View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

<a-r^£ 4 - # *



4? u s ^ >



02? v^ tjo 1.


i \^S=^d?Sl~M S


f t 'f

^ r t i nS.
«c ^




APRIL 12, 1990


y^ 4
na.n dt



Mr. Chairman and members of the Committee:

It is a pleasure to appear before

you today on behalf of the Federal Deposit Insurance Corporation and to
describe the relation between our supervisory activities and the enforcement
of statutes applicable to fraud and other abuses committed by insiders against
financial institutions.

My name is Kenneth L. Walker and I am the Regional Director of the Dallas
Region of the FDIC's Division of Supervision.

The Dallas Region, for purposes

of supervision, includes Texas, Colorado, New Mexico and Oklahoma.

We are the

primary federal supervisor for 967 state-chartered nonmember commercial banks
with $50.1 billion in assets.

In addition, the Dallas Region also monitors

some 1,297 national and state member banks located within the four state area,
and has new substantial responsibilities as back up supervisor of 172 savings
associations (this does not include 115 institutions placed in conser­
vatorship) .

For the most part, my prepared remarks deal with examiner

training, examination procedures, administrative enforcement actions, criminal
referrals, and cooperation with criminal enforcement agencies.

However, to

provide a proper framework for these topics, I would first add a few general
observations about the mission of the Division of Supervision.

Mr. Chairman, as you know, the FDIC's primary supervisory responsibility is to
help ensure the safety and soundness of insured financial institutions, thus
protecting the deposit insurance Funds.

We attempt to do this by evaluating

the respective institution's financial condition, the effectiveness of
management and accounting controls, and, when needed, recommending or
mandating remedial actions.

We view management and accounting controls as critical elements in the
successful operation of a financial institution and for this reason we
encourage banks to adopt a program of recurring external audits as a means of
ensuring that adequate controls are in place for limiting or preventing

In December 1988, the FDIC issued a policy statement urging banks to

have an annual external audit performed by an independent party.

Then, by way

of a follow-up in January of this year, the FDIC adopted a "Statement of
Policy Providing Guidance on External Auditing Procedures for State Nonmember

The follow-up policy recommends basic external auditing procedures as

a less costly alternative for banks not choosing to have a financial statement

Unless we have reason to believe otherwise, we do not approach an institution
with a preconceived notion that insider fraud and abuses are present.
Nevertheless, our examiners are trained to detect the signs of illicit insider
actions and when we come upon suspicious circumstances, we pursue the matter.

In fact, in 1987, we developed a list of "red flags" to assist our examiners
in the early detection of apparent fraud and insider abuse.

Although it is

not possible to detect all instances of apparent fraud and insider abuse,
potential problems can often be uncovered when certain warning signs are
evident .

Examples of the subject areas that the "red flags" cover include:

linked finaneing/brokered transactions, loan participations, offshore
transactions, lending to buy tax shelter investments and wire transfers.


Last year, we published a list of additional "red flags" which encompass other
supervisory areas

(see attachment).

In addition, we are now in the process

of updating and expanding the 1987 fraud and abuse "red flag" list.


New examination personnel begin their careers as Assistant Examiners and
usually serve a minimum of three or more years prior to attending an
assessment center evaluation to qualify them as commissioned examiners.
During these first three years it is mandatory that Assistant Examiners attend
four examiner schools.

Among other things, these schools provide training in

investigatory techniques, criminal irregularities, and detection of insider

During this period the Assistant Examiner is provided on-the-job

training and instruction from supervisors in the detection of insider abuse
and fraud.

Our training in connection with insider abuse covers several areas.


other things, our examiners gain a general familiarity with the principal
criminal statutes applicable to insured institutions and with the Right to
Financial Privacy Act.

They also receive training in how best to complete

standard criminal referral forms used by all financial institution

These referral forms were designed to elicit the type of

information deemed most important to the FBI and the Department of Justice in
assessing the prosecutable merit of the suspected criminal violation.
Additionally, examiners receive instruction on potential problems and warning


signs pertaining to bank fraud and insider abuse.

