Any public controversy involving a member and allegations of misdeeds should be taken seriously by a credit union, primarily because the credit union has a public-facing reputation that needs to be protected. And the best way to protect that reputation is to be factual, transparent, and clear about the credit union's member service focus. Once an issue arises, deal with it quickly before it deals with you.
The Turner case illustrates the line between a membership financial organization and a bank. Credit unions, both state and federal, have a limited ability to tell someone within their field of membership they can't open an account. Banks just say no.
Of course, the reason for the decline, even by a bank, can't be discriminatory. A turn-down because of the depositor's race, color or religion to name a few obvious ones simply isn't in the lexicon. But saying, "We don't serve that type of activity, organization purpose or goal," isn't as easy when you have members.
A credit union can always say no if the person, business or group is not within a state or federally chartered credit union's field of membership. It can always say no if the person, business or entity is on the FinCEN Specially Designated Nationals list.
In the Turner case, it is doubtful that the credit union had time to process the information and make a studied decision on what quickly turned into a major public social media matter.
It's time to look at your credit union's policies and procedures and evaluate how it would make the same decision, and whether your credit union has in place the kind of processes that would permit a full review of not only the legal issues, but the reputation risk involved in taking on high profile cases.
The Law
The law for most state and federal credit unions is fairly simple. If the person, entity (the entity specifically in the FOM or an organization of such persons) is within the field of membership, they qualify. If they pay for one share and aren't otherwise ineligible, they can at least open a share savings account.
For natural person applicants for membership, it is permissible (at present) to look at the application to see what kind of credit risk is seeking membership by looking at a credit report. Bankruptcy courts as well as NCUA opinions generally allow a credit union to turn down the application if there has been a prior loss attributable to the applicant's misuse of a credit union account.
Even if the applying member/entity gets by that screen, the credit union can almost always restrict services where facts show the applicant has misused a prior account relationship. For example, a bad credit risk may not qualify for overdraft checking.
Safety and Soundness, and Reputation Risk
Those kinds of issues have little if anything to do with the reputation risk of handling high visibility, controversial accounts. Can a credit union just say no when an application for an account/membership comes in from a group that may be within the field of membership but is a polar opposite of the core principles of the primary field of membership?
Perhaps. Let's explore why and how.
Avoiding Surprise
The recent FinCEN regulatory activity strengthens the credit union's hand by requiring it to know what type and how much use a proposed new account will visit on the credit union. While the new regulatory focus is on business account relationships, the Bank Secrecy Act tells financial institutions to ask questions until it understands the nature and type of deposits and withdrawals the credit union will be expected to process.
Recognition
The key, of course, is in recognizing, identifying and structuring the potentially troublesome account relationship early. In some instances, it may be possible through alert staff to identify the concern at the opening stage. More than once, however, we have seen the member's use after a period of time turn from a traditional personal account relationship into one that is clearly business-related, such as when a member starts depositing checks made to them from far more people than in the past – accompanied by wires out to different places.
No Business Accounts
If your credit union doesn't handle business accounts, make it clear that the credit union doesn't offer business account services and suggest the account be taken elsewhere. It will avoid the difficulty surrounding closing an unregistered Money Services Business account (reason #1) after reporting it as required to FinCEN.
We Have Business Accounts, but …
Look at the activity in the account. What is the operational or legal risk of the account being misused, or to prevent misuse, will it require additional monitoring for BSA or other regulatory purposes? It's a business account and while Regulation CC, Funds Availability may apply, there is more flexibility in the way you structure the account and price the services. In other words, it's not a consumer account. Be creative but fair in making sure the credit union has protected its members' assets against identified risk. Again, be sure that your reasons are not discriminatory – race, color, etc.
In the Turner Case – and Ones yet to Appear at Your Credit Union
Hindsight is cruel and often useless. If a member came into your credit union and said, "My son/daughter has been charged with a crime. The defense cost is going to be staggering. I need an account where I can have donors – crowd funding – send money." How would your typical account opening processors respond?
Any account of this type requires enhanced diligence. Each deposit, and, possibly each withdrawal has to be scrutinized for BSA purposes. Is this something the credit union is prepared to do? If not, say no. It can put the credit union at risk through fines, penalties and even charter revocation if the account is used in a way that violates the applicable law and tarnishes the credit union's reputation if the account becomes the subject of an unfavorable social media blitz.
The catch – and it is a catch – is when the next request for a special account is from the parents of an eight-year old cancer patient whose cure is a financially disastrous cost that must be borne. Given the same operational considerations, I suspect I know the answer most of the credit unions I've been associated with over the last 40 years would give.
Do not be troubled by the obvious inconsistency. The tipping point is the reputational risk. As long as the decision – and this applies to both individual and business accounts – doesn't involve race, color, sex and so on, your members will appreciate sound judgment.
Practical Steps
- Train staff involved in opening accounts and monitoring account activity to be alert to proposed and actual use.
- When issues arise, make sure there is a review process in place that involves key decision makers.
- Make sure your account agreement supports closing off the use of the account by the member and restrict services as needed to reduce risk.
- Consult counsel when in doubt.
- Report account misuse as appropriate.
In the final analysis, as long as the credit union extends to a member or organization of members the basic share account, other services may be restricted as prudent to prevent operational and reputational risk.
Bruce O. Jolly, Jr., is partner at Reed & Jolly PLLC, a full service law firm specializing in credit union matters. He can be reached at [email protected] or 703-241-5858.
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