oversight

Savings and Loan Crisis: Federal Response to Fraud in Financial Institutions

Published by the Government Accountability Office on 1990-08-01.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

,I .                 United States General Accounting Ofl’ice          f//Pa       7
                     Testimony                                                                   6
   GAO


  For Release          Savings and Loan      Crisis:         Federal    Response       to
  on Delivery          Fraud in Financial       Institutions
  Expected    at
  10:00 a.m. EDT
  August   1, 1990




                       Statement   of
                       Richard   L. Fogel
                       Assistant   Comptroller       General
                       General   Government      Programs



                       Before    the Committee    on Banking,
                       Housing     and Urban Affairs
                       United    States   Senate




  GAO/T-GGD-90-61
                                                                          GAO Fono 160 (12/87)

                                                               ‘
                     Savings and Loan Crisis:              Federal
                Response to Fraud In Financial             Institutions
                             SUMMARYOF STATEMENT BY
                                RICHARD L. FOGEL
                         ASSISTANT COMPTROLLERGENERAL
                         U.S. GENERAL ACCOUNTING OFFICE
GAO estimates     that losses from thrift             failures  could be as much
as $500 billion      in the next 40 years.             Though the extent   to which
fraud contributed      to or caused thrift            and bank failures  is not
known, fraud has played a significant                 role.
Our   review to date indicates              that the Justice        Department and
other    federal     agencies have been actively               pursuing    this fraud.
U.S. attorneys,         for example, are in the process of prosecuting
thousands     of financial        institutions'        officers,     directors,    major
borrowers,       accounting     firms,      law firms,      and others.       The number
of successful        prosecutions        is growing.
Furthermore,      on its own initiative             and in response to
congressional      action,    Justice      is stepping      up its efforts   by
adding and redeploying          resources       to concentrate     more on financial
institution     fraud.     Initiatives        recently    announced by Justice       and
the financial      regulatory       agencies      are promising.     New task forces
are being established.            Priority      lists   have been developed.      A
Special     Counsel for Financial          Institution      Fraud has been
appointed     in Justice.
It is too early to tell             what impact these actions      will    have.
Moreover,       GAO's assessment raises        some concerns.      One concern         is
that,     although      Justice   is focusing   more systematically        on
financial       institution     fraud,   it may not be giving      sufficient
attention       to two areas:
--    Justice  lacks a mechanism that would allow the newly appointed
      Special Counsel for Financial    Institution       Fraud to readily
      access the key information    needed to determine         how well the
      efforts  are proceeding,   what more needs to be done, where it
      needs to be done, and what further       resources     are actually
      needed.
--    Justice     and the agencies     referring     instances  of suspected
      fraud need to ensure that their            newly expanded coordination
      initiatives     are actually     leading    to the concentration     of
      resources     on top priority      targets    and in determining   the best
      way to proceed against        these targets.
GAO is also concerned that the number, magnitude,                  and complexity
of fraud cases may demand further            infusion    of resources.      The
Congre&      should continue      to monitor    new initiatives      and require
Justice    to report    regularly    on the results      achieved.     Congress
could then better       assess the investigative         and prosecutorial
resources     needed and the effectiveness          of interagency
coordination      for this critical     effort.
Mr.      Chairman       and Members of                  the Committee:


We are
     .  pleased to participate                             in your           hearing       on the      federal
response to fraud in depository                                   institutions.              As you requested,
my testimony             today       will      cover        (1)      what we have learned                      about         the
extent       of     fraud        in failed       and open depository                       institutions;
(2)      what the        federal        response           has been to the                 fraud,      including
recent      Justice            Department            initiatives:             and (3)        our    assessment                  of
the      response       to      fraud       in depository                 institutions          as we see it
today.


EXTENT OF FRAUD IN FAILED AND
OPEN DEPOSITORY INSTITUTIONS


During      the      last       4 l/2       years,       831 banks and 515 thrifts                             have
failed      and have been resolved.                           Another           247 thrifts           were in the
Resolution           Trust        Corporation's              (RTC) conservatorship                     program               as
of    June 30,         1990.         These failures                 have been attributed                       to
economic          problems;          deregulation             of      the thrift           industry            and
inadequate           supervision:              poor      management             in the       institutions:                   and
fraudulent           activities             on the part             of officers,             directors,
borrowers,           accounting             and law firms,                 and others         associated                 with
the depository                 institutions.               Many of          these        same factors               threaten
the      solvency       of many open institutions                             and will        probably              result
in additional               failures.
       P

