Court Opinion

ID: 4120329
Source: CourtListenerOpinion
Date Created: 2017-01-27 22:46:52.099307+00
Date Added: 2024-06-11T14:19:50.522939
License: Public Domain

May 22, 1979

79-35       MEMORANDUM OPINION FOR THE DEPUTY
            ATTORNEY GENERAL

            Right to Financial Privacy Act of 1978 (12 U.S.C.
            § 3401)—Banks—Disclosure of Customer Financial
            Records

  This responds to your request for our opinion o f April 30 on the follow­
ing questions concerning the Right to Financial Privacy Act (A ct):1
        (1) To what extent does the Act affect the ability o f a bank
     supervisory agency to report to the Department o f Justice viola­
     tions o f the law that it uncovers?
        (2) W hat kinds o f inform ation may be included as part o f the
     notification that is explicitly permitted banks under § 1113(h)(5)
     (12 U.S.C. § 3413) or that may be impliedly permitted bank
     supervisory agencies?
        (3) W hat is the interplay o f § 1112 (12 U .S.C . § 3412) o f the
     Act and the ability o f bank supervisory agencies to notify the
     Department o f possible offenses without giving notice to
     customers?
  These issues arise because o f the restrictions the Act has placed on
Federal agencies’ access to and dissemination o f the financial records o f
bank custom ers.2
  Our conclusions may be summarized as follows: first, a report that a
customer’s financial records may relate to a criminal offense, when based
on a summary or analysis o f the records, is itself a “ financial record”
within the meaning o f § 1102(2); second, with the exception o f § 1113(h),

   1 The Right to Financial Privacy Act, 12 U .S.C . § 3401 et seq., was enacted as Title XI of
the Financial Institutions Regulatory Act o f 1978, Pub. L. No. 95-630, 92 Stat. 3697. The
section references in this opinion are to those in title XI.
   1 In § 1101(4)—(5) o f the A ct, a “ custom er” means an individual or a partnership o f five or
fewer individuals, who used or is using any service o f a financial institution. T he financial
records o f corporations, larger partnerships, or other legal entities are not covered and access
to such records is not affected.

                                             217
 the procedures in § 1112 are the only ones expressly provided for a super­
 visory agency to make such a report to a law enforcement agency; third,
 notwithstanding § 1112, implied authority for a bank supervisory agency
 to make such a report exists in a narrow class o f cases, namely, possible
 violations o f criminal statutes that are part o f the regulatory system en­
 forced by the supervisory agency; fourth, the report o f possible criminal
offenses expressly permitted by §§ 1103(c) and 1113(h)(5), and impliedly
 permitted for “ regulatory” crimes, may be specific enough to permit the
law enforcement agency to request the primary records but may not be so
detailed as to am ount to a transfer o f the substance o f the original records.
   We are informed by your staff that the background to your request is as
 follows. Before the enactm ent o f the A ct, a supervisory agency routinely
inspected custom er records in the course o f examining the financial in­
stitutions under its charge.3 W hen this led the agency to believe that a
Federal offense might have been committed by the customer or others, it
would report to the proper Federal enforcement agency. The report would
begin with a summary o f the reasons for believing that an offense had
been committed and would proceed with a detailed analysis o f the sup­
porting customer records involved. The offenses tended to fall into two
groups. The first involved misuse o f authority by an officer or employee
o f the financial institution, whether or not in concert with a custom er.4
The second involved offenses not related to the management o f the institu­
tion. We are informed that referrals by supervisory agencies o f offenses
not involving the financial institution were rare. Accordingly, this opinion
will focus on the authority o f the supervisory agencies to notify law en­
forcement agencies o f offenses affecting the financial institution and the
authority o f the law enforcement agencies to receive such referrals.
   The extent to which the Act affects the ability o f a bank supervisory
agency to report violations to the Departm ent o f Justice depends on four
factors: the ability o f the supervisory agency to report before the Act was
passed; the A ct’s definition o f financial record inform ation; its restric­
tions on the supervisory agencies’ access to records, and the A ct’s re­
strictions on their referral power.

