As corporate fines rocketed, DOJ enforcement budgets swelled

When Wall Street collapsed in 2008 under a mountain of bad residential mortgage debt, the public clamoured for prosecution of the industry executives responsible for the subsequent deep recession.

But little happened. A federal trial in Brooklyn against former Bear Stearns executives resulted in acquittal, while the US attorney in Los Angeles declined to prosecute the most notorious mortgage industry executive. The Justice Department’s Criminal Division seemed capable only of entering into deferred prosecution agreements racking up big fines, but sending no one to prison.

Under pressure from Congress, then Attorney General Eric Holder changed tack. The DOJ’s Civil Division pursued a series of actions against banks for mortgage-related fraud that reeled in eye-popping record fines, instead of individual convictions. The biggest of them all: Bank of America’s $16.65 billion settlement in August 2014.

The mortgage effort contributed to an enormous swelling of a little-known supplemental Justice Department funding source called the Three Percent Fund. During the Obama administration from 2009 to 2016, the fund brought in a head-spinning $2 billion, much of which was funneled back into white-collar crime enforcement.

Created by Congress in 1994 to help the Justice Department collect its fines and settlements, the fund derived its name from the 3% the DOJ was allowed to keep from its civil law enforcement actions.

Originally the fund was intended to help DOJ collect civil penalties. In 2002 Congress amended the statute to allow Three Percent Fund money to be used to collect criminal fines as well.

Over time, the fund morphed into an irresistibly sweet honeypot for the often resource-poor Justice Department.

The story that follows is based on documents obtained by GIR Just Anti-Corruption under the Freedom of Information Act.

The turning point

The 2014 fiscal year marked a turning point for the fund: The DOJ collected $13.5 billion in fines that qualified for the 3% skim. That was a 154% increase over the previous year’s $5 billion.

The numbers stayed high: the DOJ collected $15.5 billion in 2015, and $11.2 billion in 2016. Previously, the DOJ between 2009 and 2013 collected on average around $5 billion a year in qualifying fines.

In total over the eight years of the Obama administration, nearly $66 billion in fines from corporate wrongdoers were eligible for a scrape into the fund.

With numbers that huge, even 3% meant big money. In all, the Obama DOJ over eight years was handed a nearly $2 billion windfall to play with outside the congressional funding process – though only about $1.3 billion of that amount was actually spent during the same period, records show. Portions of the remaining money were reallocated by Congress to other areas of government. 

The rest accumulated in an account that Republicans fret allows the DOJ to maintain a cash reserve to spend on matters outside the supervision of Congress. By the 2014 fiscal year, there was $391 million unspent in the fund.

Bank withdrawals

About 40% of the Obama-era fund came from bank fines, according to analysis by GIR Just Anti-Corruption, though not every mortgage-related case was deemed eligible for the 3% scrape.

But those that were – $4 billion from JPMorgan Chase’s $13 billion global settlement in 2013; Citigroup’s $4 billion federal portion of its $7 billion civil settlement in 2014, and $8 billion of Bank of America’s $16.65 billion settlement in August 2014 – were so huge as to be significant. Those cases alone contributed $575 million to the fund.

It wasn’t just bank fines that bulked up the fund.

Civil settlements reached under the False Claims Act – an enforcement tool in health-care fraud cases – were also major contributors. The top three FCA settlements since 2009 contributed $95 million to the Three Percent Fund, records show. 

The DOJ, for example, took over $44 million from the federal civil portion of the largest FCA case in history – the $2 billion settlement in 2012 with UK pharmaceutical company GlaxoSmithKline.

Follow the money

In 2014, as the fund’s reserves were piling up, congressional Republicans began raising questions.

During a House financial services subcommittee hearing on Operation Choke Point, a DOJ investigation into money lending that some lawmakers said violated due process standards, Rep. Michael Fitzpatrick put senior DOJ official Stuart Delery on the spot.

“Mr Delery, you just responded a moment ago to the ranking member that this really is about following the money,” said the Pennsylvania Republican. “That is what ‘Operation Choke Point’ is about. So, let’s follow the money here. Mr Delery, what is the Department of Justice 3 percent fund?”

