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.

Footnotes

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.