HEARING OF THE HOUSE JUDICIARY COMMITTEE
SUBJECT: PROPOSALS TO FIGHT FRAUD AND PROTECT TAXPAYERS
CHAIRED BY: REP. JOHN CONYERS (D-MI)
WITNESSES: PANEL I: REP. ELIJAH CUMMINGS (D-MD); REP. JUDY BIGGERT (R-IL); REP. NEIL ABERCROMBIE (D-HI); PANEL II: RITA GAVIN, ACTING ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION, DEPARTMENT OF JUSTICE; JOHN PISTOLE, FEDERAL BUREAU OF INVESTIGATION; JONATHAN MINTZ, NEW YORK CITY DEPARTMENT OF CONSUMER AFFAIRS; IRA RHEINGOLD, NATIONAL ASSOCIATION OF CONSUMERS ADVOCATES; BARRY POLLAK, NATIONAL ASSOCIATION OF CRIMINAL DEFENSE LAWYERS; MARCIA MADSEN, INSTITUTE OF LEGAL REFORM, CHAMBER OF COMMERCE; JEB WHITE, TAXPAYERS AGAINST FRAUD
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REP. CONYERS: Good morning ladies and gentlemen.
Today's hearing concerns itself with how best to fight fraud and protect taxpayers. We've got seven bills in front of us and 13 different statutes already law that deal with the problem of when companies cross the line.
So, what are we trying to do? We're trying to separate, in this global economic crisis, accidents, bad judgment, errors, huge mistakes that have been committed from those strategies, tactics or intentions to cross the line into the criminal code. In this multi-trillion dollar melt down, it's very hard, especially with as little regulation and inquiry that's gone on so far, to determine which is which.
We're here to begin this discussion with the committee that has this very enormous responsibility. I'm pleased to start this off; I'll put the rest of my statement in the record and I'll yield to my friend from Texas, Mr. Smith, the Ranking Member of this committee.
REP. LAMAR SMITH (R-TX): Thank you, Mr. Chairman.
Mr. Chairman, I appreciate your holding this hearing today on legislative proposals to address mortgage fraud, security fraud and other financial crimes. Congress cannot prevent all crime, but Congress can ensure that tough penalties are in place to punish offenders and deter future wrong doers and we can provide law enforcement officials and prosecutors with the resources and tools they need to bring criminals to justice.
In times of crisis, crime often flourishes. Following the 9/11 terrorist attacks and Hurricane Katrina, unscrupulous people chose to exploit these tragedies to pad their pockets with funds intended to help the victims. Bringing to bear the heavy hand of government in too heavy a manner can be counter-productive. This could lead to a long term reduction in credit, fewer bidders for government contracts and higher costs for taxpayers.
We must strike an appropriate balance in advancing any fraud legislation. Many of the bills on our agenda today strike that balance, though I am concerned with one or two others. I am pleased to join you, Mr. Chairman, as a sponsor of H.R. 1948, the Fight Fraud Act of 2009.
This legislation amends federal criminal laws to include fraud committed by mortgage lending business or other entities that provide mortgage loans. The Fight Fraud Act also authorizes additional funds for federal law enforcement agencies and prosecutors charged with combating these fraud schemes.
I'm also pleased to join my colleague from California, Mr. Lungren, as a sponsor of his legislation to address money laundering and Crime Subcommittee Chairman Scott as a sponsor of his legislation to support the National White Collar Crimes Center.
I wish to commend the gentlelady from Illinois, Judy Biggert, for her legislation to provide additional resources to the FBI for its Mortgage Loan Fraud Investigations. I thank Mr. Abercrombie for joining us today to speak about his war profiteering legislation, which I also support.
Unfortunately, in addition to these bills that will help government's effort to fight fraud, we are also considering the False Claims Correction Act as part of the committee's effort at addressing fraud. No one doubts the tremendous importance the False Claims Act has played in combating fraud and federally funded programs.
Since 1986, when it was last amended, the federal government has recovered over $21 billion dollars under the False Claims Act. However, as the Act's success demonstrates, it is not in need of a substantial overhaul that the False Claims Correct Act proposes. As currently drafted, this bill does not properly strike the balance between providing the government the tools it needs to fight fraud and ensuring the innocent recipients of federal funds are not hauled into court to defend against lawsuits based on an overly broad law.
I suspect that the provisions of this legislation will subject non-fraudulent conduct of too many organizations, including hospitals, universities and non-profits, to costly False Claims Act litigation, while at the same time taking away defenses against frivolous cases.
Every member of this committee undoubtedly is concerned with combating fraudulent claims against the federal government. If there is identifiable fraud against the government that the False Claims Act is currently unable to address, we should amend the law to close the gaps, but I believe that as currently drafted, the False Claims Correction Act does go too far.
In our haste to fix a few problems, we must be careful not to create new ones.
Thank you, Mr. Chairman; I'll yield back.
REP. CONYERS: The Chairman of the Subcommittee on Crime, Bobby Scott of Virginia.
REP. BOBBY SCOTT (D-VA): Thank you, Mr. Chairman, for holding this hearing on fighting fraud and protecting taxpayers.
As we explore ways to hold accountable unscrupulous mortgage brokers, wall street executives, government contractors, I hope this hearing will give us more insight and what is being done and particularly, what is needed in the way of resources to investigate those suspected of serious crimes of fraud against the taxpayers.
The underpinnings of the financial crisis began as banks and private mortgage companies relaxed their standards for loans, approving riskier mortgages with less scrutiny. This created an environment that some took as an invitation to fraud.
In the last three years alone, the number of criminal mortgage fraud investigations opened by the FBI has more than doubled. The FBI's previously testified that it currently has more than 2,000 mortgage fraud investigations open, but only 250 agents specifically assigned to those cases.
I understand that for the savings and loan debacle a few years ago, we had over 1,000 agents assigned to those cases. The amount of finances associated with this problem is approximately three times the size of the problem with the savings and loan debacle. So, after pouring more resources for the Department of Justice to assist the FBI and the states and enforcing the fraud laws to recover the billions lost.
I'm not at this point persuaded that we need new criminal laws in this area. Many in this industry knew they were dealing with worthless paper; they even had names for the paper like, Ninja Loans -- no income, no job or assets loans -- and they were laughing as they put these things together. These loans were then passed off as AAA assets and when somebody sells the garbage as AAA assets, somebody along the way has committed common law fraud.
To suggest that we need new criminal laws may suggest that the behavior that got us into this mess was not already criminal. Furthermore, new laws and penalties could not be applied retroactively and therefore would not apply who committed crimes that got us in the mess we're in today.
I believe that Federal Mail and Wire Fraud statutes should be sufficient to address the problem on the federal level. Penalties associated with these statutes are substantial. Mail and Wire Fraud violations carry a maximum penalty of 20 years and any Mail or Wire Fraud that affects a financial institution increases the maximum sentence to 30 years.
It's not just Mail and Wire Fraud that is at the disposal of federal prosecutors; the FBI has already identified nine applicable federal criminal statutes which may be charged in connection with mortgage fraud. In addition to the federal criminal law, these financial crimes can be also prosecuted by state and local law enforcement officials under aggressive and very punitive state criminal laws as well.
Now, Mr. Chairman, what we need to do is provide more resources to law enforcement to prosecute the fraud, whether its consumer ID theft, contracting fraud in Iraq or mortgage fraud that affects us all today? In this regard, I've introduced H.R. 1779, the Financial Crimes Resources Act, that provides an authorization for additional funding to various government agencies responsible for enforcing financial fraud and identity theft laws.
For example, the bill authorizes $100 million to the FBI for fiscal years 2010 through 2012 and $50 million to U.S. Attorneys offices to investigate and prosecute identity theft, financial crimes and other fraud. The bill also provides resources to cover the costs associated with providing federal defense services for these fraud cases.
More importantly, the bill addresses the lack of funding at the state level. We need to provide adequate resources to state authorities to battle fraud and we need to ensure that federal authorities are coordinating with their state counterparts to ensure an effective approach. H.R. 1779 aims at achieving this task by allocating $250 million to the state and local levels to attack the low hanging fruit of identity theft and predatory lending practices that federal prosecutors fail to go after today.
And Mr. Chairman, I think its appropriate to note that if we spend this money on prosecution today, it will not only have deterrent effect, but there is significant potential for fines and forfeiture that will off set most of the cost of persecution.
I'm supportive of other bills that have been introduced to provide more resources to combat fraud; this includes H.R. 1292, a bill that I introduced with you, Mr. Chairman and the Ranking Member of the full committee, which would authorize funds for states to work with the information sharing and training programs, such as the National White Collar Crime Center.
The Center has over 30 years of experience, provides a nationwide support network for state and local enforcement agencies involved in prevention, investigation and prosecution of economic, high tech and terrorism related crimes.
In addition, both the Chairman's Fight Fraud Act and the bill introduced by the gentle lady from Illinois, Ms. Biggert -- the Stop Mortgage Fraud Act -- contains provisions allowing for additional federal resources to combat fraud and I support these provisions as well.
Now, Mr. Chairman, I look forward to hearing from our witnesses on the legislative approach that we're going to take in dealing with the mortgage fraud and other financial frauds and look forward to their testimony and suggestions on what we need to do.
Thank you and I yield back.
REP. CONYERS: Former Chairman of Judiciary Committee for six years, Jim Sensenbrenner.
REP. JAMES SENSENBRENNER (R-WI): Thank you very much, Mr. Chairman.
False Claims Act is the principal tool of law enforcement to combat fraud against federal programs. Originally passed at the behest of President Lincoln during the Civil War to combat fraud against the Union Army, it has been amended several times since then; the most recent change in 1986.
Under the Act, private parties or whistleblowers may bring a civil qui tam action for violations of the Act for themselves and the U.S. government. The government has the primary responsibility for prosecuting the action when it opts to proceed with the matter. Any damage awards may be trebled and are apportioned among the whistleblower and the Treasury.
I'm sure no one here would argue that the False Claims Act has been anything but successful for the federal government. In the past 20-plus years, more than $20 billion in settlements and judgments have been achieved. A study found that the federal government is bringing back $15 for every dollar it spends pursuing FCA cases.
Although the False Claims Act has been successful, there is always room for improvement. Several federal courts have applied and interpreted provisions of the FCA in ways that have substantially weakened the law. For example, the False Claims Correction Act closes the loopholes that permit fraudsters from stealing with impunity and from allowing the government to fully recover stolen funds.
Last year in Allison Engine the courts stressed its hands were tied when it held that the Justice Department could only prosecute those who steal government funds from the government itself. With the U.S. government relying on private contractors to disperse funds for everything from our Medicare Prescription Drug Program to our war efforts in Iraq, billions of federal dollars are now in jeopardy.
The bail out that Congress is approving left and right without the proper transparency or accountability only adds to the government funds in jeopardy from the fraudsters. It's my hope that the House passes the proposed amendments this year and removes the debilitating qualification that fraud perpetrators use to hide behind judicially created qualifications and evade liability.
I yield back the balance of my time.
REP. CONYERS: Mr. Lungren or Mr. Issa, are you so inclined?
REP. DAN LUNGREN (R-CA): Thank you very much, Mr. Chairman.
As one who has supported the False Claims Act Amendments in the past and voted basically for the effective restoration of this law during the Reagan Administration, I might just mention that this does have a Republican Heritage to it, it was asked for in its concept by Abraham Lincoln -- the Congress passed it, it was signed by Abraham Lincoln, it was effective, fell into disuse for a period after World War II.
It was not until the 1980's when the Reagan Administration asked it to be resurrected in effective mode that we passed it out of this committee; it was on the Floor, it was passed in the House and the Senate, signed by President Reagan because of some court decisions which basically say, If you're not the direct contractor, you are a subcontractor, we cannot go after this; we need this changed.
