Criminal Debt: Court-Ordered Restitution Amounts Far Exceed
Likely Collections for the Crime Victims in Selected Financial
Fraud Cases (31-JAN-05, GAO-05-80).
In the wake of a recent wave of corporate scandals, Senator Byron
L. Dorgan noted that the American taxpayers have a right to
expect that those who have committed corporate fraud and other
criminal wrongdoing will be punished, and that the federal
government will make every effort to recover assets held by the
offenders. Recognizing that GAO previously reported on
deficiencies in the Department of Justice's (Justice) criminal
debt collection processes (GAO-01-664), Senator Dorgan asked GAO
to review selected criminal white-collar financial fraud cases
for which large restitution debts have been established but
little has been collected. Specifically, GAO was asked to
determine (1) the status of Justice's efforts to collect on the
outstanding debt, (2) the prospects for future collections, and
(3) whether specific problems have affected Justice's ability to
collect the debt.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-05-80
ACCNO: A16498
TITLE: Criminal Debt: Court-Ordered Restitution Amounts Far
Exceed Likely Collections for the Crime Victims in Selected
Financial Fraud Cases
DATE: 01/31/2005
SUBJECT: Collection procedures
Crimes or offenses
Criminals
Debt collection
Fines (penalties)
Fraud
Restitution
Victim compensation
White collar crime
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GAO-05-80
United States Government Accountability Office
GAO Report to the Honorable Byron L. Dorgan, U.S. Senate
January 2005
CRIMINAL DEBT
Court-Ordered Restitution Amounts Far Exceed Likely Collections for the Crime
Victims in Selected Financial Fraud Cases
a
GAO-05-80
Highlights of GAO-05-80, a report to the Honorable Byron L. Dorgan, U.S.
Senate
In the wake of a recent wave of corporate scandals, Senator Byron
L. Dorgan noted that the American taxpayers have a right to expect that
those who have committed corporate fraud and other criminal wrongdoing
will be punished, and that the federal government will make every effort
to recover assets held by the offenders. Recognizing that GAO previously
reported on deficiencies in the Department of Justice's (Justice) criminal
debt collection processes (GAO-01-664), Senator Dorgan asked GAO to review
selected criminal whitecollar financial fraud cases for which large
restitution debts have been established but little has been collected.
Specifically, GAO was asked to determine (1) the status of Justice's
efforts to collect on the outstanding debt, (2) the prospects for future
collections, and (3) whether specific problems have affected Justice's
ability to collect the debt.
GAO recommends that the Attorney General (1) include in the criminal debt
strategic plan, which is called for by recent congressional action,
legislative initiatives, operational initiatives, or both that are
directed toward maximizing opportunities for collection; and (2) report
annually in Justice's Accountability Report on the progress toward
developing and implementing the strategic plan. Justice stated it is
taking steps to develop a strategic plan to improve criminal debt
collection.
www.gao.gov/cgi-bin/getrpt?GAO-05-80.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Gary T. Engel at (202)
512-3406 or [email protected].
January 2005
CRIMINAL DEBT
Court-Ordered Restitution Amounts Far Exceed Likely Collections for the Crime
Victims in Selected Financial Fraud Cases
The court-ordered restitution for the five selected white-collar financial
fraud criminal debt cases GAO reviewed far exceeded amounts likely to be
collected and paid to the victims. These offenders, who had either been
highranking officials of companies or operated their own business, pled
guilty to crimes for which the courts ordered restitution totaling about
$568 million to victims. As of the completion of GAO's fieldwork, which
was up to 8 years after the offenders' sentencing, court records showed
that amounts collected for the victims in these cases totaled only about
$40 million, or about 7 percent of the ordered restitution.
At some point prior to the judgments establishing the restitution debts,
each of the five offenders either reported having wealth or significant
financial resources to the courts or to Justice, or there were indicators
of such. However, following the judgments, the offenders claimed that they
were not financially able to pay full restitution to their victims.
Justice's Financial Litigation Units (FLU) that were responsible for
collection performed certain activities to collect the debts after the
judgments, but the debts had not been significantly reduced as a result of
the FLUs' identification and liquidation of additional assets of the
offenders.
The FLUs' prospects are not good for collecting additional restitution
amounts on these cases. A major problem hindering the FLUs' ability to
collect restitution debt in the selected cases was the long time intervals
between the criminal offense and the judgment. Court records show that 5
to 13 years passed between when the offenders began to engage in the
criminal activity for which they were sentenced and the date of their
judgments. For each of the selected cases, by the time the court rendered
the judgment establishing the restitution debt, certain of the offenders'
assets had been, among other things, transferred to family members or
others, involved in forfeiture actions, subject to bankruptcy, or moved to
a foreign account. In addition, one of the selected cases involved an
offender who was jointly and severally liable for the debt with another
offender who had been deported. Justice acknowledged that such
dispositions or circumstances are not uncommon and create major debt
collection challenges for the FLUs. Moreover, there were minimal, if any,
apparent negative consequences to these offenders for not paying their
restitution debts.
Recently, to further implementation of a related recommendation made in
2001 by GAO, the Congress directed the Attorney General to develop a
strategic plan with certain other federal agencies to improve criminal
debt collection. Given the significant upward trend in outstanding
criminal debt and the difficulty experienced by Justice in collecting
criminal restitution debt, it is important that Justice include in such a
plan legislative initiatives, operational initiatives, or both to enhance
the federal government's capacity to collect restitution for victims of
financial crimes. Justice's comments on a draft of this report are
consistent with this conclusion.
