During the week of April 20, 2009, the Senate is expected to consider S. 386, the Fraud Enforcement and Recovery Act of 2009(FERA). This bill is co-sponsored by a bipartisan group of Senators, including Senator Leahy, Chairman of the Senate Judiciary Committee, and Senators Grassley and Kaufman.

After 9/11, the Bush Administration shifted resources away from the investigation of financial fraud, leaving law enforcement under-manned and under-funded when corporate and mortgage fraud were on the rise, due in part to lax regulation by the Administration and Congress of the housing and banking industries. As a result, thousands of fraud allegations went unexamined and many instances of fraud went unchecked. This fraud ultimately contributed to the global economic crisis that is threatening the financial health of our nation and the security of American families today.

More than 65,000 suspicious activity reports were filed alleging mortgage fraud in 2008, compared with nearly 4,700 in 2001, nearly 13 times as much. Source: Senate Judiciary Committee (referencing the U.S. Department of Treasury’s Financial Crimes Enforcement Network), available here and here.

S. 386would enhance, strengthen, and rebuild the government’s ability to investigate and prosecute the increasing instances of mortgage and corporate fraud. Specifically, FERA would:

- Updating the definition of “financial institution” in federal fraud statutes to include mortgage lending businesses that are not directly regulated or insured by the federal government (these businesses account for nearly half of residential mortgages);

- Amending the major fraud statute to protect funds expended under the economic recovery package and the bank bailout;

- Strengthening the False Claims Act to reverse recent court decisions that have made it more difficult to recover funds and impose penalties for proven frauds; and

- Filling key statutory gaps to account for modern types of fraud and correct misinterpretations of the law in recent court decisions.

Besides the obvious benefits of combating financial crime and protecting taxpayer dollars from waste, fraud, and abuse, FERA would recover billions of dollars in restitution, fines, and penalties for the government and victims.

For every $1 spent in the DOJ’s Criminal Division to prosecute fraud, more than $20 is recovered. For every $1 spent in the DOJ’s Civil Division to recover health care funds under the False Claims Act,more than $15 is returned to the government. Source: Department of Justice and the Taxpayers Against Fraud.

This summary is based on the Senate Judiciary Committee’s report on S. 386, released on March 23, 2009, available here.

Section 2.Amendments to Improve Mortgage, Securities, and Financial Fraud Recovery and Enforcement.

S. 386 would amend the definition of “financial institution”in Title 18 of the United States Code 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 of such organizations, and whose activities affect interstate or foreign commerce.”

S. 386would amend the false statements in mortgage applications statute in Title 18 of the United States Code to also prohibit“mortgage lending businesses” in its prohibition against making a materially false statement or willfully overvaluing a property in order to influence any action. The current statute only applies to federal agencies, banks, and credit associations and does not include private mortgage lending businesses.

S. 386 would amend the federal major fraud state in Title 18 of the United States Code to include any grant, contract, subcontract, subsidy, loan, guarantee, insurance or other form of Federal assistance valued at more than $1 million, including through the Troubled Assets Relief Program (TARP), the economic recovery package, or the government’s purchase of any preferred stock in a company.

S. 386would amend the federal securities fraud state in Title 18 of the United States Code to include commodities (options or futures) fraud in addition to securities fraud.

S. 386would amend the criminal money laundering statutes in Title 18 of the United States Code to make clear that the “proceeds” of specified unlawful activity include the “gross receipts” of illegal activity, not just the“profits.” This reverses the Supreme Court decision in United States v. Santos, 128 S. Ct. 2020 (2008), which limited the term “proceeds” to the“profits” of a crime, and as a result, limited laundering statutes to only profitable crimes and allowed defendants to reduce the cost of their criminal conduct.

The Congressional Research Service released a report (RS22896) on the issues involved in U.S. v. Santos.

S. 386would also amend the international money laundering provision in the federal money laundering statute in Title 18 of the United States Code to make it a crime to transport or transfer money in and out of the United States for the purposes of tax evasion.

Section 3.Additional Funding for Investigators and Prosecutors for Mortgage Fraud, Securities Fraud, and Other Cases Involving Federal Economic Assistance.