Delery responded with uncertainty. “I would have to – I am not sure of exactly which types of cases lead to recoveries that contribute to the Three Percent Fund,” he said.

The Republican pressed Delery to come back to him later with an answer about whether the DOJ took a 3% cut from fines imposed in relation to the investigation. “The American people need to know more about how the Department of Justice financially benefits from these settlements,” Fitzpatrick said. 

If Delery ever responded, his answer could not be found in the committee record. But FOIA records show the DOJ did take portions of penalties collected from Operation Choke Point for its Three Percent Fund.

CRAB clawbacks

In 2009, the DOJ gave its various divisions at least $65 million from the Three Percent Fund; by 2016, its annual handouts to departments requesting extra cash had quadrupled to almost $270 million, according to internal memos.

The individuals who decide how to spend the Three Percent Fund money sit on an internal DOJ panel known as the Collection Resources Allocation Board, or simply, “the CRAB”. They are three senior financial chiefs within the DOJ: Deputy Assistant Attorney General Jolene Sullens from the Justice Management Division; Dennis Dauphin, the director of the department’s debt collection management team; and the CFO for the US Marshals Service, Holley O’Brien.

Every year the CRAB invites various DOJ divisions to request money from the fund. The CRAB tells the various divisions that the DOJ can collect 3% of all civil settlements or judgments, essentially civil fines, and spend it on future “civil and criminal debt litigation and collection activities”, according to memos obtained under the FOIA. After the divisions make their pitch, the CRAB normally issues its decisions around October, the start of the government’s new fiscal year.

“It’s really controlled by the accountants and career finance people,” said one former DOJ official familiar with the fund who requested anonymity when describing internal department processes.

Some components of the DOJ benefited more than others.

The Executive Office of US Attorneys (EOUSA) was initially given the largest sums, rising to a peak of around $77 million in 2014 (although some of that money was to be spent over three years). In 2015, it was given $70 million. Congress had appropriated around $1.95 billion for EOUSA, meaning the extra money effectively increased the budget for US Attorneys’ offices by 3.5%.

The Civil Division, however – the big enforcer of False Claims Act and mortgage securities cases – surpassed the EOUSA in 2016. The civil team’s Three Percent funding rose from around $14 million in 2009 to $73.5 million in 2016 – close to a five-fold increase. Congress appropriated around $292 million to the Civil Division that year, meaning it received a 25% budget top-up. Most of that was allocated to commercial and healthcare fraud, as well as litigation related to the Deepwater Horizon oil spill.

One former DOJ official told GIR Just Anti-Corruption that the Civil Division during the Obama years made requests to fund qui tam cases, a type of whistleblower lawsuit brought under the FCA, because whistleblower complaints had doubled. Money from the Three Percent Fund helped alleviate the workload.

Meanwhile, the Criminal Division – the one DOJ component that specifically does not collect the “civil” debts eligible under the law for a 3% scrape – saw the largest growth in funding. The Criminal Division’s allocation from the CRAB grew from $3.5 million in 2009 to around $40 million in 2016 – an 11-fold increase. (An in-depth look at the Criminal Division’s relationship with the Three Percent Fund is the subject of the second part of this series).

By contrast the Tax Division, whose criminal investigators also received funding from the Three Percent Fund between 2009 and 2011, saw a rise from $2.2 million to $11.9 million – a more than five-fold increase, admittedly on a relatively small amount.

Other divisions were late to the party. The Antitrust Division first requested money in 2011, while the Civil Rights Division didn’t start receiving extra cash until mid 2014, when it was given $2.1 million to spend on four employees over three years, for reasons that are unclear from the memos. 

Return on investment?

In the memos released under FOIA, dated from 2008 to 2016, the CRAB often referred to two terms in particular: return on investment and maintaining solvency of the fund (although it dropped the former in the last few years).

In a 2012 memo inviting the divisions to make their funding requests for the following year, the CRAB advised: “As part of your submission, an analysis should be included of how your efforts will generate a return on investment that will maintain the solvency of the fund.”

