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The False Claims Act and the Financial Industry: Areas of Concern

March 21, 2024 Uncategorized

The False Claims Act and the Financial Industry: Areas of Concern

Areas of Concern

There are several areas of the financial industry where False Claims Act violations may occur:

  • Mortgage Lending: Lenders can be liable under the FCA for fraudulent mortgage schemes that harm government loan guarantee programs like FHA loans.
  • Government Contracting: Financial companies with government contracts can face FCA suits for overbilling or improper charges.
  • Financial Crisis-Related Conduct: Banks and lenders are still facing lawsuits related to conduct during the 2008 financial crisis, especially residential mortgage-backed securities violations.
  • Small Business Lending: False statements made on applications for SBA loans or other government small business loan programs can lead to FCA liability.
  • Municipal Securities: FCA claims may arise from fraud in the municipal bond market, such as overcharging municipalities on fees or rigging bond prices.
  • Investment Advice: Investment advisors who defraud government retirement or pension funds face potential FCA actions.

Unique Aspects of FCA Claims

The FCA has several unique aspects that make it a powerful tool against financial fraud:

  • Treble Damages & Penalties: Defendants found liable under the FCA must pay back three times the amount of damages caused to the government, plus additional civil penalties ranging from $11,803 to $23,607 per false claim.
  • Whistleblower Provisions: The FCA allows private citizens, known as “whistleblowers,” to file fraud lawsuits on behalf of the government and collect 15-30% of any recovery. Many major FCA cases originate from whistleblower complaints.
  • Broad Definition of “Knowingly”: Defendants can face FCA liability not just for actual knowledge of fraud, but also for “deliberate ignorance” or “reckless disregard” of truth or falsity. This makes it easier to prosecute these claims.
  • Long Statute of Limitations: The FCA has a statute of limitations period of either 6 years or 10 years, much longer than most fraud claims. This allows more time to investigate and prosecute complex financial fraud schemes.

Recent Major Cases

Some of the largest FCA recoveries in history have come in lawsuits against major banks and lenders in connection with the 2008 financial crisis and mortgage meltdown:

  • In 2014, Bank of America paid $16.65 billion to settle FCA and other claims relating to its role in packaging and selling mortgage securities that contributed to the crisis.
  • Also in 2014, Citigroup paid $7 billion to resolve similar FCA and other claims based on mortgage-backed securities and collateralized debt obligations sold to government entities like Fannie Mae and Freddie Mac.
  • In 2016, Goldman Sachs agreed to a $5.06 billion settlement including violations of the FCA for misrepresentations in the sale of residential mortgage-backed securities.

The large recoveries in these and other Wall Street FCA cases illustrate the power of the False Claims Act to address financial fraud, even by the biggest industry players. For companies in this lucrative industry, FCA compliance should be a top priority.

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CLAIRE BANKS

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RAJESH BARUA

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