Clarification of Prior Opinion Regarding Borrowing by Bank Examiners

• Court: Department of Justice Office of Legal Counsel
• Decided: December 20, 1993
• Status: Published

Opinion

Clarification of Prior Opinion Regarding Borrowing by Bank Examiners

18 U .S.C . § 213, w hich prohibits federal bank exam iners from borrow ing from Federal Reserve m em ­ b e r banks or o th er entities subject to exam ination by them , does not prohibit such exam iners from receiving loans o r credit from affiliates o f covered banks m erely because such affiliates are under “com m on co n tro l” with the bank or because the covered bank and the affiliate have a com m on m ajority o f corporate officers or directors.

An ex am in er w ould be prohibited from borrow ing from such an affiliated entity, w here the affiliate is serving as a conduit o r “front” for the im plem entation o f a loan that is actually extended due to the direction, instigation, or influence of the affiliated m em ber bank or person connected therewith

December 20, 1993

M e m o r a n d u m O p in io n f o r t h e G e n e r a l C o u n s e l Bo a r d o f G o v ern o r s Fed er a l R eserv e S y ste m

This responds to your request that we clarify an aspect of an opinion previously issued by this Office respecting 18 U.S.C. § 213, which prohibits a bank examiner from borrowing from any Federal Reserve member bank or other covered entity that he examines, or any person connected therewith. See Federal Reserve Board Policy on Bank Examiner Borrowing , 6 Op. O.L.C. 509 (1982) (“ 1982 Opinion”). Specifically, you have asked us whether footnote 8 from that opinion should be construed to mean that 18 U.S.C. § 213 prohibits bank examiners from receiving loans or credit from affiliates of member banks that they have examined in all cases where such affiliates are under “common control” with the bank, or where the two entities have a common majority o f corporate officers or directors. We conclude that such a construction is not required by the statute, except where the affiliated bank is serving as a conduit or “front” for the implementation of a loan that is actu­ ally being extended due to the direction, instigation, or influence of the member bank or person connected therewith.

I. BACKGROUND

The criminal statute giving rise to the issue presented is 18 U.S.C. § 213, which provides as follows:1

1 A lso p e rtin en t is 18 U S C § 212, w hich prohibits “o fficer[s], d ire c to rs ] or em ployee[s]" o f Federal R eserve m em b er banks and certain olher co v ered institutions (e g , banks insured by the Federal D eposit Insurance C o rp o ratio n ) that are subject to ex am in atio n by federal exam iners from m aking or granting any loans o r g ratu ities to any ex am in er who is a u th o rized to exam ine the covered bank or institution

168 C larification o f P rior Opinion R egarding B orrow ing by B ank E xam iners

Whoever, being an examiner or assistant examiner of [a federal banking agency], accepts a loan or gratuity from any bank, branch, agency, corporation, association or organization examined by him or from any person connected herewith, shall be fined . . . or im­ prisoned . . . .

(emphasis added). In a memorandum prepared for the Federal Deposit Insurance Corporation (“FDIC”) in 1980, this Office opined as follows concerning certain proposed amendments to FDIC regulations that would permit FDIC examiners to make use of a limited amount of credit extended via credit cards by banks that are affiliates of banks that they examine:

[T]his exposition of the background of 18 U.S.C. § 213 establishes that its phrase “from any person connected therewith” includes only individuals and, insofar as the examiners of your agency are con­ cerned, is limited to an officer, director or employee of an insured State nonmember bank. Accordingly, we see no legal objection to the FDIC’s amending its regulations to allow an examiner to receive credit from a national or State member bank even though it is an af­ filiate of an insured State nonmember bank.

Memorandum for Hoyle L. Robinson, Executive Secretary, FDIC, from Leon Ulman, Deputy Assistant Attorney General, Office of Legal Counsel, Re: Proposed Amend­ ments to Regulations o f Federal Deposit Insurance Corporation Relating to Bank Loans to Examiners - 18 U.S.C. §§ 212-213 at 4 (July 10, 1980) (“ 1980 Opinion”). In response to a request made by the Federal Reserve Board in 1982, this Office issued a further opinion that a policy allowing examiners to obtain loans or credit cards from affiliates of member banks and bank holding companies they are authorized to examine would not violate 18 U.S.C. § 213. Referring back to the 1980 opinion prepared for the FDIC, the 1982 Opinion stated:

Our review of the legislative history of § 213 indicated that Con­ gress intended to do no more than bar a bank examiner from ac­ cepting a loan from a bank, or an individual connected with a bank he was responsible for examining; its prohibition was not intended to extend to loans from affiliated institutions however tenuous their relationship with the bank subject to examination. We have reex­ amined that position, and we believe it to be the correct interpreta­ tion of § 213.

6 Op. O.L.C. at 511. However, the 1982 Opinion also contained the following footnote, which occa­ sions the concern giving rise to your inquiry:

169 Opinions o f the O ffice o f L egal Counsel

We do not suggest that §§ 212 and 213 would permit an examiner to borrow or accept credit from an affiliate in a case where the rela­ tionship between the institution being examined and the affiliated lending institution is such as to suggest common control, or where the two entities have a common majority of officers or directors. In such a case, a loan from an affiliate might be tantamount to a loan from the bank being examined, thus giving rise to the very conflict of interest which §§212 and 213 were intended to prevent.

