The U.S. Trustee Program's Efforts to Prevent Bankruptcy Fraud and Abuse
Report No. 03-17
March 2003
Office of the Inspector General
APPENDIX 10
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U.S. Department of Justice Executive Office for United States Trustees |
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Office of the Director | Washington, DC 20530 |
February 27, 2003 |
MEMORANDUM | ||||||||||||||||||||||||||||||||||||||||||||||
TO: |
Guy K. Zimmerman Assistant Inspector General for Audit |
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FROM: | Lawrence A. Friedman (original signed) Director |
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SUBJECT: | Draft OIG Report on "The United States Trustee Program's Efforts to Prevent Bankruptcy Fraud and Abuse" | |||||||||||||||||||||||||||||||||||||||||||||
Thank you for the opportunity to review the draft report by the Office of the Inspector General (DIG) on the "United States Trustee Program's Efforts to Prevent Bankruptcy Fraud and Abuse. " This report provides important facts and analyses that support the programmatic and management initiatives commenced by the United States Trustee Program (USTP or Program) in calendar year 2001 and reflected in budget submissions by the Bush Administration and Attorney General Ashcroft for Fiscal Years 2002 and 2003. The report clearly identifies the need for enhanced and comprehensive efforts to identify fraud and abuse in the bankruptcy system, and provides several recommendations that will improve our ongoing activities in this critical area. This response is organized around the two findings made in the OIG report. For each of the findings, the response includes general commentary and then specific action items based upon the recommendations the OIG made related to the finding. In addition, attached is an appendix of technical corrections that we suggest be made to the report before it is issued in final form by the OIG. Response to Finding #1: Management Controls The OIG recognized that the USTP has made civil enforcement to combat bankruptcy fraud and abuse its number one priority. The OIG also correctly notes that the Program requires a more "systematic process" and more "uniform internal controls" to identify debtor and other high risk fraud in the bankruptcy system. In particular, the OIG pointed out that the Program should adopt additional management controls to ensure that it is addressing general fraud indicators, rather than place continued emphasis on private trustee fraud which now accounts for only a small portion of all criminal fraud uncovered by the Program. In making this finding, the OIG discusses several recent important projects launched by the Program to address this pressing need, including the National Civil Enforcement Initiative (NCEI or Initiative), the Debtor Identification Project, bankruptcy petition preparer enforcement activities, and continued leadership in forming district-wide bankruptcy fraud working groups.The Program largely concurs in the OIG's finding and analysis. It is important to note, however, that despite this Administration's efforts to provide the Program with additional resources, it is not realistic to expect that we ever will enjoy financial and personnel resources sufficient to uncover all civil and criminal fraud and abuse in the bankruptcy system. Insofar as private trustees appointed by the United States Trustees (USTs) administer nearly all of the 1.5 million cases filed each year, it is necessary to rely upon these trustees as a first line in identifying improper conduct. Few, if any, regulatory agencies aim to identify and investigate 100 percent of all potential violations. It is incumbent upon the USTP as the primary bankruptcy enforcement agency, however, to develop, implement, and evaluate rigorous systems to uncover and prosecute fraud and abuse. These systems should ensure severe consequences for wrongdoers and provide a strong deterrent against similar bad conduct by others in the bankruptcy system. It is important to recognize that the USTP's authority is limited to civil enforcement. When our staff identifies criminal conduct, we refer the matters to United States Attorneys and assist them in prosecuting cases. Weare not authorized to conduct criminal investigations or to prosecute cases without express authority from the United States Attorney. Moreover, resource constraints imposed upon the FBI and United States Attorneys have severely limited bankruptcy enforcement. The initial results of our National Civil Enforcement Initiative are encouraging. In the first full year of this Initiative (Fiscal Year 2002), field offices reported taking 30,000 formal or infonnal enforcement actions that, together with related activities, resulted in approximately $160 million in potential additional returns to creditors through debts not discharged and other remedies. This Initiative will remain our major priority in the foreseeable future and we are taking numerous steps to strengthen this effort. The Action Items identified below in response to OIG recommendations are among those important steps. Action Items to Implement Recommendations Recommendation #1: Establish unifoffil management control procedures within UST offices to prevent and detect the more common and higher-risk types offraud affecting the bankruptcy system, such as concealment of assets and serial filers, and ensure that resources are targeted accordingly.