No one knows exactly                    how great            the role          of    fraud      has been in the
failure       of     thrifts         and banks,            nor      the     extent        to which        it        is
occurring            in open            institutions.                   RTC suspects                 that        fraud       or
criminal           activity            on the part              of directors,                     officers,            or senior
managers contributed                          to the      failure              of     40 percent                of    the    thrifts
    .
it has investigated.                            Ely     and Co.,              savings            and loan            consultants,
have offered               a rough            estimate          that          3 percent,             or $5 billion                  of
the     $147 billion                  in thrift          losses             have been caused                     by       Wcrooks."
The Federal            Deposit               Insurance          Cooperation                   (FDIC)        estimates              that

fraud       on the         part        of directors,                  officers,              or senior               managers
contributed               to      13 to       18 percent              of      bank failures.                     One of        the
difficulties               with        estimating              the      extent          of       fraud      in depository
institutions               is determining                 if         and when suspect                     activities
crossed        the     fine           line     between          poor         business             judgment            and fraud.


Financial           institution                fraud      cases             typically             involve            complex
transactions               that        must      be    thoroughly                investigated.
Investigators                  and prosecutors                  often          must       sift       through              thousands
of documents               just        to determine                  whether          a criminal                offense        has
occurred.            Thus,            these      investigations                     are      labor        intensive            and a
great       deal     of        time      (sometimes             several             years)         is required               to
complete           a thorough                investigation                  and obtain             an indictment.                     The
more    creative               criminals          are     in covering                   the       "paper         trail"       of
their       crimes,            the     more arduous                  this      task       becomes.               Also,
prosecutors            are        faced        with     the          task      of proving                that        the paper
trail       establishes                beyond         a reasonable                  doubt         that      a criminal
violation           was committed                 and that              the      accused           was guilty.




2
FEDERAL RESPONSE: BASELINE
ACTIVITY        LEVELS


The federal             bank and thrift                        regulators--FDIC,                   the     Office            of     the
Comptroller             of        the    Currency              (OCC),       the       Federal        Reserve           System,

and the Office                 of Thrift                Supervision               (OTS)--are             the    federal
government's             first           line      of defense               against            illegal         activities
and/or       wrongdoing                 associated               with      banks and thrifts.                         The
regulators         are responsible                         for       examining           and supervising                     banks
and thrifts             to ensure                that      they         are operating               in a safe           and sound
manner and in compliance                                with        applicable           laws and regulations.
The nature         of        the        institution's                   charter        determines              which
regulatory         agency               has federal                 oversight          responsibility                  for         the
institution.                 RTC also             plays          a role         in identifying                 fraud         and
wrongdoing         in failed                thrifts.


FDIC and RTC are                    authorized                 to    initiate          civil       suits        in     instances
where       improper          conduct             of     professionals                 associated              with     failed
institutions             is        uncovered.                  The agencies              are responsible                     for
investigating                all        failed          institutions              to determine                 the merit                of
pursuing        civil         professional                     liability          suits.           As of July,                1990,

FDIC and RTC were involved                                 in about             500    civil       professional
liability        suits,             which         include            actions          against        directors,
officers,        other             professionals,                    and their           insurers,             as well             as
interventions                in     shareholder                 actions.
In    instances           where       criminal           activities            are      suspected,           the
regulators              and the       financial           institutions               they     regulate         are    to
refer .      these       activities          to the FBI for                   investigation             and to a U.S.
attorney          for     possible          prosecution.                These referrals                 are    submitted
on a standardized                    criminal        referral           form.           The regulatory
agencies          use different              criteria           for     keeping          records        on the
criminal          referrals           they      and the         institutions               make,       so we could
not    get     an accurate             count        of    the number of referrals.
Nevertheless,                 we found       that:


--    OTS logs          all     referral           forms.          OTS logs          showed 5,014             referrals
      in     1989 and 2,785                through        June        1990.


--    The Federal              Reserve       System         logs       referrals           by individual
      suspects          as opposed           to the         number of referral                   forms.            They
      logged       referrals           on 3,239           individuals              in    1989    and 1,445
      individuals              through       June 30,           1990.



--    OCC logs          referral           forms     involving            an estimated                loss    of over
      $200,000,           a bank insider,                 or some other                 significant
      circumstance.                  CCC logs        showed 824 referrals                       in     1989    and 637
      referrals           through        June 30,           1990.