 * Section 1101(6) o f the Act defines “ supervisory agency” to mean:
    with respect to any particular financial institution any o f the following which has statutory
    authority to examine the financial condition or business operations o f that institution—
         (A) the Federal Deposit Insurance C orporation;
         (B) the Federal Savings and L oan Insurance C orporation;
         (C) the Federal H om e L oan Bank Board;
         (D) the National Credit Union Adm inistration;
         (E) the Board o f G overnors o f the Federal Reserve System;
         (F) the C om ptroller o f the Currency;
         (G) the Securities and Exchange Commission;
         (H) the Secretary o f the Treasury, with respect to the Bank Secrecy Act and the
         Currency and Foreign Transactions Reporting Act (Pub. L. N o. 91-508, title I and
         II); or
         (I) any State banking or securities departm ent or agency.
 4 See. e.g., 18 U .S.C . §§ 656-657, 1005-1006.

                                              218
    The supervisory agencies are authorized by statute to examine the af­
 fairs o f financial institutions under their jurisdiction.5 The examining
 function has included reporting to the Department o f Justice irregularities
that may am ount to violation o f the criminal statutes applicable to finan­
cial institutions.6 These statutes were originally enacted as part o f the
Federal regulatory system for financial institutions. Their purpose is to
protect the solvency and integrity o f the institutions against willful misuse
o f their funds.7 It was considered an integral part o f the supervisory agen­
cies’ duty to protect financial institutions and their depositors to inform
the proper law enforcement authorities o f those instances o f mismanage­
ment that appeared to be criminal. As stated in Cooper v. O ’Conner, 99 F.
(2d) 135, 140 (D.C. Cir. 1938):
      By reason o f their performance o f duties clearly assigned, the facts
      and evidence which suggest criminal conduct upon the part o f
      bank officials are revealed to such [Federal] officers. It is the duty
      o f all citizens to reveal such evidence, o f which they may have
      knowledge, at the risk o f being guilty o f misprision o f felony for
      failing to do so. In the case o f an official, his failure to act under
      such circumstances would in addition, constitute serious
      malfeasance in office. In the present case, appellees were charged
      with responsibility for the collection and conservation o f the assets
      o f a bank. It would be absurd to contend that the duties o f such
      an officer—so charged and so peculiarly aware o f facts suggesting
      that certain persons were engaged in the spoliation o f those very
      assets—should stop abruptly at the point where the initiation of
      criminal proceedings became necessary to protect such assets.
There was no statutory restriction on their power to report offenses. See,
Bank o f America National Trust & Savings Assn. v. Douglas, 105 F. (2d)
 100, 103-104 (D.C. Cir. 1939); 29 Op. A tt’y Gen. 555 (1912).
   We must consider, then, the extent to which Congress has affected the
previous power arid duty o f the supervisory agencies to report violations
o f law to this Departm ent. The Act affects this power in three ways. First,
§§ 1102 and 1113 restrict the conditions under which the supervisory agen­
cies may obtain access to the records in the hands o f the financial institu­
tion. Second, §§ 1112 and 1113(h) place express restrictions on
disseminating inform ation once access has been obtained. Third, § 1101(2)
defines the term “ financial record” broadly enough to include inform a­
tion derived from the primary records.

   ’ See, e.g., 12 U .S.C . § 481 (Com ptroller o f the Currency); 12 U .S.C . § 1440 (Federal
Hom e Loan Bank Board); 12 U .S.C . § 1756 (National Credit Union Adm inistration); 12
U .S.C. § 1730(m)(l) (Federal Savings and Loan Insurance Corporation); 12 U .S.C . § 1820(b)
(Federal Deposit Insurance C orporation).
   ‘ See 18 U .S.C . §§ 213, 215, 656-657, 1005-1006.
   1 See, e.g., United Slates v. Darby, 289 U .S. 224 (1933); United States v. Corbett, 215 U .S.
233 (1909); United States v. Manderson, 511 F. (2d) 179 (5th Cir. 1975); United States v.
Wilson, 500 F. (2d) 715 (5th Cir. 1974); Weir v. United States, 92 F. (2d) 634 (7th Cir. 1937).

