United States: OCC Announces Shift In Enforcement Policy: Increased Focus On Internal Risk Management And Personal Liability Of Bankers

Last Updated: March 11 2016
Article by Travis P. Nelson

Executive Summary

The Office of the Comptroller of the Currency, the primary federal regulator for most large banks, recently issued a new policy on agency enforcement actions seeking civil money penalties against institutions and individuals. There are several key developments that will directly affect institutions and the directors, officers, employees, major shareholders, and vendors associated with them.

At the close of February, the Office of the Comptroller of the Currency ("OCC") issued a revision of its internal policies and procedures guidance on civil money penalties ("CMPs") in enforcement actions. OCC PPM 5000-7 (Rev) (Feb. 26, 2016) (the "CMP Policy"). While much of the CMP Policy is focused on reiterating established OCC enforcement processes and procedures, there are several key developments that national banks and federal savings associations (both OCC-regulated entities) – and the directors, officers, employees, major shareholders, and vendors associated with them – should consider, such as a shift in the weight that the OCC will accord certain aggravating and mitigating factors when determining whether to bring a CMP action and how much of a penalty the OCC will seek, increased expectations for maintaining a robust internal compliance program, and a possible increase in CMP actions brought against specific insiders associated with an institution.

Under the Federal Deposit Insurance Act ("FDI Act"), the OCC may bring a CMP action for a variety of violations of laws, unsafe or unsound practices, and breaches of fiduciary duty. The severity of the CMP depends on the culpability of the target and the effects of the conduct on the institution and can vary from $5,000 per violation per day, to $1 million for actions against individuals, and the lesser of $1 million or 1 percent of the bank's assets for actions against institutions.1

Enhancements to the Civil Money Penalty Matrix

The OCC's new CMP Policy makes numerous significant changes to the civil money penalty matrix or "CMP Matrix." Developed in 1991 by the federal bank regulatory agencies in response to passage of the Financial Institutions Reform Recovery, and Enforcement Act of 1989 ("FIRREA"), the original CMP matrix condenses the statutory factors for a CMP and the factors developed by the Federal Financial Institutions Examination Council ("FFIEC") into a single set of factors, each with an assigned weight (determined by agency discretion).2 This matrix was updated by the OCC in its prior CMP policy, OCC PPM 5000-7, issued June 16, 1993.

The new OCC PPM departs from the prior CMP matrix in several respects. First, the OCC has bifurcated the prior singular matrix into two separate matrices, one for actions against institutions and another for actions against individuals. Second, the OCC has changed the weights that are assigned to several of the aggravating and mitigating factors that the OCC considers in determining whether to bring a CMP action, and the severity of such an action. For example, in the case of actions against institutions, the OCC has increased the weight accorded to the following aggravating factors: intent; continuation of conduct after notification; concealment; the existence of a prior citation from examiners as to the same problem; history of violations; and duration and frequency of the violations before being notified by the OCC. The OCC has also added a new aggravating factor: "Effectiveness of internal controls and compliance program." The inclusion of this last aggravating factor is a strong sign of the OCC's continued focus on creating a "culture of compliance," as it has stated in numerous public pronouncements and we have encountered in reports of examination that have been issued to clients. The OCC has also changed the weights assigned to some of the matrix's mitigating factors; specifically, it has decreased the weight accorded good faith before notification, and efforts at restitution. This lowering of the weights assigned to these mitigating factors will result in less credit being given to those proactive remedial actions.

Similar to the CMP matrix for institutions, the OCC has also modified the weight accorded to several of the factors for actions against institution-affiliated parties ("IAPs," discussed below). Specifically, the OCC has increased the weights assigned to the following aggravating factors: intent; continuation after notification; financial gain or other benefit to the IAP as a result of violation; loss or risk of loss to the bank; and history of violations and tendency to engage in violations. The OCC has also added two new factors to the individual CMP matrix that were not present in the prior version: number of instances of misconduct at issue; and IAP responsibility for internal controls environment and its effectiveness. Also similar to the institutions matrix, the OCC has lowered the weight accorded to the mitigating factor of good faith before notification.

