Banking and Finance Law Daily BSA not unconstitutionally vague; FDIC may rely on FFIEC manual to clarify regulation
Tuesday, March 13, 2018

BSA not unconstitutionally vague; FDIC may rely on FFIEC manual to clarify regulation

By Lee P. Dunham, J.D.

On a bank’s petition for review of an order of the Federal Deposit Insurance Corporation, a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit held that the Bank Secrecy Act (BSA) and its implementing regulations were not unconstitutionally vague, and that the FDIC had properly relied on the Federal Financial Institutions Examination Council (FFIEC) Manual to clarify its "four pillars" regulation (California Pacific Bank v. Federal Deposit Insurance Corporation, March 12, 2018, Gritzner, J.).

The bank petitioned for review of the issuance of a Feb. 17, 2016, cease and desist order by the FDIC, which had found that the bank violated the BSA (31 U.S.C. §§ 5311-5330) by failing to establish and maintain procedures designed to ensure adequate internal controls, independent testing, administration, and training—the "four pillars" of compliance outlined in 12 CFR § 326.8. The failure of any individual pillar can result in the FDIC deeming a bank noncompliant with the BSA. The bank’s petition challenged the constitutionality of the BSA and its implementing regulations, and alleged that the FDIC’s decision was not supported by substantial evidence.

Bank’s contention. The FFIEC Manual clarifies compliance requirements and provides for consistent examination procedures. The bank argued that the BSA was unconstitutionally vague because neither the statute itself nor its implementing regulations were precise enough to inform the bank of its required conduct, and that the FFIEC Manual could not clarify compliance procedures because the manual lacks the force and effect of law.

Court’s decision. The court noted that the BSA and the FDIC’s implementing regulations were economic in nature and threatened no constitutionally protected rights; therefore, vagueness was not a paramount concern. Further, the court held that an agency-issued instruction manual, even if lacking the force of law itself, can clarify what conduct is expected of a person subject to a particular regulation and thus mitigate against vagueness. As a result, the court held that the BSA and its implementing regulations are not unconstitutionally vague.

Additionally, the court held that the FDIC’s use of the FFIEC Manual, as relevant authority in interpreting what the "four pillars" regulation required of the bank, was proper. Because the four pillars regulation was itself ambiguous, the agency could properly rely on, and clarify the regulations with, an instructional manual. Although the manual was written collaboratively among multiple federal and state agencies, the FDIC had announced its release in Financial Institution Letter 17-2010, clarifying that the manual contained the FDIC’s supervisory expectations with respect to BSA compliance. Therefore, the court held that the manual was entitled to deference.

The case is No. 16-70725.

Attorneys: Matthew W. Powell (Wilke, Fleury, Hoffelt, Gould & Birney, LLP) for California Pacific Bank. Joseph Brooks for the Federal Deposit Insurance Corporation.

Companies: California Pacific Bank

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