After bureaucratic maneuver, criminal division special funding climbed

Part two of a three-part series. View part one here

In January 2011, Assistant Attorney General Lanny Breuer went to Capitol Hill to plead for more Criminal Division funding. He portrayed the need as just. 

“The amount of taxpayer money restored to the United States Treasury through our criminal enforcement efforts far exceeds – far exceeds – what we spend to recover that money,” Breuer told a Senate Judiciary Committee hearing.

The committee responded with the bipartisan Fighting Fraud to Protect Taxpayers Act of 2011. Among the provisions intended to boost enforcement in the wake of the 2008 financial crisis was an amendment to an obscure statute dating to 1994 that let the Justice Department skim 3% from all “civil debts” it collected. That early law, later amended in 2002, gave the DOJ authority to use the 3% skim to fund more civil and criminal debt collection efforts and related activities – without defining further what Congress meant.

The bill, introduced in May 2011, would have allowed the DOJ to take an extra 0.5% cut from the corporate civil fines owed in connection with DOJ enforcement actions for use specifically in fraud investigations. But with this proposed expansion of the so-called Three Percent Fund came one caveat: The new source of funding could not be used to pursue Foreign Corrupt Practices Act cases.

The proposed restriction was a minor lobbying victory for the big multinational companies that were increasingly the target of the Criminal Division fraud section’s vigorous enforcement of the foreign bribery statute – and whose push-back against FCPA enforcement was being led by the US Chamber of Commerce. 

Ultimately the fighting fraud bill died a quiet death, victim of a lack of “political necessity”, said a former congressional aide familiar with its drafting. Yet the idea of using Three Percent Fund money for fraud investigations lived on at the DOJ – even for foreign bribery probes.

Early frustrations

The fund – even before it began to swell from record mortgage fraud fines – was an important supplement to the Justice Department’s enforcement efforts. The $4.6 billion in eligible penalties collected in the 2009 financial year contributed almost $140 million to the fund, though not all of that was immediately allocated.

But the Criminal Division wasn’t receiving much of this windfall. In part, that’s because before 2010, it was contributing little to the fund – and receiving relatively little in return. 

In the 2009 fiscal year, for example, corporate settlements handled by the Criminal Division generated only about $480,000 for the Three Percent Fund, DOJ records obtained by GIR Just Anti-Corruption through a Freedom of Information Act request show. At the end of fiscal 2009, the Criminal Division was given a few million dollars from the fund to spend the following year. 

By law, the money going into the fund had to come from civil matters. And by definition, the criminal division wasn’t in the business of generating civil resolutions. 

As a result, bureaucrats from the Justice Management Division at the DOJ weren’t inclined to dole out Three Percent Fund money to the Criminal Division. These bean-counters, through their membership on the Collection Resources Allocation Board – an accounting body known internally as “the CRAB” – were keen that allocated funds be used to help secure a “return on investment”.

In other words, Three Percent Fund money was being allocated in part based on whether a DOJ applicant was pursuing cases that would generate more money for the fund. 

“Please include an analysis of how your efforts will generate a return on investment that will maintain the solvency of the fund,” the CRAB wrote in an August 2008 memo sent to eligible DOJ divisions and US attorneys’ offices. Language about maintaining the solvency of the fund remained consistent throughout the years, although the specific phrase ‘return on investment’ eventually was dropped from the memos. 

The situation frustrated leaders of the Criminal Division’s fraud section, according to former senior department officials who asked not to be named in order to speak candidly about internal department deliberations. 

“There was a feeling that the JMD [Justice Management Division] was making it too difficult to get to the money,” said one former senior fraud section official, who explained the JMD seemed more concerned with building a cash reserve – a view repeated by others interviewed for this article. 

Prosecutors at the time felt stretched for resources trying to manage expensive, complex international cases. “We were fairly down to the bare bones,” said the ex-prosecutor. ‘We were trying to get more resources and tools to grow the FCPA unit.”

The Criminal Division’s fortunes, however, soon began to change. 

