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Knowing When to Hold on to Docs Can Be Tough Shredding

Remember Arthur Andersen? The erstwhile accounting giant’s 2002 criminal conviction on charges it had obstructed justice by deleting records related to the Enron collapse was a major victory for government prosecutors and set the tone for a wave of corporate scandals that came to characterize the first half of the decade.

Now it turns out the verdict was bogus. In May, the U.S. Supreme Court unanimously overturned the ruling, concluding that Andersen’s shreddingu00e2u20ac”which came after one of the firm’s attorneys sent employees an email reminding them of Andersen’s policy of routine document destructionu00e2u20ac”didn’t meet criminal standards. Although the shredding took place in the weeks before subpoenas were issued, government prosecutors convinced the jury that it was done to preventSEC investigators from learning details of Andersen’s involvement in Enron’s various off-balance-sheet activities.

” ‘Document retention policies,’ which are created in part to keep certain information from getting into the hands of others, including the government, are common in business,” the court observed in its opinion. “It is, of course, not wrongful for a manager to instruct his employees to comply with a valid document-retention policy under ordinary circumstances.”

The ruling came too late for Andersen, which died a slow and inglorious death following the conviction. (It’s tough to get state licenses with a felony on your record.) What it means to everyone else remains to be seen. Given the speed of the decisionu00e2u20ac”it came just five weeks after oral arguments were heardu00e2u20ac”and the fact that it was unanimous, some legal experts read it as a signal that justices think the government’s crackdown on white-collar crime might be going too far.
That might be true, but don’t order the power-shredders just yet. While the decision “raises questions” about how some parts of the Sarbanes-Oxley Act will be interpreted by the courts, “at the end of the day, the climate for companies and executives is still one of fear and caution,” says Russell Ryan, a corporate governance partner with King & Spalding in Atlanta and a former assistant director of enforcement with the Securities and Exchange Commission. “Nothing in this ruling should be read as a green light to begin shredding documents or deleting emails.”

The Andersen case was tried under laws from the good-ol’ pre-Sarbanes-Oxley days, when prosecutors needed to prove that records were destroyed “knowingly … [and] corruptly.” Under Section 802 of Sarbanes-Oxley Act, the standard was weakened to simply shredding and deleting with an “intent to obstruct, impede or influence a legal investigation,” even if that investigation is merely pending or “contemplated,” notes Eliot Robinson, a securities and investment banking partner with Powell Goldstein in Atlanta. “The jury instruction that was found inappropriate under prior law with Andersen would likely be upheld under Sarbanes-Oxley.”

For bank boards, the ruling reinforces just how important it is to maintain sound document-retentionu00e2u20ac”or as one attorney calls them, “document-destruction”u00e2u20ac”policies. Law firms report an uptick in the number of calls they’re receiving from clients seeking to clarify document-retention policies and practices, and rightly so.

Banks today are great storehouses of information. The records might be digitized or on paper, but either way thieves want at it, consumer groups want it destroyed, and regulators can never seem to get enough of it. A brief sampling of recent retention guidance from the Office of Thrift Supervision offers a glimpse of the complexities: Mortgage loan application registers must be retained for three years, records related to “adverse actions” on existing accounts for 25 months, and Bank Secrecy Act datau00e2u20ac”including records of wire transfers, persons with foreign accounts and the issuance of monetary instrumentsu00e2u20ac”for five years.

While it’s not the sexiest subject in the world, documentation is the foundation of the banking business and the ultimate responsibility for how those files are managedu00e2u20ac”like so much elseu00e2u20ac”lies with the board. Directors face “potential liability” if the right document-retention mechanisms aren’t in place, and their organizations come under investigation, says Ron Glancz, a partner with Venable LLC in Washington, D.C. “Adopting a strong policy won’t get you off the hook, but not having one exposes you to tremendous risk.”

