RECOMMENDATIONS

MORAL SUASION (Recommendation No. 1):

The Federal bank supervisory agencies make a coordinated, concerted, continued use of their powers of moral suasion to have the banking community refrain and desist from the use of nonpurpose transactions and from window dressing of bank reports and statements.

RESULTS. The Federal Reserve Board and the Federal Deposit Insurance Corporation, advised that they collaborated on determined face-to-face discussions with the bankers in every city where the practice of window dressing prevailed; the presidents of the Federal Reserve banks were requested to arrange meetings with the principal officials of the State and National banks in their districts that appeared to be engaging in window dressing, so that a frank exchange of views would lead to a cooperative agreement to put an end to the practice; comments of the presidents of the Federal Reserve banks and of individual bankers were almost entirely favorable to the program of moral suasion; comparative studies of year-end reports of condition have indicated that the program was quite successful.

The Comptroller of the Currency's original proposal to eliminate window dressing in bank reports was to utilize "surprise" calls; i.e., to require condition reports as of dates which the banks could not anticipate, and therefore could not effectively take steps to "window dress" their reports.

The Comptroller advised that while maintaining the belief that genuine surprise dates for call reports are the most effective method for dealing with the problem of window dressing, alternate means have nevertheless been explored with the Federal Reserve System and the FDIC; and that resulting from a series of meetings held with representatives of the other bank regulatory agencies, beginning with the fourth call for 1965, the forms used by the three agencies will be basically uniform and will preserve the statistical and supervisory value of the report; a memorandums section to be added to the call report form will require, among other disclosures, the average of total deposits for the 15 calendar days ending with the call date; and the average of total loans for the 15 calendar days ending with the call date. Window-dressing effects, according to the agencies, cannot be maintained for longer than a few days at most, and the proposed publication of a 15-day average of loans and deposits-the two most significant items in a window-dressing operation--will go a long way toward making any such attempt difficult and largely unrewarding.

ENFORCEMENT PROVISIONS (Recommendation No. 2):

That the Federal bank supervisory agencies adopt uniform rules or regulations under which, commencing with the second call date in 1964: (a) Every bank shall be required (1) to include in every required and voluntary report and statement of condition a certification that no window dressing is contained therein, and (2) to file with its Federal supervisory agency as many

copies of such reports and statements as such agency shall require. (b) Any supervisory agency which finds through bank examination or otherwise that contrary to such certification a bank has engaged in window dressing shall give public notice of its findings by publication of the name of the bank, the extent of the window dressing, and other details thereof in the Federal Register and by press release; and shall refer the matter to the Attorney General for possible prosecution under the false state

ments statutes.

RESULTS. The FDIC advised that the agencies have always required a certification that the statements and figures in a call report are "true and correct," and questioned whether an additional negative restatement of this fact would be helpful, because unscrupulous managements would have no moral hesitancy in signing such a certification, and the great preponderance of managements who are honorable might consider such a requirement an indignity. The FDIC further stated it was inclined to agree that some form of disciplinary action should be taken against flagrant offenders. The Comptroller of the Currency advised that where abuses are observed, his Office will take supervisory measures as deemed appropriate.

[H. Rept. No. 1147, 88th Cong., 2d sess.]

CRIMES AGAINST BANKING INSTITUTIONS

Eighteenth Report by the Committee on Government Operations

(Submitted to the Speaker February 20, 1964)

This report is concerned with the ever-increasing rise in crimes against banking institutions (both in the external crimes of robberies, burglaries, and larcenies, and in internal crimes like embezzlements and false entries), and the actions of the Federal banking supervisory agencies to deal with the problem. The report concluded that, for the most part, the supervisory agencies (i.e., the Office of the Comptroller of the Currency, the Federal Reserve System, the Federal Deposit Insurance Corporation, the Federal Home Loan Bank Board, and the Federal Savings and Loan Insurance Corporation) had issued no rules, regulations, or requirements with respect to the prevention of bank crimes. They specified no standards or requirements for bank structures or vaults, or for any security devices or procedures. There was virtually no coordination and cooperation between the agencies with reference to security matters. In general, the agencies left all such matters completely to the discretion of bank managements, except as to such security deficiencies which might be noted by agency examiners in the course of bank examinations. In order to combat the rise in crimes against banking institutions the report recommended:

RECOMMENDATIONS

SECURITY GUIDELINES (Recommendation No. 1):

That the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, the Federal Deposit Insurance.

Corporation, and the Federal Home Loan Bank Board, hereafter called supervisory agencies, each establish by rules or regulations specific guidelines for the prevention of external and internal crimes against banking institutions under their supervision, consistent with the requirements of the several kinds and sizes of such institutions, and the public interest.

RESULTS. The Federal Reserve System and the Federal Deposit Insurance Corporation advised that they jointly formulated a questionnaire, used in each bank examination, to supply clearer guidelines for examiners. It spells out 21 specific points to be checked by the examiner in appraising a bank's security and controls against external crimes, and supplements the questionnaires on internal operations, which are being revised and expanded. These are designed to make bank management more security conscious. The FDIC sent copies of the committee report to over 13,000 insured banks and copies are used in examiners' training. FDIC has assigned a staff man to the problem of bank crimes.

The Comptroller of the Currency has advised that since the committee hearings in 1963, that Office has given special attention to the scope of bank examinations as a means of deterring internal and external crimes against national banks; that reports of examination have been recently revised requiring national bank examiners to detail the scope of their examinations; that it is the responsibility of the 14 Regional Comptrollers of the Currency to carefully review the scope of the examinations of each national bank located in his assigned region and to determine that it is of sufficient depth to disclose any weaknesses which might lead to the commission of internal and external crimes; and that during the course of an examination that Office's representatives carefully review with bank management internal control procedures and adequacy of the protective equipment for the prevention of external crimes.

