On December 18, 2012, the Federal Deposit Insurance Corporation (“FDIC”) changed a Statement of Policy to narrow the offenses that automatically bar employment at a bank absent FDIC’s consent. The Statement of Policy is available here. As a practical matter, this change increases banks’ exposure to discrimination claims if in disqualifying a candidate from employment they rely on an offense of a type that is no longer considered an automatic bar by FDIC, without appropriate analysis of the circumstances of the offense and the job being sought. Banks should review their criteria for disqualifying persons from employment to ensure they are current under the FDIC policy and compliant with federal and state discrimination laws.

Section 19 Overview

Section 19 of the Federal Deposit Insurance Act prohibits a federally insured bank from allowing persons convicted of or agreeing to a pre-trial diversion program for a criminal offense involving dishonesty, breach of trust or money laundering from participating in the conduct of the bank’s affairs, becoming affiliated with the bank, or owning or controlling a bank. The recently updated Statement of Policy addresses Section 19. In the policy, FDIC states that if a FDIC-insured institution wants to employ a person who was convicted of or entered a pretrial diversion for a prohibited offense, it generally has to seek a waiver from FDIC. The FDIC states a waiver is not required where certain prohibited offenses are de minimis.

The Scope of the De Minimis Exclusion of Section 19

To be de minimis, an offense has to meet all four of the following criteria:

  1. There is only one conviction or program entry for a covered offense;
  2. The offense was punishable by imprisonment for a term of one year or less and/or a fine of $2,500 or less, and the individual served three days or less of actual jail time. (FDIC changed these elements on December 18, 2012. Previously, for an offense to be de minimis, the offense had to be punishable only by less than one year imprisonment and/or a fine of less than $1,000, and the individual could not serve time in jail);
  3. The conviction or program was entered at least five years prior to the date an application to FDIC for a waiver would otherwise be required; and
  4. The offense did not involve an insured depository institution or insured credit union.

The FDIC states that these factors generally encompass offenses that are less than felonies. A conviction or program entry of record based on the writing of a “bad” or insufficient funds check satisfies the de minimis test — even if it involved an insured depository institution or insured credit union — if:

  1. All other requirements of the de minimis offense provisions are met;
  2. The aggregate total face value of the bad or insufficient funds check(s) cited in the conviction was $1,000 or less; and
  3. No insured depository institution or insured credit union was a payee on any of the bad or insufficient funds checks that were the basis of the conviction.

Although there is no prohibition on hire, the bank must ensure that any person who meets the de minimis criteria is covered by a fidelity bond to the same extent as others in similar positions and the person must disclose the presence of the conviction or program entry to all insured institutions in the affairs of which he or she intends to participate.

FDIC increased the de minimis standard’s maximum fine to $2,500 and allowed up to three days’ jail because its experience reflected that a significant number of waiver applications involved individuals who were one-time offenders for minor infractions who served limited jail time in jurisdictions that could have imposed fines of $2,500 or less. FDIC indicated that these changes appeared “just and reasonable” and that in numerous cases, minimal, actual jail time served was not “a significant factor” in FDIC’s decision to grant a waiver.

Tension with State and Local Discrimination Laws

The application of Section 19’s prohibition often is inconsistent with state and local equal employment opportunity laws. Some states, like Wisconsin and Hawaii, prohibit discrimination on the basis of a conviction record unless it is substantially related to the job (Wisconsin) or the conviction occurred within the last 10 years and has a rational relationship to the job (Hawaii). Many other states and municipalities have pre-employment guides that purport to bar or limit employment application questions about convictions, require that the conviction be recent or job-related before an employer may rely on it to deny employment, and/or impose notice requirements on applications that ask questions about convictions. These state and local government-imposed restrictions are often based on race discrimination concerns. This tension between federal law (Section 19) and state and local anti-discrimination law poses no risk to banks if the banks appropriately apply Section 19, because Section 19 trumps (or preempts) state or local anti-discrimination laws. This tension creates unresolved risk, however, when a bank thinks it is applying Section 19 to bar a candidate in circumstances when in fact Section 19 does not apply.

