Understanding OFAC

Glossary
602 Letter – An administrative demand sent by OFAC to a U.S. financial institution that failed to
block or reject an illicit transaction. The 602 letter requests how the financial institution processed
the transaction.

Blocked Transaction – A financial institution must block, also called “freezing”, transactions
involving entities on the SDN list. Funds that are blocked are put into a ‘blocked account’ on the
financial institution’s books. A blocked account should be a separate interest-bearing account
that is established by the institution whenever property is blocked under a U.S. sanctions
program. The blocking must be reported to OFAC Compliance within 10 business days.

Civil Penalty – This occurs when a state entity or a government agency seeks monetary relief
against an entity as restitution for wrongdoing by the entity. Failure to comply with OFAC can
result in civil penalties based on the sanction(s) or act(s) broken, amount of transaction(s), and/or
number of transactions.

Customer Identification Program (CIP) – Requires banks and other financial institutions to
adopt written procedures to ensure proper identification of customers.

Office of Foreign Assets Control (OFAC) – OFAC administers and enforces economic sanctions
programs primarily against countries and groups of individuals, such as terrorists and narcotics
traffickers. The sanctions can be either comprehensive or selective, using the blocking of assets
and trade restrictions to accomplish foreign policy and national security goals.

Prepenalty Notice – A notice issued by OFAC’s Civil Penalties Division that cites the OFAC
violation committed and the proposed penalty.

Rejected Transaction – A transaction which is prohibited, but has no blockable interests. The
financial institution cannot process the transaction, so it is rejected, or not processed. For
example, a wire transfer between two Non-SDN companies in Sudan would be rejected because
the transaction would support commercial activity in Sudan, a sanctioned country. Rejected
transactions must be reported to OFAC within 10 days.

Sanctions – A coercive measure adopted against a nation violating international law. Usually
several nations act together on the coercive measure.

SDN List (OFAC List) – A list of individuals and companies owned and controlled by, or acting
on behalf of, targeted countries, which is published by OFAC (Office of Foreign Assets Control).
The lists also names individuals, groups, and entities, such as terrorists or narcotics traffickers
designated under programs that are not country-specific. These individuals are called “Specially
Designated Nationals” or “SDNs.” Their assets are blocked and U.S. persons are generally
prohibited from dealing with them. The SDN list is frequently updated; however, there is no
predetermined timetable for updating. Names are added and removed as necessary and
appropriate.
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Specially Designated National (SDN) – Individuals who are not nationals of a designated
targeted country, but who are nonetheless treated as nationals by the U.S. government in
applying sanctions to their transactions. Occasionally, the term also refers to actual nationals
identified as being of specific concern to the U.S. government.

Specially Designated Terrorists (SDT) – Groups or individuals identified as undertaking or

involved with terrorist activities.

Specially Designated Narcotics Traffickers (SDNT) – Identified groups or individuals the U.S.
government has determined that are involved in drug trafficking.

Violation – A breach, infringement, or transgression of a law, regulation, or rule.

Wire transfer – An electronic transfer of funds, such as one that is made over the Federal Reserve
Wire Network.

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 Understanding OFAC

Summary
What is OFAC?

OFAC, an office of the U.S. Department of the Treasury, administers and implements laws that
enforce economic and trade sanctions against countries, companies, and individuals. OFAC was
set up to determine which countries, companies, and individuals have been sanctioned and has
been tasked with enforcing these economic sanctions. All United States persons are required to
comply with OFAC.

This includes all:

• U.S. citizens
• Permanent resident aliens regardless of where they are located
• Persons and entities within the U.S.
• U.S. incorporated entities and their foreign branches

Those targeted by OFAC can include identified foreign countries and governmental agencies,
individuals, and foreign businesses. You can determine who the targeted entities are by referring
to the Specially Designated Nationals (SDN) list, commonly known simply as the OFAC list.

How to Comply?

OFAC updates the SDN list continually. You can download the entire list from OFAC’s website, but
your financial institution likely has software known as “interdiction software” to check. Manually
checking the SDN list would be required for performing transactions for noncustomers like
money orders or cashier’s check.

Most of the transactions that you will see on a daily basis are covered by OFAC. There are some
red flags that can help you determine when something out-of-the-ordinary might be occurring.

• International funds transfers

• Nonresident alien accounts
• Foreign customer accounts
• Commercial letters of credit and other trade finance products
• Payable through accounts
• International private banking
• Overseas branches or subsidiaries
• Customers who lack identification or provide strange forms of I.D.
• Customers who refuse to provide you with personal background information regarding
themselves or the destination of the funds.
• A business that refuses to disclose details about its business activities or is unwilling to
provide financial documentation or lacks corporate records.

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Check the OFAC list before completing the transaction. If it appears that a name is a hit on the
OFAC list, it should first be verified with follow-up questions, such as the entity’s location, or other
means of identification. You should be aware that sometimes a search of the SDN will result in a
false positive.

If it is verified that an individual, entity, or country appears on the SDN list and is attempting to
open an account, requesting specific financial service, or attempting to conduct a financial
transaction, OFAC requires an institution to block or reject the transaction and report the situation
to the authorities. Whether the transaction is blocked (commonly known as “freezing”) or
rejected is based upon the particular OFAC sanction. This is handled on a case-by-case basis,
and OFAC will let you know precisely how you should proceed. If a sanction states that the
transaction must be rejected, then the financial institution is not allowed to accept the funds. If a
sanction states that the transaction must be blocked, then blocked accounts should be established
to hold the entities’ frozen assets. Once the transaction is blocked, the organization must report
the blocking to OFAC within 10 business days from the date of the attempted transaction. Those
funds must be placed in an account in the name of the blocked party.

In addition to the SDN, there is a list of countries that are sanctioned by OFAC. These transactions
should be carefully examined, as each country has different transactions that are allowed or
blocked.

Noncompliance

Depending on the type of violation, criminal penalty fines may be assessed from $50,000 to $10
million. In addition to these fines, willful violators may be imprisoned anywhere from 10 to 30
years. For civil penalties, once again, depending on the program, these penalties range from
$250,000 or twice the amount of each underlying transaction (up to a limit updated for inflation).
Depending on the situation, employees of financial institutions may be prosecuted in criminal or
civil court for OFAC violations, as well as the entire financial institution.

What Can Supervisors Do To Prevent OFAC Violations?

Ensure that employees know how to access the OFAC list and verify a “hit”
Periodically, based on policy, check all current accounts against the most current OFAC list
(and/or a system such as OFAC’s SDN Search) for compliance
Educate yourselves on which countries have OFAC sanctions
Ensure that new relationships are checked against the OFAC list according to policy
Utilize and review software that helps employees check the OFAC list. Also, ensure that
employees know how to access the list if the software stops working.
Ensure the Board has approved OFAC policies and procedures on an annual basis

Perhaps the single most important thing you can do to prevent violations is to know who your
institution’s BSA or OFAC Officer is. Many times, this is the same individual. That way, if there is a
situation that warrants a question about OFAC, you’ll know exactly where to route the question.

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SAFE Act Compliance

Glossary (1 of 3)
Annual Renewal Period – means November 1st through December 31st of each year.