Id. at 511 n.8. You have stated that this footnote is inconsistent with the general conclusion of the 1982 Opinion and suggested that the interpretation it expresses would restrict borrowing by Federal Reserve examiners in a manner not required by the statute itself. Pointing out that such a construction would impose unfair restrictions on covered examiners in their efforts to obtain credit card accounts, mortgages, and other commonplace forms of credit, you have asked us to clarify the uncertainty created by the language of the questioned footnote.

II. ANALYSIS

The analysis in both the 1980 and 1982 Opinions adequately establishes that (1) the phrase “from any person connected herewith” used in 18 U.S.C. § 213 is lim­ ited to natural persons and does not encompass corporations or other legal entities affiliated with a member bank; and (2) as a general rule, that phrase does not ex­ tend § 213’s prohibition to loans extended by corporate affiliates of covered banks to examiners with authority to examine such banks. The uncertainty created by footnote 8 in the 1982 Opinion stems from its at­ tempt to convey that, where an examiner accepts a loan from an entity that has a very close relationship with a covered bank, there is some potential for “sham” transactions concealing the reality of a loan that was actually extended at the insti­ gation or direction of the covered bank. As you point out, however, footnote 8 may also be read to suggest that §§212 and 213 implicitly prohibit examiners from borrowing or accepting credit from an affiliate of a member bank whenever their relationship “is such as to suggest common control, or where the two entities have a common majority of officers or directors.” 6 Op. O.L.C. at 511 n.8. We do not believe that such a construction is warranted and, to the extent that footnote 8 im­ plies such a construction, it does not reflect the legal opinion of this Office.2

2 As y o u r letter req u estin g th is opinion p o in ts out, many “ affiliates" of m em ber banks are by definition under “co m m o n c o n tro l” w ith such banks. S e e 12 U.S C § 1 8 4 1(k). T herefore, an interpretation that any affiliate that is un d er “co m m o n control” with a m em ber bank is p e r se subject to § 2 13’s prohibition is d iffi­ cult to reco n cile w ith the 1982 O pin io n ’s m ain conclusion that § 213 does not generally prohibit exam iners o f covered banks from receiv in g loans or cre d it from affiliates o f those banks

170 C larification o f P rior Opinion R egarding B orrow ing by Bank E xam iners

To resolve any further uncertainty on this issue, it is not the opinion of this Of­ fice that examiners are prohibited from borrowing from an affiliate of a covered bank solely because that affiliate is under common control with the covered bank or because it shares a common majority of officers or board members with it.3 As long as the affiliate extending credit to the examiner is not extending that credit due to the direction, instigation, or influence of the covered bank, the transaction is not subject to the prohibition of 18 U.S.C. §§212 and 213.4 We believe that the prohibitions of §§ 212 and 213 would apply, however, in a case where an affiliate of a covered bank extended a loan to an examiner of that bank on behalf o f that bank, or acted as a conduit to disguise the true source of a loan to the examiner that has been authorized or instigated by the covered bank. See United States v. Bris­ tol, 473 F.2d 439, 442 (5th Cir. 1973) (“[A] construction of [§ 213] which would allow a bank officer to circumvent [§ 213’s] intent simply by channeling a loan through a controlled shell corporation is untenable.”) (emphasis added). The key issue in these cases is whether the affiliated bank is acting as an alter ego, agent, or conduit for a member bank or a covered “person” in circumstances where it is actually the latter that has authorized, caused, or brought about a loan or other extension of credit to the examiner. In such instances, we believe that §§ 212 and 213 would apply to the transaction — not because the affiliate is under com­ mon control or management with the member bank, but because the transaction is in reality a loan or extension of credit initiated by the member bank rather than by the affiliate. See United States v. Bristol, 473 F.2d at 442. However, where the affiliate has independently authorized the loan or extension of credit to the exam­ iner, and the transaction does not result from the direction, control, or influence of the covered bank or other covered “person,” the transaction is not subject to the prohibitions of the statute even though the affiliate is under common control, or has an overlapping majority of officers or directors, with the member bank.

WALTER DELLINGER Assistant Attorney General Office o f Legal Counsel

’ C f U nited States v. Sclw en h u l, 576 F 2d 1010, 1020 (3d C ir 1978), c e rt denied. 4 39 U S 964 (1978), w here the court held that the fact that tw o financial institutions had overlapping officers “ is not en o u g h to provide a basis for concluding that the corporations were id en tical" for purposes o f establishing the coverage of conflict o f interest laws respecting certain prohibited bank loans 4 T his c o n clu sio n is fortified by the restrictive in terpretation o f § 2 1 3 ’s coverage applied by co u rts in related co n tex ts See, e g , U nited States v. N apier, 861 F 2d 547, 549 (9th C ir 1988) ( “Strict re a d in g ” applied to § 213 in holding that a state C o m m issio n er o f Financial Institutions could not be treated as a covered “exam iner,'* notw ithstanding g o v ern m en t’s argum ent that the com m issioner was the functional equivalent o f an ex am in er and that a narrow reading o f the term w ould “e v isc e ra te d ” the statute ) In so holding, the N a p ier court rejected the g o v e rn m e n t's argum ent that the “general statutory purposes’7 und erly ­ ing the statute ju stifie d a more expansive interpretation Id at 548-49