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TESTIMONY OF

L. WILLIAM SEIDMAN
CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION

ON

THE PROSECUTION OF FINANCIAL CRIMES

BEFORE THE

COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE

10:00 A.M.
TUESDAY, JULY 24, 1990
ROOM 226, DIRKSEN SENATE OFFICE BUILDING

Good morning, Mr. Chairman and members of the Committee.

It is

a pleasure be here today to discuss the actions the Federal
Deposit Insurance Corporation and the Resolution Trust
Corporation are taking to identify and punish those involved in
fraud and abuse in the banking and savings and loan industries
and to comment on pending legislation to improve prosecutions of
financial institutions crime.

The FDIC and the RTC have long put the fight to curtail
fraudulent activity in financial institutions at the top of
their regulatory agendas.

In the last five years, we have

developed specially trained fraud squads to pursue those
committing fraud and have given our examiners special tools to
help in detecting such abuses.

Greedy and unscrupulous

individuals, insiders, advisors or related parties must not be
allowed to profit at the expense of the deposit insurance funds
and the American taxpayer.

Our testimony will outline the FDIC and RTC programs to prevent,
detect and punish fraud and abuse by individuals and financial
institutions.

We also will comment on the amendments to the

Senate's omnibus crime bill, S. 1970, that address financial
institutions fraud and which were adopted by the full Senate on
July 11, 1990.

Those amendments are designed to provide the

banking regulators and law enforcement agencies with additional
tools to control fraudulent activities by banks and thrifts and
their insiders.




2

The FDIC and the RTC have authority to bring civil —
criminal —

but not

actions against banks and thrifts for fraudulent or

other unlawful activities.

Our prosecution of civil fraud cases

provides an additional significant role in the prosecution of
financial crimes.

We investigate every failed bank and thrift

to determine whether civil or criminal activity was involved in
a bank or thrift failure.

In addition, our examiners look

carefully for evidence of fraudulent activity during the regular
examination process of all open institutions.

In the case of

both failed and open institutions, we refer suspected criminal
activity to the appropriate law enforcement agencies.

We also provide much of the basic information needed by the law
enforcement agencies throughout all stages of a criminal
prosecution.

To that end, we participate in the regional

inter-agency bank fraud working groups to encourage
communication and improve coordination of criminal
investigations.

The FDIC also uses administrative enforcement actions to stop
fraud and abuse in operating institutions.

In addition, the

FDIC and the RTC bring civil suits for money damages and
restitution (against officers, directors and other insiders)
after an institution has failed.

Detecting and Reporting Fraud and Abuse in Open Institutions

FDIC examiners are trained to detect the signs of fraud and
other illicit or improper insider actions.




Potential problems

3
often can be uncovered when certain warning signs are evident.
In 1987, we developed a list of time tested Mred flags” to
assist our examiners in the early detection of apparent fraud
and insider abuse.

The "red flag" list has been expanded once

and now is in the process of being updated and expanded again.
Examples of the areas that the "red flags" cover include:
linked financing/brokered transactions; loan participations;
offshore transactions; lending to buy tax shelter investments;
and wire transfers.

When "red flag" warnings are detected,

specially trained members of our "fraud squad" may be called in
to pursue the matter using their special training.

Training and role of examiners.

New examination personnel begin

their careers as Assistant Examiners and usually serve a minimum
of three years before they can qualify as commissioned
examiners.

During these first three years, Assistant Examiners

are required to attend four schools that include training in
investigatory techniques and detection of insider abuse and
fraud.

Assistant Examiners also receive on-the-job training in

the detection of insider abuse and fraud.

Through the training process, our examiners gain a familiarity
with the principal criminal statutes applicable to insured
institutions.

They also learn how to complete the standard

criminal referral forms (Reports of Apparent Crime) used by all
financial institution regulators.

Additionally, examiners

receive instruction on potential problems and warning signs
pertaining to bank fraud and insider abuse —




namely, the red

4
flags.

The Division of Supervision's Manual of Examination

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

An examiner's detection of management fraud or other abuse in an
operating state nonmember bank generally results in one or more
administrative enforcement actions by the FDIC and, in some
cases, criminal referrals 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
possible.

