02.05.09

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 below.

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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.

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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.

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