Administrative or Clerical Tasks – means the receipt, collection, and distribution of information
common for the processing or underwriting of a loan in the residential mortgage industry and
communication with a consumer to obtain information necessary for the processing or underwriting of a
residential mortgage loan.

Batch Processing – Provides institutions with the ability to submit a portion of the required information
on multiple MLOs into the NMLSR in a single process instead of one-by-one.

Channeler – Entities authorized by the FBI, such as the CSBS and SRR, which provide employee
fingerprints for the purpose of background checks

Consumer Financial Protection Bureau (CFPB) – A product of the Dodd-Frank Act, the Bureau was
created to ensure that consumers are protected from unfair, deceptive, and abusive acts or practices,
and ensures that consumers receive timely and understandable information. In addition, it addresses
outdated regulations, enforces financial laws consistently, and ensures the transparent and efficient
operation of markets for products and services.

Covered Financial Institution – means any national bank, federal branch or agency of a foreign
bank, member bank, insured state non-member bank, (including state-licensed insured branches of
foreign banks), savings association, or certain of their subsidiaries; branch or agency of a foreign bank
or commercial lending company owned or controlled by a foreign bank; FarmCredit System institution;
or federally insured credit union, including certain non-federally insured credit unions

Dodd-Frank Wall Street Reform and Consumer Protection Act – Impacts every area of banking –
especially compliance – as a set of rules that improves the transparency and accountability of the
financial industry. Rules in this act have a profound focus on protecting and educating consumers on
various financial practices surrounding loans, ending “too big to fail” and protecting consumers from
unfair and abusive practices.

Employee – is not defined in the SAFE Act or SAFE Act regulation. However, the regulation’s
preamble explains that the meaning of “employee” under the SAFE Act regulation is consistent
with the common-law right-to-control test. For example, the results of this test generally
determine whether an institution files an Internal Revenue Service Form W-2 or Form 1099 for
an individual.

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SAFE Act Compliance

Glossary (2 of 3)
Mortgage Loan Originator or MLO – means an individual who both (1) takes a residential mortgage
loan application and (2) offers or negotiates terms of a residential mortgage loan for
compensation or gain. The term mortgage loan originator does not include:
• An individual who performs purely administrative or clerical tasks on behalf of an individual who
is an MLO;
• An individual who only performs real estate brokerage activities (as defined in 12 U.S.C. Section
5102(3)(D)) and is licensed or registered as a real estate broker in accordance with applicable
state law, unless the individual is compensated by a lender, a mortgage broker, or other MLO or
by any agent of such lender, mortgage broker, or other MLO, and meets the MLO definition
• An individual or entity solely involved in extensions of credit related to time-share plans, as that
term is defined in 11 U.S.C. Section 101(53D).

Nationwide Mortgage Licensing System and Registry – The registry is what Mortgage Loan
Originators are required by the SAFE Act to use to record specific information about themselves and
their institutions, such as name, contact information, and employment information

Registry –the Nationwide Mortgage Licensing System and Registry, or NMLS system, developed and
maintained by the Conference of State Bank Supervisors and the American Association of Residential
Mortgage Regulators for the state licensing and registration of statelicensed MLOs, and through which
federal MLO registrations must be accomplished.

Registered Mortgage Loan Originator or Registrant –any individual who

(1) meets the MLO definition
(2) is an employee of a covered financial institution
(3) is registered pursuant to the regulation with the Registry
(4) maintains a unique identifier through the Registry

Residential Mortgage Loan – means any loan primarily for personal, family, or household use that is
secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling (as
defined in Section 103(v) of the Truth in Lending Act, 15 U.S.C. Section 1602(v)) or residential real
estate upon which is constructed or intended to be constructed a dwelling (including manufactured
homes) and includes refinancings, reverse mortgages, home equity lines of credit, and other first and
additional lien loans.

SAFE Act – Encourages states to develop and maintain minimum standards for state-licensed
mortgage originators. Specified employees of financial institutions (or their subsidiaries) regulated by a
federal agency who act as residential Mortgage Loan Originators (MLOs) are required to register with
the Nationwide Mortgage Licensing System and Registry (NMLSR).

Staggered Registration – Limits the number of initial NMLSR registrations and spreads them
throughout the 180-day implementation period.

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SAFE Act Compliance

Glossary (3 of 3)
Unique Identifier – means a number or other identifier that:
(1) permanently identifies a registered MLO
(2) is assigned by protocols established by the Registry and the Bureau to facilitate electronic
tracking of MLOs, as well as uniform identification of, and public access to, the employment
history of and the publicly adjudicated disciplinary and enforcement actions against MLOs
(3) must not be used for purposes other than those set forth under the SAFE Act.

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SAFE Act Compliance

Summary (1 of 5)

The Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act)

The SAFE Act is implemented by the Consumer Financial Protection Bureau at 12 C.F.R. Part 1007. It
was passed by Congress in direct response to the economic collapse that followed the bursting of the
housing bubble.

Nearly all mortgage loan originators (MLOs), and financial institutions must register with the Nationwide
Mortgage Licensing System (NMLS) and renew their registration annually to comply with the SAFE Act.

NMLS Objectives

The objectives of the NMLS include:

• Aggregating and improving the flow of information to and between regulators

• Providing increased accountability and tracking of MLOs
• Enhancing consumer protections
• Supporting anti-fraud measures
• Providing consumers with easily accessible information at no charge regarding the employment
history of and publicly adjudicated disciplinary and enforcement actions against MLOs

SAFE Act Overview

The SAFE Act states that each employee of a covered financial institution (or its subsidiaries) who acts
as an MLO must register with the NMLS, obtain a unique identifier, and maintain this registration.

Unique Identifiers and Disclosure

The SAFE Act requires all MLOs in the United States to obtain a unique identifier. This unique identifier,
which must be made available to the public, enables anyone to use the NMLSR to look up MLOs,
access their employment history, and discover any public disciplinary and enforcement actions against
them.

The SAFE Act requires that a registered MLO’s unique identifier must be made available by financial
institutions to consumers in a method and manner that is practical to the institution.

An MLO must provide his or her unique identifier to a consumer:

• Upon oral or written request.

• Orally or in writing before acting as an MLO.
• In the MLO’s initial written communication with the consumer, such as a Loan Estimate,
disclosure statement, or commitment letter. This is true even if the identifier has already been disclosed
orally.

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SAFE Act Compliance

Summary (2 of 5)

Written communication of an MLO’s unique identifier may be in hard copy or electronic format.

To Whom Does the SAFE Act Apply?

The SAFE Act regulates MLOs who both take applications and negotiate terms for potential
borrowers of residential mortgage loans.

The SAFE Act makes a clear distinction that individuals who perform only administrative or clerical
tasks – which includes the receipt, collection, distribution, and consumer communication of information
that is commonly used in the processing or underwriting of a residential mortgage loan—are not MLOs.

Residential Mortgage Loans

The SAFE Act does not regulate MLO activity for commercial, business, and agricultural-purpose loans
– even if they are secured by a one-to-four family dwelling. The de minimus exception waives the
registration requirement for MLOs who have never registered and originate five or fewer residential
mortgage loans.