                                             219
   Initial access by a Governm ent agency to records in the hands o f a
financial institution is governed by § 1102. It prescribes the general re­
quirement that access must be obtained through one o f the formal
methods set out in §§ 1104-1108, subject to notice to the customer and to
judicial supervision under §§ 1109-1110. It further provides that, no t­
withstanding the general requirem ent, initial access may be obtained
through the exceptions contained in §§ 1103(c)—     (d), 1113, and 1114. O f
these, § 1113(b) and (h) are relevant to the functions o f the supervisory
agencies.
   Section 1113(b) provides:
      Nothing in this title prohibits examination by or disclosure to any
      supervisory agency o f financial records or inform ation in the ex­
     ercise o f its supervisory, regulatory, or m onetary functions with
      respect to a financial institution.
This is intended to give the supervisory agencies access to customer records
in order to conduct examination.
   In addition, § 1113(h)(1)(A) permits a Governm ent authority to have
access to customer records in connection with a lawful examination, in­
spection, or investigation o f the institution or o f a legal entity not a
customer.* The investigating agency must certify that the investigation is
lawful; transfer o f the primary records to another agency is restricted.
§ 1113(h)(2), (4). However, under § 1113(h)(5) the agency in possession
may notify another agency with proper jurisdiction “ that financial records
obtained pursuant to this subsection may relate to a potential civil,
criminal, or regulatory violation by a custom er,” and the notified agency
may then seek access under the procedures provided by the Act. By its
terms, § 1113(h)(1)(A) may be used as authority to examine a financial in­
stitution, thereby expressly permitting a supervisory agency to notify a law
enforcement agency under § 1113(h)(5). We are informed, however, that
the supervisory agencies prefer to obtain access under § 1113(b) in order to
avoid the certification process required by § 1103(b) and§ 1113(h)(2).
   Unless one o f the exceptions in § 1113-1114 applies, § 1112 o f the Act
provides the mechanism for disseminating financial records obtained from
the acquiring agency to other agencies. U nder subsection (a), the
transferor agency must certify that the records are relevant to a legitimate
law enforcement inquiry within the jurisdiction o f the recipient agency.
Under subsection (b)-(c), the transferor must notify the customer within
14 days unless a court authorizes delayed notice.9 Subsection (d) expressly
excludes from the A ct’s restrictions the exchange o f inform ation among
supervisory agencies.

  ' This m eans, in effect, a partnership o f more than five individuals or a legal person not an
individual. See note 2, supra.
  ' T he reasons justifying delayed notice provided by § 1109(a)(3) are:
     (3) there is reason to believe th at such notice will result in—
                                                                                     (Continued)

                                              220
   As reported to the House, § 1112 o f the Act provided:
      Nothing in this title prohibits any supervisory agency from ex­
      changing examination reports or other information with another
      supervisory agency, or from supplying information to a prosecu­
      tion or enforcement agency concerning a possible violation o f a
      regulation or statute administered by the supervisory agency.
      [Emphasis added.]10
This language would have expressly continued the existing referral prac­
tices o f the supervisory agencies for offenses relating to the financial in­
stitution. It was deleted when the present § 1112 was introduced in an
amendment offered by Representatives Goldwater and M cKinney." The
effect o f the am endm ent, Representative Goldwater explained, “ is to
force an agency to justify beforehand its request for inform ation, leave a
paper trail o f the transaction, and only upon court agreement not notify
an individual.” 12 Representative McKinney introduced a letter from As­
sistant A ttorney General Wald supporting the amendment; the letter did
not distinguish referrals by supervisory agencies from other interagency
transfers.13
   The term “ financial records” is defined by § 1101(2) o f the Act to in­
clude “ an original of, a copy of, or information known to have been
derived fro m ” any record held by a financial institution concerning its
relationship with a customer. [Emphasis added.] The emphasized
language was added on the House floor in an amendment by Represent­
ative Pattison, but is not discussed in the legislative history.14 On its face,
it is broad enough to include both summaries o f customer records and
analyses o f the' records showing that the customer may have engaged in
any particular activity, including commission o f a crime.
   There are several reasons for a broad reading of this language. First,
one principal purpose o f the Act was to restrict the ability o f the Govern­
ment to reconstruct an individual’s affairs from his financial records.15
Derived information and its use are at the center o f what Congress con­
sidered to be the threat to privacy under prior law. Second, §§ 1103(c)

(Continued)
          (A) endangering life o r physical safety o f any person;
          (B) flight from prosecution;
          (C) destruction o f or tam pering with evidence;
          (D) intim idation o f potential witnesses; or
          (E) otherwise seriously jeopardizing an investigation or official proceeding or un­
        duly delaying a trial or ongoing official proceeding, to the same extent as the cir­
        cumstances in the preceding subparagraphs.
  10 124 C o n g r e s s i o n a l R e c o r d H. 11728 (d a ily e d ., O ct. 5, 1978).
  11 124 C o n g r e s s i o n a l R e c o r d H . 11733, 11734 (d a ily e d ., Oct. 5, 1978).
  11 124 C o n g r e s s i o n a l R e c o r d H . 11733 (d a ily e d ., Oct. 5, 1978).
  " 124 C o n g r e s s i o n a l R e c o r d H. 11734 (d a ily e d ., Oct. 5, 1978).
  14 124 C o n g r e s s i o n a l R e c o r d H . 11735 ( d a ily e d . , Oct. 5, 1978).
  11 See H. Rept. 1383, 95th C ong., 2d sess., at 33-35; 124 C o n g r e s s i o n a l R e c o r d
H. 11731-32 (Representatives Pattison, Rousselot), 11739 (Representative Cavanaugh),
11739 (Representatives Rousselot and Pattison), (daily ed., Oct. 5, 1978).

