Referral of Known or Suspected Criminal Violations

FARM CREDIT ADMINISTRATION

12 CFR Part 617

RIN 3052-AB33

Referral of Known or Suspected Criminal Violations

AGENCY: Farm Credit Administration (FCA).

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA), by order of the FCA

Board, issues a final rule amending its regulations governing the

referral of known or suspected criminal violations. The objective of

this final regulation is to promote consistency, efficiencies, and

timeliness by Farm Credit System (FCS or System) institutions in

reporting, investigating, and aiding in the prosecution of known or

suspected criminal activities. Therefore, the final regulation requires

System institutions to notify law enforcement agencies of known or

suspected criminal violations that meet certain reporting thresholds.

Generally, a criminal violation must be reported under this part if

there is a reasonable basis to conclude that there was an intent to

``defraud'' a System institution and the amount of the actual or

potential loss meets the reporting thresholds.

The final regulation mandates the continued use of the FCA Criminal

Referral Form (hereinafter FCA Referral Form), which is located in the

FCA Examination Manual, for making a criminal referral.

DATES: The regulation shall become effective upon the expiration of 30

days after publication during which either or both houses of Congress

are in session. Notice of the effective date will be published in the

Federal Register.

FOR FURTHER INFORMATION CONTACT:

Eric Howard, Policy Analyst, Regulation Development Division, Office of

Policy Development and Risk Control, Farm Credit Administration,

McLean, VA 22102-5090, (703) 883-4498, TDD (703) 883-4444,

or

Jane Virga, Senior Attorney, Legal Counsel Division, Office of General

Counsel, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-

4020, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION:

I. Background

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 could undermine public confidence in the FCS and

affect the safety and soundness of FCS institutions. 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 (BFWG) was formed to

address concerns that financial institutions were becoming increasingly

vulnerable to insider fraud and prosecutions were not keeping pace with

criminality, and to promote cooperation toward the goal of improving

the Federal Government's response to white-collar crime in the Nation's

federally insured and/or regulated financial institutions. The BFWG

consists 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. The objectives of the

BFWG were 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 BFWG developed uniform reporting standards and

processes for filing criminal referrals and developed a model

regulation.

Following the BFWG's guidance, the FCA proposed a regulation that

was published in the Federal Register on October 13, 1992 (57 FR

46819). The comment period for the proposed regulation amending part

617 closed on November 12, 1992. Pursuant to the commenters' request,

the FCA Board agreed to republish the proposed regulation in order to

afford the public another opportunity to comment. The reproposed

regulation was published in the Federal Register on June 20, 1994 (59

FR 31562). The FCA considered and addressed all comments to the

proposed regulation in the reproposed regulation.

Following the reproposal, there were several requests that FCA

staff meet with the commenters to discuss issues and problems that

arise in the area of criminal referrals. Commenters believed that it

would provide a better opportunity for them to present their views on

the reproposed regulation. Hence, after the comment period closed, FCA

staff met with the commenters in Sacramento, California, on September

27, 1995. This meeting was held in compliance with the FCA Board's

Policy Statement FCA-PS-37 published in the Federal Register on April

1, 1992 (57 FR 11083), which addresses communications with the public

during the rulemaking process.

During the meeting, commenters expounded on their written comments.

After the meeting, several attendees provided written confirmation of

the meeting discussions. No new substantive comments were made at the

meeting and, thus, comments made at the meeting are not separately

described herein. These follow-up letters and minutes of the meeting

are retained in the FCA's rulemaking file and are available for public

review.

II. Analysis of Comments to the Reproposed Regulation and FCA Responses

A. The Need for a New Criminal Referral Regulation

Several commenters questioned the need for a new criminal referral

regulation and argued that the existing regulation (found in 12 CFR

part 617) is adequate to ensure the proper reporting of criminal

referrals. The FCA disagrees and believes that the existing criminal

referral regulation should be revised because it is out-of-date and

fails to reflect the arms-length relationship between the FCA and the

System.

