Two Compliance Lessons from 13 Bank BoD Members' Civil Money Penalties
Thirteen board members of a bank in Utah recently received civil money penalties because the regulators believed that they hadn’t effectively followed regulatory guidance. These civil money penalties are a good reminder of two things: 1. The importance of Board involvement in compliance, because individual members may be held personally responsible, and 2. The importance of understanding and responding to guidance offered by regulators.
On June 20, 2014, the OCC released news of individual civil money penalties (CMPs) for 13 members of a bank in Utah’s Board of Directors (BoD). These penalties were issued because the regulators percieved that the bank directors "failed to take appropriate actions in response to previous criticisms and violations relating to the Bank’s compliance with the Real Estate Settlement Procedures Act," according to the enforcement action. In the eyes of the regulators, the Utah bank failed to comply, and the board members were held personally responsible.
These CMPs provide two subtle reminders for financial institutions: first, that members of the Board of Directors can potentially be held personally responsible for compliance violations, and second, that it’s important to pay attention to guidance from the regulators.
Personal Liability Associated with Compliance
In this regulatory environment, it’s important that leadership and employees of financial institutions are aware of compliance-related risks and activities. The personal liability associated with compliance is a growing concern.
We’ve learned a few valuable lessons about BoD responsibility. This provides a good opportunity to review some basic responsibilities of the Board of Directors:
- Select Competent Executive Officers
- Effectively Supervise the Bank’s Affairs: The Board should be actively involved in supervising the institution’s affairs.
- Adopt and Follow Sound Policies and Objectives
- Avoid Self-Serving Practices: Board members should avoid conflicts of interest, and do not create financial arrangements or use particular services in a self-serving way.
- Be Informed: It’s critical that the Board be aware of the institution’s condition and management policies.
- Maintain Reasonable Capitalization
- Observe Banking Laws, Rulings, and Regulations: Directors must exercise care that banking laws are not violated.
- Ensure that the Bank has a Beneficial Influence on the Economy of its Community: While this is a broad and complex directive for leadership to follow, well-balanced and community-conscious economic growth are important to compliance.
Heed the Regulators' Warnings
Consent orders are difficult to analyze as they only provide a limited amount of information, and certainly not enough to judge an organization or an individual. However, these civil money penalties can provide key lessons. One of these relates to regulatory guidance.
When you receive guidance from the regulators regarding your compliance practices and policies, you must proactively manage these issues. These recommendations can help improve the quality of your compliance program. They also provide insight into what the regulators may review in the future.
If a regulator reinvestigates an institution and finds that appropriate action has not been taken to address identified compliance issues, the penalties for non-compliance may be higher. To put it bluntly, follow the regulator’s guidance in order to avoid the repercussions of repeat findings.
Now that we are more aware of the potential for personal liability in regulatory compliance, and the value of listening to the regulators’ warnings, we need to consider what steps to take next.
In addition to the eight key responsibilities of the Board, it’s important to ensure that the Board of Directors has the necessary optics into their institution’s activities. These optics are critical because they enable the Board to be proactive about compliance. The Board must also be aware of changes made in response to formal or informal guidance from the regulators, including progress and status checks.
Bottom line: The Board of Directors must be aware of their institution’s activities and proactively address compliance risk as identified by internal staff, external auditors, and/or the regulators. A risk assessment with data analysis will help ensure the bank is proactively keeping an eye of the financial institution’s risk.
By now we know that teamwork is important element of a strong compliance program. Compliance officers: This is a great reminder to help everyone, including the Board, embrace compliance. Your experience and expertise are an asset. With your insight, you can help lead your Board to achieve compliance goals and respond to challenges. Lead them with optics, and lead them with action!
- The OCC Director's Book: The Role of a National Bank Director
- Duties and Responsibilities of Directors
- Basics for Bank Directors
- Enforcement Action