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Comment letter in response to Section 16.5 of the Illinois Banking Act

Section 16.5 of the Illinois Banking Act

Scott D. Clarke, Assistant Commissioner
Bureau of Banks & Trust Companies
Office of Banks and Real Estate
500 East Monroe Street
Springfield, Illinois 62701

Re: Section 16.5 of the Illinois Banking Act

Dear Scott:

On behalf of the Community Bankers Association of Illinois ("CBAI"), I am seeking clarification regarding Section 16.5 of the Illinois Banking Act [205 ILCS 5/16.5]. Specifically, I am interested in how the Office of Banks and Real Estate ("OBRE") applies Section 16.5 and what compliance expectations or requirements OBRE places on state-chartered banks. In addition to Section 16.5, Policy Statement #1009 of OBRE's Bureau of Banks & Trust Companies and Section 19 of the Federal Deposit Insurance Act [12 U.S.C. 1829] may be relevant to this inquiry.

Section 16.5 provides that a state bank shall not "knowingly employ or otherwise permit an individual to serve as an officer, director, employee, or agent...if the individual has been convicted of a felony or of any criminal offense relating to dishonesty or breach of trust." Recently, CBAI has been informed of OBRE's position that a comprehensive state and federal criminal background check may be required in order to create reasonable assurance that the subject of the background check is not disqualified by Section 16.5. If CBAI has been misinformed regarding OBRE's expectations or requirements, then portions of the following analysis may be inapplicable.

Assuming that OBRE does have certain expectations or requirements pertaining to mandatory and comprehensive criminal background checks, we are inquiring as to what law, facts or circumstances trigger such expectations or requirements. In construing and applying Section 16.5, Policy Statement #1009 states:

"These statutory employment restrictions impose a duty upon each institution to make a reasonable inquiry into an applicant's background. The Office of Banks and Real Estate, Bureau of Banks and Trust Companies ("Bureau") believes that at a minimum, each institution should establish formal background investigation procedures for all employment situations. The purpose of these procedures should be to provide the institution with information concerning any convictions pertaining to a job applicant. At a minimum, an institution's background investigation procedures should require each applicant to complete a written employment application that requires a listing of all convictions.

In determining whether an institution has made a reasonable inquiry into an applicant's background, the Bureau will review the circumstances of each employment situation. For example, the Bureau would consider the establishment of a more thorough background investigation for those positions that have the ability to influence and or control the management or affairs of the institution to be reasonable, which, for example, may include the use of a competent background investigation firm. Similarly, the Bureau would also consider the establishment of a more thorough background investigation for persons not presently employed by the institution, as compared to existing employees, to be reasonable."

This language from Policy Statement #1009 raises two relevant issues. First, it appears that Policy Statement #1009 attempts to change the legal standard for a bank's culpability from "knowingly" to "negligently." Section 16.5 clearly establishes the legal standard that prohibits a bank from knowingly hiring a person who is ineligible under the terms of that statute. This standard is commonly understood and construed at law as a standard that requires actual knowledge and consciousness on the part of the actor (in this case, the bank). It imposes neither a duty to inquire nor a duty to take reasonable precautions. If the bank is unaware of the officer's, employee's or director's criminal history, the bank would seemingly not be in violation of Section 16.5.

Policy Statement #1009, on the other hand, claims that Section 16.5 "impose(s) a duty upon each institution to make a reasonable inquiry into an applicant's background." This, CBAI suggests, converts the "knowingly" standard in the statute to a standard of negligence. It is the negligence standard that requires an actor to do that which a reasonable person should do under the relevant circumstances. The negligence or "reasonable care" standard is reflected in Policy Statement #1009's statement that there is "a duty upon each institution to make a reasonable inquiry...."

Converting the statutory culpability standard from "knowingly" to "negligently" is a substantial defect in Policy Statement #1009, in CBAI's opinion. Beyond that issue, however, is a second issue concerning the application of Section 16.5. That issues relates to whether, and when, OBRE expects a state bank to conduct a comprehensive federal and state criminal background investigation. Policy Statement #1009 appears to suggest that not all employees need to be the subjects of such comprehensive background checks. This conclusion is implicit in language such as "(a)t a minimum, an institution's...procedures should require each applicant to complete a written employment application that requires a listing of all convictions" and "the Bureau would consider the establishment of a more thorough background investigation for those positions that have the ability to influence...the management or affairs of the institution to be reasonable ...." Even under the negligence standard imposed by Policy Statement #1009, it appears that comprehensive background investigations are not an absolute requirement. Rather, some sort of "sliding scale" apparently should be applied when determining whether to conduct a criminal background investigation and the extent of any such investigation. This sliding scale approach is inconsistent with CBAI's more recent understanding that OBRE examiners are admonishing state banks to conduct comprehensive background checks as the only realistic assurance of compliance with Section 16.5.

With respect to applicable federal requirements, Section 19(a) of the Federal Deposit Insurance Act prohibits an insured depository institution from "permitting" certain convicted individuals to engage in the conduct or professional relationships described in that section. However, Section 19(b) only penalizes knowing violations of Section 19(a). Furthermore, in recent conversations with FDIC personnel, I was told that the FDIC has no examination protocols or guidelines designed to ensure compliance with Section 19.

CBAI is not suggesting that Illinois banks, as a practical matter, should be unreasonably lax in their hiring practices. However, the public policy of Illinois, as evidenced by Section 16.5 of the Illinois Banking Act, only prohibits banks from knowingly hiring persons with certain criminal histories. With this in mind, CBAI seeks clarification regarding: (1) whether, or the extent to which, OBRE's Policy Statement #1009 is consistent with the statutory standard of culpability; and (2) when, or under what circumstances, a comprehensive federal and state criminal background check will be required by OBRE.

Thank you for your consideration of these issues. Clarity with respect to the nature of and requirements for compliance with Section 16.5 will be helpful to CBAI's members.

Sincerely,

Jerry D. Cavanaugh General Counsel

JDC/lls

Legal Link is a free benefit of CBAI membership. To pose a banking-related legal question to CBAI General Counsel Jerry Cavanaugh, e-mail him at jerryc@cbai.com">jerryc@cbai.com.