The Division of

Supervision’s Manual of Examination Policies also sets out alternative
investigative procedures appropriate to the particular circumstances and
addresses the handling of criminal violations when they are discovered.

Training does not stop once an Assistant Examiner is commissioned as an
examiner. Additional training includes the "White Collar Crime" school, the
FBI School on Bank Fraud" and various other seminars conducted by federal
enforcement agencies, colleges and universities, or private vendors.

Additionally, in January, 1987, the Dallas Region designated nine examiners
for special training and use in conducting special investigations of complex
fraudulent activities.

These examiners are located in field offices

throughout the Region and can be called upon to assist when there is evidence
of complex fraudulent activities.

In addition to having attended the white

collar crime school, each of these examiners has been provided additional
training to develop their skills in detecting misconduct and insider abuse.


Bank management has the primary responsibility for preventing and detecting
fraud and insider abuse.

When bank management or employees suspect a criminal

violation, they are required under Part 353 of the FDIC's Rules and
Regulations to make referrals in the form of filing a Criminal Irregularity
Report with the U.S. Attorney and the appropriate investigatory agency.



management does not cooperate or follow through with suspected violations, we
will make the referrals ourselves.

Usually referrals by banks are a result from such events as teller shortages,
false entries, theft, false statements on loan applications, embezzlement or
misapplication of funds, check kiting, mysterious disappearance of bank funds,
or money laundering.

Since the beginning of 1988, state nonmember banks in

the four states that comprise the Dallas Region of the Division of Supervision
made 453 criminal referrals.

Apparent criminal violations that are detected by examiners are brought to the
the bank's attention for reporting by bank management in accordance with FDIC
regulations for disciplinary or corrective action by the bank's board of

However, in isolated cases, it is appropriate to delay noti­

fication to bank officials, for example, where senior bank officials are
implicated or the examiner has reason to believe that an official might
destroy evidence, warn the target, or otherwise jeopardize an effective
criminal or civil investigation.

An examiner's detection of management abuse

in an operating financial institution generally results in one or more
administrative enforcement actions by FDIC and, in some cases, in criminal
^ef®rrals to the respective U.S. Attorney and the appropriate criminal
investigatory agency.

Criminal referrals prepared by examiners are reviewed

by regional office staff and forwarded to the FBI and U.S. Attorney as soon as

However, when examiners detect significant apparent violations, we

immediately contact the FBI and the U.S. Attorney by telephone before the


examiner prepares the respective written referral.

When requested by the law

enforcement agents, our examiners will assist in developing evidence and
appearing as expert witnesses.

Since the beginning of 1988, examiners of the

Dallas Region made 48 criminal referrals, of which 31 involved insiders.

With regard to affiliated parties, such as accountants or lawyers, that
are engaged in abusive activities affecting the institution, we are
now -- subsequent to FIRREA -- able to subject these persons to civil
enforcement actions as they are "institution-affiliated parties."

Prior to

FIRREA, if these persons engaged in abusive activities , we would order the
institution to cease all relationships with the person, if the institution had
not done so on its own.

If the persons activity rose to the level of criminal

activity, the institution, or the FDIC, would refer the case to the U.S.
Attorney or appropriate investigatory agency.

In 1988 the Division of Supervision revised its examination policy to increase
the level and frequency of on-site supervision of banks.

Our goal is to have

an on-site examination every 24 months for well-rated institutions (those
rated 1 or 2) and one every 12 months for problem and near-problem
institutions (those rated 3, 4, or 5).

Additionally, we would likely schedule an examination or visitation of an
institution if information comes to our attention, such as information
addressed in the Attachment, which might indicate the possibility of insider
fraud or abuse.


Mr. Chairman, in your letter of invitation you inquired about the use of

The use of investigators is usually limited to situations

where possible fraud or abuse is detected and where there is a need for one of
our trained examiners to develop information necessary to make a referral to
the U.S. Attorney and the FBI or prepare documentation for possible admin­
istrative actions under Section 8 of the FDI Act.

Investigations of

violations of U.S. criminal statutes are normally performed by representatives
of the FBI after a referral has been made.

