Leahy, Grassley Introduce Anti-Fraud Legislation
Bill Would Give Federal Government More Resources
To Combat Mortgage Fraud
WASHINGTON (Thursday, Feb. 5, 2009) – Senator Patrick Leahy (D-Vt.) and
Senator Chuck Grassley (R-Iowa) introduced legislation Thursday to
provide the federal government with more tools to investigate and
prosecute financial fraud. The Fraud Enforcement and Recovery Act
makes necessary changes to federal criminal laws, including criminal
fraud, securities law, and money laundering laws, increases the funding
available to the federal law enforcement agencies to combat mortgage
fraud and predatory lending, and also revises the False Claims Act to
ensure that the government can recover taxpayer dollars lost to fraud
and abuse.
The Federal Bureau of Investigation has seen a 100 percent increase in
the number of fraud investigations opened since 2005. The Treasury
Department has also reported that more than 60,000 cases alleging
mortgage fraud were filed in 2008, 10 times as many as were reported in
2002. The legislation introduced Thursday by Leahy and Grassley
aims to provide federal investigators and prosecutors the tools and
resources needed to unravel complex criminal frauds and bring criminals
to justice.
Leahy said, “The federal government has spent hundreds of billions of
dollars to stabilize our banking system, and Congress will soon spend
even more to restart our economic recovery. But to date, we have
paid far too little attention to investigating and prosecuting the
mortgage and corporate frauds that has so dramatically contributed to
this economic collapse. Congress should move quickly to pass this
legislation so the American taxpayers can be confident that those who
are criminally responsible for contributing to this economic disaster
are caught and held fully accountable and to ensure that the money we
are now spending to restore America is protected from fraud in the
future.”
Grassley said, “Unfortunately, throughout the housing crisis we’ve seen
innocent homeowners who have been victims of shady mortgage lenders and
unscrupulous individuals who have used a down market to line their own
pockets at the expense of others. This bill is designed to send a
message by revising our laws to ensure criminals are brought to justice
and that law enforcement has the tools to uncover these fraudulent
schemes and go after the bad actors. Criminals should be put on
notice that ripping off homeowners and taxpayers won’t be tolerated.”
The Leahy-Grassley
bill will:
-
Amend the definition of “financial
institution” to extend federal fraud laws to mortgage lending
business not directly regulated or insured by the Federal government
-
Amend the major fraud statute to protect funds
expended under the Troubled Asset Relief Program (TARP) and the
economic stimulus package
-
Authorize funding to hire fraud prosecutors
and investigators at the Department of Justice, the FBI, and other
law enforcement agencies, and authorize funding for U.S. Attorneys’
Offices to help staff FBI mortgage fraud task forces.
-
Amend the federal securities statute to cover
fraud schemes involving commodities futures and options
-
Amend the criminal money laundering statute to
make clear that the proceeds of specified unlawful activity include
the gross receipts of the illegal activity, and not just the profits
of the activity
-
Improve the False Claims Act to clarify that
the Act was intended to extend to any false or fraudulent claim for
government money or property, whether or not the claim is presented
to a government official or employee, whether or not the government
has physical custody of the money, and whether or not the defendant
specifically intended to defraud the government.
A hearing on financial fraud is scheduled in the Senate Judiciary
Committee for
Wednesday, February 11. Leahy is the Chairman of the
Committee, and Grassley is a senior member of the panel.
The text of Leahy’s full statement on the introduction of the Fraud
Enforcement and Recovery Act follows. A section-by-section summary
of the bill is
also
available.
# # # # #
Statement Of Senator Patrick Leahy (D-Vt.),
Chairman, Senate Judiciary Committee
Introduction of Fraud Enforcement and Recovery Act of 2009
February 5, 2009
Today, I am pleased to introduce with Senator Grassley the Fraud
Enforcement and Recovery Act (FERA) of 2009, a bipartisan bill that will
reinvigorate our Nation’s capacity to investigate and prosecute the
kinds of financial frauds that have so severely undermined our economy
and hurt so many hard working people in this country.
Our Nation is in the midst of its most serious economic crisis since the
Great Depression. With each passing week, tens of thousands more
Americans lose their jobs to layoffs, and many thousands have already
lost their homes to foreclosure. We learn more and more each day
about the causes of this debacle, and it is now clear that unscrupulous
mortgage brokers and Wall Street financiers were among the principle
contributors of this economic collapse.
As the crisis worsened last fall, I called upon Federal law enforcement
to track down and punish those whose conduct went beyond mere negligence
or incompetence and who were directly responsible for the corporate and
mortgage frauds that helped make the economic downturn far worse than
anyone predicted. With the new tools and resources in this bill,
it will be easier to ensure that all of those responsible for these
financial crimes are held accountable.