Taking a Loan Application

“Taking a loan application” means receipt by an individual, for the purpose of facilitating a decision
whether to extend an offer of loan terms to a borrower or prospective borrower, of a mortgage loan
application. The key idea is that it is the decision maker who is the MLO.

Negotiating Terms

“Offering or negotiating the terms of a loan” includes:

• Presenting for consideration by a borrower or prospective borrower particular loan terms,
whether verbally, in writing, or otherwise
• Communicating directly or indirectly with a borrower or prospective borrower in order to
reach a mutual understanding about prospective residential mortgage loan terms. This includes
responding to a borrower or prospective borrower's request for a different rate or different fees
on a pending loan application by presenting to the borrower or prospective borrower a revised loan
offer, even if a mutual understanding is not subsequently achieved.

For Compensation or Gain

Under the SAFE Act, an MLO is someone who acts for compensation or gain.Acting “for compensation
or gain” means that an individual receives or expects to receive in connection with his or her activities
anything of value, including, but not limited to, payment of a salary, bonus, or commission.

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SAFE Act Compliance

Summary (3 of 5)

A person who volunteers his or her services as a mortgage lender, processor, or underwriter—without
receiving or expecting to receive compensation or gain in exchange—is not acting as an MLO under
the SAFE Act.

Information Employers/Financial Institutions Must Submit

A covered financial institution must submit the following categories of information to the NMLS:

• Name
• Main office address
• Business phone number
• Business e-mail address
• Employer Identification Number (EIN)
• Research Statistics Supervision and Discount (RSSD) Number issued by the Fed
• Name of primary federal regulator
• Name and contact information of the individuals with authority to act as the financial institution’s
primary NMLS contact – may not be an MLO
• Indication of whether the reporter is a subsidiary of a financial institution; and if so, the RSSD
Number
• Name and contact information of the individuals with authority to enter data into the Registry
and those who may delegate this authority to others (not an MLO)

Employees who enter information must comply with NMLS standards for identity verification and attest
that they have the authority to enter data. They must also attest to the accuracy of the information
entered, and that the institution will keep it current and file supplementary or updated information on a
timely basis.

Modifying Financial Institution Information in the Registry

Financial institutions must:

• Renew information annually
• Update information within 30 days of when it becomes inaccurate
• Confirm that it employs a registrant (after the individual has registered)
• Notify the NMLS within 30 days if a registrant ceases to be employed at the institution (along
with date employment ceased)

Information MLOs Must Provide to the Registry

MLOs must submit the following information to the NMLS:

Personal information:
• Name and any other names used;
• Home address and contact information;

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SAFE Act Compliance

Summary (4 of 5)

• Principal business location address and business contact information;

• Social Security Number (SSN);
• Gender; and
• Date and place of birth

Fingerprints, in digital form if practicable, are also required – they cannot be more than three years old.
These fingerprints are used by the FBI or other federal agency in order to perform a criminal history
background check.

Employment information:
• Principal location of employment
• Business phone number
• Business e-mail address
• Employment history for the last 10 years within the financial services industry prior to the date of
registration or renewal
• Date the MLO became an employee of the financial institution

Additional Information MLOs Must Provide to the Registry

MLOs who have been the subject of certain disciplinary or enforcement actions must upload
documentation for the actions taken against them to the NMLS. The actions will be made public.

The NMLS is a repository of information – it does not screen or approve any particular registration. If an
MLO reported a criminal or civil offense, it would not necessarily prevent him or her from being
registered.

MLOs must provide authorization and attestation as follows:

• Attest to the completeness and accuracy of all information provided to the NMLS (or that was
submitted on behalf of the MLO)
• Authorize the NMLS and his or her employer to obtain any information related to sanctions or
findings related to any administrative, civil, or criminal action to which the employee is a party, made by
any governmental jurisdiction; and
• Authorize the NMLS to make certain contact information (not including private information) and
employment history available to the public.

Modifying MLO Information in the Registry

A registered MLO must update the Registry within 30 days of any of the following:
• The MLO changes his or her name
• Any information submitted to the NMLS becomes inaccurate, incomplete, or outdated
• The MLO ceases to be an employee of the covered financial institution

An MLO must maintain his or her registration, unless the MLO is no longer engaged in the activity of an
MLO.

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SAFE Act Compliance

Summary (5 of 5)
If the MLO’s employment has changed due to merger or acquisition, then the information must be
updated within 60 days as of the effective date of the merger or acquisition.

Applicable Fees and Completing Registration

The NMLS charges “reasonable fees to cover the cost of maintaining and providing access to
information” from the Registry. Fees imposed on MLOs cover the initial registration, renewals, and
updates. Consumers will not be assessed fees to access the Registry

Renewals and Reactivation

Registry renewal involves:

• Confirming the accuracy of information in the Registry
• Updating any inaccuracies as needed

MLOs must renew their registrations annually between November 1 and December 31.

If a registration is not renewed, then the MLO will be become inactive and may not perform MLO duties.
The status of a federal registrant who fails to register for renewal during the renewal period becomes
“Inactive - Failed to Renew” on January 1 of the following year. The reactivation process is identical to
the renewal process.

Written Policy and Procedure Requirements

Your financial institution’s policies and procedures must:

• Establish a process to identify each employee that must be registered as an MLO
• Require all covered employees to be notified of the registration requirements, including
instructions on how to register
• Establish reasonable procedures and tracking systems for monitoring registrations and
renewals, including maintaining appropriate records
• Establish reasonable procedures for confirming the adequacy and accuracy of the institution’s
employees’ registrations, including updates and renewals, by comparing registration information with its
own records.
• Provide for appropriate action, including disciplinary action, if an employee fails to comply with
the requirements and the institution’s policies and procedures prohibiting an employee from acting as
an MLO if he or she has failed to register/renew
• Establish a process for reviewing or acting upon background reports provided by the NMLS, and
maintaining records of these reports and actions taken
• Establish procedures that ensure that any third parties working with the institution regarding
mortgage loan originations have their own policies and procedures to comply with SAFE Act.
• Provide for independent testing for compliance by financial institution personnel or a third party
at least annually
• Establish procedures to comply with the unique identifier requirements

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 Mortgage Fraud: Identifying Red Flags

Glossary
Asset Rental — Assets are temporarily placed in the borrower’s possession in order to qualify for a
loan. Borrower may pay a "rental" fee for temporary "use."

AUS — An Automated Underwriting System is a computer-generated loan underwriting decision. An

AUS retrieves relevant data (i.e., borrower’s credit history), and arrives at a logic-based loan decision.

BSA — The Bank Secrecy Act requires financial institutions in the United States to assist U.S. government
agencies to detect and prevent money laundering. The purpose of a BSA program is to ensure
compliance with the BSA and all of its implementing regulations.

Buy and Bail — After obtaining new property, borrower “bails” on the first loan.

Chunking — Without borrower knowledge, third party submits loan application on various properties
to multiple financial institutions. Third party keeps loan proceeds, loans cannot be repaid, and banks
must foreclose.

Debt Elimination Scheme — Fraudulent third party offers to eliminate borrower’s debt for an upfront
fee.

