Our nation is stronger when we learn from crisis, adapt our way of thinking, and change to protect vulnerabilities to future harm. The attacks of September 11th, 2001 required the Federal Bureau of Investigation (FBI) to make a paradigm shift from a law enforcement agency that investigated crime after the fact to a national security service that works to prevent crime and terrorism.i The 2008 financial crisis is not 9/11, but it too laid bare one of our nation's vulnerabilities: fraud in financial institutions. And with no permanent change to law enforcement since, scandals in financial institutions continue.ii Our nation would be made safer by a paradigm shift in law enforcement, one designed to catch financial institution fraud early, thereby preventing further fraud.
Congress created SIGTARP as a temporary office to investigate financial institution fraud, related to TARP. More than 400 have been arrested including 98 bankers and eight Wall Street traders, with 55 of those bankers already sentenced to prison, and fraud actions were brought by the Justice Department against Goldman Sachs, Bank of America, JP Morgan Chase and others. Even though we have a full pipeline of open investigations, present day financial institution fraud is outside of our mandate, leaving the U.S. again vulnerable.
I recommend that Congress create a permanent law enforcement office with a narrow mandate to investigate financial institution fraud. That office would maintain continuity in the fight against financial institution fraud, partnering with other law enforcement as the go-to financial institution fraud specialist.
- Special Inspector General Christy Goldsmith Romero
There is a need for a law enforcement office dedicated solely to investigating financial institution fraud - a permanent cop on the financial institution fraud beat, not just in times of crisis. SIGTARP is the second temporary "special" office for financial institution fraud law enforcement created in times of crisis. The first was the Special Counsel for Financial Institution Fraud created by Congress in 1990 after the savings & loan crisis.
Financial fraud has repeatedly demonstrated its ability to wreck havoc on our economy, put our nation's finances at risk, and ruin American lives. Fraud in financial institutions does not come in temporary surges, but is constant. Temporary "special" law enforcement offices result in only temporary surges in prosecutions of insiders. There is a better way and, as an Inspector General, my role includes recommending change to government inefficiencies.iii
The threat of financial institution fraud is so serious and harmful as to require constant law enforcement expertise with dedicated resources. Financial institution fraud is typically committed in a series of criminal acts that incrementally evolve and grow more harmful over time - weakening our financial system from the inside. Without a dedicated permanent law enforcement office that evolves its knowledge and expertise as fraud evolves, more fraudulent schemes by insiders at financial institutions will grow undetected. Without a permanent paradigm shift, law enforcement will keep playing catch up, losing an opportunity to prevent fraud.
At SIGTARP, we uncovered - not surprisingly - that financial institution fraud has evolved to be significantly larger and more complex than the self-dealing crime that marked the savings and loan crisis.iv The fraud had escaped detection from traditional identification methods (regulator referrals and bank self-reporting), leaving only whistleblowers of which there were few.v
SIGTARP found that there has been no true continuity in law enforcement in identifying financial institution fraud as fraud has evolved. So, SIGTARP created a new law enforcement playbook to catch up to the fraud. SIGTARP's intelligence-driven playbook identifies insider crime without relying on the regulator or the bank to sound the alarm. We actively search for crime using industry, financial and human intelligence. Every case is different, but we capitalize on similarities to root out crime. We understand complex bank records, and bank operations, and use intelligence to identify anomalies and trends. Technologies analyze mountains of electronic data, and find digital footprints that serve as powerful evidence of criminal intent.vi
A permanent law enforcement office to fight financial institution fraud can catch fraud early, before it snowballs to hurt institutions, hard-working Americans, and communities.
- Special Inspector General Christy Goldsmith Romero
Our intelligence-driven approach should not be lost, but shared with the proposed new office. Just like SIGTARP, the office does not need to be large or costly. I propose an efficient new office that partners with other law enforcement agencies, and has cross-jurisdiction over all banks. This format avoids duplication of effort, and resolves the scarcity of dedicated white-collar resources that exists now. Prosecutions would be referred to DOJ to ensure due process.
Now, before expertise is lost is the time to act. I would welcome a chance to talk to you about this proposal and any of SIGTARP's work detailed in this report. Already, in the first month of fiscal year 2018, recoveries from SIGTARP's investigations are $60 million. SIGTARP has a 35 times return on investment, with cumulative recoveries of $10billion. SIGTARP's audits this quarter found about $3 million in taxpayer dollars squandered by state agency officials on barbeques, parties, gifts, bonuses, food, cars, and more, and found mismanagement by a Georgia agency that cost taxpayers $18 million, and jeopardized the program's foreclosure-prevention mission. We issue these audit reports to improve TARP programs. I look forward to hearing from you.
This proposal was featured in SIGTARP's 2017 Fourth Quarter Report to Congress.
ii While SIGTARP's investigations have resulted in the successful prosecution of CEOs and other top executives at medium sized banks and smaller banks, we have faced difficulties proving criminal
intent of senior officials in large organizations that are designed to insulate high level officials from knowing about crime or civil fraud. In 2016, I proposed that Congress fix the problem of the "Insulated CEO" by requiring CEOs, CFOs, COOs and CCOs at the six largest Wall Street banks that took TARP dollars to sign an annual certification to law enforcement that they have conducted due diligence and can certify that there is no criminal conduct or civil fraud in their organization. Until top officials have an affirmative duty to look for crime in their organization, it is likely they will stay in the dark. This certification would give an incentive for CEOs to catch fraud in the company's business practices early and stop it, limiting damage. A false certification would give law enforcement a tool to prove criminal intent.
iii Significant knowledge and expertise is gained, then diminished, and eventually lost with temporary special offices while financial institution fraud evolves, growing in magnitude and complexity. It also takes valuable time to open offices, recruit staff, and form partnerships. It took 2-3 years for the work of both the Special Counsel and SIGTARP to result in a surge of prosecutions.
iv SIGTARP's investigations have resulted in $15.3 billion ordered, more than four times the $2.945 billion ordered from savings and loan crisis prosecutions. Just two weeks ago, Wilmington Trust, a TARP bank indicted resulting from a SIGTARP investigation, forfeited $60 million.
v Regulator referrals are extremely rare in SIGTARP investigations, as regulators often rely on banks to self-report crimes. Self-reporting is extremely rarely in SIGTARP investigations because bank insiders committing large-scale fraud are unlikely to report themselves.
vi TARP housing programs continue to spend at least $4 billion each year, and will continue until 2023. While we work bank investigations, SIGTARP is using intelligence driven law enforcement to counter threats of corruption, non-competitive practices, and fraud in the $800 million TARP-funded blight demolition program, and to counter the threat of fraud in HAMP.