The Fraud Enforcement and Recovery Act of 2009 ("FERA" or "the Act") was signed into law by President Obama May 20, 2009, and became effective on that date.1 The law was passed with the stated purpose of improving "enforcement of mortgage fraud, securities and commodities fraud, financial institution fraud, and other frauds related to federal assistance and relief programs, for the recovery of funds lost to these frauds, and for other purposes."
In short, FERA amends certain existing sections of the United States Criminal Code and the False Claims Act ("FCA"), authorizes additional funding to combat fraud, and establishes a "Financial Crisis Inquiry Commission." The Act expands definitions under current federal criminal laws to reach private mortgage brokers and funds received through the Troubled Asset Relief Program ("TARP"), and other economic stimulus recovery programs. In addition, FERA amends the FCA to expand liability and nullify the effect of recent Supreme Court precedent that imposed textual based limitations on the anti fraud statute. It also appropriates investigative funds, and commissions a new Financial Crisis Inquiry Commission with broad authority to examine the domestic and global causes of the current U.S. and global financial and economic crisis.
Amendments to the Federal Criminal Code
FERA amends several existing federal criminal statutes: 18 U.S.C. § 20, 18 U.S.C. § 1031(a), 18 U.S.C. § 1348, 18 U.S.C. § 1956(c), and 18 U.S.C. 1957(f). The practical effect of these revisions is to expand federal criminal law combating major fraud against the United States, securities fraud, and money laundering, and to apply the criminal laws to the conduct of mortgage lenders when making mortgage loans or distributing TARP assets.
Expansion of Definitions in the Federal Criminal Code
FERA broadens the definition of "financial institution" in the federal criminal code, 18 U.S.C. § 20, to include "any person or entity that makes in whole or in part a federally related mortgage loan as defined in section 3 of the Real Estate Settlement Procedures Act of 1974." The previous statutory definition did not cover mortgage lenders.
FERA also expands the federal criminal code's definition for "mortgage lending business," 18 U.S.C. § 27. A "mortgage lending business" is now defined as "an organization which finances or refinances any debt secured by an interest in real estate, including private mortgage companies and any subsidiaries of such organizations, and whose activities affecting interstate or foreign commerce."
Loan and credit applications generally; renewals and discounts; crop insurance
FERA also expands the reach of section 1014 of the criminal statutes, which currently makes it a federal crime to knowingly make any false statement or report, or willfully overvalue any land, property or security for the purpose of influencing a bank. The new Act expands the reach of the statute to include false statements in mortgage applications, by mortgage brokers and by agents for mortgage lending businesses.
Major fraud against the United States
FERA further broadens coverage of the federal criminal statute covering major fraud against the federal government, section 1031, to include "any grant, contract, subcontract, subsidy, loan, guarantee, insurance, or other form of Federal assistance, including through the Troubled Asset Relief Program, and 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 or 2008." The major fraud prohibition covers the knowing execution, or attempt to execute, "any scheme or artifice with the intent to defraud the United States, or to obtain money or property by means of false or fraudulent pretences, representations, or promises," in any federal procurement, the value of which is $1 million or more.
FERA broadens the definition of securities fraud to include fraud involving commodities, not just securities. Under the new Act, the criminal provision for securities fraud now covers fraudulent acts in connection with "any commodity for future delivery or any option on a commodity for future delivery," or "any person in connection with the purchase or sale of [...]" The federal prohibition concerning securities fraud, 18 U.S.C. § 1348, previously made it a crime to knowingly "execute, [or attempt] to execute, a scheme or artifice to defraud any person in connection with any security," or, "to obtain, by means of false or fraudulent pretenses, representations, or promises, any money or property in connection with the purchase or sale of any security."
Amendments to Criminal Statutes Involving Money Laundering
FERA enlarges the scope of crimes covered by the federal money laundering prohibition, 18 U.S.C. § 1956, which makes it a crime to "conduct or attempt to conduct . . . a financial transaction which . . . involves the proceeds of specified unlawful activity. . . . ," knowing that the property represents the proceeds of such unlawful activity. FERA adds subsection (c)(9) to § 1956 in order to broaden the definition of "proceeds" related to money laundering, to include "any property, derived from or obtained or retained, directly or indirectly, through some form of unlawful activity, including the gross receipts of such activity."
