[Federal Register Volume 62, Number 87 (Tuesday, May 6, 1997)]
[Rules and Regulations]
[Pages 24562-24567]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-11685]
[[Page 24562]]
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FARM CREDIT ADMINISTRATION
12 CFR Part 617
RIN 3052-AB33
Referral of Known or Suspected Criminal Violations
AGENCY: Farm Credit Administration (FCA).
ACTION: Final rule.
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SUMMARY: The Farm Credit Administration (FCA), by order of the FCA
Board, issues a final rule amending its regulations governing the
referral of known or suspected criminal violations. The objective of
this final regulation is to promote consistency, efficiencies, and
timeliness by Farm Credit System (FCS or System) institutions in
reporting, investigating, and aiding in the prosecution of known or
suspected criminal activities. Therefore, the final regulation requires
System institutions to notify law enforcement agencies of known or
suspected criminal violations that meet certain reporting thresholds.
Generally, a criminal violation must be reported under this part if
there is a reasonable basis to conclude that there was an intent to
``defraud'' a System institution and the amount of the actual or
potential loss meets the reporting thresholds.
The final regulation mandates the continued use of the FCA Criminal
Referral Form (hereinafter FCA Referral Form), which is located in the
FCA Examination Manual, for making a criminal referral.
DATES: The regulation shall become effective upon the expiration of 30
days after publication during which either or both houses of Congress
are in session. Notice of the effective date will be published in the
Federal Register.
FOR FURTHER INFORMATION CONTACT:
Eric Howard, Policy Analyst, Regulation Development Division, Office of
Policy Development and Risk Control, Farm Credit Administration,
McLean, VA 22102-5090, (703) 883-4498, TDD (703) 883-4444,
or
Jane Virga, Senior Attorney, Legal Counsel Division, Office of General
Counsel, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-
4020, TDD (703) 883-4444.
SUPPLEMENTARY INFORMATION:
I. Background
Pursuant to the Farm Credit Act of 1971, as amended, the FCA
regulates and examines FCS institutions for safety and soundness and
for compliance with Federal laws and regulations. Violations of Federal
laws and regulations could undermine public confidence in the FCS and
affect the safety and soundness of FCS institutions. System
institutions have the responsibility to establish and maintain
safeguards to detect, deter, and report criminal activity involving the
assets, operations, or affairs of the institution. Law enforcement
agencies need to receive timely and specific information from FCS
institutions on known or suspected criminal violations to determine
whether investigations and prosecutions are warranted.
The Interagency Bank Fraud Working Group (BFWG) was formed to
address concerns that financial institutions were becoming increasingly
vulnerable to insider fraud and prosecutions were not keeping pace with
criminality, and to promote cooperation toward the goal of improving
the Federal Government's response to white-collar crime in the Nation's
federally insured and/or regulated financial institutions. The BFWG
consists of the Office of the Comptroller of the Currency, the Board of
Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the Office of Thrift Supervision, the National Credit
Union Administration, the Farm Credit Administration, the Federal
Bureau of Investigation, the U.S. Secret Service, the Department of
Justice, and the U.S. Department of the Treasury. The objectives of the
BFWG were to facilitate the reporting of criminal activity by financial
institutions and to enhance the law enforcement agencies' ability to
investigate and prosecute the matters reported. To accomplish these
objectives, the BFWG developed uniform reporting standards and
processes for filing criminal referrals and developed a model
regulation.
Following the BFWG's guidance, the FCA proposed a regulation that
was published in the Federal Register on October 13, 1992 (57 FR
46819). The comment period for the proposed regulation amending part
617 closed on November 12, 1992. Pursuant to the commenters' request,
the FCA Board agreed to republish the proposed regulation in order to
afford the public another opportunity to comment. The reproposed
regulation was published in the Federal Register on June 20, 1994 (59
FR 31562). The FCA considered and addressed all comments to the
proposed regulation in the reproposed regulation.