--    FDIC logs           referral          forms        involving         estimated            losses        exceeding
      $10,000        or a bank director,                     officer,           or principal
      shaieholder.               FDIC logs           showed 938 referrals                       in     1989 and
      about       798 referrals              through         July       11,     1990.
--   The RTC system                      for     maintaining              criminal          referral        data       is not
     yet      operational.                      RTC estimates              that      it     has submitted              about
     200
      I  referral                forms           since      August         1989.



Within        the      Justice            Department,              the FBI investigates                     and U.S.
attorneys           prosecute                  those     criminal          referrals            having      merit.        The
FBI also         begins          investigations                    based on information                     from other
sources         (informants                    and other          members of              the public).


The FBI headquarters                            tracks      all     investigations                field      offices           have
underway,           but     there              is no accounting               for         the   criminal       referral
forms        received.              In October              of     this     year          the FBI plans             to begin
keeping        a record             of     each referral                  and providing             feedback           to the
regulatory             agencies            on any action                  taken.           The FBI had 7,097
financial           institution                  fraud      investigations                  underway        as of
February         1990.



Of the        investigations                     underway          as of February                1990,      3,027       were
major       investigations                      involving         potential           dollar        losses      of
$100,000         or more.                 Further,          of     the major           investigations,                 2,278
involved         banks        (276 were failed                      banks),          654 involved            thrifts           (234
were failed             thrifts),                and 95 involved                  credit        unions      (20 were
failed        credit       unions).


FBI field           offices          determined              through          a manual           search      that       as of
Februaiy         1990,        they         had 21,147             criminal           referrals           relating        to
financial           institution                  fraud      on file         that      the FBI calls

5
"unaddressed                    referrals."                   Unaddressed                referrals          (1)    may not       meet
the     U.S.       attorneys'                      priorities             for     investigation,                  (2) may need
further          investigation                        to determine                whether        they       involve         a federal
      :
violation,                or         (3)     await       a determination                    concerning            whether       they
should          be prosecuted                       under        a specialized               prosecution             program          for
simple          cases.                Furthermore,                some of          these        referrals          may replicate
or     relate           to other              referrals             or relate             to ongoing          investigations.
Some of          these               referrals           may be worth               pursuing.               The FBI plans              to
review          these           referrals              this       month         to determine             what action            to
take      on them.


I would          like           to turn             to the        prosecution              of    these       violations.
Although          the U.S.                  attorneys             receive          information             on all      referrals,
they      are generally                       not      brought         into        the     case until             the FBI
believes           it      has determined                       criminal           activities           have occurred.
As of       February                  28,     1990,        the      U.S.        attorney         offices          had 5,862
matters          and 1,489                  cases        pending           involving            7,992      and 1,920
defendants,                respectively.                         (A matter          is an item             being      reviewed
to determine                    if     an indictment                 or     information              should        be filed.)


As shown in figure                            1, in        fiscal          year     1989 the U.S.                 attorney
offices          filed               criminal          charges        in        2,336      cases      relating         to
financial               institution                  fraud        against          2,749        defendants.            The figure
also      shows that                   U.S.         attorney         activities              have been increasing
steadily          between                  fiscal        years       1985 and 1989.                   In addition,              U.S.
attorn&ys               filed          charges           in     794 cases           against          970 defendants              in
the     first           5 months              of     fiscal         year        1990.


6
Figurr 1: Criminal Chargor Flkd by                                                                                          *r
U.S. Attorneya In Finrnolal kwtitutbn
Fraud ma.8                                         2wo NlJmbw
                                                   2200
                                                   2720


                                                   2200
                                                   24w


                                                   a20
                                                   2loo
                                                   2mo
                                                   1800
                                                   1000
                                                   17W
                                                   1000
                                                   18W
                                                   1400




                                                             -0-1     Defmdanm charged

                                                   Source: Executbe Oflim for United States Attomeys.




    During      the    same time              period,               the    U.S.    attorney          offices        obtained
    convictions          for    financial                 institution              fraud      against          9,374
    defendants         (8,763       plea           agreements               and 611 guilty              verdicts).
    Figure      2 shows that                 convictions,                  like    charges          being      filed,      appear
    to   be increasing.                 It      should              be noted       that     only        150 defendants
    were acquitted.                In addition,                      the    U.S.     attorneys          obtained
    convictions          against             787 defendants                   (745 plea        agreements               and 42
    guilty      verdicts)          in        the     first           5 months        of    fiscal       year      1990.



