California Pacific Bank v. Fdic
885 F.3d 560
9th Cir.2018Background
- California Pacific Bank (a small community state nonmember bank) had a 2010 FDIC ROE that found its BSA program "satisfactory" but listed specific deficiencies that "must be corrected." Management agreed to the recommendations.
- Between 2011–2012 the Bank cycled BSA officers; CEO’s son, Alan Chi, became BSA Officer without board interviews and retained multiple senior roles concurrently.
- The Bank revised customer risk-scoring and monitoring practices (downgrading certain new accounts and relying on daily batch reviews) over the objections of its internal auditor, Joan Vivaldo, and contrary to FDIC recommendations.
- FDIC examiner Heather Rawlins’ 2012 examination found widespread failures across the FDIC’s four-pillar BSA framework (internal controls, independent testing, administration, training) and identified failures to file or document Suspicious Activity Reports (SARs) for several accounts subject to an FBI grand jury subpoena.
- The ALJ held the Bank violated the BSA/regulations; the FDIC Board adopted the recommendation, relied on the FFIEC Manual to interpret the four pillars, and issued a cease-and-desist order. The Bank petitioned for review.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Vagueness of BSA/regulations (12 C.F.R. §326.8(c)) | Regulations and statute are too imprecise to inform required conduct; FDIC can arbitrarily deem compliance inadequate | Statute/regulations are economic, non-criminal, clarified by FFIEC Manual and agency guidance, so not vague | Statute/regulations are not unconstitutionally vague; FFIEC Manual clarifies expectations |
| Investigative/adjudicative bias | FDIC examiners and ALJ were biased; examination predetermined; relevant prior ROE ignored | Examiners perform fact-finding (need not be neutral); no showing of personal/financial interest; full ALJ hearing and Board review provided impartial adjudication | No due process violation; investigation and adjudication were not unconstitutionally biased |
| Reliance on FFIEC Manual to interpret four pillars | FFIEC Manual lacks force of law and cannot impose obligations | Manual is an agency interpretive guidance; §326.8(c) is ambiguous; Auer deference applies to agency interpretations unless plainly erroneous | FFIEC Manual is an appropriate interpretive aid and receives Auer-level deference here |
| Application of four pillars & SAR requirement to Bank | Bank contends it had adequate controls, testing (internal auditor), training and that SAR non-filing was compelled by DOJ/FBI secrecy | FDIC: inadequate documentation of depositors, improper risk ratings, insufficient independent testing (conflict of interest), underqualified/overloaded BSA officer, untailored training, and SAR could have been filed without mentioning subpoenas | Substantial evidence supports FDIC findings on all four pillars and that SARs should have been filed or decision documented; cease-and-desist upheld |
Key Cases Cited
- Auer v. Robbins, 519 U.S. 452 (1997) (agency interpretation of its own regulation controlling unless plainly erroneous)
- Christensen v. Harris Cty., 529 U.S. 576 (2000) (interpretations in opinion letters and manuals do not warrant Chevron deference)
- Village of Hoffman Estates v. Flipside, 455 U.S. 489 (1982) (vagueness analysis factors for regulatory statutes)
- Hannah v. Larche, 363 U.S. 420 (1960) (due process requirements differ for investigations vs. adjudications)
- Marshall v. Jerrico, Inc., 446 U.S. 238 (1980) (prosecutorial discretion and role of agency prosecutors)
- De La Fuente v. FDIC, 332 F.3d 1208 (9th Cir. 2003) (substantial evidence standard in FDIC review)
- Elias v. United States, 269 F.3d 1003 (9th Cir. 2001) (consideration of specialized knowledge in vagueness/interpretation contexts)
- United States v. Helmy, 951 F.2d 988 (9th Cir. 1991) (de novo review for vagueness challenges)