It's Anyone's Guess How Fincen Determines Fines

For many years, the federal banking agencies have used publicly available processes and matrices to determine both whether a civil money penalty is justified and, if so, the size of the fine. They must also litigate the action in a formal Administrative Procedure Act proceeding, brought before an independent administrative law judge. Most recently, the Office of the Comptroller of the Currency updated the guidelines on civil money penalties as well as cease and desist orders to enhance consistency.

In contrast, the Financial Crimes Enforcement Network has not publicly disclosed any civil money penalty matrix or criteria to determine either the justification or amount of a penalty. There is an urgent need for Fincen to bring its process into alignment with the other regulators. As it stands, there is no publicly known process to ensure that Fincen's vast power is applied consistently and equitably. Likewise, as it stands now, Fincen can unilaterally and publicly assess a penalty on an institution or person without any standards, hearing or opportunity for the targeted party to appeal.

On Feb. 26, the OCC reiterated its intention to continue using a matrix for assessing appropriate fines, with adjustments to its decision-making process to strengthen fairness and consistency. The OCC's changes - consistent with congressional requirements for the agency to use statutory criteria to justify an action - include one matrix for institutions and, for the first time, a separate matrix for institution-affiliated parties. Three days later, the OCC issued a revised bulletin on cease-and-desist powers in cases of "potential noncompliance with Bank Secrecy Act compliance program requirements or repeat or uncorrected BSA compliance problems."

Why Fincen has no uniform process, administrative standards or a required hearing is beyond explanation. Most agencies follow standards and statutes that usually call for a hearing. There is nothing unique about the BSA that would require a different process for the banking agencies versus Fincen. A lack of any guidance is troubling since it allows Fincen largely unfettered power, opening the door to arbitrary and unjustified decisions.

Well-defined standards for fines from the bank regulatory agencies date back to the seventies. In 1978, Congress amended the Financial Institutions Supervisory Act of 1966 to provide regulators, for the first time, with the power to assess civil penalties for violations of laws and regulations.

The statute also required a formal hearing under the APA before an independent administrative law judge on pending enforcement actions. Regulators have the power to make the final decision on issuing a fine, but a company or individual targeted has the right to appeal an action to a federal court of appeals. As required by Congress, a bank regulator deciding whether to bring a case and impose a penalty must evaluate five statutory criteria to justify an action. The factors include: size of the financial resources and good faith of the person or entity charged; the gravity of the violation; history of previous violations; and such other matters that justice may require.

Fincen has neither publicly available factors nor any hearing rights.

To ensure even more consistency, the regulators created a matrix of 13 factors they would consider in determining whether to bring an action and the size of any penalty. Each factor has a point value which is adjusted based on the severity. The total points determine whether a penalty should be assessed and if so, a recommended amount.

Under its recent changes, the OCC will now evaluate a penalty based on the five statutory and 14 matrix criteria.

If the OCC decides to proceed, it notifies a potential subject that the agency is preparing to issue a notice of a penalty and that the subject has 15 days to explain to the agency why a penalty is not justified or should be limited. The notice, commonly referred to as a "fifteen day letter", is not public, nor will the matter become public until there is a settlement or a hearing before an ALJ.

If the OCC, after review of the submissions, believes an action is appropriate the subject can either settle with the agency or request a hearing before an independent ALJ. If no settlement is reached, a hearing is held. After the hearing and submissions from counsel for both sides, the ALJ renders an opinion and makes a recommendation to the comptroller of the currency, whose decision can be appealed to the federal court of appeals.

Meanwhile, a revised bulletin on Feb. 29 said the OCC will issue a fifteen day letter to the subject if the agency determines that a BSA compliance program violation satisfies criteria for a mandatory cease-and-desist order. The OCC's enforcement and supervisory personnel will review the case and the subject's response. If they believe a violation exists, they present the matter to a Supervision Review Committee for its review and recommendation to the senior deputy comptroller for a final decision. Fincen has no public policy to allow for a confidential submission such as the fifteen day letter.

Given that Fincen has yet to address concerns of fairness and consistency in its CMP cases, a legislative solution may be necessary. A simple legislative fix would do the following: Require Fincen to prove its case before an independent ALJ in an APA hearing and remove its authority to impose unilateral assessments; subject Fincen to statutory standards for CMPs similar to those that apply to the banking agencies, including good faith, financial capacity, etc.; require Fincen to establish criteria, similar to the factors used by the banking agencies, to provide subjects guidance on the factors justifying a penalty and the amount; and require Fincen to provide non-public notice of a possible penalty and the basis for the penalty, along with the opportunity to respond within 15 days or longer.

Alternatively, while a legislative fix is necessary to require an APA hearing, Fincen should follow the OCC's lead and issue its own guidance explaining its CMP assessment process and criteria. In doing so, Fincen should consider the utility of OCC's recent adoption of separate matrices for banks versus institution-affiliated parties. Fincen in its handling of penalty cases should also follow the process the OCC uses in its cease-and-desist actions for BSA violations set forth in the OCC's Feb. 29 bulletin.

These reforms would fully address some of the common industry concerns about Fincen's implementation of its CMP powers.

Robert B. Serino is of counsel at Buckley Sandler LLP. He was formerly director of enforcement and compliance and deputy chief counsel at the Office of the Comptroller of the Currency. The views expressed in this article are his own.