In a little-noticed November report, Bank of America announced that it had donated more than $60.1 million to various charitable funds and nonprofit groups.
The donations were a good deal for Bank of America. For every dollar the bank gives, an independent monitor for the deal credits the bank with $2 toward the record $16.6 billion settlement with the Justice Department on financial fraud charges it signed in August 2014. To date, the donations have reduced that penalty by $138 million.
Ordinarily, this practice would be illegal. Not on the bank's part, but on the government's.
Federal law says that any funds obtained by a government official, such as a Justice Department prosecutor, must be deposited with the Treasury Department. Officials cannot instruct anybody making a payment to direct the funds anywhere else, much less offer them a deal if they do.
Yet President Obama's Justice Department has found a legal workaround to do just that in two of the biggest financial fraud settlements the government has ever obtained. Left-leaning nonprofit groups who would be eligible for the donations lobbied for this, according to Republican critics.
How does the Justice Department do this? By arguing that these are "voluntary" donations by the banks and therefore not funds that would otherwise go to the Treasury. Never mind that the banks would violate their plea agreements with the department if they did not make the payments.
"It's a cute lawyer's trick," said Paul Larkin, senior legal research fellow with the conservative Heritage Foundation. "Rather than take the money and then hand it out, which they cannot do, they tell the bank to give it directly. It's really an effort to funnel public money to private parties."
Under the $7 billion settlement Citigroup signed with the Justice Department in 2014 on financial fraud charges, the bank is obligated to pay at least $10 million in "community relief" to housing-related nonprofit groups from a list the government maintains, many of which are Democratic-friendly. It must also pay $15 million to legal aid funds and $25 million to public or private community development funds.
Bank of America must pay at least $20 million to housing groups, $30 million to legal aid groups and $50 million to public or private community development funds.
Not only do both banks get double credit toward their overall penalties for each donation, but there is also no explicit cap on the amount of credits they can get. They could erase potentially hundreds of millions of dollars in federal penalties in this way.
"The DOJ announces, 'Oh, we have gotten these multibillion settlements,' and then you look at the fine print and see the banks get more credit for giving to a slush fund than to the Treasury," said Ted Frank, founder of the nonprofit Center for Class Action Fairness.
Direct consumer relief, on the other hand, such as forgiving delinquent loans, earns the banks at best only $1 of credit for each dollar they spend. Sometimes less.
Republicans have fumed. "It appears that DOJ is systematically subverting Congress's budget authority by using the settlements to funnel money to favored activist groups," said House Judiciary Chairman Bob Goodlatte, R-Va., and House Financial Services Chairman Jeb Hensarling, R-Texas, in a May letter to Attorney General Loretta Lynch.
Even the Justice Department has conceded that they are skirting the law on this. In February, while giving testimony before the House Judiciary Committee, Deputy Assistant Attorney General Geoffrey Graber said, "This kind of relief could not have been ordered by a court, even if the government had prevailed at trial."
The Justice Department isn't eager to discuss any of this despite having touted both settlements when they were announced in 2014. "We will decline your interview request on money from the financial settlements," spokesman Patrick Rodenbush told the Washington Examiner.
A legal loophole
When DOJ announced the $7 billion settlement with Citigroup in July 2014, then-Associate Attorney General Tony West, one of the deal's key architects, boasted that it included "innovative consumer relief."
"In addition to the principal reductions and loan modifications we've built into previous resolutions, this consumer relief menu includes new measures such as $200 million in typically hard-to-obtain financing that will facilitate the construction of affordable rental housing, bringing relief to families pushed into the rental market in the wake of the financial crisis," West said in a department press release.
The announcement for the Bank of America settlement, which came two months later, noted that it would include "donations to assist communities in recovering from the financial crisis, and financing for affordable rental housing."
In other words, the department had carved out some funds for nonprofit groups involved in housing-related issues, funds that would have otherwise gone toward forgiving delinquent mortgages.
When asked during the February congressional hearing whose idea in the Justice Department it was to include these provisions in the plea agreements in the first place, Graber said he didn't know.
Republicans believe the administration did it at the behest of liberal activists. "[T]he little information that DOJ did provide [to the House Judiciary Committee] suggests that at least some major organizations advocated for the inclusion of such provisions in communications with DOJ personnel," Goodlatte and Hensarling wrote in their letter to Lynch.
The lawmakers point to a February 2014 email from the nonprofit group Virginians Organized for Interfaith Community Engagement to the department as proof. Prior emails to DOJ showed that the group had been working with the Leadership Conference on Civil and Human Rights, a major coalition of civil rights groups, liberal nonprofits and labor organizations, on housing issues.
The VOICE group sought a meeting with DOJ's West to "make the case that the Department of Justice should make 'grants to capitalize community equity restoration funds' mandatory in all future settlements."
