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4000 - Advisory Opinions
"Pre-Trial Diversion Agreements and Other Similar Programs"
Language in Section 19 Cases
FDIC--94--29
June 22, 1993
H. Andrea Gribble, Senior Counsel
This responds to ***'s letters dated July 20, 1992 and March 1,
1993 to Senior Deputy General Counsel Douglas H. Jones regarding your
concern with the amendment to section 19 of the Federal Deposit
Insurance Act ("Act"), 12 U.S.C. 1829, which extended its
coverage to persons who have agreed to enter pre-trial diversion or
similar programs in connection with their prosecution for any criminal
offense involving dishonesty or breach of trust. The FDIC's Legal
Division apologizes for the lengthy delay in our response to your
original inquiry.
By way of background, section 19 of the Act is a companion provision
to section 8(g) of the Act, 12 U.S.C. 1818(g), which pertains to the
suspension and removal of institution-affiliated parties who are
indicted for certain types of offenses. On August 9, 1989, section 8(g)
of the Act was amended by the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA"), Public Law No. 101--73.
Where previously, individuals who were indicted or named in
informations or other complaints for crimes involving dishonesty or
breach of trust which were punishable by imprisonment for a term
exceeding one year could be suspended from office pursuant to section
8(g), and could be
{{10-31-94 p.4866}}permanently barred if ultimately
convicted, the FIRREA amendments broadened applicability of the
provision regarding permanent 8(g) prohibition orders to include those
individuals who have agreed to enter a pre-trial diversion or other
similar program.
The Conference Report accompanying the 1989 amendment to section
8(g) indicates that Congress intended that section to apply to a
broader class of individuals than those who are actually
"convicted." A reference to those who enter a plea of nolo
contendere was deleted from draft legislation as unnecessary, because
such a plea results in a judgment of conviction. The addition of
language which covers situations in which no formal conviction is
entered, therefore, indicates that the section clearly was meant to be
broadened to cover instances in which no conviction was obtained. On
November 29, 1990, in Public Law No. 101--647, Congress, indicating a
need for stricter controls over the hiring of individuals who work for
and with banks, 1
similarly expanded the language in section 19 to cover pre-trial
diversion and other similar programs.
We agree with the purpose of these amendments, which is to protect
institutions from a wide range of individuals whose criminal history
indicates a greater risk of abuse to the institution and its
depositors. Individuals who enter pre-trial diversion or other similar
programs may or may not be free of culpability for the charges alleged
against them, consequently, we are concerned that such individuals may
become institution-affiliated parties without our knowledge, and
occasionally, without the knowledge of the institution which hires
them.
That being said, I hope the following will address some of the
specific concerns expressed in ***'s letters.
The July 20, 1992 letter requested clarification as to whether any
or all of the following groups of individuals would come within the
scope of section 19. The groups and responses are as follows:
1. Individuals who have been arrested and have a pending
charge for a theft or dishonest act.
The pre-trial diversion language of section 19 does not apply to
individuals in this category. Only those individuals who have agreed to
enter, and who have been accepted into the program, were intended to be
covered by this provision. However, section 8(g), 12 U.S.C. 1818(g),
addresses individuals who have been "charged in any information,
indictment, or complaint" with the commission or participation in
crimes involving dishonesty or breach of trust (punishable by
imprisonment for a term exceeding one year under State or Federal law)
or individuals charged with criminal violation of section 1956, 1957,
or 1960 of Title 18 or section 5322 of Title 31 (bank fraud and money
laundering related offenses). Under section 8(g), any such individual
may be suspended from office, pending trial or other hearing, by the
appropriate Federal banking agency if the agency determines that the
individual may pose a threat to the interests of depositors or the
institution. If the individual is ultimately convicted, or enters into
a pre-trial diversion program, the agency may enter an order
permanently barring that individual from the bank, or any other insured
depository institution, and in the case of the bank fraud/money
laundering offenses, the agency is mandated to issue such an order. It
is interesting to note that this statute includes a provision which
states:
{{10-31-94 p.4867}}
A finding of not guilty or other disposition of the charge
shall not preclude the agency from instituting proceedings after such
finding or disposition to remove such party from office or to prohibit
further participation in depository institution affairs, pursuant to
paragraph (1), (2), or (3) of subsection (e) of this section.
See U.S.C. 1818(g)(1)(D)(ii). This could be interpreted
as an indicator from Congress that the FDIC look behind dismissal of
criminal charges and of conviction records before allowing an
individual to be hired and/or continue to serve in an insured
depository institution.
2. Individuals who are currently participating in a pre-trial
diversion program for a theft or dishonest act.
These individuals would be covered by the pre-trial diversion
provisions of section 19. Before a pre-trial diversion program may be
entered into and time served, the participant, the appropriate U.S. or
State attorneys' office, the judge, and in many jurisdictions, the
victim, must agree that the participant can go into the program. Until
agreement between the parties has been reached, the participant's offer
to go into such a program is merely that--an offer. Upon agreement of
all necessary parties, the individual is then deemed to be
participating in the program and is subject to the provisions of
section 19.