It also clarifies some things, streamlined some procedures, both for dismissal and for people bringing this forward and for those who would suggest that this is not the place for private action, I would just suggest that the gentleman from Wisconsin's statement, that the federal government manages to recover $15 for every dollar it expends, suggests that this is a very effective means by which we (ride herd ?) on those who would defraud our country.
This goes to the question of war profiteers; it also goes to the question of those who would receive the benefit of the humongous stimulus package that we voted and other spending that appears to be on the horizon.
I thank the chairman for the time.
REP. CONYERS: Darrell Issa.
REP. DARREL ISSA (R-CA): I thank the chairman for holding this hearing and I look forward to voting for most, if not all, of these bills.
I do have some concern with the modifications in the False Claims Act. Somewhat differently from my colleague, although I appreciate the Republican nature of this, I believe that the inherent nature between a contractor and their subcontractors is an important on where if the federal government, using third party specialists to sue, receives money in a sense for the government, that's fine.
One of the challenges is that it ultimately runs up the cost of the general contractor. So although I accept the fact that whistleblowers, through my committee next door, are essential, I'm not sure that the bill as proposed really brings about the kind of cost benefit that it could. In a nutshell, it doesn't cost that much to get whistleblowers to blow the whistle on subcontractors, either to the government to take action or more properly, to the government, to inform the general contractors; the general contractor can find better subcontractors and save the government more money overall.
But I do look forward to the hearing today and yield back.
REP. CONYERS: Steve King; okay.
Trent Franks; okay.
Ladies and gentlemen, we're pleased to receive these comments of our members who are here. Judy Biggert is a lawyer from Illinois, a member of three committees -- Financial Services, Education, Labor, Science and Technology -- has worked with this committee in helping us set up informal discussions with members of the Supreme Court over the years. We're happy to have her with us and we have your statements, all which are in the record, and allow you to proceed at this time.
REP. BIGGERT: Thank you very much, Mr. Chairman and thank you and the Ranking Member Smith and the members of the committee for extending to me the opportunity to join you today.
Given your agenda, I'll be brief.
Some years ago, the Chicago Tribune published a series that revealed that gangs in the Chicago area increasingly were turning to mortgage fraud. They found it easier and more lucrative than selling drugs, believe it or not, but it turns out the gangs were not alone; everyone, it seems, was in on the act.
Just last week, the U.S. Attorney in Chicago, Patrick Fitzgerald, brought mortgage fraud indictments against two dozen players; they are brokers, accountants, loan officials and processors, and attorneys. Mortgage fraud comes in all shapes and sizes. Scam artists inflate appraisals, flip properties and lie about information, including income and identity, on loan applications. Some used the identity of deceased people to obtain mortgages and other desperate thieves bilked out of their homes and home equity the most vulnerable homeowners and seniors in dire financial straits.
Let's face it, this is just the tip of the iceberg and as we in Congress, as we work to get the economy back on track and credit flowing again, we have to address what was at the root of the mortgage melt-down in the first place and that is mortgage fraud.
Mortgage fraud continues to rise in record numbers. The FBI has reported that in 5 years, its mortgage fraud caseload increased by 237 percent and investigations more than doubled in three years. During a 12-month period ending in 2008, mortgage fraud reports increased by 44 percent reaching over 63,000 reports, with predictions of up to $25 billion in losses. On refinanced FHA loans, defaults have more than quadrupled.
For the fifth year in a row, my state of Illinois secured a spot on the Mortgage Asset Research Institute's top ten list of states with the most severe and prevalent incidents of mortgage fraud. In 2009, the Mortgage Fraud Case Report, issued last week, Illinois ranked third in the nation, behind Rhode Island and Florida. As a former real estate attorney and member of the House Committee on Financial Services, I've seen first-hand the devastating effects of mortgage fraud.
It has plagued our financial system and economy; most tragically, it has cost millions of American families their homes and required taxpayers to commit trillions of (their dollars to ?) prop-up the financial industry. It's just not fair to the good actors in the industry and the 90 percent of homeowners who are paying their mortgage on time.
That's why I was pleased to join with you, Mr. Chairman and Ranking Member Smith, in introducing H.R. 1748, the Fight Fraud Act, and I introduced H.R. 78, the Stop Mortgage Fraud Act. I look forward to working with you and members of this committee on these important bills. Last Congress, the House three times passed, in some form, my bill, the Stop Mortgage Fraud Act, only to see it removed or ignored by the Senate. But I haven't given up and I won't give up. This Congress, I reintroduced the Stop Mortgage Fraud Act to provide additional funds to the FBI and Department of Justice to investigate and prosecute mortgage fraud.
By bolstering federal law enforcement's efforts, Congress can help to inject certainty and fairness into the mortgage system to restore investor, homebuyer and public confidence in the American Dream and our financial system. As we work to modernize financial laws and regulations, it is our duty to supply federal law enforcement with the tools and resources it needs to rapidly tackle fraud, particularly mortgage fraud. Fighting fraud must play a central role in solving the underlying problems that have undermined economic recovery.
With that, I respectfully request that you support H.R. 78 and I offer my continued commitment to improve the bill and move it through the legislative process.
Thank you, again, for your time and dedication to this matter.
REP. CONYERS: Neil Abercrombie of Hawaii is a senior athlete, a jazz historian and an unlicensed lawyer.
So, we're particularly happy to have him before us. Welcome, Neil.
REP. ABERCROMBIE: Thank you very much, Mr. Chairman.
Aloha to you and Mr. Smith and all the members; thank you very much for the opportunity to be with you.
Mr. Chairman, before I begin, I want to express to you what I know is a shared feeling, I'm sure, by all the members and the staff; that you will be losing Mr. Lou DeBaca to the State Department, but I want to say that the nation is all the more gaining from it and the world. He will be Ambassador-at-Large in the State Department in the area of trafficking in persons, particularly women and girls, throughout the world who are now suffering oppression will find a great champion in Mr. DeBaca and I commend you and the committee for having the foresight to have him with you and I know we wish him all a bon voyage in his new role.
Mr. Chairman and members, I'm very grateful to the committee for your hearing on H.R. 1667 and I want to thank Mr. Smith for his mentioning it in his remarks. This is a bill I believe that does not have an ideological equation or philosophical equation or partisan equation, but one which is particularly American, going back as was indicated by Mr. Lungren and others; something which the members of Congress have had a shared obligation and responsibility for and about for decades, the War Profiteering Prevention Act of 2009 and other legislation, which will begin to hold companies that accept and spend the public's money accountable to the public.
Mr. Chairman, as you know, this bill is part of a larger package of legislation intended to deter the waste and abuse of public funds. It is absolutely essential to strengthen federal law so that private sector contractors who enter agreements with the government to provide goods and services will know that the misuse of public funds is a crime, and that violators will be prosecuted and punished. It is also absolutely essential to strengthen federal law so the public knows that such behavior will no longer be tolerated.
It is unfortunate that a relative few American companies have wreaked complete havoc on our country's economy and provoked national outrage with their singular focus on profits at the expense of market stability, the long-term benefit of their customers and any sense of business ethic, but it didn't just happen last year, just on Wall Street, or just in our domestic housing and financial markets.
The same corrupt atmosphere followed our military forces overseas and is the particular object of my bill. The last Administration privatized logistical support for combat and reconstruction operations in Iraq and Afghanistan to an extent unprecedented in our history. Wars have always been huge and highly profitable business, but never have we seen the pursuit of profit practiced with more cavalier disregard for the health and safety of our troops, the ultimate success of our reconstruction efforts or the continuing support the American public.
In fact, some of our largest contactors have acted as if it was open season on the U.S. taxpayer. At least ten companies eventually paid more than $300 million in penalties to resolve allegations of bid rigging, fraud, gross overcharging, delivery of faulty military parts and environmental damage in Iraq. Even more tragically, some of our soldiers have become casualties of shoddy work simply because U.S. law has not fully brought these firms to account. There have been 16 reported deaths of American soldiers and two civilians; not from combat, but from electrocution as a result of shoddy work.
Mr. Chairman, I want to add parenthetically that I am well aware of some of the commentary made about existing law with regard to fraud and misuse and abuse of public funds. Our difficulty here, and the reason for this bill appearing before you, is there is now some question as to the legal reach of these laws outside the nation in warzones and combat zones, such as in Iraq and Afghanistan; that is the object of the bill.
Not to reiterate what is already on the books, but rather to see to it that no legal obstacles might exist to be able to bring such perpetrators to account. The U.S. has spent more than $50 billion to hire private contractors in Iraq to provide food, water, gasoline and other supplies, guard bases, drive trucks and many other activities in support of our troops and for reconstruction.
Today, with an additional 21,000 troops planned for deployment to Afghanistan along with billions of reconstruction dollars, contractor accountability is an urgent need. Cleaning up this mess and preventing its recurrence has been hampered by the fact that anti- fraud laws that can protect against the waste or theft of U.S. tax dollars in the United States are not as clearly applicable overseas. There has been ambiguity in legal jurisdiction.
An abundance of well-documented cases of contract fraud and abuse led to the introduction of the War Profiteering Prevention Act in 2007, to that bill's mark-up and hearing before this committee, and to its passage by the full House in October 2007 by a vote of 375-3; I'm hoping that the three will reread this bill and that we can prevail upon them to reconsider.
However, the Bush Administration, through its testimony against the bill before your committee and on the floor of the House, viewed this legislation as an example of burdensome regulation over the free enterprise system. As a result, action in the Senate was blocked and as a result, we have worked the bill over in such a way as we hope and believe will meet the objections that existed previously.
That bill was H.R. 400 and it has now been reintroduced in new form which, as I say, I hope will address such questions as existed in 2007 -- introduced in the 111th Congress as H.R. 1667, which received, as I said, the favorable commentary of Ranking Member Smith -- the War Profiteering Prevention Act of 2009; that is before you today.
The measure is very brief and very direct. It defines contract fraud and specifies who will be covered by the law and where it will be in force. It does not have maybe some of the general implications that found some objection previously. It establishes jurisdiction very clearly for enforcement of the law and the prosecution under it and it specifies the penalties for violation of the law and finds impossible imprisonment. It is profoundly distressing that such laws are necessary, but this bill is critical to our national security interest, both for the survival of our own economy and accountability to the taxpayer and the successful reconstruction in foreign nations gripped by extremism.
We have seen what can happen without proper government oversight. We would be derelict in our responsibility to the public we serve if we did not take every step available to us to discourage such behavior in the future to punish those who violate the public trust.
Therefore, Mr. Chairman and Mr. Smith, I appreciate today's hearing, certainly, and I appreciate the fact that you are having a hearing on the wider problems of fraud and corruption. And I certainly look forward to this committee's mock-up and other pieces of reform legislation and their full consideration by the House and will do all I can to aid and assist you should anyone still have any questions after we have gone through the House -- after the Hose has worked its will.
Thank you very much, Mr. Chairman.
REP. CONYERS: Elijah Cummings is the past chairman of the Congressional Black Caucus and a member of the Transportation Committee as well as the Armed Services Committee. Welcome this morning, Elijah.
REP. ELIJAH CUMMINGS (D-MD): Thank you very much, Mr. Chairman. I'm also a member of the Government Reform Committee also where we've spent a lot of time looking at fraud and a lot of the fraud that Mr. Abercrombie just talked about within the military and, of course, I'm looking at AIG and what's going on right now with regard to these TARP funds.
Chairman Conyers, I want to thank you and Mr. Smith for inviting us today and I commend both of you and this entire committee for your tireless effort, your ongoing efforts, to protect consumers and prevent fraud. I also appreciate the work of this entire committee in that regard.
