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Blowing The Whistle On Fraud In The Banking Industry

By Jonathan Tycko, Partner

The qui tam provisions of the False Claims Act are well-known, and the recently-enacted SEC and IRS whistleblower laws have received widespread publicity. But another similar law has seen little use, despite being on the books for more than 20 years, and despite applying broadly to a sector of the economy—the banking industry—where the potential for large scale fraud is ever-present. Insiders who blow the whistle on fraud or other unlawful conduct by banks, or on banks, may be eligible for substantial rewards under this law.

The law that provides the whistleblower rewards is the Financial Institutions Anti-Fraud Enforcement Act of 1990 (“FIAFEA”). To understand FIAFEA, however, requires an understanding of another statute, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”). FIRREA, which was enacted in the wake of the savings and loan crises of the 1980s, gives the U.S. Attorney General the power to bring civil actions seeking statutory penalties for violations of various criminal laws that apply to the banking industry. For example, the Attorney General can bring a civil action under FIRREA for any of the following:

  • Bank fraud, which is defined broadly to include any “scheme or artificae” to “defraud a financial institution”;
  • Either mail fraud or wire fraud, if the fraud affects a bank;
  • Fraud in connection with loan applications;
  • Receiving commissions or gifts in exchange for procuring loans;
  • Embezzlement or misapplication of funds by a bank officer or employee;
  • Fraud in connection with various types of reports that banks must make to government agencies or officers; or
  • Concealing assets from a government conservator, receiver or liquidator of a bank.

Indeed, the first two categories noted above—“bank fraud,” and mail or wire fraud—are so broadly defined, that almost any fraud on a bank by its customers, or any fraud by a bank’s own employees, officers or directors, may come within the scope of the FIRREA civil penalties provision.

The year after FIRREA was passed, Congress enacted FIAFEA. The goal of FIAFEA was to encourage whistleblowers with information about fraud on or by banks to come forward with that information, so that the Attorney General could use that information to ferret out FIRREA violations. Under FIAFEA, a whistleblower must file a “declaration” with the Attorney General—in practice, with the Civil Division of the Department of Justice (“DOJ”)—laying out the information known to the whistleblower. The “declaration” is similar to the “disclosure statement” typically filed with DOJ in qui tam cases under the False Claims Act. If the information in the declaration gives rise to liability under FIRREA, and if the government obtains “funds or assets” as a result, then the whistleblower is entitled to an award.

The awards available to whistleblowers under FIAFEA can be quite large. The primary award provision of FIAFEA provides that “[t]he declarant shall be entitled to 20 percent to 30 percent of any recovery up to the first $1,000,000 recovered, 10 percent to 20 percent of the next $4,000,000 recovered, and 5 percent to 10 percent of the next $5,000,000 recovered.” So, if the government recovers $10 million or more, then the whistleblower reward would range from a low of $850,000 to a high of $1.6 million.

FIAFEA also contains a unique provision relating to the role of a whistleblower’s attorney. Within one year of the date that the whistleblower files his or her declaration, DOJ must provide the whistleblower with written notice of the status of its investigation into the whistleblower’s allegations. One option available to DOJ is to stated in this notice that the allegations “have not yet been addressed.” If DOJ chooses that option, then the whistleblower can request that DOJ award a contract to the whistleblower’s own attorney to pursue the case. DOJ must then either award such a contract, or bring a claim on its own based upon the whistleblower’s allegations. If DOJ chooses to award a contract to the whistleblower’s attorney, then FIAFEA provides that it should be a contingency fee contract. In other words, the whistleblower’s attorney is given a stake in the outcome of the litigation separate and apart from the reward available to the whistleblower.

In sum, FIAFEA provides very strong financial incentives for whistleblowers to come forward with evidence of fraud in the banking industry, and separate financial incentives for attorneys to represent these whistleblowers.

Despite these incentives, FIAFEA has been used only sporadically. The reason for this, I believe, is simply that the availability of FIAFEA whistleblower rewards is not well known either in the legal world, or within the banking industry. DOJ has recently signaled that it is interested in increasing the use of FIRREA to attack fraud in the banking industry, and in receiving new FIAFEA whistleblower declarations to aid in this effort. Accordingly, we may soon seen in increase in FIAFEA whistleblower filings, followed by an increase in rewards being paid to banking industry whistleblowers.