Feds find violations at First National

Fort Collins-based First National Bank is first in a lot of respects – first in deposit volume in Northern Colorado, first in the number of offices in Fort Collins.

But the bank’s most recent first is one it probably wishes it could have avoided. The Office of the Comptroller of the Currency on July 20 issued an enforcement action against First National Bank, the first one of this millennium against a Northern Colorado bank.

During its June 6, 2005, examination of First National the federal agency charged with regulating and examining nationally chartered banks found three banking code violations that led to the enforcement action. The codes violated dealt with a wide variety of issues including loans in areas with special flood hazards, truth in lending and real estate settlement procedures.

An OCC spokesman said he could not discuss information not included in the enforcement action. The specific violations were cited in an exam, which is not public record.

“We had a couple of situations where we had not properly documented flood insurance,” according to First National President Mark Driscoll.

The enforcement action against First National Bank took the form of what regulators call a formal agreement. Formal agreements differ from other formal enforcement actions, such as consent orders and cease-and-desist orders, mostly in name. According to an OCC policy and procedures manual, the decision to enter into a formal agreement rather than a consent order is often a negotiating strategy. Boards of directors are more likely to oppose a consent order than a formal agreement.

The formal agreement requires the bank to form a compliance committee of five members of the board of directors. Under the agreement, the committee will meet monthly and submit quarterly progress reports focusing on what actions are needed and have been implemented in order to comply.

Three action items

The agreement contains three items for the bank to act on. Within 90 days of the agreement, the board must implement a consumer compliance program. The purpose of the program is to ensure that the bank is “operating in compliance with all applicable consumer protection laws, rules and regulations.”

The bank also needs to correct the violations that were found. Within 75 days, the board needs to put in place procedures to prevent any future violations.

Also within 90 days of the agreement, the bank is required to implement a plan to ensure compliance with the Bank Secrecy Act.

The Bank Secrecy Act – or BSA – was put in place in 1970 to establish requirements for recordkeeping and reporting by individuals, banks and financial institutions.

“It’s all about knowing your customer,” Driscoll said. “The short and sweet of BSA is knowing your customer.”

First National, he added, would blend the BSA requirements into what the bank is already trying to do, since the best approach to community banking is to know your customer.

“We’ve always known our customer, but we maybe haven’t always documented it enough,” he said. “We’re challenged to a new depth of reporting.”

The new depth is a result of the Patriot Act, and the federal government’s focus on potential money laundering.

Increased reporting

The agency within the U.S. Treasury Department responsible for establishing and implementing policies to detect money laundering is known as FinCEN, for Financial Crimes Enforcement Network.

“In 2001, the Patriot Act further enhanced the BSA by strengthening customer identification procedures, prohibiting financial institutions from engaging in business with foreign shell banks, requiring financial institutions to have due-diligence procedures, and, in some cases, enhanced due-diligence procedures for foreign correspondent and private banking accounts and improving information sharing between financial institutions and the U.S. government,” FinCen spokeswoman Candice Pratsch wrote in response to an e-mail from the Business Report.

The increased reporting is being felt across regulatory agencies.

The Colorado Division of Banking is charged with regulating state-chartered banks, along with the Federal Reserve and the Federal Deposit Insurance Corp. However, it wasn’t until this year that the state division started checking for BSA compliance.

The Division of Banking has always conducted safety and soundness exams. But changes to the program now require that BSA compliance be conducted with every safety exam, which affects the division’s staffing.

Colorado Banking Commissioner Richard Fulkerson said that it previously took eight to 12 examiners a week on-site to conduct a safety and soundness exam on a small to medium-sized bank. Now, the division adds two more examiners for several days to check for BSA compliance.

“For a small division like us, it does add a lot onto what we do,” Fulkerson said.

While its more work, Fulkerson isn’t complaining. He feels that the BSA examinations and enforcement have become more consistent during the past few years.

Feds under fire

Such consistency might have been the reason First National’s violation came to light. For the past two years, the OCC has been under scrutiny for supposedly being too lenient on BSA violations at Wells Fargo & Co.

American Banker magazine first reported the situation, citing internal OCC memos. A report from the Treasury Department’s Office of the Inspector General stated that the OCC officials should have ordered a formal enforcement action to Wells Fargo for BSA violations instead of the non-public, informal action that was handed down.

OCC examiners, in fact, found BSA violations at Wells dating from 1999 to 2004, and recommended formal action. However, after a meeting between Wells’ CEO and an OCC senior official, an informal action was carried out.

“Since the Wells enforcement action, OCC has renewed its emphasis on Bank Secrecy Act/Anti-Money Laundering compliance by national banks,” the Inspector General’s report read.

The report also summarizes the fact that enforcement actions regarding BSA compliance have increased, making the OCC’s informal action with Wells that much more unusual.

The banking industry has always been one that is highly regulated. In the late 1990s, both First National Bank of Estes Park and Cache Bank and Trust had enforcement actions issued against them, and last year former New Frontier Bank employee Fred Allison received an order barring him from banking.

on Facebook on LinkedIn