The existing regulation, first promulgated in 1982, has no minimum

reporting thresholds and requires the reporting of all criminal

violations. Further, the existing regulation does not contain

procedures adequate to ensure consistent System-wide reporting. A 1982

interpretative letter from the FCA to the President of each Farm Credit

Bank introduced procedures not included in the regulation at part 617.

The letter indicated that dollar-reporting thresholds could be applied

in certain circumstances and emphasized the significant discretion

District Bank counsel had in reviewing cases of suspected violations.

At present, some institutions report all violations and some follow the

1982 interpretative letter and only report criminal violations

exceeding certain thresholds, which in some cases is $50,000. This

final rule supersedes the guidelines provided in the 1982

interpretative letter and the existing regulation. The final rule

establishes reporting thresholds that all System institutions must

follow.

[[Page 24563]]

The existing regulation established slightly different procedures

for reporting violations allegedly committed by institution personnel

and procedures for reporting violations allegedly committed by

borrowers. The existing regulation specifically requires that criminal

referrals concerning institution personnel be reported to the Chief

Examiner of FCA's Office of Examination and that those concerning

borrowers be reported to the FCA. The regulation also specifies that

the Chief Examiner is to refer cases concerning criminal law violations

by institution personnel to the U.S. Attorney, while the general

counsel of the Farm Credit district is to refer criminal law violations

by borrowers to the U.S. Attorney and report the referral to the FCA's

General Counsel. The final regulation makes the reporting procedures

for institution personnel and borrowers the same. It requires

institutions to make these referrals directly to the appropriate

Federal law enforcement authorities and to provide copies of all

referrals to the FCA's Office of General Counsel. It is the Office of

General Counsel that, in practice, monitors criminal referrals and has

primary contact with Federal law enforcement authorities. The final

regulation reflects that role in addition to bringing greater

consistency to the referral process.

In addition, the existing regulation is not consistent with the

BFWG's recommendations concerning reporting thresholds, which have been

implemented by the other Federal financial regulatory agencies. The

BFWG, which included the FCA, established the same thresholds for all

Federal financial regulatory agencies. The BFWG believed that uniform

thresholds would enhance the ability of the Federal financial

regulatory agencies and the law enforcement agencies to detect,

investigate, and prosecute known or suspected criminal violations. The

Department of Justice, as a member of the BFWG and oversight agency for

the Offices of the U.S. Attorneys, assisted in the establishment of the

thresholds. Therefore, as a participant in the BFWG and in concurrence

with the Department of Justice's judgment on this matter, the FCA is

establishing the reporting thresholds as recommended by the BFWG.

Although the FCA's final regulation has been tailored, as

appropriate, to address concerns raised by agricultural lending, it is

patterned on the BFWG's model regulation and the rules promulgated by

the other Federal financial regulatory agencies. The FCA continues to

believe that the FCA criminal referral regulation should incorporate

the core principles of the model regulation.

B. Reporting Threshold Limits

The dollar amount that would trigger the requirement to make a

criminal referral has been a matter of some controversy. The proposed

and reproposed regulation established reporting thresholds of $1,000

and $5,000 for known and unknown suspects, respectively, and $0 for

institution personnel. (The term ``unknown suspect'' is used where a

criminal violation has occurred but no reasonable basis exists for

identifying the perpetrator.) Although commenters supported the $0

reporting threshold for institution personnel, they argued that the FCA

should adopt higher reporting thresholds for borrowers. The commenters'

principal objection to the $1,000 and $5,000 thresholds was that few

investigations or prosecutions by Federal law enforcement authorities

result from referrals unless the amount at issue is substantial.

Several commenters suggested that a $50,000 reporting threshold for

borrowers would be appropriate. One commenter suggested that reporting

thresholds should be the same for borrowers and unknown suspects.

Another commenter stated that if the FCA was not mandating the use of a

Uniform Criminal Referral Form it should not mandate the use of uniform

reporting thresholds.

The BFWG first recommended reporting thresholds of $1,000 for known

suspects and $5,000 for unknown suspects. The BFWG subsequently revised

the thresholds and recommended reporting thresholds at $5,000 for

borrowers and $25,000 for unknown suspects. The BFWG has not changed

its recommendation of $0 for institution personnel. The Federal law

enforcement authorities that are part of the BFWG, including the

Department of Justice, believe these revised reporting thresholds are

appropriate and have specifically stated that they want to receive all

criminal referrals meeting these thresholds.