Double Sale — Individual of lending institution copies loan file and sends to separate warehouse
lenders.

Equity Skimming — Use a fraudulent appraisal to create “Phantom Equity” which is stripped out
through various other schemes.

Fake Down Payment — Fictitious, forged, falsified, or altered documents used to mislead the lender.

Fictitious Loan — Fabrication of loan documents to apply for loan in which the real applicant has no
intention of paying.

Foreclosure Rescue Scheme — Fraudulent third party convinces borrower to deed property to them,
then collects fees and payments that are not delivered to the lender, resulting in default.

Fraud for Housing — Trying to get an unqualified buyer into a home. This is almost always fraud by
your borrower misstating their qualifications on the loan (e.g., falsified tax returns).

Fraud for Profit —Involves larger schemes that are orchestrated by either individuals or groups of
individuals to extract funds from your financial institution, secondary market, or from the lender.

Fraudulent Appraisal — Falsified information or appraiser provides misleading assessment.

Fraudulent Documentation — Forged, falsified, or altered documents the lender relied upon for the
credit decision.

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 Mortgage Fraud: Identifying Red Flags

Identity Theft — Use of another person’s identity without their knowledge to obtain credit.

Modification — (Refi Fraud) Borrower submits false information to persuade lender to modify loan to
more favorable terms.

Phantom Sale — Obtaining false transfer of title, getting a loan for fraudulent owner, then selling
property to another third party.

Property Flip — “Straw” borrowers buying and selling properties among themselves to artificially
inflate property values.

Red Flag — A warning of fraud. It is not proof that fraud is occurring, but it’s the first place to start
looking.

SAR — A Suspicious Activity Report is a report made by a financial institution to the Financial Crimes
Enforcement Network (FinCEN), an agency of the United States Department of the Treasury, regarding
suspicious or potentially suspicious activity.

Servicing — Diversion or misuse of funds for the benefit of the service provider.

Shell Company — A business entity that typically has no physical presence, visible assets and
generates little income.

Short Sale Fraud — Borrower withholds payments, forcing loan into default; then third party submits
straw sale at less than balance.

Straw/Nominee Borrower — Using someone to serve as a cover for a questionable transaction.

Fronting for a relative, for example, and then having them immediately default.

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 Mortgage Fraud: Identifying Red Flags

Summary
Fraud Basics

Fraud is a material misrepresentation or concealment of a material fact which deceives and is relied upon
by another, resulting in damages.

In general, there are two categories of mortgage fraud:

• Fraud for Housing
• Fraud for Profit

What is a Red Flag?

A red flag is a warning of fraud. It is not proof that fraud is occurring, but it’s the first place to start looking.
Most, if not all, loans will contain red flags. And a red flag in one transaction may not be a red flag in
another. Due diligence is required to see if a true issue exists.

With your consumers, industry experts recommend that you “trust, but verify.” This means you need to:
• Verify all information
• Ask questions
• Look for inconsistencies
• Check internal watch lists
• Know your consumer and their profile

General Red Flags

There are certain red flags that should be watched for throughout the entire loan process:
• Social Security Number (SSN) or address discrepancies
• Documentation with deletions, correction fluid, or other alterations
• Numbers on the documentation that appear to be “squeezed” from alterations
• Different handwriting or type styles within a document
• Excessive Automated Underwriting System (AUS) submissions

Red Flags During the Application Stage

• Changes in handwritten and typed application

• Unsigned or undated paperwork
• Employer’s address is a P.O. Box
• Same phone number for borrower and employer
• Cash out refinance deals on recently acquired property
• Buyer is already living in proposed property
• Purchaser of investment property does not own their own residence

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 Mortgage Fraud: Identifying Red Flags

Red Flags in the Credit Report

• No credit history or a “thin” credit file

• Invalid or different SSN from that on other documents
• Duplicate, recently-issued, or additional user of SSN
• Liabilities appear on credit report that are not on application
• Credit patterns are inconsistent with income and lifestyle
• All trade lines opened at the same time
• Significant differences between original and new/supplemental credit reports
• “Also Known As” (AKA) or “Doing Business As” (DBA) indicated
• Numerous recent inquiries
• Missing pages and/or supplements

Red Flags During Verification

• Applicant’s job title is generic, such as “manager,” or “vice-president”

• Employer name is similar to a party to the transaction (e.g., utilizes applicant’s initials)
• Employer unable to be contacted
• Year-to-date or past-year earnings are even dollar amounts
• Withholding not calculated correctly (check FICA tables)
• Pay period dates overlap or don’t correspond with other documentation
• Abnormalities in paycheck numbering
• Inconsistent handwriting on the VOE, pay stubs, or W-2 forms
• W-2 form presented is not the employee’s copy
• Employer’s EIN has a format other than 12-3456789
• Income appears to be out of line with type of employment
• Self-employed application does not make estimated tax payments
• Real estate taxes or mortgage interest claimed, but no ownership of real property disclosed
• Tax returns not signed or dated
• High income application without paid preparer
• Paid preparer signed taxpayer’s copy of tax returns
• Interest and dividend income don’t substantiate assets
• Applicant reports substantial income but has no cash in bank
• Large increase in housing expense
• Income is out of line with type of employment, applicant age, education and/or lifestyle
• Verifications are addressed to a specific party’s attention
• Verification were completed the same day they were ordered, or were completed on weekends
or holidays

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 Mortgage Fraud: Identifying Red Flags

Red Flags During Appraisals

• Appraisal ordered by a party to the transaction

• Occupant shown to be tenant or unknown, or someone other than seller shown on sales contract
• Appraisal indicates transaction is a refinance, but other documentation reflects a purchase
• Purchase price is substantially higher or lower than predominant market value
• Large positive adjustments made to comparable properties
• Comparable sales are not similar in style, size and amenity, or dated sales are used
• Comparable properties are a significant distance from the subject, or located across
neighborhood boundaries (main arteries, waterways, etc.)
• Map scale distorts distance of comparable properties
• “For Rent” sign appears in photographs
• Photos appear to be taken from an awkward or unusual standpoint
• Address reflected in photos does not match property address
• Weather conditions in photos inconsistent with time, date of appraisal
• Significant appreciation in short period of time
• Prior sales are listed for subject and/or comparables without adequate explanation

Closing Disclosure/HUD-1 Red Flags

• Borrower or seller name is different than sales contract and title

• Excessive earnest money or builder deposit
• Earnest money deposit is inconsistent with sales contract and/or application
• Payouts to unknown parties
• Refinance pays off previously undisclosed liens
• Excessive sales commissions, fees, and/or points
• Seller-paid closing costs, especially for purchaser with sufficient assets for down payment
• Cash proceeds to borrower are inconsistent with final application and loan approval

Common Schemes and Warning Signs

1. Buy and Bail – After obtaining new property, borrower “bails” on the first loan
2. Chunking – Without borrower knowledge, third party submits loan application on various
properties to multiple financial institutions. Third party keeps loan proceeds, loans cannot be
repaid, and banks must foreclose.
3. Double Sale – Individual of lending institution copies loan file and sends to separate warehouse
lenders.
4. Equity Skimming – Use a fraudulent appraisal to create “Phantom Equity” which is stripped out
through various other schemes.
5. Modification – (Refi Fraud) Borrower submits false information to persuade lender to modify
loan to more favorable terms.
6. Fictitious Loan – Fabrication of loan documents to apply for loan in which the real applicant has
no intention of paying.
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 Mortgage Fraud: Identifying Red Flags
7. Servicing – Diversion or misuse of funds for the benefit of the service provider.
8. Phantom Sale – Obtaining false transfer of title, getting a loan for fraudulent owner, then selling
property to another third party.
9. Property Flip – “Straw” borrowers buying and selling properties among themselves to
artificially inflate property values.
10. Short Sale Fraud – Borrower withholds payments, forcing loan into default; then third party
submits straw sale at less than balance.
11. Debt Elimination Scheme – Fraudulent third party offers to eliminate borrower’s debt for an
upfront fee.
12. Foreclosure Rescue Scheme – Fraudulent third party convinces borrower to deed property to
them, then collects fees and payments that are not delivered to the lender, resulting in default.

