President Obama Signs Landmark Anti-Fraud Bill Into Law

FERA Amends Criminal and Civil Statutes, Provides Increased Funding for Government Efforts to Combat Fraud

On May 20, 2009, President Obama signed into law the Fraud Enforcement and Recovery Act of 2009 (FERA).¹ The new statute, which aims to “improve enforcement” of laws prohibiting mortgage, financial institution, securities and other frauds related to “federal assistance and relief programs” and to facilitate the recovery of federal funds lost to those frauds, barreled through Congress with little dissent or debate.

Public attention to the bill has focused on provisions that reclassify mortgage lenders as financial institutions and expand federal criminal liability for mortgage fraud, securities fraud, and major fraud against the United States involving Troubled Asset Relief Program funds. Perhaps more significantly, however, FERA amends the civil False Claims Act (FCA) to greatly expand the statute’s reach while eliminating certain legal arguments that companies and organizations accused of FCA violations have used to defend against those claims.

Criminal Statutes Amended to Address Fraud and Misuse of Funds Related to the Economic Crisis

FERA amends the federal criminal code to include mortgage lending businesses in the definition of “financial institutions” and thereby make them subject to anti-fraud statutes.² Even mortgage lending businesses that are entirely privately funded are encompassed in the new definition; as President Obama noted in his remarks upon signing FERA, the bill “expands DOJ’s authority to prosecute fraud that takes place in many of the private institutions not covered under current federal bank fraud criminal statutes – institutions where more than half of all subprime mortgages came from as recently as four years ago.”³

FERA also expands criminal liability for major fraud against the United States. It specifically prohibits participating in a scheme with the intention of obtaining money through false or fraudulent representations or promises made “in any grant, contract, subcontract, subsidy, loan, guarantee, insurance, or other form of Federal assistance, including through the Troubled Asset Relief Program, an economic stimulus, recovery or rescue plan provided by the Government, or the Government’s purchase of any troubled asset as defined in the Emergency Economic Stabilization Act of 2008.”⁴

Other amendments to the criminal code add to the securities fraud statute and close certain loopholes in the forfeiture provisions of the anti-money laundering statute.⁵

Law Enforcement Agencies Receive an Additional $245 Million to Investigate and Prosecute Frauds Involving Federal Economic Assistance

FERA also includes substantial additional funding authorizations over the next two fiscal years (2010 and 2011) for the Department of Justice, the Postal Inspection Service, the Department of Housing and Urban Development, the Secret Service, and the Securities and Exchange Commission.⁶ A total of $245 million will be available to these enforcement agencies in order to investigate and pursue “criminal, civil, or administrative proceedings involving financial crimes and crimes against Federal assistance programs, including mortgage fraud, securities and commodities fraud, financial institution fraud, and other funds related to Federal assistance and relief programs.”⁷ The funds may also be used more generally to provide training, develop policing strategies, and establish information-sharing among federal, state and local agencies.

Amendments to the False Claims Act Significantly Increase Investigation and Enforcement Risks to Recipients of Federal Funds

FERA amends and expands the civil FCA⁸ in various ways that increase the risk of investigation and civil enforcement actions for recipients of federal funds, although it does not go so far as some of the proposed amendments to the FCA that were considered by Congress last year. Among other things, FERA makes the following changes to the FCA:

• It extends liability to persons who “shortchange” the government, i.e. who possess or control money or property used, or to be used, by the government and knowingly deliver less than the full amount, or who falsely certify receipt of property used, or to be used by the government. It also extends liability to persons who knowingly buy or receive as a pledge public property from a government employee who is not authorized to sell or pledge that property.⁹
• It eliminates the requirement that the false claim be presented to a representative of the United States government. It provides that false “claims” can include requests for payment or property that are made either to the federal government or to a contractor, grantee, or other recipient of federal funds. Subcontractors, subgrantees, and vendors are now explicitly covered by the Act. This revision allows for the “tracing” of federal funds through state and local government agency grants, as well as other public or even private entities, as long as the funding or some portion of it comes from the federal government and “is to be spent or used on the Government’s behalf or to advance a Government program or interest.” (emphasis added).¹⁰ The amendment also eliminates the former requirement that the false record or statement must have been used “to get” a false or fraudulent claim paid. Instead of such a direct connection between the false statement and payment of the claim, it requires only a looser connection, i.e. that the false record or statement was “material to” a false or fraudulent claim.¹¹
• It expands the definition of a prohibited “reverse false claim” to include all efforts to knowingly and improperly avoid or decrease the repayment of money or property to the government, with or without the use of a false record or statement.¹²
• It explicitly authorizes the Department of Justice to share information obtained through a civil investigative demand (pre-intervention investigative discovery)¹³ with a whistleblower, an administrative agency, and/or a state investigative agency for the purposes of advancing or pursuing an FCA matter (this can occur before the defendant is even aware that a lawsuit is pending against it).¹⁴
• It permits state and local authorities to receive pleadings and materials while a whistleblower case is under seal if the state or local government is named as a co-plaintiff with the United States.¹⁵
• It permits the government to add claims to a whistleblower action that would otherwise be barred by the applicable statute of limitations by providing that these additional claims shall be considered to have been filed as of the date of the initial qui tam lawsuit.¹⁶
• It extends anti-retaliation protections for whistleblowers to include contractors and agents.¹⁷

