it is more probable than not that a criminal activity occurred.
The Council also commented that an institution should have discretion on whether to report known or suspected criminal activities of State criminal laws to State law enforcement authorities. In response to this comment, the proposed regulation was amended to provide that nothing in this part shall be construed as reducing, in any way, an institution's general responsibility to report criminal activities to the appropriate investigatory and/or law enforcement agencies, whether Federal, State or local. Therefore, institutions would have to be cognizant of, and take the necessary steps to comply with, State reporting requirements. The appropriate law enforcement agency would then decide whether or not such acts constitute a violation of a criminal statute.
The Council was concerned that the proposed regulation did not identify whether a Farm Credit Bank (FCB) or a Federal land bank association (FLBA) would report known or suspected criminal activities when the FLBA services the loans of the FCB. Due to this concern, the FCA amended � 617.2(a) to clarify that an FCB would have the responsibility to refer known or suspected criminal activities identified by the servicing FLBA to the appropriate law enforcement agency.
The Council commented that the proposed criminal referral regulation appears to make the criminal referral process burdensome because the institution lacks the discretion not to refer known or suspected criminal violations above the threshold amounts. At this time, it appears that any additional burden would be slight and offset by the regulation's benefits, such as the promotion of efficiency and timeliness in reporting, investigating, and prosecuting known or suspected criminal activities. Also, the regulation would standardize the reporting process and ensure that all individuals, including borrowers, employees, officers and directors, are treated equally. It is believed that the proposed regulation, which conforms to those proposed and final regulations of other financial regulatory agencies, would improve the law enforcement agencies' response to System institutions' reports of criminal activities. However, commentors may want to provide empirical information on the cost of compliance, as requested above.
The Council questioned the institution's role or ability to make a recommendation concerning prosecution. The Council suggested that reporting "minor" violations could hamper System relationships with the U.S. Attorney as well as with its customers. While the regulation establishes threshold referral levels, an institution is free, nonetheless, to express its view on whether prosecution does or does not appear to be warranted to the Federal authorities, including a U.S. Attorney or other investigatory agency. A well-reasoned recommendation against prosecution in appropriate cases should go far toward addressing the Council's concern without undermining the uniformity that the referral requirements seek to promote.
The Council commented that the 14-day period to report criminal activity was insufficient to investigate, document, review, and submit referral information. On further reflection, the FCA agrees. To ensure thorough documentation and reporting by System institutions, the FCA has amended the proposed regulation, increasing the reporting period to 30 calendar days from the date of discovery of the known or suspected criminal violation. Nonetheless, System institutions would be encouraged to submit a criminal referral report as soon as possible following the discovery of a reportable known or suspected criminal activity.
The Council commented that it was uncertain as to when the period for reporting a criminal referral begins. Upon further consideration, the proposed regulation was amended to address this concern. The reporting period would begin when management has discovered that there is a known or suspected criminal activity. In the alternative, the reporting period would begin when management should have discovered that there was a known or suspected criminal activity. This amendment is believed to be appropriate because management must ensure the institution's safety and soundness and should be diligent in the exercise of their attendant duties, e.g., the timely identification and reporting of known or suspected criminal activity, and in the adequate investigation and documentation of such criminal activity.
The Council commented that � 617.2(c) (now � 617.2(b)) should define "management" as senior management of the institution or the institution's criminal conduct officer/coordinator. The proposed regulation would require that management make the criminal referral. The board of directors of a System institution, which is responsible for the safe and sound operations of that institution, should establish appropriate policies and internal controls for management to comply with these regulations. However, the board would have the discretion to implement the regulation in a manner suited to its institution and could require senior management or the criminal conduct officer/coordinator to make the criminal referral.
The Council suggested eliminating � 617.2(d), which requires prompt notification, by telephone or other expeditious means, to the appropriate law enforcement agency of situations requiring immediate attention or of ongoing reportable violations. In coordination with other Federal financial regulatory agencies, the FCA included this section to provide for circumstances in which direct telephone or other expeditious communications with the appropriate law enforcement agency would be necessary or appropriate, even though an institution would have begun the referral process required by � 617.2(a). While a 30-day notification period may be adequate in many situations, immediate notification would be considered essential when the safety and soundness of an institution may be threatened by potential fraud, losses, or an ongoing criminal activity, when there is a likelihood a suspect will flee, or when key institution personnel are involved. For the foregoing reasons, it does not appear that this section would impose any unnecessary burden on System institutions.
C. Section 617.3-Notification of Board of Directors and Bonding Company
The Council commented that the regulatory reporting requirement concerning criminal referrals should be left to the discretion of each board of directors, rather than requiring a report to the board of directors by their next scheduled meeting. The intent of this section is to keep the board of directors informed when a known or suspected crime has been [*31566] committed against the institution. In response to the Council's comment, this section has been amended to require that the board of directors be notified promptly of the filing of any Referral Form by the institution's management. Reporting "promptly" to the board of directors means reporting the criminal referral at a regularly scheduled meeting, or earlier if the estimated loss is of such magnitude that it would have a significant impact on the safety and soundness of the institution. Alternatively, reports involving insignificant losses may be summarized and reported periodically at a regularly scheduled meeting of the board. Because violations of Federal criminal statutes may affect the safety and soundness of FCS institutions and/or undermine public confidence in the FCS, a board of directors should be promptly notified of all known or suspected criminal activities. Furthermore, boards of directors should treat this information with the same degree of care and confidentiality as other similar types of information are treated.