However, the Justice Department is generally restricted from directing payments to outside groups. The Constitution states that only Congress can appropriate funds from the Treasury and several laws have further clarified this and strictly defined what counts as Treasury money. The Miscellaneous Receipts Act, for example, states that any funds received by the government must go directly to the Treasury.
The U.S. Attorneys' Manual states that "plea agreements ... should not include terms requiring the defendant to pay funds to a charitable, educational, community or other organization or individual who is not a victim of the criminal activity."
The manual provides an exception for groups that are directly involved in "providing services to redress the harm," but only under limited circumstances since the practice "can create actual or perceived conflicts of interest and/or other ethical issues."
Before Obama took office, any funds obtained from federal prosecutions that did go to the third party groups did so only after all matters relating to the people directly injured by the wrongdoing had been addressed. In other words, only "leftover" funds were used. Including payment as part of the main plea agreement was not allowed.
The Justice Department got around this by saying these rulings could be ignored, especially in "deferred" or "non-prosecution" agreements, according to the July 2012 U.S. Attorneys' Bulletin. These are deals in which the alleged wrongdoers agree to pay penalties prior to the feds officially filing charges, allowing both to avoid going to court.
For businesses, these deals are attractive because they can be resolved faster and at less expense than if they go to court. For Justice Department lawyers, they make it easier to get settlements and avoid the risk of any error at trial that would undermine the case.
In the Bank of America settlement, the government may have had an additional reason to avoid the courthouse. Many of the bank's alleged violations related to other companies that it had bought during the 2008 crisis, purchases made with the government's active encouragement.
"The claims relate primarily to conduct that occurred at Countrywide and Merrill Lynch prior to Bank of America's acquisition of those entities," the bank said in its statement announcing the 2014 settlement.
The takeovers limited the financial crisis by preventing those failing companies from disappearing altogether. But by acquiring them, the bank took on their liabilities, including legal ones. Prosecuting Bank of America for this in court would have highlighted the government's role in how it became liable.
Administration lawyers realized there was another benefit to these kinds of deals: If the company agrees to make donations prior to any official legal action, then DOJ could argue that those funds are technically separate from any penalties imposed as part of the plea deal.
This exception was initially conceived for environmental crimes, but by 2014 the department was using the same rationale in its settlements with Bank of America and Citigroup.
The 2012 U.S. Attorneys' Bulletin is explicit that this particular maneuver is meant to circumvent the law on turning over funds to the Treasury.
"First, it is important that a plea agreement containing a community service provision be negotiated and executed prior to the admission of guilt," the memo stated. Doing it this way "minimize[s] the risk that the government might be deemed to be in constructive receipt of the community service funds, which would raise [Miscellaneous Receipts Act] concerns."
Part of minimizing that risk, the memo explains, is demonstrating that the government does not have direct control over how the money is spent once the agreement is signed. But the government can still set up the rules.
"Rather than the department saying, 'You must give it to John Doe No. 1-5,' they say, 'Here's a list of 50 John Does. You can give it to anyone on the list.' But it still only goes to organizations that the government likes," Larkin said.
The community relief sections of the Citigroup and Bank of America settlements specifically say that they must give at least $10 million and $20 million, respectively, to groups on the Department of Housing and Urban Development's list of "approved housing counseling agencies." These are nonprofit groups whose activities the department has sponsored.
The list is several hundred names long and includes numerous nonpartisan groups like Catholic Charities as well as exclusively local nonprofits. Others are more liberal. Reports by the monitor for the Bank of America settlement show that National Council of La Raza received $1.5 million, the National Urban League received $1.2 million, and New Jersey Citizen Action, a labor-backed activist group received $100,000.
Bank of America also gave $2.25 million to the Local Initiatives Support Corporation and received a $5.2 million credit in return. LISC's board includes Andrew Plepler, the bank's global corporate social responsibility executive. Therefore, the bank got more than double credit toward paying down its penalty for donating to an organization it was already supporting.
In his Judiciary Committee testimony, DOJ's Graber stressed, "The banks choose which specific organizations receive these donations. The DOJ does not mandate that any funds go to any [particular] third parties."
A bank official who requested anonymity told the Washington Examiner they expect their next report on the settlement, due in February, to show they have paid out the minimum amount of community relief the deal requires, more than two years ahead of schedule.
Specific details of Citigroup's donations were not available. The bank declined to comment.
Critics like Goodlatte argue that many of these charities may be doing good work, but if that is the case, there's no reason the funds could not come through the normal congressional appropriations process.
It is not clear what a court would think of this maneuver since it has never been challenged. Nor is any such challenge likely. Neither the government nor the banks have any interest in preventing it and outside groups lack the legal standing to challenge it.
The administration is not the only one using these kind of agreements. As a U.S. attorney in 2005, New Jersey Gov. Chris Christie used a deferred prosecution agreement against drugmaker Bristol-Myers Squibb to get it to send funds to his alma mater, Seton Hall University School of Law. The funds were used to endow a professorship in ethics.