The current announcements by the federal banking agencies of inflation-adjusted maximum amounts for civil money penalties (CMP’s) give good reason to re-examine the recent Office of the Comptroller of the Currency (OCC) revision of its internal directive on CMP assessment. That action makes three critical points:

  • CMP’s against institution-affiliated parties (IAP’s) operate on the core banking principle of individual accountability;
  • As a matter of high concern, Bank Secrecy Act (BSA)/ anti-money laundering (AML) compliance has been prominently added to the CMP Matrix; and
  • When the OCC issues a 15-day letter to initiate the CMP process, a full and proper response, guided by expert counsel, is the single most productive step towards mitigating the ultimate CMP determination.

On February 26, 2016, the OCC issued a revised Policies and Procedures Manual (PPM) 5000-7, which updated and superseded CMP guidelines contained in other OCC and Office of Thrift Supervision (OTS) releases. Aiming the PPM at promoting an appreciation of positive public policy underpinning CMP assessment, the OCC explains that a CMP may serve as a deterrent to future violations of law, breaches of fiduciary duty and the like by IAP’s and institutions. At the same time, a range of possible CMP’s can encourage correction of violations and unsafe and unsound practices. While affirming its discretionary authority to assess CMP’s among a number of available enforcement actions, the OCC notes that nothing in the PPM or Matrix creates any substantive or procedural rights.

Three statutory tiers of CMP’s are identified in the revised PPM – Tier 1: simple violations of law or official actions; Tier 2: violations of law or supervisory actions or reckless unsafe or unsound practices or breaches of fiduciary duty that are part of a pattern of misconduct, cause more than minimal damage to the institution or bring the violator monetary gain; and Tier 3: knowing violations, unsafe or unsound practices or breaches of fiduciary duty that knowing or recklessly cause substantial loss to the institution or bring the violator substantial gain. The higher the tier, the greater the penalties. Additional CMP authority arises under the change-in-control, call report and flood insurance laws.

In determining a CMP, the OCC is required to consider four statutorily mandated factors: (1) size of financial resources and good faith; (2) gravity of the violation, (3) history of violations, and (4) other matters as justice may require. Although, historically, the OCC aligned itself with other banking agencies in following the 1998 Federal Financial Institutions Examination Council (FFIEC) “Interagency Policy Regarding the Assessment of Civil Money Penalties by the Federal Financial Institutions Regulatory Agencies”, which identifies 13 additional relevant factors, the revised PPM makes some modifications.

Appended to the revised PPM is a CMP matrix for IAP’s and a similar matrix for institutions, each designed to enhance consistency of decision making. Described as tools to quantify the degree of severity of violations, unsafe and unsound practices and breaches of fiduciary duty, these matrices provide guidance in determining whether a CMP is warranted and, if so, the appropriate amount. Alongside the statutory factors, the OCC has added two factors to the 13 on the interagency list – (1) loss or harm caused by the IAP to consumers or the public from consumer law or Bank Secrecy Act violations and (2) the level of good faith displayed before OCC notifies the IAP of the violation.

BSA violations deserve special attention. Not only is a high weight assigned to these violations, but a strong signal of their importance was also sent when OCC Bulletin 2016-6, reiterating the CMP process for BSA noncompliance, was released only three days after the revised PPM. Importantly, the matrices are not intended to reduce the CMP process to a mathematical equation, nor are they a substitute for sound supervisory judgment.

The revised PPM sets forth specific CMP assessment procedures and the three supervisory responses available to the OCC when evaluating the legal supportability of any CMP against an IAP – (1) it can assess a CMP, (2) it can deliver a reprimand, or (3) it can issue a supervisory letter. A reprimand is used when the CMP would be small; the misconduct was technical in nature; there was no history of misconduct or no intent; the reprimand will achieve the supervisory objectives; and the appropriate Supervision Review Committee (SRC) (established at the OCC District and Washington levels to ensure effective and consistent enforcement policies) approves. Nonetheless, a reprimand remains on record and leaves no doubt that the IAP will face significant consequences should he or she commit any future missteps. A supervisory letter is used when a CMP or reprimand is not warranted but the event should not pass unnoticed.

Of paramount significance, the CMP process begins with the issuance of a 15-day letter, so called because the recipient ordinarily is given 15 days to respond to the allegations that warrant issuance of a reprimand and/or CMP’s. The 15-day letter is the outgrowth of a supervisory and legal determination that a basis exists for taking the recommended action and is dispatched upon approval by the appropriate SRC. The response to the 15-day letter is pivotal and must be approached with the greatest seriousness, since it is the one opportunity for the IAP or institution to present their account of the facts, and, if handled properly, can persuade the supervisory office to revise its recommendation to the SRC, update the examiner-in-charge (EIC) recommendation, recalculate the CMP matrix, and possibly mitigate the nature and amount of potential penalties. For this reason, an IAP or institution usually will engage expert counsel to map strategy and manage preparation of the response, as well as any subsequent negotiation and settlement efforts.