Questions Concerning the Right to Financial Privacy Act

• Court: Department of Justice Office of Legal Counsel
• Decided: May 22, 1979
• Status: Published

Opinion

May 22, 1979

79-35 MEMORANDUM OPINION FOR THE DEPUTY ATTORNEY GENERAL

Right to Financial Privacy Act of 1978 (12 U.S.C. § 3401)—Banks—Disclosure of Customer Financial Records

This responds to your request for our opinion o f April 30 on the follow­ ing questions concerning the Right to Financial Privacy Act (A ct):1 (1) To what extent does the Act affect the ability o f a bank supervisory agency to report to the Department o f Justice viola­ tions o f the law that it uncovers? (2) W hat kinds o f inform ation may be included as part o f the notification that is explicitly permitted banks under § 1113(h)(5) (12 U.S.C. § 3413) or that may be impliedly permitted bank supervisory agencies? (3) W hat is the interplay o f § 1112 (12 U .S.C . § 3412) o f the Act and the ability o f bank supervisory agencies to notify the Department o f possible offenses without giving notice to customers? These issues arise because o f the restrictions the Act has placed on Federal agencies’ access to and dissemination o f the financial records o f bank custom ers.2 Our conclusions may be summarized as follows: first, a report that a customer’s financial records may relate to a criminal offense, when based on a summary or analysis o f the records, is itself a “ financial record” within the meaning o f § 1102(2); second, with the exception o f § 1113(h),

1 The Right to Financial Privacy Act, 12 U .S.C . § 3401 et seq., was enacted as Title XI of the Financial Institutions Regulatory Act o f 1978, Pub. L. No. 95-630, 92 Stat. 3697. The section references in this opinion are to those in title XI. 1 In § 1101(4)—(5) o f the A ct, a “ custom er” means an individual or a partnership o f five or fewer individuals, who used or is using any service o f a financial institution. T he financial records o f corporations, larger partnerships, or other legal entities are not covered and access to such records is not affected.

217 the procedures in § 1112 are the only ones expressly provided for a super­ visory agency to make such a report to a law enforcement agency; third, notwithstanding § 1112, implied authority for a bank supervisory agency to make such a report exists in a narrow class o f cases, namely, possible violations o f criminal statutes that are part o f the regulatory system en­ forced by the supervisory agency; fourth, the report o f possible criminal offenses expressly permitted by §§ 1103(c) and 1113(h)(5), and impliedly permitted for “ regulatory” crimes, may be specific enough to permit the law enforcement agency to request the primary records but may not be so detailed as to am ount to a transfer o f the substance o f the original records. We are informed by your staff that the background to your request is as follows. Before the enactm ent o f the A ct, a supervisory agency routinely inspected custom er records in the course o f examining the financial in­ stitutions under its charge.3 W hen this led the agency to believe that a Federal offense might have been committed by the customer or others, it would report to the proper Federal enforcement agency. The report would begin with a summary o f the reasons for believing that an offense had been committed and would proceed with a detailed analysis o f the sup­ porting customer records involved. The offenses tended to fall into two groups. The first involved misuse o f authority by an officer or employee o f the financial institution, whether or not in concert with a custom er.4 The second involved offenses not related to the management o f the institu­ tion. We are informed that referrals by supervisory agencies o f offenses not involving the financial institution were rare. Accordingly, this opinion will focus on the authority o f the supervisory agencies to notify law en­ forcement agencies o f offenses affecting the financial institution and the authority o f the law enforcement agencies to receive such referrals. The extent to which the Act affects the ability o f a bank supervisory agency to report violations to the Departm ent o f Justice depends on four factors: the ability o f the supervisory agency to report before the Act was passed; the A ct’s definition o f financial record inform ation; its restric­ tions on the supervisory agencies’ access to records, and the A ct’s re­ strictions on their referral power.