Recommendation #2: Expand the existing data system to allow for detection of multiple bankruptcy filings nationwide.
Recommendation #3: Ensure uniform and complete reviews of Final Reports and Final Accounts.
Recommendation #4: Ensure that review procedures for cash receipts and disbursements reports are fully implemented.
Response to Finding #2: Performance Measurement System The OIG describes the importance of adopting a more reliable "management information system" to track cases in which fraud was identified, to ensure the accuracy of field office reporting, to discern trends, and to measure performance. The DIG also noted in two sections of the report (p. 24 and p. 58) that the Program has not measured the extent of fraud and abuse in the entire bankruptcy system. The DIG focused on the Program's Criminal Referral Data Base which is insufficiently reliable and upon which the Program generally does not rely in making policy and resource allocation decisions. The Data Base is used only as a rudimentary tracking system and not as a management tool. The DIG analysis contained favorable commentary on recent data collection projects undertaken by the Program, including the new "Significant Accomplishments" data base and new performance measures adopted pursuant to the Government Performance and Results Act (GPRA). Action Items to Implement Recommendations Recommendation #5:3 Redesign the Criminal Referral Tracking System so that it tracks UST investigations as well as referrals made to law enforcement authorities, and use the system for trend analyses of the types of fraud and caseloads both nationally and regionally.
Recommendation #6: Establish data entry protocols for the Criminal Referral Tracking System to ensure that the data is [sic] complete and consistent.
Recommendation #7: Require regional offices to verify criminal fraud referral data for accuracy, completeness, and consistency prior to submitting the appropriate data to the EOUST.
Recommendation #8: Require the EOUST's staff to spot check fraud referral data submitted by the regional offices to help ensure completeness, uniformity, and accuracy.
Recommendation #9: Establish a system or modify the existing system to accurately track civil enforcement actions nationally and to compile performance data on the civil enforcement aspect of the UST Program.
I hope that the commentary provided above and technical corrections suggested in the appendix to this response are helpful to you in preparing a final report. The OIG staff did a commendable job in preparing the report, and the findings and recommendations contained in the report will prove to be extremely valuable to the USTP as it moves forward in its criminal and civil enforcement initiatives. Please let me know if I may provide additional information APPENDIX SUGGESTED TECHNICAL CORRECTIONS Page 2, Footnote 1: "In the event that the private trustee is unable or unwilling to serve, the U.S. Trustee is to assume the private trustee's duties."
Explanation for Technical Correction 1: Section 322 of the Bankruptcy Code provides that the United States Trustee is eligible to serve as a case trustee in a chapter 7, 12, or 13 case. The Code, however, does not require the United States Trustee to serve as a case trustee. See 11 U.S.C. §§ 701, 1202, and 1302. In addition, the Code prohibits the United States Trustee from serving as a chapter 11 trustee. See 11 U.S.C. § 1104. Page 14: United States Trustee Organizational Chart.
Explanation for Technical Correction 2: The chart depicted on page 14 is not the official organizational chart approved by Attorney General Ashcroft on May 14, 2002. EOUST was not the source of the chart. In addition, the chart on page 14 reflects that private trustees are employees of the United States Trustee Program. Private trustees are not employees of the United States Department of Justice or the United States Trustee Program. Page 15, Footnote 8: "A creditors' committee generally consists of three to eleven unsecured creditors. The creditors' committee may consult with the Program, trustees, and the bankruptcy courts on matters affecting the administration of the estate."
Explanation for Technical Correction 3: 11 V.S.C. § 1102 states that, "A committee of creditors ... shall ordinarily consist of the persons willing to serve, that hold the seven largest claims against the debtor ...." The statutory duties of a chapter 11 creditors' committee are set forth in 11 V.S.C. § 1103. The last sentence of the footnote describes the duties of a chapter 7 creditors' committee as set forth in 11 V.S.C. § 705. Page 15, Footnote 9: "Creditors may elect Chapter 7 trustees."
