Comptroller of the Currency Washington, D. C. 20219 Bank Supervision Newsletter October 1985 Number 11 SALE OF BANK ASSETS Recently, a large bank announced a plan to sell many of its nonperforming assets and international loans to its parent and other affiliates. Although the transaction will result in a stronger bank, it is interesting to note that the bank will book a $50 million loss (before taxes and other offsetting gains) on the sale. It may be questioned whether such a loss should be recognized since the assets are simply moved from one affiliate to another. The answer depends on which entity is reporting the transaction and on the governing accounting rulesGAAP or RAP (regulatory ac counting principles). On a consolidated basis, GAAP and RAP are in agreement-no loss would be recognized. However, when a bank reports the transac BANK SECRECY ACT REFERRALS A Policy and Procedures Manual issuance regarding referral recommendations for Bank Secrecy Act (BSA) violations is being developed. In the interim, please be guided by Examining Circular 228, dated April 24, 1985 and supplemental information provided in this article. The Department of the Treasury is responsible for pur tion, there may be a difference. Accounting under GAAP may or may not result in loss recognition, but RAP clearly requires booking a loss if the assets are currently worth less than the book value. A gain or loss on a transaction is measured by the difference between the book value of the assets and their fair market value regardless of the amount paid by the affiliate. If a bank were to receive an amount greater than the fair mar ket value-such as book valuethe excess would be booked as a capital contribution. We frequently see similar transactions of a smaller magnitude involving the sale of loans, securities and other assets to affiliates. They may also involve sale/leaseback transactions, sales of charged off loans or exchange of securities. Sales or exchange transactions are generally motivated by tax and suing BSA referrals. The OCC's responsibilities include furnishing information to Treasury "for further investigation and consideration for civil or criminal penalties." The examiner and District Counsel are relieved of specifying the type of penalty that should be assessed since Treasury/IRS will make that determination pursuant to an investigation. If, however, the examiner chooses to recommend a criminal referral, follow the guidelines in Banking Circular 207. In This Issue... • Sale of Bank Assets • Bank Secrecy Act Referrals • RE Construction Loan Survey • Global Banking Markets • International Monetary Fund • Trust Support Services capital considerations. Although the transactions vary in type and complexity, the accounting is generally the same. Fair market values must be determined, and the accounting may include a gain or loss coupled with either a capital contribution or a "constructive” dividend. This accounting treatment ensures that the transaction is recorded on the same basis as if the (continued on page 3) The examiner's recommendation for a referral should include comments regarding bank management's commit. ment to comply with the act, as well as the nature and magnitude of the BSA violation. If such information is included in the report of examination, copies of the appropriate pages may be attached to the referral. Documentation of BSA violations should be retained with (continued on page 2) Bank Supervision 1 (BSA REFERRALS from page 1) the workpapers. In the event Treasury authorizes further investigation, the documentation may be requested by IRS agents. Referral Criteria Questions have arisen regarding the nature and number of viola tions that warrant a referral. While the decision is left to examiner discretion, the most common situations include: • Failure to file Form 4789, whether intentional or not: in more than an insignificant number of reportable transactions, - as a pattern or practice at a certain location, - as a pattern or practice for a specific customer/account; • More than an insignificant number of technical violations; ie, incomplete/inaccurate Forms 4789; • Failure to maintain an exempt customer list, except when management does not authorize any exemptions; • Inclusion of ineligible entities on the exemption list; • Lack of internal controls and/or audit coverage regarding the BSA in combination with violations of the act; and •Failure to maintain specific information regarding deposit ac counts, certificates of deposit and loans as detailed in the regulations. The referral document should be in memorandum form and for warded by the examiner-in-charge to District Counsel. This procedure The Bank Supervision Newsletter is a compilation of articles from the various Bank Supervision Divisions. The newsletter is published monthly by the Chief National Bank Examiner's Office under the editorship of James E. Tracy, Deputy Director, Commercial Examinations Division. should be followed in all cases except multinational bank cases, which should be sent directly to the Director, Multinational and Regional Bank Supervision. Survey Content The survey was designed to provide the detail necessary to evaluate the potential for risk being taken in the marketplace as a Subsequent to review and apwhole and by individual companies proval by District Counsel or Diand banks. The following is a brief rector, Multinational and Regional description of information