* Section 1101(6) o f the Act defines “ supervisory agency” to mean: with respect to any particular financial institution any o f the following which has statutory authority to examine the financial condition or business operations o f that institution— (A) the Federal Deposit Insurance C orporation; (B) the Federal Savings and L oan Insurance C orporation; (C) the Federal H om e L oan Bank Board; (D) the National Credit Union Adm inistration; (E) the Board o f G overnors o f the Federal Reserve System; (F) the C om ptroller o f the Currency; (G) the Securities and Exchange Commission; (H) the Secretary o f the Treasury, with respect to the Bank Secrecy Act and the Currency and Foreign Transactions Reporting Act (Pub. L. N o. 91-508, title I and II); or (I) any State banking or securities departm ent or agency. 4 See. e.g., 18 U .S.C . §§ 656-657, 1005-1006.

218 The supervisory agencies are authorized by statute to examine the af­ fairs o f financial institutions under their jurisdiction.5 The examining function has included reporting to the Department o f Justice irregularities that may am ount to violation o f the criminal statutes applicable to finan­ cial institutions.6 These statutes were originally enacted as part o f the Federal regulatory system for financial institutions. Their purpose is to protect the solvency and integrity o f the institutions against willful misuse o f their funds.7 It was considered an integral part o f the supervisory agen­ cies’ duty to protect financial institutions and their depositors to inform the proper law enforcement authorities o f those instances o f mismanage­ ment that appeared to be criminal. As stated in Cooper v. O ’Conner, 99 F. (2d) 135, 140 (D.C. Cir. 1938): By reason o f their performance o f duties clearly assigned, the facts and evidence which suggest criminal conduct upon the part o f bank officials are revealed to such [Federal] officers. It is the duty o f all citizens to reveal such evidence, o f which they may have knowledge, at the risk o f being guilty o f misprision o f felony for failing to do so. In the case o f an official, his failure to act under such circumstances would in addition, constitute serious malfeasance in office. In the present case, appellees were charged with responsibility for the collection and conservation o f the assets o f a bank. It would be absurd to contend that the duties o f such an officer—so charged and so peculiarly aware o f facts suggesting that certain persons were engaged in the spoliation o f those very assets—should stop abruptly at the point where the initiation of criminal proceedings became necessary to protect such assets. There was no statutory restriction on their power to report offenses. See, Bank o f America National Trust & Savings Assn. v. Douglas, 105 F. (2d) 100, 103-104 (D.C. Cir. 1939); 29 Op. A tt’y Gen. 555 (1912). We must consider, then, the extent to which Congress has affected the previous power arid duty o f the supervisory agencies to report violations o f law to this Departm ent. The Act affects this power in three ways. First, §§ 1102 and 1113 restrict the conditions under which the supervisory agen­ cies may obtain access to the records in the hands o f the financial institu­ tion. Second, §§ 1112 and 1113(h) place express restrictions on disseminating inform ation once access has been obtained. Third, § 1101(2) defines the term “ financial record” broadly enough to include inform a­ tion derived from the primary records.

’ See, e.g., 12 U .S.C . § 481 (Com ptroller o f the Currency); 12 U .S.C . § 1440 (Federal Hom e Loan Bank Board); 12 U .S.C . § 1756 (National Credit Union Adm inistration); 12 U .S.C. § 1730(m)(l) (Federal Savings and Loan Insurance Corporation); 12 U .S.C . § 1820(b) (Federal Deposit Insurance C orporation). ‘ See 18 U .S.C . §§ 213, 215, 656-657, 1005-1006. 1 See, e.g., United Slates v. Darby, 289 U .S. 224 (1933); United States v. Corbett, 215 U .S. 233 (1909); United States v. Manderson, 511 F. (2d) 179 (5th Cir. 1975); United States v. Wilson, 500 F. (2d) 715 (5th Cir. 1974); Weir v. United States, 92 F. (2d) 634 (7th Cir. 1937).

