Senate Begins Debate On Leahy-Authored Anti-Fraud Legislation To Improve Watchdogging Of TARP Funds And Other Financial Sector Activities

WASHINGTON (MONDAY, April 20) – The Senate Monday began debate on the bipartisan Fraud Enforcement and Recovery Act (FERA), legislation that will increase the tools available to help prosecutors combat fraud. 

The bill was introduced by Senate Judiciary Committee Chairman Patrick Leahy (D-Vt.) on February 5.  The measure cleared the Committee on March 5.

“At its core, the Fraud Enforcement and Recovery Act authorizes the resources necessary for the Justice Department, the FBI, and other investigative agencies to respond to this crisis,” said Leahy.  “Only by reinvigorating our anti-fraud measures and giving law enforcement agencies the tools and resources they need to root out fraud can we ensure that fraud can never again place our financial system at risk and victimize so many Americans.” 

The Fraud Enforcement and Recovery Act will authorize funding and amend federal law to give law enforcement enhanced tools for fighting fraud.  More than 60,000 cases of mortgage fraud were reported in 2008, nearly 10 times as many as in 2002.  The bill authorizes funding to increase the number of agents from the Federal Bureau of Investigation (FBI) working on the mortgage fraud task force, increases funding to the U.S. Secret Service to combat financial crimes, as well as funding to hire fraud prosecutors for the Department of Justice and FBI. 

The Fraud Enforcement and Recovery Act will:

  • Amend the definition of “financial institution” to extend federal fraud laws to mortgage lending businesses 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.

The legislation is sponsored by Leahy, Senators Charles Grassley (R-Iowa), Ted Kaufman (D-Del.), Arlen Specter (R-Pa.), Charles Schumer (D-N.Y.), Olympia Snowe (R-Maine), Amy Klobuchar (D-Minn.), Tom Harkin (D-Iowa), Carl Levin (D-Mich.), Byron Dorgan (D-N.D.), Sheldon Whitehouse (D-R.I.), and Patty Murray (D-Wash.).

The Senate is expected to debate the legislation throughout the week.  The full text of Leahy’s opening remarks follows.

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Opening Statement of Senator Patrick Leahy

Chairman, Senate Judiciary Committee

On S. 386, the Fraud Enforcement and Recovery Act of 2009

April 20, 2009

As Prepared

This afternoon, we begin consideration of the bipartisan Fraud Enforcement and Recovery Act of 2009, S.386.  This measure will strengthen the Federal Government’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.  It will also provide the resources and legal tools needed to police and deter fraud in connection with the massive recovery efforts now being implemented. 

I commend Senator Grassley, our lead cosponsor, for his contributions to this package and his dedication to protecting taxpayer funds by deterring, investigating, and prosecuting fraud.   He has worked with me to write this bill, and has been a leader on this issue and on this legislation every step of the way.

I thank our many cosponsors for their steadfast support for this effort.  Senator Schumer has not only supported this measure but has also introduced additional legislative proposals with Senator Shelby.  Senator Kaufman is an original cosponsor and has been a strong ally.  He has spoken and written about the need for fraud enforcement all year.  Senator Klobuchar has participated throughout the course of Judiciary Committee consideration of this bill.  As former prosecutors, she and I both know how important it is to have sufficient resources on the ground committed to deterring and discovering these devastating crimes.  More recently, we have been joined in our efforts by the Ranking Republican on the Judiciary Committee, another former prosecutor and friend, Senator Specter, and by Senators Snowe, Harkin, Levin, Dorgan, and Whitehouse. 

This is a bipartisan effort about a shared concern. I believe that this is an effort that should be supported by all Americans.  Whether you supported the economic recovery efforts proposed by President Bush and President Obama, no one wants that money squandered by fraud.  Whether you are for helping homeowners now in hard times or think folks who have lost their jobs or were lured into subprime mortgages are now getting what they deserve, no one should want to see those who engaged in mortgage fraud escape accountability.    