Following the reproposal, there were several requests that FCA
staff meet with the commenters to discuss issues and problems that
arise in the area of criminal referrals. Commenters believed that it
would provide a better opportunity for them to present their views on
the reproposed regulation. Hence, after the comment period closed, FCA
staff met with the commenters in Sacramento, California, on September
27, 1995. This meeting was held in compliance with the FCA Board's
Policy Statement FCA-PS-37 published in the Federal Register on April
1, 1992 (57 FR 11083), which addresses communications with the public
during the rulemaking process.
During the meeting, commenters expounded on their written comments.
After the meeting, several attendees provided written confirmation of
the meeting discussions. No new substantive comments were made at the
meeting and, thus, comments made at the meeting are not separately
described herein. These follow-up letters and minutes of the meeting
are retained in the FCA's rulemaking file and are available for public
review.
II. Analysis of Comments to the Reproposed Regulation and FCA Responses
A. The Need for a New Criminal Referral Regulation
Several commenters questioned the need for a new criminal referral
regulation and argued that the existing regulation (found in 12 CFR
part 617) is adequate to ensure the proper reporting of criminal
referrals. The FCA disagrees and believes that the existing criminal
referral regulation should be revised because it is out-of-date and
fails to reflect the arms-length relationship between the FCA and the
System.
The existing regulation, first promulgated in 1982, has no minimum
reporting thresholds and requires the reporting of all criminal
violations. Further, the existing regulation does not contain
procedures adequate to ensure consistent System-wide reporting. A 1982
interpretative letter from the FCA to the President of each Farm Credit
Bank introduced procedures not included in the regulation at part 617.
The letter indicated that dollar-reporting thresholds could be applied
in certain circumstances and emphasized the significant discretion
District Bank counsel had in reviewing cases of suspected violations.
At present, some institutions report all violations and some follow the
1982 interpretative letter and only report criminal violations
exceeding certain thresholds, which in some cases is $50,000. This
final rule supersedes the guidelines provided in the 1982
interpretative letter and the existing regulation. The final rule
establishes reporting thresholds that all System institutions must
follow.
[[Page 24563]]
The existing regulation established slightly different procedures
for reporting violations allegedly committed by institution personnel
and procedures for reporting violations allegedly committed by
borrowers. The existing regulation specifically requires that criminal
referrals concerning institution personnel be reported to the Chief
Examiner of FCA's Office of Examination and that those concerning
borrowers be reported to the FCA. The regulation also specifies that
the Chief Examiner is to refer cases concerning criminal law violations
by institution personnel to the U.S. Attorney, while the general
counsel of the Farm Credit district is to refer criminal law violations
by borrowers to the U.S. Attorney and report the referral to the FCA's
General Counsel. The final regulation makes the reporting procedures
for institution personnel and borrowers the same. It requires
institutions to make these referrals directly to the appropriate
Federal law enforcement authorities and to provide copies of all
referrals to the FCA's Office of General Counsel. It is the Office of
General Counsel that, in practice, monitors criminal referrals and has
primary contact with Federal law enforcement authorities. The final
regulation reflects that role in addition to bringing greater
consistency to the referral process.
In addition, the existing regulation is not consistent with the
BFWG's recommendations concerning reporting thresholds, which have been
implemented by the other Federal financial regulatory agencies. The
BFWG, which included the FCA, established the same thresholds for all
Federal financial regulatory agencies. The BFWG believed that uniform
thresholds would enhance the ability of the Federal financial
regulatory agencies and the law enforcement agencies to detect,
investigate, and prosecute known or suspected criminal violations. The
Department of Justice, as a member of the BFWG and oversight agency for
the Offices of the U.S. Attorneys, assisted in the establishment of the
thresholds. Therefore, as a participant in the BFWG and in concurrence
with the Department of Justice's judgment on this matter, the FCA is
establishing the reporting thresholds as recommended by the BFWG.
