Congress has many methods of responding to crises, yet some
Members of Congress consistently choose a politically popular and
expedient route: more and harsher criminal laws, criminal
enforcement, and criminal punishment. The knee-jerk congressional
response to virtually every crisis is to add to the over 4,400
federal criminal offenses already on the books and increase already
harsh federal criminal penalties.
Not surprisingly, some Senators are bent on "solving" the
subprime meltdown and the resulting financial crisis by adding more
criminal offenses to the currently monstrous compilation of
criminal laws. The faulty premise of the Fraud Enforcement and
Recovery Act (S. 386) (FERA), co-sponsored by Senators Patrick
Leahy (D-VT) and Charles Grassley (R-IA), is that criminal activity
caused the financial mess America is facing and that criminal
prosecution and punishment can fix it. This is precisely the sort
of reflexive criminalization that is behind the current
over-federalization of crime and that Members of Congress on both
sides of the aisle have stated they abhor because it has
contributed to the record federal prison population.
Financial Fraud Enforcement
Hearings
To their credit, three federal law enforcement officials who
testified at a February 11 Senate Judiciary Committee hearing on
financial fraud enforcement did not quite accept the gambit that
America needs more and harsher federal criminalization. As
expected, all three federal officials--the Justice Department's
Rita Glavin, the FBI's John Pistole, and the Treasury Department's
new special inspector for the TARP program, Neil Barofsky--eagerly
confirmed their respective agency's desire for the additional
financial resources and manpower FERA promises. But they also made
it clear that existing federal law is more than adequate to punish
any actual criminal conduct associated with the current financial
crisis.
These witnesses also offered a highly sensible recommendation:
The key to combating continuing crisis-related crime, as well as
preventing the next Bernard Madoff, will be more and better
coordination among federal, state, and local law-enforcement
officials--not tough-on-crime sound bites or the creation of new
federal crimes. Congress should pursue practical recommendations,
such this one, that make the most efficient use of scarce federal
resources and do not contribute to the unrestrained federalization
of crime.
Unnecessary Criminalization:
Prosecutors Have the Tools They Need to Police Financial
Markets
Is there really a need for more and harsher federal criminal
laws? If criminality is determined to be a pervasive cause or
feature of the market crisis, some additional resources in the form
of money and manpower for federal, state, and local authorities may
be warranted. In the meantime, however, FBI and Justice Department
officials have independently confirmed that, when it comes to
criminal charging statutes, they have what they need to
prosecute any criminal activity associated with the financial
crisis.
For example, Benton Campbell, the top federal prosecutor in New
York's Eastern District, headquartered in Brooklyn--an area hit
hard by the subprime mortgage crisis--has had a mortgage-fraud task
force in place since early 2008. In discussing the types of
criminal activity his prosecutors are encountering, he stated that
the crimes "are fundamentally familiar to us" and are being
adequately investigated and prosecuted under existing federal
law.[1]
Further, federal law enforcement's two most popular criminal
offenses for prosecuting fraud--the federal mail and wire fraud
statutes--are so exceedingly broad they can cover an almost
unimaginable range of financial wrongdoing. Indeed, general federal fraud statutes, such
as the mail and wire fraud statutes, are available to address
any crimes related to the subprime market and market
crisis.
For instance, the federal courts' expansive reading of the mail
fraud statute "has made it possible for the federal government to
attack a remarkable range of criminal activity even though some of
the underlying wrongdoing does not rest comfortably within
traditional notions of fraud."[2] Leading commentators agree
that "scheme to defraud," the key phrase of the mail fraud and wire
fraud statutes, "has long served ... as a charter of authority for
courts to decide, retroactively, what forms of unfair or
questionable conduct in commercial, public, and even private life,
should be deemed criminal. In so doing, this phrase has provided
more expansive interpretations from prosecutors and judges than
probably any other phrase in the federal criminal law."[3]
Virtually all bank frauds are also mail frauds, wire frauds, or
both and, unlike the federal bank fraud statute, the mail and wire
fraud statutes are not limited in their application to frauds
"perpetrated against a financial institution." And regardless of
which federal fraud statute a prosecutor uses to charge a
defendant, the potential penalty is substantial. Mail and wire
fraud violations already carry a maximum penalty of 20 years
imprisonment, and any mail or wire fraud that "affects" a financial
institution increases the maximum possible prison sentence to 30
years. By comparison, the maximum federal penalty for attempted
murder is 20 years, and the maximum for voluntary manslaughter is
15 years.[4]
It should be noted that, unlike the elements of the bank fraud
statute, conduct qualifying for the enhanced penalty must merely
"affect" a financial institution; it need not be perpetrated
against a financial institution in order to draw the
increased penalties. Thus, even if a fraud perpetrated against a
"mortgage lending business" could not be characterized as bank
fraud, the fraud inevitably "affects" a financial institution such
that the 30-year maximum sentence under the mail and wire fraud
statutes would apply.
