Trends in Bank

Compliance &
Enforcement:
2003 Annual Update
THOMAS P. VARTANIAN
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON LLP
vartath@ffhsj.com
 MOLE HILLS BECOME
MOUNTAINS BY ADDING DIRT
 Bank Enforcement Actions
OCC FRB FDIC OTS

2003 403 53 72 16

2002 365 23 131 43

2001 410 21 129 49

2000 348 37 78 60
 GSE Enforcement Actions

2003 OFHEO Actions Fannie Mae Freddie Mac

Informal Duration Gap

Settlements David Glenn - $125,000

Freddie Mac –
$125,000,000
Notice of Charges Leland Brendsel -
$38,000,000
Vaughn Clarke -
$3,000,000
 Trends Behind the Numbers

gCriminalization of Banking
gPiling On
gAccounting
gBSA/Anti-Money Laundering
gAbusive Lending
gInternal Controls
gOrders to Liquidate
gMutual Fund Fees/Trading
 Criminalization of Financial
Services
gSection 802 / 18 USC 1519
— Knowing Destruction, Alteration,
Concealment or Falsification of Records,
Documents or Tangible Objects
— Intent to Impede, Obstruct or Influence an
Investigation or Proper Administration of any
Matter by Agency or in Relation or
Contemplation of Such Matter
— 20 Years Incarceration
 Discerning What is Prohibited

gCan We Tell What is Prohibited?

— Deletion of Emails or Voicemails
— Throwing Out or Destruction of Files
— Thrashing or Handling Personal Notes
gWhat Are the Implications in the Real World?
— Document Retention Programs
— Email Rules and Archiving
 The Sentencing Matrix

gOfficer Fraud gArmed Robber in a Ski

— No Criminal History
Mask
— No Criminal History
— Single Count of
— 5 - 6 Years
Securities Fraud
— Two Time Felon
— 20 Years in Prison
— 7 - 9 Years
— Career Offender
— 15 - 20 Years
 Piling On
gJoint or Concurrent Jurisdiction Problems
— Multiple Federal Bank Regulators
— SEC
— State AGs and Agencies
— Civil & Civil Rights Divisions of the
Department of Justice
— U.S. Attorney
— Federal Trade Commission
— Foreign Regulators
 Bank Compliance Trends

gAccounting
— Loan Loss Reserves

— Earnings Management

— FASB 133 – Derivative Accounting

— Certifications
 Critical Accounting Cases

gPNC – July 2002 – FRB, OCC, SEC

— $762 million in loans moved off balance
sheet
— 2001 earnings overstated by 52%
gCapital One – July 2002 – OTS, FRB
— $247 in loan losses added
— Change accounting for uncollected fees and
finance charges
 Critical Accounting Cases

gAuditors for FNB Keystone

— OCC Levies $300,000 fine
— FDIC sues for $187 million
gFreddie Mac – 2003 - OFHEO
— Earnings Management
— Loan Loss Reserves
— Accounting for Derivatives
 Banking Agencies vs. The
Accountants
gNew Removal, Suspension and Debarment
Powers
gCollateral Actions and Standards May Impact
Accountants
gAgencies Can Bring Immediate Removal
Actions
— How Does the Bank Complete its Audit?
 Bank Compliance Trends

gBSA/Anti-Money Laundering
— Deposit Relationships

— Foreign Bank & Customer Scrutiny

— Governmental Requests

— OFAC Civil Penalties

 Selected Cases
gRiggs National Bank – 2003 - OCC
— BSA Violations
— Hire Consultant
— Evaluate Competency of Compliance Officer
and Bank Capabilities
— Assess Levels of Risk
— Board Responsibilities –
— Sufficient Authority to BSA Authority
— Competency of Performance
— Assure Compliance with Policies and
Procedures
— Training Program
 Selected Cases
gBank of America – OFAC – 2003
— Fined for Funds Transfer Violations in 1999
and 2000 involving
gBank of China -OCC
— US Branches Must Comply
— Contract with a Vendor
gRepublic National Bank of Houston -OCC
— VP Allegedly Failed to File Over 1000 CTRs in
One Year
gFirst National Bank of Wiggins (Mississippi) – OCC
— Develop and Implement Compliance Program
 Patriot Act Requests/Sharing for
Information
gUnder Section 314a of the USA Patriot Act:
— FinCen Requests to Financial Institutions