However, when examiners detect significant apparent

violations, we immediately contact the FBI and the U.S. Attorney
by telephone before the examiner prepares the written referral.
When requested by law enforcement agents, our examiners will
assist in developing evidence and appear as expert witnesses.

Role of institutions.

Bank directors and management also bear

great responsibility for preventing and detecting fraud and
insider abuse.

Bank directors must assure that appropriate

internal controls are in place.

Bank management and employees

who suspect a criminal violation are required —
of the FDIC's Rules and Regulations —

under Part 353

to submit Reports of

Apparent Crime to the appropriate FDIC Regional Office, the U.S.
Attorney, the appropriate State Banking Authority and the
appropriate Federal investigative authorities (either the FBI,
the Secret Service, the Postal Service, or the IRS) within




thirty days of discovering the suspicious activity,
different forms are used for this purpose.

Two

The Report of

Apparent Crime (Short Form) is used to report suspected criminal
violations involving less than $10,000 and suspicious
transactions that indicate possible money laundering.

The

Report of Apparent Crime (Long Form) is used to report suspected
criminal violations involving amounts of $10,000 or greater and
all cases, regardless of amount, involving an executive officer,
director or principal shareholder of the institution.

Copies of Reports of Apparent Crime involving amounts of $10,000
or greater, those involving executive officers, directors and
major shareholders, and those involving suspected money
laundering are forwarded by the regional offices to the FDIC's
Special Activities Section in Washington.

Those reports are

reviewed and certain data from the reports are entered into an
automated records system.

During 1988 and 1989, the Special

Activities Section received 902 and 938 reports, respectively.

The Special Activities Section forwards Reports of Apparent
Crime indicating losses of $200,000 or more to the Department of
Justice for special tracking.

The individual U.S. Attorneys

then make decisions about which criminal cases to pursue.
Reports forwarded for tracking totaled 200 in 1988 and 284 in
1989.

The Department of Justice enters information from these

reports into a computer tracking system and periodically advises
the FDIC of their status.




6

Reports of Apparent Crime filed by banks usually 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.

FDIC "Fraud Scruad11 Investigations of Fraud

The FDIC has its own "fraud squad."

Created in 1986, it is a

national investigations unit that investigates fraud and other
criminal activities when necessary in operating institutions and
in all closed insured banks and in those thrifts that were
closed before January 1, 1989.

(The RTC's investigatory

activities will be addressed below.)

The FDIC's investigations unit is comprised of over 500
investigators and staff.

(This number does not encompass

attorneys, examiners and other staff who deal with fraud in
their day-to-day activities, but who are not full time
investigators or support staff for the "fraud squad.")
Investigators receive specialized training in all phases of
financial institution operations, accounting, investigative
techniques and specific fraudulent schemes.

The result is a

team of individuals who are well equipped to look into the
affairs of failed institutions, as well as operating
institutions when called upon to do so.




7
Each time a financial institution is declared insolvent, an
investigative team is dispatched to determine 1) what caused the
failure, 2) whether any criminal activity took place and
3) whether any professional liability claims exist.

The

investigations unit currently is pursuing approximately 942
active claims and investigations.

When possible criminal activity is discovered, the investigators
file criminal referrals with the appropriate law enforcement
agency.
made.

Since 1987, approximately 331 such referrals have been
The investigators also follow up on these referrals

through participation in the local bank fraud working groups.
These groups bring together law enforcement personnel and
representatives of the financial institution regulatory agencies
on a monthly basis to discuss various issues related to bank
fraud and other criminal activity.

Each of the FDIC's regional

offices and consolidated office sites has a designated
participant in the local working groups or a contact person for
the U.S. Attorney's offices and relevant investigative agencies.

Participation in these groups aids financial institution civil
and criminal fraud prosecution in many ways.

Few people are as

familiar with the records of the financial institution or have
the analytical expertise as the investigative team assigned to
the failed institution.

This expertise is made available in

formal and informal ways to aid civil and criminal authorities
in discovering, documenting and prosecuting fraud.

In some

instances, individual investigators are assigned full-time to a
grand jury investigation.