    7
Flguro 2: Convktlonr ObtaIned by U.S.
AtWmyyr In Flnmcbl Institutbn Fraud
coma                                               2202 Number
                                                   2wo
                                                   1100



                                                   1100

                                                   1200

                                                   loo0

                                                    ooo

                                                    ooo

                                                    400

                                                    200

                                                        0

                                                              lws      lwe           lW7      lwa          1)18
                                                              R8ul Yur


                                                             I         GlJilly v8rdicIa
                                                                       PlD88fJmm8nm

                                                  Source: Executive Oifm for United States Attorneys ,



   It    should      also       be noted            that         Justice             tracks          the      results         of     the
  Criminal          Division’s             Dallas            Bank Fraud                   Task Force              separately           from
  those       of    the      U.S.    attorney                offices.                Between          August             1987 and
  June      1990,      the      Dallas           Bank Fraud               Task Force                 brought             charges
  against          77 defendants                 and obtained                   convictions                 of     54 defendants.
  For the          remaining         23 defendants,                        2 were acquitted,                        and charges
  are     still      pending         against                21 individuals.                         As of June             1990,       the
  task      force     had 42 separate                        thrifts           under          investigations;                  these
  investigations                involved           560 suspects.


  With      regard        to criminal              restitution,                      we were unable                      to obtain
  complete,          reliable             data     on restitution                          recoveries              for     financial
  institution             fraud.           However,              FDIC provided                      us with         data     on such
  recoveries           for      thrifts           for        1987 through                   April      1990.              The data

  8
showed $202.8                       million             in restitution                 ordered         during          this         period,
while              approximately                   $15 to         $16 million             was recovered.                      Since
restitution                      often         is not       due until            years         after         conviction,                  these
recoveries                   are not            necessarily            a result            of restitutions                         ordered
during              the period                 and therefore                can not        be     used to             calculate               a

percentage                   of     restitution                recovered.               FDIC staff              are      currently
developing                   methods            to collect            more       detailed             and accurate
information                      on recoveries               of     criminal            restitution.


JUSTICE DEPARTMENT RESPONSE TO
PRESSURE FOR INCREASED ACTIVITY


The full                  cost      of    thrift          failures,           including               interest           costs,            could
be      as     much          as $500 billion.                       The taxpayers                 will        have to pay for
most          of     it.


Moreover,                  significant                portions         of     the total               cost      are yet             to     be

fully          established.                      One      category          of        losses      where the             potential
exists              for      significant                additional            losses,           for      example,             is      the
likely             fallout           from past             transactions                 made with             acquirers              of
failed             thrifts,              in particular                the    group         of transactions                     concluded
in      1988.


Some          $50         billion         of     the      total       estimated            loss        from      failed             thrifts
is      for        assistance              to the          acquirers             of     some      181        failed       thrifts
sold          to 79 acquirers                      by     the Federal             Savings             and Loan Insurance
Corporation                      (FSLIC)         in     1988      and early             1989.


9
You and other              members of                 this     Committee         first          asked          us in
October         1988 to examine                  the         structure        and costs           of      these
transactions,              as well         as the             bidding        and selection                process.
     w


We reported            to you in early                       1989    that     we had serious                    concerns
about        the cost        and risk            exposure            to the government                    of      these
costly        transactions.                One of our                major      concerns           was that            the
selection           process           was not          adequately            documented;               we could           not
assure        your    Committee            that         the most cost-effective                           resolutions
were reached.                You asked                us to further             review          the      circumstances
of     the    selections.               We subsequently                     confirmed           that      the      lack      of
documentation              prevented             us from            giving      you such assurances,                         given
the      limited      nature          of our           work.         (A chronology               of our           work on
these        transactions              is attached.)


The Financial              Institutions                 Reform,          Recovery,         and Enforcement                      Act
of     1989 (FIRREA)              requires             RTC to        study      the bidding               and
negotiation           processes            for         these        transactions,               determine            whether
they      were "sufficiently                     competitive,"                and report               to Congress.
It     is extremely              important             that      this       RTC study,           which          is presently
ongoing,           be well        done.          It     must        be comprehensive,                   be given           high
priority,           and be appropriately                        coordinated              with     Congress             and
Justice.