FERA also strikes the original language of 18 U.S.C. § 1957(f)(3) to incorporate the changes made to 18 U.S.C. § 1956. The provision then expands the crimes covered under the money laundering statute, to reach crimes in which property is derived through some form of unlawful activity, including the "gross receipts of such activity."
FERA reflects the "sense of Congress" that no prosecutions for offenses under sections 1956 and 1957 should be undertaken with the prosecution of any other offense without the prior approval of Justice Department officials. It also charges the United States Attorney General to report to the House and Senate Committees, within one year after the date of the Act, on the efforts of the Department of Justice to ensure the review and approval of prosecutions involving money laundering allegations. This does not substantially change current Justice Department policy.2
Increased Appropriations for Enforcement of Criminal Financial Statutes
Under FERA, Congress will now provide appropriations for the investigation of criminal, civil, and administrative violations, and proceedings involving financial crimes and crimes related to federal assistance programs. The Act calls for the appropriation of these additional amounts:
- Office of the United States Attorney General – $165 million for fiscal years 2010 and 2011, for investigations and prosecutions, and civil and administrative proceedings, involving federal assistance programs and financial institutions, including institutions to which the Act and amendments apply.
- United States Postal Inspection Service – $30 million for fiscal years 2010 and 2011, for investigations involving financial institutions, including institutions to which the Act and amendments apply.
- Office of the Inspector General for the Department of Housing and Urban Development – $30 million for fiscal years 2010 and 2011, for investigations involving federal assistance programs and financial institutions, including institutions to which the Act and amendments apply.
- United States Secret Service – $20 million for fiscal years 2010 and 2011, for investigations involving federal assistance programs and financial institutions, including institutions to which the Act and amendments apply.
- Securities and Exchange Commission – $20 million for fiscal years 2010 and 2011, for enforcement proceedings involving financial institutions, including institutions to which the Act and amendments apply.
Amendments to the False Claims Act
The centerpiece of FERA is its amendments to the FCA, 31 U.S.C. §§ 3729, et seq. FERA claims that its FCA amendments "reflect the original intent of the [False Claims] law." The FCA, first enacted by Congress to curtail fraud in the United States government's procurement for the Union Army during the Civil War, allows a private citizen to sue on behalf of the government, and share in a percentage of any recovery in a given case. The FCA provides for statutory penalties, attorneys' fees and costs, and penalties of up to three times the actual damages sustained by the government as a result of the alleged fraud. Its "bounty hunter" provision allows the individual plaintiff (referred to as the "qui tam relator") to recover up to a third of the damages recovered.3 In 2007, the latest year for which statistics are available, the Civil Division of the U.S. Department of Justice collected $2,011,093,367 under the FCA.
Government contractors will likely see the FERA amendments to the FCA as a broad expansion of the FCA's reach. The amendments remove the limitations that the Supreme Court imposed on FCA enforcement during its last term, Allison Engine Co., Inc. v. United States ex rel. Sanders, 128 S.Ct. 2123 (2008). In Allison Engine, the Supreme Court held that the alleged false statements had to cause (literally, "to get") the government's payment of the alleged false claim. In addition, other appellate courts had limited the FCA's reach by imposing stricter materiality requirements on the alleged false statement. The new Act eliminates many of the limitations that the Supreme Court and lower courts had imposed, as described below.
FERA replaces subsection (a) of the FCA, 31 U.S.C. § 3729, with language that increases the scope of liability under the Act. Liability under the FCA now reaches any person who:
Knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval
- Knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim
- Conspires to commit a violation of the Act
- Knowingly buys or receives as a pledge of an obligation or debt, public property from an officer or employee of the government, or a member of the Armed Forces, who lawfully may not sell or pledge property
- Knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the government
FERA also adds a new subsection (b) to § 3729 to redefine "knowing/knowingly" and "claim," and to add definitions of two terms previously not defined by the statute – "obligation" and "material." Under the new subsection (b), obligation is defined as "an established duty, whether or not fixed arising from an express or implied contractual, guarantor-guarantee, or licensor-licensee relationship, from a fee-based or similar relationship, from statute or regulation, or from the retention of any overpayment.
"Material" is now defined under the Act as "having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property [.]" In addition, materiality now extends to anyone who "knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government."