Additionally, the proposed regulation was amended to provide some discretion in the event a member of the board of directors is the subject of a criminal referral. In this instance, it may be appropriate to seek guidance from legal counsel or other appropriate sources.
Criminal referrals, Criminal transactions, Defalcations, Embezzlement, Insider abuse, Institutions of the Farm Credit System, Money laundering, Theft.
For the reasons stated in the preamble, part 617 of chapter VI, title 12 of the Code of Federal Regulations is proposed to be revised to read as follows:
PART 617-REFERRAL OF KNOWN OR SUSPECTED CRIMINAL VIOLATIONS
617.1 Purpose and scope.
617.2 Referrals.
617.3 Notification of board of directors and bonding company.
617.4 Institution responsibilities.
� 617.1 -- Purpose and scope.
(a) This part applies to all institutions of the Farm Credit System as defined in section 1.2(a) of the Act (12 U.S.C. 2002(a)) including, but not limited to, associations, banks, service corporations chartered under section 4.25 of the Act, the Federal Farm Credit Banks Funding Corporation, the Farm Credit System Financial Assistance Corporation, the Farm Credit Leasing Services Corporation, and the Federal Agricultural Mortgage Corporation (hereinafter, institutions). The purposes of this part are to ensure the reporting of known or suspected criminal activity, the safety and soundness of the institution, and public confidence in the Farm Credit System, thereby reducing potential losses to institutions. This part requires that institutions use the Farm Credit Administration Criminal Referral Form to notify the appropriate Federal authorities when any known or suspected Federal criminal violations of the type described in � 617.2 are discovered by an institution.
(b) The specific referral requirements of this part are limited to known or suspected criminal violations of the United States Code involving the assets, operations, or affairs of an institution. This part prescribes procedures for referring those violations to the proper Federal authorities and the Farm Credit Administration.
(c) Nothing in this part should be construed as reducing in any way an institution's responsibility to report known or suspected criminal activities to the appropriate investigatory or prosecuting authorities, whether State or Federal, even if circumstances required for a report under � 617.2 are not present.
(d) Each referral required by � 617.2(a) shall be made on the Referral Form in accordance with the Referral Form Instructions relating to its filing and distribution and the requirements of � 617.2 (b) and (c).
� 617.2 -- Referrals.
(a) Each institution and its board of directors shall exercise due diligence to ensure the discovery, investigation, and reporting of criminal activity. Within 30 calendar days of determining that there is a known or suspected criminal activity, the institution shall refer such criminal violation of the United States Code involving or affecting its assets, operations, or affairs to the appropriate regional offices of the United States Attorney and either or both the Federal Bureau of Investigation or the United States Secret Service, using the Referral Form. In the event that a Farm Credit Bank makes a loan through a Federal land bank association which services the loan, the Farm Credit Bank has the responsibility to refer known or suspected criminal violations under this section. A report is required in circumstances where there is:
(2) Any known or suspected criminal activity involving an actual or potential loss (before reimbursement or recovery) of $ 1,000 or more, through false statements or other fraudulent means, where the institution has a substantial basis for identifying a possible suspect or group of suspects and the suspect(s) is not an employee, officer, director, agent, or other person participating in the conduct of the affairs of such an institution;
(3) Any known or suspected criminal activity involving an actual or potential loss (before reimbursement or recovery) of $ 5,000 or more, through false statements or other fraudulent means, where the institution has no substantial basis for identifying a possible suspect or group of suspects; or
(b) A copy of the completed Referral Form, accompanied by any relevant documentation, shall be provided to the Farm Credit Administration's Office of General Counsel no later than 30 calendar days after the institution's management, has discovered (or should have discovered) a known or suspected criminal violation.
(c) In circumstances where there is also a known or suspected violation of State or local criminal law, the institution shall also notify the appropriate State law enforcement authorities.
(d) In addition to the requirements of paragraph (a) of this section, the institution shall immediately notify by telephone the offices specified on the Referral Form upon discovery of cases involving known or suspected criminal violations requiring urgent attention or where a referable violation is ongoing. Such cases include, but are not limited to, those where:
(3) Key institution personnel are involved. [*31567] � 617.3 -- Notification of board of directors and bonding company.
(a) Unless the criminal referral involves a member of the board of directors, the institution's board of directors shall be promptly notified of any criminal referral by the institution.
(b) If the criminal referral involves a member of the board of directors, discretion shall be exercised in notifying the board of directors of such a criminal referral.
(c) In any event, if any losses can be recovered under a surety bond or other contract for protection against losses, the institution involved shall promptly make all required notifications.
� 617.4 -- Institution responsibilities.
Dated: June 13, 1994.
[FR Doc. 94-14893 Filed 6-17-94; 8:45 am]