I've worked closely with the administration of Governor Martin O'Malley in my home state of Maryland to make my constituents aware of the consumer protections available to them and I'm pleased to be here.
From the instant the decision was made to inject taxpayer dollars into the private capital markets have beaten the drum for the rights of our nation's involuntary investors. From for profit loan modification firms in the housing sector to corporate bonuses and protection payments on Wall Street, we've seen too many examples of our hard-working constituents getting taken advantage of at a time when many are in desperate straits themselves.
At the state level, the Maryland General Assembly has passed the Maryland Mortgage Fraud Act explicitly making mortgage fraud a specific crime as well as creating an affirmative obligation for all mortgage brokers and lenders to report cases of fraud, theft, or forgery. More recently, we've all seen the emergence of the so-called foreclosure or loan modification consultants. These scam artists charge high upfront fees to vulnerable consumers to supposedly help them obtain modifications of their loans. In reality, they are charging hardworking people for information that is available to them at no cost. Too often, these efforts result in both wasted money and wasted time and that home buyer is left with two bags in each hand, one bag says " zero" and the other one says "debt."
The bills to be considered by the committee today would provide exactly the kind of tools we need to create stronger taxpayer protections. In the case of AIG, all taxpayers have been victimized. We've seen a pattern of less-than-full disclosure of AIG uses of the TARP funds. First, we found out that they were attending conferences at lavish resorts having their manicures, pedicures, and massages done at taxpayers' expense after getting significant bailout money. Then we found that they were issuing bonuses and retention payments even within the Financial Products Division whose actions brought AIG down and created the systemic turmoil that threatens our entire economy, not only of this country, but of the world. Mr. Liddy, the head of AIG, and his team at AIG have not convinced me that these bailout funds are always being used in the best interest of the taxpayers. And it is simply unacceptable that the taxpayers who are provided these funds should have any doubts.
I particularly commend you, Mr. Conyers, Mr. Smith, Ms. Biggert, Mr. Scott, Mr. Delahunt, Ms. Jackson Lee, for your sponsorship of the legislation. But let me say something else.
As I listened to Mr. Scott and I listened to Mr. Issa and some others, I was thinking about how do you address these issues? Having practiced law for many years, I think there are two things and I think that Mr. Scott hit on a very, very -- did a good job of pointing it out. The question is, it's not just whether you have the laws on the books, the question is whether law enforcement make those laws a priority to prosecute and whether they have the resources to do it.
Now, Mr. Abercrombie makes a good point. There are some loopholes and we need to fill those loopholes, but we also, Mr. Chairman, I'm just commentary, we need to make sure that the U.S. Attorney and our attorneys and his assistants throughout the country and our state folks know that this is a priority of this Congress.
I get tired of seeing my constituents after they have been defrauded and left with nothing and the sad part about it, as I close, is that, you know, I've often said we have one life to live. This is no dress rehearsal, this is our life. And it's so sad when I see people like I saw them this morning, Mr. Chairman, getting up at 5:00 in the morning, going out there, working their butts off, and now, they stand to lose their houses, their homes, their savings, and their healthcare. And then they see their tax dollars being used in a way that is, to me, fraudulent. And they also see something else happening. They also see that it becomes almost impossible for them to reclaim their dream and reclaim their hope.
I encourage this committee to do what I know you're going to do and thank you for being so vigilant.
REP. CONYERS: Well, we're indebted to all three of you and look forward to our continued working together on these bills and laws that exist and how we enforce and supply the government with the resources to do what you've suggested. I thank you all for your attendance this morning.
We'll now call up our second panel of seven witnesses and we're pleased to welcome the President and CEO of The Taxpayers Against Fraud, Jeff Dwight; senior law partner, Marcia Matteson; another law firm partner, Barry Pollock; the Executive Director and General Counsel of the Association of Consumers, Ira Rheingold; the New York City Commissioner for Consumer Affairs, Jonathan Minsk; the Deputy Director of the Federal Bureau of Investigation, John Pistole; and the Acting Assistant Attorney General for the Criminal Division in the United States Department of Justice, Ms. Rita Glavin.
Ms. Glavin has done some very excellent work. She will be our first witness. All of the statements will be in the record. We welcome you to begin.
MS. GLAVIN: As you all know, the nation's current economic crisis has had devastating effects on mortgage markets, credit markets, the banking system, and all of our nation's citizens. And while not all of the current economic ills are the result of criminal activity, the financial crisis has laid to bear criminal activity such as Ponzi schemes that may have otherwise gone undetected for years. The Department of Justice is committed during these difficult times to redoubling our efforts to uncover abuses involving financial fraud schemes, mortgage lending and securitization fraud, foreclosure rescue scams, government program fraud, bankruptcy schemes, and securities and commodities fraud.
Where there's evidence of criminal wrongdoing, including criminal activity that may have contributed to the current economic crisis or any attempt to criminally profit from the current crisis, the Department will prosecute the wrongdoers, seek to put them in jail when appropriate, and work tirelessly to recover assets and criminally derived proceeds in strives to make the victims whole.
Historically, the Department has had tremendous success in identifying, investigating and prosecuting massive financial fraud schemes.
Last year, for example, the Department obtained convictions of four executives, including a former AIG executive who engaged in corporate fraud by executing two false reinsurance transactions to conceal a $59 million dollar decrease in the loss reserves of AIG. Similarly, last year, the Department secured the conviction of five former executives, including the owner and president of National Century Financial Enterprises, one of the largest healthcare finance companies in the United States until its 2002 bankruptcy, on charges stemming from an investment fraud scheme resulting in $2.3 billion dollars in investor losses.
Last week, the former president of that company was sentence to thirty years in prison and a co-owner was sentenced to twenty-five years in prison. The defendants were also ordered to pay restitution of $2.3 billion dollars and forfeit $1.7 billion dollars. In just the last few weeks, the Department has secured the guilty plea from Bernard Madoff for securities fraud and mail fraud violations. And we filed a criminal complaint against Laura Pendergest-Holt, the Chief Investment Officer of Stanford Financial, alleging that she obstructed an SEC investigation into the activities of Stanford Financial.
The Department has approached the current financial problem with three primary goals.
First, coordination. The Department has sought to aid in the coordination among law enforcement agencies by working with our partner agencies in forming a variety of national and regional working groups. The coordination is important to share information and share ideas.
Second, investigations and prosecution. As always, the Department focuses on those to investigate financial fraud and mortgage fraud. When people go to jail, when people incur stiff fines and have to pay restitution, we deter similar conduct by others. The Department has, over the last several years, aggressively prosecuted fraud cases. We've done nationwide sweeps resulting in hundreds of convictions.
Third, in addition to coordination and investigating/prosecuting crime, we look to fulfill our responsibilities to the victims. Looking to make them whole, looking to identify them, looking to recover assets and provide the restitution to the victims. In addition to continuing our efforts to prosecute financial crimes, like Ponzi schemes, mortgage fraud, securities fraud, the Department knows that we have to ensure that the funds that Congress has authorized to rejuvenate our economy are used as intended. Where those taxpayer funds are used unlawfully and where misrepresentations are made in order to get those funds, we're committed to looking at the matter, investigating and prosecuting wrongdoers where we find them.
Our past experience, including many prosecutions relating to the Hurricane Katrina Recovery Fund and the funds used as part of the Iraq reconstruction efforts show that we know when large investments of taxpayer money go out over a short period of time, people will try and exploit and system and criminally profit.
We're aware of that, we're ready for that, and we're already starting to work with our other law enforcement agencies, including the SIGTARP, to prepare for what may come down the pipe.
Looking forward, the Department believes it has the tools it needs to continue to vigorously combat financial fraud. We support certain legislative steps that can be used to close existing gaps that might exist in the law to strengthen some of the statute that we already use to prosecute these financial fraud crimes.
I appreciate the committee's invitation to be here today and I look forward to your questions.
REP. CONYERS: Deputy Director, John Pistole, of the Federal Bureau of Investigation.
MR. PISTOLE: Thank you, Chairman Conyers and Ranking Member Smith, members of the committee. It's a pleasure to be here today. I'd like to give you just a very brief overview of the law enforcement challenges facing us and describe the FBI's current efforts to address the growing economic fraud.
First, in the area of mortgage fraud, our work focuses on schemes that rely on industry insiders, of course, those appraisers, accountants, mortgage brokers, and other professionals who override lender controls trying to prevent this type of crime from happening. To state the obvious, we have experienced a significant increase in mortgage fraud related cases since 2005 and we expect that upward trend to continue. Also, mortgage rescue schemes designed to prey on individuals facing the dramatic loss of their homes and who are, therefore, very vulnerable are of great concern to us and we are now beginning to see the growth of this crime problem as well.
The FBI is also combating other types of economic crime from securities fraud to healthcare fraud to fraud with corruption associated with our country's efforts to rebuild Iraq and Afghanistan as we heard from the prior panel.
Finally, the numerous Ponzi schemes that we've heard about such as Madoff and other investments frauds that have been uncovered which we are actively pursuing.
We are responding in a number of specific ways.
We have shifted resources and now have additional FBI agents and financial analysts as well as intelligence analysts assigned to mortgage fraud and related to investigation. We have another group of agents and analysts working corporate fraud and security fraud matters. We have augmented our efforts with state and local law enforcement officers assigned to mortgage fraud task forces and working groups and we've established at our headquarters a national mortgage fraud team to coordinate and prioritize our efforts across the country with our partners and to provide tools that identify the most egregious fraud perpetrators and work even more effectively with our counterparts in law enforcement regulatory (and industry leaders ?).
For example, last June, we completed the initial phase of what we called Operation Malicious Mortgage involving the arrest of more than four hundred offenders nationwide believed to be responsible for over one billion dollars in estimated losses. This initiative has focused on three types of mortgage fraud; asset lending, of course, mortgage rescue schemes, and mortgage-related bank rescue schemes. And we continue our strong efforts within the International Contract Corruption Task Force in which we, with our other Federal partners, address fraud and corruption in U.S. funded Iraq and Afghanistan construction projects.
In closing, it's clear to us in the FBI and our law enforcement partners that more must be done to protect our country and our economy from those who try to rich themselves through illegal financial transactions. We are committed to doing so and very grateful for your support. Thank you, Mr. Chairman.
REP. CONYERS: New York City Commissioner for Consumer Affairs, Jonathan Minsk. Welcome.
MR. MINSK: Good morning. Thank you, Chairman Conyers and Ranking Member Smith for the opportunity to testify on behalf of New York City Mayor, Michael Bloomberg.
Given the urgent nature of these hearings, I'll skip the extensive background on my department's 40-year history of enforcing and litigating against deceptive and misleading practices in New York City. And I'll also forego the in-depth stories about the damage that's inflicted on consumers by foreclosure scams. My brief testimony will diagnose from an on-the-ground municipal, anti-fraud perspective why these scams are so very linked and suggest practical, immediate Federal outreach and enforcement interventions that must occur in the coming days and weeks.
A combination of enforcement and education is just what's needed to disrupt the tide of foreclosure prevention and loan modification scams sweeping across our cities. The numbers are alarming. Nearly 5,000 homes in New York City were auctioned off last year and nearly 14,000 homeowners had lis pendens filings. The national foreclosure crisis has created a formidable demand for rescue and refinancing. Unfortunately, a shadow industry aimed at profiteering from both the enormity of the crisis and the Federal resources is moving aggressively to respond to that demand.
This shadow thrives for three reasons all too familiar to consumer protection agencies. First, the intense demand for loan modifications; second, a captive, vulnerable and often unsophisticated population; and, third, the lack of a single trustworthy and tamper- proof source to which people can be directed for help. Many of the same people who were deceived by the marketing tactics used for subprime loans, people with limited experience with financial services, are the targets now.