8

The investigations unit also documents and requests restitution
pursuant to the Victim and Witness Protection Act when
individuals are convicted of crimes involving failed financial
institutions.

RTC Investigations of Fraud in Closed Institutions

Investigations unit.

The RTC also has its "fraud squad” with a

corps of trained, experienced financial investigators.
RTC's Office of Investigations —
300 investigators and staff —

The

which now has approximately

projects to have 300

investigators alone by year-end.

The Office provides the

investigatory support to initiate civil and criminal recoveries
from thrift owners, managers and professionals —

such as

accountants and lawyers —- who caused losses through fraudulent
or criminal conduct or professional malpractice.

Recoveries can

come from insurance policies covering professional conduct or
directly from the assets of insiders and professionals.
Successful recovery, however, requires thorough investigation
and, in many instances, litigation.

The investigator's task is to:

gather facts about insider

abuse; identify the individuals who caused the thrift's losses;
assess the degree of culpability of each party —

from negligent

and reckless mismanagement to fraud or criminal conduct —

and

help determine whether and what sort of litigation should be
initiated to maximize recoveries.

Investigators are involved

throughout the civil litigation process, supporting the RTC
attorneys and outside counsel.




9
A second, but equally important, responsibility of the Office of
Investigations is to assist the Department of Justice and other
Federal agencies in prosecuting individuals who engaged in
criminal conduct, particularly those who benefited personally at
the taxpayers' expense.

RTC investigators are being trained to

work with law enforcement agents to achieve our mutual
objectives.

Similarly, law enforcement agents are being trained

to understand and respect the RTC's responsibility to recover
assets for the thrift receiverships.

The investigator's initial task after RTC is appointed
conservator of an insolvent thrift is to conduct a preliminary
investigation of the facts leading to insolvency and to prepare
a ’’Preliminary Findings Report.”

As of June 30, 1990, 397

Preliminary Findings Reports had been completed, representing
about 87 percent of the 454 thrifts under the RTC's control.

Insider abuse and misconduct in insolvent thrifts.

As a result

of our experience over the past few months, we estimate that:

Approximately 50 percent plus of RTC-controiled thrifts
have had suspected criminal misconduct referred to the
Department of Justice;

-




In about 40 percent of RTC-controiled thrifts, insider
abuse and misconduct contributed significantly to the
thrift's insolvency;

10

About 15 percent of the thrifts appear to have been
involved in irregular and possibly fraudulent
transactions with other financial institutions.

The average asset size of RTC-controlled thrifts is about $500
million, and they are complex organizations with numerous
subsidiaries and affiliates.

Many were owned or dominated by

one individual and operated more like real estate development
organizations, investment banks, or mutual funds than thrift
institutions.

This situation allows for abuse and lack of control.

It creates

opportunities for self-dealing, fraud, theft and other
misconduct to occur unabated.

The RTC works with other Federal

agencies and, where necessary, retains investigators with
specialty skills in securities, commodities, and other
disciplines to assist in documenting complex and sophisticated
schemes of abuse and misconduct by insiders and other affiliated
parties.

Trends and patterns of fraud and misconduct.

Evidence of

insider abuse and misconduct in RTC thrifts ranges from
embezzlement and loan fraud to complex schemes to generate paper
accounting profits that allowed cash to flow to thrift owners
through subsidiaries or personal holding companies.

Many of the

complex lending schemes involve over-valued property that was
swapped several times between borrowers or among various
thrifts.




These "land flip" schemes created false values and

11

generated excessive fees that were parceled out to appraisers,
brokers, developers and others —

including thrift insiders.

Real estate development loans were made with no recourse to the
borrower if the project failed.

We are investigating these

situations, as well as instances of unauthorized trading in
mortgage-backed securities, junk bonds and other financial
instruments in which insiders took the profits and pushed the
losses onto the institution.

The example of Drexel Burnham Lambert and Michael Milken is a
case in point.

As announced last month, a special FDIC and RTC

task force is actively and aggressively investigating possible
claims against Drexel and Michael Milken for substantial losses
suffered by failed financial institutions in junk bond
investments.

Based on preliminary information available to us,

we anticipate filing claims in the Drexel bankruptcy proceedings
against the $750 million pool being administered by the
Securities and Exchange Commission, and for any civil recoveries
available.