Common Fraud Mechanisms

1. Asset Rental - Assets are temporarily placed in the borrower’s possession in order to qualify for
a loan. Borrower may pay a "rental" fee for temporary "use."
2. Fake Down Payment - Fictitious, forged, falsified, or altered documents used to mislead the
lender.
3. Fraudulent Appraisal - Falsified information or appraiser provides misleading assessment.
4. Fraudulent Documentation - Forged, falsified, or altered documents the lender relied upon for
the credit decision.
5. Shell Company - A business entity that typically has no physical presence, visible assets and
generates little income.
6. Identity Theft - Use of another person’s identity without their knowledge to obtain credit.
7. Straw/Nominee Borrower - Using someone to serve as a cover for a questionable transaction.
Fronting for a relative, for example, and then having them immediately default.

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 RESPA: Essentials

Glossary
Annual Escrow Disclosure – A summary of the activity within the borrower’s escrow account
over the previous 12-month computation period. It must be provided within 30 days of the
conclusion of the period.

Changed Circumstance – A new Loan Estimate may be issued if there is a “changed

circumstance” affecting fees and charges. This includes information specific to the borrower or
transaction that is relied on in providing the Loan Estimate that changes or is found to be
inaccurate after the Loan Estimate or GFE has been provided, or there is new information
particular to the borrower or transaction that was not relied on in providing the original Loan
Estimate.

Closing Disclosure – Created by the TILA-RESPA Integrated Disclosures (TRID) rule, this
disclosure combined and replaced the HUD-1 Settlement and the final Truth in Lending (TIL)
Statement. It provides a detailed accounting of the mortgage loan transaction and must be
provided to borrowers three business days before closing a loan.

Consumer Financial Protection Bureau – Granted rule-making and enforcement authority of

RESPA by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Escrow Account – In order to be sure that fees related to the mortgage loan (such as taxes and
insurance premiums) will be paid, the lender establishes an account to and from which these fees
are paid. The account is under the control of the lender. The monthly escrow amount is usually
added to the borrower’s monthly principal and interest payment.

Federally Related Mortgage Loans – Covered by RESPA, federally related mortgage loans are
those made by any lender whose deposits or accounts are insured by any federal agency,
intended to be sold to any of the government-sponsored enterprises, or made by any creditor
who makes or invests in residential real estate loans aggregating more than $1 million per year.

Home Loan Toolkit – A detailed booklet that includes advice to potential borrowers. For first-
lien purchase loans, it must be provided within the same timeframe as the Loan Estimate.

Initial Escrow Disclosure – The servicer must submit an initial escrow statement to the borrower
at settlement, if the escrow account is established as a condition of the loan. If an escrow account
is not a condition of the loan and is established after settlement, the servicer must submit the
initial escrow statement to the borrower within 45 calendar days after the account is established.

Kickback – A kickback is an illegal fee or rebate paid to someone in order to gain that person’s
decision or recommendation for the award of business.

Loan Estimate – Created by the TRID rule, this disclosure combined and replaced the Good
Faith Estimate (GFE) and the early TIL Statement. It provides a summary of the key loan terms and
estimated loan and closing costs and must be provided to the borrower within three days of
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 RESPA: Essentials

submitting the loan application.

Qualified Written Request (QWR) – A written communication from the borrower to the servicer,
requesting the servicer to correct an error or provide other information.

Real Estate Settlement Procedures Act (RESPA) – Implemented by Regulation X, RESPA is a

consumer protection statute passed by the U.S. Congress in 1974. The statute has two main
purposes: (1) to help consumers become better shoppers for settlement services and (2) to
eliminate kickbacks and referral fees that may increase the costs of certain settlement services.

Referral – An agreement, understanding, or expectation to send business to someone, them to

you. RESPA prohibits lenders from engaging in certain activities in connection with referring
business or receiving business referrals from others.

Servicing Transfer Notice – A notice sent to the borrower(s) when the servicing of a loan is
being transferred from one servicer to another. This notice must be provided by both the creditor
who is transferring the servicing (transferor) and the new company that will service the loan
(transferee).

U.S. Department of Housing and Urban Development (HUD) – Had the authority to enforce
RESPA until the CFPB took it over in 2010.

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 RESPA: Essentials

Summary
The Real Estate Settlement Procedures Act (RESPA), implemented by Regulation X, has two main
purposes: (1) to help consumers become better shoppers for settlement services and (2) to
eliminate kickbacks and referral fees that may increase the costs of certain settlement services.

RESPA requires that borrowers receive disclosures at certain times during the mortgage loan
transaction.

Loan Estimate
Lenders must provide the Loan Estimate to consumers within three business days of receipt of the
application. The Loan Estimate must list all the fees that are paid to any party for services as a
condition of obtaining the loan.

For reverse mortgages and chattel-dwelling loans, the GFE is used instead.

Home Loan Toolkit

For first-lien purchase loans, the Home Loan Toolkit, or a suitable substitute, must be provided
within the same timeframe as the Loan Estimate. The booklet is a detailed document that includes
advice to potential borrowers, including the borrower’s rights under RESPA, an explanation of
settlement services and costs, and sample forms and worksheets.

Homeownership Counseling
RESPA requires lenders to provide applicants with a reasonably complete or updated list of
homeownership counselors who are certified by HUD and located in the area of the applicant. The
list must be provided at the time of application or within three business days of receipt of an
application.

Closing Disclosure
A Closing Disclosure must be provided to the borrower no later than three business days before
consummation of the loan. The Closing Disclosure reflects the actual terms and costs of the loan,
and it is substantially similar in format to the Loan Estimate.

For reverse mortgages and chattel-swelling loans, a Settlement Statement (HUD-1) must be
provided one day prior to the settlement, if the borrower requests it.

Servicing Disclosure Statement

RESPA requires that each applicant for a closed-end loan secured by a first lien receive
information concerning the likelihood that the mortgage loan will be transferred to another
servicer during the life of the loan. For loans that require the Loan Estimate, the servicing
disclosure statement is included within the Loan Estimate. If a loan requires a GFE, then servicers
must provide this information to the applicant in writing.