While the full scope of the fraud that triggered this economic crisis is
still unknown, we have already learned a great deal about what went
wrong. As banks and private mortgage companies relaxed their
standards for loans, approving ever riskier mortgages with less and less
due diligence, they created an environment that invited fraud.
Private mortgage brokers and lending businesses came to dominate the
home housing market, and these companies were not subject to the kind of
banking oversight and internal regulations that had traditionally helped
to prevent fraud. We are now seeing the results of this lax
supervision and accountability.
In the last six years, suspicious activity reports alleging mortgage
fraud that have been filed with the Treasury Department have increased
more than 10-fold, from about 5,400 in 2002 to more than 60,000 in 2008.
In the last three years, the number of criminal mortgage fraud
investigations opened by the Federal Bureau of Investigation (FBI) has
more than doubled, and the FBI anticipates a new wave of cases that may
double that number yet again. Despite the increase, the FBI
currently has fewer than 250 special agents nationwide assigned to
financial fraud cases. At current levels, they cannot even begin
to investigate the more than 5,000 fraud allegations they receive from
the Treasury Department each month.
Of course, the problem is not limited to mortgage frauds. As is so
common in today’s financial markets, home mortgages were packaged
together and turned into securities that were bought and sold in largely
unregulated markets on Wall Street. Here again, the environment
invited fraud. As the value of the mortgages started to decline
with falling housing prices, Wall Street financiers began to see these
mortgage-backed securities unravel. Unfortunately, some were not
honest about these securities, leading to even more fraud, and
victimizing investors nationwide.
All of this fraud has contributed to an unprecedented collapse in the
mortgage-backed securities market. In the past year, banks and
financial institutions in the United States alone have suffered more
than $500 billion in losses associated with the sub-prime mortgage
industry. Some of our Nation’s largest and most venerable
financial institutions collapsed as a result. The list of
publicly-traded companies that declared bankruptcy or have been taken
over by the Federal government because of the mortgage-backed securities
market collapse include Fannie Mae, Freddie Mac, Bear Stearns, IndyMac,
and Lehman Brothers.
As we take steps to make sure this kind of collapse cannot happen again,
we must reinvigorate our anti-fraud measures and give law enforcement
the tools and resources they need to root out fraud so that it can never
again place our financial system at risk. Taxpayers, who bear the
burden of this financial downturn, deserve to know that government is
doing all it can to hold responsible those who committed fraud in the
run-up to this collapse. This bill will do just that.
This bipartisan legislation begins by providing the resources needed for
law enforcement to uncover and go after these frauds. The bill
authorizes $155 million a year for hiring fraud prosecutors and
investigators at the Justice Department for fiscal years 2010 and 2011.
This includes $65 million a year for the FBI to bring on 190 additional
special agents and more than 200 professional staff and forensic
analysts to rebuild its “white collar” investigation program. With
this funding, the FBI can double the number of its mortgage fraud task
forces nationwide – from 26 to more than 50 – that target fraud in
the hardest hit areas in our Nation. This also includes $50
million a year for U.S. Attorneys’ offices to staff those strike forces
and $40 million for the criminal, civil, and tax divisions at the
Justice Department to provide special litigation and investigative
support to those efforts. The bill also authorizes $60 million a
year for fiscal years 2010 and 2011 for investigators and analysts at
the U.S. Postal Inspection Service and the Office of Inspector General
for the Housing and Urban Development Department to combat fraud against
Federal assistance programs and financial institutions.
Of course, the economic recovery legislation includes new appropriations
of $75 million for FBI salaries and $2 million for the Inspector General
for the Treasury Department, yet certainly far more needs to be done to
address the full scope of these enforcement issues now and in the
future.
The Fraud Enforcement and Recovery Act also makes a number of
straightforward, important improvements to fraud and money laundering
statutes to strengthen prosecutors’ ability to combat this growing wave
of fraud. Specifically, the bill amends the definition of
“financial institution” in the criminal code in order to extend Federal
fraud laws to mortgage lending businesses that are not directly
regulated or insured by the Federal government. These companies
were responsible for nearly half the residential mortgage market before
the economic collapse, yet they remain largely unregulated and outside
the scope of traditional Federal fraud statutes. This change will
apply the Federal fraud laws to private mortgage businesses like
Countrywide Home Loans and GMAC Mortgage, just as they apply to
federally insured and regulated banks.