Abuses are more prevalent in the Southwest and Southern
California.
and Florida.

More recent problems are arising in the Northeast
The RTC's Central Region, comprising Arkansas and

11 midwestern states, reports far and away the lowest percentage
of thrifts exhibiting fraud and abuse —




less than 30 percent.

12

Civil Actions Against Directors. Officers, and
Institution-Affiliated Parties

When an insured depository institution fails, the FDIC or the
RTC becomes the legal owner of the institution's claims against
its former directors, officers, employees, attorneys,
accountants, and other professionals employed by the
institution.

In the case of every failed institution and those

placed in conservatorship, the FDIC or the RTC conducts an
investigation of potential professional liability claims.

These

investigations focus on whether the potential claim is
meritorious and, if so, whether it would be cost effective to
bring a civil suit seeking money damages.

The Professional Liability Section of the FDIC's Legal Division
is responsible for litigating the FDIC's cases involving:
directors' and officers' liability ("D&O"); attorney
malpractice; accountants' liability; commodity and securities
brokers' liability; claims under bankers blanket bonds; and
certain appraiser malpractice cases.

This section also works in

conjunction with the RTC's Office of Investigations to pursue
similar actions on behalf of the RTC.

Prior to February 1989, when the savings and loan
conservatorship program began, the FDIC had pending
investigations of professional liability claims involving
approximately 500 institutions.
lawsuits on file.




The FDIC also had more than 100

13
Following the merger with the Federal Savings and Loan Insurance
Corporation (FSLIC) in August 1989 and the creation of the RTC
—

which formally took over those savings institutions placed in

conservatorship after January 1, 1989 —

the FDIC became

responsible for the investigation of potential claims and the
prosecution of viable claims involving a vastly increased
caseload of institutions.

The FDIC and RTC currently are

conducting investigations in 1300 institutions and have filed
more than 500 lawsuits against former directors, officers and
other professionals for damages ranging from $1 million to
$1 billion.

The 1300 institutions we have responsibility for

in-house can be broken down as follows:

Banks

550 Institutions

Thrifts

(old FSLIC)

350 Institutions

Thrifts

(RTC)

400 Institutions

In 1989, the FDIC's and the RTC's recoveries for professional
liability claims totaled approximately $100 million.

This

figure includes old FSLIC recoveries taken in after the
August 9, 1989 merger.

During 1989, an additional $50 million

in recoveries was received by FSLIC prior to August 9 for
professional liability claims.

A rough breakdown of these

recoveries follows:

FSLIC Thrifts (prior to August 9)

$50 million

FSLIC Thrifts (after August 9)

$35 million

FDIC Banks (1989)

$60 million

RTC Thrifts (1989)




$4 million

14
Our recoveries for the first quarter of 1990 alone total more
than $100 million.

Settlements and judgments during the first

half of 1990 will produce recoveries totalling in excess of $200
million.

That is in excess of $1 million per day in recoveries.

Over the past few years, the FDIC has litigated claims involving
approximately 50 percent of those institutions for which it has
been appointed receiver.

This percentage of claims in

litigation may drop somewhat —
thrifts —

particularly as to the RTC

because of a scarcity of recovery sources, including

D&O insurance and personal assets among many of the potential
defendants.
«

The FDIC and the RTC contract with approximately 150 law firms
to prosecute professional liability claims.

Our in-house

attorneys supervise and manage this litigation to ensure
consistency in arguing legal issues and conformity to case plans
and budgets, among other things.

In-house attorneys also

directly conduct settlement negotiations involving claims.

Much of the litigation now pending in the Professional Liability
Section involves claims brought against former directors and
officers who managed the failed institutions.

These claims

range from fraud and insider abuse to grossly negligent failures
to conduct or supervise the financial institution's affairs.

Although historically many of the FDIC's cases are based on
abusive lending practices, that is not the only basis for filing




15
suits.

We also have brought suits based on the payment of

unreasonable dividends, imprudent or illegal investments in bank
buildings, speculative securities trading, unreasonable
compensation and expenses paid to directors and officers, and
fraudulent "land flips” and other complex real estate
transaction schemes.

