Eric H. Holder
Deputy Attorney General
United States Department of Justice
The Economic Crime Summit
May 11, 1999
Thank you very much. I appreciate the opportunity to speak to you today, even though I could not get away from Washington to speak to you in person. Since the theme of your Summit is "Focusing on the Future," it is appropriate we are using state-of-the-art telecommunications technology to enable me to speak to you today.
To focus on the future of white-collar crime enforcement and prevention, we must examine white-collar crime closely through the lens of recent law enforcement experience. For that reason, I want to take a few minutes to summarize some of the major areas of white-collar crime that we have addressed during the 1990s, and then identify some of the solutions that we see as the most effective in addressing current and future problems in white-collar crime.
Since the late 1980s, the Department has moved away from its traditional reactive approach to white-collar crime. In the past, all too often we waited until a particular problem had become a major scandal or issue of public concern before we even began planning to commit significant prosecutive resources to that problem.
Our approach began to change with the savings and loan scandal of the 1980s. Over the past ten years, the Department has devoted substantial resources to bank fraud prosecutions, resulting in the conviction of more than 7,000 defendants for "major fraud"-- that is, fraud of more than $100,000 -- against financial institutions. That represents more than a 95 percent success rate in our prosecutions. Moreover, almost 75 percent of those defendants were sentenced to prison.
What made those successes possible was the prioritization of bank fraud prosecutions in numerous United States Attorneys' offices, supplemented by large-scale deployment of resources by the Department of Justice, especially through the use of multi-agency task forces in the geographic areas where the criminal activity was most heavily concentrated. First in Dallas and later in Boston, Assistant U.S. Attorneys, Justice Department prosecutors from the Criminal and Tax Divisions, FBI and IRS agents, and even bank examiners were assigned to permanent task forces.. Their familiarity with the patterns of bank fraud and with each of the agencies' strengths and procedures enabled them to work together with greater coordination and efficiency.
The Department applied similar tactics to its battle against telemarketing fraud. During the 1980s, large-scale telemarketing "boiler rooms" grew steadily throughout the United States. Once we began prosecuting telemarketing fraud in earnest, we discovered the complexity and sophistication of many telemarketing fraud schemes and the devastating impact they often had on certain segments of society, particularly older Americans. Many telemarketing fraud victims reported that they had lost their life savings, had been forced to sell their homes to deal with their losses, suffered tremendous personal anguish, and even entertained thoughts of suicide.
In response, the Department provided national coordination and support for federal prosecutions of telemarketing fraud cases around the country. In three nationwide undercover operations since 1993 -- Operation Disconnect, Operation Senior Sentinel, and Operation Double Barrel -- the FBI, the Department, and other federal law enforcement agencies have successfully investigated and prosecuted cases that have had a substantial impact on fraudulent telemarketing.
For example, in Operation Senior Sentinel, which ran from 1993 to 1996, approximately 600 individuals were convicted of telemarketing-fraud related federal charges. In Operation Double Barrel, which ran from 1996 to 1998, nearly 800 individuals were charged in federal criminal cases, and 14 state Attorneys General charged nearly 200 other individuals in state criminal cases. Lower-level telemarketers received prison sentences, while organizers received more substantial sentences -- in some cases, more than 10 years in prison. As a result of these operations, and the close cooperation of multiple law enforcement agencies in regional telemarketing fraud task forces, cities which had once been strongholds of fraudulent telemarketing operations have effectively eliminated those operations.
Today we are applying the tools we developed in past investigations -- task forces, national coordination, and close cooperation with other federal agencies, state and local authorities and the private sector -- to combating health care fraud.
From the beginning of her tenure, Attorney General Reno made combating health care fraud a top priority of the Department of Justice. As a result of the Attorney General's emphasis, the Department of Justice and its enforcement partners have a well-developed health care fraud enforcement program which has achieved impressive results, with the number of civil and criminal health care fraud investigations steadily increasing. And we expect our health care caseload to continue to escalate into the foreseeable future.
The Medicare and Medicaid programs provide health care to millions of our nation's elderly and disadvantaged citizens, and public confidence in the integrity of those programs is essential to ensuring their vitality in the decades ahead. The financial cost of health care fraud is borne not only by taxpayers in the form of increased costs to government health care programs, but also to private businesses, insurance companies, and individual consumers. There are few health care fraud schemes which victimize only one payor; most of the schemes we investigate have caused losses on several fronts, losses which our health care system cannot afford to absorb.
Although the financial losses to government and private health care programs are staggering, dollars alone do not tell the full story about the impact of health care fraud. Fraud schemes which have quality of care implications cry out for out attention. Some fraudulent schemes, such as kickbacks, corrupt the decision making of medical providers by placing profit above patient welfare, leading to grossly inappropriate medical care, unnecessary hospitalization, surgery, tests, and equipment.