I want to thank the Majority Leader for moving to proceed to this important measure.  It is my hope that we will reach a time agreement or at least agreement to proceed to the measure without having this matter filibustered.  I hope we will not have to spend unnecessary time before we consider these anti-fraud efforts on behalf of the American people. 

We are just now returning from the Easter recess.  During these first months of the year, the Judiciary Committee has concentrated on what it can do legislatively to assist in the economic recovery.  Already we have considered and reported this fraud enforcement bill, the patent reform bill, and worked hard to ensure that law enforcement assistance was included in the economic recovery legislation.  The President’s efforts are beginning to show dividends.  As the President said last week at Georgetown University, this administration has “responded to an extraordinary set of economic challenges with extraordinary action—action that’s been unprecedented both in terms of its scale and its speed.”  We have seen the recovery plan enacted, the bank capitalization program, the housing plan, the strengthening of the non-bank credit market, the auto plan and the work with the G-20.  As the President said “these actions are starting to generate signs of economic progress.” 

That is good. That is necessary. But that is not enough.  We need to make sure that we are spending our public resources wisely and that they are not being dissipated by fraud.  We need to ensure that those responsible for the downturn through fraudulent acts in financial markets and the housing market are held to account.  That is why we need to enact the Fraud Enforcement and Recovery Act. 

In this time of economic crisis, we must make every effort to ensure accountability for the massive wave of fraud that has so undermined our economy, and to protect taxpayers from the ongoing fraud that threatens to slow our economic recovery.  This bipartisan bill will do just that, by rebuilding our Nation’s capacity to investigate and prosecute the financial frauds that have so severely weakened our financial system and hurt so many hard working Americans.

Mortgage fraud has reached near epidemic levels in this country.  Reports of mortgage fraud are up 682 percent over the past 5 years, and more than 2,800 percent in the past decade.  By some estimates, we are losing more than $4 billion each year to mortgage fraud alone.  And massive, new corporate frauds, like the $65 billion dollar Ponzi scheme perpetrated by Bernard Madoff, are being uncovered as the economy has turned worse, exposing many investors to massive losses. 

In the past two weeks alone, the Justice Department announced prosecutions in mortgage and securities scams involving more than $200 million dollars in fraud.  This influx of fraud has even touched my home state of Vermont, where just last fall, Federal authorities uncovered a $26 million dollar mortgage scam involving more than 50 properties, which was being run out of the small town of Highgate, Vermont.  By all accounts, this problem is getting worse, not better, and it is time for Congress and the American people to fight back. 

The victims of these frauds must be protected, now more than ever.  These victims include homeowners who have been fleeced by unscrupulous mortgage brokers or so-called foreclosure experts who promise to help them, only to leave them unable to keep their homes and in even further debt than before.  They include retirees who have lost their life savings in stock scams and Ponzi schemes, which have come to light as the markets have fallen and corporations have collapsed. 

They also include American taxpayers who have invested billions of dollars to restore our economy and support our banking system, and who expect us to protect that investment and make sure those funds are not exploited by fraud.

As the economic crisis worsened last fall, I called upon Federal law enforcement to track down and punish those who were responsible for the corporate and mortgage frauds that helped make the economic downturn far worse than anyone predicted.  This year, as Congress reconvened, I joined with Senator Grassley to draft and introduce the Fraud Enforcement and Recovery Act, the legislation we consider today, which will provide the new tools and resources needed by law enforcement to carry out this effort.  Now, I call on all Senators to support and promptly pass this bill, so we can make sure that those responsible for these frauds are held fully accountable and that the many millions, likely even billions, of dollars lost will be recovered for fraud victims and for the American taxpayer.

Federal law enforcement needs this legislation now to combat fraud effectively.  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 that number may double yet again.  Despite this increase, the FBI currently has fewer than 250 special agents nationwide assigned to financial fraud cases, which is only a quarter of the number the Bureau had more than a decade ago at the time of the Savings and Loan crisis.  At current levels, the FBI cannot even begin to investigate the more than 5000 mortgage fraud allegations referred by the Treasury Department each month. 