Contents
Letter 1
Results in Brief 2
Background 6
Scope and Methodology 7
Restitution Amounts Far Exceed Likely Collections for the Crime
Victims 9
Recent Congressional Action 16
Conclusion 17
Recommendations for Executive Action 17
Agency Comments and Our Evaluation 18
Appendixes
Appendix I: Comments from the Department of Justice 20
GAO's Comments 23
Appendix II: Staff Acknowledgments 24
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separately.
A
United States Government Accountability Office Washington, D.C. 20548
January 31, 2005
The Honorable Byron L. Dorgan United States Senate
Dear Senator Dorgan:
In March 2004, we reported that the Department of Justice's (Justice)
unaudited records indicated that the total amount of outstanding criminal
debt had more than quadrupled over a 6-year period, growing from about $6
billion as of September 30, 1996, to almost $25 billion as of September
30, 2002.1 This significant upward trend started with enactment of the
Mandatory Victims Restitution Act of 1996 (MVRA).2 One feature of that law
substantially increased the restitution amounts the courts were required
to order for certain offenses.3 Our 2004 report included detailed
information on the reported amount and growth of criminal debt for fiscal
years 2000 through 2002, including specific amounts related to
white-collar financial fraud.4 As discussed in that report, Justice's
unaudited records indicate that for each of these 3 fiscal years, about
two-thirds or more of criminal debt was related to white-collar financial
fraud. About 80 percent of the white-collar financial fraud debt as of
September 30, 2002, was categorized as nonfederal restitution, which is
criminal debt owed to other than the federal government and for which
Justice has a significant responsibility to collect on behalf of crime
victims.
1GAO, Criminal Debt: Actions Still Needed to Address Deficiencies in
Justice's Collection Processes, GAO-04-338 (Washington, D.C.: Mar. 5,
2004). For this report, the latest reported data from Justice as of the
completion of our fieldwork in mid-December 2003 were for fiscal year
2002. Justice was still in the process of compiling and summarizing
criminal debt information for fiscal year 2003.
2Pub. L. No. 104-132, Title II, Subtitle A, 110 Stat. 1214, 1227.
318 U.S.C. S: 3663A (2000) requires the court to order restitution for
offenders, regardless of the offender's ability to pay, who are convicted
of (1) a crime of violence as defined by 18 U.S.C. S: 16 (2000); (2) an
offense against property under title 18 of the U.S.C., including any
offense committed by fraud or deceit; or (3) an offense related to
tampering with consumer products (18 U.S.C. S: 1365 (2000)), in which an
identifiable victim has suffered a physical injury or pecuniary loss. See
also 18 U.S.C. S:S: 2248, 2259, 2264, and 2327 (2000).
4White-collar financial fraud is criminal activity involving various types
of unlawful, nonviolent conduct committed by corporations, individuals, or
both, including theft or fraud and other violations of trust, for example,
securities fraud and financial institution fraud.
We noted in our earlier July 2001 report, and reaffirmed in our 2004
report,5 that the collection of outstanding criminal debt is inherently
difficult due to a number of factors, including the nature of the debt, in
that it involves criminals who may be incarcerated, may have been
deported, or may have minimal earning capacity; the MVRA requirement that
the assessment of restitution be based on actual loss and not on an
offender's ability to pay; and the significant amount of time that may
pass between offenders' arrest and sentencing, thus affording
opportunities for offenders to hide fraudulently obtained assets in
offshore accounts, shell corporations, family members' names and accounts,
or other ways. Our 2001 report also noted as contributing factors to the
growth of reported uncollected criminal debt Justice's inadequate policies
and procedures for collecting criminal debt, lack of adherence to
established criminal debt collection procedures in certain judicial
districts, and Justice's insufficient coordination with other entities
involved in the collection of criminal debt.
In the wake of a recent wave of corporate scandals, you noted that the
American taxpayers have a right to expect that those who have committed
corporate fraud and other criminal or civil wrongdoing will be punished,
and that the federal government will make every effort to recover assets
and the ill-gotten gains held by such offenders. Recognizing that we
previously reported on specific deficiencies in Justice's and other
federal agencies' criminal debt collection processes and had made
recommendations to improve collections, you asked us to study several
specific criminal restitution debt cases to shed additional light on the
difficulties involved in attempting to collect restitution for victims of
crime. Specifically, for selected criminal white-collar financial fraud
cases for which large restitution debts have been established but little
has been collected, you asked that we determine (1) the status of
Justice's efforts to collect on the outstanding debt, (2) the prospects
for future collections, and (3) whether specific problems have affected
Justice's ability to collect the debt.
Results in Brief The restitution assessed the offenders by the courts for
the five selected criminal debt cases we reviewed that involved
white-collar financial fraud far exceeds amounts that have been and are
likely to be collected and paid to victims of the crimes. Taken together,
the five offenders were ordered by
5GAO, Criminal Debt: Oversight and Actions Needed to Address Deficiencies
in Collection Processes, GAO-01-664 (Washington, D.C.: July 16, 2001).
GAO-04-338.
the courts to pay restitution totaling about $568 million to their
victims, many of whom were corporate shareholders or small investors. The
courts also ordered four of the offenders to serve prison terms ranging
from 1 to 5 years and placed one offender on several years of probation.
The offenders, who had either been high-ranking officials of companies or
operated their own business, pled guilty to various white-collar crimes.
As of June 2004, which was several years after the offenders were
sentenced, court records showed that amounts collected for the victims
totaled only about $40 million, or about 7 percent of the ordered
restitution.6
These limited collections resulted predominantly from asset forfeiture
actions7 or from payments made prior to the offenders' sentencing. For
each of these selected cases, Justice's Financial Litigation Units (FLU),
which are responsible for criminal debt collection, performed certain
activities to attempt to collect the debts after the judgments. However,
the FLUs were not able to identify and liquidate additional assets of the
offenders to significantly reduce the debts.
