United States: FDIC Loosens Restrictions On Hiring Bank Personnel With Criminal Histories

Last Updated: September 12 2018
Article by Jonathan Shapiro and Sean Malley

The Federal Deposit Insurance Corporation (FDIC) recently published its final rule on modifications to the Statement of Policy (SOP) for Section 19 of the Federal Deposit Insurance Act, 12 U.S.C. § 1829 ("Section 19"), which will ease certain hiring requirements for banking industry employers.1 Section 19 prohibits, without the prior written consent of the FDIC, a person convicted of any criminal offense involving dishonesty, breach of trust, or money laundering, or who has agreed to enter into a pretrial diversion or similar program ("program entry") in connection with a prosecution for such an offense, from directly or indirectly owning, controlling, or otherwise participating in the affairs of an FDIC-insured depository institution.  The FDIC states that the modifications are an attempt to reduce the number of minor criminal offenses that presently preclude individuals who pose a low risk to an FDIC-insured depository institution from working for, or otherwise participating in the affairs of, the institution unless they obtain the FDIC's the written consent.

Section 19 imposes a duty upon an insured institution to make a reasonable inquiry regarding an applicant's history, which consists of taking steps appropriate under the circumstances, consistent with applicable law, to avoid hiring, or permitting participation in its affairs by, a person who has a conviction or program entry for a covered offense.  The FDIC believes that at a minimum, each insured institution should establish a screening process that provides the insured institution with information concerning any convictions or program entry pertaining to a job applicant.  This process would include, for example, the completion of a written employment application that requires a listing of all convictions and program entries.

Section 19 applies, by operation of law, as a statutory bar to employment with, or other participation in the affairs of, an FDIC-insured depository institution absent the FDIC's written consent. Upon notice of a conviction or program entry, an application must be filed seeking the FDIC's consent prior to the person's employment or other participation. 

The FDIC's consent is automatically granted and an application will not be required where the covered offense is considered de minimis, because it meets all of the following criteria: (i) there is only one conviction or program entry of record for a covered offense; (ii) the offense was punishable by imprisonment for a term of one 1 year or less and/or a fine of $2,500 or less, and the individual served three 3 days or less of jail time; (iii) the conviction or program entry occurred at least 5 years prior to the date an application would otherwise be required; and (iv) the offense did not involve an insured depository institution or insured credit union.

The FDIC's revised SOP has expanded the de mimimis exception to encompass the following:

  • Isolated minor offenses committed by young adults:   If the actions that resulted in a covered conviction or program entry of record all occurred when an individual was 21 years of age or younger, then the subsequent conviction or program entry that otherwise meets the general de minimis criteria set forth above will be considered de minimis, so long as the conviction or program entry was entered at least 30 months prior to the date an application would otherwise be required and all sentencing or program requirements have been met.
  • Issuance of insufficient funds checks of moderate aggregate value:   Convictions or program entries based on the writing of "bad" or insufficient-fund checks will be considered a de minimis offense and will not be considered as having involved an insured depository institution, so long as (i) there is no other conviction or program entry subject to Section 19, (ii) the aggregate total face value of all "bad" or insufficient checks was $1,000 or less, and (iii) no insured depository institution or insured credit union was a payee on any of the checks.
  • Small dollar, simple theft:   Convictions or program entries based on a simple theft of goods, services, currency or other monetary instrument, where the aggregate value taken was $500 or less at the time of conviction or program entry, will be considered de minimis, so long as (i) the person has no other conviction or program entry under Section 19, (ii) it has been 5 years since the conviction or program entry (30 months in the case of a person age 21 or younger), and (iii) there is no involvement of an insured financial institution or insured credit union.  The FDIC notes that "simple theft" excludes burglary, forgery, robbery, identity theft and fraud.
  • The use of a fake, false or altered identification card:   Convictions or program entries for the use of a fake, false, or altered identification card by a person under the legal age for the purpose of obtaining or purchasing alcohol, or used for the purpose of entering a premise where alcohol is served but for which age appropriate identification is required, will be considered de minimis, so long as there is no other conviction or program entry for a covered offense.

The new SOP also clarifies or revises the following:

  • A conviction or program entry is considered "expunged," and is not considered a conviction of record for purposes of Section 19, if an order of expungement has been issued in regard to the conviction or program entry that is intended by the language of the order or by the law under which the order was issued to be a complete expungement prohibiting the jurisdiction from using the conviction or program entry for any subsequent purpose, including to assess an individual's fitness or character.  Additionally, the failure of a jurisdiction to destroy or seal the records expunged will not prevent the expungement from being considered complete for purposes of Section 19.  (The prior version of the SOP did not recognize the expungement of criminal conviction records that remained accessible, including by law enforcement or court order.  The focus of the revised SOP is on the intent of the order of expungement, not on the accessibility of or any failure to destroy or seal an individual's criminal records.)
  • Drug-related offenses that satisfy the de minimis criteria will be granted automatic FDIC consent and do not require an application.
  • For purposes of satisfying de minimis criteria, "jail time" includes any significant restraint on an individual's freedom of movement which includes, as part of the restriction, confinement where the person may leave temporarily only to perform specific functions or during specified time periods or both.  However, jail time will not be considered to include time spent on probation or parole, or where the individual is otherwise restricted to a particular jurisdiction or required to report to a specific individual or location.
  • Convictions that are set aside or reversed after completion of sentencing will be treated consistent with pretrial diversions or similar programs, unless the court records reflect that the underlying conviction was set aside based on a finding on the merits that such conviction was wrongful.  Notably, the FDIC explicitly rejected the recommendations of several commenters during the comment period that New York's adjournments in contemplation of dismissal (ACD) program should not be considered a pretrial diversion or similar program (noting "it is difficult to treat ACDs as anything other than a pretrial diversion or similar program").
  • An FDIC-supervised institution is permitted to provide an applicant with a conditional offer of employment contingent on the completion of a background check to determine if the applicant is barred from employment by Section 19, provided that the individual does not begin employment or work until the institution verifies that the individual's participation is not barred by Section 19.

Recommendations

Banks and other FDIC-insured depository institutions should review their policies, practices and forms to ensure that they consider the expanded de minimis exceptions and clarified definitions when assessing applicants under Section 19.

Footnote

1 The full SOP is available for download from the FDIC website: https://www.fdic.gov/news/news/financial/2018/fil18042a.pdf.

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