The bill would also amend the major fraud statute to protect funds
expended under the Troubled Asset Relief Program and the economic
stimulus package, including any government purchases of preferred stock
in financial institutions. The U.S. government has provided
extraordinary economic support to our banking system, and we need to
make sure that none of those funds are subject to fraud or abuse.
This change will give Federal prosecutors and investigators the explicit
authority they need to protect taxpayer funds.
The legislation would amend the Federal securities statute to cover
fraud schemes involving commodities futures and options, including
derivatives involving the mortgage-backed securities that caused such
damage to our banking system.
This bill will also strengthen one of the core offenses in so many fraud
cases – money laundering – which was significantly weakened by a recent
Supreme Court case. In United States v. Santos, the Supreme
Court misinterpreted the money laundering statutes, limiting their scope
to only the “profits” of crimes, rather than the “proceeds” of the
offenses. The Court’s mistaken decision was contrary to
Congressional intent and will lead to financial criminals escaping
culpability simply by claiming their illegal scams had not made a
profit. This erroneous decision must be corrected immediately, as
dozens of money laundering cases have already been dismissed.
Lastly, FERA improves one of the most potent civil tools we have for
rooting out waste and fraud in government – the False Claims Act.
The effectiveness of the False Claims Act has recently been undermined
by court decisions which limit the scope of the law and allow
sub-contractors paid with government money to escape responsibility for
proven frauds. The False Claims Act must quickly be corrected and
clarified in order to protect from fraud the Federal assistance and
relief funds expended in response to our current economic crisis.
The Federal government has spent hundreds of billions of dollars to
stabilize our banking system, and Congress will soon spend even more to
restart our economic recovery. But to date, we have paid far too
little attention to investigating and prosecuting the mortgage and
corporate frauds that has so dramatically contributed to this economic
collapse.
Congress should move quickly to pass this legislation so the American
taxpayers can be confident that those who are criminally responsible for
contributing to this economic disaster are caught and held fully
accountable and to ensure that the money we are now spending to restore
America is protected from fraud in the future.
# # # # #
Fraud Enforcement and Recovery Act of 2009
Section-by-Section
Purpose:
A bill to improve enforcement of mortgage fraud, securities fraud,
financial institution fraud, and other frauds related to federal
assistance and relief programs, and for the recovery of funds lost to
these frauds, and for other purposes.
Sec. 1. Short Title
The Act is known as the Fraud Enforcement and Recovery Act of 2009
(FERA).
Sec. 2(a) and 2(b). Definition of Financial Institution Expanded
to Include Mortgage Lending Businesses and Mortgage Brokers
At the height of the subprime lending era, independent mortgage
companies – those that are not depository institutions or their
subsidiaries or holding company affiliates – made nearly half of the
higher-priced, first-lien mortgages in America. The loans
originated by these private mortgage companies were not generally
covered by current federal fraud statutes, such as bank fraud and bank
bribery statutes. As a result, there’s a need to update the
federal fraud statutes by expanding the definition of “federal
institution” to include mortgage lending businesses.
This section amends the definition in Title 18 for a “financial
institution” to include a “mortgage lending business,” which is defined
as “an organization . . . which finances or refinances any debt secured
by an interest in real estate, including private mortgage companies and
any subsidiaries” whose activities affect interstate or foreign
commerce. The definition also includes “any person or entity that
makes in whole or in part a federally-regulated mortgage loan as defined
in 12 U.S.C. § 2602(1).”
These new definitions for “financial institution” and “mortgage lending
business” (18 U.S.C. §§ 20, 27) will ensure that private mortgage
brokers and companies are held fully accountable under federal fraud
laws, particularly where they are dealing in federally-regulated or
federally-insured mortgages. For example, the bank fraud statute,
18 U.S.C. § 1344, prohibits defrauding “a financial institution,” and
the amendment to this definition would extend the bank fraud statute
beyond traditional banks and financial institutions to private mortgage
companies. This definition of “financial institution” would also
apply to the following criminal provisions: 18 U.S.C. § 215 (financial
institution bribery); 18 U.S.C. § 225 (continuing financial crimes
enterprise); 18 U.S.C. § 1005 (false statement/entry/record for
financial institution); and 18 U.S.C. § 1344 (bank/financial institution
fraud). The new definition would also provide for enhanced
penalties for mail and wire fraud affecting a financial institution,
including a mortgage lending business, pursuant to 18 U.S.C. §§ 1341,
1343.
The recent financial crisis has demonstrated how fraudulent mortgages
can affect the health of the banking system and the overall economy.
Those who engage in frauds on mortgage lending businesses must be held
to the same standards as traditional financial institutions, given the
impact of their businesses on federally-insured and federally-regulated
institutions.