Although the FCA's final regulation has been tailored, as
appropriate, to address concerns raised by agricultural lending, it is
patterned on the BFWG's model regulation and the rules promulgated by
the other Federal financial regulatory agencies. The FCA continues to
believe that the FCA criminal referral regulation should incorporate
the core principles of the model regulation.
B. Reporting Threshold Limits
The dollar amount that would trigger the requirement to make a
criminal referral has been a matter of some controversy. The proposed
and reproposed regulation established reporting thresholds of $1,000
and $5,000 for known and unknown suspects, respectively, and $0 for
institution personnel. (The term ``unknown suspect'' is used where a
criminal violation has occurred but no reasonable basis exists for
identifying the perpetrator.) Although commenters supported the $0
reporting threshold for institution personnel, they argued that the FCA
should adopt higher reporting thresholds for borrowers. The commenters'
principal objection to the $1,000 and $5,000 thresholds was that few
investigations or prosecutions by Federal law enforcement authorities
result from referrals unless the amount at issue is substantial.
Several commenters suggested that a $50,000 reporting threshold for
borrowers would be appropriate. One commenter suggested that reporting
thresholds should be the same for borrowers and unknown suspects.
Another commenter stated that if the FCA was not mandating the use of a
Uniform Criminal Referral Form it should not mandate the use of uniform
reporting thresholds.
The BFWG first recommended reporting thresholds of $1,000 for known
suspects and $5,000 for unknown suspects. The BFWG subsequently revised
the thresholds and recommended reporting thresholds at $5,000 for
borrowers and $25,000 for unknown suspects. The BFWG has not changed
its recommendation of $0 for institution personnel. The Federal law
enforcement authorities that are part of the BFWG, including the
Department of Justice, believe these revised reporting thresholds are
appropriate and have specifically stated that they want to receive all
criminal referrals meeting these thresholds.
In the final regulation reporting thresholds for institution
personnel will remain at $0, so that any criminal act by institution
personnel will be reported. After careful evaluation of the BFWG's
recommendations and the commenters' concerns, the Agency also believes
that the reporting thresholds should be increased for both known and
unknown suspects. Thus, the FCA is increasing the threshold for known
suspects from $1,000 to $5,000. The threshold for unknown suspects is
also increased from $5,000 to $25,000. This action responds to the
commenters' requests for higher thresholds. It also is consistent with
the BFWG's revised recommendations on reporting thresholds, which the
BFWG raised in response to commentary after the model regulation was
first proposed.
The use of uniform reporting thresholds will enhance the ability of
the Federal financial regulatory agencies and the law enforcement
agencies to detect, investigate, and prosecute known or suspected
criminal activities. Therefore, the final regulation establishes
reporting thresholds of $0 for institution personnel, $5,000 for known
suspects, and $25,000 for unknown suspects.
C. Compliance Costs
Many of the commenters expressed concern about the cost of
compliance with the regulatory requirements for making a criminal
referral. The commenters were concerned that criminal referrals are
costly and time-consuming, yet rarely result in investigations, much
less prosecutions. For example, one commenter indicated that it took 40
hours of an employee's time to investigate an allegation and complete a
criminal referral form. Another commenter indicated that legal counsel
was necessary to evaluate the sufficiency of evidence or the
appropriateness of making certain criminal referrals.
The FCA recognizes that System institutions will incur costs to
comply with the final regulation just as they currently incur costs to
make a criminal referral. The FCA believes that the benefit of timely
and consistent reporting of criminal referrals at the new, higher
reporting thresholds will outweigh the expense of compliance. Also, the
regulation will standardize the reporting process and ensure that
institutions apply uniform standards to all affected parties
(borrowers, employees, officers, and directors). However, compliance
costs can be minimized. For instance, an institution is not required to
conduct an exhaustive investigation of every reported violation.
Rather, an institution is only required to conduct an inquiry
sufficient to complete the FCA Referral Form.
