2014 was a banner year for the Justice Department’s enforcement of the False Claims Act, with more civil fines and damages than ever before—but it’s not the penalty amount that should have companies on edge; it’s the growing list of industries in the federal government’s crosshairs.

The FCA, one of the government’s most powerful weapons against fraud, prohibits companies from overcharging or otherwise defrauding the U.S. federal government. In 2014, the Justice Department recovered $5.7 billion in settlements and judgments involving fraud against the federal government, the largest one-year haul in FCA history.

For the first time, however, enforcement in the financial services sector drove those eye-popping penalty amounts—not the healthcare or defense sectors, which have long been the primary targets of FCA enforcement because of their heavy dependence on federal dollars. No longer.

“The government is casting an extraordinarily wide net under the False Claims Act,” says Craig Margolis, a lawyer with law firm Vinson & Elkins. “Virtually any industry that does business with the federal government is affected.”

Justice Department fraud statistics show that most of 2014’s recoveries, $3.1 billion of the $5.7 billion total, came from four major banks for making false claims related to the origination, underwriting, or the sale of federally insured mortgages in the wake of the housing and mortgage crisis.

$1.85 billion came from a settlement Bank of America struck with the Justice Department last August for misrepresenting the quality of loans that the bank sold to Fannie Mae and Freddie Mac, as well as loans insured by the Federal Housing Administration (FHA). The three other notable FCA settlements were $614 million paid by JP Morgan Chase; $428 million paid by SunTrust Mortgage; and $200 million paid by U.S. Bank.

The scope of FCA enforcement doesn’t apply to just big banks. “Any financial institution that participates in a government program is susceptible to claims that they violated the FCA,” says Michelle Rogers, a partner with law firm Buckley Sanders.

The Justice Department has said it will continue to bring FCA cases in tandem with the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), an old and rarely used law enacted after the savings-and-loan crisis of the 1980s.

FIRREA empowers federal prosecutors to seek civil penalties for a wide range of offenses—mail and wire fraud, bank fraud, and false statements made to the government—that specifically affect federally insured financial institutions. Civil claims brought under the law only have to meet the preponderance-of-evidence standard, rather than the much higher beyond-a-reasonable-doubt threshold that criminal cases require.

“Virtually any industry that does business with the federal government is affected.”
Craig Margolis, Lawyer, Vinson & Elkins

More aggressive and expansive enforcement means higher litigation risks, which means in turn more importance placed upon compliance with the FCA and FIRREA in the first place, rather than leaving the legal department to worry about liability. “I see that expanding much more broadly to include compliance professionals given the current enforcement environment,” says Rogers. 

The good news is that first principles of FCA compliance aren’t terribly different than anything else compliance officers have handled over the years. Begin by understanding the regulatory expectations of federally insured programs. Communicate those requirements to all lines of business working on those programs.

“If something is going to go wrong on the False Claims Act side, it’s usually going to be in the execution by the business of satisfying their FHA obligations,” Rogers says. Training those employees on regulatory requirements “empowers them to be the first line of defense.” This, then, allows compliance to act as the second line of defense, and validate that the business is appropriately meeting those expectations, she says.

Then come the next principles, such as monitoring regulatory change and communicating them to the proper employees. Policies and procedures should provide concrete, specific guidance on what is required and how to satisfy those requirements.