A division’s ability to secure funding appeared at times to be influenced by how much it could supply to the fund, the memos reveal.

In 2010, the Environment and Natural Resources Division asked for money to finance 10 enforcement lawyers. In response, the CRAB warned it had approved the request only “after much deliberation”. In making the decision, the finance chiefs cited three potential benefits: the need to reduce a backlog of cases, a possible increase in “civil penalty impositions”, and “ultimately, an increase in deposits into the fund”. 

In 2011, the CRAB said it was giving $5 million less than what the Criminal Division asked for. “This amount is based on estimates provided to the CRAB of cases that have potential to furnish deposits to the Three Percent Fund during the fiscal year,” DOJ finance chiefs wrote.

A June 2015 report by the DOJ Office of the Inspector General noted that the Executive Office for US Attorneys had struggled to obtain money from the Three Percent Fund for asset investigators because they worked “almost exclusively on criminal debt cases.” 

“While the Three Percent Fund can be used to support both criminal and civil debt collection, only civil debt collections can be deposited into the Fund, making it difficult to obtain funding for additional positions that would primarily focus on criminal debt cases,” the OIG wrote.

Former DOJ officials who didn’t want to be named said providing a “return on investment” was not a requirement to receive funding, but doing so helped secure it. Without exception, every former DOJ official interviewed for this article also insisted that enforcement policies were never altered to ensure a “return on investment”, and it never influenced charging decisions.

“The incentive structure is disconnected from the people on the ground doing this work,” said former Colorado US Attorney John Walsh, citing GSK’s $2 billion settlement as an example. “As a US attorney, I never thought we would get money back from that case or any others we did. Our intention was always to do good work.”

In a statement to GIR Just Anti-Corruption, DOJ spokesman Wyn Hornbuckle said: “Decisions regarding allocation of these funds are based on how to best support the department’s and administration’s highest priorities, not on how much funding may be returned to the Three Percent Fund.”

The return on investment policy used by the CRAB would be a red-flag for conservatives. In 2015, the US Chamber of Commerce published a report critical of allowing authorities to keep the fines they collect to spend on their own policy goals, calling it a “system of prosecution for profit”. 

When GIR Just Anti-Corruption presented its findings to the business lobby, it echoed those concerns. “It’s troubling that the department’s prior leadership made profit-motivated enforcement decisions,” said Lisa Rickard, president of the Chamber’s Institute for Legal Reform. “Justice isn’t served when law enforcement agencies are driven by ‘return on investment’ or increasing their own funding.”

Brandon Garrett, a professor at the University of Virginia School of Law, defended the DOJ’s use of corporate fines to reinvest in white-collar crime enforcement. “It’s a much better use of that money,” he said. “There have been totally inadequate resources for white-collar enforcement.” 

But he acknowledged concerns “that there might be a perverse incentive to bring cases that attract more fines”, or reduced interest to investigate misconduct that result in smaller financial penalties. “There are good concerns on both sides of that issue,” he added.

A 'powerful tool' making all the difference 

The memos also lay out which investigations received cash injections over the years. 

The Deepwater Horizon oil spill, the fraudulent marketing of residential mortgage-backed securities, the emissions cheating scandal tied to German carmaker Volkswagen, and foreign exchange manipulation by international banks all received funding, according to department records.

The Criminal Division received at least an additional $27 million between 2011 and 2016 to assist with its response to the Deepwater Horizon oil rig blowout in the Gulf of Mexico, which killed 11 people in 2010 and created an environmental disaster. The Civil and Environment and Natural Resources Divisions received even more cash. 

The Criminal Division’s investigation was widely considered a failure after several cases unravelled and no individuals went to prison. Ultimately the DOJ secured only three misdemeanour convictions. The DOJ did, however, secure a guilty plea and $4 billion in criminal penalties and fines from a BP subsidiary in 2012 – none of which went to the Three Percent Fund, records show, because criminal fines cannot be deposited into the fund. A 2016 consent decree resolving civil claims against BP does appear to be contributing to the fund, records indicate.