219 Initial access by a Governm ent agency to records in the hands o f a financial institution is governed by § 1102. It prescribes the general re­ quirement that access must be obtained through one o f the formal methods set out in §§ 1104-1108, subject to notice to the customer and to judicial supervision under §§ 1109-1110. It further provides that, no t­ withstanding the general requirem ent, initial access may be obtained through the exceptions contained in §§ 1103(c)— (d), 1113, and 1114. O f these, § 1113(b) and (h) are relevant to the functions o f the supervisory agencies. Section 1113(b) provides: Nothing in this title prohibits examination by or disclosure to any supervisory agency o f financial records or inform ation in the ex­ ercise o f its supervisory, regulatory, or m onetary functions with respect to a financial institution. This is intended to give the supervisory agencies access to customer records in order to conduct examination. In addition, § 1113(h)(1)(A) permits a Governm ent authority to have access to customer records in connection with a lawful examination, in­ spection, or investigation o f the institution or o f a legal entity not a customer.* The investigating agency must certify that the investigation is lawful; transfer o f the primary records to another agency is restricted. § 1113(h)(2), (4). However, under § 1113(h)(5) the agency in possession may notify another agency with proper jurisdiction “ that financial records obtained pursuant to this subsection may relate to a potential civil, criminal, or regulatory violation by a custom er,” and the notified agency may then seek access under the procedures provided by the Act. By its terms, § 1113(h)(1)(A) may be used as authority to examine a financial in­ stitution, thereby expressly permitting a supervisory agency to notify a law enforcement agency under § 1113(h)(5). We are informed, however, that the supervisory agencies prefer to obtain access under § 1113(b) in order to avoid the certification process required by § 1103(b) and§ 1113(h)(2). Unless one o f the exceptions in § 1113-1114 applies, § 1112 o f the Act provides the mechanism for disseminating financial records obtained from the acquiring agency to other agencies. U nder subsection (a), the transferor agency must certify that the records are relevant to a legitimate law enforcement inquiry within the jurisdiction o f the recipient agency. Under subsection (b)-(c), the transferor must notify the customer within 14 days unless a court authorizes delayed notice.9 Subsection (d) expressly excludes from the A ct’s restrictions the exchange o f inform ation among supervisory agencies.

' This m eans, in effect, a partnership o f more than five individuals or a legal person not an individual. See note 2, supra. ' T he reasons justifying delayed notice provided by § 1109(a)(3) are: (3) there is reason to believe th at such notice will result in— (Continued)

220 As reported to the House, § 1112 o f the Act provided: Nothing in this title prohibits any supervisory agency from ex­ changing examination reports or other information with another supervisory agency, or from supplying information to a prosecu­ tion or enforcement agency concerning a possible violation o f a regulation or statute administered by the supervisory agency. [Emphasis added.]10 This language would have expressly continued the existing referral prac­ tices o f the supervisory agencies for offenses relating to the financial in­ stitution. It was deleted when the present § 1112 was introduced in an amendment offered by Representatives Goldwater and M cKinney." The effect o f the am endm ent, Representative Goldwater explained, “ is to force an agency to justify beforehand its request for inform ation, leave a paper trail o f the transaction, and only upon court agreement not notify an individual.” 12 Representative McKinney introduced a letter from As­ sistant A ttorney General Wald supporting the amendment; the letter did not distinguish referrals by supervisory agencies from other interagency transfers.13 The term “ financial records” is defined by § 1101(2) o f the Act to in­ clude “ an original of, a copy of, or information known to have been derived fro m ” any record held by a financial institution concerning its relationship with a customer. [Emphasis added.] The emphasized language was added on the House floor in an amendment by Represent­ ative Pattison, but is not discussed in the legislative history.14 On its face, it is broad enough to include both summaries o f customer records and analyses o f the' records showing that the customer may have engaged in any particular activity, including commission o f a crime. There are several reasons for a broad reading of this language. First, one principal purpose o f the Act was to restrict the ability o f the Govern­ ment to reconstruct an individual’s affairs from his financial records.15 Derived information and its use are at the center o f what Congress con­ sidered to be the threat to privacy under prior law. Second, §§ 1103(c)

(Continued) (A) endangering life o r physical safety o f any person; (B) flight from prosecution; (C) destruction o f or tam pering with evidence; (D) intim idation o f potential witnesses; or (E) otherwise seriously jeopardizing an investigation or official proceeding or un­ duly delaying a trial or ongoing official proceeding, to the same extent as the cir­ cumstances in the preceding subparagraphs. 10 124 C o n g r e s s i o n a l R e c o r d H. 11728 (d a ily e d ., O ct. 5, 1978). 11 124 C o n g r e s s i o n a l R e c o r d H . 11733, 11734 (d a ily e d ., Oct. 5, 1978). 11 124 C o n g r e s s i o n a l R e c o r d H . 11733 (d a ily e d ., Oct. 5, 1978). " 124 C o n g r e s s i o n a l R e c o r d H. 11734 (d a ily e d ., Oct. 5, 1978). 14 124 C o n g r e s s i o n a l R e c o r d H . 11735 ( d a ily e d . , Oct. 5, 1978). 11 See H. Rept. 1383, 95th C ong., 2d sess., at 33-35; 124 C o n g r e s s i o n a l R e c o r d H. 11731-32 (Representatives Pattison, Rousselot), 11739 (Representative Cavanaugh), 11739 (Representatives Rousselot and Pattison), (daily ed., Oct. 5, 1978).

