Putting an End to Federal Settlement 'Slush Funds'

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April 28, 2016

As federal enforcers have logged increasingly large settlements during the past several years, a growing spotlight has been shone on what happens with settlement money.

As it turns out, some of these enforcers are using settlements to fund groups whose activities further the policy (or in some instances, the personal) goals of agency officials.

That doesn't sit well with some members of Congress, in whom rests the Constitutional duty to direct federal spending. This week, that frustration manifested itself in a new bill -- the "Stop Settlement Slush Funds Act of 2016"— sponsored by House Judiciary Chairman Bob Goodlatte.

The bill received a hearing earlier today in the House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law, during which former U.S. Congressman and California Attorney General Dan Lungren testified in favor of the bill.

“This ability to use law enforcement authority to channel funds to favored groups creates a serious threat that the authority to prosecute is being used to further officials’ personal or political goals rather than the public interest standard that must govern law enforcement decisions,” said Lungren in prepared testimony. “Furthermore, these decisions are being made outside of the normal appropriations process.”

As Lungren testified, these activities raise serious constitutional, statutory, and ethical issues.

The U.S. Constitution, testified Lungren, provides that “[n]o money shall be drawn from the Treasury, but in Consequence of Appropriations made in Law” by Congress and that “[a]ll Bills for raising Revenue shall originate in the House of Representatives.”

He also referenced James Madison who, in Federalist Paper No. 51 “warned us that a system of checks and balances was necessary to guard against undue concentrations of power within our government and the natural temptation of self-interest by those in government.”

“Let’s be honest,” said Lungren. “Does anyone believe that these donations are freely-given, voluntary monetary expressions of support for these organizations?”

“No, they are coerced payments to these entities mandated by officials acting with the full power and majesty of the government,” he said.

Lungren provided a number of examples of such slush funds in action:

  • “In 2012, the Department of Justice (DOJ) forced Gibson Guitars to pay a $50,000 ‘community service payment’ to the National Fish and Wildlife Foundation even though the foundation was not a victim of the alleged crime and had no direct connection to the case. It was simply a non-governmental organization that DOJ employees liked.”
  • “In 2006, the DOJ forced a wastewater plant that had been accused of violating the Clean Water Act to give $1 million to the U.S. Coast Guard Alumni Association. Again, the Association had absolutely no connection to the case and had suffered no harm, direct or indirect.”


He also referenced the case of a Bank of America settlement with the DOJ, which he called “most curious.”

“The bank was to set aside $490 million to pay any potential tax liability to be incurred by their customers occasioned by loan modification/forgiveness,” said Lungren. “That seems logical as the directly affected consumers would be made whole.”

“Yet, with Congress subsequently deciding to continue to extend non-taxable status to these modification ‘windfalls,’ there was no damage suffered in this regard. The result was that DOJ caused the money to be ‘donated’ to NeighborWorks America and Interest on Lawyer’s Trust Account groups (IOLTAs).”

In a December 2015 column, the Wall Street Journal’s Kimberly Strassel referenced that Bank of America settlement in supporting Chairman Goodlatte’s efforts to reign in what she calls, “Justice’s Liberal Slush Fund.”

ILR has been shining a spotlight on these practices for several years and released a study last year — Enforcement Slush Funds: Funding Federal and State Agencies with Enforcement Proceeds — that calls for curbing them at the federal and state levels.

“Fairness in the law enforcement process is important because it is cornerstone of our entire system of government,” concluded Lungren. “But we also must recognize that prosecution motivated by self-interest, rather than the public interest, imposes other real-world costs.”