Adding fuel to this fire is that these easy targets are precisely identified. Lis pendens lists are readily available for purchase online. Scam artists can access critical information like servicers and payment histories in order to employ disarming familiarity. The public hears daily about the Federal government's efforts to help distressed mortgage holders, but information is channeled through multiple conduits from every level of government and from non-profit sector partners. It is this diffuse messaging and the multiple doorways which facilitates the swindles. Loan modifiers pose as messengers from government agencies, lenders, or servicers. Advertisements take on official veneer, for example, using FHA seals or including legal citations.
We believe that there are three feasible steps which can affectively intervene to protect people in foreclosure and get them to the right help. While so-called loan modifiers are located throughout the country, their targeting and their marketing is local in nature. In New York City, the neighborhoods that are most dramatically impacted by the foreclosure crisis are papered with fliers offering rescue.
To combat this flood of marketing, the national response needs to be clear and simple in messaging, but local in delivery. Simplifying the conduit to well-trusted and tamper-proof 311 or 211 information hotlines is an ideal intervening fix. More than sixty cities across the U.S. which cover close to 80 percent of the American population have these information hotlines; these referral systems which are available 24 hours a day, 7 days a week, and in dozens and dozens of languages. Local governmental have invested millions of dollars to popularize these free hotlines and we stand ready to utilize them to the present emergency.
The Federal government has a unique power to mobilize civic leaders and community partners to carry a unified message -- don't talk to anyone about helping you avoid foreclosure unless you've document it through 311 or 211.
Now, let's talk about strengthening enforcement. We applaud the Chairman's proposed Fight Fraud Act, additional resources intended to be directed to Federal law enforcement agencies. But given the local nature of these scams and the accompanying wealth of local information and need, these Federal agencies will be most effective when they're meaningfully partnering with local enforcement and consumer protection agencies who have been sectored on the ground. We have the information; we just need to be able to get it into the right hands.
We propose, therefore, the establishment of a national task force which will coordinate this database of information.
Finally, we propose a Federal ban on fee-for-service mortgage relief advocacy.
There is no reason for distressed homeowners to pay unqualified, for-profit actors to negotiate with their lenders when, instead, they could work with qualified, not-for-profit HUD counselors. Just like banning fee-based debt counseling as we have in New York, Congress has the power to enact a simple ban on fee-for-service foreclosure prevention businesses. Moreover, state and local governments must be in power to enforce such legislation. Thank you.
REP. CONYERS: Thank you very much. We have now consumer representative, Ira Rheingold.
MR. RHEINGOLD: Good morning, Mr. Chairman and thank you, Ranking Member Smith and members of this committee. I thought I would use my time to talk a little bit about my background, what I've seen over the course of a dozen years, and take a look at how, if we're going to stop fraud in this country, who we need to really target when we begin to tackle this gigantic problem that we have today in terms of our foreclosure crisis and the mortgage fraud that permeates our economic system.
I was a legal services attorney since the mid '90s working on foreclosure issues in Chicago. From the mid '90s through around 2001,I worked in low and moderate income communities in Chicago and worked with others around the country who faced these same issues. What we saw in those communities was the mortgage fraud that we're seeing today across this whole country, in Atlanta, in Boston, in Hampton Rhodes, in California, and what we saw was a mortgage system that was broken -- a mortgage system was broken -- that attracted people who were committed to committing crime.
The tinsmen of the '50s and '60s, the home repair scam artists of the '70s and '80s became mortgage brokers and got engaged in the mortgage lending industry. And what we saw in those communities were an enormous loss of wealth. In poor communities across this country, we have seen a redistribution of wealth that is shocking. Poor communities in my city, in other cities, have lost enormous wealth, had that wealth stolen from them. Stolen by Wall Street companies and by big mortgage lenders who built a system that really encouraged fraud. And I think that's the important thing that we need to look at.
When we talk about securitization and the complex mess that allowed these mortgage things to occur, we need to look at what those lenders did.
In 1997-1998, I worked with the Chicago Attorney General's Office when they pursued a company called Vamco. They were joined by a number of attorney generals pursuing Vamco. The biggest funder of Vamco was Lehman Brothers. So when Lehman Brothers failed last year because they were engaged in all sorts of nefarious practices, those of us who had been working on mortgage fraud since the mid '90s knew that Lehman Brothers was a bad actor.
In fact, a court in California found them liable for the behavior of Vamco because they knew that mortgage fraud was occurring, they encouraged it, they funded it, they did nothing about it because profits were great. Profits were great. The mortgage lending industry, the investment banking industry made money when loans were closed and they didn't care where they came from, they didn't care about who they came from.
As investigators begin to look at the mortgage problem, when they start to talk to mortgage brokers and the scam people who they'll be charging, what they will hear from them -- and I can promise you they will hear this -- is that when we made a loan that was a no-doc loan that we knew was permeated with fraud, we knew what lender to sell it to. We knew that if we went to Countrywide, we knew that if we went to AmeriQuest, we know if we went to IndyMac or Option One, they would not look. They didn't care. Because we had a system that when those mortgage lenders bought those loans, they turned it around and turned them and chopped them up and spindled them and mutated them and turned them and sold them to investors and they knew credit rating agencies didn't care and weren't going to look at it and didn't do due diligence, and that investors were the same victims of the fraud that that homeowner was.
If we're going to look at fraud, if we're going to challenge, if we're actually going to stop the practices that have led us to this economic crisis that we sit in today, then we need to look carefully at investments. We need to look at our banks. We need to look at mortgage lenders. Look at AmeriQuest and Countrywide, Angelo Mozzillo. Instead of honoring somebody like Roland Arnold by making him the Ambassador to the Netherlands, his company caused more harm to our nation's communities than anyone could've imagined. We need to look at those companies. We need to look at the investment banks that are still left. Bear Stearns and Lehman Brothers, they enabled the fraud that is occurring today. So investment banks.
We need to look at the credit rating agencies. Where were they? Did they not see that these loans were going to fail? Did they not look at all these things and rated these things as AAA and sold them to investors as good vehicles, that people's money was going to be safe? Did they, in fact, enable the fraud by their bad behavior.
Finally, when we talk about mortgage rescue scams and that is happening every single day. I talk to consumers across this country every single day and they are being inundated by claims of people who are going to help them solve their foreclosure problem. There are scared and desperate people out there. We need to go after them and we need to prosecute those people, but we also need to recognize that the reason those people succeeded, the reason why they have such a successful business model is because the mortgage servicing system is broken. No normal human behind in this country who has a mortgage and wants to get it fixed can find who their lender is, who their servicer is, contact that person, and actually get a decent loan modification.
Until we fix the problem of people being able to independently handle their matters and solve those foreclosure problems by themselves, the scam artists and the mortgage rescue schemes are going to be out there. We can't stop it until we solve the problem of mortgage servicers not being accountable to the American people. Thank you.
REP. CONYERS: Attorney Barry Pollock is a lead official in the National Association of Criminal Defense Lawyers who works on white collar crime issues. Welcome.
MR. POLLOCK: Thank you, Mr. Chairman. Thank you for inviting me to testify on behalf of the National Association of Criminal Defense Lawyers on the important issues before the committee today.
NACDL is a professional Bar association founded in 1968. It has 12,500 direct members and 80 states, local and international affiliate organization with 35,000 members include private criminal defense lawyers, public defenders, active duty U.S. military defense counsel, law professors, and judges committed to preserving fairness within the American criminal justice system.
As this committee considers the various pieces of legislation before it, we ask it to consider the following.
There are presently over 4,000 defenses that carry criminal penalties in the United States Code. In addition, there are literally tens of thousands, if not hundreds of thousands, of regulations, federal regulations, that can be enforced criminally. The federal arsenal to stop and punish financial fraud in every permeation already exists. Federal criminal laws that can be used to address criminal conduct in the financial and housing markets include, among many others, mail fraud, wire fraud, major fraud, securities fraud, bank fraud, and conspiracy to defraud. Bearing these facts in mind, NACDL poses a knee jerk response to the present financial crisis of creating more and more duplicative federal criminal laws.
Mr. Chairman, while the National Association of Criminal Defense Lawyers appreciates this committee's efforts to make sure that our membership is fully and gainfully employed, as Ms. Glavin's comments have ably demonstrated, she already has the tools to do just that, and has been prosecuting vigorously, and meting out very stiff sentences to white collar criminal offenders. Federal criminal laws are rightly reserved for egregious, intentional wrongdoing that falls well outside the mainstream of ordinary business conduct.
If large members of honest business persons took advantage of an unregulated environment, and making risky and ill-advised but not illegal decisions, they should not now be treated as criminals.
For those who went beyond that, and engaged in intentional fraudulent conduct, there are ample criminal laws on the books already that will allow for them to be prosecuted as they should be. Accordingly, NACDL does not oppose the various measures to fund the hirings of additional prosecutors, FBI agents and other law enforcement personnel, many of whom have been pulled away to and prosecute national security cases, to investigate, and where appropriate, prosecute white collar criminal offenses.
However, congress must understand it cannot fund half of the equation. Current criminal forfeiture statutes allow for assets to be restrained from criminal defendants upon indictment. As a result, increasing numbers of defendants in white collar cases cannot pay for their own defense. The defense in this case is paid for by taxpayers. This happens either through public defenders offices or through court appointments under the criminal justice act. Federal public defender offices are already overburdened, and many lack the resources and the expertise to defend complex white collar criminal cases. If we are to expand such prosecutions, we must not only fund their investigation and prosecution, but we must also adequately fund the defense of these cases.
Accordingly, if additional funding is to be included in the new legislation, NACDL applauds the Financial Crime Resources Act as provision of funding, not just for the investigation and prosecution of these offenses, but also for the defense. Mr. Scott, I note the 50 million dollars the U.S. Attorney's office's, the 100 million dollars to do the FBI, and 20 million dollars to defense function. While we applaud the effort to fund the defense function, we believe that that more than seven to one disparity between two prosecutorial agencies alone is still out of balance.
As my time is limited, I would like to refer to my written statement with respect to NACDL's position regarding each of the various unnecessary measures presently contemplated to create new federal statutes, such as mortgage lending fraud, derivates fraud, and TARP fraud, to address conduct that can easily be prosecuted under existing law. I would like to speak, however, on what we believe is the proposed ill advised effort to expand the reach of the money laundering statute, and effectively reverse the recent Supreme Court decision in the Santos (ph) case. In that case, the Supreme Court helped to define that money laundering is confined to transactions in the proceeds of unlawful criminal activity, that is engaging in transactions involving illegal criminal profits. That decision is appropriate.
The proposed legislative change would frequently, as it would have in the Santos case itself, provide an enhanced penalty based solely on the underlying conduct that is already unlawful. In essence, it allows the very same conduct to be punished twice, first as the underlying crime, and then again, and more severely, as money laundering. Thank you again, Mr. Chairman, for allowing NACDL the opportunity to be heard on these very important issues.
REP. CONYERS: Attorney Marcia Madsen is with the Institute for Legal Reform, which is an affiliate of the United States Chamber of Commerce.
MS. MARCIA MADSEN: Good morning, Mr. Chairman, ranking members Smith, members of the committee. My name's Marcia Madsen. I'm a partner Mayer Brown (ph), and I'm here today representing the United States Chamber of Commerce and its Institutes for Legal Reform. I noticed you referred to me as a senior partner, Mr. Chairman. I have, ladies always wonder when someone uses that expression. But, since 1985 I've practiced in the area of public contracts and litigation. And among other things, have defended companies and individuals in connection with the False Claims Act, of which is the subject of my testimony today, and working in the public procurement area.