Based on information available to us, the FLUs' prospects are not good for
collecting additional restitution amounts on these cases. Each of the
offenders, at some point prior to the judgments establishing the
restitution debts, either reported having wealth or significant financial
resources to the courts or to Justice, or there were indicators that this
was the case. However, following the judgments, the offenders claimed that
they were not financially able to pay full restitution to their victims.
At the time of our debt file reviews, the limited payments the offenders
had made or were
6This low rate of collection for the selected cases coincides with overall
collection rates for criminal debt we have previously reported. In 2004,
we reported that according to Justice's unaudited records, collections
relative to outstanding criminal debt averaged about 4 percent for fiscal
years 2000, 2001, and 2002 (GAO-04-338). In 2001, we reported that
criminal debt collection averaged about 7 percent for fiscal years 1995
through 1999 (GAO01-664).
7Asset forfeiture is used to seize property associated with criminal
activity. The property seized may be illegal for someone to own or it may
be the gains resulting from the criminal activity. It is a means of
punishing and deterring criminal activity by depriving criminals of
property, including items such as monetary instruments, real property, and
tangible personal property, that was used or acquired through illegal
activities. The federal government seizes such property associated with
violations of various federal statutes and takes title to that property
(forfeiture) through either an administrative or judicial process. Seized
property either can be returned to the owner or forfeited to the
government. After federal forfeiture, noncash property may be sold, put
into official use, destroyed, or shared with state and local law
enforcement agencies participating in the seizure.
then making will do little to significantly reduce the outstanding balance
of the restitution debts as initially set by the courts.
For the selected cases, we also found that there were minimal, if any,
apparent negative consequences to the offenders for not paying their
restitution debts. Court and public records indicated that each of the
offenders' lifestyles was, at a minimum, comfortable. Moreover, it is not
a crime to willfully fail to pay restitution debt. A court may revoke or
modify the terms and conditions of probation or supervised release for an
offender's failure to pay restitution;8 however, these are of little
consequence once the offender has successfully completed the term of
probation or supervised release, because at that point, the offender
cannot be sent to prison for failure to pay a restitution debt.
A major problem hindering the FLUs' ability to collect restitution debt in
the selected cases was the long time intervals between the criminal
offense and the judgment, a situation that Justice acknowledged is
typical. Court records show that 5 to 13 years passed between when the
offenders selected in our review began to engage in the criminal activity
for which they were sentenced and the date of their judgments. Justice
stated that during such intervals, criminals engaged in fraudulent
enterprises commonly dissipate their criminal gains quickly and in a
manner that cannot be easily traced, such as expending gains on intangible
and excess "lifestyle" expenses, including travel, entertainment,
gambling, and gifts. In addition, other dispositions and circumstances
involving the offenders' assets or the offenders occur that create major
debt collection challenges for the FLUs. For example, we found that for
the selected cases, by the time the court rendered the judgment
establishing the restitution debt, certain of the offenders' assets had
been, among other things, transferred through legal or potentially
fraudulent means to family members or others, involved in forfeiture
actions, subject to bankruptcy, or moved to a foreign account. In
addition, one of our selected cases involved an offender who was jointly
and severally liable for the debt with another offender who had been
deported. Justice acknowledged that such dispositions or circumstances are
not uncommon.
8Supervised release is a period during which an offender who has completed
his or her full prison sentence mandated by federal sentencing guidelines
is under supervision by federal probation officers.
Given the significant upward trend in outstanding criminal debt and the
difficulty experienced by Justice in collecting criminal restitution debt,
which we have previously reported and which is exemplified by the selected
cases discussed in this report, it is important that Justice determine how
to better maximize opportunities for making offenders' assets available to
pay the offenders' victims. In our view, Justice can best accomplish this
by addressing our 2001 recommendation that it work with other involved
federal agencies to develop a strategic plan to improve criminal debt
collection processes and establish an effective coordination mechanism
among all such entities. As stated in our 2001 report, effective and
efficient criminal debt collection hinges on the ability of the entities
involved to work together in assessing and collecting criminal debt, and
prompt action is essential for maximizing potential collections.9
Our current review of the five selected white-collar financial fraud
debts, as supported by our previous work on criminal debt collection,
strongly supports the need for Justice, as the agency primarily
responsible for collecting criminal debt, to take the lead in promptly
addressing and implementing our 2001 recommendation that Justice work with
the Administrative Office of the United States Courts (AOUSC), the Office
of Management and Budget (OMB), and the Department of the Treasury
(Treasury) to develop a strategic plan that would improve interagency
processes and coordination with regard to criminal debt collection
activities, as well as address managing, accounting for, and reporting
criminal debt. Until such a strategic plan is developed and effectively
implemented, which could involve legislative as well as operational
initiatives, the effectiveness of criminal restitution as a punitive tool
may be diminished, and Justice will lack adequate assurance that offenders
are not benefiting from ill-gotten gains and that innocent victims are
being compensated for their losses to the fullest extent possible.
The conference report accompanying the Consolidated Appropriations Act,
2005, Public Law No. 108-447, which was signed into law on December 8,
2004, included language calling for the Attorney General to take the lead
in such a coordinated effort. In tandem with this call for action, we
recommend that Justice consider a broad range of legislative and
operational initiatives for enhancing the federal government's capacity to
collect restitution for victims of financial crimes for inclusion in the
strategic plan.
9GAO-01-664.
