I. introduction
The FDIC has published a final rule codifying as regulation the agency’s Statement of Policy regarding the implementation of Section 19 of the Federal Deposit Insurance Act. Section 19 prohibits persons convicted of a criminal offense involving dishonesty, breach of trust or money laundering from being employed by financial institutions without prior written consent of the agency.
The final rule narrows the scope of crimes subject to Section 19, reducing barriers for individuals with prior criminal records who are seeking employment at a financial institution, while protecting the integrity of the banking system. Specifically, the rule exempts all individuals whose covered offenses have been expunged from submitting an application to the FDIC and makes changes to the current de minimis exception for certain offenses, thus narrowing the circumstances under which the FDIC’s written consent is required for a financial institution to hire individuals with minor criminal offenses.
The Federal Deposit Insurance Corporation (FDIC) recently approved revisions to regulations under Section 19 of the FDI Act to conform to the Fair Hiring in Banking Act (FHBA), which became effective on December 23, 2022.
II. scope of coverage
Under Section 19, any person who has been convicted of any criminal offense involving dishonesty, breach of trust, or money laundering, or has agreed to enter into a pretrial diversion or similar program (program entry) in connection with a prosecution for such offense, may not become, or continue as, an institution-affiliated party (IAP) of an insured depository institution (IDI); own or control, directly or indirectly, any IDI; or otherwise participate, directly or indirectly, in the conduct of the affairs of any IDI without the prior written consent of the FDIC.
In addition, the law bars an IDI from permitting such a person to engage in any conduct or to continue any relationship prohibited by Section 19. IDIs should therefore make a reasonable inquiry regarding an applicant’s history to ensure that a person who has a conviction or program entry covered by the provisions of Section 19 is not hired or permitted to participate in its affairs without the written consent of the FDIC issued under this subpart. FDIC-supervised IDIs may extend a conditional offer of employment contingent on the completion of a background check satisfactory to the institution and to determine if the applicant is barred under Section 19, but the job applicant may not work for, be employed by, or otherwise participate in the affairs of the IDI until the IDI has determined that the applicant is not barred under Section 19.
If there is a conviction or program entry covered by the bar of Section 19, an application under this subpart must be filed seeking the FDIC’s consent to become, or to continue as, an IAP; to own or control, directly or indirectly, an IDI; or to otherwise participate, directly or indirectly, in the affairs of the IDI. The application must be filed, and consented to, prior to serving in any of the foregoing capacities unless such application is not required under the subsequent provisions of this subpart. The purpose of an application is to provide the applicant an opportunity to demonstrate that, notwithstanding the bar, a person is fit to participate in the conduct of the affairs of an IDI without posing a risk to its safety and soundness or impairing public confidence in that institution. The burden is upon the applicant to establish that the application warrants approval.
III. Offenses covered under section 19
The conviction or program entry must be for a criminal offense involving dishonesty, breach of trust, or money laundering. “Dishonesty” means directly or indirectly to cheat or defraud, to cheat or defraud for monetary gain or its equivalent, or wrongfully to take property belonging to another in violation of any criminal statute. Dishonesty includes acts involving want of integrity, lack of probity, or a disposition to distort, cheat, or act deceitfully or fraudulently, and includes offenses that Federal, state or local laws define as dishonest. “Breach of trust” means a wrongful act, use, misappropriation, or omission with respect to any property or fund that has been committed to a person in a fiduciary or official capacity, or the misuse of one’s official or fiduciary position to engage in a wrongful act, use, misappropriation, or omission.
Whether a crime involves dishonesty, breach of trust, or money laundering will be determined from the statutory elements of the offense itself or from court determinations that the statutory provisions of the offense involve dishonesty, breach of trust, or money laundering. All convictions or program entries for offenses concerning the illegal manufacture, sale, distribution of, or trafficking in controlled substances shall require an application unless no application is required under this subpart. Convictions or program entries for criminal offenses involving the simple possession of a controlled substance are not covered under Section 19.
The FHBA excludes certain offenses from the definition of “criminal offenses involving dishonesty,” including (1) misdemeanor criminal offenses committed more than one year before the date on which an individual files an application, excluding any period of incarceration, and (2) “an offense involving the possession of controlled substances.”
The FDIC interprets the term “offense involving the possession of controlled substances” to exclude, at least, the offenses of simple possession and possession with intent to distribute from the “involving dishonesty” category of crimes. Additionally, the final rule shifts the FDIC’s position from its previous presumption that other drug-related offenses are subject to Section 19 as crimes involving dishonesty, breach of trust, or money laundering. Under the final rule, such crimes do not automatically trigger the need for an application but may require one, depending on the elements of the underlying criminal offense.
IV. Convictions under section 19
(a) Convictions requiring an application. There must be a conviction of record. Section 19 does not cover arrests or pending cases not brought to trial, unless the person has a program entry as set out in Section 303.224. Section 19 does not cover acquittals or any conviction that has been reversed on appeal, unless the reversal was for the purpose of re-sentencing. A conviction with regard to which an appeal is pending requires an application. A conviction for which a pardon has been granted will require an application.
(b) Convictions not requiring an application. When an individual is charged with a covered offense and, in the absence of a program entry as set out in Section 303.224, is subsequently convicted of an offense that is not a covered offense, the conviction is not subject to Section 19.
(c) Expungements. If an order of expungement or an order to seal has been issued in regard to a conviction, or if a record has been otherwise expunged by operation of law, then the conviction shall not be considered a conviction of record and shall not require an application.