In the final regulation reporting thresholds for institution

personnel will remain at $0, so that any criminal act by institution

personnel will be reported. After careful evaluation of the BFWG's

recommendations and the commenters' concerns, the Agency also believes

that the reporting thresholds should be increased for both known and

unknown suspects. Thus, the FCA is increasing the threshold for known

suspects from $1,000 to $5,000. The threshold for unknown suspects is

also increased from $5,000 to $25,000. This action responds to the

commenters' requests for higher thresholds. It also is consistent with

the BFWG's revised recommendations on reporting thresholds, which the

BFWG raised in response to commentary after the model regulation was

first proposed.

The use of uniform reporting 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. Therefore, the final regulation establishes

reporting thresholds of $0 for institution personnel, $5,000 for known

suspects, and $25,000 for unknown suspects.

C. Compliance Costs

Many of the commenters expressed concern about the cost of

compliance with the regulatory requirements for making a criminal

referral. The commenters were concerned that criminal referrals are

costly and time-consuming, yet rarely result in investigations, much

less prosecutions. For example, one commenter indicated that it took 40

hours of an employee's time to investigate an allegation and complete a

criminal referral form. Another commenter indicated that legal counsel

was necessary to evaluate the sufficiency of evidence or the

appropriateness of making certain criminal referrals.

The FCA recognizes that System institutions will incur costs to

comply with the final regulation just as they currently incur costs to

make a criminal referral. The FCA believes that the benefit of timely

and consistent reporting of criminal referrals at the new, higher

reporting thresholds will outweigh the expense of compliance. Also, the

regulation will standardize the reporting process and ensure that

institutions apply uniform standards to all affected parties

(borrowers, employees, officers, and directors). However, compliance

costs can be minimized. For instance, an institution is not required to

conduct an exhaustive investigation of every reported violation.

Rather, an institution is only required to conduct an inquiry

sufficient to complete the FCA Referral Form.

D. Defining Potential Loss

Several commenters believed that the FCA's discussion of

``potential loss'' in the preamble to the reproposed regulation needed

further clarification. The preamble indicated that potential loss would

always equal the amount of the collateral conversion or financial

[[Page 24564]]

misstatement. A number of commenters disagreed with this

interpretation. They pointed out that in some instances a lender may

reasonably expect the potential loss to be smaller or even zero. This

could occur, for example, if a financial misstatement, although in

excess of $5,000, was insignificant in light of the borrower's overall

financial position. Similarly, a lender might reasonably expect no loss

on a loan, despite a conversion of collateral worth more than $5,000,

if the remaining collateral well exceeded the lender's requirements and

no other obstacle to full repayment existed. Finally, the commenters

argued that if a lender discovered a financial misstatement or

collateral conversion only after the loan was repaid as agreed, the

absence of any actual loss should take precedence over any

retrospective view of potential loss.

The final rule continues to state that lenders must refer crimes

when the ``actual or potential loss'' exceeds the applicable

thresholds, but the parenthetical ``(before reimbursement or

recovery)'' has been deleted. Nevertheless, the FCA continues to

believe that when an institution experiences an actual loss, the

reporting thresholds in Sec. 617.2 govern whether a referral is

required and are to be applied before reimbursement or recovery. The

fact that a borrower reimburses the institution after the fact or that

the converted collateral is recovered is irrelevant in determining

whether a criminal referral is required. However, when the amount of

any actual loss is not yet known, the FCA has concluded that the lender

should make a reasonable assessment of the amount of the potential loss

at the time of discovery of the criminal activity and use that amount

to determine if a referral is required. The lender may base this

assessment on the amount of the collateral conversion or financial

misstatement, or on the reasonable estimate of loan loss attributable

to the conversion or misstatement, or another method that is reasonable

under the circumstances. When an estimate of potential loss is

expressed as a range, a referral is required if any part of the range

exceeds the applicable threshold.