As mentioned before, the FDIC and the RTC pursue those
directors, officers, and other professionals who have committed
fraud upon failed financial institutions if our investigation
supports such allegations.

However, it is not cost effective to

pursue suits against such individuals when the litigation costs
would exceed any collectible judgement.

In those cases in which

fraud or dishonest conduct by professionals is present, but in
which the FDIC or the RTC determines that cost considerations
prohibit filing civil suits, every effort is made to encourage
and assist criminal prosecutions by the appropriate law
enforcement authorities.

Fraud and dishonesty underlie FDIC claims brought under
financial institutions "bankers blanket" or fidelity bonds.
Fidelity bonds insure the financial institution against losses
caused by the fraudulent or dishonest activity of an
institution's employees.

The FDIC and the RTC have aggressively

pursued claims under fidelity bonds covering failed banks and
thrifts.

The FDIC's largest single recovery in the first

quarter of 1989, for example, involved the settlement of a bond
claim for $60 million.




16
Open Institution Enforcement

The Compliance and Enforcement Section of the FDIC's Legal
Division provides legal support, advice, and counsel to the
Division of Supervision ("DOS") and prosecutes civil enforcement
actions on behalf of DOS against depository institutions or
institution-affiliated parties whose activities pose a threat to
depositors or the deposit insurance funds.

The Compliance and

Enforcement Section acts as the »’district attorney's office” for
DOS, which must police the banking industry through such
administrative actions.

DOS and Compliance and Enforcement are

the first line of protection for the Federal deposit insurance
funds.

The Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 (FIRREA) greatly enhanced the enforcement powers of all
of the Federal banking agencies.

Civil money penalties for

violations of laws, rules, regulations and orders have increased
from $1,000 per day to ranges of $5,000 to $1,000,000 per day
per violation.

Call report penalties have increased from $100

per day per violation to ranges of $2,000 to $1,000,000 per day
per violation.

Other enforcement powers have been clarified —

such as jurisdiction over individuals separated from insured
depository institutions, personal liability of individuals to
insured depository institutions, records-keeping, and the like.
New enforcement powers have been added, including the right to
suspend temporarily the deposit insurance of an institution
operating with no tangible capital under the capital guidelines




17
of the appropriate Federal banking agency, and the
cross-guaranty provisions rendering affiliated depository
institutions liable for losses reasonably anticipated by the
FDIC when a commonly-controlled institution fails.

The most common administrative enforcement tool used by the FDIC
is the cease-and-desist order.

Cease-and-desist orders are used

to halt and correct unsafe or unsound banking practices
committed by state nonmember banks or individuals related to
those institutions.

In 1988 and 1989, the FDIC issued 98 and 97

cease-and-desist orders, respectively.

The FDIC also has the ability to terminate an insured
institution's Federal deposit insurance for engaging in unsafe
or unsound practices or for violations of law.

As mentioned

above, FIRREA also gave the FDIC the power to suspend
temporarily the deposit insurance of institutions not meeting
tangible capital requirements.

In 1988, the FDIC initiated 77

proceedings to terminate deposit insurance.

During 1989, the

FDIC initiated 73 such proceedings and 1 proceeding to suspend
deposit insurance temporarily.

The FDIC can remove directors, officers, and other
institution-affiliated parties from any involvement in an
institution's affairs if the individual violates any law or
engages in unsafe or unsound practices.

The FDIC also is

authorized to assess substantial civil money penalties against
depository institutions and institution-affiliated parties for




18
violations of law or outstanding enforcement orders.

During

1988, the FDIC issued 33 final removal orders and assessed civil
money penalties in 10 instances.

In 1989, we issued 10 final

removal orders and assessed civil money penalties against
institutions or individuals in 9 cases.

In 1990, 10 final

removal orders have already been issued and 9 civil money
penalties have been assessed against individuals.

In general,

there has been a shift in emphasis over the past few years to
enforcement actions against individuals, in keeping with the
FDIC's commitment to reduce insider abuse.

Cross-guaranty actions, as mentioned above, are a new
enforcement power granted to the FDIC by FIRREA.

