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Also in keeping with the agreement, FDIC has developed a computer system to track criminal referrals and to provide status reports to the initiating regional and field offices. FDIC's regulation requiring banks to report suspected crimes is expected to be adopted within the next week or two. Most banks are already reporting on the new form. FDIC is participating in the development of an FFIEC school on white collar crime that will become a permanent source of training for FDIC bank examiners. In short, FDIC is complying in every aspect with the points of agreement. We view the agreement and the commitment it represents to be a major turning point in the government's response to white collar crime and insider abuse in the nation's financial institutions.

8. Question:

Submit copies of all revised regulations, banking circulars, newsletters, internal communications, updates to the manual for examiners, and any other written information pertaining to enforcement efforts of the BSA undertaken by your agency since January 1, 1985.

8. Answer:

Attached and labeled Exhibit IV are copies of various Regional Director Directives, Bank Letters, and rule interpretations issued by the Treasury Department that were distributed since January 1, 1985. Presently one Bank Letter is in process concerning banks' requests for special exemptions for customers believed to warrant exemption from the currency transaction reporting requirements of the regulation, and one Regional Director Directive is in process concerning examiner review of the banks' copies of CTRS.

Title I (Supervisory Authority Over Depository Institutions)

In 1978 Congress gave banking regulators authority to impose civil money penalties for violations of laws, rules and orders. The new authority gave the agencies the flexibility they needed to impose penalties on individuals or institutions for violations which did not rise to a criminal violation.

A. Question:

Specifically, is there any merit to considering giving the regulators authority to impose civil money penalties upon financial institutions for their failure to report under BSA, or should the Treasury continue to have the authority to impose such penalties?

A. Answer:

We doubt that significantly better use of civil money penalties (CMP) would be made by bank regulators if given such authority without first addressing the fundamental problem implicit in the BSA regulations. As presently written, the regulations do not clearly differentiate between criminal and civil violations. The standards are essentially the same. If a violation is

committed willfully it can be pursued under either civil or criminal guidelines. Each FDIC referral to the Department of the Treasury regardless of whether we cite apparent civil or criminal violations, is first evaluated to determine whether potential criminal violations exist. If the evaluation indicates possible criminal violations, Treasury authorizes a criminal investigation. If not, the merits of a civil proceeding are assessed. Although the interagency guidelines permit FDIC to recommend civil money penalties where there is evidence that violations were committed with a continuing disregard for the law, where violations have not been corrected or where the bank fails to show good faith in cooperating with the FDIC to correct violations and to install proper systems and procedures, in practice. Treasury has not pursued CMPS on these bases. We believe the willfulness test in Section 103.47 (31 C.F.R. § 103.47), which is as we stated above is almost identical to the criminal standard, substantially precludes the effective use of CMPS to correct continuing violations due to improper procedures and recalcitrant bank officials. We would suggest amending 31 CFR § 103.47 by adding the phrase "or continuing disregard of the law" (or similar language).

B. Question:

To what extent could these powers be improved upon to lend support in appropriate cases to criminal law enforcement investigations?

B. Answer:

It is Treasury's current practice to request the bank regulatory agencies to suspend all civil enforcement efforts relating to BSA compliance, including examinations, when a criminal investigation has been authorized. Because of this practice, banks that have been identified as having problems with BSA compliance can escape BSA examinations while the criminal proceeding is ongoing, resulting in continuing noncompliance during that period and leaving the supervisory agency uninformed about BSA practices in the bank. Such information can be crucial to our regulatory process in acting on applications, changes in control, etc.

The separation of civil and criminal processes in connection with BSA enforcement is contrary to the approach taken by the Bank Fraud Working Group with regard to violations of Title 18 U.S.C. and probably results from the BSA's virtually identical standard for both civil and criminal violations. civil and criminal proceedings were permitted to move on two tracks, simultaneously, information developed on the civil side might prove helpful in the criminal investigation. In any case, the bank would not be allowed to continually violate the law while the criminal case is unfolding.

If

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Titles VI and VII (Change in Bank Control Act and Change in Savings and Loan Control Act respectively)

What modifications, if any, do you feel are necessary to deny acquisitions of control to unqualified or dishonest individuals?

A. Answer:

On March 24, 1986, the FDIC revised its policy of confidentiality for notices filed under the Change in Bank Control Act of 1978 (CBCA). The amended regulation requires a person who has filed a notice of proposed acquisition of control with the FDIC to publish in a local newspaper an announcement of the FDIC's acceptance of the notice. The regulation also makes certain information regarding accepted CBCA notices available to the public upon request.

The revised policy requiring newspaper publication and authorizing public disclosure is designed to increase the amount of timely and useful information available to the public and to increase the FDIC's sources of information in connection with its statutory review of acquisitions and changes in control, thereby enhancing the FDIC's ability to carry out the purposes of the CBCA, namely, to prevent dishonest or unqualified persons from acquiring control of federally insured banks.