To further clarify, System institutions are advised that where

criminal intent is not suspected, no criminal referral need be made

because, in most circumstances, there would be no criminal violation

regardless of the actual or potential loss. If it is clear that an act

was merely negligent and there was no criminal intent, a referral would

be inappropriate. Nor is a criminal referral required if there is clear

intent to defraud but no actual or potential loss results. A loss (or

potential loss) over the threshold amount and the requisite intent must

coincide before a criminal referral is required.

Some commenters suggested that extenuating circumstances might

argue against prosecution in a situation where a criminal referral is

required. An institution may always express its view on whether

prosecution does or does not appear to be warranted to the Federal

authorities, including a U.S. Attorney or investigatory agency. A well-

reasoned recommendation against prosecution in appropriate cases should

address any perceived inequities in the criminal referral process

without undermining the uniformity that the criminal referral

regulations seek to promote.

There may also be situations where a System institution wishes to

refer a suspected criminal violation involving a dollar amount under

the threshold amount. System institutions should be aware that the

final regulation does not affect, in any way, an institution's

discretion to make a criminal referral that is below the reporting

thresholds to the appropriate law enforcement authorities. Indeed, a

System institution should always bear in mind its obligation to uphold

the integrity of the Farm Credit System and practice sound credit

management. Thus, for example, the repeated conversion of collateral or

the conversion of large amounts of collateral should be reported even

where the actual or potential loss does not meet the threshold

requirements.

E. Discretion To Make a Criminal Referral

The preamble to the reproposed regulation attempted to clarify the

extent of an institution's discretion to make a criminal referral.

Commenters requested that the substance of the preamble discussion on

discretion or the language in the current Sec. 617.7160 be included in

the final regulation. Current Sec. 617.7160 provides that ``it shall be

the function of the general counsel of the Farm Credit district * * *

to determine if there is substantial evidence that a violation * * *

has occurred * * *.'' The commenters also believed that further

discussion on discretion is necessary in the preamble to the final

regulation to avoid unnecessary referrals.

In response to the commenters' request, the FCA has incorporated

guidance on discretion in the regulatory text as well as in the

preamble. The final regulation incorporates language on discretion in

new Sec. 617.1(d), which provides that a System institution is

responsible for determining whether there appears to be a reasonable

basis to believe that a criminal violation has occurred and, if so, to

report the violation to the proper law enforcement authorities. The FCA

did not adopt the language in current Sec. 617.7160 because the term

``substantial evidence'' may suggest a higher evidentiary standard than

may be warranted in determining whether a criminal violation may have

occurred.

The FCA reiterates that, generally, a criminal violation that must

be reported under this part involves a determination that there is a

reasonable basis to believe that a borrower or institution personnel

intended to ``defraud'' an institution through violation of a Federal

criminal statute. Institutions, therefore, must seek to determine

whether a misrepresentation of assets or a collateral conversion, for

example, was done inadvertently or with the intent to defraud the

institution. This determination involves the exercise of considerable

discretion. In ascertaining whether a criminal referral is appropriate,

an institution should consider all facts and circumstances, including

those that go to the question of intent. 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. However, an

institution should adequately document the basis for its determination

that there was no criminal intent, especially when the institution

suffers a loss. While System institutions are not required to consult

legal counsel in determining whether an activity involved criminal

intent, they may prefer to do so in close cases.

F. Probability of Prosecution

Several commenters urged the FCA to include in the final regulation

a provision that would allow System institutions to make a referral

determination based on the probability of prosecution of the subject of

the criminal referral. Commenters asserted that some U.S. Attorneys

have established informal dollar thresholds for prosecution that are

much higher than the reporting thresholds established by the BFWG. The

commenters stated that in their experience some U.S. Attorneys will not

prosecute violations in amounts below these informal thresholds.

The Department of Justice, a participant in the BFWG and the

oversight agency for the Office of the U.S. Attorneys, helped establish

and fully supports the thresholds. While it is true that prosecution

for low dollar amounts is rare, the FCA believes that the new reporting

thresholds are

[[Page 24565]]

appropriate and that law enforcement agencies should have the chance to

determine whether a criminal referral above these amounts is

investigated and prosecuted. Thus, the FCA has decided not to

incorporate this proposal in the final regulation.

