The Justice Department’s practice of diverting funds from major settlements to third-party groups, scorned as a “slush fund” by critics of the Obama-era practice, may survive under the new White House.
Several lawmakers have made efforts to prevent the fund diversion. Rep. Bob Goodlatte, R-Va., and Sen. James Lankford, R-Utah, introduced legislation dubbed the Stop Settlements Slush Funds Act in their respective chambers. But neither bill appears to have the backing of the administration, as it has not weighed in on the efforts.
The Justice Department is refusing to say whether it plans to divert any funds in any future settlements it is pursuing or if it instead plans to formally prohibit the practice. “DOJ declines to comment,” spokesman Mark Abueg told the Washington Examiner.
“We’ve made several overtures to the DOJ, but gotten no response yet on the issue,” said a congressional source, who requested anonymity.
That has critics of the settlement practice scratching their heads and wondering if, for all of its deregulatory zeal, the administration might leave that part of former President Barack Obama’s legacy in place.
Paul Larkin, a senior legal research fellow at The Heritage Foundation who has studied the practice extensively, said the official silence may be because holdovers from the previous administration are still running the Justice Department.
“The only Trump person there right now is [Attorney General] Jeff Sessions,” Larkin said. The administration hasn’t had the time or opportunity to install its political appointees. Once Sessions fills those ranks, the department will likely start reviewing its practices, he said.
It would be easy for the Trump administration to end the practice of diverting settlement funds, Larkin noted. Sessions need only issue a directive to federal prosecutors prohibiting it. Such instructions don’t need congressional review or even an official rulemaking.
That’s assuming the Trump White House doesn’t find the idea of being able circumvent Congress as enticing as Obama’s did, said Ted Frank, founder of the Center for Class Action Fairness. “It’s entirely possible that somebody in the White House might see this as a useful policy tool. That’s always the concern,” he said.
Under federal law, any funds obtained as part of a government action, such as fines secured through a Justice Department prosecution, must be given to the Treasury Department. The Constitution says only Congress can appropriate government funds, which has been further clarified by several laws.
“Requiring mandatory donations or charitable contributions to resolve allegations of criminal wrongdoing likely runs afoul of at least two federal statutes, the Miscellaneous Receipts Act and the Anti-Deficiency Act,” noted a 2016 study by the law firm Hogan Lovells.
The United States Attorneys’ Manual says that diverting the funds from settlements to anywhere other than the Treasury “can create actual or perceived conflicts of interest and/or other ethical issues.”
The Obama administration found a way around that in its 2014 settlements with Bank of America ($16.6 billion) and Citigroup ($7 billion) for fraud related to the 2008 financial crisis. The settlements required the financial institutions to pay, respectively, $100 million and $50 million, to housing-related nonprofit groups, legal aid funds and public or private community development funds, none of which were victims of fraud. Only groups on a government-approved list were eligible.
The administration argued the move was legal because the financial institutions agreed to make the payments prior to officially settling with the Justice Department. Thus, the funds were not technically government money. Supposedly, the financial institutions were “voluntarily” making the payments.
Even the Justice Department conceded that the payments skirted the law. “This kind of relief could not have been ordered by a court, even if the government had prevailed at trial,” Deputy Assistant Attorney General Geoffrey Graber said in 2015 testimony before the House Judiciary Committee.
It was a great deal for the banks since they got $2 of credit toward the settlement for every dollar they donated, money that otherwise would have gone toward forgiving delinquent mortgages. There was no cap on the donations. Bank of America ultimately gave out $112 million, $12 million more than it was required to make. That earned it $215 million in credit toward the settlement, according to the settlement’s independent monitor.
Recipients of the funds included liberal groups such as the National Council of La Raza ($1.5 million), Habitat for Humanity ($1.5 million) and the National Urban League ($850,000), prompting several Republicans to label the effort a “slush fund.”
The Obama administration got even more ambitious in a $14.7 billion settlement finalized in January with Volkswagen for rigging its cars to cheat clean air requirements. The settlement required the company to invest $1.2 billion in an Environmental Protection Agency plan to promote “zero-emissions vehicle technology” rather than sending the funds to the Treasury Department. That was after Congress repeatedly rejected funding the EPA program.
The Obama administration simply circumvented the entire congressional appropriations process, Frank said. Getting rid of that option “doesn’t appear to be high on the agenda” of the current administration, he said.
