Prosecution Rate in Bank Failures Is Low, Surveys Find

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Last month, James M. Pates, counsel to the House Banking subcommittee on commerce, consumer, and monetary affairs, presented an analysis on criminal misconduct by bank officers, directors, and insiders. Excerpts from his report ppear here.

In connection with its ongoing study of the effectiveness of the federal banking agency supervisory process, the subcommittee initiated an investigation last year into the enforcement of criminal laws against officers, directors, and insiders of the nation's financial institutions. At the first day of hearings, held on June 28, 1983, it became apparent that neither the federal banking agencies nor the Justice Department maintained adequate statistics on the incidence of criminal misconduct by top officials and insiders of financial institutions or how cases involving criminal misconduct were handled by the banking agencies and the Justice Department.

Accordingly, the subcommittee, in cooperation with the agencies, undertook a comprehensive examination of the nature and extent of insider abuse in the nation's financial institutions and how the bank regulatory system and the criminal justice system handle cases of insider abuse and potential criminal misconduct.

The staff has prepared a statistical analysis of the civil actions taken and the criminal referrals made since 1980 by the Federal Reserve, the Comptroller of the Currency, the Federal Deposit Insurance Corp., and the Federal Home Loan Bank Board, involving misconduct and bank fraud by officers, directors, and insiders of banks and thrift institutions.

The staff undertook two separate surveys. First, at the June 28 hearing, it was requested that the agencies provide information on all criminal referrals involving insiders in the 75 FDIG-insured commercial banks that failed between Jan. 1, 1980, and June 17, 1983. Later, this group was expanded to include the 30 savings and loans which were placed in involuntary receivership by the FHLBB during that same period. Once the banking agencies had provided information on their referrals in these informations, the Justice Department then surveyed Federal Bureau of Investigation offices to determine whether the FBI had conducted an investigation on each institution and, if so, what the results were.

The second survey consisted of a review of all criminal referrals which the banking agencies made during 1980-81 that involved officers, directors, or insiders of "problem" institutions. We limited ourselves to problem institutions for two reasons. First, the agencies objected to a larger survey, citing the administrative burden of retrieving the information. Second, the subcommittee made the assumption that the misconduct involved in criminal referrals originating from "problem" institutions poses a greater threat to the safety and soundness of these institutions than does misconduct in referrals from nonproblem institutions. Reasons for Surveys

There were several important reasons for conducting these surveys. The subcommittee wanted to determine if criminal misconduct in failed institutions was a widespread phenomenon. In addition, there was a need to know whether the referrals made by the banking agencies were adequate, whether the Justice Department was vigorously prosecuting such cases, and whether the banking agencies had taken appropriate civil action against individuals whom they suspected of serious insider abuse.

The results of our two surveys show the following:

Rate of criminal Msiconduct in Failed Banks: There is a high correlation between the number of failed commercial banks and the incidence of actual or probable criminal misconduct by officers, directors, and insiders. Our survey of 75 recent commercial bank failures reveals that in 46 of these institutions (61%), officers, directors, and insiders have been involved in actual or probable criminal misconduct. For failed thrift institutions, the rate of probable criminal misconduct is approximately one-half that of banks, under 36%. …