G. Discovery of a Criminal Violation

Several commenters correctly noted an inconsistency in the language

of reproposed Sec. 617.2(a) and (b). Reproposed Sec. 617.2(a) required

System institutions to refer criminal activity after a

``determination'' that a violation has occurred. Reproposed

Sec. 617.2(b) required forwarding an FCA Referral Form to the FCA after

a System institution ``has discovered (or should have discovered)'' a

violation. Commenters also requested that the FCA limit its references

to due diligence in the final regulation. Specifically, several

commenters requested that the FCA delete the language ``(or should have

discovered)'' from Sec. 617.2(b).

The FCA agrees that the due diligence standard is already

established in Sec. 617.2(a) and therefore applies to all aspects of an

institution's criminal referral process. Consequently, the FCA is

deleting Sec. 617.2(b) and moving the requirement that an FCA Referral

Form be forwarded to the FCA's Office of General Counsel to

Sec. 617.2(a).

These changes make it clear that the obligation to make a criminal

referral arises when management has determined that there is a known or

suspected criminal activity, not when management ``has discovered (or

should have discovered)'' a violation.

H. Time Limit To Make a Criminal Referral

Several commenters requested that the 30-day period during which a

System institution must make a criminal referral be amended to reflect

the varying complexity of some criminal referrals. Although the FCA

recognizes System concerns, the Agency does not believe a change is

warranted. The final regulation continues to provide that referrals

must be made within 30 days of determining that a criminal violation

appears to have occurred. The FCA believes that in the great majority

of situations it is reasonable to expect that System institutions will

be able to make a criminal referral within 30 days of determining that

a violation has occurred. In unusual situations involving complicated

facts, a System institution may need more than 30 days to make a

complete criminal referral detailing all relevant information to law

enforcement authorities. If so, System institutions should make a

preliminary criminal referral to the appropriate law enforcement

authorities and follow up as soon as possible to ensure that a complete

accounting of the facts and circumstances are reported to the law

enforcement authorities. Finally, a System institution should not delay

making a complete and accurate criminal referral because it is involved

in a sensitive workout with a borrower or the borrower is under

bankruptcy protection.

I. Transferring Responsibility for Making Criminal Referrals

Several commenters queried whether the final regulation would allow

System institutions that have primary responsibility for making

criminal referrals to transfer this activity to their supervising bank.

While the institution retains the ultimate accountability for

exercising due diligence to ensure the discovery, appropriate

investigation, and reporting of criminal activity as required by

Sec. 617.2(a) and for ensuring that the criminal referral is made, a

criminal referral can be made on the institution's behalf by a

supervising System bank. This may be done pursuant to a formal

agreement whereby the System bank making the referral is acting as an

agent for the institution with primary responsibility.

J. Referrals to State and Local Authorities

One commenter urged the FCA to amend the final regulation so that

System institutions are merely encouraged to file copies of the FCA

Referral Form with State and local authorities rather than be required

to make such a criminal referral. The FCA never intended to require

that System institutions use the FCA Referral Form to refer State and

local violations to State and local authorities or to inform State and

local authorities of Federal violations. Rather, Sec. 617.2(b)

(formerly Sec. 617.2(c) in the reproposed regulation) requires a System

institution to notify the appropriate State or local law enforcement

authorities when there is a known or suspected violation of State or

local criminal law. The FCA continues to believe that this is a

reasonable requirement that will help ensure the safety and soundness

of the institution and the System without imposing an undue burden. A

System institution may use whatever means it deems appropriate to make

the referral. If a System institution thinks it appropriate, it can

recommend that the State or local authorities not pursue a criminal

investigation and prosecution.

K. Adding a Section Incorporating the Language of Current Sec. 617.7140

One commenter requested that the language of Sec. 617.7140 of the

existing regulation be incorporated in the final regulation. Section

617.7140 outlines the two most common types of malfeasance that System

institutions encounter--conversion and false financial statements--and

cites the statutory sources in the Federal criminal code. The FCA does

not believe that this information needs to be included in the final

regulation because it is included in the FCA Referral Form.