As discussed in the "Agency Comments and Our Evaluation" section at the
end of this report, Justice's comments on a draft of this report, which
are reprinted in appendix I, are consistent with our conclusion that given
such poor prospects for collection of restitution debt for our five
selected cases, as well as the overall low collection rates for criminal
debt we have previously reported, it is important that Justice determine
how to better maximize opportunities to make offenders' assets available
to pay crime victims. In its comments, Justice stated that consistent with
our recommendation and the conference report that accompanied the
Consolidated Appropriations Act of 2005, Justice is in the process of
organizing an interagency joint task force to develop a strategic plan for
improving criminal debt collection. Justice did not, however, specifically
comment on our recommendations.
Background Justice is responsible for collecting criminal debt and has
delegated operating responsibility to its FLUs within all of Justice's
U.S. Attorneys' Offices (USAO).10 Justice's Executive Office for United
States Attorneys (EOUSA) provides administrative and operational support,
including support required for debt collection, to the USAOs. According to
Justice, the FLUs typically become involved in the criminal debt
collection process after the judgment, which occurs when an offender is
convicted and a judge orders the offender to pay a fine or restitution.
The U.S. Courts and their probation offices may also assist in collecting
moneys owed. AOUSC provides national standards and promulgates
administrative and management guidance, including standards and guidance
required for debt collection, to the various U.S. judicial districts.
10There are 94 districts throughout the country, but USAOs for 2 of them
are combined, resulting in 93 USAOs.
In July 2001, we reported on the growth of uncollected criminal debt
through fiscal year 1999. We noted that although some of the key factors
that contributed to the increasing amount of criminal debt were beyond
Justice's control, certain of Justice's criminal debt collection processes
were inadequate.11 Accordingly, in the 2001 report, we made 14
recommendations to Justice to improve the effectiveness and efficiency of
its criminal debt collection processes.12
In our March 2004 report, we discussed the extent to which Justice had
acted on our previous recommendations to it to improve criminal debt
collection. Our follow-up work on Justice's efforts to implement our 2001
recommendations showed that it had completed actions on 7 of the 14
recommendations, most of which were completed about 2 years after we made
the recommendations, and had efforts under way to address 6 other
recommendations. We noted that because many of these recommendations
largely focused on establishing policies and procedures, it is important
that they be effectively implemented once they are established, and it
will likely take some time for collection results to be realized from full
implementation. However, efforts to implement the recommendation that we
considered the most critical had not progressed-namely for Justice to
participate in a multiagency effort to develop a unified strategy for
criminal debt collection. Specifically, we reported that Justice had not
yet worked with other agencies, including AOUSC, OMB, and Treasury, to
implement a key recommendation to work as a joint task force to develop a
strategic plan that addresses managing, accounting for, and reporting
criminal debt. We concluded that the long-standing problems in the
collection of outstanding criminal debt-including fragmented processes and
lack of coordination-continued because there is no united strategy among
the major entities involved with the collection process.13
Scope and Our case study review, on which the results described in this
report are based, focused on a nonrepresentative selection of five
criminal white-
Methodology collar financial fraud debts that Justice reported outstanding
as of
11GAO-01-664.
12In the 2001 report, we also made recommendations to address
long-standing problems in the collection of outstanding criminal debt to
the AOUSC, OMB, and Treasury.
13GAO-04-338.
September 30, 2002, each with a judgment prior to fiscal year 2001 that
assessed the offender millions of dollars of restitution. We selected
debts involving offenders who were not currently in prison and for which
the offenders had paid a relatively small amount of the outstanding
restitution amounts as of September 30, 2002. Also, our review only
involved selected cases for which we could clearly identify the lead
debtor in court and Justice records.
We obtained sufficient information to address our three reporting
objectives; however, we were not provided all of the details pertaining to
each of the five selected cases and thus cannot be assured that there was
not additional relevant information. Because Justice still considers these
cases to be open law enforcement cases for collection purposes, the
information Justice provided for each case was limited primarily to what
was included in its debt collection file minus personal identifiers, such
as the names of the offenders, their addresses, and their Social Security
numbers. Therefore, we are not providing a comprehensive account of any
particular case.
For each selected debt, we reviewed Justice's debt collection file or
files, minus all personal identifiers. We interviewed appropriate
officials from Justice's EOUSA and the responsible FLUs concerning actions
taken to collect the debt, obstacles to collection, and prospects for
future collections. To supplement or attempt to further corroborate the
information obtained from Justice for each case, we obtained and reviewed
pertinent information about the selected debts and debtors from certain
records made available by the courts and from public sources available
through the Internet, such as property records. Also, for reporting
purposes, rather than highlighting specific case studies in detail, our
discussions focus on specific types of debt collection problems identified
during this review, many of which we were aware of from our previous work.
This was done to ensure sufficient privacy of those involved in our
selected cases, and in consideration of Justice's concern that the release
of information on open cases could hinder the department's efforts to
collect the debts.
We conducted our review from November 2003 through June 2004 in accordance
with U.S. generally accepted government auditing standards.
We received written comments signed by the Director, Executive Office for
United States Attorneys, on a draft of this report. Justice's comments are
reprinted in appendix I, and technical comments received from both Justice
and AOUSC have been addressed as appropriate in this report.
Restitution Amounts Far Exceed Likely Collections for the Crime Victims
The court-ordered restitution amounts assessed the offenders for the five
selected criminal debt cases far exceed likely collections for the crime
victims. The offenders' restitution amounts totaled about $568 million.