Explanation for Technical Correction 4: Creditors may elect chapter 7 and chapter 11 trustees. 11 V.S.C. § 11O4(b). Page 16: "The court appoints a Chapter 11 trustee upon the request of an interested party or the UST."
Explanation for Technical Correction 5: The court orders the appointment of a trustee. The United States Trustee appoints the trustee and the court approves the appointment. 11 V.S.C. § 702 and § 1104(d). Page 17: "The UST Program is funded by fees assessed against debtors who use the bankruptcy system."
Explanation for Technical Correction 6: Statutory fees assessed against debtors are the Program's sole source of funding. Page 18: "Chapters 12 and 13 Trustees"
Explanation for Technical Correction 7: The enumerated list is a list of statutory responsibilities and not fiduciary duties. The language change clarifies that standing trustees are responsible for disbursements under the confirmed plan. Page 19: "The second category, providing $82.4 million or 55 percent of the UST Program's funding, is quarterly fees paid by the Chapter 11 debtors. The other $7.4 million or 5 percent comes from miscellaneous compensation associated with Chapters 12 and 13 debt collection receipts, and refunds."
Explanation for Technical Correction 8: The dollar amount and corresponding funding percentage were corrected for accuracy. Additionally, the source of funding was corrected. Page 19: "In FYs 1997 to 2002, the UST Program expended or obligated about $740 million in total to manage and provide oversight of the bankruptcy system ...."
Explanation for Technical Correction 9: $740 million should be changed to $739 million. "Expended" should be deleted from every place it appears in the paragraph, and the word "obligated " should be substituted. Obligations and expenditures have specific legal definitions in connection with appropriation law. Obligations are the amounts of money federal agencies legally set aside to pay for contracts, grants, services, and other items that require the government to make payments. An expenditure is a payment to liquidate the obligation. Obligations are not necessarily equal to expenditures. Page 20: Chart -"Funds Expended or Obligated by the UST Program, FY s 1997 to 2002."
Explanation (or Technical Correction 10: The words "Expended or" should be deleted from the chart title (see Explanation for Technical Correction 9), and the highlighted numbers should be substituted for the numbers in the chart.
* Per JMD guidance, as part of a GPRA initiative, the USTP was directed to merge the Management and Administration decision unit into the Administration of Cases decision unit. Page 20: "For FY 2002 the UST Program had requested $7.8 million for two fraud and abuse initiatives ...."
Explanation for Technical Correction 11: The word "two" should be deleted and the word "a" should be added before fraud and the word "an" should be added before the word abuse. These changes clarify that the request was for one fraud initiative and one abuse initiative. Page 30: "In cases where money is returned to creditors (asset cases), Chapter 7 trustees receive compensation based on the percentage of the assets collected and reduced to cash ...."
Explanation for Technical Correction 12: Chapter 7 trustee compensation is based on disbursements to creditors and not on the percentage of the assets collected. 11 V.S.C. § 326. Page 30: "However, if the trustees elect to perform the review and uncover assets, they would receive additional compensated for administering the case."
Explanation for Technical Correction 13: The word "compensation" should be substituted for the word "compensated" to make the sentence grammatically correct. Page 33: "Five referrals were based on judicial proceedings such as adversary proceedings, a rule 2004 meeting ...."
Explanation for Technical Correction 14: The word "examination" should be substituted for the word "meeting" in the body of the text and in footnote 19. Fed. R. Bankr. P. 2004. Page 36, Footnote 21: "Creditors must cease all collection efforts for 90 days ...."
Explanation for Technical Correction 15: The phrase "for 90 days" should be deleted because the law does not impose a time limitation on the automatic stay. 11 U.S.C. § 362. Page 64: FY 2002 and 2003 Performance Indicators Chart.
Explanation for Technical Correction 16: The chart depicted is not current. Page 64, Note "a": "Section 707 of Title 11 addresses dismissal of bankruptcy cases if debtors cause unreasonable delays that are detrimental to creditors, fail to pay bankruptcy filing fees or charges, fail to file required documentation requested by trustees or USTs, or if the debts are primarily consumer debts. Section 707 also includes substantial abuse of the bankruptcy system, e.g. the debtor's ability to pay."