The newspaper publication would invite comment by the public, for a twenty-day period, and would, we believe, bring to our attention, relevant information about the proposed acquirors that under our previous confidentiality policy may not have become known to us until the transaction had been consummated.

First,

There are two other areas where the CBCA could be modified. transactions which are subject to Section 3 of the Bank Holding Company Act of 1956 (12 U.S.C. 1842) are not subject to the Change in Bank Control Act. In certain cases, the applicability of the Bank Holding Company Act depends on a determination by the Board of Governors, after notice and opportunity for hearing, that a company has power, directly or indirectly, to exercise a controlling influence with respect to management or policies of a bank. (Section 2(d), 12 U.S.C. 1841(d)). Pending proceedings by the Board of Governors should have the effect of staying the time within which the FDIC may act under the Change in Bank Control Act.

Second, the Change in Bank Control Act (12 U.S.C. 1817(j) (15)) provides for civil penalties for violations, but there is no specific provision for divestiture or prohibiting an acquiring party from exercising control if stock was acquired in violation of the Act. Specific authority authorizing such actions would promote enforcement of the Act.

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B. Question:

Should more specific standards regarding what constitutes sufficient integrity or criteria used to determine what would not be in the best interest of the depositors or the public, be included by statute or imposed by regulation?

B. Answer:

Under the CBCA, regulatory agencies are empowered to impose a rather severe penalty on an individual. A disapproval of a CBCA Notice effectively precludes a person from exercising ordinary property rights with respect to ownership of an insured bank. A denial based on the factor of personal integrity is the most difficult to support and the most sensitive in terms of individual rights. A legislative definition of lack of integrity would facilitate administration of the Act. Any such definition should provide discretion to the FDIC (and other agencies) to make findings in cases not specifically covered by the definition. We would be pleased to work with this Committee in developing a proposal. Better definition by regulations is an alternative to legislation and we are studying the approach taken by the Federal Home Loan Bank Board. At this time, however, we are not in a position to make any formal suggestions or recommendations.

Should the agency be given more time in which to disapprove an application for change of control (currently within 60 days, not to exceed 90 under certain circumstances)?

C. Answer:

Generally, the time limits included in the CBCA are adequate to permit FDIC to properly exercise its responsibility. We would, however, support an extension of time based on specific criteria, one of which might be to assure compliance with BSA regulations as proposed in H.R. 3892. Additional time might also be appropriate to fully assess the impact of a criminal investigation or indictment on the competence and integrity of proposed acquiror or to complete background investigations of foreign nationals.

What is the standard used for the term "willful" under the Act? definition create problems for the agency? If so, what are they?

Does this

D. Answer:

The problem we encounter with the term "willful" as used in the CBCA is whether it relates to a person's intent to acquire control in a bank or intent to violate the statute. More difficulty is encountered in attempting to show that a proposed acquiror acted willfully and "in concert" with others to violate the statute. Better definition of these and other terms used in the CBCA is certainly desirable.

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E. Question:

What problems, if any, is the agency incurring in obtaining sufficient relevant information of foreign nationals seeking to acquire U.S. depository institutions?

E. Answer:

We encounter several problems when attempting to verify the backgrounds of foreign nationals proposing to acquire insured State nonmember banks. First, no central file of arrest and conviction records exists, so we are required to check with a number of agencies. In addition to the FBI, we routinely check with Interpol, CIA, and Customs; and check with the State Department, DEA and other agencies if circumstances indicate they might have records.

Second, background checks with many of these agencies cannot be completed within the sixty day time period allowed under the law. The third problem is that information, when located, is often not of the substance and quality needed to support a disapproval. We are open to suggestions from law enforcement agencies on how to proceed in this area and would welcome an initiative to improve the system currently in place.

Title XI; Right to Financial Privacy Act (RFPA)

There is no question that the Right to Financial Privacy Act has impeded the flow of information from banks and bank regulators to federal law enforcement agencies. The Act represents both a legal and psychological barrier that impedes the successful investigation and prosecution of financial criminals. Its dysfunctional impact, we believe, reaches well beyond the legitimate privacy concerns that Congress intended to protect. As we see it, the Act's major flaws are as follows:

(1) Psychologically, the Act has created the perception in the public's mind that Congress is more concerned about the privacy of individuals, including potential criminals, than it is about effectively enforcing criminal violations against financial institutions. This factor, among others, has contributed to the lack of an effective deterrent in recent years to would-be financial criminals.

(2) The Right to Financial Privacy Act has had a troubled and confusing history. Conflicting interpretations of its meaning and reach abound. As an example, each of the federal financial institutions regulatory agencies holds a different opinion on how the Act should be applied to criminal referrals. At a minimum, the Act should be revised to clarify, once and for all, the intent of the Congress.

(3) The Act, as interpreted by most interested parties, extends the customer-privacy protections to bank insiders by virtue of the fact they are often also customers of the bank. Insider abuse of federally insured financial institutions is unquestionably a major cause of bank failures and of losses to the FDIC's insurance fund. We believe that insiders, by virtue of their position in federally