However, according to court records, only about $40 million, or about 7
percent of the total, had been collected several years after the courts
sentenced each of the offenders. The vast majority of these collections
resulted from asset forfeiture actions and from payments that were made
before the offenders were sent to prison or placed on probation. We found
that the FLUs, which typically become involved in criminal debt collection
after the debt is established at judgment, performed certain debt
collection activities; however, they were not able to reduce the
restitution debts significantly by identifying and liquidating additional
assets of the offenders to pay the victims. Moreover, based on information
available to us, the FLUs' prospects are not good for collecting
additional restitution amounts from the offenders to compensate their
victims to the extent initially ordered by the courts. Following the
judgments, despite indications of prior wealth or possession of
significant financial resources, the offenders claimed to have limited
financial means to pay their restitution debts. Further, there were
minimal, if any, apparent negative consequences to the offenders for not
paying such debts.
A major debt collection problem for the FLUs for the selected cases was
that up to 13 years had passed between the offenders' criminal activities
and the related judgments. By the time the FLUs became involved in trying
to collect the restitution debts, the offenders' assets had been, among
other things, transferred to family members or others, forfeited to the
government, or involved in bankruptcy. Justice acknowledged to us that the
long intervals between criminal activity and the related judgments, and
certain dispositions and circumstances involving the offenders' assets or
the offenders that take place during such intervals, make collection
difficult for many criminal restitution debt cases.
Most of the Court-Ordered As previously mentioned, the offenders'
restitution amounts for the Restitution Has Not Been selected cases
totaled about $568 million. Restitution amounts for Collected individual
cases ranged from over $7 million to more than $400 million.
Court records show that each of the offenders, who pled guilty to engaging
in criminal activity, had been high-ranking officials of companies and
lending institutions or operated their own business. The crimes in these
cases consisted of fraudulently manipulating company sales figures and
inventories to increase stock values or to obtain loans, engaging in
schemes to convert business loan proceeds for personal use, selling
securities to private investors under false pretenses, and illegally
sharing in loan proceeds from a federally insured financial institution.
The victims of the crimes involving the offenders of our selected cases
included corporate shareholders, large lending institutions, and small
investors-many of whom were elderly and had been harmed financially. In
addition to the court-ordered restitution, prison terms ordered by the
courts for four of these offenders ranged from 1 to 5 years followed by 3
to 5 years of supervised release. One offender received several years of
probation rather than prison. As of June 2004, all of the offenders were
out of prison or off probation, but three offenders were still on
supervised release.
As noted earlier, only about $40 million, or about 7 percent of the total
restitution for the selected cases had been paid as of June 2004, which
was from about 4 to 8 years after the courts sentenced each of the
offenders. Collections for the individual cases ranged from less than 1
percent to about 10 percent of the restitution amounts owed. About $24
million of these collections resulted from asset forfeiture actions, and
over $11 million from payments that were made prior to the offenders'
sentencing. After the judgments were rendered, the FLUs performed certain
debt collection activities, such as filing liens on the offenders' real
property; issuing restraining notices forbidding the transfer or
disposition of assets; performing title searches; and requesting,
obtaining, and reviewing financial information from the offenders.14
Performing such activities did not enable the FLUs to further reduce the
restitution debts significantly by identifying and liquidating additional
assets of the offenders.
14Although the FLUs performed certain debt collection actions for each of
the selected cases, we found that some of the FLUs' efforts, such as
filing liens, were not always done promptly following the judgment. In
addition, the asset discovery work performed by the FLUs consisted
primarily of requesting, obtaining, and reviewing financial information
provided by the offender. We noted in our 2001 report (GAO-01-664) certain
problems stemming from a lack of independent verification of financial
information provided by offenders. We also noted that prompt collection
action, including the performance of asset discovery work, such as
researching online property locator services, is critical to minimizing
the dilution of assets that could be available for payment of a
restitution debt. Accordingly, we offered recommendations to help Justice
improve the timeliness and extent of its criminal debt collection efforts.
Prospects Are Not Good for Collecting Additional Restitution to Fully
Compensate the Crime Victims
For the selected cases, based on information available to us, the FLUs are
not likely to collect sufficient additional restitution amounts from the
offenders to compensate their victims to the extent initially ordered by
the courts. At some point prior to the judgments establishing the
restitution debts, each of the offenders either reported having wealth or
significant financial resources to the courts or to Justice, or there were
indicators of such. Specifically, prior to sentencing, one or more of the
offenders reported earning millions of dollars in annual gross income,
having millions of dollars in net worth, or spending thousands of dollars
per month on clothing and entertainment. In addition, court records
indicate that certain of the offenders converted millions of dollars of
fraudulently obtained assets for personal use, established businesses for
their children, or held residential properties worth millions that were
located in upscale communities. In spite of the reported wealth or
financial resources or indications of such, following their judgments,
each of the offenders reported to either the courts or Justice a modest
income or net worth and claimed to have limited financial means to pay
restitution debt. Further, at the time of our file reviews, three of the
offenders were on supervised release and making monthly or yearly payments
set by the courts that will do little to reduce the outstanding balance of
their restitution debts, one offender had stopped making routine monthly
payments after supervised release terminated, and one offender had
negotiated a settlement with the crime victim, which was approved by
Justice and the court, for far less than the initial court-ordered
restitution.
There were minimal, if any, apparent negative consequences to the
offenders for not paying restitution to their victims as initially ordered
by the courts. First, information obtained from the courts and public
documents indicated that the offenders were living in reasonable comfort.
For example, one offender and his immediate family owned and, at the time
of our review, resided in a property worth millions of dollars; another
offender owns a home worth over $1 million; and two offenders took
overseas trips while on supervised release. Second, after probation or
supervised release has expired, the offenders cannot be sent to prison for
failure to pay their restitution debts. According to Justice, although it
does not apply to restitution, the willful failure to pay a fine is a
crime of criminal default, which can result in the offender's receiving an
additional fine of not more than twice the amount of the unpaid balance of
the fine or $10,000, whichever is greater; being imprisoned not more than
1 year; or both. However, there is no such similar crime for willful
failure to pay restitution. A court may revoke or modify the terms and
conditions of probation or supervised release for an offender's failure to
pay restitution. However,
these are of little consequence once the offender has successfully
completed the term of probation or supervised release.