Contractors and grantees, or subcontractors and subgrantees, who receive, use, or administer federal dollars, have increased risk under FCA, particularly as it has been amended by FERA. Contractors can protect themselves by implementing pro-active, effective compliance policies and procedures to ensure that federal funds are appropriately used and distributed in accordance with the terms and conditions of the contracts, grants, and programs in which they participate. This is the best insurance against a FCA suit alleging that it “knowingly” or “recklessly” mishandled or misused federal funds.

Financial Crisis Inquiry Commission Established

The final section of FERA reflects a House of Representatives addition to the bill (which itself originated in the Senate) creating a Financial Crisis Inquiry Commission “to examine the causes, domestic and global, of the current financial and economic crisis in the United States.”¹⁸ The Commission is to be composed of ten “prominent United States citizens with national recognition and significant depth of experience” in fields such as banking, taxation, economics, or housing. The Commission will be responsible for examining the causes of the current financial crisis, including the specific roles that certain industries, regulations (or lack thereof) and practices played leading up to the crisis. The Commission is to present its analysis and conclusions in a report to the President and the Congress by December 15, 2010.

To discharge these duties, FERA authorizes the Commission to hold hearings, issue subpoenas for documents and testimony, to enter into contracts, and to obtain information from any other federal department or agency (including confidential matters). In addition, the Commission may refer to criminal enforcement authorities any person that it finds may have violated federal law in relation to the financial crisis.

Impact and Response

Because of the world-wide financial meltdown and the resulting recession, many companies that previously focused on commercial business opportunities have seen those business lines dry up. They have turned to the large, expansively funded federal recovery and TARP programs. Federal money is, or will be, flowing into those programs, but those seeking to get involved in, or expand their government business need to pay close attention to the extensive strings that are attached. Many new compliance, tracking and reporting obligations have been enacted to prevent and detect improper uses of the federal funds. Significant new criminal, civil FCA and administrative sanctions are available to the government.

As often happens with new government programs enacted to respond to a crisis, there is haste to get the money out the door, and controls are sometimes lacking in the early stages of the program. Later, in hindsight, different federal authorities, often with pressure from Congress, begin to examine how the funds were spent. Even companies that have made good faith efforts to do the right thing and help resolve the crisis often come under investigation for civil or criminal fraud.

The most effective way companies can protect against these risks is to establish internal policies and controls that will allow them to effectively and fully explain how the government’s funds were secured, accounted for, and used. Comprehensive compliance and ethics programs are now required of government contractors. Even companies with existing compliance and ethics programs should review their policies to insure that they incorporate legislative and regulatory changes affecting their business.

¹ This is the second in a series of client alerts outlining the significant expansion of legal, regulatory and reputational risk for entities and individuals that directly or indirectly receive federal government funding. The first alert in this series, “The Expansion of the Civil False Claims Act Under S. 386” – March 16, 2009 analyzed the False Claims Act amendments that were proposed in the original Senate version of FERA.

² FERA §§ 2(a) (amending 18 U.S.C. § 20); (b) (adding 18 U.S.C. § 27, “Mortgage Lending Business Defined”); (c) (amending 18 U.S.C. § 1014 to prohibit false statements in mortgage applications by mortgage brokers and agents of mortgage lending businesses).

³ Remarks by the President at the Signing of the Helping Families Save Their Homes Act and the Fraud Enforcement and Recovery Act, May 20, 2009.

⁴ FERA § 2(d) (amending 18 U.S.C. § 1031(a), which was previously limited to statements and promises made in the context of a federal government contract or subcontract).

⁵ See, e.g., id. §§ 2(e) (amending 18 U.S.C. § 1348, “Securities and Commodities Fraud”); (f) (amending 18 U.S.C. § 1956(c) to include definition of money-laundering proceeds).

⁶ Id. § 3(a)-(e) (delineating amounts appropriated to each department or agency).
 
⁷ Id. § 3(f) (providing loose guidance on appropriate uses for appropriated funds).

⁸ 31 U.S.C. § 3729 et seq.

⁹ FERA § 4(a)(1).

¹⁰ Id. § 4(a)(2).

¹¹ Id. § 4(a)(1).

¹² Id.

¹³ 31 U.S.C. § 3733 allows the Department of Justice to issue “civil investigative demands” for documents, responses to written interrogatories, oral testimony, or any combination of these forms of discovery, before commencing an FCA action.

¹⁴ FERA § 4(c).

¹⁵ Id. § 4(e).

¹⁶ Id. § 4(b).

¹⁷ Id. § 4(d).

¹⁸ Id. § 5(a).