                                             221
and 1113(h)(5) specifically permit a financial institution or a supervising
agency to report to a law enforcement agency, in limited circumstances,
that financial records show a crime may have been comm itted, without
notifying the custom er. This express grant o f auihority would not be
necessary if the reports were not deemed to be disclosure o f a “ record”
otherwise prohibited by the Act. Third, the Pattison am endm ent, as a
whole, had the purpose o f encouraging customers to seek judicial review
and requiring agencies to justify access to records with greater particu­
larity.16 Although the scope o f the phrase “ inform ation known to be de­
rived from * * *” is not discussed, the phrase was enacted as part o f an
effort to make it more difficult for the Governm ent to obtain or use finan­
cial inform ation without notice to the customer.
   The argument to the contrary is that the operation o f § 1112 requires
that a summary or analysis, if sufficiently general, need not be considered
a “ record.” Representative Goldwater explained that § 1112’s purpose
was to require the agency receiving the financial inform ation to justify its
need.17 The transferring agency is required to certify that the transfer is for
a legitimate law enforcement purpose. To do so, the receiving agency must
be able to explain to the transferring agency what it wants and why. This,
in turn, requires that the transferring agency first have informed the
receiving agency that it has available financial information that may be
relevant to a legitimate law enforcement inquiry.
   This argument, in our view, does not overcome the action o f the House
(under § 1103(c) and § 1113(h)(5)) in expressly permitting reports that a
crime may have been committed and deleting similar express authority in
§ 1112(d). These actions would have been superfluous if 'such a report,
based on examination and analysis o f financial records, was not itself a
record. It is consistent, moreover, with the A ct’s general purpose o f limit­
ing Government access to financial data to construe the statute to prevent
one agency from informing another that an individual’s financial records
should make him an object o f the latter’s agency’s suspicions without in­
forming the individual. We therefore conclude that the definition of
“ financial record” in § 1102(2) includes a report that analysis o f the
primary records shows a custom er to have possibly committed a crime.
   Thus, the statement that a custom er’s records may relate to a Federal
crime, when based on examination o f those records, is itself a financial
record under the Act. The Act expressly permits an agency that has ob­
tained access to the primary financial records under § 1113(h) to notify a
proper law enforcement agency o f this conclusion, and it expressly permits
transfer o f any inform ation am ong supervisory agencies. Otherwise, the
procedures o f § 1112(a)-(c) are the A ct’s only explicit mechanism

  16 124 C o n g r e s s i o n a l R e c o r d H. 11735 (Representative Pattison) (daily ed., Oct. 5,
1978).
  " 124 C o n g r e s s i o n a l R e c o r d H. 11733 (d a ily e d ., O ct. 5, 1978).

                                                222
for disseminating custom er record inform ation, including derivative infor­
m ation, from one agency to another. The question thus becomes whether
Congress intended a further, implicit m ethod o f transfer from the super­
visory agencies.
   As a general m atter, the legislative history o f § 1112 is clear that implicit
exceptions to it were not intended. The House was aware that the “ routine
use” exception to the Privacy Act, 5 U .S.C . § 552a(a)(7), (b)(3), has been
used to justify exchanges o f inform ation among Federal agencies based on
implicit authority. In an exchange among Representatives Rousselot, P at­
tison, and Cavanaugh on this point, it was clearly stated that § 1112, as
amended, contained no “ routine use” exception, and that interagency
dissemination could only be made with certification by the transferring
agency and notice to the custom er." W ithout equally clear support de­
rived from the purpose and legislative history o f the Act, we are unable to
say that Congress intended to preserve as implied exceptions to § 1112 any
pre-enactment practices o f transferring information.
   We believe, however, that support for implied authority to transfer in­
formation can be found in the narrow circumstances in which the offense
reported by a supervisory agency relates to the financial institution’s
operations. Representative Goldwater stated that his version o f § 1112 did
not apply “ to supervisory agencies properly conducting their responsibili­
ties.” 19 The proper conduct o f those responsibilities has long been con­
sidered to include reporting criminal violations o f the banking laws to the
law enforcement agencies.20 Moreover, the Right to Financial Privacy Act
was but one title o f 20 in an omnibus statute that was primarily concerned
with strengthening the powers o f the supervisory agencies and tightening
the restrictions on bank officers, directors, and shareholders.21 The House
Banking, Finance, and U rban Affairs Committee relied in at least one case
on referrals from a supervisory agency to U.S. Attorneys as indications
that a regulatory problem existed.22 It would be anomalous to conclude
that a statute intended on the whole to strengthen the regulation o f finan­
cial institutions was also intended to deprive the regulators o f one o f their
oldest and strongest weapons for dealing with the most serious cases of
management abuse.
   Considering the Financial Institutions Regulatory Act as a whole, we
conclude that Congress did not intend to prohibit a supervisory agency
from reporting to the proper law enforcement agency that it has dis­
covered in a custom er’s records evidence that a criminal statute that is part