Long Intervals between the Offenders' Criminal Activities and Their
Judgments Create Major Debt Collection Challenges for the FLUs
For the selected cases, according to records provided by the courts, at
least 5 to 13 years passed between when the offenders began to engage in
the criminal activities for which they were sentenced and the date of
their judgments. We identified and the FLUs acknowledged that by the time
the courts rendered the judgments establishing the restitution debts,
certain of the offenders' assets were, among other things, transferred
through legal or potentially fraudulent means to a family member or
others, involved in forfeiture actions, subject to bankruptcy, or moved to
a foreign account. In addition, one of our selected cases involved an
offender who was jointly and severally liable for the debt with another
offender who had been deported.
Justice stated that after criminal activity occurs, years may pass before
the initial investigation of a crime, let alone the arrest, trial, and
conviction of an offender. Justice also stated that the primary focus
during the criminal investigation, prior to judgment, is on the discovery
and prosecution of the offender's criminal acts rather than on the
potential future debt recovery by the federal government. During the
intervals between criminal activities and the related judgments, Justice
acknowledged that dispositions and circumstances involving the offenders'
assets or the offenders often occur that create major debt collection
challenges for the FLUs. According to Justice, criminals with any degree
of sophistication, especially those engaged in fraudulent criminal
enterprises, commonly dissipate their criminal gains quickly and in an
untraceable manner. Assets acquired illegally are often rapidly depleted
on intangible and excess "lifestyle" expenses. Specifically, travel,
entertainment, gambling, clothes, and gifts are high on the list of means
to rapidly dispose of such assets. Moreover, money stolen from others is
rarely invested into easily located or exchanged assets, such as readily
identifiable bank accounts, stocks or bonds, or real property. Justice
emphasized that the initial efforts by criminal law enforcement
investigators, federal prosecutors, and the probation office promise the
greatest opportunity for meaningful recovery of illegally obtained assets.
Therefore, in our view, coordination among the FLUs and other entities
involved in criminal debt collection is critical.
Transfer of Assets According to Justice, there is no general statutory
authority for Justice to obtain pretrial restraint of assets in order to
satisfy a potential criminal judgment that may result in a restitution
debt. However, once such a
judgment is imposed, Justice can proceed against a third party by filing a
separate federal action to recover the assets or proceeds thereof. Justice
emphasized that it must prove by a preponderance of the evidence that the
offender fraudulently transferred assets, which often involves a lengthy
and time-consuming process. Moreover, even when a valid claim is made
against a third party for a fraudulent transfer, the third party may have
a "good faith" defense if the transfer was accepted in exchange for a
"reasonably equivalent value."
The challenges encountered in collecting restitution debt from offenders
who may have transferred assets to others through legal or potentially
fraudulent means were evident in our review of selected cases. According
to Justice, at least one of the offenders in our selected cases has
engaged in a shell game for the purpose of shielding their assets. In
addition, Justice stated that at least one of the offenders has not
provided full financial disclosure, and that the FLU is currently
exploring whether the offender fraudulently conveyed assets to family
members and others. Based on information in Justice and court records,
certain of the offenders in the selected cases engaged in one or more of
the following activities.
o Prior to the judgment, the offender and the offender's family
established trusts, foundations, and corporations for their assets at
about the same time they closed numerous bank and brokerage accounts.
o Over the course of several years, the offender converted for personal
use hundreds of millions of dollars obtained through illegal white-collar
business schemes.
o Several years prior to the judgment, the offender's minor child, who is
now an adult, was given the offender's company. As of completion of our
fieldwork, that company employed the offender.
o Prior to the judgment, the offender placed a multimillion-dollar
residence in a trust.
o Prior to the judgment, the offender established a trust worth hundreds
of thousands of dollars for the offender's child.
o The offender and the offender's family rent their expensively furnished
residence, which they previously owned, from a relative.
Forfeited Assets Justice stated that forfeited assets are the property of
the federal government and do not always go to crime victims. Justice can
restore forfeited assets to a victim upon the victim's filing of a
petition, but only in those limited cases when it is the victim's actual
property that is being restored. According to Justice, the FLUs'
coordination with Justice's Asset Forfeiture Unit and others at the outset
of the case is invaluable in securing assets for payment of the victims'
restitution when such potential exists.
The importance such coordination has to securing forfeited assets for the
crime victim was evident in one of our selected cases. Court records
showed that about $175 million of the offender's assets that had been
identified as related to the case had been forfeited; however, the FLU's
records showed that only about $50 million of such assets had been
forfeited. At the time of our file review, the FLU was not certain whether
any forfeited assets had been, or could be, applied toward the offender's
restitution debt. Subsequent to our visit to the FLU and our inquiries
related to this matter, Justice stated that only about $24 million of the
$50 million of forfeited assets in its records may be applied toward the
offender's restitution debt as a result of a petition filed by the victim.
Bankruptcy According to Justice, bankruptcy can impair the FLU's ability
to collect criminal restitution debt. When a bankruptcy proceeding is
initiated before the criminal judgment, the bankruptcy estate attaches to
all of the offender's property and rights to property, which can
significantly limit assets available for restitution. When a bankruptcy
proceeding is initiated after the criminal judgment, the United States may
file a proof of claim in the bankruptcy proceeding and may have secured
status if its lien was perfected against any of the defendant's property.