In the late 1980s and early 1990s, we faced a similar financial crisis with the collapse of the federally insured savings and loan industry.  At the time, Congress responded by passing legislation to hire prosecutors and agents similar to the bill we consider today, and that effort resulted in more than 600 fraud convictions nationwide and recovery of more than $130 million in ordered restitution.  But the Savings and Loan collapse is dwarfed in scale by the current crisis, as financial institutions have lost more than one trillion dollars in assets in the past year, compared to only $160 billion in assets lost during the entire Savings and Loan era.  Clearly, we must respond at least as strongly as we have in the past.

Two decades ago we responded during the savings and loan crisis by hiring more agents, analysts and prosecutors and allocating the resources needed to catch those who took advantage to profit through fraud.  We need to do so, again. 

At a February 11, 2009, Judiciary Committee hearing, we heard from the FBI, the Special Inspector General for the Troubled Asset Relief Program (TARP) and the Justice Department. All witnesses testified concerning the need for this legislation and these additional law enforcement resources.

Deputy Director Pistole of the FBI testified that the number of mortgage fraud cases opened by the FBI had more than doubled in the past three years, with 721 cases open in 2005, and more than 1800 open at the end of 2008. He warned that the losses in this economic crisis dwarf those of the Savings and Loan debacle, and the need for more enforcement is even greater now than it was then.

Special Inspector General Barofsky described how law enforcement resources had understandably been diverted from traditional white collar crime to terrorism following the attacks on September 11, 2001. This trend left the Justice Department's capacity to respond to financial and securities fraud significantly weakened, and with the recent trends shifting even more resources to mortgage frauds, other white collar efforts were even further “underfunded and underprosecuted.”  He warned that with trillions of dollars being spent under TARP and other associated programs, “it is essential that the appropriate resources be dedicated to meet the challenges of both deterring and prosecuting fraud.”  I agree.

Acting Assistant Attorney General Glavin of the Justice Department testified that our bill would provide the Justice Department with needed tools “to aggressively fight fraud in the current economic climate” and “provide key statutory enhancements that will assist in ensuring that those who have committed fraud are held accountable.” 

The Committee also received written testimony supporting this enforcement effort from the Inspector General for the Department of Housing and Urban Development, and from the Acting Chief Postal Inspector.

Earlier this year, we were all shocked to learn of Bernard Madoff’s infamous $65 billion Ponzi scheme and that it had gone undetected for years. Each month we learn of additional scandals in the financial industry, as leading money managers are charged with multimillion dollar fraud schemes over years. We need to clean up the mess. That means providing the tools and resources that law enforcement needs to get to the bottom of this, restore order, and exact accountability. 

At its core, the Fraud Enforcement and Recovery Act authorizes the resources necessary for the Justice Department, the FBI, and other investigative agencies to respond to this crisis.  In total, the bill authorizes $245 million a year over the next two years to hire more than 300 Federal agents, more than 200 prosecutors, and another 200 forensic analysts and support staff to rebuild our nation’s “white collar” fraud enforcement efforts.   While the number of fraud cases is now skyrocketing, we need to remember that resources were shifted away from fraud investigations after 9/11.  Today, the ranks of fraud investigators and prosecutors are drastically understocked, and thousands of fraud allegations are going unexamined each month.  We need to restore our capacity to fight fraud in these hard economic times, and this bill will do that.

Some have suggested that we cannot afford to even authorize additional money for fraud investigation at a time when we are struggling to keep budget deficits down.  This view is shortsighted and fails to recognize that investigating and deterring fraud actually saves money in the long term.  If fraud goes unprosecuted and unpunished, then victims across America lose money.  In many cases, American taxpayers take the loss directly.  For example, in the case of many mortgage frauds where the Federal Government has guaranteed the loans, and when the fraud remains hidden, American taxpayers, as well as the victim, lose out.  If we don’t take action to investigate and prosecute this kind of fraud, Americans will lose far more money than this bill costs. 

