Suspicious Activity Reports and Enforcement Actions against Individuals

FRB: Supervisory Letter SR 03-20 on Suspicious Activity Reports and enforcement actions against individuals -- November 19, 2003

BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D. C.  20551

DIVISION OF BANKING

SUPERVISION AND REGULATION

SR 03-20

November 19, 2003

TO THE OFFICER IN CHARGE OF

SUPERVISION

AT EACH FEDERAL RESERVE BANK

SUBJECT:  Suspicious

Activity Reports and Enforcement Actions against

Individuals

All domestic and foreign banking organizations supervised

by the Federal Reserve are required to file Suspicious

Activity Reports (SARs) regarding known or suspected

criminal activities by current and former officers,

directors, employees and other institution-affiliated

parties (IAPs), and others.

1

Board staff reviews SARs on a regular basis to identify

significant cases in order to ensure that appropriate

enforcement actions are brought against IAPs, subject

to the jurisdiction of the Federal Reserve, whose

misconduct is reported in SARs. Staff also reviews

SARs to facilitate coordination with law enforcement

authorities investigating the matters reported on

the forms. The SARs identified by Board staff during

these reviews are referred to the Reserve Banks for

follow-up action. Reserve Banks also independently

review SARs filed by supervised institutions within

their districts on a regular basis to identify IAPs

whose misconduct warrants enforcement actions, and

they review SARs prior to an examination or inspection

of a state member bank, bank holding company and

other supervised institution in order to evaluate

a banking organization's compliance with the Board's

SAR reporting rules and the Bank Secrecy Act.

2

The Special Investigations Section of the Division

of Banking Supervision and Regulation has recently

had its responsibilities expanded and is now responsible

for enforcement actions against IAPs handled by the

Division

other supervised institution in order to evaluate

a banking organization's compliance with the Board's

SAR reporting rules and the Bank Secrecy Act.

2

The Special Investigations Section of the Division

of Banking Supervision and Regulation has recently

had its responsibilities expanded and is now responsible

for enforcement actions against IAPs handled by the

Division.

3

This SR letter provides guidance to Reserve

Banks regarding the coordination of enforcement matters

with the Special Investigations Section once a SAR

against an IAP has been identified for follow-up

action.

Generally, Reserve Bank follow-up is required on

SAR filings involving IAPs when any of the following

criteria is met:  (1) the amount of the

loss is $25,000 or greater; (2) multiple SARs

have been filed on an individual, regardless of the

amount of loss; (3) the conduct resulted in

unjust enrichment; or (4) the conduct would

have resulted in a significant loss had it gone undetected

or had restitution not been paid. Once either Board

staff or a Reserve Bank identifies a SAR fitting

one of these criteria, then the Reserve Bank should

contact the financial institution to discuss the

details of the SAR and ascertain law enforcement's

involvement. Of course, Reserve Banks should continue

to contact banking organizations and law enforcement

authorities regarding a particular SAR filing when

other events raise supervisory concerns.

If law enforcement intends to prosecute the IAP,

the Reserve Bank should monitor law enforcement's

efforts and notify Board staff of law enforcement's

interest

ment's

involvement. Of course, Reserve Banks should continue

to contact banking organizations and law enforcement

authorities regarding a particular SAR filing when

other events raise supervisory concerns.

If law enforcement intends to prosecute the IAP,

the Reserve Bank should monitor law enforcement's

efforts and notify Board staff of law enforcement's

interest. If informed that a guilty plea is likely,

the Reserve Bank should provide law enforcement with

the following paragraph to be included in the plea

agreement:

"Defendant further agrees not to become

or continue serving as an officer, director, employee,

or institution-affiliated party, as defined in 12 U.S.C.

Section 1813(u), (the Federal Deposit Insurance

Act, as amended), or participate in any manner in

the conduct of the affairs of any institution or

agency specified in 12 U.S.C. Section 1818(e)(7)(A),

without the prior approval of the appropriate federal

financial institution regulatory agency as defined

in 12 U.S.C. Section 1818(e)(7)(D)."

The use of this language in a plea agreement obviates

the need for the Board or any other banking agency

to take a separate enforcement action barring the

individual from the banking industry. The aforementioned

paragraph was drafted in consultation with the other

federal financial institutions supervisory agencies

and the U.S. Department of Justice.

4

Reserve Banks should also notify Board staff if a

conviction is obtained

need for the Board or any other banking agency

to take a separate enforcement action barring the

individual from the banking industry. The aforementioned

paragraph was drafted in consultation with the other

federal financial institutions supervisory agencies

and the U.S. Department of Justice.

4

Reserve Banks should also notify Board staff if a

conviction is obtained.

If

law enforcement declines to prosecute an IAP identified

in a SAR filing meeting one or more of the above-mentioned

criteria, the Reserve Bank should do the following:

Gather all appropriate documents from the filing

financial institution and the law enforcement

agency related to the SAR filing, including a

copy of the signed confession, if applicable,

records relating to any admission made to banking

officials, and any other pertinent supporting

materials, such as affidavits, investigative reports,

bank records, and the names of banking officials

with knowledge of the misconduct or internal investigation;

Follow-up with the financial institution to ascertain

whether any civil action has been taken by the

organization against the individual, and whether

the financial institution has obtained any restitution,

either through the voluntary cooperation of the

individual or by means of a court judgment;

Determine the current home address of the individual;

Determine if the individual is being represented

by legal counsel and identify the legal counsel

contact information (i.e., address and telephone

number); and

To the extent possible, ascertain the individual's

current employment status and his or her ability

to pay restitution or a civil money penalty

nt;

Determine the current home address of the individual;

Determine if the individual is being represented

by legal counsel and identify the legal counsel

contact information (i.e., address and telephone

number); and

To the extent possible, ascertain the individual's

current employment status and his or her ability

to pay restitution or a civil money penalty.

