Mr. PICKETT. I think it is, and a philosophical one, too. But offhand I would say that you would think that the banking industry would marshal its forces in order to take care of the people that are giving it the bad name that it is getting because of these hearings. On the other hand, you have many bankers, and I suppose a lot of them still believe in States rights and still believe that if they own a bank or own control of a bank, they should have some say, and they will, I am sure, resist the imposition on them by the Government of stringent parameters which they feel they don't want or can't operate under.

Chairman ST GERMAIN. And they are also resisting efforts to remove some of those restrictions and parameters, to wit, with the removal of the prohibition of payment of interest on demand deposits. That is another rhetorical question.

Mr. LaFalce?

Mr. LAFALCE. Mr. Thompson, you have indicated that over a certain period of time—and I am not exactly sure what that period of time was-that there were 250 referrals to the Department of Justice on the subject of compensating balances; is that correct? Mr. THOMPSON. Yes, sir.

Mr. LAFALCE. You have also indicated that Justice only deemed 1 of the 250 referrals to be worthy of prosecution; is that correct? Mr. THOMPSON. I can say that they only prosecuted one of those

cases.

Mr. LAFALCE. All right, that is pretty close. I believe you also said that thus far this year you have referred but nine cases to the Justice Department; correct?

Mr. THOMPSON. Yes, sir.

Mr. LAFALCE. Now, you have drawn the inference that because there has been such a reduced number, to wit, nine cases, that, therefore, the practice of establishment of compensaitng balances is on the wane. Is that accurate, or could there also be an inference drawn, which might be more plausible, that because of the almost nonexistent prosecution of the referrals, you have tossed your hands up and said, "Why bother"?

Mr. THOMPSON. No, sir, I do not operate that way. If an apparent violation is reported to me, then I would proceed on that basis.

Now, I have not ceased efforts in discussing this question for many years, and we have succeeded if you view the interest rates on the correspondent bank loans being charged going from zero interest up to the normal lending rate and the reduction in excess balances being maintained. This would suggest that the improvement, as I have suggested, does actually exist, that it is real and not imagined.

Mr. LAFALCE. All right.

I would assume that you and your attorney have discussed this matter with the Justice Department to see why there is such a paltry, almost nonexistent prosecution of your referrals, and I would like to know what the gist of that discussion has been. Mr. PICKETT. If I may respond to this

Mr. LAFALCE. What is that, section 18-656, willful misapplication?

Mr. PICKETT. Yes, sir.

As you know, willful misapplication of funds as under section 656 is a catchall for almost any misapplication-embezzlement, every type of misapplication.

Mr. LAFALCE. This does not refer exclusively to banks, does it? Mr. PICKETT. Yes, sir.

Mr. LAFALCE. It is under the National Bank Act?

Mr. PICKETT. It is in 18 United States Code, the criminal code. Mr. LAFALCE. But it is not just the banks, is it?

Mr. PICKETT. It is bank officers.

One of the reasons-and I don't think any inference should be left by us and at least not by me, that just because you have had one prosecution that I know of on several hundred referrals, that the U.S. attorneys are not doing their job. I would say, as an exprosecutor, that these are the toughest cases to prosecute that any U.S. attorney runs up against for this reason: That they have to prove beyond a reasonable doubt in order to get a conviction that the correspondent account was used-the bank funds were used with an intent to defraud the bank. Now, when you get down to this particular element it just is almost impossible for U.S. attorneys or their assistants to prove that there was a willful intent on the part of the controlling bank officer who obtained the loan, the low-interest-rate loan, with the use of the correspondent account. It is almost impossible to get inside his mind and say he intended to injure or defraud the bank, even though he has, in my opinion, converted the bank's correspondent account to his own use.

Chairman ST GERMAIN. Drawing on that same experience-you related to us your experience as a prosecuting attorney in the matter of overdrafts-is that just as difficult to prosecute? Did you have any cases or handle any overdraft cases during your days as a prosecuting attorney?

