The Federal Deposit Insurance Corp. has terminated several public enforcement actions before banks achieved full compliance, according to a new government watchdog report that is critical of the agency’s practices.
A review of 10 consent orders that the FDIC ended between January 2017 and June 2019 — all in the anti-money laundering realm — found that four of the banks were released from the legally enforceable orders after achieving only partial compliance. The report’s authors said that the term “partial compliance” is not well defined by the FDIC, and could provide leeway to cover even small, insignificant progress.
Under FDIC policy, the agency may terminate a formal consent order if the bank has partially met its provisions, as long as a new formal or informal action has been issued to address the outstanding matters. Unlike formal consent orders, informal enforcement actions are not legally enforceable, and they are not publicly disclosed.
The FDIC’s inspector general, which conducted the review of Bank Secrecy Act consent orders, said that the regulator’s practices limit transparency and can mislead the customers and investors.
“If the FDIC does not disclose that it has terminated an order based on partial or substantial compliance, the public, bank customers, and bank investors are left with the false impression that the bank corrected all order provisions,” the inspector general’s office wrote in a report published last week.
The inspector general made 10 recommendations aimed largely at promoting consistency in the handling of consent order terminations — both between federal banking agencies and across the FDIC’s various regions.
In its response to the report, the FDIC said that its policy of placing remaining provisions of terminated consent orders into informal actions is longstanding, and that the policy was made public in 2019.
“The FDIC disagrees with the premise that its termination of a consent order consistent with longstanding, publicly available policy limited transparency,” Doreen Eberley, director of the FDIC’s division of risk management supervision, wrote in a response to the inspector general’s report.
Still, the FDIC agreed, at least partially, with most of the inspector general’s recommendations. In response to concerns that its policies could better align with those of other federal bank regulators, the FDIC agreed to talk with other agencies and determine whether any action is appropriate.
And in an effort to ensure that similarly situated banks are treated consistently, the FDIC said that it will develop and implement procedures for monitoring how its regional offices make decisions on terminating anti-money laundering consent orders.
The inspector general’s report called for such monitoring as a control to detect potential regulatory capture. Regulatory capture is the idea that regulators sometimes act in the interest of the companies they oversee, rather than in the public interest.
The FDIC did dissent from one recommendation. The agency disagreed with the inspector general’s suggestion that it should publicly note which consent orders were terminated after only partial compliance. It said that doing so would bring confidential supervisory information into the public realm.
The 26-page inspector general report compared the FDIC’s practices unfavorably with those used by the Federal Reserve Board. Fed officials told the report’s authors that they generally do not terminate anti-money laundering consent orders until all provisions have been met.
“The Federal Reserve Board officials stated that they do not use informal enforcement actions to terminate consent orders as they do not want to give the public a false impression that order provisions have been met when, in fact, some portion of the order provisions have been included in an informal enforcement action,” the inspector general’s report stated.
In one example cited in the report, both the FDIC and Fed found similar facts about a particular bank and its holding company. Both agencies imposed anti-money laundering consent orders. But the FDIC terminated its consent order first, while moving the uncorrected provisions into an informal enforcement action.
Though the inspector general’s report does not identify specific banks, other publicly available information shows that the FDIC entered into an anti-money- laundering consent order with the credit card company Discover Financial Services in 2014 before
A spokesperson for Discover declined to comment.
Of the four formal FDIC consent orders that were terminated after a bank achieved only partial compliance, the FDIC said that in three cases the remaining provisions were placed into an informal action. In the fourth instance, the remaining provisions were placed into an amended formal action.
The inspector general criticized the FDIC for failing to provide guidance that would address how to apply the terms “partially met” and “substantial compliance.”
“It appeared that the four banks partially met at least some of the provisions of these orders,” the inspector general’s report stated. “However, the term ‘partially met’ provides extremely wide latitude to terminate a consent order when any portion of it — large or small, significant or insignificant — is met.”
The FDIC said in response that it will provide additional guidance to its staffers about when it is appropriate to terminate formal consent orders and to include the outstanding provisions in an informal action.
Last year, the Government Accountability Office published a
The GAO found that the regulator has policies for documenting bank examination decisions so as to promote transparency and assign responsibility, but that the policies were not always followed.
“The FDIC takes the risk of regulatory capture seriously,” the regulator said in its response to the GAO report, “as demonstrated by the significant measures it takes to ensure that agency and individual examiner actions are free of private interests … .”
