NCUA sets high bar for criminal referrals after Trump order

As the Trump administration battles what it calls the “overcriminalization” of financial offenses, the nation’s top credit union regulator is following its lead.

On Wednesday, the National Credit Union Administration outlined new standards for referring potential crimes to the Department of Justice, in accordance with a May 9 executive order by President Trump. Like that order, the new NCUA policy raises the bar for such referrals significantly higher than it was previously.

“This is a really aggressive approach to rolling back criminal enforcement of regulatory violations,” Michele Alt, co-founder of the consulting firm Klaros Group, told American Banker.

Trump’s order, titled “Fighting Overcriminalization in Federal Regulations,” states that in general, “criminal enforcement of criminal regulatory offenses is disfavored.” For the first time, it applies a legal standard called “mens rea” — or “guilty mind” in Latin — meaning that only those who appear to have known they were breaking the law should be prosecuted.

“The purpose of this order is to ease the regulatory burden on everyday Americans and ensure no American is transformed into a criminal for violating a regulation they have no reason to know exists,” the executive order says.

The NCUA’s notice, issued three weeks later, takes its cues from that order. From now on, before referring an alleged criminal offense to the DOJ, the agency’s officers must consider “whether the putative defendant held specialized knowledge” of the regulation in question, and must also weigh “evidence … of the putative defendant’s general awareness of the unlawfulness of his conduct.”

This marks a departure from the previous “strict liability” standard used for such referrals. That standard only required evidence of wrongdoing — not the alleged criminal’s knowledge that their actions were wrong.

“The NCUA notice is a faithful interpretation of an executive order that has a fundamentally different approach to the interpretation and application of strict liability statutes,” Alt said.

Other financial regulators have already issued similar directives. Over the past two weeks, the Federal Deposit Insurance Corp., the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency all have issued notices augmenting their policies on DOJ referrals, including the same wording as the NCUA’s regarding “mens rea” considerations.

Some banking industry advocates are welcoming the new approach.

“I think their point is well taken, that there’s sometimes wording in these statutes which can allow a prosecution of a case even if the individual did not know about the regulation or the law,” said David Baris, president of the American Association of Bank Directors. “The executive order does say how many regulations there are and how impossible it is to really know all of them or be informed about all of them.”

According to Trump’s order, the Code of Federal Regulations contains more than 48,000 sections, spread over more than 175,000 pages.

“The situation has become so dire that no one — likely including those charged with enforcing our criminal laws at the Department of Justice — knows how many separate criminal offenses are contained in the Code of Federal Regulations,” the order says.

But other observers worry that Trump’s instructions — and the agency guidelines following them — have gone too far. In particular, Alt wondered whether the executive order, which only applies to federal regulators, may create a disparity between the rules for state banks and those for national banks.

“Does this give the federally licensed entities a pass that is not enjoyed at the state level?” she asked.

More broadly, Alt said the “blanket approach” to so many laws and regulations made her uncomfortable. And she balked at the notion that all criminal enforcement of financial regulations should be “disfavored.”

“Why would it be disfavored?” Alt asked. “The underlying assumption seems to be that a violation of a mere regulation couldn’t reach the level of a crime warranting criminal enforcement — which is a pretty staggering view.”