L. FCA Referral Form

Commenters expressed some general concern about whether System

institutions would be using the FCA Referral Form found in the FCA

Examination Manual or a Uniform Criminal Referral Form developed by the

BFWG. System institutions were concerned that a Uniform Criminal

Referral Form would not be appropriate for reporting violations arising

from agricultural lending, such as collateral conversions of

agricultural products.

The FCA concludes that System institutions should continue to use

the FCA Referral Form found in the FCA Examination Manual rather than a

Uniform Criminal Referral Form developed by the BFWG. The FCA believes

that the FCA Referral Form is more closely tailored to the types of

crimes most often encountered in agricultural lending. It has been

designed to be easy to use and to ensure the proper reporting of all

required information. The form itself contains instructions and a brief

summary of statutory provisions pertaining to criminal violations that

most often occur in the context of agricultural lending. Thus, the

final regulation requires System institutions to continue to use the

FCA Referral Form for all criminal referrals. The FCA will review the

FCA Referral Form periodically as part of its ongoing effort to ensure

that System institutions have access to the best guidance possible.

M. Civil Liability for Making a Criminal Referral

Several commenters expressed concern that System institutions and

institution personnel did not have immunity from civil liability for

making a criminal referral. The FCA's reproposed regulation did not

address this issue and no provision has been provided in the final

regulation as this matter has been addressed by a statutory amendment.

The Farm Credit System Reform Act of 1996 amended the Farm Credit

Act of

[[Page 24566]]

1971 to provide System institutions and their personnel with immunity

from civil liability for making a criminal referral. See 12 U.S.C.

2219e. Now, FCS institutions and their personnel who disclose to a

government authority information proffered in good faith that may be

relevant to a possible violation of any law or regulation are not

liable to any person under any law of the United States or of any State

for the disclosure or for any failure to notify the person involved in

the possible violation.

As a result of this statutory change, FCS institutions and their

personnel enjoy immunity similar to that of the other financial

institutions and their personnel. See 12 U.S.C. 3401, 3403; 31 U.S.C.

5312, 5318. See also 31 CFR part 103, subpart B.

N. Miscellaneous Clarifications

1. Section 617.2(a) was amended to clarify the FCA's intent that,

although in the exercise of due diligence it is the direct lender's

responsibility to make a criminal referral involving a loan it has

made, when a Federal land bank association services a loan made by a

Farm Credit Bank, the association must notify the Bank of any known or

suspected criminal violation involving that loan.

2. Section 617.2(c) was amended to specify that System institutions

must notify both the appropriate Federal law enforcement authorities

and the FCA offices in those instances requiring urgent attention.

3. Former Sec. 617.3(a) and (b) were combined for brevity and

renumbered as Sec. 617.3(a). That section provides that if a criminal

referral involves a member of the board of directors, discretion may be

exercised in notifying such member of the criminal referral. The FCA

intends the term ``exercise of discretion'' to mean that the

institution must determine whether, under the circumstances, only those

members of the board of directors not involved in the criminal

violation should be notified of the criminal referral.

4. Former Sec. 617.3(c) has been renumbered as Sec. 617.3(b) and

amended to provide that a System institution shall make all required

notifications under a surety bond or other contract. A System

institution is no longer required to make an initial determination of

whether there is a loss prior to notification.

List of Subjects in 12 CFR Part 617

Banks, banking, Criminal referrals, Criminal transactions,

Embezzlement, Insider abuse, Insvestigations, Money laundering, Theft.

For the reasons stated in the preamble, part 617 of chapter VI,

title 12 of the Code of Federal Regulations is revised to read as

follows:

PART 617--REFERRAL OF KNOWN OR SUSPECTED CRIMINAL VIOLATIONS

Sec.

617.1 Purpose and scope.

617.2 Referrals.

617.3 Notification of board of directors and bonding company.

617.4 Institution responsibilities.

Authority: Secs. 5.9, 5.17 of the Farm Credit Act (12 U.S.C.