Beyond Wall Street
Looking beyond Wall Street, federal prosecutors have a multitude
of tools to use on whatever "retail-level" mortgage fraud schemes
have been carried out on Main Street. The largest area of mortgage
fraud activity identified so far consists of what could be called
white-collar street crime--i.e., traditional white-collar crime,
such as mail fraud and wire fraud, on an individual and personal
level. Because of this, the same prosecutorial tools can be used
for criminal conduct allegedly committed on Wall Street or on Main
Street. The FBI itself recently identified nine "applicable Federal
criminal statutes which may be charged in connection with mortgage
fraud"--including Chapters 47 (fraud and false statements), 63
(mail fraud), and 73 (obstruction) of Title 18 of the United States
Code,[5] the same provisions used to charge
financial crimes committed on Wall Street.
Congress should take note of the FBI's public acknowledgement
that it is in no way hindered by a lack of charging statutes in its
pursuit of allegedly criminal conduct associated with the financial
meltdown. If, as unlikely as this may be under the exceedingly
expansive federal law, some wrongful conduct is beyond the
jurisdiction of federal prosecutors, it can almost always be
prosecuted on the state and local level. Criminal conduct need not
go unpunished even if it is not addressed by a federal statute.
Indeed, in many instances the case is strong for increased
state-level activity as an alternative to federal prosecutions. At
both the state and local levels, prosecutors have been aggressively
battling retail-level fraud perpetrated by individual brokers, real
estate agents, lenders, buyers, and borrowers.[6] Like the federal
government, the states have ample legal authority to prosecute
fraud. In addition, states--not the federal government--are
the primary regulators of mortgage brokers and the insurance
industry. Thus, conduct that takes place entirely on the state or
local level and that is within the state's jurisdiction should be
investigated and prosecuted by state and local officials. As the
U.S. Supreme Court has frequently recognized, the federal
government does not have a plenary police power.[7] Nor does this nation
have a nationalized police force.
Section 2 of FERA Is Unnecessary and
Counterproductive
Considering the many charging statutes that are already
available to federal prosecutors, the new criminalization in
Section 2 of FERA is not only redundant but also an inappropriate
expansion of federal authority undertaken at the expense of state
and local law enforcement operations and based on the thinnest of
Commerce Clause jurisdictional hooks. While the purpose of FERA may
be laudable, identical goals can be realized through existing
federal and state statutory authorities, as well as through
whatever percentage of the increased funding proposed under FERA
Section 3 can be justified by the hard evidence of criminal conduct
that is available to date. Section 2 accomplishes little, if
anything, that is not already possible under current law.
Section 2 is a predictable reaction from lawmakers. In 2006,
then-Senator Barack Obama told The New York Times how common
it was for members of the Illinois state legislature to consider
election-year politics when deciding when and how much to increase
criminal penalties.[8] Indeed, a 1998 American Bar Association
task force reported that because lawmakers consider new and harsher
federal crimes to be so popular, some will not vote against such
legislation "even if it is misguided, unnecessary, and ...
harmful."[9] The criminal law provisions in Section 2 of
FERA are an example of such unnecessary and potentially harmful
legislation. If passed into law, these provisions will contribute
substantially to the hyper-expansion of federal criminal law that
Senators and Representatives of both major parties claim they hope
to end.
A Better Role for Congress
Investigators and prosecutors at all levels of government are
sufficiently armed with the tools necessary to investigate and
prosecute mortgage fraud, financial fraud, and related crimes.
Unless and until it is demonstrated that a new and
heretofore unidentified form of criminality is associated
with the subprime mortgage meltdown and resulting financial
crisis--and that this criminality is not adequately addressed by
existing state or federal criminal law--Congress should devote its
time and energy to:
- Assisting federal, state, and local officials in developing
better coordination and cooperation for the investigation and
prosecution of financial crimes; and
- Investigating and resolving the fundamental economic and policy
problems that caused the current crisis.
Members of Congress should not embrace harmful or misguided
legislation simply to show they are "doing something" to "solve"
the subprime meltdown and resulting financial crisis.
Brian W. Walsh is Senior Legal Research Fellow
in the Center for Legal and Judicial Studies at The Heritage
Foundation, and Tiffany M. Joslyn is Research Counsel for the White
Collar Crime Project at the National Association of Criminal
Defense Lawyers.