However, there may be other creditors seeking payment from the offender's
estate, including often the Internal Revenue Service. These other
creditors may be just as much victims of the offender as the victims named
in the restitution order and may also have valid interests in payment from
the estate. Moreover, bankruptcy's automatic stay may limit the FLUs'
ability to otherwise enforce the debt.15
For one of the selected cases, the offender went into bankruptcy prior to
the judgment. Shortly after the judgment, which was rendered over 5 years
15The automatic stay mandated by 11 U.S.C. S: 362 (2000) prevents the
federal government from pursuing collection action against debtors in
bankruptcy for certain debts that arise prior to the commencement of the
bankruptcy litigation.
ago, the FLU issued a restraining notice to the offender, forbidding the
transfer or disposition of his assets, and filed a lien on certain
property. However, according to the FLU, the ongoing bankruptcy has
prevented it from taking additional collection action. Recently, Justice
stated that it had been advised by the bankruptcy trustee that for this
case, most of the offender's bankruptcy estate of several million dollars
would be distributed to the victim.16 Justice emphasized that generally
for cases in which the offender goes into bankruptcy prior to the
judgment, the criminal restitution debt will only be recognized as a
general unsecured debt and, therefore, most often will not be satisfied.
Foreign Accounts and Justice stated that money obtained illegally is often
moved to offshore
Deportation
accounts or to debtor-haven countries. In the absence of a treaty with a
foreign government or a provision of law to provide for the repatriation
of money transferred to foreign accounts, acquiring such money for the
liquidation of an offender's restitution debt is difficult at best.
Justice also stated that certain offenders are deported; however, they
continue to be liable for the unpaid portion of their restitution debts,
as current law requires that the debts stay on the books for 20 years
after the period of incarceration ends or after the judgment if no
incarceration is ordered. Justice acknowledged that potential collection
actions are limited for offenders who have been deported. For example,
liens filed in counties where the offender previously held property have
little, if any, effect when offenders have moved assets and are living
abroad. In addition, FLU officials cannot subpoena financial information
from offenders who have been deported or obtain depositions from such
offenders regarding their assets.
Debt collection complications due to transfers of assets to foreign
accounts and the deportation of offenders were evident in our selected
cases. For one case, according to Justice, the FLU's efforts to identify
and secure assets of the offender to liquidate the restitution debt have
been hampered, in part, because the offender had established, among other
things, a foreign bank account for the purpose of shielding his assets.
For another case involving two offenders who were jointly and severally
liable for the restitution debt, one offender had settled his liability
for the debt, with the approval of Justice and the court, by paying the
victim far less than the amount initially ordered by the court. With
regard to this offender, Justice
16It is important to note that a large outstanding restitution balance
will remain after the bankruptcy estate is distributed to the victim.
stated that his reported assets and net worth were such that the thought
that additional collection efforts would have positive results was not
considered by the FLU to be reasonable. The FLU was left with little
recourse for additional collection action because the other offender in
the case, who is still liable for the remainder of this debt, was deported
after serving a prison term.
Recent Congressional Action
Our March 2004 report and ongoing discussions with your office have kept
you apprised of progress in implementing the recommendations included in
our 2001 report. As discussed more fully in the background section of this
report, Justice has made progress in establishing certain policies and
procedures to improve criminal debt collection. Unfortunately, the effort
we considered key to more substantive progress, namely, development of a
strategic plan by all of the involved entities, had not been started.
However, very recently, the Congress directed the Attorney General to
develop a strategic plan with certain other federal agencies to improve
criminal debt collection. Specifically, the conference report that
accompanied the Consolidated Appropriations Act, 2005, Public Law No.
108-447, signed into law on December 8, 2004, included language to further
the implementation of our 2001 recommendation regarding the establishment
of an interagency task force for the purpose of better managing,
accounting for, reporting, and collecting criminal debt.
In the conference report, the conferees directed the Attorney General to
establish a task force within 90 days of enactment of the act and to
include specified federal agencies, such as Treasury, OMB, and AOUSC, to
participate in the task force. Led by the Department of Justice, the task
force will be responsible for developing a strategic plan for improving
criminal debt collection. The strategic plan is to include specific
approaches for better managing, accounting for, reporting, and collecting
criminal debt. Specifically, the plan is to include steps that can be
taken to better and more promptly identify all collectible criminal debt
so that a meaningful allowance for uncollectible criminal debt can be
reported and used for measuring debt collection performance. Also, the
conferees directed the Attorney General to report to the Committees on
Appropriations within 180 days of enactment of this act on the activities
of the task force and the development of a strategic plan.17
17H.R. Report No. 108-792, reprinted in 150 Cong. Rec. H10426-H10427
(daily ed. Nov. 19, 2004).
Conclusion Given such poor prospects for collection for the selected
cases, as well as the overall low collection rates for criminal debt we
have previously reported, it is important that Justice determine how to
better maximize opportunities to make offenders' assets available to pay
offenders' victims once judgments establish restitution debts. By taking
advantage of all debt collection opportunities, Justice may be able to
better achieve the intent of MVRA, which is to compensate crime victims to
the extent of their financial loss. Justice can best accomplish this aim
by implementing the recommendation we made in 2001 to work with AOUSC,
OMB, and Treasury to develop a strategic plan as now also called for by
the conference report accompanying the Consolidated Appropriations Act,
2005, to address managing, accounting for, and reporting criminal debt
including the collectibility of such debt.