2243, 2252).

Sec. 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 Farm Credit Act of 1971, as

amended, (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

public confidence in the Farm Credit System, to ensure the reporting of

known or suspected criminal activity, to reduce potential losses to

institutions, and to ensure the safety and soundness of institutions.

This part requires that institutions use the Farm Credit Administration

Criminal Referral Form (hereinafter FCA Referral Form) to notify the

appropriate Federal authorities when any known or suspected Federal

criminal violations of the type described in Sec. 617.2 are discovered

by institutions.

(b) The specific referral requirements of this part apply 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. No specific

procedural requirements apply to the referral of violations of State or

local laws.

(c) Nothing in this part should be construed as reducing in any way

an institution's ability to report known or suspected criminal

activities to the appropriate investigatory or prosecuting authorities,

whether Federal, State, or local, even when the circumstances in which

a report is required under Sec. 617.2 are not present.

(d) It shall be the responsibility of each System institution to

determine whether there appears to be a reasonable basis to conclude

that a criminal violation has been committed and, if so, to report the

matter to the proper law enforcement authorities for consideration of

prosecution.

(e) Each referral required by Sec. 617.2(a) shall be made on the

FCA Referral Form in accordance with the FCA Referral Form instructions

relating to its filing and distribution.

Sec. 617.2 Referrals.

(a) Each institution and its board of directors shall exercise due

diligence to ensure the discovery, appropriate investigation, and

reporting of criminal activity. 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. A copy of the completed FCA Referral Form,

accompanied by any relevant documentation, shall be provided at the

same time to the Farm Credit Administration's Office of General

Counsel. In the event that a Farm Credit bank makes a loan through a

Federal land bank association which services the loan, the Federal land

bank association must inform the Farm Credit bank of any known or

suspected violation involving that loan and the Farm Credit bank shall

refer the violation to Federal law enforcement authorities under this

section. A report is required in circumstances where there is:

(1) Any known or suspected criminal activity (e.g., theft,

embezzlement), mysterious disappearance, unexplained shortage,

misapplication, or other defalcation of property and/or funds,

regardless of amount, where an institution employee, officer, director,

agent, or other person participating in the conduct of the affairs of

such an institution is suspected;

(2) Any known or suspected criminal activity involving an actual or

potential loss of $5,000 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 institution 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 of $25,000 or more, through false

[[Page 24567]]

statements or other fraudulent means, where the institution has no

substantial basis for identifying a possible suspect or group of

suspects; or

(4) Any known or suspected criminal activity involving a financial

transaction in which the institution was used as a conduit for such

criminal activity (such as money laundering/structuring schemes).

(b) In circumstances where there is a known or suspected violation

of State or local criminal law, the institution shall notify the

appropriate State or local law enforcement authorities.

(c) In addition to the requirements of paragraph (a) of this

section, the institution shall immediately notify by telephone the

appropriate Federal law enforcement authorities and FCA offices

specified on the FCA Referral Form upon determining that a known or

suspected criminal violation of Federal law requiring urgent attention

has occurred or is ongoing. Such cases include, but are not limited to,

those where:

(1) There is a likelihood that the suspect(s) will flee;

(2) The magnitude or the continuation of the known or suspected

criminal violation may imperil the institution's continued operation;

or

(3) Key institution personnel are involved.

Sec. 617.3 Notification of board of directors and bonding company.

(a) The institution's board of directors shall be promptly notified

of any criminal referral by the institution, except that if the

criminal referral involves a member of the board of directors,

discretion may be exercised in notifying such member of the referral.

(b) The institution involved shall promptly make all required

notifications under any applicable surety bond or other contract for

protection.

Sec. 617.4 Institution responsibilities.

Each institution shall establish effective policies and procedures

designed to ensure compliance with this part, including, but not

limited to, adequate internal controls.

Dated: April 25, 1997.

Floyd Fithian,

Secretary, Farm Credit Administration Board.

[FR Doc. 97-11685 Filed 5-5-97; 8:45 am]

BILLING CODE 6705-01-P