The potential              for     still         further            increases         in the           total       losses
resul;ing           from     thrift        and bank failures                     of      the     1980s         has
contributed           to pressure                on Justice              to expand         its         efforts.

10
Congress          and the         administration                  have increased               the      resources
allocated            to financial              institution              fraud,          although        the     full
effects        of these           additional           resources            have not yet                been felt.
     v


In March          1989,       Justice          surveyed           the    FBI and U.S.              attorney            offices
to determine                what additional              resources               those      offices           needed        for
dealing        with         financial          institution              fraud.           The survey            identified
the     need for            425 additional             FBI agents                and 231 additional
assistant            U.S.     attorneys.             Before           FIRREA was passed,                      the FBI
spent        about     400 work years                annually            investigating                 financial
institution            fraud.           U.S.     attorneys              estimated           that       they     were
devoting          about       200 work years                 annually            to prosecute             financial
institution            fraud          cases.


FIRREA authorized                     $75 million            each year            for     fiscal        years      1990,
1991,        and 1992 to enhance                   Justice's             efforts          against        financial
institution            fraud.           Of the       $75 million,                 $65 million            was for
investigation                and prosecution                 of      financial           institution            fraud.
The other          $10       million       was for           civil       proceedings.                  In December
1989,        Congress         appropriated             $49 million,                as requested               by the
administration,                 for     strengthening                 Justice's           investigation                and
prosecution            of     financial          institution               fraud.          According            to Justice
officials,            the     $49 million            appropriated                 in December             1989 was used
to    support


--    15; FBI agents                  (49 additional                 positions          were allocated                 to
      financial           institution            fraud        using       other         FBI funds),

11
--    118 assistant                   U.S.      attorneys,


--    24 Fraud            Section            attorneys,
       .


--    100     FBI accounting                    technicians,               and


--    6 Tax Division                   attorneys.


As of       June         1990,        most      of    the        positions          were filled.


For      fiscal          year        1991,      Justice           asked      for         an increase           of      68 FBI
positions              and 60 positions                     in the      Civil            Division       for         financial
institution               fraud,          but    no increase               in assistant                U.S.         attorney
positions.                In     total,         the        1991    Justice          budget          seeks about              $55
million           of     the $75 million                    authorized             for     financial           institution
fraud.            This        will     cover         the     persons         added in fiscal                   year         1990   and
the      new positions                 requested.                 Various          legislative           proposals
currently              being         considered             by    Congress          call      for      authorizing               from
$25 million               (this        is     in addition             to the             $75 million           already
authorized               by    FIRREA) to             as     much     as     $162.5          million          for     additional
investigators                  and prosecutors                    targeted          at financial               institution
fraud.


The federal               government             has responded                  in a variety             of         other       ways
to punish              those         who have defrauded                    financial            institutions.
     Y




12
Dallas          Bank Fraud Task Force--                        In October           1986,        the     U.S.        Attorney
in Dallas             said      he needed more                 resources          to address             the massive
thrift    and bank fraud crisis.   In August 1987, Justice
     .
established    the Dallas Bank Fraud Task Force, using existing
Criminal             Division          resources          and the         resources            of other         agencies
to supplement                the       work of         the U.S.         attorney          office.          This        task
force       is directed                by    Justice's           Fraud      Section.             As of July             1990,

the      task        force      included         16 Fraud             Section      attorneys,             7 assistant
U.S.       attorneys,             3 Tax Division                 lawyers,         41 FBI agents,                17 IRS
agents,         and 3 OTS examiners.                           I have already                noted       above the
accomplishments                   of    the     task      force.


Creation         of      a Special            Counsel          for     Financial          Institution
Fraud--Justice                  recently         created             the position            of Special              Counsel
for      Financial           Institution               Fraud         to be the       focal        point        for
Justice's             efforts          in this         area.          The role       of      the Special              Counsel,
who reports              to the Deputy                 Attorney         General,          is     to ensure            that
resources             are allocated              to     the most          significant             cases,        ensure
good coordination                      between         Justice         and the       thrift         and bank
regulatory             agencies,             and track           and maintain             data      on civil           and
criminal         enforcement                 actions.


