The New York Clearing House Association (the "Clearing House"), an association of twelve leading commercial banks located in New York City, is writing to express its concern with the Employee Polygraph Protection Act of 1986 (H. R. 1524) and the Polygraph Protection Act of 1985 (S. 1815), both of which would prohibit the use of polygraphs by most private employers, including financial institutions. The Clearing House strongly urges the Senate Labor and Human Resources Committee to amend this legislation to exempt banks and other federally regulated financial institutions from any such ban against the use of polygraphs. Although the Clearing House shares Congress' concern that polygraphs may be abused if administered indiscriminately or unprofessionally, we note that Congress also has recognized certain situations in which the need to use the polygraph outweighed this interest and therefore exempted certain employers from the proposed ban. S. 1815 thus permits the polygraphing of government employees and certain Defense Department personnel. H. R. 1524 contains additional exemptions for government intelligence agencies, the pharmaceutical industry, day care centers and nursing homes, and certain security service providers. Society's interest in secure and well managed financial institutions is equally compelling. Because the very nature of their business makes them vulnerable to internal theft, security is a matter of paramount concern to banks and other financial The members of the Clearing House are The Bank of New York, The Chase Manhattan Bank, N.A., Citibank, N.A., Chemical Bank, Morgan Guaranty Trust Company of New York, Manufacturers Hanover Trust Company, Irving Trust Company, Bankers Trust Company, Marine Midland Bank, N. A., United States Trust Company of New York, National Westminster Bank USA and European American Bank. 61-532 0 - 86 - 15 Honorable Orrin G. Hatch Page 2 institutions. It is important that financial institutions remain able to use every legitimate means to identify dishonest employees and to deter potential criminal activity. The integrity of the nation's financial system weighs heavily in favor of permitting federally regulated financial institutions to use the polygraph in an objective and professional manner. Whatever the merits of prohibiting the use of polygraphs by employers generally, its blanket application to financial institutions is ill-advised. We respectfully urge that Congress exempt federally regulated financial institutions from this ban. Internal employee theft is the most significant factor in crime related losses suffered by financial institutions. Although the overwhelming majority of employees are trustworthy, financial institutions nonetheless suffer significant financial losses as a result of criminal acts committed by their employees. Contrary to the popular belief that most crime related losses are due to bank robberies, Federal Bureau of Investigation ("FBI") statistics for the past few years indicate that most losses are due to acts of internal theft. According to the FBI, losses to financial institutions stemming from fraud and embezzlement totalled more than $282 million in 1983. (Federal Bureau of Investigation, Bank Crime Statistics [on] Federally Insured Financial Institutions, January 1, 1983 to December 31, 1983). These losses mounted to $382 million in 1984, (Federal Bureau of Investigation, Bank Crime Statistics [on] Federally Insured Financial Institutions, January 1, 1984 to December 31, 1984), and there is no reason to believe that they will not continue to rise. In each of these years, more than 80% of these incidents were attributed to internal sources. In contrast, it is worth noting that while losses from internal theft have climbed steadily, losses from bank robberies, burglaries, and external larcenies have remained at a relatively stable level of $40 to $42 million, a fraction of the losses due to fraud and embezzlement. Banks are also particularly vulnerable to certain types of criminal activity which require the cooperation of co-workers and the complicity of employees and persons over whom the institutions have no control. The potential for the laundering of money obtained illegally, primarily through organized crime's drug trafficking and gambling activities, is one such example which has attracted recent public attention. In addition to thwarting internal investigations, prohibiting banks from polygraphing employees reasonably suspected of involvement in money laundering would greatly restrict the ability to identify persons initiating the schemes from outside the bank. Honorable Orrin G. Hatch Page 3 Additionally, as banks have widened the range of services they provide to their customers, the scope of opportunity to commit crimes against banks has increased significantly. Crimes unheard of before the advent of sophisticated telecommunications and computer technology, such as unauthorized electronic funds transfers by a bank employee to his own or a partner's account and the fraudulent use of automated teller machines and point of sale terminals, are becoming sources of financial loss. Millions of dollars can be diverted in an instant if the confidentiality of computer codes is compromised. Dishonest employees can also tamper with sensitive customer information stored in banks' electronic data bases, often leaving no trace of such activity. When added to the more "traditional" acts of dishonesty, such as credit card fraud, the manipulation of customer