D. Defining Potential Loss
Several commenters believed that the FCA's discussion of
``potential loss'' in the preamble to the reproposed regulation needed
further clarification. The preamble indicated that potential loss would
always equal the amount of the collateral conversion or financial
[[Page 24564]]
misstatement. A number of commenters disagreed with this
interpretation. They pointed out that in some instances a lender may
reasonably expect the potential loss to be smaller or even zero. This
could occur, for example, if a financial misstatement, although in
excess of $5,000, was insignificant in light of the borrower's overall
financial position. Similarly, a lender might reasonably expect no loss
on a loan, despite a conversion of collateral worth more than $5,000,
if the remaining collateral well exceeded the lender's requirements and
no other obstacle to full repayment existed. Finally, the commenters
argued that if a lender discovered a financial misstatement or
collateral conversion only after the loan was repaid as agreed, the
absence of any actual loss should take precedence over any
retrospective view of potential loss.
The final rule continues to state that lenders must refer crimes
when the ``actual or potential loss'' exceeds the applicable
thresholds, but the parenthetical ``(before reimbursement or
recovery)'' has been deleted. Nevertheless, the FCA continues to
believe that when an institution experiences an actual loss, the
reporting thresholds in Sec. 617.2 govern whether a referral is
required and are to be applied before reimbursement or recovery. The
fact that a borrower reimburses the institution after the fact or that
the converted collateral is recovered is irrelevant in determining
whether a criminal referral is required. However, when the amount of
any actual loss is not yet known, the FCA has concluded that the lender
should make a reasonable assessment of the amount of the potential loss
at the time of discovery of the criminal activity and use that amount
to determine if a referral is required. The lender may base this
assessment on the amount of the collateral conversion or financial
misstatement, or on the reasonable estimate of loan loss attributable
to the conversion or misstatement, or another method that is reasonable
under the circumstances. When an estimate of potential loss is
expressed as a range, a referral is required if any part of the range
exceeds the applicable threshold.
To further clarify, System institutions are advised that where
criminal intent is not suspected, no criminal referral need be made
because, in most circumstances, there would be no criminal violation
regardless of the actual or potential loss. If it is clear that an act
was merely negligent and there was no criminal intent, a referral would
be inappropriate. Nor is a criminal referral required if there is clear
intent to defraud but no actual or potential loss results. A loss (or
potential loss) over the threshold amount and the requisite intent must
coincide before a criminal referral is required.
Some commenters suggested that extenuating circumstances might
argue against prosecution in a situation where a criminal referral is
required. An institution may always express its view on whether
prosecution does or does not appear to be warranted to the Federal
authorities, including a U.S. Attorney or investigatory agency. A well-
reasoned recommendation against prosecution in appropriate cases should
address any perceived inequities in the criminal referral process
without undermining the uniformity that the criminal referral
regulations seek to promote.
There may also be situations where a System institution wishes to
refer a suspected criminal violation involving a dollar amount under
the threshold amount. System institutions should be aware that the
final regulation does not affect, in any way, an institution's
discretion to make a criminal referral that is below the reporting
thresholds to the appropriate law enforcement authorities. Indeed, a
System institution should always bear in mind its obligation to uphold
the integrity of the Farm Credit System and practice sound credit
management. Thus, for example, the repeated conversion of collateral or
the conversion of large amounts of collateral should be reported even
where the actual or potential loss does not meet the threshold
requirements.
E. Discretion To Make a Criminal Referral
The preamble to the reproposed regulation attempted to clarify the
extent of an institution's discretion to make a criminal referral.
Commenters requested that the substance of the preamble discussion on
discretion or the language in the current Sec. 617.7160 be included in
the final regulation. Current Sec. 617.7160 provides that ``it shall be
the function of the general counsel of the Farm Credit district * * *
to determine if there is substantial evidence that a violation * * *
has occurred * * *.'' The commenters also believed that further
discussion on discretion is necessary in the preamble to the final
regulation to avoid unnecessary referrals.