The division in the 2010 calendar year had collected a record $2 billion in criminal penalties – 10 times its $200 million budget. Foreign bribery resolutions contributed more than half that amount.

A larger portion went into the Three Percent Fund than previous years. A handful of Criminal Division corporate settlements contributed around $9.5 million to the fund – mostly from one particularly large FCPA resolution with Snamprogetti Netherlands. 

For the following year the Criminal Division received $6 million for mostly fraud section-related expenses. Separately, it was also given $6 million specifically for investigating the Deepwater Horizon oil spill – an exceptional case involving a high-profile environmental disaster and various DOJ components.

But the Criminal Division wanted more.

In August 2011, it filed a special mid-year request for $9.2 million in supplemental funds, which the CRAB rejected, the FOIA records show. In December 2011, the CRAB lopped off $6 million from a $16 million request. “This amount is based on estimates to the CRAB of cases that have potential to furnish deposits to the Three Percent Fund during this fiscal year,” CRAB officials told the Criminal Division.

Prosecutors change tack

The Criminal Division’s fraud section found a solution.

In December 2011 it began reclassifying most of its deferred prosecution (DPA) and non-prosecution agreements (NPAs) as civil, rather than criminal, matters – at least for purposes of generating contributions to the Three Percent Fund, an analysis by GIR Just Anti-Corruption shows.

“Our fines were not being properly accounted for as 3% eligible,” said Kathleen Hamann, an FCPA unit prosecutor at the time. And so the Criminal Division made sure fines were sent to the fund every time they were eligible.

For public consumption, though, many of the Criminal Division press releases still referred to those DPA and NPA fines as “criminal” penalties.

“It was really a paperwork exercise,” Hamann said in a phone interview. “Once we were properly accounting for our settlements, we were in a better position to be successful in getting more support from the fund.”

But while contributing to the fund helped a division get money back from it, there were no guarantees of funding, as any request had to meet other criteria, Hamann added. 

She stressed there was “not a quid pro quo” – a sentiment repeated by 14 other former and current DOJ officials interviewed for this article, who also said the fund never affected charging decisions. A spokesman for the Criminal Division, Wyn Hornbuckle, said allocations on funds are not based “on how much funding may be returned to the three percent fund.”

Neither Breuer nor the DOJ’s criminal fraud section chief at the time, Denis McInerney, responded to emails seeking comment.

No one appears to have challenged the Criminal Division’s interpretation of the Three Percent Fund statute. Congress did not act to stop it despite being aware of it (in 2011 Breuer told then Sen. Jeff Sessions that 3% was sometimes taken from FCPA cases, according to a congressional document, and reinvested in FCPA cases), while the CRAB bureaucrats accepted the fraud section’s representations that the DPA and NPA fines it was collecting were civil.

Another DOJ component looked at the money it was returning to the Treasury through NPAs and reached the opposite conclusion. Between March 2015 and January 2016, the Tax Division had collected $1.36 billion through its Swiss Bank Program, which allowed financial institutions that admitted helping Americans evade taxes to resolve their criminal liability.

A former Tax Division official said the decision to forgo taking 3% from those NPAs was made after careful analysis. A key question, the ex-official said, was whether the fine imposed as part of the settlement was punitive. The Swiss Bank Program penalties were therefore considered criminal and not eligible to contribute to the fund.

Brandon Garrett, a professor at the University of Virginia School of Law who has been tracking the DOJ’s use of DPAs and NPAs for years, said whether such settlements are eligible for the Three Percent Fund is a “grey area”. But he added: “The DOJ isn’t wrong to refer to these criminal penalties as civil debts; often they are hybrids between civil and criminal resolutions.”

David Vladek, a former Democratic appointed director of the Federal Trade Commission familiar with funding mechanisms similar to the Three Percent Fund, said authorities have to contend with ambiguities all the time. 

