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A Higher Standard for Bank HR Departments (Part 5)

on Tuesday, 6 May 2014 in Banking Update

With an additional overlay of state and federal regulation, employment law issues at financial institutions take on an additional level of complexity. Whether it is the new regulations affecting permissible compensation practices for mortgage loan originators, state and federal licensing requirements or complex rules applicable to insider transactions, human resource professionals who work in financial services need to be attuned to the special rules that apply to employees and executives at their institutions.

This article is the fifth installment in a six-part series on banking regulations that impact your financial institution’s Human Resources Department. These materials originally were presented to attendees of the 26th Annual Baird Holm Labor Law Forum.

Part 5: Rules Applicable to Employees of FDIC-Insured Depository Institutions

1. Section 19 of FDIA

Section 19 of the Federal Deposit Insurance Act (12 U.S.C. 1829) prohibits, without the prior written consent of the Federal Deposit Insurance Corporation (FDIC), a person convicted of any criminal offense involving dishonesty or breach of trust or money laundering (covered offenses), or who has agreed to enter into a pretrial diversion or similar program in connection with a prosecution for such offense, from becoming or continuing as an institution-affiliated party, owning or controlling, directly or indirectly an insured depository institution (insured institution), or otherwise participating, directly or indirectly, in the conduct of the affairs of the insured institution. In addition, the law forbids an insured institution from permitting such a person to engage in any conduct or to continue any relationship prohibited by section 19. It imposes a ten-year ban against the FDIC’s consent for persons convicted of certain crimes.

Section 19 imposes a duty upon the insured institution to make a reasonable inquiry regarding an applicant’s history, which consists of taking steps appropriate under the circumstances, consistent with applicable law, to avoid hiring or permitting participation in its affairs by a person who has a conviction or program entry for a covered offense.

The FDIC requires a screening process that provides the insured institution with information concerning any convictions or program entry pertaining to a job applicant. This would include, for example, the completion of a written employment application that requires a listing of all convictions and program entries. The FDIC will look to the circumstances of each situation to determine whether the inquiry is reasonable.

2. FDIC Statement of Policy for Section 19 of FDIA

All employees of an insured institution fall within the scope of Section 19. In addition, those deemed to be de facto employees as determined by the FDIC based upon generally applicable standards of employment law, will also be subject to Section 19. Upon notice of a conviction or program entry, an application seeking the FDIC’s consent prior to the person’s participation in the affairs of the insured institution must be filed.

Except as indicated in paragraph (E), below, an application must be filed where there is present a conviction by a court of competent jurisdiction for a covered offense by any adult or minor treated as an adult, or where such person has entered a pretrial diversion or similar program regarding that offense:

(A) Convictions. There must be present a conviction of record. Section 19 does not cover arrests, pending cases not brought to trial, acquittals, or any conviction that has been reversed on appeal. A conviction with regard to which an appeal is pending will require an application until or unless reversed. A conviction for which a pardon has been granted will require an application. A conviction that has been completely expunged is not considered a conviction of record and will not require an application. For an expungement to be considered complete, no one, including law enforcement, can be permitted access to the record even by court order under the state or federal law that was the basis of the expungement.

(B) Pretrial Diversion or Similar Program. Program entry, whether formal or informal, is characterized by a suspension or eventual dismissal of charges or criminal prosecution upon agreement by the accused to treatment, rehabilitation, restitution, or other noncriminal or nonpunitive alternatives. Whether a program constitutes a pretrial diversion is determined by relevant federal, state or local law, and will be considered by the FDIC on a case-by-case basis. Program entries prior to November 29, 1990, are not covered by Section 19.

(C) Dishonesty or Breach of Trust. The conviction or program entry must be for a criminal offense involving dishonesty, breach of trust or money laundering. “Dishonesty” means directly or indirectly to cheat or defraud; to cheat or defraud for monetary gain or its equivalent; or wrongfully to take property belonging to another in violation of any criminal statute. Dishonesty includes acts involving want of integrity, lack of probity, or a disposition to distort, cheat, or act deceitfully or fraudulently, and may include crimes which federal, state or local laws define as dishonest. “Breach of trust” means a wrongful act, use, misappropriation or omission with respect to any property or fund that has been committed to a person in a fiduciary or official capacity, or the misuse of one’s official or fiduciary position to engage in a wrongful act, use, misappropriation or omission. Whether a crime involves dishonesty or breach of trust will be determined from the statutory elements of the crime itself. All convictions for offenses concerning the illegal manufacture, sale, distribution of or trafficking in controlled substances shall require an application.

(D) Youthful Offender Adjudgments. An adjudgment by a court against a person as a “youthful offender” under any youth offender law, or any adjudgment as a “juvenile delinquent” by any court having jurisdiction over minors as defined by state law does not require an application. Such adjudications are not considered convictions for criminal offenses.

(E) De minimis Offenses. Approval is automatically granted and an application will not be required where the covered offense is considered de minimis, because it meets all of the following criteria:

  • There is only one conviction or program entry of record for a covered offense;
  • The offense was punishable by imprisonment for a term of one year or less and/or a fine of $2,500 or less, and the individual served three (3) days or less of actual jail time;
  • The conviction or program was entered at least five years prior to the date an application would otherwise be required; and
  • The offense did not involve an insured depository institution or insured credit union.
  • A conviction or program entry of record based on the writing of a “bad” or insufficient funds check(s) shall be considered a de minimis offense under this provision even if it involved an insured depository institution or insured credit union if the following applies:
  • All other requirements of the de minimis offense provisions are met;
  • The aggregate total face value of the bad or insufficient funds check(s) cited in the conviction was $1000 or less; and
  • No insured depository institution or insured credit union was a payee on any of the bad or insufficient funds checks that were the basis of the conviction. Any person who meets the foregoing criteria shall be covered by a fidelity bond to the same extent as others in similar positions, and shall disclose the presence of the conviction or program entry to all insured institutions in the affairs of which he or she intends to participate.

3. Federal Bank Bribery Law

The Bank Bribery Amendments Act of 1985 requires that the financial institution regulatory agencies publish guidelines to assist employees of financial institutions in complying with the law. These guidelines recommend that financial institutions adopt internal codes of conduct or written policies that explain the general prohibitions of the bank bribery law. The financial institution’s code of conduct should prohibit any employee, officer, director, agent or attorney of the institution (“bank official(s)”) from (1) soliciting for themselves or for a third party (other than the financial institution itself) anything of value from anyone in return for any business, service or confidential information of the financial institution and (2) accepting anything of value (other than bona fide salary, wages and fees) from anyone in connection with the business of the financial institution, either before or after a transaction is discussed or consummated. The financial institution’s codes or policies should be designed to alert employees about the bank bribery statute, as well as to establish and enforce written policies on acceptable business practices.

In its code of conduct, the financial institutions may also specify appropriate exceptions to the general prohibition of accepting something of value in connection with bank business. There are a number of instances where a bank official, without risk of corruption or breach of trust, may accept something of value from one doing or seeking to do business with the insured state nonmember bank. The most common examples are the business luncheon or the special occasion gift from a customer. In general, there is no threat of a violation of the statute if the acceptance is based on family or personal relationship existing independent of any business of the institution; if the benefit is available to the general public under the same conditions on which it is available to the bank official; or if the benefit would be paid for by the insured state nonmember bank as a reasonable business expense if not paid for by another party.

Part 6 >>

Jonathan J. Wegner

1700 Farnam Street | Suite 1500 | Omaha, NE 68102 | 402.344.0500