221 and 1113(h)(5) specifically permit a financial institution or a supervising agency to report to a law enforcement agency, in limited circumstances, that financial records show a crime may have been comm itted, without notifying the custom er. This express grant o f auihority would not be necessary if the reports were not deemed to be disclosure o f a “ record” otherwise prohibited by the Act. Third, the Pattison am endm ent, as a whole, had the purpose o f encouraging customers to seek judicial review and requiring agencies to justify access to records with greater particu­ larity.16 Although the scope o f the phrase “ inform ation known to be de­ rived from * * *” is not discussed, the phrase was enacted as part o f an effort to make it more difficult for the Governm ent to obtain or use finan­ cial inform ation without notice to the customer. The argument to the contrary is that the operation o f § 1112 requires that a summary or analysis, if sufficiently general, need not be considered a “ record.” Representative Goldwater explained that § 1112’s purpose was to require the agency receiving the financial inform ation to justify its need.17 The transferring agency is required to certify that the transfer is for a legitimate law enforcement purpose. To do so, the receiving agency must be able to explain to the transferring agency what it wants and why. This, in turn, requires that the transferring agency first have informed the receiving agency that it has available financial information that may be relevant to a legitimate law enforcement inquiry. This argument, in our view, does not overcome the action o f the House (under § 1103(c) and § 1113(h)(5)) in expressly permitting reports that a crime may have been committed and deleting similar express authority in § 1112(d). These actions would have been superfluous if 'such a report, based on examination and analysis o f financial records, was not itself a record. It is consistent, moreover, with the A ct’s general purpose o f limit­ ing Government access to financial data to construe the statute to prevent one agency from informing another that an individual’s financial records should make him an object o f the latter’s agency’s suspicions without in­ forming the individual. We therefore conclude that the definition of “ financial record” in § 1102(2) includes a report that analysis o f the primary records shows a custom er to have possibly committed a crime. Thus, the statement that a custom er’s records may relate to a Federal crime, when based on examination o f those records, is itself a financial record under the Act. The Act expressly permits an agency that has ob­ tained access to the primary financial records under § 1113(h) to notify a proper law enforcement agency o f this conclusion, and it expressly permits transfer o f any inform ation am ong supervisory agencies. Otherwise, the procedures o f § 1112(a)-(c) are the A ct’s only explicit mechanism

16 124 C o n g r e s s i o n a l R e c o r d H. 11735 (Representative Pattison) (daily ed., Oct. 5, 1978). " 124 C o n g r e s s i o n a l R e c o r d H. 11733 (d a ily e d ., O ct. 5, 1978).