The FHBA excludes certain convictions from the scope of Section 19 that have been expunged, sealed, or dismissed. The Act excludes from the scope of Section 19 an offense where:
It is intended by the language in the order itself, or in the legislative provisions under which the order was issued, that the conviction shall be destroyed or sealed from the individual’s State, Tribal, or Federal record, even if exceptions allow the record to be considered for certain character and fitness evaluation purposes.
(d)Youthful offenders. An adjudication by a court against a person as a “youthful offender” under any youth-offender law applicable to minors as defined by state law, or any judgment as a “juvenile delinquent” by any court having jurisdiction over minors as defined by state law, does not require an application. Such an adjudication does not constitute a matter covered under Section 19 and is not a conviction or program entry for determining the applicability of Section 303.227.
V. De minimis offenses
An application is not required for a covered offense or program entry relating to de minimis offenses.
(a) In General. Approval is automatically granted, and an application will not be required where all of the following de minimis criteria are met.
(1) The individual has been convicted of, or has program entries for, no more than two covered offenses, including those subject to paragraph (b); and for each covered offense, all of the sentencing requirements associated with the conviction, or conditions imposed by the program entry, have been completed (the sentence- or program completion requirement does not apply under paragraphs (b)(2) and (b)(4) of this Section 303.227);
(2) Each covered offense was punishable by imprisonment for a term of one year or less and/or a fine of $2,500 or less, and the individual served three days or less of jail time for each covered offense. The FDIC considers jail time to include any significant restraint on an individual’s freedom of movement which includes, as part of the restriction, confinement to a specific facility or building on a continuous basis where the person may leave temporarily only to perform specific functions or during specified times periods or both. Jail time includes confinement to a psychiatric treatment center in lieu of a jail, prison, or house of correction on mental-competency grounds. The definition is not intended to include any of the following: (i) persons on probation or parole who may be restricted to a particular jurisdiction, or who must report occasionally to an individual or to a specified location; (ii) persons who are restricted to a substance-abuse treatment program facility for part or all of the day; and (iii) persons who are ordered to attend outpatient psychiatric treatment;
(3) If there are two convictions or program entries for a covered offense, each conviction or program entry was entered at least three years prior to the date an application would otherwise be required, except as provided in paragraph (b)(1); and
(4) Each covered offense was not committed against an IDI or insured credit union.
(b) Other types of offenses for which the de minimis exception applies and no application is required.
(1) Age of person at time of covered offense. If there are two convictions or program entries for a covered offense, and the actions that resulted in both convictions or program entries all occurred when the individual was 21 years of age or younger, then the de minimis criteria in (a)(3) above shall be met if the convictions or program entries were entered at least 18 months prior to the date an application would otherwise be required.
(2) Convictions or program entries for insufficient funds checks. Convictions or program entries of record based on the writing of “bad” or insufficient funds check(s) shall be considered de minimis offenses under this provision if the following conditions apply:
(i) The aggregate total face value of all “bad” or insufficient funds check(s) cited across all the conviction(s) or program entry(ies) for “bad” or insufficient funds checks is $1,000 or less;
(ii) No IDI or insured credit union was a payee on any of the “bad” or insufficient funds checks that were the basis of the conviction(s) or program entry(ies); and
(iii) The individual has no more than one other de minimis offense under this Section 303.227.
(3) Convictions or program entries for small-dollar, simple theft. Convictions or program entries based on the simple theft of goods, services, or currency (or other monetary instrument) shall be considered de minimis offenses under this provision if the following conditions apply. Simple theft excludes burglary, forgery, robbery, identity theft, and fraud.
(i) The value of the currency, goods, or services taken is $1,000 or less;
(ii) The theft was not committed against an IDI or insured credit union;
(iii) The individual has no more than one other de minimis offense under this Section 303.227; and
(iv) If there are two de minimis offenses under this Section 303.227, each conviction or program entry was entered at least three years prior to the date an application would otherwise be required; or at least 18 months prior to the date an application would otherwise be required if the actions that resulted in the conviction or program entry all occurred when the individual was 21 years of age or younger.
(4) Convictions or program entries for the use of a fake, false, or altered identification. A conviction or program entry for the creation or possession of a fake, false, or altered form of identification by a person under the age of 21, or the use of a fake, false, or altered form of identification by such a person to circumvent age-based restrictions on purchases, activities, or premises entry, shall be considered a de minimis offense under this provision if the following conditions apply.
(i) The individual has no more than one other de minimis offense under this Section 303.227; and
(ii) If there are two de minimis offenses under this Section 303.227, each conviction or program entry was entered at least three years prior to the date an application would otherwise be required; or at least 18 months prior to the date an application would otherwise be required if the actions that resulted in the conviction or program entry all occurred when the individual was 21 years of age or younger.
(5) Designated lesser offenses. The FHBA excluded de minimis offenses—including “designated lesser offenses”—from the scope of Section 19 including relatively minor offenses that are specified either by the FHBA or by the FDIC through regulations.
The Act requires that any additional de minimis offense criteria that the FDIC may designate, by rule, must include specific criteria regarding confinement criteria and offenses involving nonsufficient funds checks. The Act also excludes from the scope of Section 19 “designated lesser offenses,” including the use of a fake form of identification, shoplifting, trespass, fare evasion, and driving with an expired license or tag, if 1 year or more has passed since the applicable conviction or program entry.