Julesburg bank on receiving end of OCC enforcement

For the second time in only a few months, a Northern Colorado bank has been handed an enforcement action from a federal bank regulatory agency.

The Office of the Comptroller of the Currency, which is charged with regulating nationally chartered banks, entered into a formal agreement with First National Bank of Julesburg on Oct. 24. The bank’s four locations include branches in Windsor and Wellington.

The move comes after an action this summer involving Fort Collins-based First National Bank – an institution not related to First National of Julesburg.

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Prior to this year, no Northern Colorado-based bank had received an enforcement action from the OCC since First National Bank of Estes Park in 1999. First National of Estes is not affiliated with either of the aforementioned First Nationals.

The Julesburg bank is based in Sedgwick County, in the northeastern corner of the state, and in addition to the branches in Windsor and Wellington in Julesburg and Haxtun.

“In a nutshell, what prompted (the formal agreement) was a currency transaction report,´ said Tom Olson, bank president.

Currency transaction reports must be filed by all banks for each deposit, withdrawal, exchange of currency or other transaction that involves more than $10,000. This includes transactions that might occur at different times in the day or at different branches of the same institution.

“Banks and other institutions are required to complete a Currency Transaction Report to help law enforcement agencies detect and prevent money laundering and other illegal activities,” according to information posted on the Web site of the Federal Deposit Insurance Corp. The reports are part of the compliance required by the Bank Secrecy Act.

Olson said that the bank had assigned the task of filing the reports to its BSA officer, who had been handling them appropriately. However, there was confusion about who would be responsible for the reports after that employee left the bank. The bank’s internal auditor caught the error, Olson said, about a week before the OCC conducted its inspection. He added that the issue had been corrected prior to the exam.

“Realistically, we fixed the problem that started it in five minutes,” he said.

The enforcement action against the Julesburg 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.

Burden on smaller banks

In addition to citing lapses in First National of Julesburg’s BSA program, the OCC’s formal agreement asked for additional oversight by the bank’s consumer compliance officer and for more specific documentation of its real estate appraisal program.

To address the latter, the bank needed to show that the appraiser approves loans, not the loan officer – a matter of getting a different signature on a form, Olson explained. He pointed out that this is a requirement that is really aimed more at large institutions where the loan officers do not interact with the appraisers on a regular basis. Three loan officers and one appraiser, all of whom interact with each other on every loan, staff First National’s loan department in the small eastern plains town of Julesburg.

Prior to the agreement, compliance went through three lines of defense – the frontline of the teller or loan officers, the BSA compliance officer and then the internal auditor. Now, a general compliance officer will be added to the mix in order to meet the OCC’s compliance requirements. First National has pulled one of its branch presidents to serve as its new compliance officer.

“We’ll have to hire another officer (to replace the branch president),” Olson said.

Olson said he is happy to comply with the regulations. However, he worries that requiring community banks to operate under the same regulatory umbrella as the large national banks might become too burdensome.

“Since Sept. 11 (2001), the regulatory burden has really stepped up,” he said. “It concerns me about our financial burden down the road.”

Olson said he was shocked at how little it takes to get an enforcement action under the BSA standards.

BSA was put in place in 1970 to establish requirements for recordkeeping and reporting by individuals, banks and financial institutions. It was largely aimed at detecting money laundering and organized crime. In 2001, the USA Patriot Act enhanced the reporting requirements of BSA with the purpose of weeding out terrorists.

“The whole key behind this is know your customer,” he said. “What’s looked over is that in rural areas, we already know our customer and have for a long time.”

Where a bank with more than $100 billion in assets might not be adept to noticing any unusual activity by any of its hundreds of thousands of customers, a $90 million bank like Julesburg’s First National is more likely to know all of its customers by name.

The question is how much compliance can small, community banks handle.

“The government is asking us, essentially, to police,” Olson said, and the FDIC Web site backs him up.

Relief possible next year?

Regulatory relief has long been the drumbeat for the Independent Community Bankers of America, the national organization to which the Independent Bankers of Colorado belongs. Olson sits on the IBC board.

“Certainly, BSA is a major component of (regulatory relief),´ said Barbara Walker, executive director of the IBC.

She’s heard numerous reports of small banks receiving actions due to small technical violations.

“It sounded like (Olson’s) experience is the most common experience of community banks with BSA compliance in Colorado,” Walker said.

Walker and many community bankers have been a bit surprised by the reasons the regulators have been handing out actions.

“What is unusual is that the examiners are given no discretion,” she said. “It makes it sound like there is some risk to the bank and some risk to the customer when there’s not.”

Walker expects that there is likely to be some relief measures pushed through Congress next year.

She explained that it is typical for legislators to pass through crisis bills after a major event, such as the terrorist attacks of Sept. 11. The legislation is almost always an overreaction that is later reigned in and made more reasonable, she explained.

Walker would have liked to see the burden caused by BSA requirements reigned in sooner. However, she said she understands that is a domino effect. The legislators are under pressure to act, putting the regulatory agencies under pressure, which in turn, puts the squeeze on regional offices and examiners.

“It’s taken longer than it should have, but there’s some light on the horizon with possible relief in 2007,” she said.

Unfortunately, that is too late for the banks that have already been affected by the increased scrutiny of regulatory agencies.

In June, OCC examiners signed a formal agreement with Fort Collins-based First National Bank. The codes cited in the agreement dealt with a wide variety of issues including loans in areas with special flood hazards, truth-in-lending and real estate settlement procedures.

Additionally, the OCC recently released an enforcement action ordering First National to pay $12,000 to the National Flood Insurance Program. The action – a civil money penalty – was related to the issues detailed in the formal agreement.

The civil money penalty was actually handed down in June. The formal agreement was not entered into until July. However, the OCC did not make the civil money penalty order available to the public until Nov. 14.

In discussing the formal agreement, First National Bank President Mark Driscoll echoed Olson’s sentiment.

“It’s all about knowing your customer,” Driscoll told the Business Report in August. “The short and sweet of BSA is knowing your customer.”

And true to the plight facing many community banks, First National Bank is now being required to show what it already knows.

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