222 for disseminating custom er record inform ation, including derivative infor­ m ation, from one agency to another. The question thus becomes whether Congress intended a further, implicit m ethod o f transfer from the super­ visory agencies. As a general m atter, the legislative history o f § 1112 is clear that implicit exceptions to it were not intended. The House was aware that the “ routine use” exception to the Privacy Act, 5 U .S.C . § 552a(a)(7), (b)(3), has been used to justify exchanges o f inform ation among Federal agencies based on implicit authority. In an exchange among Representatives Rousselot, P at­ tison, and Cavanaugh on this point, it was clearly stated that § 1112, as amended, contained no “ routine use” exception, and that interagency dissemination could only be made with certification by the transferring agency and notice to the custom er." W ithout equally clear support de­ rived from the purpose and legislative history o f the Act, we are unable to say that Congress intended to preserve as implied exceptions to § 1112 any pre-enactment practices o f transferring information. We believe, however, that support for implied authority to transfer in­ formation can be found in the narrow circumstances in which the offense reported by a supervisory agency relates to the financial institution’s operations. Representative Goldwater stated that his version o f § 1112 did not apply “ to supervisory agencies properly conducting their responsibili­ ties.” 19 The proper conduct o f those responsibilities has long been con­ sidered to include reporting criminal violations o f the banking laws to the law enforcement agencies.20 Moreover, the Right to Financial Privacy Act was but one title o f 20 in an omnibus statute that was primarily concerned with strengthening the powers o f the supervisory agencies and tightening the restrictions on bank officers, directors, and shareholders.21 The House Banking, Finance, and U rban Affairs Committee relied in at least one case on referrals from a supervisory agency to U.S. Attorneys as indications that a regulatory problem existed.22 It would be anomalous to conclude that a statute intended on the whole to strengthen the regulation o f finan­ cial institutions was also intended to deprive the regulators o f one o f their oldest and strongest weapons for dealing with the most serious cases of management abuse. Considering the Financial Institutions Regulatory Act as a whole, we conclude that Congress did not intend to prohibit a supervisory agency from reporting to the proper law enforcement agency that it has dis­ covered in a custom er’s records evidence that a criminal statute that is part

11 124 C o n g r e s s i o n a l R e c o r d H. 11739 (daily ed., O ct. 5, 1978). 19 124 C o n g r e s s i o n a l R e c o r d H. 11733 (daily ed., O ct. 5, 1978). 10 See p. 4, supra. 21 See generally Pub. L. No. 95-630, Financial Institutions Regulatory and Interest Rate Control Act o f 1978, Titles I-1II, IV, VI-1X, 92 Stat. 3461; H. Rept. 1383, 95th C ong., 2d sess., at 4-22 (1978). “ H. Rept. 1383, 95th C ong., 2d sess., at 13 (1978).

223 o f its regulatory system has been violated. Such reports are an integral part o f the process o f regulating financial institutions, and they further the regulatory agencies’ primary mission o f protecting the soundness o f these institutions. Notwithstanding § 1112, the supervisory agencies have im­ plicit authority to inform the proper law enforcement agency that their in­ spection o f customer records shows that an individual may have violated a priminal statute governing the management o f financial institutions they regulate. We must, however, point out that the contrary argument is strongly grounded on the language and legislative history o f the Act. We cannot say with certainty that the courts would not conclude that a supervisory agency that has obtained access under § 1113(b) must give notice under §1112 even when reporting evidence o f a crime relating to the manage­ ment o f the institution. Furtherm ore, we are not aware o f anything in the language or legislative history o f the Act that would lead to the conclusion that supervisory agencies have implied authority to report that crimes unrelated to their supervisory function may have been committed on the basis o f an analysis o f a custom er’s financial records. The next question is the scope o f the inform ation that may be included in a report to a law enforcement agency under § 1103(c) or § 1113(h)(5), or in a report under the supervisory agencies’ implied authority. These provi­ sions permit notice to be given so that the law enforcement agency may then seek access to the records under the formal provisions o f the Act, which require customer notice. The permissible scope o f referral therefore lies somewhere between two poles. On the one hand, a report cannot be so detailed as to effectively substitute for access to the records themselves. This would permit the for­ mal access procedures to be bypassed.23 On the other hand, the report must be sufficiently detailed in order to inform the law enforcement agency that reasonable grounds exist to believe that an individual has vio­ lated the law. Since the referral provisions contem plate access under the Act, it would be reasonable to identify the records and provide an explana­ tion in sufficient detail to permit the law enforcement agency to support a formal proceeding for access. This requires a written statement giving a “ demonstrable reason” to believe that the records are relevant to a legitimate law enforcement inquiry.24 While the legislative history is silent on the am ount o f detail that must be provided, the language of § 1110(c) clearly contem plates a factual showing beyond mere conclusions. We sug­ gest that this middle ground would be occupied by a description o f the pat­ tern o f transactions shown in the custom er records that does not discuss

21 Indeed, § 1113(h)(4) explicitly forbids transfer except to facilitate investigation o f the in­ stitution or a legal entity not a customer. Act, § 1110(bMc).

224 particular, identifiable transactions, coupled with the supervisory agency’s analysis of why this may relate to a potential violation.

M ary C. L aw ton Deputy Assistant A ttorney General Office o f Legal Counsel