Together, the new operational language and the expanded definitions will largely undercut the Supreme Court's unanimous decision in Allison Engine Co., supra. In addition, those operative changes, specifically in § 3729(a)(1)(B), are effective as of June 7, 2008, the date on which the Supreme Court decided the Allison Engine case, making it clear that Congress intended to roll back the Supreme Court's limitations.
Congress also opted for the less strict materiality standard as had been evolving in the Circuit Courts of Appeal, as "having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property . . . . ," rather than one that would more fully restrict those instances where liability would attach.
The Act further expands conspiracy liability under the Act, as well as other provisions.4
False Claims Procedure
FERA inserts a new subsection 31 U.S.C. § 3731(c), concerning the procedure that the government may follow in civil actions brought by private persons pursuant to 31 U.S.C. § 3730(b). FERA provides that the government may proceed by filing its own complaint, or by amending the complaint of the private person who brought the action to "clarify or add detail to the claims in which the Government is intervening and to add any additional claims with respect to which the Government contends it is entitled relief." Any government pleading will relate back to the filing date of the complaint by the private party for statute of limitations purposes.
Civil Investigative Demands
Prior to the enactment of FERA, the FCA provided that the attorney general could not delegate the authority to issue civil investigative demands to defendants or would be defendants. FERA removes that prohibition; now, the attorney general may delegate the authority to issue civil investigative demands under subsection 31 U.S.C. § 3733(a), thus making it easier to carry out investigations under the Act.
FERA also adds a new paragraph to subsection (a) of § 3733, which permits the attorney general to share information with the qui tam relator, or private bounty hunter. The new language reads, "Any information obtained by the Attorney General or a designee of the Attorney General under this section may be shared with any qui tam relator if the Attorney General or designee determine it is necessary as part of any false claims act investigation."
FERA also adds a new term, § 3733(l)(8), to provide a definition for the term "official use." "Office use" is broadly defined as "any use that is consistent with the law, and the regulations and policies of the Department of Justice, including use in connection with internal Department of Justice memoranda and reports; communications between the Department of Justice and a Federal, State, or local government agency, or a contractor of a Federal, State, or local government agency, undertaken in furtherance of a Department of Justice investigation or prosecution of a case; interviews of any qui tam relator or other witness; oral examinations; depositions; preparation for and response to civil discovery requests; introduction into the record of a case or proceeding; applications, motions, memoranda and briefs submitted to a court or other tribunal; and communications with Government investigators, auditors, consultants and experts, the counsel of other parties, arbitrators and mediators, concerning an investigation, case or proceeding.''
Retaliation Prohibition Expanded
Under FERA, the prohibition against retaliation by an employer against an employee who reports fraud under the Act is expanded to include a "contractor, or agent." 31 U.S.C. § 3730.
False Claims Jurisdiction
FERA adds a new subsection (c) to § 3732 to provide that the complaint, any other pleadings, or the written disclosure of material evidence and information may be served on any State or local government named as a co-plaintiff, even if the court has placed a seal on the action under Section 3730(b).
Establishment of the Financial Crisis Inquiry Commission
FERA also calls for the establishment of the Financial Crisis Inquiry Commission (the "Commission"). Under the Act, the Commission is required, within 18 months from the date of the Act, to examine, and report to Congress, the specific causes of the current financial and economic crisis in the United States, including the role that identified topics played in the current crisis. These topics include: accounting practices, fraud and abuse in the financial sector, tax treatment of financial products, credit ratings agencies, lending practices and securitization, corporate governance, compensation structures, credit default swaps and other derivatives, short-selling, and the quality of due diligence undertaken by financial institutions.
Two members of the Commission shall be appointed by the minority leader of the Senate, and two members shall be appointed by the minority leader of the House of Representatives. No member shall be a member of Congress or an officer or employee of the federal government.
The Act further grants the Commission subpoena power and provides for broad investigative authority, including the ability to refer any evidence of criminal activity to the U.S. attorney general and state attorneys general.
FERA creates new liabilities and eliminates many previously available defenses. These changes will undoubtedly impact any entity that pays money to the government or receives federal funds. Thus, it is imperative that all such entities consider updating internal policies and procedures related to the receipt and disbursement of federal funds.