CMP Actions Against Individuals

The authority for the OCC to seek a CMP against an IAP is found in Section 8(i) of the FDI Act.3 An IAP includes any of the following categories of individuals: (a) directors, officers, and controlling shareholders; (b) any person who has filed or is required to file a notice under the Change in Bank Control Act (12 U.S.C. 1817(j));4 (c) any shareholder, consultant, joint venture partner, or any other person as determined by the OCC "who participates in the conduct of the affairs" of an institution; and (d) any independent contractors (e.g., appraiser or accountant), who knowingly or recklessly participates in any violation of law or regulation, breach of fiduciary duty, or unsafe or unsound practice.5 These final two categories, "any other person" and "any independent contractors," have been utilized by the OCC to seek CMPs against a broad variety of third-party service providers who would not normally be thought of as subject to the enforcement jurisdiction of a bank regulatory agency, including outside auditors and attorneys.6

Several of the changes to the weight factors in the CMP matrix for individuals suggest an increased propensity for the OCC to target IAPs with CMP actions. The increases in the weights accorded intent, concealment, number of instances of violations or misconduct, and gain or other benefit to the IAP, suggest that the OCC will be more likely to bring actions against individuals. Moreover, the addition of a new factor – "IAP responsible for internal controls environment and its effectiveness" – is another strong signal that the OCC will be particularly aggressive in bringing a CMP action against supervisors who contribute to serious violations or other compliance deficiencies. On this basis, OCC-regulated institutions are likely to see an increase in the instances of examiners requesting job descriptions for those personnel in supervisory roles with respect to high-risk areas, such as BSA/AML, information technology/cybersecurity, vendor management, and any area involving consumers. The purpose for requesting such written job descriptions will be two-fold: first, to ensure that supervisors have the appropriate skills to match the work that is expected of them, and second, to use the job description to determine whether the compliance failure was within the oversight of a targeted IAP and thus relevant to the new CMP factor discussed above.

Key Take-Aways

From the above-discussed changes brought by the revised PPM on CMPs, we can observe the following shift in OCC enforcement policy with respect to CMPs:

  • Shift in Weight Factors: The increases in the weight factors for intent, concealment, continuation after notification by examiners, and prior history of the same violation, signals the OCC's heightened expectation that institutions and individuals learn from prior mistakes, and act promptly to correct issues, whether those issues are discovered through the institution's own internal review, or brought to the institution's attention by examiners.
  • Possible Focus on Self-Reporting: The increase in the weight factor for concealment is some indication that OCC examiners will place greater emphasis on institutions self-reporting of violations. This may not necessarily require a special meeting with or call to the examiner-in-charge, but it may require a more detailed and candid report of identified compliance deficiencies when meeting with examiners prior to routine examinations.
  • OCC Announces Shift in Enforcement Policy: Increased Focus on Internal Risk Management and Personal Liability of Bankers The inclusion of a new internal controls and compliance factor in the institutional CMP matrix reflects the OCC's steady increase in its focus over the last twelve months on internal compliance. For example, in the OCC's Semiannual Risk Perspective, issued December 16, 2015, the OCC noted: "Some banks have failed to develop or incorporate appropriate controls as products and services have evolved." By adding a CMP factor on compliance programs and internal controls, the OCC is laying the foundation for even more vigorous CMP actions for serious compliance failures.
  • Focus on Results Not Efforts: The lowering of the weight accorded good faith before notification may suggest that from the OCC's viewpoint, the proactive efforts toward compliance are less of a factor where compliance deficiencies are identified. This would be consistent with the corresponding addition of the lack of an effective compliance program as an aggravating factor. The OCC appears to be taking the approach that institutions will only receive negative credit for compliance failures, and not positive credit for attempting to create a compliance program that is ultimately unsuccessful. In other words, the OCC is focusing more on results, and less on efforts.

Given this shift in the OCC's approach to initiating CMP enforcement actions against institutions and individuals, it is crucial that institutions' legal and compliance teams work closely with outside regulatory counsel that is highly experienced with navigating the OCC supervisory and enforcement process. Clearly, the first priority is to design a compliance program that avoids examination concerns before they arise. If that fails, the next priority is to ensure that swift action is taken so that a supervisory concern that would otherwise result in a "matter requiring attention" on the report of examination does not become a formal enforcement action, such as a CMP action, or a cease and desist action.


1. 12 U.S.C. § 1818(i).

2. See Federal Reserve Board SR 91-13 (June 3, 1991).

3. 12 U.S.C. § 1818(i).

4. A shareholder required to file a notice under the Change in Bank Control Act would include any shareholder, either acting alone or in concert with others, who holds at least 10 percent of the voting securities of the bank. See 12 C.F.R. § 5.50.

5. 12 U.S.C. § 1813(u).

6. See, e.g., OCC Docket No. AA-EC-04-02 and -03 (Dec. 7, 2006) (enforcement action against an outside auditing firm); OCC Docket No. AA-EC-06-102 (June 27, 2009) (enforcement action against an outside attorney).

This article is presented for informational purposes only and is not intended to constitute legal advice.

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