The Department's cases have included psychiatric hospitals unnecessarily admitting children and Alzheimer's patients for inpatient treatment, and nursing homes providing inadequate and unsafe care to residents, as well as instances in which a health care provider has placed financial considerations above his duty to care for the patient. In addition, a deliberate decision to cut back on promised and medically necessary services can constitute a fraud, and the Department will pay special attention to these matters.
We have developed partnerships among all of the federal, state and local agencies charged with health care fraud enforcement authority. At every level -- from the FBI field offices and United States Attorneys across the country which participate in local level health care fraud working groups, to the national level where we meet with the headquarters staff of the many agencies at both the working and executive levels -- we are sharing information and strategies, identifying issues and working to resolve them. We have developed models for how to approach various types of health care cases, and we are sharing that information across the country.
In my opinion, the Department's nationwide efforts to combat health care fraud have already been a huge success. In the past fiscal year alone, the Department obtained criminal convictions of 326 defendants in 218 criminal cases, and won and negotiated over $480 million in civil and criminal cases. At the same time, the Department of Health and Human Services excluded more than 3,000 individuals and businesses from participating in federal health programs, many due to criminal convictions. In the past two years, the Department has collected $1.2 billion in civil judgments and settlements.
The lessons we have learned from health-care fraud and telemarketing fraud, however, are not limited to enforcement. We also have come to recognize that the prevention of fraud is indispensable to the success of our law enforcement programs against fraud. Wherever we can find ways of stopping fraud before it can occur -- through outreach to industry, and through public education and prevention campaigns that arm consumers to know how to respond to fraudulent solicitations -- we are using resources more efficiently than if we simply react to crime after it occurs.
We have done a significant amount of outreach to the provider community to encourage them to adopt compliance and voluntary disclosure programs. Although our enforcement efforts have a deterrent effect, we believe that it is far more productive for health care providers to police themselves by instituting well designed compliance programs which call for promptly changing billing systems and internal controls which allowed the overbilling to occur or inadequate care to be rendered; which have the true support of top management; which call for the payment of restitution in an expeditious manner; which disciplines employees who act in violation of the standards set forth by the corporation; and which calls for making voluntary disclosures to the government about the wrongdoing.
The benefits of a well-designed compliance program should not be underestimated. Indeed, the existence of a corporate compliance program with "teeth" will have a significant effect on the decision-making of a prosecutor. In addition to the fact that giving credit for an effective compliance program is good policy -- and IS the policy of the Department of Justice in the health-care arena -- it makes good practical sense for a prosecutor to assess the attempts that a corporation has made to abide by the law.
Applying these Lessons in the Future
What lessons should we draw from these experiences with white-collar crime in the 1990s if we are to maintain a clear focus on the future of fraud enforcement and prevention? The first lesson is that we must be prepared to identify and move against emerging forms of white-collar crime more quickly than we have done in the past, using a fully coordinated approach that draws on resources at all levels of government. Let me offer some examples of emerging white-collar crime problems.
One problem that is growing rapidly is Internet fraud. Even as federal, state, and local authorities have been making inroads against telemarketing fraud, criminals are increasingly exploiting the Internet as a medium to reach out to prospective victims on a global scale, and to try to profit even more handsomely than they could through traditional schemes. The very features of the Internet that make it so valuable as a tool for legitimate commerce and communication are being turned to criminal purposes.
In the area of online securities trading, for example, the Securities and Exchange Commission reportedly receives approximately 300 complaints a day about fraudulent securities schemes on the Internet. One of the most frequently reported is a form of market manipulation known as the "pump and dump" scheme. These schemes typically use various devices to mislead online investors into putting large amounts of funds into speculative, thinly traded, or shell companies. In this way, the scheme "pumps" up the price, so that insiders in the schemes can "dump" their stock at a handsome profit and leave other investors with virtually worthless stock when the price plummets.
The Internet lends itself to other fraudulent securities schemes as well. For instance, "shills" use multiple E-mail messages -- putting false information in their E-mail headers and messages -- to make it appear that multiple people from different parts of the country are enthusiastic about a particular stock. Market manipulators may pay undisclosed fees to writers for ostensibly independent online stock newsletters, touting particular stocks. These manipulators may also establish Web sites and disseminate massive amounts of "spam" - unsolicited E-mail - to help promote these stocks.
In one case that the Department has criminally prosecuted in coordination with the SEC, the CEO of a shell company worked with stock promoters to manipulate the price of his stock through bribes to brokers, stock touters, and market makers. As a result of the manipulative activities, the company's stock price rose in just a few months from pennies to more than $4.50 per share. The CEO, using nominee accounts to sell his stock into the inflated market, realized proceeds of more than $9.6 million, and a stock broker who had assisted his efforts made illegal profits of more than $3 million from his role in the scheme. Ultimately, the SEC brought enforcement actions, and the U.S. Attorney's Office in Alexandria, Virginia successfully prosecuted the head of the company, the brokers, stock touts, and others connected with the scheme. The former CEO is now serving a 46-month prison sentence, and one of the touts is serving a one-year sentence.