3. Individuals who have entered a pre-trial diversion program
for a theft or dishonest act but whose participation has been
terminated prior to the completion of the program.
These individuals would also be covered by the "pre-trial
diversion" language, and likely by the "conviction" language
of section 19 as well. As will be discussed later in this letter,
pre-trial diversion agreement programs were created to help address the
problem of over-crowded prisons. In many jurisdictions, one of the
primary requirements before entry into such a program is accepted is
the entry of a guilty plea by the participant which is accepted by the
presiding official (usually a judge), and the "conviction" is
held in abeyance. The pre-trial diversion program "diverts" such
an individual away from the normal sentencing procedures, into the
program. Since successful completion of the program is what allows the
individual to avoid sentencing and imprisonment, it would seem that
failure to successfully complete the program reverts the individual
back "on track" to the status of someone who has entered a guilty
plea, whose plea has been accepted, and whom the court can, and usually
does, immediately pronounce as convicted, and is subsequently sentenced
accordingly. The timing of these procedures would seem to be very
rapid, if not almost instantaneous. It would seem logical then, that
such an individual would be subject to the pre-trial diversion language
while the individual is in the program, and subject to the ordinary
"conviction" language of section 19 almost immediately upon being
dropped from the program. 2
4. Individuals who previously entered a pretrial diversion
program for a theft or dishonest act and have successfully completed
the program and the charges are dismissed.
These individuals would also be subject to the application of the
requirements of section 19, as they are individuals who have "agreed
to enter a pre-trial diversion agreement program." The statute
provides no relief for individuals who have successfully completed
their sentences upon conviction, nor does it otherwise address
individuals who have successfully completed a pre-trial diversion
agreement program. As will be discussed later, whether or not the
charges are ultimately dismissed is irrelevant in such a situation.
I note that the letter of July 20, 1992 indicates that BANC ONE
views section 19 as somehow precluding banks from hiring individuals
who are subject to its terms. This is simply not the case. Nothing in
section 19, or the Act, states that employment should be refused to
individuals who have been convicted of crimes involving dishonesty or
breach of trust. Section 19 merely requires that any individual
convicted of a crime involving dishonesty or breach of trust, including
those individuals who have entered into pre-trial
{{10-31-94 p.4868}}diversion agreements or other similar
programs for any such crime, must obtain the FDIC's prior written
approval before working for a bank. This statutory prior approval
requirement would seem to preclude your suggestion to allow banks to
hire individuals pending receipt of a response to an exemption request.
While you complain generally about the burden of the exemption
process precluding the hiring of covered individuals, we believe the
FDIC has been very reasonable in its application of section 19, and
has, under appropriate circumstances, granted numerous section 19
applications. By way of example, in 1991, of 73 applications for
permission to serve pursuant to section 19, 71 were approved and 2 were
denied. Additionally, individuals whose section 19 applications have
been denied are not without an opportunity for further due process.
FDIC regulations provide for a hearing, if requested, in any case in
which an application pursuant to section 19 has been denied. See
12 C.F.R. 308.156-308.160.
Furthermore regarding the statement in the March 1, 1993 letter that
it takes several months to receive a response on a request for a
section 19 exemption, FDIC records reflect that the average processing
time for all section 19 applications nationwide in 1992 was 44 days. I
learned from discussions with the FDIC's Division of Supervision that
it appears most straightforward section 19 applications take
substantially less time than this to process. Unless the section 19
application involves some complex issue, or is in some fashion
incomplete, it should not take several months to process.
We do not disagree that the recent statutory amendments to section
19 impose additional burdens on banks to make sure that each and every
job applicant, and in fact, each and every bank employee, understands
that for depository institutions insured by the FDIC, information
relating to criminal indictment, conviction, participation in pre-trial
diversion agreements or other similar programs, etc. against that
individual must be fully disclosed before the individual can be
considered for employment. It is clear, however, that Congress believed
that FDIC consideration of the activities of such individuals prior to
their employment by an insured depository institution was significantly
important to the protection of the industry and outweighed any
disadvantages caused by its
implementation. 3
You also expressed concern regarding state law prohibitions against
employers taking adverse actions on the basis of arrest records or
dispositions of criminal charges. Specifically, citations were made to
the Wisconsin Fair Employment Act (Sec. 111.31-32) and to the Michigan
Code (MSA 3.548). 4
It is fairly common statutory interpretation that federal law
supersedes state law, and it is our opinion that the requirements of
section 19 applicable specifically to Federally insured depository
institutions would supersede any general state law prohibitions against
hiring restrictions.