As part         of     his      efforts        to achieve              these     goals,          the Special
Counsel         plans        to meet          with      U.S.      attorney         office         officials            to
discuss         the      status         of    their      financial             institution             fraud         cases.
The Sbecial              Counsel            expects      that         through      this        review,         he will
identify         cases          that        need more attention                  by the U.S.              attorney            or

13
that      would       be     more appropriately                        pursued         through      civil
litigation.                He    also        expects          to gain       a better             understanding            of
where resources                  are        needed.
    .

To effectively                  oversee         and coordinate                  the government's                efforts          to
pursue        financial           institution                 fraud,      the     Special          Counsel       needs to
have access               to detailed             and timely             information              on enforcement
activities.                Currently,             there        is no centralized                   system       that
maintains           these        data.          To obtain           such information                 as the        type         and
number of           financial               institutions            involved,            estimated          losses,
number of defendants                         charged,          sentences          and restitution                ordered,
and fines           imposed,           each U.S.             attorney        office         had to do a manual
search        of    its      files.           The Special              Counsel          then     had to      tabulate

this      information.                 The Special              Counsel          said      he may computerize
data      on priority             cases         to    facilitate           his         review.


27 City        Task Force              Attack--On              December          7,     1989,      the Attorney
General        announced              the     allocation            of resources                to establish            task
forces        in 27 cities               across         the     country          for     investigating             and
prosecuting               financial            institution             fraud.           He allocated          over        300
FBI agent           and assistant                U.S.        attorney        positions             to the     task
forces,        most        of which           were from            increased            staffing       levels
authorized            under       FIRREA.            The task            forces         were to be modeled
after      the      Justice           Department's              Dallas       Bank Fraud Task Force.


We swke            with     officials            in U.S.         attorney             offices       in five       of      the
cities        where these              task      forces         were to be established.                          All      had

14
been notified                   of        their       increased               allocations         throug.h          a Telex
issued          by the          Executive                 Office        for     U.S.        Attorneys          on December                7,
1989.    (Most                 of        these      positions            have been filled.)                       Officials               in
    .
four offices                   told        us that           they      had established                  task      forces        of
some form on their                          own initiatives.


The Special               Counsel              may also              assume supervision                   of    some task
forces.           According                  to the Special                    Counsel,        in the unlikely                  event
that      a U.S.          attorney                fails        to     aggressively             pursue          financial
institution               fraud--           and is           unresponsive              to headquarters'
insistence             on stepped-up                       efforts--           the    Special      Counsel           may take
control         of     task           force         resources            to ensure            financial           institution
fraud      cases          are properly                     pursued.


Compilation               of        Priority              Lists      --The      regulatory         agencies              recently
compiled          lists             of     those          institutions               they     believe          Justice        should
focus      on.         The aim of                   the      lists       is     to    identify          certain
institutions               for           priority            investigation              and prosecution.


I would         like       to talk                about       OTS' "Top              100" list          for     a moment,
since      it    has received                       considerable                publicity.           According             to an
OTS official,                  OTS compiled                   the      list      on the basis                 of a review            of
its     most significant                          referrals            and gave it             to Justice            on July          5,
1990.       U.S.          attorney                and FBI officials                    we spoke to said                   the OTS
list      and the          lists            compiled              by the other              regulatory            agencies
would*probably                      not     have a significant                       effect       on their          ongoing
investigations                      and prosecutions                     because        most of          the      institutions

15
on the           list      already           had high            priority.             However,          th.ey also            said
that        they        would      reevaluate              cases        involving            the      institutions
appearing     on the                 lists         that         have not       been given              high     priority              in
      I
their   offices.


IS THE FEDERAL RESPONSE ENOUGH?


Determining                whether           the    federal            response            to financial              institution
fraud        has been sufficient                          is difficult.                    The extent          to which
fraud        has occurred               is not            easily        ascertained,               nor    is    a clear
picture           readily          available              showing        what        impact        curre'nt          efforts       are
having.             We do see strong                      indications               that     the Justice
Department               is gearing            up to and deploying                          resources          for      increased
effort        against             financial          institution               fraud.           However,             we are
concerned               that      in focusing              more systematically                      on this           fraud,
Justice           may not          be giving              sufficient           attention            to two areas:


--     Justice           lacks      a mechanism                 that     would        allow        the newly            appointed
       Special           Counsel        to readily                access       the key information                         needed
       to effectively                 oversee             and coordinate                   the federal          government's
       efforts           to pursue            financial             institution              fraud.        This
       information                is needed          to determine,                   overall        as well           as by type
       of   financial              institution,                 how well            the efforts           are proceeding,
       what more needs to be done,                                  where      it     needs to be done,                     and
       what further                resources              are     actually           needed.           The new Special
       Co;nsel           relied       on each of                the U.S.            attorney        offices           to
       manually           collect        data        on closed               and ongoing            cases       addressing

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     thrift          fraud    a n d b a n k fraud.                       For inform a tio n             on unaddressed
     crim inal          referrals,           h e w o u l d h a v e to h a v e th e F B I field
     o ffices         manually         search            their           files.
      .