In response to the commenters' request, the FCA has incorporated
guidance on discretion in the regulatory text as well as in the
preamble. The final regulation incorporates language on discretion in
new Sec. 617.1(d), which provides that a System institution is
responsible for determining whether there appears to be a reasonable
basis to believe that a criminal violation has occurred and, if so, to
report the violation to the proper law enforcement authorities. The FCA
did not adopt the language in current Sec. 617.7160 because the term
``substantial evidence'' may suggest a higher evidentiary standard than
may be warranted in determining whether a criminal violation may have
occurred.
The FCA reiterates that, generally, a criminal violation that must
be reported under this part involves a determination that there is a
reasonable basis to believe that a borrower or institution personnel
intended to ``defraud'' an institution through violation of a Federal
criminal statute. Institutions, therefore, must seek to determine
whether a misrepresentation of assets or a collateral conversion, for
example, was done inadvertently or with the intent to defraud the
institution. This determination involves the exercise of considerable
discretion. In ascertaining whether a criminal referral is appropriate,
an institution should consider all facts and circumstances, including
those that go to the question of intent. If the institution is
persuaded that there is no evidence of intent and, hence, no criminal
violation, then it need not make a criminal referral. However, an
institution should adequately document the basis for its determination
that there was no criminal intent, especially when the institution
suffers a loss. While System institutions are not required to consult
legal counsel in determining whether an activity involved criminal
intent, they may prefer to do so in close cases.
F. Probability of Prosecution
Several commenters urged the FCA to include in the final regulation
a provision that would allow System institutions to make a referral
determination based on the probability of prosecution of the subject of
the criminal referral. Commenters asserted that some U.S. Attorneys
have established informal dollar thresholds for prosecution that are
much higher than the reporting thresholds established by the BFWG. The
commenters stated that in their experience some U.S. Attorneys will not
prosecute violations in amounts below these informal thresholds.
The Department of Justice, a participant in the BFWG and the
oversight agency for the Office of the U.S. Attorneys, helped establish
and fully supports the thresholds. While it is true that prosecution
for low dollar amounts is rare, the FCA believes that the new reporting
thresholds are
[[Page 24565]]
appropriate and that law enforcement agencies should have the chance to
determine whether a criminal referral above these amounts is
investigated and prosecuted. Thus, the FCA has decided not to
incorporate this proposal in the final regulation.
G. Discovery of a Criminal Violation
Several commenters correctly noted an inconsistency in the language
of reproposed Sec. 617.2(a) and (b). Reproposed Sec. 617.2(a) required
System institutions to refer criminal activity after a
``determination'' that a violation has occurred. Reproposed
Sec. 617.2(b) required forwarding an FCA Referral Form to the FCA after
a System institution ``has discovered (or should have discovered)'' a
violation. Commenters also requested that the FCA limit its references
to due diligence in the final regulation. Specifically, several
commenters requested that the FCA delete the language ``(or should have
discovered)'' from Sec. 617.2(b).
The FCA agrees that the due diligence standard is already
established in Sec. 617.2(a) and therefore applies to all aspects of an
institution's criminal referral process. Consequently, the FCA is
deleting Sec. 617.2(b) and moving the requirement that an FCA Referral
Form be forwarded to the FCA's Office of General Counsel to
Sec. 617.2(a).
These changes make it clear that the obligation to make a criminal
referral arises when management has determined that there is a known or
suspected criminal activity, not when management ``has discovered (or
should have discovered)'' a violation.
