President Barack Obama’s FY 2013 budget includes large funding boosts for regulatory and enforcement agencies that combat financial crime. If it passes, financial institutions and corporations will face increased oversight, tighter regulations and the threat of possible legal actions.
On the surface, financial criminals appear to face formidable opposition from the regulatory networks, investigators and law enforcement agencies arrayed against them. In reality, regulators and counter-financial crime agents are often under-financed and over-worked, unable to follow up with even a fraction of investigations or violations.
The successful financial criminal, meanwhile, has access to a resource that not even the most dedicated regulator or investigator can match: money. Financial criminals can often tap massive funding streams, whether laundered fraud or corruption proceeds, which they can use to buy top legal defense teams, corrupt officials, and hide dirty money. In many cases a single big league fraudster can receive billions of dollars from victims over time, sometimes more than the entire operating budgets of the agencies assigned to catch him.
The Fiscal Year 2013 budget that President Obama has sent to Congress may narrow that funding gap a little. It requests big funding boosts for several financial regulatory agencies. The Securities and Exchange Commission, Commodities Futures Trading Commission (CFTC), and Consumer Financial Protection Bureau would all receive large budget increases of between 20 and 50 percent.
Proposed budget increases for the Department of Justice and the FBI would augment their counter-financial crime operations, and tighten their focus on investigating and prosecuting mortgage fraud and corporate fraud cases.
Major Funding Increases Target Financial Crimes, But Huge Obstacles Remain
The biggest winner under the proposed budget is the Commodities Futures Trading Commission (CFTC), which would see its funding jump by 50% to $308 million. The CFTC says it would use the increased funds to hire new staff and update technology to improve oversight of derivatives trading. The agency oversees markets for swaps, over-the-counter derivatives, futures and other exotic investment vehicles. These multi-trillion dollar markets were loosely regulated in the past, and many experts contend they had a hand in triggering the financial crisis of 2008.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 increased the authority of the CFTC to regulate these markets, but the agency still struggles to implement the new rules the legislation requires. As of February 1 of this year, the CFTC had missed its deadlines on creating and enacting 28 of the 64 new rules mandated by the Dodd-Frank Act. The SEC also lags behind, having missed deadlines on nearly 60 percent of the rules it was charged with making and enforcing.
The SEC is planning to use increased funding on much-needed regulatory staff, according to its budget request. The agency has stated that it would use the nearly $200 million in new funding to employ 191 enforcement division staff, who investigate alleged violations of securities laws and negotiate settlements. It would also add another 222 employees to its Office of Compliance Inspections and Examinations, which oversees financial institutions like broker-dealers and investment companies. In sum, the budget increase would allow the SEC to grow its staff by 676 persons, a 15 percent increase.
Although the proposed increases are large, they pale in comparison to the size of the multi-trillion dollar markets and assets these agencies regulate.
“A number of financial firms spend many times more each year on their technology budgets alone than the SEC spends on all of its operations,” the SEC bemoans in its budget request.
Department of Justice, FBI would increase financial crime staff, focus on financial institutions
The Department of Justice is seeking another $55 million to investigate and prosecute financial crimes. It would use these funds to increase the number of lawyers devoted to financial crime cases, including 16 new attorneys in the Criminal Division and 38 in the Civil Division. The Civil Division says in its budget request that increased funding will allow it to act on fraud cases brought by whistleblowers, including an “unprecedented number that alleged mortgage fraud.”
The FBI, by far the largest federal investigative agency, says additional funds will “increase resources for investigating the highest impact Complex Financial Crime cases.” It asks for a $15 million increase to spend on hiring 40 new agents and four forensic accountants.
In their requests, the Department of Justice and the FBI both highlight the record numbers of financial crime cases they are pursuing. They emphasize the need for more agents, and more staff time to devote to these cases. The FBI said it had more than 761 corporate fraud cases pending in 2011 alone.
The budget requests are significant because they magnify the focus on high-level crime at financial institutions. The Obama administration has been sharply criticized for failure to bring major financial crime cases against Wall Street banks and financial institutions for their role in the housing collapse.
Lack of resources has hamstrung counter-financial crime actions, say agencies
Both the SEC and the CFTC are far behind on implementing reforms mandated by the Dodd-Frank act, and struggling to fulfill their core regulatory functions.”Over the past decade, the SEC has faced significant challenges in maintaining a staffing level and budget sufficient to carry out its core mission,” SEC Director Robert Khuzami said in last year’s House budget hearings. “It is the next step of making the new oversight regimes [mandated by Dodd-Frank] operational that will require significant additional resources.”
A long list of items still await the SEC’s attention, from adopting rules on executive compensation, to reporting to Congress on short selling violations, to establishing and staffing offices to regulate credit ratings and municipal securities. The agency hopes to accomplish some of these goals by the end of this year, but others have no timeline attached. Without increased funding, the SEC contends it will remain overtaxed and unable to fully meet its regulatory requirements.
The proposed agency budgets are now in the hands of Congress, to be taken up for debate in coming weeks. The increases will face an uphill battle in the Republican-controlled House of Representatives. It is unlikely that the final numbers will match current proposals.