It is not without precedent that certain classes of jobs are
statutorily deemed to be sensitive enough in nature to permit special
inquiries into background prior to employment, despite general
prohibitions to the contrary. In fact, it has been our experience that
many states having such prohibitions against discrimination in hiring
because of possible criminal involvement also include several
"carve-outs" to these prohibitions, usually for special classes
of jobs which are deemed by the state legislature to require a higher
degree of public confidence. Jobs of this nature appear to include
police officers, public officials, attorneys, teachers, and some
licensed professions, to name a few. For example, immediately following
the provisions of Wisconsin law cited by you, is section 111.335 of the
Wisconsin Fair Employment Act, entitled "Arrest or conviction
record; exceptions and special cases." (a copy of which is
attached). This provision seems to indicate that for certain types of
jobs, an employer may consider an individual's criminal record.
Also
{{10-31-94 p.4869}}included, for your information, is an
exception for employment of individuals whose work would require them
to be bonded. 5
It is further interesting to note that Wisconsin does not disapprove
of laws which prohibit the employment of individuals with conviction
records when the circumstances of the conviction and/or arrest relate
to the circumstances of the particular job or licensed activity.
See Law Enforcement Standards Bd. v. Village of Lyndon Station,
305 N.W.2d 89 (1981), which upheld an administrative rule
prohibiting employment of convicted felons as law enforcement officers.
The Lyndon Station court stated: "Surely, an
administrative rule prohibiting persons convicted of felonies from
receiving appointments as law enforcement officers is designed to
insure that only those who possess proper professional character,
education and training are appointed to protect and promote the health,
welfare and safety of the people of this state." Id at
96. Could anything less be said with regards to instilling confidence
in the banking system? Because of the sensitive nature of banking, and
because the nature of the business requires the implicit trust by the
public of a bank's employees, there should be little doubt that crimes
involving dishonesty or breach of trust as stated in section 19, must
be deemed to relate to the circumstances of participating in the
conduct of the affairs of a bank.
It does not appear that Wisconsin has a per se formal
pre-trial diversion agreement program. I was unable to find any
particular statute or policy which provided for such a program. About
the only material I did uncover was a fairly old article entitled
"Pre-Trial Diversion" by Judge Frederick P. Kessler, which
encouraged adoption of such a program, and laid out what the background
and criteria for such a program should be. I include a copy of this
article with this letter, because I felt you would find the reasons for
creating such a program of interest. Pre-trial diversion does seem to
exist in some form or fashion in Wisconsin, because it is possible to
find case law somewhat obliquely referencing such a program. However,
no state case law exists which addresses the particular matters at
issue here.
The State of Michigan likewise carves out exceptions to its
anti-employment discrimination laws. Included in the same sentence of
the statute which prohibits an employer from "making a record of
information regarding an arrest, detention, or disposition of a
violation of law in which a conviction did not result," is a
specific exception for a law enforcement agency of the state and a
political subdivision of the state. See Michigan Statutes,
Annotated § 3.548(205a).
We hope this response is of assistance to you. If you have any
questions, or need any additional information, please feel free to call
me at (202) 898-3726.
1As further evidence that Congress is seriously concerned about
the backgrounds of individuals who participate in the conduct of the
affairs of insured depository institutions, Congress again recently
amended sections 19 and 8(g). Amendments to Section 19 added by the
Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), which was enacted December 19, 1991, included a
mandatory ten-year bar for persons who have been convicted (or agreed
to enter a pre-trial diversion program) for certain banking-related
crimes from applying for permission to participate in an insured
depository institution. The 10-year absolute bar to application applies
unless the FDIC makes a motion to the original sentencing court to
waive the bar.
Also, in October of 1992, Congress enacted the "Annunzio-Wylie
Anti-Money Laundering Act" which, among other things, placed further
conditions on hiring individuals and broadened the FDIC's powers and
responsibilities with regards to sections 19 and 8(g). Go Back to Text
2Even should a "gap" occur, it should be noted that
nothing precludes the appropriate Federal banking agency from
suspending and/or barring such an individual pursuant to 12 U.S.C.
1818(e) based on the conduct which was the subject of the pre-trial
diversion and/or subsequent conviction, under appropriate
circumstances. Go Back to Text
3Although not entirely analogous, in somewhat contemporaneous
legislation, Congress ensured that all the federal banking agencies
must also now be more concerned about the backgrounds of individuals
they are considering hiring, and must now be more specific in the
questions they ask before hiring an individual. See 12
U.S.C. 1818(e)(7). Go Back to Text
4Pursuant to our telephone conversation, I concentrated my
research on the two states you selected--Wisconsin and Michigan. Go Back to Text
5See: Bear v. City of Wauwatosa, 716 F.2d 1117.
(Plaintiff's license to sell guns in city was taken away when plaintiff
received felony conviction of second degree sexual assault for
consensual sex acts with a 14-year old girl in his gun shop, which had
become a teenage hangout, held not to be prohibited discrimination);
and Milwaukee County v. Labor and Industry Review Commission,
407 N.W. 2d 908 (Felony conviction for homicide by reckless
conduct deemed "substantially related" to circumstances of job as
county crisis intervention specialist). Go Back to Text
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