5

After obtaining the documentation available from

the financial institution, and considering whatever

additional information that the Reserve Bank has

about the IAP, the Reserve Bank should evaluate the

quality of the documentation, weigh any other relevant

circumstances and determine whether to recommend

that the Board take an enforcement action against

the IAP. Possible actions include a permanent ban

from the banking industry through a prohibition order

or a cease and desist order requiring restitution

and corrective actions addressing the IAP's misconduct

and future employment. If the Reserve Bank decides

to recommend an enforcement action, then the Reserve

Bank should continue to follow current procedures

relating to the submission of enforcement action

recommendations to Board staff, which include a memorandum

summarizing the facts, along with a copy of the supporting

documentation. The Reserve Bank should also notify

Board staff when it recommends that no action be

taken.

Reserve Banks are asked to distribute this letter

to appropriate supervisory and examination staff.

For SARs and related enforcement action recommendations

meeting the criteria described in this SR letter,

Reserve Bank staff should contact Carmina Hughes,

Special Counsel and Manager of the Special Investigations

Section, at (202) 452-5235, or John Davidson,

Senior Attorney, at (202) 452-2808. Questions

can also be directed to Herbert A. Biern,

Senior Associate Director, at (202) 452-2620

or to Ms

ecommendations

meeting the criteria described in this SR letter,

Reserve Bank staff should contact Carmina Hughes,

Special Counsel and Manager of the Special Investigations

Section, at (202) 452-5235, or John Davidson,

Senior Attorney, at (202) 452-2808. Questions

can also be directed to Herbert A. Biern,

Senior Associate Director, at (202) 452-2620

or to Ms. Hughes or Mr. Davidson.

Richard Spillenkothen

Director

Cross Reference:

SR letter 01-18

Notes:

Sections 1813(u)

and 1818(b)(3) and (4) of Title 12 of

the United States Code generally define

an IAP subject to the enforcement jurisdiction

of the Federal Reserve as any officer, director,

employee, controlling shareholder, independent

contractor such as an attorney or accountant

under certain limited circumstances, or any

other person who participates in the conduct

of the affairs of an insured depository institution,

bank holding company, nonbank subsidiary of

a bank holding company, or a U.S. branch or

agency of a foreign bank supervised by the

Federal Reserve.

Return to text

See SR letter 01-18.

http://www.federalreserve.gov/boarddocs/SRLETTERS/2001/sr0118.htm

.

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The Enforcement Section

of the Division will continue to be responsible

for enforcement actions against the domestic

and foreign banking organizations supervised

by the Federal Reserve. Both sections continue

to report to Herbert A. Biern, Senior

Associate Director.

Return to text

It is important to

note that Section 19 of the Federal Deposit

Insurance Act (12 U.S.C

continue to be responsible

for enforcement actions against the domestic

and foreign banking organizations supervised

by the Federal Reserve. Both sections continue

to report to Herbert A. Biern, Senior

Associate Director.

Return to text

It is important to

note that Section 19 of the Federal Deposit

Insurance Act (12 U.S.C. 1829)

currently generally bars a convicted felon

from being an officer or director or otherwise

participating in the conduct of the affairs

of an insured depository institution without

the approval of the Federal Deposit Insurance

Corporation. Section 19 does not

cover employment by bank holding companies,

nonbank subsidiaries of bank holding companies,

and the U.S. branches and agencies of foreign

banks. The use of the suggested language described

above is meant to address the limitations of

Section 19 by mandating that an IAP who

is convicted of a criminal offense pursuant

to a plea agreement containing this provision

cannot work for any domestic or foreign banking

organization supervised by the Federal Reserve

or any other federal financial institution

regulator without the approval of the bank

supervisor overseeing the institution where

the convicted IAP seeks employment.

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In the event that

staff finds that the individual whose misconduct

is reported in a SAR is

currently

employed

at a banking organization supervised by the

Federal Reserve or any of the other federal

financial institutions supervisory agencies,

the Reserve Bank must immediately contact the

Special Investigations Section

ext

In the event that

staff finds that the individual whose misconduct

is reported in a SAR is

currently

employed

at a banking organization supervised by the

Federal Reserve or any of the other federal

financial institutions supervisory agencies,

the Reserve Bank must immediately contact the

Special Investigations Section. Working together,

Board and Reserve Bank staff will coordinate

an appropriate response to the situation, which

could include the initiation of an immediate

suspension action by the Board if the IAP is

employed by a Federal Reserve-regulated financial

institution. If the IAP is employed at a non-Federal

Reserve supervised entity, the matter will

be brought to the attention of the bank or

functional regulatory authority overseeing

the institution currently employing the IAP.

Return to text

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