VW
     Justice          a n d th e regulatory                       agencies            n e e d to p a y close
     a tte n tio n       to w h e th e r        their          newly e x p a n d e d coordinatio n
     initiatives             a r e having              th e       intended            results        by c o n c e n trating
     resources           o n th e to p priority                         ta r g e ts     a n d d e te r m i n i n g         th e b e s t
     w a y to p r o c e e d against                    th e s e     ta r g e ts.          Justice          a n d th e
     regulatory            agencies          h a v e l o n g recognized                        th e n e e d for
     coordinatio n ,           given         th e       significant                   differences           in their
     respective            roles       a n d responsibilities.                             S till,         n o clear
     picture          h a s yet e m e r g e d depictin g                          h o w well      th e agencies                are
     doing      overall        to      i d e n tify,           investigate,                a n d prosecute
     financial           institution              fraud.             O ver th e p a s t several                      m o n ths,
     however,          a n u m b e r o f e fforts                   to      i m p r o v e coordinatio n                   have been
     launched.            P riority          lists            of    institutions                ta r g e te d       for
     investigation             a n d prosecutio n                    have been developed                          by th e
     regulatory           agencies.              T h e n e w Special                    C o u n s e l h a s recently
     b e g u n e fforts        to e n h a n c e coordinatio n                           b e tween th e regulatory
     agencies,           th e F B I,      a n d th e U .S . a ttorneys.                               T h e F B I plans              to
     begin      providing           fe e d b a c k        to       th e regulatory               agencies            on any
     actio n         ta k e n o n e a c h crim inal                  referral            s u b m i tte d         by th e s e
     agencies.            W h ile th e s e             initiatives                 a r e a start,           it      is to o
     early      to d e te r m i n e        w h e th e r        th e y      will        b e sufficient.
       II

In a n y e v e n t,       th e n u m b e r , m a q n i tu d e ,                   a n d complexity              o f fraud
cases m a y d e m a n d furth e r                infusion                o f resources.                Congress             should

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continue        to monitor      these     initiatives       and require       Justice      to
report       regularly      on the results         achieved.       Congress        could   then
better       assess      the adequacy      of   both    investigative        and
prosecutorial            resources      and the effectiveness           of   interagency
coordination.


This     concludes       my testimony.          I would     be pleased       to answer      any
questions.




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         CHRONOLOGYOF MAJOR EVENTS IN GAO's WORK FOR THE SENATE
               BANKING COMMITTEE ON THE FSLIC 1988 DEALS


10/20/88        Senators Rieqle,     Graham, Wirth,       Sasser, Chiles,    and
                Proxmire ask GAO to select         five FSLIC-assisted
                transactions     and to examine them with respect          to the
                (1) bidding     and selection    process and (2) terms and
                structure    of the transactions       (including  related
                cost, viability     analyses,    and FSLIC risk exposure).
                GAO is also asked to provide          comparable data on the
                background and experience        of the senior officials       of
                the Federal Reserve Board, OCC, FDIC, and FHLBB.
11/03/88        GAO sends a confirmation      letter    in response to the
                six Senators'  10/20/88   letter     identifying     the five
                transactions  selected   and detailing        the issues to be
                addressed.
12/30/88        Senator Rieqle asks GAO to examine FSLIC's             December
                1988 transactions,       focusing   on the bidding     and
                selection     process,   the structure    of the
                transactions,      and the tax costs.
01/89           GAO and Senate Banking Committee agree to merge the
                October and December 1988 requests    and to focus the
                GAO work in response to the latter    request on 5
                Southwest Plan transactions    and 2 other
                transactions.   GAO is to testify   on the results of
                this work in March 1989.
03/03/89        GAO writes   to the six Senators with information    on
                the backqround    and experience of senior officials    at
                the FRB, OCC, FDIC, and FHLBB in response to their
                10/20/88 request    letter.
03/l    4/89    GAO testifies       before  the Senate    Banking Committee on
                "Failed    Thrifts:      GAO's Analysis    of Bank Board 1988
                Deals."
03/14/89        During the hearing,        the Committee Chairman, in
                reaction   to GAO's comments on the lack of adequate
                documentation,    asks GAO to continue     work on the
                selection    of acquirers.
03/14/89        Senators Rieqle   and Cranston       jointly     ask GAO to
                answer 11 questions   relating       primarily     to FDIC.