While examiners are available to

assist the FBI in these investigations and to serve as a source of infor­
mation. the responsibility for the criminal investigation rests with the
federal law enforcement agencies.

Notwithstanding the preceding, the circumstances underlying a criminal
referral by an examiner generally will also call for an administrative
enforcement action pursuant to several provisions of the FDI Act.


quently, examiners will investigate and determine whether we have grounds for
possible enforcement actions against insiders for violations of unsafe and
unsound banking practices.

Once this information is developed, it is reviewed

by our attorneys to determine if there is sufficient evidence to proceed.


usual course in such instances is to either order the removal of the offending
party from the bank, impose civil money penalties, or both.

Since the

beginning of 1988, the Dallas Region of the Division of Supervision has
recommended 64 removal and 57 civil money penalty actions; of these numbers 21
and 23 cases, respectively, are still pending.

We have been successful in

obtaining 11 final orders of removal and 7 orders assessing money penalties.

The remainder have been terminated for such reasons as parallel procedures
were concluded by another regulatory agency, the subject was removed from the
bank through other means or restitution was made to the bank.

In cases involving potential losses of $200,000 or more to an institution, or
which involve senior officials of an institution, the case is forwarded by the
FDIC's Washington Office to the Department of Justice's Criminal Tracking

Under the Tracking System, we are easily apprised of the status and

outcome of these cases.

Our relations with the criminal enforcement and other supervisory agencies has
always been good.

Recent developments within the Dallas Region of the

Division of Supervision promise to make our cooperative efforts more

We are participating in local Bank Fraud Working Groups that have been
organized by the U.S. Attorneys in three of the federal judicial districts
within the Dallas Region.
Task Force.

We are also participants in the Dallas Bank Fraud

These working groups encourage the exchange of information,

improve coordination of criminal investigations and open channels of
communication prior to and after a formal referral is made.

Informal meetings

and contacts occur regularly and are encouraged so that dialogue between
regulators and law enforcement agencies begins before a formal referral is


In one judicial district, the bank regulatory supervisors are meeting with the
FBI to create a consolidated index of referrals that are made within the

This will enhance our ability to identify and exchange information

on individuals of concern to more than one agency within the district.

In another district, the agencies are organizing an inter-agency committee for
recommending a priority list of cases to the FBI and the U.S. Attorney for
investigation and prosecution.

For each case on the list, the referring

agency will stand ready to provide examiners to assist with additional
investigations or act as expert witnesses.

We support this move to give the supervisors some input into the prioritizing
of cases for prosecution.

We anticipate that our meeting with the

inter-agency group next month will result in these cases being actively

In your letter of invitation, Mr. Chairman, you also asked us to

provide case studies or examples.

At the aforementioned meeting we will

recommend high priority for several referrals that Division of Supervision
examiners submitted concerning a person who was an insider at several banks.

Among other things, the referrals center on the insider's use of his influence
and position to cause a series of transactions through which the banks made
loans to nominees and paid unjustified renumeration to the nominees as a means
for these borrowers to keep the loan payments current.

The nominee used the

loan proceeds to purchase stock of the parent bank holding company from the
insider at a time when the insider was having financial difficulties.
scheme resulted in significant losses to the banks.


We will also recommend priority in prosecuting the same insider for his
alleged involvement in maneuvering his banks into signing data processing
contracts for rates far and above what was available from the same vendor.


this instance, the insider received direct payments from the vendor for
various stated reasons.

We believe that the recent changes made by FIRREA in the enforcement area have
been very positive.

For example, the "logjam” that we were experiencing in

section 8(e) management removal actions has been broken and we are
reactivating some of these actions.

Also, FIRREA amends section 8(e) of the

FDI Act to make it clear that a removal order disqualifies the person from
present and future associations with any other insured institution.

In conclusion, the Division of Supervision is vitally concerned with the
threat that fraud and insider abuses pose to the continued safety and
soundness of insured institutions.

We believe the increased penalties and

stronger enforcement authority, in general, will prove to be a formidable
deterrent to both insider fraud and abuse and fraud by other institutionaffiliated parties.

Thank you Mr. Chairman.
Committee may have.

I will be pleased to answer any questions the