H. Time Limit To Make a Criminal Referral
Several commenters requested that the 30-day period during which a
System institution must make a criminal referral be amended to reflect
the varying complexity of some criminal referrals. Although the FCA
recognizes System concerns, the Agency does not believe a change is
warranted. The final regulation continues to provide that referrals
must be made within 30 days of determining that a criminal violation
appears to have occurred. The FCA believes that in the great majority
of situations it is reasonable to expect that System institutions will
be able to make a criminal referral within 30 days of determining that
a violation has occurred. In unusual situations involving complicated
facts, a System institution may need more than 30 days to make a
complete criminal referral detailing all relevant information to law
enforcement authorities. If so, System institutions should make a
preliminary criminal referral to the appropriate law enforcement
authorities and follow up as soon as possible to ensure that a complete
accounting of the facts and circumstances are reported to the law
enforcement authorities. Finally, a System institution should not delay
making a complete and accurate criminal referral because it is involved
in a sensitive workout with a borrower or the borrower is under
bankruptcy protection.
I. Transferring Responsibility for Making Criminal Referrals
Several commenters queried whether the final regulation would allow
System institutions that have primary responsibility for making
criminal referrals to transfer this activity to their supervising bank.
While the institution retains the ultimate accountability for
exercising due diligence to ensure the discovery, appropriate
investigation, and reporting of criminal activity as required by
Sec. 617.2(a) and for ensuring that the criminal referral is made, a
criminal referral can be made on the institution's behalf by a
supervising System bank. This may be done pursuant to a formal
agreement whereby the System bank making the referral is acting as an
agent for the institution with primary responsibility.
J. Referrals to State and Local Authorities
One commenter urged the FCA to amend the final regulation so that
System institutions are merely encouraged to file copies of the FCA
Referral Form with State and local authorities rather than be required
to make such a criminal referral. The FCA never intended to require
that System institutions use the FCA Referral Form to refer State and
local violations to State and local authorities or to inform State and
local authorities of Federal violations. Rather, Sec. 617.2(b)
(formerly Sec. 617.2(c) in the reproposed regulation) requires a System
institution to notify the appropriate State or local law enforcement
authorities when there is a known or suspected violation of State or
local criminal law. The FCA continues to believe that this is a
reasonable requirement that will help ensure the safety and soundness
of the institution and the System without imposing an undue burden. A
System institution may use whatever means it deems appropriate to make
the referral. If a System institution thinks it appropriate, it can
recommend that the State or local authorities not pursue a criminal
investigation and prosecution.
K. Adding a Section Incorporating the Language of Current Sec. 617.7140
One commenter requested that the language of Sec. 617.7140 of the
existing regulation be incorporated in the final regulation. Section
617.7140 outlines the two most common types of malfeasance that System
institutions encounter--conversion and false financial statements--and
cites the statutory sources in the Federal criminal code. The FCA does
not believe that this information needs to be included in the final
regulation because it is included in the FCA Referral Form.
L. FCA Referral Form
Commenters expressed some general concern about whether System
institutions would be using the FCA Referral Form found in the FCA
Examination Manual or a Uniform Criminal Referral Form developed by the
BFWG. System institutions were concerned that a Uniform Criminal
Referral Form would not be appropriate for reporting violations arising
from agricultural lending, such as collateral conversions of
agricultural products.
The FCA concludes that System institutions should continue to use
the FCA Referral Form found in the FCA Examination Manual rather than a
Uniform Criminal Referral Form developed by the BFWG. The FCA believes
that the FCA Referral Form is more closely tailored to the types of
crimes most often encountered in agricultural lending. It has been
designed to be easy to use and to ensure the proper reporting of all
required information. The form itself contains instructions and a brief
summary of statutory provisions pertaining to criminal violations that
most often occur in the context of agricultural lending. Thus, the
final regulation requires System institutions to continue to use the
FCA Referral Form for all criminal referrals. The FCA will review the
FCA Referral Form periodically as part of its ongoing effort to ensure
that System institutions have access to the best guidance possible.
M. Civil Liability for Making a Criminal Referral
Several commenters expressed concern that System institutions and
institution personnel did not have immunity from civil liability for
making a criminal referral. The FCA's reproposed regulation did not
address this issue and no provision has been provided in the final
regulation as this matter has been addressed by a statutory amendment.