Online auctions can also be exploited for fraudulent schemes. According to the Federal Trade Commission and the consumer organization Internet Fraud Watch, online auctions generate more complaints of alleged fraud than any other form of Internet-based commerce. These fraud schemes operate much more simply than "pump and dump" schemes: the would-be seller promises to deliver some valuable merchandise, ranging from computer equipment to collectibles such as Beanie Babies and Furbys, and then, after the buyer has sent a check or money order for hundreds or even thousands of dollars, simply fails to deliver the goods, or delivers only shoddy or damaged goods. U.S. Attorneys' Offices, working with the FBI and the Postal Inspection Service, are also prosecuting such schemes.
The global reach of the Internet has also given traditional fraud schemes, which were more local in scope or used mass mailings or telemarketing boiler rooms to contact victims, a new lease on life. The World Wide Web now abounds with Web sites that promote pyramid schemes, questionable or unapproved drugs and medical equipment, fraudulent business opportunity and credit-repair schemes, and nonexistent Internet banking services, among other things. In one case recently indicted in the Central District of California, the indictment alleges that the defendants used the Internet and other means to contact aliens in the United States who needed immigration documents, and then charged them substantial amounts of money, sometimes $10,000 or more, before supplying them with forged or falsified documents.
Concern and Strategy
These developments are truly cause for concern -- not only because of the harm they pose to consumers in this country and abroad, but because they threaten to undermine consumer confidence in the Internet at a critical time in its growth and development. Fraud has no place on the Internet, and if we are to combat it effectively we need to take specific steps to ensure a sustained and coordinated national approach.
For these reasons, as the President announced last week, the Administration has established a new national initiative to address the problem of Internet fraud. The Internet Fraud Initiative represents the first time that the Department of Justice has made Internet fraud a priority, and the first initiative that the Department has developed to address Internet fraud through both criminal and civil enforcement.
The Internet Fraud Initiative involves a six-part approach that will provide a nationally coordinated approach to Internet fraud:
The second emerging fraud area that I wanted to mention is identity theft and fraud. Identity theft -- the misappropriating of an individual's identification information -- has long been a component of many fraud schemes. In recent months, it has become apparent that the problem is even more serious, in part because of new technologies such as the Internet. Criminals can commit identity theft through various subterfuges: for example, using personal identification information to gain unauthorized access to another's bank account funds or to a credit card account for unauthorized transactions, or assuming another's identity when facing arrest or indictment on criminal charges or to avoid identification as an adjudicated bankrupt. Innocent victims suffer not only the immediate financial losses when their credit card balances are run up or their bank accounts clean out, but also the frustration and additional expense incurred in contacting credit bureaus, creditors, and banks to try to restore their credit and their good standing.
Identity theft has become a substantial law enforcement concern, and Congress responded to this concern last year by making identity theft a crime in its own right. With the passage of the Identity Theft and Assumption Deterrence Act last fall, federal law enforcement and the FTC have become partners in the effort to develop a coordinated approach to identity theft and fraud. In addition, the President has asked that we put "sharper teeth" in that legislation by stepping up prosecution of identity theft cases.
As Congress noted last year in passing the Identity Theft and Assumption Deterrence Act, accurate information about the incidence and methods of this crime is difficult to develop. Although the problem is widespread and growing, thus far there has not been a central clearinghouse for collecting and disseminating information.
Now that it is a federal crime to engage in identity theft and fraud, the Federal Bureau of Investigation, the United States Secret Service, and the Postal Inspection Service are focusing increased attention on this enforcement area. Because in some cases the new federal law may not reach the illegal conduct, we need to improve our coordination with our state and local counterparts who may be in a better position in address certain cases; likewise, because some states have not enacted specific legislation outlawing this conduct, we may in some cases be the better avenue for enforcement and prosecution. We also need to coordinate our efforts with the Federal Trade Commission, which is establishing a complaint system and database for reports of identity theft to assist both law enforcement agencies and the victims of this crime. Through our collective efforts, we will provide our citizens more effective protection against this frustrating and potentially costly crime.
One mechanism on which the Department of Justice increasingly relies to identify and coordinate action on emerging areas of white-collar crime, such as Internet fraud and identity theft, is the Attorney General's Council on White-Collar Crime. The Council periodically brings together senior-level representatives of all federal law enforcement and regulatory agencies that investigate or prosecute fraud and white-collar crime, to ensure appropriate participation and coordination by agencies in ongoing enforcement and prevention programs, and to develop new enforcement and prevention efforts. In recent months, for example, the Council has established a Subcommittee on Identity Theft to address the many issues relating to identity theft and fraud and provide coordination as appropriate. Other Council Committees handle a wide range of issues, such as consumer protection, investigations, and fraud prevention, to provide similar coordination and to facilitate interagency cooperation and communication.
As you can see from this brief overview, these efforts reflect the Department of Justice's commitment to forging extensive partnerships with law enforcement and regulatory agencies at all levels, and to ensuring fully coordinated approaches to combating current and newer forms of fraud as we move into the twenty-first century. I thank you for the opportunity to address you today, and wish you every success as you continue with the Summit.