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ATTACHMENT                                                                 ATTACHMENT


             Question     8, however,   asks GAO to compare the
             strengths      and weaknesses of a FSLIC and an FDIC
             assisted     transaction.
03/w         The Committee Chairman asks GAO to respond for                         the
             March 14 hearing       record to 17 questions      related               to
             the FSLIC transactions        and the administration's
             proposal    to resolve     the thrift    crisis and
             restructure    the thrift      industry.
             Question 6 asked:              "Do you observe any patterns      of
             favoritism       in the deals made last year.          I am
             particularly        interested      in cases where former
             insiders      from the Federal         Home Loan Bank System
             purchased failed           thrifts    or acted in some capacity
             to help arrange          the deals.      In how many of last
             year's     deals were former senior Bank Board officials
             involved?        Did they benefit        from inside information
             in those deals?"
             Question 7 asked:     "Please suggest standards   and
             offer  guidelines for the maintenance    of adequate
             records regarding   the deals."
             Question       15 asked:       "FSLIC contends that the thrift
             institutions         resulting     from FSLIC's December 1988
             assisted       acquisitions      are adequately        capitalized         --
             despite      having a low ratio        of capital        to total
             assets -- because much of the institutions'                        assets
             consist      of FSLIC notes and FSLIC-guaranteed                   assets,
             which are categorized            as involving     little       or no
             credit     risk.      Do you agree?       Has FSLIC succeeded in
             banishing        the moral hazards of low capital,                 such as
             the incentives          to take excessive     risks?"            :
04/07/89     GAO responds to Senators       Riegle's    and Cranston's
             3/14/89 request.     The response to question         8
             provides    a summary description       of FDIC's NCNB Texas
             transaction    and FSLIC's First      Gibraltar   transaction.
             (The GAO response    is included      in the hearings
             record--S.    HRG. 101-127,    Part IV, pp. 320-333.)
04/07/89     GAO responds to the 17 questions       for inclusion  in
             the testimony   record.     (The GAO response is printed
             in the hearings    record --S. HRG. 101-127, Part IV,
             pp. 334-353.)
05/31/89     GAO officials        brief  Senate Banking Committee staff
             on the results        to date of GAO's Office of Special
       *

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ATTACHMENT                                                        ATTACHMENT


             Investigations       work on FSLIC's   sale   of thrifts   to
             acquirers.
OS/OS/89     FIRREA requires      GAO to monitor the FSLIC deals and
    .        to estimate    their   cost.  GAO subsequently initiated
             these studies.
01/25/90     GAO testifies      before the House Banking Committee on
             the preliminary       results     of its FIRREA-required
             monitoring    work.      GAO says that FDIC is not giving
             sufficient    attention       to its management of the FSLIC
             deals and identifies          three areas where improvements
             are needed.
03/29/90     GAO refers     items related    to failed    S&Ls to the
             Department of Justice.         (Office    of Special
             Investigations      field  work on the FSLIC deals ended
             in late 1989.)
04/02/90     GAO testifies    before the House Banking Committee             on
             differences   between the RTC and FSLIC 1988
             resolutions   in terms of bidding  and selection
             approaches and structure.
04/06/90     GAO testifies   before    the Senate Banking Committee on
             the cost of the S&L crisis       resolution.      Estimated
             costs of the FSLIC Resolution        Fund, which includes
             the cost of the FSLIC 1988 deals,          are included.    The
             FIRREA-required    report    on cost of 1988 FSLIC deals
             will  be issued this summer.
04/26/90     GAO writes       Senator Riegle summarizing   past and on-
             going work       on the FSLIC deals for the Senate Banking
             Committee,       as well as the status of the two RTC
             studies   of     these deals that were required   by FIRREA.
07/19/90     GAO issues report  "Failed Thrifts:           FDIC Oversight
             of 1988 Deals Needs Improvement"




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