Pub. 7 2012-2013 Issue 5

www.nebankers.org 18 Extraordinary Service for Extraordinary Members. Dishonest Acts Result in Loss of Bonding& Employment Termination Charles M. Towle , Senior Vice President, Kansas Bankers Surety Company SECURITY OFFICER’S BY-WORD B ANKS HOLD A SPECIAL POSITION of public trust in the com- munity. It is imperative that the bank constantly guard this position of trust. This special trust comes with responsibilities and with substantial penalties for anyone who has committed any kind of dishonest or fraudulent act. Employing persons at a bank who have committed any dishonest or fraudulent act tarnishes the position of public trust earned by banks. In addition, bonding companies guarantee the honesty of bank employ- ees by agreeing to indemnify the bank if an employee embezzles funds from the bank. Bonding companies will not guarantee the honesty of an employee if such employee is known by the bank to have committed dishonest or fraudu- lent acts. A standard Financial Institution Crime Bond, Section 14, paragraph 2(a) states: “This bond terminates as to any Employee . . . (a) as soon as any In- sured, or any director or officer of an Insured who is not in collusion with such person, learns of any dishon- est or fraudulent act committed by such person at any time, whether in the employment of the Insured or otherwise, whether or not of the type covered under Insuring Agreement (A), against the Insured or any other person or entity...” (emphasis added) Once the bank, or its directors or officers, learn that an employee (or employee applicant) committed any kind of dishonest or fraudulent act, that employee is immediately and automatically no longer bonded. Future dishonest or fraudulent acts committed by that employee are not covered under the bond. This is true whether or not the bonding company is ever notified. The FDIC requires banks to have employees bonded as allowed by Sec- tion 18(e) of the Federal Deposit Insur- ance Act. The OCC requires national banks to have employees covered under a fidelity bond under 12 CFR 7.2013. Many states have a law or regulation that requires state-chartered banks to have all their employees bonded. Due to recent requirements by regulators, banks are conductingmuch more rigorous investigations of new employees. The investigations some- times reveal past dishonest or fraudu- lent acts of an employee or employee applicant. Human resources personnel sometimes mistakenly believe they are placed in the uncomfortable position of deciding whether or not the past dishonest or fraudulent act is serious enough to warrant termination of an employee. However, when a bank continues to employ such person after learning that the person committed a dishonest or fraudulent act, there is suddenly a new uninsured risk to the bank. Continuing to employ a person who is not bonded is a violation of bank regulatory requirements. The keywords are “dishonest and fraudulent acts.” Traffic violations such as speeding or DUI are not generally dishonest or fraudulent acts. Assault and battery, undermost circumstances, are not dishonest or fraudulent acts. Shoplifting or stealing a package of gum is a dishonest act. Writing checks back and forth between accounts inmultiple banks for the purpose of hiding the fact that the accounts in total have a negative balance, often called check kiting, is a dishonest act. Force bal- ancing or manipulating bank records with false information is a dishonest or fraudulent act. A notary signing as notary, swearing a person appeared