Iowa Banking Law Blog

Against this background . . .
Apr. 29, 2013The Dickinson Law Newsroom, Iowa Banking Law Blog
background checks for bank employees

In recent months, we’ve noticed a substantial increase in the number of Section 19 waiver actions on the FDIC’s monthly enforcement actions. Some highly publicized cases involving termination of employees after several banks stepped up their background check efforts apparently prompted employees or their employers to pay renewed attention to Section 19 of the FDIC act.

As we have blogged about in the past, Section 19 prohibits an insured financial institution from employing or continuing to employ any individual that has been convicted of committing a crime of dishonesty, breach of trust, or money laundering unless the individual has received written consent from the FDIC. This can mean that an individual who is found to have been convicted of such crimes must resign or be terminated, if currently employed, and go through the waiver application process, or obtain a waiver prior to being employed. For some crimes, there is an absolute ban for 10 years against being employed by a bank. These include receiving commission or gifts for procuring loans, theft, embezzlement or misapplication by a bank officer or employee; filing or making false or misleading bank entries reports or transactions; concealing assets from a conservator or receiver; bank fraud; obstructing examinations and certain others.

For purposes of Section 19, pre-trial diversion programs (e.g., deferred adjudication) or similar programs are considered convictions by the FDIC.

Knowing violations of Section 19 can result in penalties of up to $1 million per day, up to 5 years in prison or both.

The waiver process takes time, but there are a number of di minimis exceptions that do not require a waiver application. FDIC guidance in this regard has continued to evolve and expand.

Banks that have a good system for checking for criminal convictions prior to hiring and periodically thereafter reduce the risk of violating Section 19. While this may be an unsavory task, as it can produce information that does not preclude employment but could unnecessarily taint or prejudice the perception of an individual who may have something in his or her background that should not disqualify the person from being hired, it is an important one.

To avoid this unnecessary outcome while at the same time assuring that a financial institution has undertaken the proper due diligence, we often assist banks in conducting background checks and reviewing the information. Where there is a potential disqualifying conviction, we alert the institution and proper steps can be taken. Where there may be something that is not serious or disqualifying, we retain the information as the institution’s agent for compliance and examination purposes along with all other information reviewed so that, come examination time, proof of proper due diligence is available.

Similarly, we have been asked to help affected individuals navigate the waiver process, which, as with any regulatory application, can be difficult to handle effectively and efficiently.

Regulators most assuredly would not respond well to the idea that background checks were never performed because the institution is located in a place where it seems “everybody knows everything about everybody” due to a community’s size or personal relationships. The better approach when asked, “what have you done lately” is to be able to say that employees have been checked out, records are available for the regulator to inspect, and that the bank periodically updates such information on a regularly scheduled basis.

Only by undertaking thorough background checks can an insured institution be assured that it has met its duty to comply with Section 19. Remember, it’s never too late to start if it is something that has been overlooked in the past.

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Categories: Banking Law
Industry Categories: Banks & Financial Institutions
Practice Area Categories: Banking Law

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