Further, our review of the five selected criminal white-collar financial
fraud debts, in conjunction with the findings on our previous criminal
debt collection work, strongly supports the need for Justice to take the
leadership role in promptly addressing this recommendation. Effective
coordination and cooperation is essential for maximizing collections, and
as the federal agency primarily responsible for criminal debt collection,
Justice's leadership in this effort is vital. The strategic plan should
include a determination of how to best maximize opportunities to make
offenders' assets available to pay the victims once judgments establish
restitution debts. Until such a strategic plan is developed and
effectively implemented, which could involve legislative as well as
operational initiatives, the effectiveness of criminal restitution as a
punitive tool may be diminished, and Justice will lack adequate assurance
that offenders are not benefiting from ill-gotten gains and that innocent
victims are being compensated for their losses to the fullest extent
possible.
Recommendations for Executive Action
To help ensure that the strategic plan called for in the conference report
effectively addresses all potential opportunities for collection, we
recommend that the Attorney General include in the strategic plan
legislative initiatives, operational initiatives, or both that are
directed toward maximizing opportunities to make offenders' assets
available to pay victims once restitution debts are established by judges.
To monitor progress in leading the development and implementation of the
strategic plan, we also recommend that the Attorney General report
annually in Justice's Accountability Report on progress toward developing
and implementing a strategic plan to improve criminal debt collection.
This report should include a discussion of any difficulties or impediments
that significantly hinder such progress.
Agency Comments and Our Evaluation
Overall, Justice's EOUSA's comments on a draft of this report, which are
reprinted in appendix I, are consistent with our conclusion that given
such poor prospects for collection for the selected cases, as well as the
overall low collection rates for criminal debt we have previously
reported, it is important that Justice determine how to better maximize
opportunities to make offenders' assets available to pay offenders'
victims once judgments establish restitution debts. EOUSA stated that
consistent with our recommendation and the conference report that
accompanied the Consolidated Appropriations Act of 2005, Justice is in the
process of organizing an interagency joint task force to develop a
strategic plan for improving criminal debt collection.
EOUSA did not specifically comment on our recommendations including the
recommendation that the Attorney General include in the strategic plan
legislative initiatives, operational initiatives, or both that are
directed toward maximizing opportunities to make offenders' assets
available to pay victims once restitution debts are established by judges.
However, EOUSA did emphasize that current statutes do not provide adequate
remedies for the collection of criminal debt and cited several examples
including the lack of general statutory authority for the United States to
obtain pretrial restraint of assets in order to satisfy a potential
criminal judgment that may result in a restitution debt. Regarding
operational initiatives, as stated in this report, because many of the
recommendations we have previously made to Justice to improve criminal
debt collection focused on establishing policies and procedures, it is
important that the policies and procedures be effectively implemented once
they are established. Moreover, any multiagency effort to develop a
unified strategy for criminal debt collection will need to address
operational issues.
Both EOUSA and AOUSC provided technical comments that have been addressed
as appropriate in this report.
As agreed with your office, unless you announce its contents earlier, we
plan no further distribution of this report until 30 days after its
issuance date. At that time, we will send copies to the Chairmen and
Ranking
Minority Members of the Senate Committee on Homeland Security and
Governmental Affairs; the Subcommittee on Financial Management, the
Budget and International Security, Senate Committee on Homeland
Security and Governmental Affairs; and the Subcommittee on Government
Efficiency and Financial Management, House Committee on Government
Reform. We will also provide copies to the Attorney General, the Director
of the Administrative Office of the U.S. Courts, the Director of the
Office of
Management and Budget, and the Secretary of the Treasury. Copies will be
made available to others upon request. The report will also be available
at
no charge on GAO's Web site, at http://www.gao.gov.
If you have any questions about this report, please contact me at (202)
512
3406 or [email protected] or Kenneth R. Rupar, Assistant Director, at
(214) 777-5714 or [email protected]. Staff acknowledgments are provided in
appendix II.
Sincerely yours,
Gary T. Engel
Director
Financial Management and Assurance
Appendix I
Comments from the Department of Justice
Note: GAO comments supplementing those in the report text appear at the
end of this appendix.
Appendix I
Comments from the Department of Justice
See comment 1.
Appendix I
Comments from the Department of Justice
See comment 2.
Appendix I
Comments from the Department of Justice
The following are GAO's comments on the Department of Justice's letter
dated January 13, 2005.
GAO's Comments 1. As discussed in this report, only about $40 million, or
about 7 percent, of the $568 million restitution for these five selected
cases had been paid as of June 2004, and collections for these individual
cases ranged from less than 1 percent to about 10 percent of the
restitution amounts owed. Prospects are not good for collecting additional
restitution to fully compensate the crime victims for the selected cases
in our study. Regardless of whether these offenders currently have, or
once had, wealth equal to the restitution amounts, the disparity between
restitution owed to the crime victims for the financial losses they
incurred as a result of criminal activity and amounts paid to the victims
by the offenders makes it necessary for Justice to take advantage of all
debt collection opportunities to better achieve the intent of MVRA, which
is to compensate crime victims to the extent of their financial loss.
2. EOUSA stated that the USAOs had collected over $4 billion on behalf of
victims of crime over the last 5 years. However, as stated in this report,
the low collection rate (about 7 percent of the ordered restitution) for
the selected cases coincides with overall collection rates for criminal
debt as we have previously reported. In 2004, we reported that according
to Justice's unaudited records, collections relative to outstanding
criminal debt averaged about 4 percent for fiscal years 2000, 2001, and
2002 (GAO04-338). In 2001, we reported that criminal debt collection
averaged about 7 percent for fiscal years 1995 through 1999 (GAO-01-664).
Appendix II
Staff Acknowledgments
Richard T. Cambosos, Michael D. Hansen, Andrew A. O'Connell, Ramon J.
Rodriguez, Linda K. Sanders, and Matthew F. Valenta made key contributions
to this report.
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