So, on behalf of the Chamber, I'm really here today to talk about HR 1788, the legislation that was introduced yesterday to amend the Civil False Claims Act. As an initial matter, I want to emphasize that the Chamber supports the Department of Justice and the Agency Inspector General in their efforts and roles to identify and eliminate fraud involving taxpayer funds. The Chamber recognizes that the False Claims Act is an important tool to fight fraud in federal contracts and federal programs. The 21.6 billion dollars recovered since 1986 evidences that the statute is working, particularly when it gets deployed by the government.
The Chamber believes very strongly that the proposed amendments to the statute, which largely are directed at encouraging -- (inaudible) -- plaintiffs to file and maintain meritless actions are unnecessary. Further, those amendments may actually disrupt the government's efforts to pursue fraud, waste and abuse in federal contracts and programs, and unjustly enrich plaintiffs who do not deserve to be rewarded. Since this committee last looked at the False Claims Act amendments last summer, there have been some pretty dramatic changes in the government investigative and oversight mechanisms and resources.
There are just a couple of points I'd like to summarize for my written testimony. The first is, I would like to draw in particular, the committee's attention to the new mandatory disclosure rule that became effective in December 2008, at the behest of the Department of Justice. This new regulation, which was described by the government itself as a sea change, requires federal contractors to disclose potential violations of the False Claims Act, certain criminal laws related to procurement and significant overpayment. While this rule was initially adopted as a amendment to the federal acquisition regulation, at which I'll undoubtedly refer to as the FAR here and confuse everyone, that amendment became applicable to other programs very quickly. It sort of, mandatory disclosure kinds of becomes the latest theme in government programs.
It was quickly picked up by the Implementing Guidance to the American Reinvestment and Recovery Act for grants and assistance agreements, and in the TARP regulation for financial agreements under the TARP as well as contracts. The point I want to emphasize to the committee today about this regulation, is that because the government's investigators have direct access to obtain information from contractors and grantees, there is really no need to enact changes to False Claims Act to further encourage relators. Just in summary, the rule has two main features; first, contractors with larger contracts are required to have a code of business ethics and conduct, a government approved internal control system, and that control system has to be designed to detect improper conduct.
The system is required to include timely mandatory disclosure whenever the contractor has credible evidence of a potential violation of the False Claims Act. Subcontractors also are required to have such a program and to make disclosures. And I heard the comments and the questions from the members of the committee today about concerns about subcontractors. They are covered by the rule. Importantly, contractors and subcontractors must provide full cooperation with government investigators, which includes providing access to employees with, who have information about the potential violation.
The second point I'd like to note, is that a contractor of any size is subject to debarment for a knowing failure to timely disclose credible evidence of a violation of the False Claims Act, and the designated criminal laws, or a significant overpayment. This obligation does not end until three years after final payment, and it requires a look back at the time of final payment, even if contract performance has long been completed. When you consider that only two percent of False Claims Act recovery come from non-intervened cases, it's pretty obvious, I think, that the government investigators access (ph) under the mandatory disclosure rule, is going to be a more effective means for determining whether there's a meritorious case or a violation at an earlier stage. And Mr. Chairman, you commented earlier, what's the best way to get at fraud?
And I submit to you that the mandatory disclosure rule is a better solution than using third party relators. I would like to comment just briefly, about some of the problems that arise in the legislation, really, in the proposed legislation as a result of the advent of the mandatory disclosure rule. The first relates to the public disclosure provision. With the change, changes to the amendment that's been proposed in this bill, a relator would actually be able to proceed with an action involving the same transaction or facts that have already been mandatorily disclosed. Just a couple of examples. Because of the exclusivity standard in the bill, a relator who has any additional information, no matter how small, would be able to proceed, because it would be new information. Also, the definition of public is not clear.
It's not clear with definition, whether a mandatory disclosure would qualify as an audit or an investigation sufficient to have the action dismissed.
So, unless this language is revised, it is possible that a relator would be able to obtain a recovery, even though the proper government authorities had the information, and were pursuing it. A similar problem exists with respect to this bill's 9-B provision, the relator is subject to a lower pleading standard, the relator will be allowed to proceed to obtain discovery and potentially to obtain a mandatory -- is able to obtain a recovery, even though the mandatory disclosure has already been made to the government, and the government already has the information.
We have the same concern about sharing information under civil investigative demands. The second point I just want to make very briefly, and it's made at length in my written testimony, is that the government is really in the last two months, has tremendous new assets and resources and capability to pursue fraud. The recovery act created the new accountability and transparency board, the ability to use the IG's powers and additional authority to compel documents. They can have hearings and can compel testimony.
It also authorized the Recovery Independent Advisory Panel, which also can take evidence and hold hearings. The recovery act added new powers for the IG's and the GAO to investigate and to subpoena testimony from recipients of recovery act fund. That's new authority for them. The recovery act contains a separate whistle blower provision, authorizing damages and a right of action in federal court. And it contains a lot of money for the Inspector General, over 220 million dollars for new (resources ?). The TARP also gets a special IG, extensive audit rights, extensive supervision by the GAO, and there's mandatory disclosure for TARP.
So, in sum, I would just like to note that there really is no need to give relators and their lawyers more tools to reduce (ph) fraud. When you think about the best way, the best way is the government steps in to get the information, and where is the value? I submit to the committee, the value for the government is to use its resources and the information rather than basically outsourcing that function to the relators. I'd be happy to respond to any questions.
REP. CONYERS: Jeb White, president of a couple of organizations that deal with the public interest in dedicating their attention to combating fraud through promotion of the False Claims Act and other provisions.
MR. JEB WHITE: Chairman Conyers, ranking members of the committee, thank you for inviting me to speak here today. I'm here on behalf of Taxpayers Against Fraud, to voice our strong support for this common sense law enforcement legislation, False Claims Act, Corrections Act of 2009. Since 1986, over 20 billion stolen dollars have been recovered under the False Claims Act, which includes over 12 billion dollars from qui tam whistleblowers suits. And it's now widely considered the government's primary fraud fighting weapon.
However, over the course of time, liability loopholes have been ripped into the act, and judge created procedural road blocks have emerged, greatly undermining the Justice Department's efforts, and permitting fraudsters to steal our tax dollars with impunity. Late last congressional term, you sought to correct these problems by passing this very legislation. Unfortunately, our time was short, and the bill ran out of time. However, with our country in the midst of an economic crisis, and nearly a trillion stimulus dollars now vulnerable to fraud, it's now more important than ever to fix the problems that are holding back the False Claims Act.
We fully support every provision of this bill, but I wanted to highlight four problems that this legislation can fix. Number one, the bill clarifies that the act protects government money dispersed by government contractors. This clarification is badly needed to ensure that the act remains fully effective in an era in which so many government functions are outsourced to government contractors. As we all know, we now rely largely on this outsourced government to award and oversee contracts, to disburse government funds, and to detect fraud in our government contracting system. However, after a recent Supreme Court decision, false claims committed to this outsourced government are now largely out of the reach of the False Claims Act.
In this decision, the court read the act to apply only to false claims that are potentially reviewable by quote, the government itself. This bill closes that loophole by focusing not on who actually inks the check, but on the nature of the funding. Number two, the bill attaches liability when someone wrongfully retains an overpayment of government funds. This finders-keepers scheme is perhaps, the most pervasive fraud attacking our American tax dollar. But the act remarkably, does not reach these funds. For example, the act currently does not apply when health care providers identify overpayments brought to them through mistaken billing, and then makes a deliberate decision to keep those funds.
This blatant dishonesty would run afoul of the criminal law, and as Ms. Madsen said, would run afoul of the mandatory disclosure rule, but it would not violate the Federal False Claims Act. Number three, the bill clarifies that a qui tam whistle blower with detailed knowledge of fraudulent scheme may proceed with his case even if he can't his hands on the actual invoices. This provision, which explicitly defines how federal rule, civil procedure 9-D applies to qui tam suits. It's needed to remove the judicial confusion that is currently undermining the country's fraud fighting efforts. The simple fact is, that our Justice Department needs whistleblowers to provide the inside information about fraudulent schemes.
They already have the invoices. They can access those through their files. They need the whistleblowers to point out fraudulent schemes. This is precisely why the Justice Department has repeatedly and consistently argued for the very standards codified in today's bill. Number four, the bill vests solely with the government the power to dismiss cases that are based on public allegations. The act's so called public disclosure bar is designed specifically to protect the government's interest from qui tam pleadings that merely copy public allegations of fraud.
Other provisions in the act are designed to protect the defendant's interests. But when it comes to the public disclosure bar, it's the government who should properly assess whether or not the whistleblower's pleadings are parasitic on what's out in the public domain. Yet time and time again, defendants have improperly filed these motions under this provision, and time and time again have delayed adjudication on the merits to wear down their opposition.
In many cases, in which the defendants have filed these motions, there is no government investigation involving the public disclosure. If the government was concerned about it, they would and can and do file motions to dismiss these cases. The opponents of this corrective legislation argue that the False Claims Act is working, quote, well enough. They argue that we don't need the inside information of fraud provided by whistleblowers. They argue that the country should somehow be satisfied for recovering a portion of its stolen fund.
They offer up the recent regulatory life preserver as somehow plugging the gaping liability loopholes imparting upon the fraud sliding vessel of the False Claims Act. The problem, of course, of course, is that the False Claims Act relies upon inside information to uncover fraud. I encourage you to recognize the realities of fraud, the realities of fraud prosecution, detection, and support this legislation to rectify the deficiencies of this act. For when it comes to fighting fraud, particularly in today's economic environment, it's not a matter of (our ?) settling for well enough. Thank you so much.
REP. CONYERS: Crime subcommittee chairman Bobby Scott.
REP. BOBBY SCOTT (D-VA): Thank you, Mr. Chairman. Mr. Pistole, could you remind me how many agents that you had on board during the Savings and Loan crisis?
MR. PISTOLE: Yes sir, congressman. We had approximately 1,000 FBI agents who were dedicated to the Savings and Loan crisis.
REP. SCOTT: And is this crisis significantly more complicated than the Savings and Loan crisis?
MR. PISTOLE: Absolutely.
REP. SCOTT: I don't know, the savings and loan crisis -- a lot of the crisis was caused by just the fluctuation in interest rates, where the long term rates just put a lot of banks out of business. And it wasn't the fraud and the schemes.
Are these cases, is more crime involved in these cases today than back then?
MR. PISTOLE: We believe so. And honestly, we are still assessing on a case by case basis, in terms of the dollar loses, is based on the suspicious activity reports that have been filed, and our ongoing investigations. Yes, the loses here appear to be much more significant than the S&L crisis.
REP. SCOTT: And you had a thousand then. How many do you have dedicated to the problem today?
MR. PISTOLE: We have approximately 250 FBI agents dedicated to the mortgage fraud issue.
REP. SCOTT: Okay. We've heard discussions of some of these loans and people looking the other way. If somebody packages up a bunch of worthless documents and passes them off as mortgages, (worthy ?) securities, where are the crimes?
MR. PISTOLE: Well, clearly they could be false statements that are made. There could be wire fraud, mail fraud, as you mentioned earlier, in the securitization of those, the packaging of those mortgages and other financial instruments. So, there's any number off fraud that may have been committed, depending on the actual facts of the investigation.
REP. SCOTT: Ms. Glavin, you indicated that there are hundreds of convictions. Can you give us an idea of the disposition of some of those cases, including the times and forfeitures that you were able to get?
MS. GLAVIN: There have been hundreds of convictions since, between 2004 up until now, for the many nation-wide sweeps that the Justice Department has been involved in, in mortgage fraud cases. I can get you some more specifics on the exact sentences, but what I can say is, during the hundreds (ph), people have been arrested, convicted and sentenced. People have gotten jail time. There is restitution that's required to be ordered by statute in those cases, and I would refer you also to some of the specific examples I gave in my testimony on some of the sentences and the fines.