Expanding the term “financial institution” to include mortgage lending
businesses will also strengthen penalties for mortgage frauds and the
civil forfeiture in mortgage fraud cases. It would also extend the
statute of limitations in investigations of mortgage fraud cases to be
consistent with bank fraud investigations.
This definition of “financial institution” would not apply to the
Suspicious Activity Reports (SARs) that banks and other financial
institutions are required to file, as “financial institution” is defined
separately under the Bank Secrecy Act, 31 U.S.C. § 5312(a)(2).
Sec. 2(c). False Statements and Appraisals by Mortgage Brokers and
Agents in Loan Applications
This section would amend the false statement in mortgage application
statute (18 U.S.C. § 1014) to make it a crime to make a materially false
statement or to willfully overvalue a property in order to influence any
action by a mortgage lending business. The current offense only
applies to federal agencies, banks, and credit associations and does not
extend to private mortgage lending businesses, even if they are handling
federally-regulated or federally-insured mortgages. Similar to
expanding the definition of “federal institution” in Sections 2(a) and
2(b), this provision would ensure that private mortgage brokers and
companies are held fully accountable under this federal fraud provision.
This is a particularly important offense as it specifically relates to
false appraisal fraud, which has been a particularly problematic type of
mortgage fraud during the recent financial crisis.
Sec. 2(d). Major Fraud Against the Government Amended to
Include Economic Relief and Troubled Asset Relief Program Funds
This section would amend the federal major fraud statute (18 U.S.C. §
1031) to include “any grant, contract, subcontract, subsidy, loan,
guarantee, insurance or other form of Federal assistance, including
through the Troubled Assets Relief Program, an economic stimulus,
recovery or rescue plan provided by the Government, or the Government’s
purchase of any preferred stock in a company.” This amendment will
make sure that federal prosecutors have jurisdiction to use one of their
most potent fraud statutes to protect the government assistance provided
during this most recent economic crisis, including money from the TARP
and circumstances where the government purchased preferred stock in
companies to provide economic relief. These amendments, however,
only apply to major frauds against the government, where the value of
the contract or services is more than $1,000,000.
Sec. 2(e). Amending Securities Fraud Statute to Include
Commodities Fraud
This section would amend the federal securities fraud statute (18 U.S.C.
§ 1348) to include commodities frauds, in addition to securities fraud.
Currently, the securities fraud statute does not reach frauds involving
options or futures, which include some of the derivatives and other
financial products that were part of the financial collapse.
Sec. 2(f). Amending the Money Laundering Statute to Include the
Proceeds for Specified Unlawful Activity.
This section would amend the criminal money laundering statute (18
U.S.C. §§ 1956, 1957) to make clear that the proceeds of specified
unlawful activity include the gross receipts of the illegal activity,
not just the profits of the activity. The money laundering
statutes make it an offense to conduct financial transactions involving
the “proceeds” of a crime (referred to as “specified unlawful activity”
in the statutes). These statutes, however, do not define the term
“proceeds” and the term has been left to definition by the courts.
For 22 years, since the money laundering statutes enactment in 1986,
courts have construed “proceeds” to mean “gross receipts” and not “net
profits” of illegal activity consistent with the original intent of
Congress. In United States v. Santos, 128 S.Ct. 2020
(2008), however, the Supreme Court in a four-justice plurality suggested
that the term “proceeds” was “ambiguous” and as a result, under the rule
of lenity the Court gave the term a narrower meaning. In this
decision, the Court mistakenly limited the term “proceeds” to the
“profits” of a crime, not its receipts, and as a result, the Court’s
decision has limited the money laundering statute to only profitable
crimes, and permits criminal defendants to reduce their culpability for
money laundering by deducting the costs of their criminal conduct.
For example, if a drug dealer committed a financial transaction with the
proceeds of illegal drug dealing, but the money was only being used to
purchase drugs, then they could not be prosecuted for money laundering.
Similarly, if a fraudulent mortgage broker intentionally overvalued the
fair market of a home for purposes of a mortgage, that broker could only
be charged for money laundering related to any fees or potential profit
made in the fraudulent transaction, not based on the full value of the
house. Furthermore, an executive who committed securities fraud
could not be charged with money laundering, if the fraud were
unsuccessful in making a profit, even though there was a fully completed
financial transaction. This decision is contrary to the intent of
Congress in passing the money laundering statutes and weakens one of
federal government primary tools used to recover the proceeds of illegal
activity, including mortgage and securities frauds.