The Farm Credit System Reform Act of 1996 amended the Farm Credit
Act of
[[Page 24566]]
1971 to provide System institutions and their personnel with immunity
from civil liability for making a criminal referral. See 12 U.S.C.
2219e. Now, FCS institutions and their personnel who disclose to a
government authority information proffered in good faith that may be
relevant to a possible violation of any law or regulation are not
liable to any person under any law of the United States or of any State
for the disclosure or for any failure to notify the person involved in
the possible violation.
As a result of this statutory change, FCS institutions and their
personnel enjoy immunity similar to that of the other financial
institutions and their personnel. See 12 U.S.C. 3401, 3403; 31 U.S.C.
5312, 5318. See also 31 CFR part 103, subpart B.
N. Miscellaneous Clarifications
1. Section 617.2(a) was amended to clarify the FCA's intent that,
although in the exercise of due diligence it is the direct lender's
responsibility to make a criminal referral involving a loan it has
made, when a Federal land bank association services a loan made by a
Farm Credit Bank, the association must notify the Bank of any known or
suspected criminal violation involving that loan.
2. Section 617.2(c) was amended to specify that System institutions
must notify both the appropriate Federal law enforcement authorities
and the FCA offices in those instances requiring urgent attention.
3. Former Sec. 617.3(a) and (b) were combined for brevity and
renumbered as Sec. 617.3(a). That section provides that if a criminal
referral involves a member of the board of directors, discretion may be
exercised in notifying such member of the criminal referral. The FCA
intends the term ``exercise of discretion'' to mean that the
institution must determine whether, under the circumstances, only those
members of the board of directors not involved in the criminal
violation should be notified of the criminal referral.
4. Former Sec. 617.3(c) has been renumbered as Sec. 617.3(b) and
amended to provide that a System institution shall make all required
notifications under a surety bond or other contract. A System
institution is no longer required to make an initial determination of
whether there is a loss prior to notification.
List of Subjects in 12 CFR Part 617
Banks, banking, Criminal referrals, Criminal transactions,
Embezzlement, Insider abuse, Insvestigations, Money laundering, Theft.
For the reasons stated in the preamble, part 617 of chapter VI,
title 12 of the Code of Federal Regulations is revised to read as
follows:
PART 617--REFERRAL OF KNOWN OR SUSPECTED CRIMINAL VIOLATIONS
Sec.
617.1 Purpose and scope.
617.2 Referrals.
617.3 Notification of board of directors and bonding company.
617.4 Institution responsibilities.
Authority: Secs. 5.9, 5.17 of the Farm Credit Act (12 U.S.C.
2243, 2252).
Sec. 617.1 Purpose and scope.
(a) This part applies to all institutions of the Farm Credit System
as defined in section 1.2(a) of the Farm Credit Act of 1971, as
amended, (Act) (12 U.S.C. 2002(a)) including, but not limited to,
associations, banks, service corporations chartered under section 4.25
of the Act, the Federal Farm Credit Banks Funding Corporation, the Farm
Credit System Financial Assistance Corporation, the Farm Credit Leasing
Services Corporation, and the Federal Agricultural Mortgage Corporation
(hereinafter, institutions). The purposes of this part are to ensure
public confidence in the Farm Credit System, to ensure the reporting of
known or suspected criminal activity, to reduce potential losses to
institutions, and to ensure the safety and soundness of institutions.
This part requires that institutions use the Farm Credit Administration
Criminal Referral Form (hereinafter FCA Referral Form) to notify the
appropriate Federal authorities when any known or suspected Federal
criminal violations of the type described in Sec. 617.2 are discovered
by institutions.
(b) The specific referral requirements of this part apply to known
or suspected criminal violations of the United States Code involving
the assets, operations, or affairs of an institution. This part
prescribes procedures for referring those violations to the proper
Federal authorities and the Farm Credit Administration. No specific
procedural requirements apply to the referral of violations of State or
local laws.
