President Obama Signs The Fraud Enforcement & Recovery Act
Today, May 20, 2009, President Obama signed the Fraud Enforcement and Recovery Act, authorizing more than $280 million for federal fraud enforcement and specifically expanding the reach of federal fraud statutes. With the powers now being aggressively exercised by the Special Inspector General for the Toxic Asset Recovery Program, and the mandate issued to the inspectors general of all funding agencies under the American Recovery and Reinvestment Act, criminal, civil and administrative scrutiny of the use and accounting for all federal funding and private lending practices will be intense. Recipients of federal funding and financial institutions should assume they will be subject to exhaustive audits and investigations. The most crucial protections are complete and accurate records, a robust compliance system and nimble adjustment to changes and refinements in applicable rules.
In addition to providing substantial additional funding for investigation and enforcement, the FERA enhances prosecutors' statutory tools for charging fraud by adding private mortgage lenders to the definition of financial institutions, specifically covering TARP and Recovery Act recipients under the fraud statute, adding commodities fraud to the securities fraud statute, clarifying the comprehensive scope of the money laundering statute, and expanding the reach of the False Claims Act.
The Drivers of FERA and SIGTARP
As the economy began to falter in early 2008 and the Department of Justice shifted resources from national security to fraud investigations, it admitted that its backlogs were too large to allow increased attention to new cases. Provisions to add anti-fraud funding to the American Recovery and Reinvestment Act (“Recovery Act”) were stricken before its passage. Congress has now responded by authorizing substantial funding increases for 2010 and 2011 to the Department of Justice ($165 million), the Securities and Exchange Commission ($40 million) and other agencies in the housing and financial sectors ($80 million). The intended effect is to add 300 federal agents to the current 250 FBI agents, 200 more prosecutors, and 200 forensic analysts.
The legislation, styled the Fraud Enforcement and Recovery Act (“FERA”), also specifically includes all recipients under the Emergency Economic Stabilization Act of 2008 (“EESA”) and the Recovery Act as subject to all federal fraud laws, including the False Claims Act. And, to assure that none of the participants in the housing meltdown escape the full range of regulatory examination, the statute includes mortgage brokers and initial lenders in the definition of “financial institution.”
This legislation comes on the heels of the establishment and recent additional powers of the Special Inspector General for the Toxic Asset Recovery Program (“SIGTARP”), who has auditing, investigative and criminal referral authority over every recipient and participant in TARP funding programs, including, not only the Department of Treasury’s capital enhancement funding activities, but entities created under the Term Asset-Backed Loan Program (“TALF”): the Legacy Loan Program and the Legacy Security Program under the Public-Private Investment Program (“PPIP”). SIGTARP Neil Barofsky has initiated a monthly average of 10 criminal investigations and numerous audits in the first quarter of his activities.
Details of the FERA Provisions Expanding Coverage of the Criminal Code
Private Mortgage Lending Added Under the Criminal Code
- The definition of “financial institution” in 18 U.S.C. §20 is expanded to include a mortgage lending business, defined (in a new provision, 18 U.S.C. §27) 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 commerce.” Thus, federal criminal code provisions now reach private mortgage firms and their affiliates.
- The current provision criminalizing false statements in loan and credit applications, 18 U.S.C. §1014, is revised to include specifically false statements made to influence any action by a mortgage lending businesses. Coupled with the definitional changes, this amendment clarifies that the statute will extend beyond its current reach of frauds affecting federal agencies, banks and credit unions to include those affecting private mortgage brokers and companies.
TARP, Stimulus Programs Added Under the Criminal Fraud Statute
- The federal criminal code is also amended in18 U.S.C. § 1031, prohibiting fraud against the United States, to include both funds received under the various TARP programs and funding under the Recovery Act.
Commodities Fraud Added to the Criminal Securities Fraud Statute
- The securities criminal fraud statute (18 U.S.C. § 1348) is expanded to include fraud involving commodities options or futures, which the Committee report notes have included derivatives and other financial products that contributed to the current financial crisis.
All Proceeds of Money Laundering Are Covered
- The money laundering statute is revised to reverse the Supreme Court’s Santos decision that suggested that “proceeds” of unlawful activity included only actual profits. The definition of “proceeds” is amended to confirm that it includes the entire gross receipts of illegal activity, not just the “profit” component.
- Movement of money across international borders in furtherance of tax evasion is now subject to money laundering statute.
Civil False Claims Act (FCA)
- The current FCA is expanded to reach any request or demand for payment that is presented to contractors, grantees or others if the money is to be spent or used on the government’s behalf, or “to advance a government program or interest” if the U.S. has provided any portion of the money or will reimburse the recipient.
- Treble damages actions can now be based on the use of any false records or statements that are “material to” the submission of a false claim. Previously the FCA reached only those false statements “made or used” to get a false claim paid, a narrower category of actionable false statements.
- These amendments are designed to reverse the effects of the Supreme Court’s decision in Allison Engine Co. v. U.S. ex rel. Sanders, holding that the government must prove that a defendant specifically intended that the government itself would pay a claim, and the D.C. Circuit decision in United States ex rel. Totten v. Bombardier Corp., which held that false claims liability required presentment of a claim to an officer or employee of the government and not to a grantee.
- The “reverse” false claims provision is revised by adding a section that includes any action designed to conceal, avoid, or decrease a payment obligation to the government, expanding the current provision that reaches only the making, use, or causing the use of a false record. “Obligations” of the government are now defined to include not only fixed but also contingent obligations, codifying existing Department of Justice policy. A specific statement is added that retention of overpayments is an “obligation” for purposes of the FCA.
- The conspiracy provision of the FCA is expanded to include conspiracies to violate any requirement of the statute, not only conspiracy to get a false claim paid as provided in the current statute.
- The existing scienter standard is retained:
- Liability will attach for the “knowing” submission of a false claim, use of a false statement or record in making a claim or in reducing an amount otherwise owed, or retention of money due and owing to the government.
- “Knowing” is defined as a person acting, with respect to information, with actual knowledge that the information is false, or with deliberate ignorance or reckless disregard of the truth or falsity of the information.
- No specific intent to defraud is required.