REP. SCOTT: Forfeitures?
MS. GLAVIN: Forfeitures as well, yes.
REP. SCOTT: If billions and trillions of dollars have been lost in this mess, then trillions, billions and trillions have been made by somebody. Are we anywhere close to recovering a lot of what's been stolen?
MS. GLAVIN: I probably should separate out the two concepts. Millions of dollars can be lost, but speaking from the perspective of the criminal division, we can't necessarily go after that, unless it's related to a crime. So to the extent there's a crime involved, criminal division, U.S. Attorney's office will go after, prosecute it, and we will seek restitution and forfeiture to the extent we can. Separately, if there's not a crime, and money's lost, you can certainly look at that from the department's civil division and see what civil enforcement remedies are available as it meets the statute. But there is no question that the department will look, when appropriate, and seek restitution and forfeiture, and action, whether it be civil or criminal to retain lost funds (ph).
REP. SCOTT: Are you using RICO and conspiracy statutes?
MS. GLAVIN: I don't want to address the specifics of using the RICO conspiracy statutes unless, unless they're appropriate, and unless, I don't want to get out of, speak hypothetically. But we use what tools we have statutorily in fraud cases to go after these crimes.
REP. SCOTT: Do you know whether or not your forfeitures are more or less than the cost of the prosecutions?
MS. GLAVIN: I don't know that. I know, though, that each year, the forfeitures, in the last couple of years totaled hundreds of millions of dollars. I can't make an assessment based on what the cost would be of prosecuting comparisons of forfeitures.
REP. SCOTT: Iraqi contractor fraud, do we have a problem with jurisdiction?
MS. GLAVIN: We've been able to prosecute procurement fraud with respect to reconstruction in Iraq and Afghanistan. We have a procurement fraud task force that's focusing on that. And there have been dozens of convictions as a result of our efforts. So I know that we're able to have jurisdiction in a number of instances, and we've had successful prosecutions. As to the specifics of whether there have been problems encountered in jurisdiction, I'm happy to speak with my people about that, and get back to you. But I know we've had success in that area.
REP. CONYERS: Lamar Smith.
REP. LAMAR SMITH (R-TX): Thank you, Mr. Chairman. Mr. Chairman, my first question is to Mr. Pistole. This follows up just a little bit on the first question that Mr. Scott asked you about the number of agents. But I want to bring it current. Would you go into a little bit more detail about the FBI's agents to combat mortgage fraud? Number of agents assigned to mortgage fraud, number of task forces that exist to combat it as well. Maybe something about law, local and state law enforcement efforts, and then any other initiatives that the FBI is taking?
MR. PISTOLE: Gladly Congressman Smith. Thank you. Going from 2005, just to put it on context, we had about 720 mortgage fraud investigations. We now have over 2,000 investigations. In fiscal year 2007, we had about 120 agents working, and as you've heard, we've more than doubled that to over 250. We also have approximately 50 financial analysts, intelligence analysts, who help work, just from the FBI who work on this. And then there's an additional approximately 250 state and local and other federal agents and officers who work on the mortgage fraud matter.
So that's a broad brush on it. We also have people working securities fraud, and in corporate fraud. But in terms of the working groups and task forces, we have 18 regional mortgage task forces and 47 working groups. So the total is 65 regional task forces or working groups that address mortgage fraud. The other corporate securities fraud address things such as the Ponzi schemes, such as Madoff, and then other issues. But that's just a brief overview on mortgage fraud.
REP. SMITH: Thank you, Mr. Pistole. Ms. Glavin, if I could ask you in regard to federal criminal laws, whether there are any gaps or whether there are any changes that you'd like for us to make that would enhance the prosecution of mortgage fraud?
MS. GLAVIN: Yes, congressman. The department has already expressed its support for the bill, the Fraud Enforcement and Recovery Act, which just passed, came out of senate Judiciary committee. And it contains what we would call enhancements to some of our fraud statutes. Some of the enhancements in those statutes mirror a piece of legislation I know is in draft form here in the house, the Fight Fraud Act. Those enhancements would be that we would expand, we support expanding the definition of financial institutions in fraud crimes, such that they would include mortgage lending businesses.
That would make it easier for us to bring prosecutions. In addition, we would propose amending the major fraud statute, 18 USC 1031 to, it focuses on procurement fraud right now, and we would ask that it be amended such that it would include funds relating to TARP or economic stimulus. So those are some of the revisions that we'd support.
REP. SMITH: Those are good suggestions. Thank you, and I hope we take them under advisement as well. Ms. Madsen, let me direct my next and final question to you. And let me mention some statistics in regard to the False Claims Act, and ask you to respond. More than 90 percent of the amounts recovered in the false claims cases brought by private plaintiffs, had come from the 20 percent of the cases in which the federal government had intervened. That means that only 10 percent of recoveries have come from the 80 percent of the cases where the Justice Department has declined to pursue them. Could these numbers be evidence of the lack of merit to the majority of the False Claims Act cases brought by private plaintiffs?
MS. MADSEN: Congressman Smith, I think there's probably some truth in that statement. I don't know that it's an absolute truth.
REP. SMITH: I'm just looking at for a possibility here.
MS. MADSEN: Possibility is there. I think, I mean, we know that the --
REP. SMITH: Absolute truths are hard to find.
MS. MADSEN: Right, right. Especially, never mind. The Justice Department reviews qui tam complaints very carefully, investigates them, and makes very thoughtful decisions typically, about whether to intervene or not intervene. So I think you can, you can safely say that, when the Justice Department decides not to intervene, they've made a conclusion that the case isn't probably worth, it doesn't have the merit to be, worth their time.
REP. SMITH: And it seems that that's the case most of the time, is the point.
MS. MADSEN: The, my friend Mr. White here would say, but you know, in those additional cases the relator should be allowed to proceed, because there may be a nugget in there somewhere, and the Justice Department might get back in. And there might be a recovery. I think that the point here really is that, is that the most efficient, really, way to do this? Is that the right way to expend the funds, particularly now that we have this mandatory disclosure rule where the information is available to the government at an early stage to make its decisions about whether to proceed? Is that really the most efficient way to spend the money?
REP. SMITH: Thank you, Ms. Madsen. Yield back, Mr. Chairman.
REP. CONYES: Hank Johnson.
REP. HANK JOHNSON (D-GA): Thank you, Mr. Chairman.
Mr. Chairman. You know, we live in a country where most of us are proud of the system that we live under, and we make certain assumptions about our system. And on of the aspects of the criminal justice system is that, you know, it's an adversary system, both civilly and criminally that two sides -- you have a judge to rule on the law, you have a jury on occasion, or they have a right to a jury trial. And citizens or peers make the decisions on the substance of the allegations against you. In order for that adversary system to work, one of those parties should not have their hands tied behind their back.
And the other one is free and big and healthy and, you know, that it's predictable what's going to happen in that kind of a situation. And regardless of whether or not the accused is innocent or guilty, the fact is that justice in this country comes when there is a fair trial. And so I support all measures that get at criminal misconduct.
And also, you know, not to be left out of the consideration is the criminal defense bar. I know a lot of -- under these measures that are being proposed, they bulk up the prosecution's ability to get at various crime. But I see nothing that would actually assist the criminal defense bar in terms of having the resources to defend these cases for people who will need public defenders. Of course, there's a group of -- we certainly need to change our focus and concentrate more on the white collar -- I mean, the upper echelon of the fraudulent activity, while at the same time dealing with those who perhaps may not have the funds to have an attorney, so they need a public defender.
Ms. Glavin and Mr. Pistole, would you all support additional funding for the public defenders office thoroughly, as well as grants, federal grants to states to beef up their public defender programs?
MS. GLAVIN: I have not seen any type of proposed legislation on this, and I'm sure that the department would be happy to take a look at this. Certainly, the department agrees that in every case in which you have a vigorous prosecution, you're entitled to very competent defense counsel to defend against the prosecution. So I'm sure that the department would be happy to look at any proposal that you might have. I'm just not as familiar with what the funding levels are, so I can't speak to that.
MR. PISTOLE: Yes, congressman. Obviously, fundamental fairness and the rule of law assume that there is an adequate defense, and that's critically important to our system. Be glad to work, obviously, with the department and the committee to further explore that.
REP. JOHNSON: Okay. Mr. Pollack (sp) -- Pollack or Pollack?
MR. POLLACK: Pollack.
REP. JOHNSON: Pollack, I'm sorry. Can you comment on that specific issue as well?
MR. POLLACK: Yes, congressman. I think you've hit on a vitally important issue, and that is as we beef up the federal prosecution investigation of these cases, we equally have to beef up the defense function. It's the only way that you're going to make sure that innocent people are not convicted along with the guilty.
I talked with Congressman Scott about the vast disparity between the resources that are being allocated to the prosecution function and the defense function. I think that disparity has to be lessened. I'd also note that your point about public defenders is an apt one, and that line in terms of where the higher echelon is that can still afford the private bar versus the increasing numbers that are turning to public defenders keeps moving.
And that's largely a function of the forfeiture laws that allow, at the time that a person is charged, while they are still presumed innocent and have been found guilty of no wrongdoing, to have their assets restrained, and not available even for the use of their own defense, so that individuals who have had substantial resources, nonetheless are turning to the taxpayers to fund their defense. And as long as that continues to be true, it is all the more important there are public resources available to defend these cases, which are necessarily complex cases that require a lot of resources to defend.
REP. JOHNSON: Anyone else want to comment, if I may, Mr. Chairman? Okay, all right. Thank you all very much.
REP. CONYERS, JR.: Dan Lungren.
REP. LUNGREN (R-CA): Thank you very much, Mr. Chairman.
Ms. Madsen, thank you for your testimony. I appreciate the fact that you stated that chamber's position in supporting DOJ and the inspectors general, working to detect, investigate and prosecute fraud involving taxpayer funds.
However, as one of the sponsors of the False Claims Act amendment, I'm a little disappointed in the chamber's position here. And I'm trying to find out exactly what the position is because you said two things. They both may be true and compatible, or they may be neither or. You said, number one, I thought that the False Claims Act has not been effective, and you gave the numbers of the relatively small amount of recoveries. And then on the other hand, you said you don't support strengthening it.
So what I'm trying to find out is are you saying the chamber's position is you don't support an effective false claims act, or are you saying that you would support it if it were effective?
MS. MADSEN: Mr. Lungren, you may have misconstrued my testimony. The statistics that the Department of Justice publishes show that the -- in the cases in which the Department of Justice chooses to intervene, which is about 20 percent of the cases, are responsible for the lion share --
REP. LUNGREN: I understand that. I heard that. You said that. What I'd like to know is do you support strengthening the False Claims Act to make it effective, or do you believe it is inherently ineffective?
MS. MADSEN: We believe the False Claims Act is effective as it sits and does not need these changes.
REP. LUNGREN: So it's effective even though you've said that the results are paltered. I mean, that's what I can't quite understand. Again, I'm biased in favor of it. People should know that it was originally called Lincoln's Law. It wasn't just Abraham Lincoln signed it. He thought it was so important.
If you read the language of the original act, it says it is to reward to the informer who comes into court and betrays his co- conspirator, indicating that there was a specific purpose to try and attract individuals who had knowledge to come forward.
The second observation I have is that we've heard that the Department of Justice has a lot of work to do, has a lot of other things to do. Perhaps they can't get everything. And perhaps even if a smaller amount is gotten by these individual relaters, as opposed to the, um, as opposed to the Justice Department. The fact that they have recovery means that that money was falsely obtained by the people against whom it was directed.