“This is the type of thing the department would talk to Congress about. Ultimately, it’s real money,” he said in an telephone interview. “Congress oversees this and they get to make the call. It’s hard for me to believe that they haven’t gone to Congress to check with them first. A lot of the time Congress is not as explicit as you might expect.”

Current department officials, who asked to remain anonymous, said the Criminal Division had been taking 3% from DPAs and NPAs for many years prior to 2011. The records obtained through FOIA, however, indicate that practice was infrequent before 2011. The current department officials also said that different divisions may have developed different practices in this area.

Criminal Division funding climbs

Between January 2008 and November 2011, around 20% of DPAs and NPAs handled by the Criminal Division contributed to the fund. 

From December 2011 until June 2016 – when FOIA records end – 80% of such settlements were skimmed off for the fund. Those 20% that weren’t skimmed either involved guilty pleas – making them unquestionably a criminal fine – or other penalty types, such as forfeiture, that were not eligible to contribute to the Three Percent Fund.

Once the Criminal Division began regularly classifying DPAs and NPAs as civil penalties eligible for the Three Percent Fund, its contributions to the fund increased substantially. During the 2013 fiscal year, Criminal Division cases yielded over $23.5 million; for 2014, over $18 million; and for 2015, almost $22.5 million.

The Criminal Division took cuts from Libor settlements worth hundreds of millions of dollars with the likes of Deutsche Bank, Rabobank and UBS, as well as some of the largest-ever foreign bribery resolutions, including VimpelCom, Total and Weatherford International.

However, some of the Criminal Division’s biggest settlements didn’t contribute to the fund, most notably BNP Paribas’s $8.9 billion resolution over sanctions violations, and Alstom’s $772 million deal with the DOJ over FCPA violations. Both of those cases involved guilty pleas.

The Criminal Division soon began securing more money from the fund. For the 2013 fiscal year, it received $15 million, of which $2.44 million was spent on 15 new hires for the FCPA and securities and financial fraud units, records show. The CRAB originally refused the request for FCPA and securities fraud unit money but changed its mind mid-way through 2013. 

The approval to fund prosecuting positions was an important victory for the fraud section, which previously had been using the money only to cover expenses such as travel. The CRAB was reluctant to approve cash for staff because the funds were unstable. It meant anyone hired with Three Percent Fund money could not come on as a permanent government employee. 

“Later on, when we were more systematically accounting for our settlements, the requests were part of a broader plan – more about getting personnel, and prosecutors at the lower level weren’t really involved in those decisions,” said Hamann. “You couldn't get people on full-time employment with the 3% fund so people came on contracts or on detail."

For the 2014 fiscal year, the Criminal Division’s allocation from the fund rose by a few million dollars from 2013. Then in 2015 and 2016, the division’s funding rocketed, receiving around $40 million each year to invest in white-collar crime investigations and related expenses – a more than 20% top-up to its annual budget (the division received around $180 million in 2016 from Congress).

Just a few years earlier, in 2010, the Criminal Division had only been given around $2.4 million in Three Percent funds. In the space of a five years, it had secured a 16-fold increase in extra cash from the fund.

The 2015 and 2016 cash hike, however, would not just have come from increased contributions by the Criminal Division – other factors played a significant role. 

The huge increase can be explained in part by the 3% collections taken from several multi-billion dollar civil bank fines collected in 2014 and 2015, which led to the fund trebling in size.

Congress had also previously signalled to the DOJ that it didn’t like the idea of the department building a cash reserve for use on priorities outside the supervision of elected officials. In the fighting fraud bill of 2011 that was never enacted, lawmakers flashed the DOJ a warning sign when they inserted a provision requiring the department to hand back any money collected from fines over $175 million that wasn’t spent.

In early 2015 a report of the Government Accountability Office, a federal watchdog agency, criticised the DOJ for building up a cash reserve and failing to spend more of its Three Percent Money.

In the third part of our series on the Three Percent Fund, GIR Just Anti-Corruption looks at where the extra $80 million for the Criminal Division in 2015 and 2016 went, and how FCPA enforcement was an important beneficiary.

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