In the event that loan servicing is later transferred, a notice must be sent to the borrower(s). This
notice must be provided by both the creditor who is transferring the servicing (transferor) and
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 RESPA: Essentials

the new company that will service the loan (transferee).

Escrow Account Disclosures

The servicer must submit an initial escrow statement to the borrower at settlement, if the escrow
account is established as a condition of the loan. If an escrow account is established after
settlement, then the servicer must submit the initial escrow statement to the borrower within 45
calendar days after the account is established. Servicers must also provide borrowers, at least
annually, an escrow account summary. This summary must cover a twelve-month computation
period and be provided within 30 days of the conclusion of that period.

Other Requirements
RESPA requires servicers to correct errors or to provide other information to borrowers who
request it in the form of a qualified written request (QWR).

RESPA also addresses certain industry practices that have been shown to increase the cost of
settlement services. Prohibited practices include:

• Offering kickbacks, referral fees, or fee-splitting with other settlement service providers
• Charging fees for services not actually rendered
• Charging a fee for preparing and distributing required loan statements and disclosures
• Requiring the borrower to place “excessive” funds in an escrow account
• Requiring the homebuyer to use a particular title insurance company, either directly or
indirectly, as a condition of sale

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 USA PATRIOT Act: Managing Compliance

Glossary
Account – A formal banking or business relationship established to provide regular service,
dealings and other financial transactions. It includes demand deposit, saving deposit or other
financial transaction or asset accounts, a credit account or other extension of credit.

Affiliate – For the purposes of this regulation, an affiliate means a foreign financial institution that
is controlled by or is under common control with, a depository credit union or foreign financial
institution.

Association of Financial Institutions – A group or organization, the membership of which is

comprised entirely of financial institutions as described in 31 U.S.C. 5312(a)(2) and in 31 CFR
1010.540(a)(1).

Control the ownership – Control or power to vote 50% or more of any class of voting securities
or other voting interests of another company; or control in any manner the election of a majority
of the directors (or individuals exercising similar functions) of another company.

Covered Financial Institutions – An insured bank, private banker, agency or branch of a

foreign financial institution in the U.S. Upon request from its U.S. Federal banking regulator, a
covered financial institution must produce records relating to the institution’s anti-money
laundering compliance and information on any account opened, maintained, administered, or
managed in the U.S. by the institution. These records must be made available or presented to the
requesting agency within 120 hours of the request.

Customer Identification Program – Requires banks and other financial institutions to adopt
written procedures to ensure proper identification of customers at the time an account is opened
or a relationship is established.

Immediate Family Member – Parents, spouses, children, siblings, uncles, aunts, grandparents,
grandchildren, first cousins, stepchildren, stepsiblings, parents-in-law, and spouses of any of the
parties listed.

Institution Affiliated Party – Includes any director, officer, employee, stockholder, agent,
consultant, joint venture partner, or any other person who participates in the conduct of the affairs
of a bank or bank holding company.

Interim Verification – If, at any time, an institution knows, suspects or has reason to believe that
the information provided by a foreign financial institution is no longer correct, the institution must
request that the foreign financial institution verify or correct such information, or shall take other
appropriate measures to ascertain the accuracy of the information or to obtain correct
information.

Offshore Banking License – A license, issued by certain jurisdictions outside of the U.S., to

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 USA PATRIOT Act: Managing Compliance

conduct banking activities which, as a condition of the license, prohibits the licensed entity from
conducting banking activities with citizens of, or with the local currency of, the country which
issued the license.

Owners of a Foreign Financial Institution – Any person who directly or indirectly owns,
controls or has the power to vote 25% or more of any class of voting securities or other voting
interests of a foreign financial institution or controls in any manner the election of a majority of the
directors (or individuals exercising similar functions) of a foreign financial institution. Members of
the same family shall be considered to be one person.

Payable-Through Accounts – A correspondent account maintained by a covered financial

institution for a foreign bank.

Private Banking Account – An account that a) Requires a minimum aggregate deposit of funds or
other assets of not less than $1 million; b) Is established on behalf of one or more individuals who
have a direct or beneficial ownership interest in the account; or c) Is assigned to, or is
administered or managed by, in whole or in part, an officer, an employee or agent of a financial
institution acting as a liaison between the institution and the direct or beneficial owner(s) of the
account.

Regulated Affiliate – A foreign shell financial institution that is an affiliate of a depository

institution, credit union or foreign financial institution that maintains a physical presence in the
U.S. or a foreign country, as applicable; and is subject to supervision by a banking authority in the
country regulating the affiliated depository, credit union or foreign financial institution.

Safe Harbor Provision – Provides immunity from civil liability to a financial institution, its
directors, officers, employees and agents for reporting suspicious activity, in accordance with
regulations or voluntarily. This immunity was provided under existing regulations, against “any
law or regulation of the U.S. or any constitution, law, or regulation of any state or political
subdivision.”

Triennial Verification – At least every three years, an institution must obtain a certification or re-
certification from each foreign financial institution for which it maintains a correspondent account.

USA PATRIOT ACT – The official title of the USA PATRIOT Act is “Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA
PATRIOT) Act of 2001.” The purpose of the USA PATRIOT Act is to deter and punish terrorist acts
in the U.S. and around the world, to enhance law enforcement investigatory tools, and other
purposes, some of which include: To strengthen U.S. measures to prevent, detect and prosecute
international money laundering and financing of terrorism; To require all appropriate elements of
the financial services industry to report potential money laundering.

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 USA Patriot Act: Managing Compliance

Summary
Purpose of the USA PATRIOT Act

Broadly speaking, the USA PATRIOT Act was enacted to detect and prevent terrorism and to
prosecute and punish those who perpetrate it. However, the Act affects the banking industry in
some very specific ways. Title III of the Act (“International Money Laundering Abatement and
Anti-Terrorist Financing Act of 2001”) covers three areas:

International Counter Money Laundering and Related Measures

Bank Secrecy Act Amendments
Currency Crimes and Protection

The USA PATRIOT Act requires each financial institution to establish anti-money laundering
programs, to include at a minimum:

The development of internal policies, procedures and control

The designation of a compliance officer
An ongoing employee training program
An independent audit function to test programs

Information Sharing and PATRIOT Act Penalties

Every insured financial institution is required by the USA PATRIOT Act to keep certain records
(pertaining to the institution’s anti-money laundering policy, as well as any accounts) on file
within the United States and, upon request, to provide information contained therein to
appropriate federal regulators within 120 hours.

In the case of correspondent accounts held on behalf of foreign banks, the following records must
be maintained in the United States and supplied to a federal regulator within seven days of a
request:

Identity of the owners of the foreign bank

The name and address of a person who resides in the U.S. and is designated as an agent of the
foreign bank and authorized to accept service of legal process for records regarding the
correspondent bank

If a foreign bank fails to provide such information or any other information by demand of a
subpoena or summons, the Treasury Secretary or the Attorney General can order the termination
of the correspondent account. Failure to comply with such an order within 10 business days
warrants a $10,000 daily fine to the U.S. financial institution which maintains the correspondent
account for the foreign institution.