Over Extension of Section 19 to Various Employees of Non-FDIC Insured Entities Affiliated with or Providing Services to a Bank

A financial institution’s umbrella may include a FDIC-insured bank corporation and other, non-FDIC-insured entities, such as those related to the sale of insurance or other financial products. Financial institutions often assume Section 19 applies equally to non-bank employees. Section 19 applies only to insured institutions, their institution-affiliated parties, and those participating in the affairs of an insured depository institution. All employees of an insured institution fall within the scope of Section 19. Section 19, however does not generally apply to all employees of non-FDIC-insured entities or to independent contractors that work with a bank, though it may apply to some, if they are found to be “de facto” employees of an insured institution. If a financial institution applies Section 19 to all employees within its umbrella — even non-bank employees — it creates an unprotected gap between Section 19’s actual coverage and defenses under state and local anti-discrimination law. Banks need to be aware of those gaps, assess the risks of discrimination claims versus the risks of hiring persons with criminal convictions or program diversions for offenses that are not prohibited under Section 19, and decide whether to change their practices.

Practical Impact of FDIC Change

FDIC-insured banks should consider their practices for disqualifying applicants under Section 19 to ensure that if Section 19 does not automatically bar the applicants’ hire, that the bank’s hiring processes are consistent with state and local anti-discrimination laws.

A bank that relies on a conviction record or program entry to deny employment to a candidate has a defense to a state law conviction record or other discrimination claim by pointing to FDIC’s Section 19. However, a conviction or program entry that meets the definition of a de minimis crime under Section 19 does not provide a “safe harbor” from state and local anti-discrimination laws if a bank nevertheless uses it as the basis on which to refuse to hire an applicant, because Section 19 does not bar the individual’s hire.

Based on FDIC’s amendment of its Section 19 policy statement, a bank may no longer rely upon Section 19 as a basis to refuse to hire a person with a conviction or pre-trial diversion program entry for a prohibited offense involving dishonesty, breach of trust or money laundering that (1) occurred only once; (2) was punishable by imprisonment for a term of one year or less and/or a fine of $2,500 or less and for which the individual served three days or less of actual jail time; (3) occurred five years ago; and (4) did not involve a federally insured bank or credit union. Because Section 19 does not provide an automatic bar to hiring such an individual, it does not insulate a bank from a state or local law conviction record discrimination claim. If Section 19 does not provide an automatic bar to employment, the bank’s only legal defense is what is available under the state or local anti-discrimination law. In Wisconsin, the defense is that the circumstances of the conviction or program entry is substantially related to the sought after position. That defense is interpreted narrowly. Many other states and municipalities have similar defenses.

Furthermore, while reviewing its criteria for excluding persons from working for a bank, a financial institution should take a look at its application of Section 19 to any non-bank employees within its umbrella. If a gap exists between Section 19’s actual coverage and its application, the financial institution should assess its risk of state and local discrimination claims and formulate an approach to address risks posed by candidates’ criminal histories while minimizing conviction record discrimination claims under state and local law.

An additional justification for a bank to review the criteria for exclusion of candidates for employment is the ever present risk of audit by the Office of Federal Contract Compliance Programs (“OFCCP”), which audits federal contractors’ hiring and employment practices. OFCCP takes the position that all FDIC-insured banks are federal contractors.

Furthermore, improperly applying Section 19 could open the door for a race or ethnicity discrimination claim. To see the risk, one look no further than the EEOC’s April 25, 2012 updated Enforcement Guidance concerning potential discrimination resulting from employers’ use of arrest and conviction records to make hiring and other employment decisions. The EEOC Enforcement Guidance is available here. In the updated guidance, the EEOC does not ban the use of criminal background checks, but advises employers that the use of such information may be discriminatory under certain circumstances, particularly because their use may have a statistically significant negative impact on racial and ethnic minorities, thus resulting in potential claims of race or ethnicity discrimination under Title VII. The same analysis could apply to a race or ethnicity discrimination claim under state or local anti-discrimination law. The guidance recommends that employers not ask applicants about criminal convictions on their job applications. Section 19 requires a bank to make a reasonable inquiry regarding an applicant’s history to avoid hiring or permitting participation in its affairs by a person who has a conviction or program entry for a covered offense. Section 19 will insulate a bank’s practices of delving into candidates’ criminal background and hiring decisions made based on Section 19. It will not shield a financial institution from a discrimination claim, however, if the institution is applying Section 19 beyond its scope.