The other question I would have is that in 1986, we revived this law under President Reagan. As a matter of fact, the Reagan administration at that time sent us letters talking about how it was necessary for us to strengthen it, and as I recall at that time, some business groups supported the strengthening of the act so that it could be utilized. I don't think you were there in '86. I happened to be here in '86. But do you know what the chamber's position was back in 1986 when we improved the law?
MS. MADSEN: You're correct that I was not here. But my recollection is that there were concerns about it. I think what's become visible, though, in the 22 years since this law's been effective.
REP. LUNGREN: I was a mere child when I was here. I just --
MS. MADSEN: Yeah, I would've been a mere child as well. When the statute's used by the Justice Department, and when the Justice Department gets involved in cases, the law is very effective. The question is, for those non-intervene cases, whether that really is the best use of a government's money for those very, very small numbers of recoveries. And the reason I mentioned the mandatory disclosure rule is because the way the rule operates is that the contractors and grantees, and the rule also applies to Medicare and Remediar, Medicare and Remediar have to disclose.
REP. LUNGREN: Right. No, I understand what you're saying. You are supportive of those new improvements on those laws. I guess the question would be whether we need a multiplicity of laws to go against the fraud that might be there. I would just say that 1986, the Business Executives for National Security, which is a group of executives basically in the quote, unquote, "military industrial complex," came forward testifying saying they supported our strengthening the law at that time because these are their words.
It is supportive of improved integrity that military contracting has built adds no new layers of bureaucracy, new regulations or new federal police policy. Instead, the bill takes a sensible approach of increasing penalties for wrongdoing, and rewarding those private individuals who take significant personal risk to bring such wrongdoing to light. And all I would say is I think that the testimony of that business organization, Business Executives for National Security, in 1986 is as valid today as it was then.
REP. BERMAN (D-CA): Would the gentleman yield, and I'd ask for unanimous consent for one additional minute?
REP. LUNGREN: Of course I'd be happy to yield to the gentleman. He's going to agree with me. (Laughter.)
REP. BERMAN: It's the only reason I asked. The gentleman who raises this issue, which I will pursue on my own time, of cases where the qui tam plaintiff brings the case. The Justice Department decides not to come in. But this bill has nothing to do with changing that particular issue. This is a bill that strengthens the law and deals with some unfortunate court decisions that apply whether it is a qui tam plaintiff without Justice Department intervention, or the Justice Department taking over the lead role in pursuing the case brought by the qui tam plaintiff.
In other words, the testimony regarding non-intervention by the Justice Department and the merits of those suits really has nothing to do with the bill that's now in front of us. That's the only point I wanted to make. The bill we're dealing with deals with the substantive law, not the issue of what happens to a case where the Justice Department decides not to intervene.
REP. LUNGREN: I thank the gentleman.
And before returning my time, I would just say, Mr. Chairman, this -- we went through a period of time in World War II where Secretary Biddle at that time thought that for some reason the approach that underlies the essence of the False Claims Act somehow interfered with the government opportunity to investigate, and the government's opportunity to contract for needed services. And that lead to the emasculation, essentially, of the law.
And it was, again, I just reiterate, during the Reagan administration that there was a reconsideration of the question of whether or not you could just rely on the Justice Department to utilize its resources in these circumstances, or we needed again to resurrect this law. And all I would say is that what we're attempting to do with our amendments is to correct some specific legal decisions that seem to call into question whether or not you can go after subcontractors for fraud. And we also facilitate the ease of which the plaintiff's case can be dismissed by the plaintiff, and the action of -- the interaction of the Justice Department and the original bringer of the action. So it really goes to the question of whether you're going to continue to have an effective False Claims Act.
And thank you very much, Mr. Chairman, for the time.
REP. CONYERS, JR.: Howard Berman.
REP. BERMAN: Thank you, Mr. Chairman.
And I just wanted to make a couple of comments, and then ask a couple of questions. It's already been mentioned that this bill has brought in $22 billion to the taxpayers of recoveries from fraudulent actors by people who've contracted with the government.
In recent months, we've taken extraordinary steps to revive our economy. We've used government funds to show our private entities, we've made a massive investment of taxpayer dollars to stimulate the economy. We can have a debate about the merits of any of those bills and policies, but the one thing we know is that in the context of all these different programs, there will be some bad actors who will try to defraud the government through these programs. And that makes it even more important that we, at this point, strengthen what has proven to be an enormously successful tool against fraud, so there's a particular logic to the timing of doing this now, given what we've done in terms of public investments and private sector, the use of contractors, these kinds of things.
I was amused to hear the opponent's primary argument against the bill, which seemed to be that the False Claims Act doesn't need any fixing because it worked well enough. Or as Ms. Madsen said, it is even more than sufficient. I don't agree with that conclusion. And by the way, I do have a vivid memory of 1986 because as young as I was, and the chamber had more than concerns about the bill. They were in outright opposition to the bill, and spent the next several years after the bill passed, the bill that was signed by President Reagan, trying to repeal or dilute a variety of its provisions. That was the camber's position at that time.
What we have here is several judicial decisions that have weakened key provisions of the False Claims Act, narrowed its application, misconstrued congressional intent, and I think in many cases, the clear language in the law in the legislative history, leaving entire categories of fraud outside the reach of the law. Mr. White has talked about a number of those issues in his testimony.
But I would like to ask Mr. White two questions. The first, the chamber asserts that only 2 percent of the recoveries under the False Claims Act have come from qui tam suits that the government declined to join. Putting aside that huge amount of the $22 billion comes from cases that because qui tam plaintiffs file them, the Justice Department had to go through a process, which in many cases caused them to join that lawsuit and doesn't speak to those monies.
But that two percent figure, it seems low to me. And does that accurately reflect the contributions of these cases? Give us some examples of why that number doesn't tell the whole story.
MR. WHITE: Mr. Berman, first off, I wanted to thank you for have the foresight back in 1986 to resurrect this law.
The second thing is, you know, during my tenure as a -- (inaudible) -- I've worked with a lot of good federal and state government attorneys who are zealous advocates of protecting the public fisc (ph). But I can assure you, and they would tell you firsthand, they need the help of whistleblowers to uncover what's going on inside of that company. Putting aside the mandatory disclosure rule where the company gives you what they say is going on, that inside information from whistleblowers is key.
To provide you one example of why that number isn't accurate and doesn't reflect truly what happens, in 1989, a case was filed by two Northrop-Grumman employees against the contractors involving radar-jamming devices. And what the employees were saying was that they were ripping off the government. They were defective, they were overbilling, there was a whole host of fraud that happened. The government looked at the case, and three years later decided to decline to intervene in that case.
The relaters and their counsel, convinced that there was something wrong going on, proceeded forward for the next nine years on their own investigating, spending hundreds of thousands of dollars investigating what was going on there. Finally, in 2002, 12 years after initially filing that case, the government intervened, and the case settled in 2006 for over $160 million.
That case, and the Department of Justice statistics has listed it as an intervened case. But I posit that for nine years the government wasn't there. It was because of the efforts of that relators counsel. So that two percent number doesn't reflect the billions, and the numbers well into the billions -- and I can give you a more accurate count -- of the times where the government declined, and the relators and their counsel moved forward, and the government subsequently intervened. Those cases happen time and time again to the tune of well over $1 billion.
REP. CONYERS: Bob Goodlatte.
REP. GOODLATTE (R-VA): Well, thank you, Mr. Chairman.
And I thank all these panelists for their contribution today.
I would like to start by asking a question of acting Assistant Attorney General Glavin. Welcome. You mentioned that the Department of Justice is working with the inspector general of the TARP to find ways to avoid fraud and abuse of the stimulus package fund. And I wondered if you could tell us in what ways you're acting together to accomplish this, and do you plan on harnessing technological tools, like tracking software, to track where the funds from TARP and the stimulus bill are going, and how they're being used?
I recently introduced legislation along with Congresswoman Maloney from New York that would require the use of software to aggregate all the government reports to get a full picture of how the recipients of the TARP money are using it. And I wonder if you're familiar with that technology, and if you're planning on deploying it?
MS. GLAVIN: I'm not as familiar with the technology you just mentioned. What I can say about the department's relationship with the TARP is that one, it's a natural relationship because the TARP is going to be doing investigations, and of course, the department would handle prosecutions or referrals. And we've already, you know, had discussions with the Office of the SIGTARP about anticipating that and about how to do it.
Secondly, I know there's coordination with the SIGTARP in terms that I know that that office has met a number of times with the FBI to sort of talk about coordinating and leveraging resources. You know, the SIGTARP has also formed a task force with a number of different investigative agencies to talk about how to share information, leverage resource, do the necessary training with a bill that includes a lot of sub-provisions to it, and can sometimes be complex, you know, to understand how the monies go out and what to look for in terms of fraud.
I know that the department also has had discussions with the SIGTARP, specifically about our experience with the False Claims Act and whistleblowers. SIGTARP has a hotline, and there would be a natural partnership there. So we have an ongoing dialogue with the SIGTARP, as well as we do with most of the inspector general's community.
REP. GOODLATTE: In your communication with them, would you look into this technology as well and have conversations with them about the possibility of utilizing it?
MS. GLAVIN: I'd be happy to follow up on that once I get a little more familiarity with it, sir.
REP. GOODLATTE: Great, thank you. And a follow-up question on a separate subject. What statute is the department using in bringing charges against those who engage in predatory lending, or mortgage companies that defrauded their customers?
MS. GLAVIN: The department uses its traditional statute, such as the mail-fraud, wire-fraud statute. The amendment to the major fraud statute, as well as the bank-fraud statute, that would expand the definition of financial institutions to include mortgage lending businesses, would give us another tool in which to prosecute people who defrauded mortgage lending businesses, such that we don't always have to look for mails and wires and see that they're further into the scheme.
One of the reason's that we support the amendments in the FERA legislation is because it would certainly make some of the crimes easier to explain and present in terms of our grand juries, and to juries.
REP. GOODLATTE: Thank you.
Mr. Pistole, it's my understanding the FBI has currently 18 regional mortgage fraud task forces, and I wonder if you could explain that to us. Why were these task forces set up on a regional basis like that?
MR. PISTOLE: Yes, congressman. The idea was to leverage the resources beyond the FBI with the other, both federal, state and local investigators, to approach the issue from a broader prospective. So in addition to those 18 task forces, we had 47 working groups. And we also have the national mortgage fraud team at headquarters to try to use intelligence, such as you're talking about with software, to drive those investigations rather than sitting back and waiting for referrals, whether it's from SIGTARP or somebody else. So we have members from other -- for example, HUD, or Federal Reserve, or state and local police perhaps receive referrals. Try to work in a unified way to bring a broader prospective, rather than just this specific, discreet area that would limit our information.
The whole idea is to push as much information as we can to our partners, obviously while protecting privacy and all those issues, but making sure that we have the best available information across the country. And we believe these regional task forces and working groups are the best way to accomplish that.
REP. GOODLATTE: Are you getting results?
MR. PISTOLE: We are. We've had a number of successful matters. You heard about one earlier in Chicago dealing with a recent takedown of an undercover operation where we had some very good successes, and that's all part of this effort to leverage our resources with other agencies.
REP. GOODLATTE: One more question if I might, Mr. Chairman, to Mr. Mintz.
MR. MINTZ: Thank you for asking. Frankly, no. And the reason is, as I said in my testimony, I think that there are so many multiple conduits from which people are hearing about help, and so many multiple conduits to which they would go to for help, that the ability of swindlers to step in and interpose themselves as part of the help is very difficult to stem on a local level. It's why I've suggested that this committee should consider using the 311 systems and the 211 systems across the country as the one tamper-proof, already trusted source to which people would be able to get information.