Mr. PICKETT. Yes, I did. And this is one thing that I found out: That an overdraft, apparently, is all right if it is not criminal in nature. Let us put it this way. An overdraft is not criminal in nature if, I suppose, it eventually is paid. However, as a prosecuting attorney, there is a very small difference between overdrafts and insufficient funds checks. If you have an overdraft on the bank, it is not a prosecutable offense. If you have an insufficient funds check, that means you have overdrawn your account and the bank has sent your check back to the merchant and the merchant demands prosecution because it was not paid during the ordinary course of business and apparently you are not going to pay it, or you have overdrafts running, running, and running, and finally the bank closes the account and sends the check back, insufficient funds. I have prosecuted many cases, and I am sure every prosecuting attorney in the land has. It is the bane of their existence, prosecuting of insufficient funds checks, which means that you have had an overdraft and the bank has converted it into an insufficient funds check by sending it back to the payee.

Mr. LAFALCE. Mr. Pickett, you indicate you have prosecuted many cases. Now, in what position, in what capacity, did you prosecute these cases: as regional counsel for the FDIC?

Mr. PICKETT. No. I have no prosecuting responsibility as regional counsel.

Mr. LAFALCE. That is what I thought. In what capacity?

98-440 - 77 - pt.2 - 38

Mr. PICKETT. I was a county attorney for 4 years. I was a district attorney for 4 years, and assistant attorney general-in these capacities, many cases.

Mr. LAFALCE. Fine. I was just wondering whether you were using the word "prosecute cases" for the taking of some civil action as opposed to criminal action.

Mr. PICKETT. No, sir.

Mr. LAFALCE. Let us go back now to section 656 because it seems to me that perhaps we need changes or clarification of section 656, or in the alternative perhaps we ought to deal with the issue in some other manner, through civil violations clearly defined, where you would have a lower standard of proof. I think it is going to be difficult to change criminal law in any way and be successful in prosecutions because of the virtually impossible standard of proof on intent. I don't know if you concur in that judgment.

Mr. PICKETT. I do concur in that judgment, sir. And that is one of the reasons that when we found out that Justice could not in good conscience go ahead and prosecute criminal actions on these particular sets of circumstances, on the use of the correspondent account as a compensating balance for personal loans, I feel, as Justice does, that they are just unable to make a successful prosecution.

Mr. LAFALCE. Let us get our terms clear first. Let us talk about Calhoun National Bank, and then let us talk about, oh, Manny Hanny. Can we put a tag on Calhoun? Which one is the correspondent bank and which one would be the other bank, and what tag do we put on it? Manny Hanny would be the correspondent bank, right?

Chairman ST GERMAIN. I think we should tell them Manny Hanny is Manufacturers Hanover Trust.

Mr. LAFALCE. Is it correct the Manufuacturers Hanover Trust in that example would be the correspondent bank?

Mr. THOMPSON. Yes.

Mr. LAFALCE. What would we call Calhoun; the respondent? Mr. THOMPSON. They used to call them that. Now they just loosely refer to it as the correspondent of my correspondent. But if you want to define terms-—

Mr. LAFALCE. It does make it difficult to discuss the issue unless we have some appropriate titles, definitions. So let us call it the correspondent bank, which would be the one offering the services, and the respondent bank, the one receiving the services; OK?

Now let us turn to section 656. Now, section 656 has criminal sanction insofar as individuals are concerned, does it not? Or is it also criminal sanctions against legal persons?

Mr. PICKETT. It applies to individuals.

Mr. LAFALCE. Fine. So we are talking now about officers of banks. Apparently the only hat we have to hang on is the willful misapplication, so we would be talking about the officer of a bank willfully misapplying money; correct?

Mr. PICKETT. That is correct.

Mr. LAFALCE. Now, whose money would it be willfully misapplying; the respondent bank or the correspondent bank? Mr. PICKETT. The respondent bank.

Mr. LAFALCE. OK.

What are the elements of a prosecutable violation that would have to be proven against the officer of the respondent bank? I would like you to go into not only the question of intent, but I would like you to go into also the question of detriment to the bank. And I think the question would be detriment to the respondent bank.

Mr. PICKETT. Well, yes, the respondent bank.

The three main elements of a prima facie case of misapplication of funds is: First, the accused is an officer, director, agent, or employee of an insured bank; second, that the accused willfully misapplied money, funds, assets, or securities of the bank entrusted to the bank's care and custody; third, he makes this willful misapplication with intent to defraud or injure the bank—that is, the respondent bank.

