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Federal Reserve Bank of Dallas
DALLAS, TEXAS

75222

C i r c u l a r N o . 78-9
J a n u a r y 25, 1978

IMPROPER PAYMENTS BY BANKS
AND BANK HOLDING COMPANIES

TO ALL MEMBER BANKS
AND BANK HOLDING COMPANIES IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:

T h e Board of G o v e r n o r s of th e Federal R e s e rv e System ,
C om p tro ller of the C u r r e n c y , a nd F e de ra l Deposit I n s u r a n c e C o r p o r ­
ation h a v e is s u e d a policy statem ent c o n c e rn in g im p r o p e r paym ents
by b a n k s a n d b a n k h olding c om p a n ies.

P r in te d on the r e v e r s e of

th is c i r c u l a r is a copy of th e p r e s s r e l e a s e a nd a copy of the FEDERAL
REGISTER docum ent is e n c lo s e d .
All m ember b a n k s a r e in c lu d e d in th is d is t r i b u t i o n for
informational p u r p o s e s .
Sincerely yo u rs,
Robert H . Boykin
F irst Vice President
E n c lo s u re

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

FEDERAL
press

RESERVE

release

January 17, 1978

For immediate release

The Federal bank regulating agencies today issued notice that
political contributions and certain other questionable payments by banks
and bank holding companies may be regarded as unsafe and unsound banking
practices subject to appropriate corrective action.
In a joint policy statement the agencies said they will use their
full legal authority to halt such practices, including cease and desist
orders and referrals to law enforcement agencies for possible prosecution.
Such payments may also become a relevant factor in consideration of
applications submitted by organizations that made them.
The policy statement was issued by the Comptroller of the Currency
(supervisor of national banks), the Federal Deposit Insurance Corporation
(Federal supervisor of insured State chartered banks that are not members
of the Federal Reserve System) and the Federal Reserve Board (supervisor
of State chartered member banks and of bank holding companies).
Referring to recent disclosures by a small number of banks and
bank holding companies of certain questionable payments the statement
expressed the belief of the Federal regulators that continuation of such
practices would reflect unfavorably on the banking system as a whole and
thus undermine public confidence.
The text of the joint policy statement is attached.
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FEDERAL RESERVE SYSTEM
COMPTROLLER OF THE CURRENCY
FEDERAL DEPOSIT INSURANCE CORPORATION
Joint Policy Concerning Improper Payments
by Banks and Bank Holding Companies
Docket No. R-0140
AGENCIES:

Board of Governors of the Pederal Reserve System, Comptroller

of the Currency, and Federal Deposit Insurance Corporation.
ACTION:

Policy Statement.

SUMMARY:

The policy statement reflects the judgment of the bank super­

visory agencies that certain questionable payment practices as have
been disclosed by a few banks and bank holding companies, may,

in addition

to their possible illegality, constitute unsafe and unsound banking
practices.

Notification is given that the agencies intend both to take

appropriate steps under the law to deal with such practices where found
to exist, and to adopt additional examination procedures to evaluate
the effectiveness of individual institutions' controls for ensuring
that improper and illegal payments are not undertaken.
EFFECTIVE DATE:

January 13, 1978.

FOR FURTHER INFORMATION CONTACT:

C. Keefe Hurley, Jr., Senior Attorney,

Legal Division, Board of Governors of the Federal Reserve System, Washington,
D.C.

20551 (202-452-3269); Robert B. Serino, Director of Enforcement

and Compliance, Comptroller of the Currency (202-447-1847); or
Gerald F. Lamberti, Projects and Planning Specialist, Federal Deposit
Insurance Corporation

(202-389-4483).

SUPPLEMENTARY INFORMATION:

This policy statement is issued pursuant

to the Financial InstitutioreSupervisory Act, 12 U.S.C. 1818, and
supervisory authority of the Board of Governors of the Federal Reserve

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System with respect to member banks, bank holding companies. Edge and
Agreement Corporations; the Comptroller of the Currency with respect
to national banks; and the Federal Deposit Insurance Corporation with
respect to nonmember insured banks.

Statement of
Policy Concerning Improper and Illegal Payments
by Banks and Bank Holding Companies

In recent years a number of United States corporations have
disclosed that they have engaged in certain questionable practices
with respect to foreign and domestic payments.

These practices have

included improper and illegal political contributions, bribes, kickbacks,
etc., and have taken place, in some instances, with the knowledge,
consent and even the participation of senior corporate management.
Many of the foreign payments, legal under United States law at the time
they were made, would, as a result of the recently enacted Foreign
Corrupt Practices Act of 1977, Pub. L. No. 95-213, 91 Stat. 1494 (1977),
be illegal if made today.

In addition, under Federal and State laws,

certain political contributions and other types of payments are illegal.
Recently, a few banks and bank holding companies have dis­
closed that, over a period of time, they also have engaged in questionable
payment practices either directly or through subsidiary banks.

Of the

questionable payment practices disclosed to date, most have consisted
of domestic political contributions,

while information presently available

does not indicate any significant involvement by banks or bank holding
companies in any of the other types of questionable payment practices
disclosed by other United States corporations, the agencies recognize

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that the circumstances in which questionable domestic and foreign payments
were made by corporations may influence banks and bank holding companies.
Thus, although the available information indicates that the number of
banking firms that have engaged in improper payment practices is small,
federal bank supervisory agencies are concerned that such practices,
if permitted to continue, would come to reflect adversely on the banking
system as a whole.

It is the judgment of the agencies that the practice

of making political contributions and certain other payments, in addition
to their possible illegality, may constitute an unsafe or unsound banking
practice.
The devices used by banking organizations to make political
payments have included compensatory bonuses to employees, improperly
designated expense accounts, excessive fees or salaries paid to officers,
and low or zero interest rate loans.

In addition, political contributions

have been made by providing equipment and services without charge to
candidates for office.

Many of these devices involved clear departures

from acceptable accounting practices.

Consequent lack of corporate

accountability raises serious questions regarding the effectiveness
of an institution's own internal audit procedures.

For banking organizations

to engage in illegal or unethical activities and to attempt to conceal
those activities by the use of irregular accounting practices could
only serve to undermine public confidence in the banking system.
All banks and bank holding companies subject to the Federal
supervisory authority of the Board, the Comptroller of the Currency
and the FDIC are expected not only to conduct their operations in accordance
with applicable laws but to refrain from making payments that may con­

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stitute unsafe and unsound banking practices.

Where violations of law

or unsafe and unsound banking practices result from improper payments,
the appropriate agency will exercise its full legal authority, including
cease and desist proceedings and referral to the appropriate law enforce­
ment agency for further action, to ensure that such practices are terminated.
In appropriate circumstances, the fact that such payments have been
made may reflect so adversely on an organization's management as to
be a relevant factor in connection with the consideration of applications
submitted by the organization.
In the near future, the agencies expect to institute add!
tional procedures in conjunction with their general and specialized
examinations of banks and bank holding companies designed to evaluate
individual institutions' controls for ensuring adherence to provisions
of law prohibiting unsafe or unsound practices, including the making
of contributions to or corporate expenditures on behalf of candidates
for elective office, officials of foreign or domestic governments, and
others.

Banks and bank holding companies are urged to review their

own corporate policies and accounting practices to ensure that the funds
of the institution are applied "

Dated:

January 9, 1978

Dated:

January 11, 1978
John G. Heimann
Comptroller of the Currency

Dated:

January 13, 1978
leorge A. LeMaistre
Chairman, FDIC


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102