One of the biggest recipients of fund money was the Residential Mortgage Backed Securities Working Group, a state and federal task force including the DOJ’s criminal and civil divisions. Between 2012 and 2015, the CRAB gave the RMBS Working Group almost $120 million to handle fraud cases tied to the sale of mortgage-backed securities.

“It’s proven to be a powerful tool for funding civil enforcement,” said John Walsh in a phone interview. “When you look at the RMBS case, it wouldn’t have been possible without the funding.”

A former senior official at Main Justice familiar with Three Percent Fund requests echoed those remarks, adding: “The complexity of these investigations is off the chart.” 

Congress moving to take back control

The significant contributions of a few civil bank fines to the DOJ’s budget attracted criticism from the Republican-led Congress in 2016. The GOP majority on the Senate Homeland Security and Governmental Affairs Committee in May 2016 issued a report expressing concern that the DOJ was able to take 3% from many of the multi-billion dollar civil bank fines imposed in response to the 2008 financial crisis. The report was not endorsed by the minority Democrats on the panel.

The Senate report asserted that Congress never intended the Three Percent Fund to be used for colossal bank fines that would significantly increase the department’s resources. Referring to the 3% cuts the DOJ took from multi-billion dollar civil fines levied against JPMorgan Chase, Citigroup and Bank of America, the report said: “A windfall of this magnitude was not foreseen and likely never intended by Congress.”

The report was amplified by right-wing media, suggesting a coordinated political and PR campaign. Rep. Sean Duffy (R-Wisconsin) told the Daily Caller that lawmakers considered the DOJ’s money a “slush fund”. The same article quoted an official from Cause of Action, an anti-regulatory advocacy group that has reportedly received funding from the Koch Brothers, who are major contributors to GOP candidates and causes.

Then in June 2016 Rep. Gary Palmer, a Republican from Alabama, introduced a bill that, if enacted, would change the Three Percent Fund. Under the proposed Agency Accountability Act of 2016, any agency that receives a fine or penalty from a settlement would be blocked from spending any portion of it without congressional approval.

“For too long Congress has granted federal agencies the authority to collect fines, fees and other revenues outside of their appropriated funds with little-to-no congressional oversight on how the monies are spent,” Palmer said in a statement re-introducing the bill in February 2017. “Congress’ power of the purse is exclusive and absolute and we must begin reclaiming” authority.

The House government reform and oversight committee discussed the bill in December during a hearing. Rep. Mark Meadows (R-NC) said self-funding mechanisms have “gone too far”, adding: “We have lost the transparency needed to understand what is being collected and allocated."

“All the more reason to pass the legislation, then we’ll know,” Rep. Jim Jordan (R-Ohio) said at the hearing.

The DOJ’s Civil Division is also likely to be grilled soon on its use of the fund. A House Judiciary Committee aide told GIR Just Anti-Corruption the panel is “interested in looking into potential abuse of the Three Percent Fund”, likely during a hearing with civil division officials later this year.

Others say criticism of the DOJ for making use of the fund is misplaced. 

“I think there’s a huge misunderstanding about what agencies may do with fines and civil penalties,” David Vladek, a former Democratic appointee at the Federal Trade Commission’s consumer protection bureau, told a conference in May hosted by the Federalist Society, an association of conservative lawyers. “To the extent there are agencies that are allowed to retain penalties and civil fines those statutes designate exactly where that money is to go to, by and large.” 

Vladek added: “Congress made, deliberated and voted on” those statutes.

But those votes took place a generation ago. The current congressional majority has a darker view of self-funding mechanisms for corporate law enforcement - and their ideology seems set to prevail.

“They can bring in the money to do what they want," Sen. Mike Lee (R-Utah) said of government agencies spending the fines they collect during a Federalist Society conference last month. "And they can make the law. And then they can enforce that same law. And they become a closed loop system, one in which accountability can be found nowhere.”

In the second part of our investigation, we look at how the Criminal Division boosted its use of the Three Percent Fund from a tiny budget top-up to a major resource for white-collar investigations.