In such

actions, commonly-controlled depository institutions may be
assessed for the loss reasonably anticipated by the FDIC due to
the default of a related depository institution.

The first such

action was initiated in 1989.

Amendments to Senate Omnibus Crime Bill to Improve Prosecution
of Thrift and Bank Fraud

On the whole, the FDIC and RTC support the thrift and bank fraud
amendments passed by the Senate as part of the omnibus crime
bill, S. 1970 (the "bank fraud amendments".)

They would provide

the FDIC and the RTC with a number of important new enforcement
tools.

These new tools will allow us to combat financial

institutions fraud more effectively and save money for the
Federal deposit insurance funds and the taxpayers.




We are in

19
the process of developing a detailed analysis of the individual
provisions of the bank fraud amendments and will be pleased to
provide a copy for the record once it is completed.

Bankruptcy amendments.

We strongly favor the amendments to the

Federal Bankruptcy Code that would enhance the FDIC's ability to
recover funds from individuals who have defrauded federally
insured financial institutions.

These individuals often file

personal bankruptcy that results in the discharge of judgments
or debts based on fraudulent, wrongful or criminal conduct.
Although the FDIC has actively attempted to prevent such
discharges, the Bankruptcy Code and case law interpreting it
often make it difficult for the FDIC to prevent these
individuals from avoiding these debts.

The bankruptcy amendments would remedy this situation.

We are

especially supportive of the so-called "homestead exemption”
contained in those provisions.

The homestead exemption would

prevent individuals who have defrauded banks or thrifts from
hiding their multi-million dollar homes under the protection of
state law.

We respectfully urge this Committee to work for the

inclusion of the homestead exemption in any final fraud
legislation.

Priority of claims.

Section 259 is another very important

provision to the FDIC and RTC.

It would make the law very clear

that the FDIC and the RTC have priority over competing claims
against former directors, officers, employees, accountants or




20

other professionals that had provided services to a failed
institution.

This would go a long way in protecting the deposit

insurance funds and the American taxpayer from the costs of bank
and thrift failures.

Preiudcrment attachment and fraudulent transfers.

We also favor

the amendment that would allow the FDIC and RTC to make
prejudgment attachments of the assets of persons obligated to
failed insured depository institutions.

We suggest, however,

that the authority be expanded to encompass enforcement actions
taken by the FDIC in its corporate capacity against open
institutions.

We also favor the provision that would allow the

FDIC to avoid certain fraudulent transfers of assets made within
five years of the appointment of a receiver.

Golden parachutes.

One very important area to the FDIC that is

not contained in the Senate's bank fraud amendments is the
authority to prohibit or limit excessive or abusive golden
parachutes and similar types of payments by troubled depository
institutions.

The FDIC thinks it unconscionable that directors,

officers and others responsible for an insured institution's
failure —

or near-failure —

should be able to line their

pockets with an insured institution's money at the expense of
the Federal deposit insurance funds.

Paying golden parachute

money to a director, officer, or other responsible party in the
case of a failed or failing insured institution amounts
essentially to paying that person with a check drawn on the
Federal deposit insurance funds.




21

Golden parachute provisions are contained in the various
versions of the bank fraud amendments now being considered in
the House.

Such provisions are very important to the FDIC and

RTC in limiting the liabilities of the deposit insurance funds
and taxpayers.

We urge that they be included in any final

legislation.

Qui tarn.

There are several provisions in the Senate bank fraud

amendments that cause the FDIC some concern.

Subtitle I of the

amendments, the so-called "qui tam” provisions, would encourage
private rights of action against banks and thrifts that have
engaged in fraudulent activity.

We have concern that these qui

tam provisions could create a managerial and administrative
nightmare for the FDIC and the RTC.

Because private litigants

have no real accountability for their actions, the FDIC and RTC
would have to devote substantial resources to overseeing and
monitoring those actions to ensure that they did not interfere
with our own lawsuits.

We could conceivably be put in the

position of having to intervene as a party in some of the
private suits if we thought our own positions might be adversely
affected by a judicial decision.

The costs to the FDIC and RTC

would be significant.