It is the responsibility of the financial institutions that maintain private banking accounts or
correspondent accounts for non-U.S. persons to implement enhanced due diligence policies to
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 USA Patriot Act: Managing Compliance

detect and report instances of money laundering.

For private banking accounts, the minimum standards require that the financial institution takes
reasonable steps to:

Ascertain the identity of the nominal and beneficial owners of the account
Determine the source of funds deposited into the account
Report any suspicious transactions

On behalf of a federal law enforcement agency investigating money laundering or terrorist

activity, the Financial Crimes Enforcement Network (FinCEN) may require any financial institution
to search its records to determine if that institution:

Maintains an account or has maintained any account during the preceding twelve months for the
party named in the request
Has engaged in any transaction with the party named in the request in the preceding six months

To exchange information on money laundering or terrorist financing with another financial

institution, financial institutions must file a notice with FinCEN. If, as a result of information shared,
a financial institution comes to know or suspect that an individual or other entity is involved in
money laundering or terrorist activity, the institution must:

File a Suspicious Activity Report

Immediately telephone the appropriate law enforcement authority and the institution’s
supervisory authority (in addition to filing a SAR) in situations involving violations requiring
immediate attention, such as when a reportable violation involves terrorist activity, or is ongoing

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 Diversity and Inclusion

Glossary
Harassment – Offensive and/or unwelcome conduct based on race, color, age, sex, religion,
national origin, or disability. Courts and administrative agencies decide what constitutes
harassment on a case-by-case basis, and these cases then provide guidelines that allow
employers to make judgments about what might constitute harassment, to prevent inappropriate
conduct in the workplace, and to make determinations about when discipline or termination may
be necessary.

Implicit Bias – Negative feelings or attitudes about others based on race, sex, or other
characteristics that develop unconsciously and affect a person’s thoughts and actions.

Microaggressions – Refer to subtle but offensive comments or actions directed at targets or

target groups (for example, not listening to a presentation or avoiding eye contact). These
behaviors may even be unintentional or unconsciously reinforce a stereotype.

Microinequities – Refer to subtle slights and snubs and indirect offenses among coworkers,
which can communicate messages of devaluation (for example, asking a person of color, “So,
what are you?”).

Stereotypes – Making a judgement or assumption about members of a race, religion, or other

group, instead of treating them as individuals (for example, assuming that all people with blonde
hair are unintelligent).

Title VII Civil Rights Act of 1964 – A federal law that prohibits employment discrimination
based on race, color, sex, national origin, and religion.

Workplace Bullying – Includes social isolation, exclusion, teasing, repeated and persistent
attempts to torment a co-worker or harm his or her reputation, barriers to performance, insults,
ridicule, gossip, threats, and even physical violence. Although not illegal, bullying and other acts
of incivility often precede or foster a culture that tolerates harassment.

Workplace Incivility – Includes disrespect, discourtesy, condescension, disparaging remarks,

and sexist and racist or other inappropriate examples of humor and exclusion.

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 Diversity and Inclusion

Summary
Organizations that embrace a culture of diversity and inclusion:
• increase productivity and employee engagement;
• foster teambuilding;
• eliminate distractions and disputes among employees and decrease time spent by
management to intervene;
• decrease turnover;
• improve attendance and job satisfaction;
• decrease healthcare costs; and
• attract new and younger employees.

It’s up to each institution to encourage a sense of collective responsibility to promote respect in

the workplace.

Diversity and Inclusion in the Workplace

Diversity and inclusion are critically important to alleviating risk factors in the workplace that can
lead to intolerance, bullying, harassment, and worse.

Companies have a legal obligation to provide a safe work environment, take remedial action to
address complaints of harassment, and reduce the likelihood of harassment occurring in the
future. But because there is no legal definition of harassment—it’s defined on a case-by-case
basis by courts and administrative agencies—it’s at the discretion of the employer to decide what
harassment is and to determine what discipline may be necessary, up to and including
termination.

Employers must ultimately balance legal requirements and prohibitions with issues of morale and
employee engagement and satisfaction.

Workplace risk factors that can contribute to an environment in which intolerance and harassment
develop include:
• Lack of diversity
• Gender imbalance
• Isolated and vulnerable employees
• Low status, younger, and/or employees initially entering the workforce

Stereotypes and Implicit Bias

Stereotypes occur when we unfairly characterize members of groups and treat them as the same
instead of as individuals. They also contribute to implicit bias, which causes us to harbor negative
feelings and attitudes about others based on characteristics such as age, race, ethnicity, gender,
and even appearance.

Because implicit bias occurs in our unconscious mind, we’re generally unaware of these types of
negative feelings and attitudes that may develop over the course of a lifetime. However, it’s

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 Diversity and Inclusion

important that all employees, particularly supervisors, understand stereotypes and how these
assumptions may cause them to interact with others.

Workplace bullying and general incivility, while not necessarily illegal, often precede or foster a
culture that tolerates harassment. Employers should detect and eliminate any inappropriate
conduct before it escalates.
• Bullying can include social isolation, exclusion, teasing, repeated and persistent attempts
to torment a co-worker or harm his or her reputation, barriers to performance, insults,
ridicule, gossip, threats, and even physical violence.
• Incivility includes disrespect, discourtesy, condescension, disparaging remarks, and
sexist and racist or other inappropriate examples of humor and exclusion.
• Microinequities include subtle slights and snubs and indirect offenses among co-workers.
• Microaggressions refer to subtle but offensive comments or actions directed at targets or
target groups. These behaviors may even be unintentional or unconsciously reinforce a
stereotype.

Fostering Diversity and Inclusion

Issues of conflict or perceived issues of discrimination and harassment often arise from
miscommunication. All employees must consider how their statements and actions may be
perceived by the recipient, especially subordinates (i.e. intent vs. impact).

Fostering diversity and inclusion in the workplace is more than a one-time effort and requires the
support and endorsement of the institution’s leaders.

Supervisors must model civility, respect, and empathy and create a supportive work climate by
recognizing both blatant and subtle behaviors and acting to prevent them before they escalate.
Supervisors should also be held accountable for their responsibilities through performance
measures in evaluations and reviews.

All employees should understand what behaviors are appropriate and inappropriate in the
workplace through training and modeling by supervisors. Employees should be trained as
bystanders to assist and report when they witness inappropriate behaviors and should feel
supported in doing so. Remember, if you see something, say something.

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 Sexual Harassment: Prevention and Response

Glossary
Equal Employment Opportunity Commission (EEOC) – Responsible for enforcing federal laws
that make it illegal to discriminate against a job applicant or an employee on the basis of race,
color, religion, sex, national origin, age, disability, or genetic information.

Hostile Work Environment – Occurs when the offensive conduct is so severe or frequent that it
unreasonably interferes with an individual’s ability to complete his or work.

Intersectional Harassment – Occurs when a person is harassed based on several protected

characteristics, such as his or her sex, race, and/or age. These circumstances are considered
together in determining whether a hostile environment has been created.

Retaliation – It is illegal to fire, demote, or otherwise “retaliate” against an applicant or

employee for making a claim of harassment, reporting an incident of harassment, participating in
a harassment investigation, or assisting as a bystander.