reBank Supervision, the recommendation will be forwarded to the Chief National Bank Examiner's Office for administrative coordina tion. If you have questions regarding cases you wish to refer, contact District Counsel or the District BSA Specialist. Thomas C. Lehmkuhl REAL ESTATE CONSTRUCTION LOAN SURVEY Many parts of the country are faced with an oversupply of commercial real estate and many banks are experiencing growing problems in real estate portfolios. High vacancy rates and disinflation have led to rent concessions, declines in property value and diminished collateral support for many real estate loans. In light of these adverse economic developments, in July, the OCC sent a real estate construction loan sur vey form to a selected number of large bank holding companies and banks. The selected companies and banks represented more than $900 billion in total assets and had a significant volume of activity in construction lending. Survey results are currently being analyzed. The purpose of the survey was to determine the extent of construction lending within each banking company or bank. The survey results will determine the major loans according to type of project (office building, land development, etc.) and the location of the project according to metropolitan statistical area. quested: • Provisions in lending policies relating to appraisals, revaluing property, loan review, loan loss reserves, etc; • Dollar amount of the construction loan portfolio categorized by type-non-residential, residential and land development-and further broken down by categories such as retail stores, office buildings, condominiums, apartments, etc. In addition, the amount of standby letters of credit, past-due and non-accrual loans for each real estate loan category; • Breakdown and dollar amounts of internal loan classifications by categories such as office buildings, condominiums, etc. • Breakdown and dollar amounts of non-residential and land development loans greater than $3 million situated in the 50 largest metropolitan statistical areas; • Breakdown and dollar amounts of office building loans greater than $3 million by metropolitan statistical area and the percentage of loan to appraised value. A major issue, as seen by OCC staff, is the adequacy of the appraisal supporting the loan on a construction project. Do ap. praisals reflect the current market value of the real estate collateral when adverse economic conditions occur? Under the new supervisory approach, the institutions exhibiting significant risk in construction lending will receive increased supervisory attention. Gary H. Christensen Bank Supervision Policy Group Endorses SSP Recommendations by Gerry Hagar, Strategic Planning The recommendations that came from more than seven months of brainstorming, interviewing, and writing by the Strategic Systems Planning (SSP) Team have been endorsed by the Policy Group. The team developed their long-range plan for improved OCC information management using techniques developed by the Holland Systems Corporation. After designing a functional business model that categorizes OCC activities into various "businesses," such as licensing and supervision, the team recommended several steps that would lead OCC to more unified information systems. • Construct shared databases to replace the 80 existing mainframe databases. • Give priority attention for the next 1 to IRS Bank Secrecy Responsibilities Expand by Thomas C. Lehmkuhl, Commercial Examinations On September 6, 1985, the Department of the Treasury signed a delegation order giving the Internal Revenue Service (IRS) certain authorities under the Bank Secrecy Act (BSA). Under that delegation, the IRS becomes responsible for reviewing the exemption lists developed and maintained by financial institutions. The delegation became effective January 1, 1986. The IRS also became responsible for reviewing special-case exemptions and exemptions that banks feel are justified under BSA but are not covered by the law's list of standard exempt activities. Exemption requests should no longer be submitted to the Department of the Treasury. Such requests should be made to the Internal Revenue Service, P.O. Box 32063, Detroit, Michigan 48232. Although the IRS's plans to review existing exemption lists are not yet complete, it is clear that those lists will be reviewed. If the IRS finds a customer not acceptable for exemption, it will require the financial institution to remove the customer from the exempt list and to file Currency Transaction Reports (CTRS). As yet it is unclear whether the IRS will require retroactive CTR filings for such customers. Bank supervision Specifically, systemic risk identification, assessment and strategy development and individual institution supervision. Resource management Specifically staffing plan and career path development, af. firmative action, recruitment, internal placement, and training activities. Completion of this project is an important step in achieving an integrated, usable and responsive information system that will serve OCC's present and future information needs. The SSP Team - Gerry Hagar, Ron Lindhart, Dave Perkins, Cindy Petitt, Darrell Sheets and Melanie Smith - are now turning their recommendations over to Management Systems and Information Systems and Technology for implementation. There is still much work to do to complete the project and accomplish the recommendations. health coverage, you