Explanation for Technical Correction 17: The first three causes for dismissal are set forth in 11 V.S.C. § 707(a). Only Section 707(b) addresses substantial abuse. The phrase "if the debts are primarily consumer debts" should be repositioned because the fact that a case consists primarily of consumer debt is a prerequisite for 707(b) application, but it is not a ground for dismissal pursuanto §§ 707(a) or (b). Page 65: "OIG Recommendations 7 - 11."
Explanation for Technical Correction 18: The OIG Recommendations beginning on page 65 are misnumbered. Page 74: "Woodland, CA"
Explanation for Technical Correction 19: The office is located in Woodland Hills, California. ATTACHMENT 1 TO APPENDIX
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Performance Resources Table | |||||||||||||
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Decision Unit/Program: United States Trustee Program |
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DOJ Strategic Goal/Objective: BANKRUPTCY: Protect the Integrity and ensure the effective operation of the Nation's bankruptcy system | |||||||||||||
WORKLOAD/RESOURCES | Actual | Actual | Projected | Requested | Requested (Total) |
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TYPE | Performance Measures/Resources |
FY 2001 | FY 2002 | FY 2003 Request | Current Services Adjustments |
FY 2004 Program Change |
FY 2004 Enhanced |
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Strategic Objective | Protect the Integrity and ensure the effective operation of the Nation’s bankruptcy system. | ||||||||||||
Program Activity | 1. Civil Enforcement | FTE | $000 | FTE | $000 | FTE | $000 | FTE | $000 | FTE | $000 | FTE | $000 |
69 | 8,861 | 128 | 18,139 | 210 | 26,433 | 10 | 602 | ... | ... | 220 | 27,035 | ||
Performance Measure |
# of motions & complaints & inquiries % of successful motions & complaints |
13,305 90% |
27,457 92.1% |
23,000 85% |
1,000 2% |
... ... |
24,000 87% |
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Program Activity | 2. Case and Trustee Administration | FTE | $000 | FTE | $000 | FTE | $000 | FTE | $000 | FTE | $000 | FTE | $000 |
930 | 117,573 | 908 | 127,578 | 991 | 141,077 | ... | 7,060 | ... | ... | 991 | 148,137 | ||
Performance Measure |
Chapter 11 # of cases monitored |
10,225 | 11,380 | 12,000 | ... | ... | 12,000 | ||||||
# of motions & inquiries to convert or dismiss Chapter 11 cases | 6,172 | 8,198 | 7,000 | ... | ... | 7,000 | |||||||
% of unconfirmed Chapter 11 cases over 3 years old | 4.5% | 2.7% | <4.5% | ... | ... | <4.5% | |||||||
Chapter 7 # of cases monitored |
982,934 | 1,047,969 | 1,153,000 | 69,000 | ... | 1,222,000 | |||||||
% of Chapter 7 cases over 3 years old | 2.20% | 2.10% | <3.80% | ... | ... | <3.80% | |||||||
Chapter 13 # of cases monitored |
374,133 | 410,686 | 451,000 | 29,000 | ... | 480,000 | |||||||
Outcome: | Payments to Creditors/%of total payments | ||||||||||||
Chapter 7 | $886,229,563 58.6% |
$787,707,213 52.0% |
$786,706,213 54.0% |
... ... |
... ... |
$786,706,213 54.0% |
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Chapter 12 | $30,282,131 88.8% |
$25,866,523 75.0% |
$25,866,523 75.0% |
... ... |
... ... |
$25,866,523 75.0% |
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Chapter 13 | $3,153,761,306 86.65% |
$2,911,254,306 80.0% |
$2,911,254,306 80.0% |
... ... |
... ... |
$2,911,254,306 80.0% |
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Potential Additional Returns to Creditors through Civil Enforcement and Related Efforts | Not Available (Data was not collected in FY 2001) |
$159,010,713 | $159,000,000 | ... | ... | $159,000,000 |