What’s a smart bank board to do? As with other governance matters, directors need not get deep into the minutiae of what’s being retained. “But they ought to be asking the general counsel or compliance officer if they have a policy in place that meets regulator standards and common industry practice,” Rosenberg says.

What to look for? Don’t hold onto more than you need. It’s a hassle and could cause unnecessary problems down the road, says John Beaty, a financial services partner with Venable. There’s a temptation, for instance, to hold onto emails forever. “You want a policy that gets rid of non-essential records, while keeping information where legal liabilities and regulatory requirements haven’t expired.”

On the other hand, don’t hold too little. If a government investigation or lawsuit comes up and you don’t have what the other side wants, well, that could really hurt. Considering the wording of Section 802, the most important part of any document-retention policy might be ensuring that there’s a mechanism to quickly shut down destruction practices at the first sign of trouble.

Already, failures to produce electronic documents in a handful of post-Sarbanes-Oxley trials, including cases involving investment banks Morgan Stanley and UBS, have led to either “partial summary judgments” against companies, or instructions that allow juries to make “adverse inferences” as to why the documents haven’t been produced, Robinson explains. In other words, if you don’t cough up the requested records and you’ve been deleting, juries are free to think that it’s because those records would be incriminating.

Almost by definition, such mechanisms must be companywide processes, including business-line managers and IT professionals, that are established before trouble hits. “You want your compliance officer to be looking at not just when document-destruction needs to be suspended, but also how it happens,” Robinson says. “If you wait to start working on it until you need to preserve some documents, it’s going to be too late.”
u00e2u20ac”John R. Engen

‘Round-the-Clock Service Increases

Eighty-one percent of community banks report that they offer 24/7 online account access to their customers, while 65% offer 24/7 online bill payment, reports a Grant Thornton LLP survey of community bank executives.
The size of the bank has a significant influence on these offerings, with 97% of larger banks (more than $500 million in assets) offering 24/7 online account access, compared to only 57% of small banks (less than $100 million in assets). In the area of online bill payment, the difference is even greater, with 94% of large banks offering 24/7 online bill payment and 29% of small banks.

The location of the bank also has an impact on the service offerings. Urban and suburban community banks generally have more customer service offerings than their rural counterparts. More than nine in 10 suburban banks (94%) and almost nine in 10 (89%) urban banks offer 24/7 online account access, while less than seven in 10 (67%) rural banks do. Bill pay follows similar lines, with 82% of suburban banks offering 24/7 online bill payment, compared to only 51% of rural banks.

“As more and more of the country becomes connected to the Internet, banks are finding that they need to offer online banking as a must-have service,” says John Ziegelbauer, managing partner of Grant Thornton LLP’s financial institutions industry practice. “Reality is finally catching up with predictions in this area. Two years ago in our 2003 survey, 54% of small banks said that online banking was important to the success of their business. Today, more than half of the small banks that responded offer online banking.”

Almost three out of four community banks (72%) offer customers drive-thru window service after lobby hours. As for lobby hours themselves, 66% offer Saturday lobby hours and 36% offer either early morning or late-evening lobby hours more than one day a week. Six percent of community banks even report having lobby hours on Sunday.
The size of the community bank also has an effect on the lobby hours it keeps. Sixty-two percent of small banks offer drive-thru window service after lobby hours compared to 80% of large banks. More than eight in 10 (83%) large banks have Saturday lobby hours, while only 52% of small banks do. Sunday lobby hours are offered by 10% of large community banks, whereas 2% of small community banks have them.

These previously unreleased responses were part of Grant Thornton’s Twelfth Annual Survey of Community Bank Executives. The question asked community bankers to state whether their bank offers any of the 12 customer service offerings listed, which included Sunday lobby hours and proprietary ATMs.

“Banks live and die by the customer,” says Ziegelbauer. “Making sure that they serve the needs of their customer base, whether it’s by offering longer lobby hours or belonging to an ATM network, is a top priority for all banks, community or otherwise.”