— 167 Requests

— Involved 962 “Subjects of Interest”

— On Behalf of 11 Federal Law Enforcement

Agencies
 Bank Compliance Trends

gAbusive Lending
— Credit Card Banks

— Subprime Lenders

— Conditioning Combinations

— Capital & Liquidity Agreements

 Selected Cases
gNational Bank of the Great Lakes (Saks) - 2003 –
OCC
— Limitations on Cash Payments and Credit Card
Transactions
— New Policies and Procedures
gFirst Consumers National Bank – 2003 – OCC
— Credit Card Annual Fee Refunds
gClear National Bank of San Antonio – 2003- OCC
— Reimburse Fees and Interest Charges
— Use of FTC Act
 Bank Compliance Trends

gRisk Management
gInternal Controls
gRelationships with Third Party Customers
 Selected Cases
gLitigious & J.P. Morgan Chase – July 2003 – FRB
— Enron Aftermath
— Facilitation of Customer’s SPE and Pre-Paid
Commodity forward Transactions
gCredit Lyonnais – 2003 – FRB
— BHCA Violations
— Concealment of Ownership of Executive Life
Companies and Assets
gCanadian Imperial Bank – 2003 – FRB
— Enron Structured Financings
 Bank Compliance Trends

gOrders to Merge/Liquidate
gKeep Well Capital & Liquidity Agreements
 Selected Cases

gSecurity National Bank (Capital Management

Investor Holdings, Inc.) – 2003 - OCC
— Capital Infusion

— Pledge of Assets

— Orderly Dissolution of the Bank by March

2004
 Bank Compliance Trends

gFund Fees/Disclosure
gLate Trading/Market Timing
 Selected Cases

gSecurity Trust Company, NA – 2003 – OCC

— Includes Actions Against Former Executives

— SEC Filed a Civil Suit

— Criminal Charges Pending

 Other Bank Compliance Trends

gHMDA Actions
— 7 Actions by FDIC in 2003

gGLB Security Actions

— Goleta National Bank
— Colorado National Bank
 Other Bank Compliance Trends

gExecutive Abuse
gVendor Management
g Internet Security
 Bank Enforcement Tools

gInternal Investigations
— Control of the Process

— Fair Notice to Employees

gPrivilege Considerations
— Threat of Ancillary Actions (Shareholder
Litigation, Criminal Actions)
— Attorney/Client Privilege
 Bank Enforcement Tools

gConsultants
— 27 Actions Required the Hiring of
Consultants in 2003
— Reports on Management, Policies,
Procedures and Financial Statements
gManagement Succession
— May Lead to Merger
gBoard Augmentation
— Good People/Bad Situations
 Verbum Sat Sapiens

gView Compliance From an Integrated

Management Perspective
— Lots of Moving Parts Now
— Does the Bank’s Divisions and Systems
Facilitate this Integrated Approach?
gThink Broadly & Deeply When Considering the
Enforcement Implications of Actions
— Criminal Consequences
— Multi-Agency Enforcement
— Redundant Penalties
Verbum Sat Sapiens

gFocus on the New Risks in New Laws

— Everybody Looks at the Obvious

— Watch the Elements of Intent

gStay On Top of Agency Trends and Tools

— Helps You to Know What to Focus On

— Know What to Negotiate and What to Accept

 Verbum Sat Sapiens

gFocus on Corporate Governance

— We Are Seeing the End of the Inside
Chairman
— Consider How to Bridge the Gap Between
Giving the Board Too Little and Too Much
Information