should arrange with the Payroll Office to continue family coverage during LWOP (there is no cost for individual coverage) After 365 days of LWOP, your coverage ends. If you return to an active duty status you may re-enroll. OCC Life and FEGLI coverage stays in force for up to one year with no further payment. After one year, your coverage ends with no conver sion privileges. Dental and Vision coverages continue at no cost for up to one year while you are on LWOP. At the end of that time the coverages end. If you return to active duty, coverages will be automatically reinstated. Long-term Disability coverage continues as long as you are in a nonpay status, if your non-pay status is for medical reasons (medical documentation is required). Otherwise, coverage ends when LWOP be OCC Publishes "The Changing Shape of Retail Banking" by Janet Gordon, Customer and Industry Affairs What does the future hold in store for banks, their customers, and the bankcustomer relationship? OCC has recently published a lively discussion of this question in "The Changing Shape of Retail Banking: Responding to Customer Needs." The booklet, now available upon request from the Communications Division, is a detailed summary of a conference sponsored last June by the OCC. The conference, developed by the Customer and Industry Affairs Division, gave bankers, customer group representatives, industry experts and agency leaders an opportunity to exchange information and opinions on a variety of timely issues - from innovations in lowcost basic banking services to the latest in bank technology for branches. The publication summarizes presentations and discussions from four workshop sessions, which dealt with: 1. Reconfiguration of retail service delivery systems, including branch closing policies, new technologies, and innovative branch types; 2. Small business products and deliv ery systems, including special small business centers and innovative business advisory services; 3. Consumer services, including basic banking services and innovative consumer lending and education programs; and 4. Community investment, including aggressive mortgage lending using revenue bond and secondary market programs and an innovative minority small business development program. Also included are texts of the three major presentations - Michael A. Mancusi's opening remarks on OCC customer-oriented activities; remarks on banking deregulation and consumer interests by Paul Horvitz, Professor of Banking and Finance at the University of Texas; and an overview of current trends in bank-customer relationships by Raoul Edwards, editor of U.S. Banker. The OCC publication has been provided to department and division heads and many national, regional and state banking and customer organizations. Copies are available from the Communications Division by writing them at the Washington Office or by calling 447-1768. Questions regarding the Conference should be directed to Malloy T. Harris, Jr., or Janet R. Gordon on 287-4169. el or program you find useful, please contact your Users' Group representative to have it presented to the group for review and distribution throughout OCC. The Microcomputer Users' Group representatives are: IRS and the Bank Secrecy Act by Thomas C. Lehmkuhl, Commercial Examinations The Internal Revenue Service (IRS) has embraced its newly delegated authorities under the Bank Secrecy Act (BSA) and is actively seeking to strengthen the administration of BSA compliance. IRS is increasing the staff available and hopes to provide more assistance to those with BSA problems. The IRS Data Center in Detroit, Michigan is expected to reach its target level of 300 by the summer of 1986. That staff will process Form 4789, address BSA questions, provide rulings and interpretations of the Act and respond to requests for exemptions. Contacting IRS IRS is planning a toll-free "800" telephone number to allow them to be more responsive to financial institutions, examiners, attorneys, etc. Until the number is available, field examiners should contact their District Counsel who will con tact IRS. Examiners should remind bankers to document telephone conversations with IRS. contacts: General BSA information: IRS Data Center Currency and Banking Report Division Detroit, MI 48226 Commercial (313) 226-3525 FTS (8) 226-3525 Exemptions and exemption lists: IRS Data Center Currency and Banking Reports Division Detroit, MI 48232 Dick Gabany: Commercial (202) 566-6474 Addressing Past Violations of BSA When Forms 4789/4790 are not filed, an ineligible customer is included on the exemption list, and/or a number of Forms 4789 are incomplete/inaccurate, examiners must direct the bank to contact IRS to determine what corrective action should be taken. Examiners should note in the workpapers and supervisory letter their instructions to the bank. Reviewing Exemption Lists OCC is still responsible for reviewing exemption lists. There seems to have been some confusion regarding the IRS press release attached to Banking Circular 193, Supplement 3. By delegation, IRS may request and review the exemption list of any domestic financial institution. However, IRS will concentrate its review on institutions not regulated by federal financial institution regulators. If IRS reviews a national bank's exempt list, OCC will receive a report of the findings. March 1986 It is important that employees maintain flexibility in airline selection, rather than