The Federal Home Loan Bank Board has advised that, in essence it is carrying out that part of this recommendation which relates to the prevention of internal crimes against savings and loan associations. The Board has promulgated rules and regulations covering examinations and supervisory procedures designed for the prevention of internal crimes. Among other things these regulations require the pursuit of sound financial practices, the establishment and maintenance of accurate records, and sound accounting practices and internal procedures. The Board bas considerable doubt, because of the many variables involved, detailed and specific measures for the effective prevention of external crimes are susceptible to Board rules and regulations. It believes that the establishment of workable guidelines for the prevention of external crimes should evolve from a joint effort by trade groups within the financial industry, law enforcement authorities and other specialists in the field of crime prevention and security. The Board has made available to every examiner on its staff and to each savings and loan association member of the Federal Home Loan Bank System a copy of the Federal Bureau of Investigation's "How Banks Can Help the FBI" and a copy of the committee's report. The Board also now requires all insured associations to submit an annual report giving: (1) information on the number of robberies or burglaries committed against the institution

during the calendar year, and (2) the type of protective measures in effect at the time of the incident and of plans to install new protective

measures.

SPECIFIC REQUIREMENTS (Recommendation No. 2):

That in establishing such guidelines the supervisory agencies give consideration to incorporating therein, as requirements, adequate audit, compulsory vacations, direct verification, decoy money, and other widely accepted measures referred to in the report.

RESULTS.-The FDIC and FRB advised they have implemented the above recommendations by having their examiners check for such security features as decoy money, and for other security measures again st external and internal crimes. During examination, management's attention is called to deficiencies in controls, determined by using questionnaires and also by general knowledge of banking. Management is urged to strengthen procedures where weaknesses are uncovered. According to FDIC, its questionnaire on internal controls has been expanded to include questions applicable to automated systems, to adequate audit programs, and on direct verification. Its manual for bank examination has been revised, with substantial coverage accorded to adequate records, internal controls, audits, compulsory vacation policies, sound personnel practices, cash control, rotation of personnel, segregation of duties, dual control and direct verification. Critical areas are covered, including: (1) the importance of an adequate physical security program; (2) recent developments contributing to the external hazard; (3) security measures and practices; and (4) protective facilities and devices. These subjects are also covered in the joint examination schools of the FDIC and FRB.

According to the Comptroller of the Currency, a comprehensive program for prevention and detection of crimes against national banks includes a review during bank examination of protective controls which have been established, and examiners encourage direct verification of loans and deposits, the use of decoy money and the enforcing of the requirement that all officers and employees take at least 2 consecutive weeks' annual vacations. His office also conducts periodic training schools at the regional level during which examiners are trained in methods of detection and prevention of internal and external crimes. FBI lecturers are part of the program.

The Federal Home Loan Bank Board advised that its regulations require each institution whose accounts are insured by the Federal Savings and Loan Insurance Corporation to undergo a periodic audit, in addition to the regular supervisory examination. If any institution has not been audited by independent auditors or adopted an internal audit program, a supervisory examination of such institution will include an audit. Audits are reviewed for compliance with the Board's established requirements. Its principles of internal checks and control include adequacy of audit, required vacations, direct verification, and other widely accepted elements. It recommends the use of decoy money. Examiners are instructed to report any

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failures to utilize decoy money, and where operating officers or employees do not take annual vacations.

EXAMINER TRAINING (Recommendation No. 3):

That the examiners employed by the supervisory agencies be given such training in the methods of prevention of external and internal crimes as will enable them to ascertain and advise on any security deficiencies in the institutions they examine; and that to assist in the examination for security against external crimes the examination report forms call for detailed information in that regard, similar to the American Bankers Association's bank inspection form referred to in the report.

RESULTS. All of the Federal supervisory agencies have advised that their examiner training procedures have been expanded, particularly as to security against external crimes. The FHLBB trains its examiners in the prevention of internal crimes. Indications of the nature and scope of training given examiners by the supervisory agencies are discussed above. The FDIC and the FRB have collaborated on a form entitled "Security and Controls Against External Crimes," which is used by their examiners, and questionnaires on internal hazards have been expanded by the agencies.

PERSONNEL FINGERPRINTING (Recommendation No. 4):

That the supervisory agencies consider making it a requirement on the institutions they supervise that fingerprints of prospective officers, directors, and employees of such institutions be submitted to the Federal Bureau of Investigation for criminal record checks.

RESULTS. The FHLBB advised that it has recommended all insured institutions avail themselves of the services of the FBI to obtain a fingerprint check of all prospective savings and loan association employees and has advised such associations that the FBI is willing to make such checks with respect to all their present employees including their officers and directors. The Board will obtain, at least on an annual basis, a report from each insured institution as to whether it is availing itself of these services. The Board would favor legislation requiring that fingerprints of prospective officers, directors, or employees of financial institutions supervised by a Federal board or agency be submitted to the FBI for criminal record checks, but it would be opposed if the requirement was made solely applicable to institutions subject to its jurisdiction.

The Federal Reserve Board advised that any such legislation should apply to applicants for employment in industry generally, and not just to applicants for positions in banks.

COORDINATED AGENCY EFFORTS (Recommendation No. 5):

That the supervisory agencies establish an interagency committee for the purposes of making a coordinated effort to lessen