Financial Institutions Face Increased Risk of FCA Liability

Related Practices

Related Industries

The Department of Justice (DOJ) recently announced a record breaking $4.9 billion in recoveries under the False Claims Act (FCA) for fiscal year 2012.  Unfortunately for financial institutions, this record-breaking year included an “unprecedented” $1.4 billion in recoveries from the financial industry.[1]  And it appears that this trend is here to stay.  As a result, financial institutions have begun to pay close attention to the FCA and how they can minimize future risks.

Banks and other financial institutions have only recently become a target for civil FCA actions.  In the past, the federal government typically has worked cooperatively with financial institutions to remedy regulatory non-compliances associated with the receipt of federal funding.  The collapse of the world’s financial markets, however, marked a change in the government’s approach.  Now, the DOJ is utilizing the FCA — with its treble damages and civil penalties provisions — to target financial institutions that have allegedly failed to comply with the regulatory requirements associated with federal programs such as the Troubled Asset Relief Program (TARP), the Capital Purchase Program (CPP), the American Recovery and Reinvestment Plan, and federal mortgage insurance programs. 

The FCA was not originally intended to compensate the government for regulatory violations, and it was certainly never imagined by its enactors as a vehicle for recovery against financial institutions.  Rather, the FCA was passed by Congress in 1863 at the urging of President Abraham Lincoln in response to corrupt defense contractors who provided the Union Army with faulty supplies during the Civil War.  The law included a qui tam provision that allowed private citizens, or “relators,” to bring FCA actions on behalf of the government.  In 1943, Congress, after determining that the statute had been abused by opportunistic relators, amended the statute to make it harder to maintain qui tam lawsuits.  As a result, qui tam actions and recoveries stalled for nearly 40 years.  In 1986, however, the FCA was revised significantly in response to the public’s concerns over anecdotes about $1,000 hammers, $600 toilet seats and other alleged abuses by defense contractors.  The amendments, which made it easier for relators to assert qui tam actions, led to a dramatic increase in FCA qui tam actions and recoveries. 

Although both the initial passage of the FCA and the subsequent 1986 amendments were motivated by the defense industry, those amendments coincided with a growing public concern regarding Medicare and Medicaid fraud and abuse.  Responding to that concern, the DOJ quickly targeted health care providers as favored targets for FCA lawsuits.  Health care fraud — now the largest source of FCA recoveries — accounts for more than $24 billion of the more than $35 billion recovered since the passage of the 1986 amendments.[2] 

Troubling parallels have emerged between the explosion of health care-related FCA litigation in the 1990s and the recent targeting of financial institutions by the DOJ, all of which indicate that financial institutions will be at risk for FCA exposure for years to come.  Just as increasing public concern regarding Medicare and Medicaid cost and abuse prompted a spike in health care-related FCA actions, the economic crisis of 2008 — and the subsequent scrutiny on banks — has given rise to a rapidly increasing volume of FCA lawsuits and recoveries against financial institutions.

As in the health care context, the liability of financial institutions under the FCA depends, in many cases, on the so-called “false certification” theory of liability.  Under this theory, courts have held that defendants, including financial institutions, certify compliance with all applicable laws and regulations simply by accepting federal dollars; as a result, the government and relators often bring FCA claims based merely on alleged regulatory violations.  The judiciary’s widespread acceptance (and expansion) of this theory has made it easier for the DOJ and relators to target industries — such as the finance and health care industries — that are subject to numerous (and often confusing) regulations. 

Recent amendments to the FCA have made it easier still for the government and qui tam relators to assert FCA claims against banks and other financial institutions.  On May 20, 2009, President Obama signed the Fraud Enforcement and Recovery Act (FERA), which contained several amendments to the FCA.  The FERA amendments expand the definition of a “claim,” for FCA purposes, to include requests for funds that will be used “on the government’s behalf or to advance a government program or interest.”[3]  It is no longer necessary that a defendant have the intent to induce an improper payment by the government for liability to attach.  The purpose of these amendments, according to the Senate Report accompanying the legislation, was “to protect from fraud the Federal assistance and relief funds expended in response to our current economic crisis.”[4]  

In addition to FCA amendments that are aimed directly at the recipients of TARP and stimulus finding, DOJ also announced in November 2009 the establishment of a Financial Fraud Enforcement Task Force to “hold accountable the individuals and corporations who contributed to the crisis as well as those who would claim illegal advantage through false claims for funds intended to stimulate economic recovery.”[5]  According to the DOJ press release, the “task force is the broadest coalition of law enforcement, investigative, and regulatory agencies ever assembled to combat fraud.”[6] 

From the DOJ’s standpoint, these efforts have been effective.  DOJ’s recovery of $1.4 billion under the FCA from financial institutions in 2012 appears to be less a culmination of these enforcement efforts than a harbinger of greater enforcement yet to come.  DOJ has requested a $55 million increase in funding for fiscal year 2013, for a total budget of more than $700 million, in order “to investigate and prosecute financial and mortgage crimes that have sorely hurt the American people and damaged their trust in the financial markets they expect to engage in fair play.”[7]

As a result of these recent measures, any bank or financial institution that has received TARP or stimulus money, or that participates in federally insured mortgage programs, should take immediate action to reduce their FCA exposure.  There are a number of affirmative steps institutions can take to prevent or mitigate liability under the FCA.  Compliance programs that are designed to ensure the accuracy of any certifications submitted to the government and anonymous hotlines for reporting potential non-compliances are both effective tools for reducing FCA liability.  And once indicators of an existing FCA lawsuit have emerged — frequently in the form of a government subpoena or an informal request for documents or employee interviews — it is essential to engage in an early and productive dialogue with the DOJ. 

[1]       http://www.justice.gov/opa/pr/2012/December/12-ag-1439.html

[2]       http://www.justice.gov/civil/docs_forms/C-FRAUDS_FCA_Statistics.pdf 

[3]       31 U.S.C. § 3729 (b)(2)(ii).

[4]       S. Rep. No. 110-10, at 4 (Mar. 23, 2009).

[5]       http://www.justice.gov/opa/pr/2012/December/12-ag-1439.html

[6]       Id.

[7]       Statement of Eric H. Holder Jr., Attorney General of the United States, Before the United States House of Representatives, Committee on Appropriations, February 28, 2012, available at http://www.justice.gov/ola/testimony/112-2/02-28-12-ag-holder-testimony.pdf.