This excerpt from the Department of Justice details overall False Claims Act recoveries from housing and mortgage fraud in 2014:
The $3.1 billion in federal funds recovered in the wake of the housing and mortgage crisis this past fiscal year includes $1.85 billion from Bank of America Corporation, $614 million from JPMorgan Chase, $428 million from SunTrust Mortgage Inc. and $200 million from U.S. Bank.  This brings recoveries for civil fraud and false claims against federal housing and mortgage programs from January 2009 through the end of fiscal year 2014 to $4.65 billion—an historic and important amount, especially as it restores scarce funds stolen from vital government programs. 
Bank of America paid $1.85 billion to settle allegations of false claims in connection with the bank’s practices in underwriting, origination and quality control of residential mortgages the bank sold to Fannie Mae and Freddie Mac, as well as loans insured by the Federal Housing Administration (FHA).  The settlement also covered the bank’s alleged submission of inflated insurance claims to the FHA.  Bank of America acknowledged that it had misrepresented the quality of loans to Fannie Mae, Freddie Mac and the FHA.  The $1.85 billion paid by Bank of America to settle False Claims Act allegations was part of a broader settlement that included a $5 billion penalty under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and $7 billion in relief to consumers harmed by the financial crisis to redress abuses in residential mortgage backed security practices.  In total, Bank of America agreed to pay $16.65 billion under the global resolution—the largest civil settlement with a single entity in the department’s history. 
SunTrust paid $418 million to settle allegations of false claims in connection with mortgages insured by the FHA.  SunTrust admitted that from 2006 to 2012, it originated and underwrote FHA-insured mortgages that did not qualify for federal insurance under the FHA program, failed to institute an effective quality control program to identify noncompliant loans and failed to report the noncompliant loans it did identify to the FHA as required.  In addition to the $418 million restored to the federal treasury, SunTrust agreed to pay $500 million in relief to struggling homeowners by various means, including reducing the principal on mortgages for borrowers who are at risk of default and reducing interest rates for homeowners who are current but underwater on their mortgages.  SunTrust also agreed to pay $10 million to the federal government and an additional $40 million to state governments to remedy the effects of its improper loan servicing practices.  This brings SunTrust’s total payment under the settlement to redress its abusive mortgage origination and servicing practices to $968 million. 
Source: Department of Justice.

The compliance department should also be informed of any audit reports the business may have received, and further needs to know what’s in that audit report, “Because that informs not only their compliance review moving forward, but also where there may be material weaknesses,” Rogers says.

Who’s Next?

Enforcement of the FCA historically has been dominated by the defense, healthcare, and life sciences industries; That’s expected to continue. Healthcare fraud accounted for $2.3 billion in FCA recoveries in 2014, with a substantial portion coming from the pharmaceutical industry. The bulk of that amount came from Johnson & Johnson and its subsidiaries, Janssen Pharmaceuticals and Scios. They paid $1.1 billion to resolve FCA claims relating to the prescription drugs Risperdal, Invega, and Natrecor. According to the allegations, J&J promoted the drugs for uses not approved as safe and effective by the Food and Drug Administration.

Other industries, however, could see an uptick in FCA enforcement activity. “The government’s use of the False Claims Act has always followed a consistent mantra: Follow the money,” says Robert Blume, a partner with law firm Gibson, Dunn & Crutcher. “Whatever industry in any given year has received, or touches upon, the most federal funds is where the government’s interests are going to be.”

One plausible new target for FCA enforcement could be the extractives industry. Several oil and gas companies are facing investigations for underpayment of royalties to the government related to oil and gas exploration on tribal or federal lands; the allegations are that they underestimated the value of oil and gas to lower their royalty payments.

Other companies potentially in violation of the FCA are those that treat a government customer the same as a commercial customer, without fully understanding the issues posed by doing business with the federal government, Margolis says. “Any number of different, arcane, and complex rules can apply to a company that does business with the federal government,” he says.

Many cloud IT service providers, in particular, are “government contractors that don’t realize they’re government contractors,” Margolis says. “Nobody would think of a company like Amazon as a government contractor, but it is, insofar as it’s providing services to the government.”

Overall, however, the biggest threat to companies continues to lurk from within. According to Justice Department statistics, more than half of 2014’s total damages came from cases first filed as whistleblower lawsuits; the Justice Department only climbed aboard the bandwagon later. In total, whistleblowers collected $435 million in rewards in 2014.

During remarks made on financial fraud prosecutions at NYU School of Law in September, Attorney General Eric Holder suggested that whistleblower rewards under FIRREA, currently capped at $1.6 million, should be raised to equal the much higher FCA levels (up to 30 percent of total damages recovered).

“This could significantly improve the Justice Department’s ability to gather evidence of wrongdoing while complex financial crimes are still in progress, making it easier to complete investigations and to stop misconduct before it becomes so widespread that it foments the next crisis,” Holder said.