Mr. LAFALCE. Now, what I have a problem with is, let us suppose that there is no detriment to the respondent bank, that the correspondent bank gives full service to the respondent bank, and yet there clearly is preferential treatment given to the officer of the respondent bank, and it was the intent of the officer of the respondent bank to obtain preferential treatment, but the correspondent services he gets from the correspondent bank are the same correspondent services he would get anyplace else.

Would there still be a violation, a prosecutable violation?

Mr. PICKETT. In my opinion, there would not.

Mr. LAFALCE. So if we could show that the correspondent banks, regardless of the willful intent, regardless of preferential treatment, still gave adequate services under the terms of the correspondent relationship, there would be no prosecutable violation? Mr. PICKETT. I assume that to be true.

Mr. LAFALCE. How could we then improve the law?
Mr. PICKETT. Are you talking about the criminal law?
Mr. LAFALCE. Yes, the criminal law first.

Mr. PICKETT. I think the criminal law is not going to be changed. You are always going to have those elements that we talked about here.

Mr. LAFALCE. Then I would make this suggestion to Mr. Thompson: That you forget about referring any cases, even those nine, to the Justice Department, because I doubt that in any instance you are going to be able to find the services not being given by the correspondent bank to the respondent bank.

Mr. THOMPSON. Sir, I have a duty.

Mr. LAFALCE. That is more the nature of a question.

Mr. THOMPSON. I have a duty and a responsibility to refer any such acts to the U.S. attorney.

Mr. LAFALCE. In the cases where you have referred those 9 referrals and part of that 250 referrals, did you think that there was detriment to the respondent bank?

Mr. THOMPSON. Yes, sir.

Mr. LAFALCE. How so?

Mr. THOMPSON. Because excess funds were generally deposited in the correspondent bank and were not available for utilization as earning assets by the respondent bank.

Mr. LAFALCE. OK. Now, that is a very important question. Then we are showing detriment to the respondent bank.

Mr. THOMPSON. Yes, sir.

Mr. LAFALCE. Usually not because services haven't been provided but because there has been surplus funds for those services. Now, how do we measure the adequacy of the balance that should exist in return for correspondent services? It seems to me that is a very difficult thing.

Mr. THOMPSON. Yes, sir. This is a judgment factor that I hope we have obtained through years of experience in analyzing services performed, and in some cases, whether any services are performed at all, and can make that decision on the basis of the individual case. Also, don't overlook the fact that I have mentioned earlier, that nonmember banks have to keep their reserves someplace. Mr. LAFALCE. OK. Let us posit the nonexistence of the correspondent's service even though there is a correspondent relationship. It would seem to me that then the correspondent bank is a party culprit. What criminal sanctions now exist for the correspondent bank in the situation I have posited?

Mr. THOMPSON. I have not made exceptions. I have reported them, too.

Mr. LAFALCE. Yes, I know, but what criminal statute?
Mr. Pickett, would it again be section 656?

Mr. PICKETT. They are under section 656, yes, sir.

Mr. LAFALCE. Would willful misapplication then be the appropriate statutory language?

Mr. PICKETT. Yes, sir, in those cases, in the case that you talked about where there was a correspondent account placed in a bank and they were doing no services for the bank. And we have had these cases and referred them, where there were no services performed. I think those are the very best cases we have had, and we have referred those, and only one conviction on that, and that was a case in Oklahoma.

Mr. LAFALCE. What would be the money that was willfully misapplied then?

Mr. PICKETT. He took $30,000 in this particular case.

Mr. LAFALCE. Would it be the loan given to the officer?

Mr. PICKETT. No, the misapplication of the bank's money to put in another bank.

Mr. LAFALCE. No, that is the respondent bank. I am now going after the correspondent bank. If the correspondent bank is not providing services to the respondent bank, how do we go after the correspondent bank?

Mr. PICKETT. I don't think you are going to go after the correspondent bank.

Mr. LAFALCE. Now, I have just been told by Mr. Thompson that they refer the correspondent bank for criminal prosecution.

Mr. THOMPSON. Sir, I think they are part of the conspiracy to defraud.

Mr. LAFALCE. So you get them on conspiracy. Now, conspiracy to what? Conspiracy to violate section 656? Conspiracy to willfully misapply-is that it?

I have to ask you these questions, because if we are to improve the law, we have to know what you are doing right now, and we have to get fairly specific. One of the problems that has existed is we have not gotten specific enough.