records, and the forgery and alteration of checks and securities, the potential for employee fraud is indeed great. •Prohibiting banks from using the polygraph as an effective investigative tool at a time when the scope of criminal opportunity is broadening and the magnitude of losses from fraud and embezzlement is increasing dramatically would significantly limit our ability to search out the truth in the investigation of acts of wrongdoing. Such a ban would also destroy a powerful deterrent to criminal behavior and would thus further increase the potential for misappropriation of customer's funds. Financial institutions have statutory duties to guard against wrongdoing. As the depositories of the nation's savings, and the system through which commercial and consumer transactions flow, financial institutions have a special responsibility to their customers and to the public above and beyond those of other businesses. For financial institutions security is a responsibility mandated by law. For instance, under Section 19 of the Federal Deposit Insurance Act banks which hold federally insured deposits may not employ, in any capacity, persons convicted of "any criminal offense involving dishonesty or a breach of trust" without first obtaining the written approval of the FDIC. 12 U.S.C. § 1829. Additionally, in the Bank Protection Act of 1968 (12 U.S.C. $1881 et seq.) Congress directed each federal banking supervisory agency to develop standards for bank security systems. The Board of * See generally, American Institute of Certified Public Accountants, Report on the Study of EDP-Related Fraud in Banking and Insurance Industries (1984). Honorable Orrin G. Hatch Page 4 Governors of the Federal Reserve System, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Federal Home Loan Bank Board have all promulgated such regulations. (12 C. F.R. $$216, 21, 326, and 563a (1985), respectively.) Their concern for bank security is illustrated by the requirement that the board of directors of each bank appoint and supervise its bank's chief security officer. Such officers are charged with the development and administration of security programs which equal or exceed the minimum standards contained in the regulations. Financial institutions are also required to investigate and report suspected acts of wrongdoing to their federal supervisory agency and to law enforcement agencies. Commercial banks, for example, must investigate suspected thefts, embezzlement, defalcations involving bank funds or personnel, certain mysterious disappearances or unexplained shortages of bank funds or assets, and any suspected violation of state or federal law involving bank affairs, and must report the details of such occurrences to the Federal Reserve, Comptroller of the Currency, or the FDIC and also to the FBI and other law enforcement agencies. (12 C. F.R. $$216, 7 and 21, and 353 (1985), respectively.) Similar duties are imposed by banking regulators in many states. The report of such a loss and its investigation is generally required to be filed promptly. For example, the State of New York requires the filing of a report immediately upon the discovery of events involving the taking, or attempted taking, of money or property. (N. Y. Banking Superintendent's Regulations, $300.1) Maintenance of the public's trust in financial institutions compels the investigation and rapid resolution of any wrongful acts which may interfere with the institutions' ability to safeguard their customers' property. Failure to control such acts leads to the erosion of the public's confidence in the ability of financial institutions to ensure the safe and efficient flow of funds and to safeguard the dollars, securities and other valuables entrusted to them. Wrongful acts suspected to have been committed by employees of financial institutions at all levels thus must be investigated promptly and thoroughly. Used responsibly, the polygraph is a useful investigative technique which protects the innocent in addition to identifying dishonest employees. It has been the experience of our members that the polygraph can be used effectively without abusing the privacy of the persons involved. Forbidding financial institutions the continued prudent use of the polygraph would inhibit their ability to investigate and resolve internal crimes, and would create the added harm of removing a potent deterrent to future criminal activity. Honorable Orrin G. Hatch April 22, 1986 Page 5 When you introduced S. 1815, you noted that "the bill does recognize that the use of polygraph tests may have a limited role where they are administered in an objective, professional and complete manner." (Cong. Rec., daily ed., October 31, 1985, S 14553). You also noted that the development of legislation to protect workers should also address the concerns of those employers who need to use the polygraph in "ascertaining the veracity of employment applications...or rooting out crime in [the] workforce." Id. Financial institutions, a mainstay of America's economic system, must be secure in, the knowledge that they can protect against wrongdoing by their employees. The Clearing House strongly believes that the availability of the polygraph to our nation's financial institutions should be maintained. We respectfully request that the Senate Labor and Human Resources Committee amend S. 1815 to exempt federally regulated financial institutions, allowing them to continue their responsible use of the polygraph. Very truly yours, folm J. Fer |