insisting on preferred carriers. The difference in fares can be dramatic. For instance, one airline flies from LaGuardia to O'Hare for a government rate of $210 round trip and offers four flights each day. Two other airlines charge $540 for the same trip, a difference of $330. An employee flying from Washington to Dallas at the government rate pays $234 round trip, compared to $660 full coach fare, a difference of $426. Cost differences of more than 150 percent are significant, particularly when multiplied by the number of trips taken OCC-wide. SATO will automatically search for the lowest available fare in the hour before and the hour after your requested departure time. You will not be required to change planes en route to get a cheaper fare or to take a flight with more than one stop. Exceptions to the lowest cost rule may be granted when the lowest fare flight will not arrive in time to accomplish the purpose of your trip. OCC Adopts New by DeeDee Bryant, Benefits and Travel Services Under a new IRS position, a relocating employee who secures an offer higher than Homequity's offer can turn that offer over to Homequity and receive the entire equity payment immediately, based on the higher offer. Before 1986, employees could assign a higher sale to Homequity and receive full equity only after the sale had been closed. The program change is a result of the IRS position that brokers' commissions paid through assigned sale programs are income to the employee. This new OCC amended value program does not result in taxable income by IRS standards. Employees who receive higher offers should coordinate closely with their Homequity counselors to ensure that the necessary requirements are met. It is imperative that employees not sign offers, accept earnest money or accept downpayments on their homes. Anyone who does so cannot participate in the Homequity program. Of course employees who choose to sell their homes completely independent of Homequity will still be reimbursed for allowable closing costs and the gross up. SuperVisions 60-672 0 - 86 - 20 Federal Register / Vol. 50, No. 167 / Wednesday, August 28, 1985/ Proposed Rules DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12 CFR Parts 7 and 21 [Docket No. 85-14) Reports of Suspected Crimes AGENCY: Office of the Comptroller of the Currency, Treasury. ACTION: Notice of proposed rulemaking. SUMMARY: The Office of the Comptroller of the Currency (OCC) proposes to eliminate Interpretive Ruling $7.5225 (12 CFR 7.5225) regarding reports by a national bank in the event of known or suspected crimes and replace it with a regulation that amends the requirements of the ruling. The proposed rule references a new report form, eliminates a requirement to send a report to the bank's bonding company, and extends the time for filing reports of mysterious disappearances. The current reporting system (§ 7.5225) is unduly burdensome on banks and has limited practical utility to the government agencies involved. The proposed rule is intended to make report filing more efficient for the banks and more useful for law enforcement agencies in identifying patterns of criminal activity and apprehending persons who commit crimes involving national banks. The proposed rule also clarifies the responsibilities of national banks in reporting and maintaining reco:ds of known or suspected crimes. DATES: Comments must be received on or before October 28, 1965. ADDRESSES: Comments should be directed to. Docket No. 85-14 Communications Division, 5th Fico:. 40 L'Enfant Plaza East, SW, Washington. DC 20219. Attention: Lynnette Carter. Comments will be available for public inspection and photocopying at the same location. The collection of information requirements contained in the proposed rule have been submitted to the Office of Management and Budget (OMB) for review under 44 U.S.C. 3504(h). Comments specifically addressing those information collection requirements should be submitted to: Office of Management and Budget, 726 Jackson Place, NW., Washington, DC 20500, Attention: Desk Officer for the Office of the Comptroller of the Currency: and should also be directed to this Office at the above address. FOR FURTHER INFORMATION CONTACT: Washington, DC 20218. (202) 447-1818. The OCC is charged with safeguarding the safety and soundness of national banks and is responsible for ensuring that national banks apprise law enforcement authorities of any potential violations of criminal statuts. Employee fraud, abusive insider transactions, check kiting schemes, and the like, can be serious threats to a bank's security and undermine the confidence and trust that individuals and businesses place in the banking industry. The OCC's primary concerns are losses sufficient in size or number to impact the safety and soundness of the bank, crimes committed by bank officials, and the adequacy of the bank's security systems and internal controls. The law enforcement community is concerned with receiving prompt reports with sufficient information to determine whether the matter warrants investigation and prosecution. A Working Group was formed in December 1984 to address problems and promote cooperation toward the goal of improving the federal government's response to white collar crime in federally-regulated financial institutions The Working Group is composed of senior officials of the financial institution regulatory agencies and the Justice Department. Among the 34857 |