Sec. 3. Funding for Investigators and Prosecutors for Mortgage
Fraud, Securities Fraud, and Cases Involving Federal Economic Assistance
The economic crisis has revealed an epidemic of fraud related to the
mortgage crisis and the resulting corporate collapses. The FBI and
other federal agencies will soon be overwhelmed with new cases. In
the past year, the FBI has received more than 60,000 Suspicious Activity
Reports from banks, a number which has doubled in three years, but
currently has fewer than 200 agents assigned to investigate these
criminal allegations. Investigators and inspectors in the Inspector
General’s Office for Housing and Urban Development and the Health and
Human Services are similarly stretched to the breaking point. Further,
the Postal Inspection Service, traditionally one of the nation’s
bulwarks against white collar fraud, has consistently lost funding and
support over the years and needs substantial support in these times of
economic crisis. The funding included in this bill will help the
Justice Department, the FBI, and other components responsible for
investigating mortgage and securities fraud hold accountable those
responsible for contributing to our economic crisis.
This section authorizes spending $155 million by the Attorney General
for fiscal years 2010 and 2011 to be allocated to the FBI ($65 million),
U.S. Attorney’s offices ($50 million), and criminal, civil, and tax
divisions of the Justice Department ($40 million). The section
also authorizes additional appropriations for the Postal Inspection
Service ($30 million) and the Inspector General for HUD ($30 million).
The bill also provides that the money authorized may only be used for
fighting mortgage, securities, and other financial institution frauds,
and the Department would have to certify that it was used for those
purposes, after expended.
Sec. 4.
Clarifications to the False Claims Act to Reflect the Original Intent
of the Law
In response to the economic crisis, the federal government has obligated
and expended extraordinary resources in an effort to stabilize our
banking system and restart our economy. These funds are often
dispensed through contracts with non-governmental entities and to
general and subcontractors working for the government. Protecting
these funds from fraud and abuse must be among our highest priorities as
we move forward with these necessary actions.
One of the most successful tools in combating waste and abuse in
government spending has been the False Claims Act, which is an
extraordinary civil enforcement tool used to recover funds lost to fraud
and abuse. The effectiveness of the False Claims Act has recently
been undermined by court decisions limiting the scope of the law
allowing subcontractors and non-governmental entities to escape
responsibility for proven frauds. This requires that certain
provisions of the False Claims Act be corrected and clarified in our
efforts to protect the federal assistance and relief funds expended in
response to our current economic crisis.
This section amends the False Claims Act (FCA) (31 U.S.C. § 3729 et
seq.) to clarify and correct erroneous interpretations of the law that
were decided in Allison Engine Co. v. United States ex rel., 128
S.Ct. 2123 (2008) and United States ex. rel. Totten v. Bombardier
Corp. , 380 F.3d 488 (D.C. Cir. 2004). In Allison
Engine, the Supreme Court held that Section 3729(a)(2) of the False
Claims Act requires the government to prove that “a defendant must
intend that the Government itself pay the claim,” for there to be a
violation. Allison Engine Co., 128 S.Ct. at 2128.
As a result, when a subcontractor in a large government contract
knowingly submits a false claim to general contractor there can be no
liability unless the subcontractor intended to defraud the federal
government, not their general contractor. This is contrary to
Congress’s original intent in passing the law, and would create a new
element to a False Claims Act claim and a new defense for any
subcontractor that is inconsistent with the purpose and language of the
statute. Similarly, in Totten, the D.C. Circuit Court of
Appeals held that liability under the FCA can only attach if the claim
is “presented to an officer or employee of the United States
Government.” Known as the presentment clause, the D.C.
Circuit Court of Appeals interpreted this clause to limit recovery for
frauds committed by a government contractor when the funds are expended
by a government grantee, such as Amtrak. The Totten
decision, like the Allison Engine Co. decision, runs contrary to
the clear language and congressional intent of the False Claims Act by
exempting subcontractors who knowingly submit false claims to general
contractors and are paid with government funds.
These amendments to Section 3729 clarify that the False Claims Act was
intended to extend to any false or fraudulent claim for government money
or property, whether or not the claim is presented to a government
official or employee, whether or not the U.S. Government has physical
custody of the money, and whether or not the defendant specifically
intended to defraud the U.S. government. With this change, the
additional elements read into the statute by the Supreme Court and the
D.C. Circuit decisions are vitiated, and Allison Engine and
Totten would be overturned by this legislative action.
The changes in this section, however, are carefully drafted not to
extend false claims liability to persons receiving Social Security or
other government benefits can never by subject to suit under the False
Claims Act or to alter the original intent language of the statute that
requires that the false claim be knowingly submitted.
# # # # #