(c) Nothing in this part should be construed as reducing in any way
an institution's ability to report known or suspected criminal
activities to the appropriate investigatory or prosecuting authorities,
whether Federal, State, or local, even when the circumstances in which
a report is required under Sec. 617.2 are not present.
(d) It shall be the responsibility of each System institution to
determine whether there appears to be a reasonable basis to conclude
that a criminal violation has been committed and, if so, to report the
matter to the proper law enforcement authorities for consideration of
prosecution.
(e) Each referral required by Sec. 617.2(a) shall be made on the
FCA Referral Form in accordance with the FCA Referral Form instructions
relating to its filing and distribution.
Sec. 617.2 Referrals.
(a) Each institution and its board of directors shall exercise due
diligence to ensure the discovery, appropriate investigation, and
reporting of criminal activity. Within 30 calendar days of determining
that there is a known or suspected criminal violation of the United
States Code involving or affecting its assets, operations, or affairs,
the institution shall refer such criminal violation to the appropriate
regional offices of the United States Attorney, and the Federal Bureau
of Investigation or the United States Secret Service or both, using the
FCA Referral Form. A copy of the completed FCA Referral Form,
accompanied by any relevant documentation, shall be provided at the
same time to the Farm Credit Administration's Office of General
Counsel. In the event that a Farm Credit bank makes a loan through a
Federal land bank association which services the loan, the Federal land
bank association must inform the Farm Credit bank of any known or
suspected violation involving that loan and the Farm Credit bank shall
refer the violation to Federal law enforcement authorities under this
section. A report is required in circumstances where there is:
(1) Any known or suspected criminal activity (e.g., theft,
embezzlement), mysterious disappearance, unexplained shortage,
misapplication, or other defalcation of property and/or funds,
regardless of amount, where an institution employee, officer, director,
agent, or other person participating in the conduct of the affairs of
such an institution is suspected;
(2) Any known or suspected criminal activity involving an actual or
potential loss of $5,000 or more, through false statements or other
fraudulent means, where the institution has a substantial basis for
identifying a possible suspect or group of suspects and the suspect(s)
is not an institution employee, officer, director, agent, or other
person participating in the conduct of the affairs of such an
institution;
(3) Any known or suspected criminal activity involving an actual or
potential loss of $25,000 or more, through false
[[Page 24567]]
statements or other fraudulent means, where the institution has no
substantial basis for identifying a possible suspect or group of
suspects; or
(4) Any known or suspected criminal activity involving a financial
transaction in which the institution was used as a conduit for such
criminal activity (such as money laundering/structuring schemes).
(b) In circumstances where there is a known or suspected violation
of State or local criminal law, the institution shall notify the
appropriate State or local law enforcement authorities.
(c) In addition to the requirements of paragraph (a) of this
section, the institution shall immediately notify by telephone the
appropriate Federal law enforcement authorities and FCA offices
specified on the FCA Referral Form upon determining that a known or
suspected criminal violation of Federal law requiring urgent attention
has occurred or is ongoing. Such cases include, but are not limited to,
those where:
(1) There is a likelihood that the suspect(s) will flee;
(2) The magnitude or the continuation of the known or suspected
criminal violation may imperil the institution's continued operation;
or
(3) Key institution personnel are involved.
Sec. 617.3 Notification of board of directors and bonding company.
(a) The institution's board of directors shall be promptly notified
of any criminal referral by the institution, except that if the
criminal referral involves a member of the board of directors,
discretion may be exercised in notifying such member of the referral.
(b) The institution involved shall promptly make all required
notifications under any applicable surety bond or other contract for
protection.
Sec. 617.4 Institution responsibilities.
Each institution shall establish effective policies and procedures
designed to ensure compliance with this part, including, but not
limited to, adequate internal controls.
Dated: April 25, 1997.
Floyd Fithian,
Secretary, Farm Credit Administration Board.
[FR Doc. 97-11685 Filed 5-5-97; 8:45 am]
BILLING CODE 6705-01-P