Sexual Harassment – Unwelcome sexual advances, requests for sexual favors, and other verbal
or physical conduct of a sexual nature that affects an individual’s employment, unreasonably
interferes with an individual’s work performance, or creates an intimidating, hostile, or offensive
work environment.

Title VII Civil Rights Act of 1964 – A federal law that prohibits employment discrimination
based on race, color, sex, national origin, and religion.

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 Sexual Harassment: Prevention and Response

Summary
Title VII of the Civil Rights Act of 1964 protects individuals against employment discrimination on
the basis of race, color, national origin, religion, and sex (gender). It applies to all employers with
15 or more employees.

In 1980, the EEOC issued guidelines, declaring that sexual harassment is a violation of Title VII.
The Supreme Court affirmed the EEOC guidelines in Meritor Savings Bank v. Vinson when it held
for the first time that sexual harassment is an actionable form of sex discrimination.

The EEOC defines sexual harassment as unwelcome sexual advances, requests for sexual favors,
and other verbal or physical harassment of a sexual nature. While simple teasing or offhand
comments are not necessarily illegal, conduct rises to the level of legally actionable harassment
when:

• Submission to such conduct is made, either explicitly or implicitly, a term or condition of

employment or is used as the basis for employment decisions, or
• It is so frequent or so severe that it unreasonably interferes with an employee’s ability to
complete his or her work by creating a hostile work environment

Whether conduct rises to the level of illegal sexual harassment depends on all of the
circumstances, and no single factor is determinative—each situation is considered on a case-by-
case basis.

Sexual harassment can occur in a variety of circumstances:

• It can occur between employees of the same or different gender.

• The harasser can be the employee’s supervisor, a co-worker, or a third party (such as a
customer or delivery person).
• Victims of sexual harassment may be anyone affected by the offensive conduct, not just the
person harassed.
• Sexual harassment includes harassment based on a person’s sexual orientation or gender
identity, sex stereotypes, and pregnancy.
• It also includes harassment based on the perception that a person has a particular
protected characteristic, such as a belief that a person is gay, even if that belief is
incorrect.
• It is also unlawful to harass a person based on his or her association with someone with a
protected characteristic.

The law also protects all employees against retaliation for making a claim of harassment,
reporting an incident of harassment, participating in a harassment investigation, or assisting as a
bystander.

The best way to eliminate harassment in the workplace is to prevent it from happening in the first

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 Sexual Harassment: Prevention and Response

place. Employers must clearly communicate that sexual harassment will not be tolerated, and all
employees should know their employer’s policy and the proper channels for reporting
inappropriate conduct.

If you believe that you are a victim of harassment, or that you have witnessed harassment in the
workplace, you should always report it, in accordance with your employer’s policy.

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 Workplace Violence

Glossary
Active Shooter – An individual actively engaged in killing or attempting to kill people in a
confined and populated area, generally with firearms. In most cases, there is no pattern or
method to the selection of victims, and the situations are unpredictable and evolve quickly.

Emergency Action Plan (EAP) – Required for some employers by OSHA, an EAP is a written
document that outlines employer and employee actions during emergencies.

Occupational Safety and Health Administration (OSHA) – Created by Congress with the
Occupational Safety and Health Act of 1970, OSHA is responsible for ensuring safe and healthy
working conditions for working men and women by setting and enforcing standards and by
providing training, outreach, education, and assistance.

National Institute for Occupational Safety and Health (NIOSH) – Established by the
Occupational Safety and Health Act of 1970, NIOSH is a research agency focused on the study of
worker safety and health.

Workplace Violence – Any threat or act of physical violence, harassment, or intimidation that
occurs at work. It can range from verbal abuse, threats, and bullying, to physical assaults and
even homicide.

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 Workplace Violence

Summary
Workplace violence is any threat or act of physical violence, harassment, or intimidation that
occurs at work. It can range from verbal abuse, threats, and bullying, to physical assaults and
even homicide.

Workplace violence may be committed by:

• Strangers (such as those who enter to commit a crime, such as a robbery)

• Customers or clients
• Current or former employees
• Individuals who have a personal relationship with an employee

Typically, there are warning signs that a person may be prone to violence. Institutions should
have processes in place for reporting and handling such behaviors, before they escalate to
something more serious:

• History of aggressive behavior

• Instances of anger, intimidation, threats, or other “minor violence” in the workplace
• Blatant insubordination
• Overreaction to workplace policy changes or application
• Moodiness or withdrawal
• Feelings of persecution or injustice
• Repeated references to weapons
• Preoccupation with violence
• Unexplained increase in absences
• Decreased attention to hygiene and appearance
• Paranoid behavior
• Suicidal comments or behavior
• Increased problems at home

Preventing Workplace Violence

Protection against workplace violence begins in the hiring process.

• Interviews – During the interview process, employers should ask prospective employees
specific questions to uncover a tendency towards violence or a difficulty in getting along
with coworkers.
• Reference checks – All references should be asked whether the prospective employee
has any propensity towards violence. Employers should also ask every reference to
provide the names of other individuals who know the employee, as unprepared references
are more likely to provide truthful, spontaneous information.
• Background checks – Institutions should always inquire about violence when contacting
an applicant’s former employers.
• Responding to reference requests – If a former employee has a history of violence, this
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 Workplace Violence

should be disclosed to prospective employers.

Terminating an employee can also present a risk for violence, and employers should develop
their own checklists for terminations in advance, with consideration for such things as physical
security, employer-owned property, and account access. Some best practices for terminations
include:

• Considering in advance whether notifying law enforcement or security personnel is

necessary.
• Making clear to the employee that the decision is final.
• Keeping the termination event as short as possible.
• Treating the employee with compassion, to the extent possible.

Employers should also have a non-violence policy, which clearly puts employees on notice of
what is prohibited in the workplace. Employees should be reminded of the policy on an ongoing
basis, and any changes to the policy should be communicated to employees in advance. An
effective anti-violence policy must:

• Include a statement that any violence or threats of violence will not be tolerated.
• Include procedures for reporting threats or other concerns.

Regular employee education is a key aspect of preventing workplace violence. Employees must
be thoroughly familiar with their institution’s anti-violence policies and procedures, and they
should be trained to recognize the potential for violence and to understand the importance of
reporting any questionable behavior to the appropriate authority. Training should also include
directions of how to respond should a crisis occur.

Responding to an Emergency Situation

Institutions should have a plan in place, in the event that an emergency does occur. An effective
Emergency Action Plan (EAP) should cover all of an institution’s physical locations and include:

• Means of entering and exiting each location

• A method for quickly locating each employee
• A list of local law enforcement and emergency responders for all locations
• Rosters and floor plans for first responders
• Key/access control and audits
• Panic buttons/devices
• A process for moving victims and important company data away from danger
• A plan to work with law enforcement and the media
• Follow-up support, including access to psychologists and others trained in crisis
debriefing, after an event

Institutions may want to consider drills, especially if procedures are new. It’s important that all
employees are aware of:

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 Workplace Violence

• Emergency numbers
• Locations of alarms and panic buttons/devices
• Floor plans and emergency escape routes
• Locations of safe rooms with reinforced doors, walls, or locks