S. 386would authorize appropriations of $165 million per year for Fiscal Years 2010 and 2011 for the Department of Justice to strengthen their ability to combat financial fraud. Included in this allocation, the Federal Bureau of Investigation (FBI) would receive $75 million in 2010 and $65 million in 2011; United States Attorneys’ Offices would receive $50 million per year; the Criminal Division would receive $20 million per year; the Civil Division would receive $15 million per year; and Tax Division would receive $5 million per year.

S. 386would also authorize in Fiscal Years 2010 and 2011 $30 million per year for the Postal Inspection Service, $30 million per year for the Inspector General for the Department of Housing and Urban Development (HUD), and $20 million per year for the U.S. Secret Service.

S. 386would limit the use of these funds to the investigation, prosecution, and recovery of funds associated with mortgage, securities, and other financial institution frauds and frauds involving federal economic and other assistance.

Section 4.Clarifications to the False Claims Act to Reflect the Original Intent of the Law.

S. 386 would restore the original intent of the False Claims Act (FCA) to expand beyond just those instances in which the defendant intends to directly defraud the federal government. Recent court decisions limited FCA’s effectiveness by requiring the government to prove that a defendant intended to defraud the federal government, as opposed to another non-governmental entity. For example, a subcontractor in a large government contract could offer as a defense to their prosecution under FCA that they only meant to defraud their general contractor and not the federal government. The bill would also make clear that the government can recover for frauds committed by a defendant when the funds are expended by a government grantee, such as Amtrak.

FERA would clarify that liability under FCA attaches whenever a person knowingly makes a false claim to obtain money or property, any part of which is provided by the government, regardless of whether the wrongdoer deals directly with the government, an agent acting on behalf of the government, or a third party contractor, grantee, or other recipient of government money or property. The bill does, however, explicitly exclude liability for requests or demands for money or property that the government has paid for via compensation or an income subsidy.

S. 386would clarify that FCA liability attaches regardless of whether the government holds title to the funds under its administration, which is based on the theory that the government expends taxpayer dollars to administer those funds.

S. 386would clarify that liability may attach whenever a person conspires to violate FCA.

S. 386would clarify that a person may be liable under FCA for wrongfully possessing or controlling government funds with the intent to defraud the government, willfully conceal the government’s property, or deliver or cause to be delivered less property, regardless of whether the person receives a receipt for that property from the government.

S. 386would close a loophole to incorporate liability for “reverse” false claims, where an individual knowingly makes, uses, or causes to be used, a false record or statement to conceal, avoid, or decrease an “obligation” directly to the government.

FERA would also clarify the definition of “obligation” to expressly include fixed duties owed to the government, such as judgments and tariffs on imported goods, andcontingent or non-fixed obligations. The definition of “obligation” also now expressly includes the knowing and improper “retention of an overpayment.”

On February 5, 2009, Senators Leahy, Grassley, and Kaufmanintroduced S. 386, the Fraud Enforcement and Recovery Act of 2009. A hearing entitled, “The Need for Increased Fraud Enforcement in the Wake of the Economic Downturn,” was held in the Senate Judiciary Committee on February 11. On March 5, the Committee voted to report the legislation, as amended by a complete substitute, favorably by voice vote. The legislation is co-sponsored by Senators Schumer, Klobuchar, Snowe, Specter, Harkin, Levin, Whitehouse, Dorgan, Bayh,Murray, Shaheen, and Rockefeller. The Senate is expected to consider this legislation during the week of April 2o, with a cloture vote on the motion to proceed to the legislation being held on April 21.

At the time of this writing, amendments are expected to S. 386. Information on these will be sent to the DPC e-mail lists.

The Congressional Budget Office (CBO) released an estimate on S. 386 on March 18, 2009. Assuming appropriations of the authorized amounts, the legislation is estimated to cost $490 million over Fiscal Years 2010 – 2014. However, CBO acknowledged that the bill would lead to an increase in fines and recoveries. (See summary and background section above.)

On April 20, 2009, the White House released a Statement of Administration Policy in favor of S. 386.