The qui tam provisions run the risk of upsetting well
established legal precedents, which could adversely affect the
ability of the FDIC and RTC to carry out our fundamental goals
of resolving failed banks and thrifts and protecting the deposit
insurance funds.




We also are concerned that private parties may

22

be less likely to share information with us on a voluntary basis
if they know they can get paid for the information or use it to
bring their own private rights of action.

Finally, we believe

that the qui tarn provisions would only add to the already
overloaded dockets of the Federal courts, resulting in delays of
matters that the FDIC or RTC believes should have priority.

Disclosure of civil enforcement matters.

We also have

reservations about Section 154, which would require the
disclosure of certain civil enforcement actions, because the
language is somewhat unclear.

The FDIC always has supported the

disclosure of final enforcement orders, as evidenced by our
support of the disclosure provisions contained in the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989.
However, we cannot extend our support to publication of informal
agreements since, by doing so, the force and effect of a
valuable enforcement tool is taken away.

Voluntarily executed written agreements, letter agreements,
business plans, and other such agreements are a valuable
informal method of guiding institutions that have not
deteriorated to the level of a formal enforcement action away
from potential problems.

Such plans are often "road maps" that

provide regulatory guidance to institutions on avoiding
potential trouble areas.

The failure of an institution to

follow the suggestions in a plan is no guarantee that formal
enforcement action will be necessary, nor is the entering of
such an agreement the hallmark of a troubled institution.




The

23
willingness of institutions to enter into such agreements lies
partly in the understanding that they will not be subject to
public censure.

By eliminating the impetus for these informal

agreements, the only regulatory tool left to the agencies is the
formal administrative action, which may not be appropriate for
the institution.

It is our understanding that Section 154 is intended to require
disclosure only of those administrative actions that are
analogous to, and enforceable in the same manner as, final
enforcement orders.

But, it is not intended to require

disclosure of informal memorandums of understanding and similar
agreements that the FDIC and the other banking agencies might
undertake.

We believe the statutory language in Section 154 is

not completely clear on this point.

Thus, we would feel more

comfortable if the language could be clarified to more closely
mirror congressional intent.

RTC Enforcement Division.

We also have concerns about Section

258, which would require the creation of an RTC Enforcement
Division to assist in pursuing criminal and civil claims against
individuals associated with insured depository institutions.
do not believe that a separate RTC Enforcement Division is a
necessary or cost-effective use of RTC resources.

The RTC already has established various units within its
organizational structure to assist in pursuing claims against
failed thrifts and the individuals associated with them.




As

We

24
outlined above, the RTC has its own "fraud squad" that
investigates every single failed thrift to determine whether
there is evidence of fraud or abuse that contributed to the
institution's failure.

The RTC also participates in bank fraud

working groups and other interagency cooperative efforts to
assist in the prosecution of financial institution crimes.

In

addition, the FDIC/RTC Legal Division brings claims against
directors, officers, and other insiders to recover monies owed
to the agencies.

The goals of Section 258 can and are being

accomplished without the necessity of micromanaging the internal
structure of the RTC by requiring a separate Division.

Finally, we have reservations about Section 112.

That section

provides in part that a Special Counsel for the Financial
Institutions Fraud Unit within the Department of Justice will be
responsible for ensuring that Federal statutes relating to civil
enforcement are used to the fullest extent authorized by law.
While we support legislation that encourages the fullest
prosecution of individuals guilty of bank fraud, we are
concerned that Section 112 may unintentionally encroach on the
authority of the appropriate Federal banking agencies to
supervise and monitor insured depository institutions and
institution-affiliated parties and to bring administrative
enforcement actions against them.

We would urge that this

provision be clarified to ensure that the Special Counsel is
responsible for civil enforcement only with respect to statutes
that are under its jurisdiction.




25
Conclusion

In conclusion, Mr. Chairman and members of the Committee, the
FDIC and the RTC are vitally concerned with the threat that
fraud and insider abuses pose to the continued safety and
soundness of insured institutions and the deposit insurance
funds.

We believe that our aggressive enforcement efforts, the

increased penalties and stronger enforcement authority provided
to us in FIRREA, and the legislative initiatives now being
considered by the Congress will prove to be a formidable
deterrent to financial institution fraud and abuse.