From a local prospective, when I step up in front of a camera and tell the public, "Be careful with X," you need to tell them where to go and where it's safe. And so if you all could leverage the resources and the regulations to make sure that, for example, only through 311's and 211's could you access HUD certified counselors, and adding a ban on the fee for service in this industry, you would effectively shift the tide, and people would be able to turn to the one number that they already know, the one number that nobody can pretend is them, and access those services without that. The truth is, it's a very complicated message, and it's much easier to be swayed by the swindling messages.
REP. GOODLATTE: Thank you.
And thank you for your forbearance, Mr. Chairman.
REP. CONYERS, JR.: Sheila Jackson Lee.
REP. JACKSON-LEE (D-TX): Mr. Chairman, thank you for holding this hearing, and it's both needed and maybe sad, a sad commentary on where we are with respect to the basic commitment to legal structures that will protect consumers.
We have seen an enormous amount of challenges to the system, and I would suggest to my good friend, who's representing the criminal defense lawyers, that it is not expanding as much as it is fixing and restructuring, because apparently, we have some glaring loopholes that large trucks have been able to go through, both in a metaphoric manor as well as literally.
And I go to you, Assistant Attorney General Glavin, on why we're where we are. Let me just propose to you the fact that we have seen AIG prosecution, at least for malfeasant. So we've seen it from a former hometown company of mine that had great respect previously, Enron. We've seen it from WorldCom, Adelphia. We've seen it from another native Texan, Stanford. We've seen these actions. We've seen a proliferation of major corporate -- (inaudible) -- cases. Then we've also seen over the years, as our good friend from -- (inaudible) -- has indicated, maybe increase in penalties. Can you tell us what we're doing wrong that we're still seemingly having the atmosphere that creates or seems to grow these failures?
MS. GLAVIN: Congresswoman, where there's a lot of money involved -- and this is an age-old problem. When money goes out the door, lots of money involved, greed's involved, it's not something that you could probably ever stop until the end of time. And what we do at the department is when we see problems form, such as we saw with big corporate fraud in the last ten years, we put something out there to address the problem, like the Corporate Fraud Task Force, do what we can to get in front of it and prosecute those crimes, educate prosecutors as to the new schemes that develop. We see it again: the Hurricane Katrina Fraud Task Force formed a few years ago. As soon as we recognized there'd be a big outlay of funds in connection with that, we knew there would be fraud.
REP. JACKSON-LEE: So you're saying that the climate generates bad behavior in many instances, sometimes. Let me just ask, give me one major new legal tool that you would want as part of the DOJ.
MS. BLAVIN: I have to pick one?
REP. JACKSON-LEE: Yes, one.
MS. GLAVIN: We support enforced, we support the passing of the Fraud Enforcement Recovery Act. So, I say that's one, even though it's got several legal tools in it. But at this time, we would support the passage of that, and it went through Senate Judiciary Committee.
REP. JACKSON-LEE: Right. Let me move quickly to Mr. Rheingold and ask the question, do you think we should add language in either through legislation, free standing bill and otherwise. There are some fine lines between how the CEO of corporations seems to merge undercover. We know that our good friend from Countrywide is still moving about and certainly has quite a bit of freedom here in the United States, but we're trying to craft language that suggests that malfeasance and inappropriate behavior bars you from ever doing business with the United States, whether you come back as a turtle, you come back as a dove, which is what many of the corporations do.
What do you think about that added enhancement, though, you know, barring doing business obviously means that if Countrywide, for example, had Freddie Mac and Fannie Mae loans and tragically so many people were hurt, that they just can't be in the business, no matter how they come back. What do you think about that?
MR. RHEINGOLD: I think fundamentally it's a good idea. I think one of the questions when we turn about all this money out there, we had all this money that wasn't being regulated. We had all of this money that was being pushed out there, and it was the wild, wild West. All sorts of bad behavior could go on because nobody was being responsible for it and nobody was being held accountable. So if you begin to hold the CEOs of these major companies accountable for the culture and the behavior of their companies, maybe that cost benefit analysis will work in the future, so that next time lots of money is out there and lots of money can be made, they might think twice about creating a corporate culture that engages in systematic fraud.
REP. JACKSON-LEE: And let me quickly ask you, and I'd like to ask the FBI director if he'd follow up on a question that I'm going to ask in terms of any tools that you need, and particularly on these whistle blower cases, which I think are very crucial. People need protection in the workplace. But again, Mr. Rheingold, if, for example, you suffer -- this is your consumer hat now, not necessarily your legal hat -- suffered in your credit score because you were victim to predatory lending, should you have an ability to seek an appeal or reprieve on a score that went down because of your victimizing through that predatory lending process?
MR. RHEINGOLD: Well, that's a whole other issue, but yes, there are significant issues around consumers' ability to fix their credit scores. Credit reporting and peoples' financial information is being ruined on a daily basis based on loans they should not have gotten, loans they didn't get, and in fact, one of the things that we need to do to improve the Fair Credit Reporting Act is people have more control over their financial information and correct errors in that. And right now, we have a fair credit reporting system that simply doesn't work properly to protect consumers.
REP. JACKSON-LEE: If you would conclude, I just need you to tell me about the tools that you may need on the whistle blower aspect. The FBI usually is investigating on the basis of whistle blower claims under some of the bills that have been here, but what do you need further to provide an enhancement, a protection of that process?
MR. PISTOLE: Well, I agree with Ms. Glavin's comments. Our issue is more simply the number of resources rather than legal tools other than what she's mentioned. So where the committee and the Congress can be most helpful to the FBI and others are the amount of resources to address this critical issue.
REP. JACKSON-LEE: And you investigate both federal employees and outside people who are whistle blowers?
MR. PISTOLE: Sure.
REP. JACKSON-LEE: Alright. I yield back. Thank you.
REP. CONYERS: Bill Delahunt.
REP. DELAHUNT: Thank you, Mr. Chairman. I want to pose a question.
I mean, the economic crisis that we are in the midst of, the cause, the cause, if you will, of that crisis is not necessarily fraud, but it's the lack of a regulatory scheme, as I think you suggested, it was the wild West. If we have the tools and the resources had been allocated, would it have prevented the economic or the financial crisis that we're experiencing?
MR. : I think the answer is absolutely yes. I thought --
REP. DELAHUNT: It would?
MR. : It absolutely would have. I talked about what we saw in the --
REP. DELAHUNT: -- Without having a regulatory regime that --
MR. : -- Oh, no, well, we need an, absolutely we need to have a restructured regulatory market where accountability is in place. What we saw in the 1990's in communities like Rochester (ph) and Jamaica Plain (sp) and Mattapan (sp), and communities in Chicago and Atlanta were the same fraud that now permeates the whole country. And we knew it was going to happen because there was no accountability and there was no regulatory structure that actually protected the consumer from the bad behavior of banks. And when states attempted to address those problems, most notably Georgia, the federal regulators not only stopped those consumer -- they not only did not support those consumer protections, but they preempted those consumer --
REP. DELAHUNT: -- Right. And I understand it, but I guess what I am saying is that, was there violations of a criminal statutory scheme that led to the crisis that we find ourselves in? Or is it lack of regulation?
MR. : I'm not a criminal attorney --
REP. DELAHUNT: Okay.
MR. : -- But I think that fraud permeated the mortgage lending industry for the last dozen years absolutely.
REP. DELAHUNT: But your understanding of fraud, and my understanding of fraud might very well be the same, but it might be a behavior that currently is not criminalized.
MR. : That could quite be possible. Again -- yes --
REP. DELAHUNT: Let me ask the acting, the assistant attorney general, Ms. Glavin, her opinion on that.
MS. GLAVIN: I can't -- I'm not in a position to say what caused the current economic crisis. What I do know is looking back in retrospect, we have now seen a lot of schemes such as Ponzi schemes that could have gone on otherwise undetected that were exposed because people wanted to get their money out, it wasn't there, and --
REP. DELAHUNT: The collapse itself --
MS. GLAVIN: Yeah.
REP. DELAHUNT: -- you know, revealed what was going on.
MS. GLAVIN: Yeah.
REP. DELAHUNT: But we don't know, or it's subject to debate. My own opinion is it did not precipitate the collapse. But the lack of regulation and the lack of transparency. And I'm not suggesting that we don't need more resources, and we don't need to review and provide more tools. If it comes down to tools or resources, and I'll direct this to the government witnesses, what's more important?
MR. PISTOLE: If I could start off with that, Congressman. Going back to your first part of your question, the issue is partially, from an audit standpoint, for example, you look at -- (inaudible) -- reviews, obviously.
REP. DELAHUNT: Right.
MR. PISTOLE: Some of the activity may have been fraud, often was fraud. Some may have been waste or abuse, which may not be -- rise to the level of criminal violation. Again, from our perspective, we're looking at resources because we are trying to do a lot of different things and trying to be proactive rather than just reactive -- (inaudible) -- additional resources to do that, so that's our, from the FBI's perspective, it's a resource issue as much it is legal regimen issue.
REP. DELAHUNT: Ms. Glavin?
MS. GLAVIN: They're both pretty important.
REP. DELAHUNT: Okay. You referenced the TARP and -- I think it was the Inspector General -- and yet what I found particularly disturbing recently was a comment by the chair of the Congressional Oversight Panel expressing frustration in the -- with the Treasury Department not providing answers to the -- to the oversight panel. You've seen, at least from what I'm hearing, you represent that you're working in a collaborative way with Treasury? And if so, what's your secret, that somehow you're doing a -- you seem to getting more cooperation than Congress?
MS. GLAVIN: Speaking as a -- from the criminal division as a criminal prosecutor, we're working with the SIGTARP --
REP. DELAHUNT: Give me -- what does that mean, that acronym?
MS. GLAVIN: What it mean, when it happens is what we do when we work with any Inspector General's office. We --
REP. DELAHUNT: -- So it's the Inspector General's office.
MS. GLAVIN: Yeah. When I refer the SIGTARP, I'm referring to Mr. Borofsky, Neil Borofsky --
REP. DELAHUNT: -- And his team?
MS. GLAVIN: Yes.
REP. DELAHUNT: And does he have the resources?
MS. GLAVIN: You're going to have to ask him a little bit more, but what I can say is that there have been -- I know he's had discussions with other investigative entities about how to leverage the resources. He has a certain amount of money in his budget. He wants to see if he's doing things that may perhaps overlap, or he can work with FBI on so that they can pull the resources.
REP. DELAHUNT: I would hope that you and the FBI would coordinate with the Inspector General and provide answers to the Congressional Oversight Panel when they are, you know, when they're proffered.
MR. PISTOLE: Right. We are, Congressman, and he is building his staff, I think he's up to 50 now from where he was a couple months ago when he had just a handful. We actually had a meeting with him and his staff in New York yesterday. We meet regular here. We have agents and analysts embedded with him to make sure that we can -- (inaudible) -- and use those resources in the best possible way. I'd defer to him on the response to the oversight.
REP. DELAHUNT: That's all I have, Mr. Chairman.
REP. CONYERS: Thank you.
REP. DELAHUNT: Thank the panel.
REP. CONYERS: I thank them too. This has been an extremely polite discussion about some matters that I don't think have been covered adequately. To be honest with you, the failures of the federal justice system are so enormous that to rationalize them with a few bills that will be taken up and everybody will agree with does not uncover the failure to anticipate. You know, we all have talked about, we know that when huge amounts of money go out, that there are going to be problems that follow it. But there is nothing in the Department of Justice annals that show that anybody did anything about what they already know that would happen. It's always after the fact.
And this hearing only sets a predicate for us to begin to try to get in front of the curve, and not come rushing in with these homilies about that we know people do wrong, we'll do wrong when the large amounts of money are flowing around. So if I don't feel happy about what I've heard, it's because it's correct. So I thank you very much, and the committee's adjourned.