Understanding Civil Money Penalties
Civil money penalties (CMPs) serve as a critical tool for federal regulatory agencies to enforce compliance and deter misconduct within the banking industry. The FDIC, along with other regulatory bodies, follows a structured approach outlined in the Interagency Policy Statement on CMPs to assess penalties. Additionally, the Federal Civil Penalties Inflation Adjustment Act Improvements Act mandates annual adjustments to CMP amounts to keep pace with inflation. This article aims to elucidate the FDIC’s criteria for assessing penalties, the interagency policy on CMPs, and the requirements of the Inflation Adjustment Act, with a focus on the new penalty amounts for violations of 12 USC 1818(i)(2).*
Interagency Policy on Civil Money Penalties:
The Interagency Policy Statement on CMPs provides a comprehensive framework for regulatory agencies to assess penalties consistently and equitably. It outlines 13 assessment factors that agencies like the FDIC consider when determining the appropriate CMP amount for violations. These factors encompass various aspects such as consumer harm, intent, concealment, history of previous supervisory action, and cooperation. The policy emphasizes the importance of evaluating the severity of violations and their impact on consumers and the banking industry. It also underscores the significance of compliance programs and internal controls in preventing misconduct. The factors include:
- Evidence that the violation or practice or breach of fiduciary duty was intentional or was committed with a disregard of the law or with a disregard of the consequences to the institution;
- The duration and frequency of the violations, practices, or breaches of fiduciary duty;
- The continuation of the violation, practice, or breach of fiduciary duty after the respondent was notified or, alternatively, its immediate cessation and correction;
- The failure to cooperate with the agency in effecting early resolution of the problem;
- Evidence of concealment of the violation, practice, or breach of fiduciary duty or, alternatively, voluntary disclosure of the violation, practice, or breach of fiduciary duty;
- Any threat of loss, actual loss, or other harm to the institution, including harm to the public confidence in the institution and the degree of such harm;
- Evidence that a participant or his or her associates received financial gain or other benefit as a result of the violation, practice, or breach of fiduciary duty;
- Evidence of any restitution paid by a participant of losses resulting from the violation, practice, or breach of fiduciary duty;
- History of prior violation, practice, or breach of fiduciary duty, particularly where they are similar to the actions under consideration;
- Previous criticism of the institution or individual for similar actions;
- Presence or absence of a compliance program and its effectiveness;
- Tendency to engage in violations of law, unsafe or unsound banking practices, or breaches of fiduciary duty; and
- The existence of agreements, commitments, orders, or conditions imposed in writing intended to prevent the violation, practice, or breach of fiduciary duty.
Federal Civil Penalties Inflation Adjustment Act Improvements Act:
The Federal Civil Penalties Inflation Adjustment Act Improvements Act mandates annual adjustments to CMP amounts to account for inflation. Under this act, federal agencies must review and adjust their penalty amounts annually based on inflation indices provided by the Office of Management and Budget (OMB). The goal is to maintain the deterrent effect of penalties by ensuring that they remain consistent with the economic environment. The act enhances transparency and accountability in penalty administration and promotes the fair and equitable treatment of regulated entities.
New Penalty Amounts for Violations of Section 8 of the FDIC Act:
Section 8 of the FDI Act (12 USC 1818(i)(2)) pertains to the imposition of CMPs by federal banking agencies for violations of most banking regulations. A federal banking agency may impose a Tier 1 penalty for any insured depository institution and any institution-affiliated party who violates any law or regulation; violates any final order or temporary order issued by the federal banking agency; violates any condition imposed in writing by a federal banking agency in connection with any action on any application, notice, or other request by the depository institution or institution-affiliated party; or violates any written agreement between the depository institution and agency. A federal banking agency may impose a Tier 2 penalty for any insured depository institution and any institution-affiliated party who engages in any Tier 1 behavior, recklessly engages in an unsafe or unsound practice in conducting the affairs of such insured depository institution, or breaches any fiduciary duty where the violation, practice, or breach is part of a pattern of misconduct; causes or is likely to cause more than a minimal loss to such depository institution; or results in pecuniary gain or other benefit to such party. A federal banking agency may impose a Tier 2 penalty for any insured depository institution and any institution-affiliated party who knowingly engages in any Tier 1 or 2 behavior and knowingly or recklessly causes a substantial loss to such depository institution or a substantial pecuniary gain or other benefit to such party by reason of such violation, practice, or breach. For ongoing breaches, the federal banking agencies can impose the penalties for each day on the ongoing behavior.
The recent inflation adjustment has resulted in revised maximum penalty amounts for Tier One, Tier Two, and Tier Three violations under this section. Effective from January 15, 2024, the adjusted maximum CMP amounts are as follows:
- Tier One CMP: $12,249.
- Tier Two CMP: $61,238.
- Tier Three CMP: $2,449,575.
It’s important to note that while some regulations may call for different penalty amounts, the most common penalties assessed by the FDIC are under Section 8 of the Federal Deposit Insurance (FDI) Act.
Conclusion
Civil money penalties play a crucial role in maintaining the integrity and stability of the banking system. The federal banking agencies, guided by the Interagency Policy Statement and the Federal Civil Penalties Inflation Adjustment Act Improvements Act, ensure that penalties are assessed fairly, consistently, and in proportion to the severity of violations. The recent adjustments to penalty amounts for violations of Section 8 of the FDI Act underscore the commitment to enforcement and deterrence in the banking sector. Moving forward, continued vigilance and adherence to regulatory standards will be essential to uphold the safety and soundness of financial institutions. * This article will address the FDIC’s specific policies and procedures related to the assessment of CMPS, but the other agencies employ similar policies and penalty amounts.