In fact, fraud enforcement is an excellent investment for the American taxpayer.  According to recent data provided by the Justice Department, the government recovers on average $32 dollars for every dollar spent on criminal fraud litigation.  Similarly, the non-partisan group Taxpayers Against Fraud has found that the government recovers $15 for every dollar spent in civil fraud cases.  Just last year, the Justice Department recovered nearly $2 billion in civil false claims settlements, and, in criminal cases, courts ordered nearly $3 billion in restitution and forfeiture.  Strengthening criminal and civil fraud enforcement is a sound investment, and this legislation will not only pay for itself, but will bring in money for the federal government.

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 Assets 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.

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 did not make a profit.  Indeed, Ponzi schemes like the $50 billion dollar fraud perpetrated by Bernard Madoff, which by definition turn no profit, are exempt from money laundering charges under this formulation.  This erroneous decision must be corrected immediately, as dozens of money laundering cases have already been dismissed. 

The Fraud Enforcement and Recovery Act also strengthens one of the most potent civil tools we have for rooting out fraud in government – the False Claims Act.  The Federal Government has recovered more than $11 billion using the False Claims Act since it was modernized through the work of Senator Grassley in 1986, but the statute still can be more effective.  Recent court decisions and changes in government contracting practices have limited the effectiveness of the False Claims Act.  As we did in the last Congress, Senator Grassley and I have joined together to update and restore the False Claims Act to protect the American taxpayer.  

Some may argue that the legal fixes in this bill constitute over-reaching by the Federal Government,  In fact, this bill does not over-federalize or over-criminalize, as we took great care in crafting it to avoid those kinds of excesses.  The bill creates no new statutes and no new sentences.  Instead, it focuses on modernizing existing statutes to reach unregulated conduct and on addressing flawed court decisions interpreting those laws.

The Fraud Enforcement and Recovery Act has broad bipartisan support, as well as the strong backing of the Justice Department and the Obama administration.  Along with Senator Grassley, Senator Specter, the ranking Republican member of the Judiciary Committee, and Senator Snowe have joined as co-sponsors of this legislation.  They join Senators Kaufman, Schumer, Klobuchar, Levin, Harkin, and Dorgan, who have also cosponsored the bill. 

The Justice Department has sent a views letter on the legislation which says: 

            “The Department strongly supports enactment of FERA.  The provisions of the      legislation would provide federal investigators and prosecutors with significant new    tools and resources . . . to combat mortgage fraud, securities and commodities fraud.      . . .” 

Similarly, FBI Director Robert Mueller recently testified before the Judiciary Committee in support of the bill, stating that “FERA will be tremendously helpful in giving us the tools to investigate . . . to help prosecutors prosecute, and finally to obtain the convictions and the jail sentences that are the deterrent to this activity taking place in the future.” 

The bill has also received the support of the Fraternal Order of Police, the Federal Law Enforcement Officers Association, the National Association of Assistant United States Attorneys, the Association of Certified Tax Examiners, and Taxpayers Against Fraud. 

The current epidemic of fraud went hand in hand with the greed and neglect that poisoned our economy in recent years.  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 lack of accountability.

The problem spread as 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.  Some were not honest about these securities, leading to even more fraud, and victimizing investors nationwide. 

Only by reinvigorating our anti-fraud measures and giving law enforcement agencies the tools and resources they need to root out fraud can we ensure that fraud can never again place our financial system at risk and victimize so many Americans.  Taxpayers, who bear the burden of this financial downturn, deserve to know that the government is doing all it can to hold responsible those who committed crimes in the run-up to this collapse. 

There should be strong bipartisan support for this bill.  The Justice Department supports it, the FBI supports it, the Secret Service supports it, the Postal Inspection Service supports it, the HUD Inspector General supports it, the Special Inspector General for the Troubled Asset Relief Program supports it, the FOP supports it, FLEOA supports it, NAAUSA supports it, and Taxpayers Against Fraud supports it.  I urge all Senators to support our efforts and work with us to pass this bill without further delay.  

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