   11 124 C o n g r e s s i o n a l R e c o r d H. 11739 (daily ed., O ct. 5, 1978).
   19 124 C o n g r e s s i o n a l R e c o r d H. 11733 (daily ed., O ct. 5, 1978).
   10 See p. 4, supra.
  21 See generally Pub. L. No. 95-630, Financial Institutions Regulatory and Interest Rate
Control Act o f 1978, Titles I-1II, IV, VI-1X, 92 Stat. 3461; H. Rept. 1383, 95th C ong., 2d
sess., at 4-22 (1978).
  “ H. Rept. 1383, 95th C ong., 2d sess., at 13 (1978).

                                           223
 o f its regulatory system has been violated. Such reports are an integral part
 o f the process o f regulating financial institutions, and they further the
 regulatory agencies’ primary mission o f protecting the soundness o f these
 institutions. Notwithstanding § 1112, the supervisory agencies have im­
 plicit authority to inform the proper law enforcement agency that their in­
 spection o f customer records shows that an individual may have violated a
priminal statute governing the management o f financial institutions they
 regulate.
    We must, however, point out that the contrary argument is strongly
 grounded on the language and legislative history o f the Act. We cannot
 say with certainty that the courts would not conclude that a supervisory
 agency that has obtained access under § 1113(b) must give notice under
 §1112 even when reporting evidence o f a crime relating to the manage­
ment o f the institution. Furtherm ore, we are not aware o f anything in the
language or legislative history o f the Act that would lead to the conclusion
that supervisory agencies have implied authority to report that crimes
unrelated to their supervisory function may have been committed on the
basis o f an analysis o f a custom er’s financial records.
    The next question is the scope o f the inform ation that may be included
in a report to a law enforcement agency under § 1103(c) or § 1113(h)(5), or
in a report under the supervisory agencies’ implied authority. These provi­
sions permit notice to be given so that the law enforcement agency may
then seek access to the records under the formal provisions o f the Act,
which require customer notice.
    The permissible scope o f referral therefore lies somewhere between two
poles. On the one hand, a report cannot be so detailed as to effectively
substitute for access to the records themselves. This would permit the for­
mal access procedures to be bypassed.23 On the other hand, the report
must be sufficiently detailed in order to inform the law enforcement
agency that reasonable grounds exist to believe that an individual has vio­
lated the law. Since the referral provisions contem plate access under the
Act, it would be reasonable to identify the records and provide an explana­
tion in sufficient detail to permit the law enforcement agency to support a
formal proceeding for access. This requires a written statement giving a
“ demonstrable reason” to believe that the records are relevant to a
legitimate law enforcement inquiry.24 While the legislative history is silent
on the am ount o f detail that must be provided, the language of § 1110(c)
clearly contem plates a factual showing beyond mere conclusions. We sug­
gest that this middle ground would be occupied by a description o f the pat­
tern o f transactions shown in the custom er records that does not discuss

   21 Indeed, § 1113(h)(4) explicitly forbids transfer except to facilitate investigation o f the in­
stitution or a legal entity not a customer.
      Act, § 1110(bMc).

                                                224
particular, identifiable transactions, coupled with the supervisory agency’s
analysis of why this may relate to a potential violation.

                                   M ary C. L aw ton
                           Deputy Assistant A ttorney General
                                                Office o f Legal Counsel

                                   225