Stop Settlement Slush Funds Act - H.R. 732

Summary

H.R. 732 would prohibit government officials from entering into or enforcing any settlement agreement for civil or criminal actions on behalf of the United States if that agreement requires a party to the settlement to make a donation to a non-victim third party. That prohibition would not include payments to provide restitution that directly remedies actual harm caused by the defendant, including harm to the environment.

Background

The House Judiciary Committee uncovered disturbing proof from internal Department of Justice documents that the Obama Administration used settlements to funnel money to its political allies while excluding conservative groups. Even when non-partisan, settlement provisions that direct money to non-victim third-parties subvert Congress’s spending power.

In recent settlements with the United States, large corporations, such as Goldman Sachs and Bank of America, have been required to donate funds to charitable institutions as a part of their restitution. Though the donations represent a very small fraction of overall settlement amounts, there is a tremendous amount of money in absolute terms flowing to non-victim third-party groups, over a billion dollars in just the last 30 months of the Obama Administration.

In June of 2017, the Trump Department of Justice (DOJ) announced that it would prohibit the use of third party settlements in the future.

In the early 1800s Executive Branch agencies would enter into vendor contracts without authorization, knowing that Congress could not in good conscience deny payment once the goods were provided. These “coercive deficiencies” prompted the 1820 Antideficiency Act (ADA) to prevent unappropriated spending.

“The Executive Branch soon found ways around the ADA. The Constitution requires an appropriation to withdraw money from the Treasury, it does not, agencies argued, require that money be placed there to begin with. Thus, agencies began to ‘divert funds received by an agency to that agency’s uses before it is placed in the Treasury.’ Congress closed this loophole with the 1849 Miscellaneous Receipts Act (MRA).

“Unfortunately, DOJ [under previous Administrations] devised a way around the MRA too. […] Because the DOJ has such broad settlement authority, it has the ability to use settlements to circumvent the appropriations authority of Congress.’ In particular, DOJ has the power ‘to short circuit the Miscellaneous Receipts Act by agreeing to settlement terms that require the violator of a Federal statute to undertake certain responsibilities or actions that might inure to the benefit of the executive branch.’ Thus, the Department could effectively ‘‘augment the appropriations of the Executive Branch without running afoul of the technical requirements of the Miscellaneous Receipts Act—although creating an unconstitutional interference with Congress’ appropriations power.’

In the 2013 JP Morgan settlement with DOJ, the bank was offered credit against its settlement obligations for donations to community redevelopment groups.[6] The Citi and Bank of America settlements in 2014 required $150 million in donations to housing non-profits.[7]These donations earned double credit against the banks’ overall obligations. Meanwhile, credit for direct forms of consumer relief remained dollar-for-dollar.

“In November 2014, the House Judiciary and Financial Services Committees opened a pattern-or-practice investigation into the Justice Department’s mortgage lending settlements with major banks, including JP Morgan, Citi and Bank of America (BoA). The initial evidence supporting the committees’ concern was a progression of troubling terms in DOJ’s major mortgage banking settlements.”[9] H.R. 732 closes this loophole that was being used by the Obama DOJ by ensuring that government officials do not enter into settlement agreements that require payments to non-victim third-parties.

In the 114th Congress, the House passed similar legislation, H.R. 5063, the Stop Settlement Slush Funds Act of 2016 by a vote of 241 to 174 on September 7, 2016.

According to the bill sponsor, “In its last two years, the Obama Justice Department directed nearly a billion dollars to third-parties entirely outside of Congress’s spending and oversight authority. In some cases, these mandatory donation provisions reinstated funding Congress specifically cut.  It is time for Congress to end this abuse.”

Cost

The Congressional Budget Office (CBO) estimates that implementing the bill could affect direct spending and revenues; however, CBO cannot determine the magnitude or timing of those effects. CBO also cannot determine the long-term effects of the bill on direct spending or on-budget deficits but such effects are very unlikely to increase net direct spending or on-budget deficits by more than $5 billion in any of the four consecutive 10-year periods beginning in 2028.

House Democratic Whip Steny Hoyer:

This bill would sharply limit the ability of the Department of Justice (DOJ) and other government agencies to address unlawful conduct, provide restitution, or to adequately address illegal conduct by prohibiting settlement agreements involving the U.S. government from requiring that the defendant make payments to an organization or individual not a party to the litigation.  Under existing law, settlement terms that result from federal enforcement actions can include payments to third parties to advance programs that assist with recovery, benefits, and relief for communities harmed by lawbreakers, to the extent such payments further the objectives of the enforcement action.

Contrary to assertions by House Republicans that H.R. 732 is necessary to ensure that agencies do not use settlement agreements to fund political or activists groups, there are already laws in place to prevent civil enforcement agencies from directing funds to politically-favored groups.  As a matter of public policy, H.R. 732 will, if enacted, hamper the federal government’s ability to punish companies and organizations that engage in unlawful conduct, such as financial firms that engaged in mortgage fraud that contributed to the 2008 financial crisis.  Amplifying the flaws of H.R. 732 is that the legislation is so poorly and broadly written that it will severely deter agencies from pursuing settlements and invite legal challenges to proposed settlements.