News Intelligence Analysis
SEATTLE POST-INTELLIGENCER
The FBI Turns Its Back on
White-Collar Crimes
FBI's terrorism trade-off
Focus on national security after 9/11 means that the agency has
turned its back on thousands of white-collar crimes
Wednesday, April 11, 2007
By PAUL SHUKOVSKY, TRACY JOHNSON AND DANIEL LATHROP
P-I REPORTERS
© 2007 Seattle Post-Intelligencer
Thousands of white-collar criminals across the country are
no longer being prosecuted in federal court -- and, in many cases,
not at all -- leaving a trail of frustrated victims and potentially
billions of dollars in fraud and theft losses.
It is the untold story of the Bush administration's massive
restructuring of the FBI after the terrorism attacks of 9/11.
Five-and-a-half years later, the White House and the Justice
Department have failed to replace at least 2,400 agents transferred
to counterterrorism squads, leaving far fewer agents on the trail
of identity thieves, con artists, hatemongers and other criminals.
Two successive attorneys general have rejected the FBI's pleas
for reinforcements behind closed doors.
While there hasn't been a terrorism strike on American soil
since the realignment, few are aware of the hidden cost: a dramatic
plunge in FBI investigations and case referrals in many of the
crimes that the bureau has traditionally fought, including sophisticated
fraud, embezzlement schemes and civil rights violations.
"Politically, this trade-off has been accepted,"
said Charles Mandigo, a former FBI congressional liaison who
retired four years ago as special agent in charge in Seattle.
"But do the American people know this trade-off has been
made?"
Among the findings of a six-month Seattle P-I investigation,
analyzing more than a quarter-million cases touched by FBI agents
and federal prosecutors before and after 9/11:
Overall,
the number of criminal cases investigated by the FBI nationally
has steadily declined. In 2005, the bureau brought slightly more
than 20,000 cases to federal prosecutors, compared with about
31,000 in 2000 -- a 34 percent drop.
White-collar
crime investigations by the bureau have plummeted in recent years.
In 2005, the FBI sent prosecutors 3,500 cases -- a fraction of
the more than 10,000 cases assigned to agents in 2000.
In
Western Washington, the drop has been even more dramatic. Records
show that the FBI sent 28 white-collar cases to prosecutors in
2005, down 90 percent from five years earlier.
Civil
rights investigations, which include hate crimes and police abuse,
have continued a steady decline since the late 1990s. FBI agents
pursued 65 percent fewer cases in 2005 than they did in 2000.
Already
hit hard by the shift of agents to terrorism duties, Washington
state's FBI offices suffer from staffing levels that are significantly
below the national average.
While other federal agencies have stepped in to pick up more
of the load in drug enforcement, and the FBI has worked to keep
agents on Indian reservations, the gaps created by the Bush administration's
war on terrorism are troubling to criminal justice experts, police
chiefs -- even many current and former FBI officials and agents.
"There's a niche of fraudsters that are floating around
unprosecuted," said one recently retired top FBI official,
who spoke on condition of anonymity. "They are not going
to jail. There is no law enforcement solution in sight."
In most cases, local law enforcement agencies haven't been
able to take up the slack.
Seattle police Chief Gil Kerlikowske said his department isn't
as equipped to handle complex white-collar investigations --
particularly when officers must also join anti-terrorism efforts
and when federal funding for local police departments has shrunk.
Whether the solution is to hire more FBI agents or shift some
away from the counterterrorism effort, he said, more resources
should be devoted to solving white-collar crime.
"This is like the perfect storm," Kerlikowske said.
"It's now five years later. We should be rethinking our
priorities."
A solution can't come soon enough for a growing number of
discouraged fraud victims: A 75-year-old Issaquah woman who was
allegedly swindled out of more than $1 million. A cancer patient
whose identity was stolen from a Seattle hospital. People who
fell victim to a nationwide investment scam worth about $70 million.
They all sought the FBI's help. They got little or none.
"As far as I'm concerned, the FBI has no interest in
protecting people from these kinds of crimes," said Lloyd
Martindale Jr., a Bellingham man who put $500,000 into an investment
con and is still fighting to get some of it back. "They
were not responsive to this at all."
If the FBI had continued investigating financial crimes at
the same rate as it had before the World Trade Center came down,
about 2,000 more white-collar criminals would be behind bars,
according to the P-I analysis, which was based on Justice Department
data from 1996 through June 2006. Since 9/11, the number of white-collar
convictions in federal courts has dropped about 30 percent.
White-collar crimes often affect the people least able to
afford it -- lower-income and elderly people, according to Peter
Henning, a former Justice prosecutor who teaches law at Wayne
State University in Detroit. "If you keep it small, and
act quickly and get out of the jurisdiction, you can avoid being
prosecuted," he said. "Scam artists know that."
Large numbers of FBI agents also were transferred out of violent-crime
programs because bureau officials knew that local police -- who
have overlapping jurisdiction in violent crimes -- would have
to help.
The retired FBI official said the Bush administration is forcing
the bureau to "cannibalize" its traditional crime-fighting
units in the name of fighting terrorism.
"The administration is starving the criminal program,"
the former official said.
'Fairly awful situation'
Margarita MacDonald, a 75-year-old widow who has Parkinson's
disease, may never get back more than $1 million from a man who
helped her with household tasks and then allegedly betrayed her
trust.
She was nearly deaf, all alone and living in Canada when he
befriended her. He began helping her with chores and errands
in exchange for room and board. He won her trust and persuaded
her to move to Issaquah with him.
The man told her that he had her best interests at heart,
but he began manipulating her, persuading her to sign documents
and threatening that he wouldn't bring her food or medicine if
she didn't do what he wanted, MacDonald stated in court documents.
He gradually stole about $1 million from her, buying furniture,
electronics, jewelry -- even vacations to Banff, Alberta, and
Hawaii, she wrote.
Larry Gold, a lawyer in Vancouver, B.C., who represented her,
called the Seattle office of the FBI in January 2005. The duty
officer seemed interested and told him to put the information
in writing, he said.
Gold did. In several carefully detailed pages, he explained
that the man stole most of MacDonald's savings and even got his
hands on $400,000 worth of gold she kept in a safe deposit box
in Canada. He said the FBI never responded.
"It was a fairly awful situation, and I thought they
might be interested in it," Gold said. "What can I
say? They weren't."
Frustrated, Gold sought help from Issaquah police, but Lynnwood
attorney John Tollefsen took over the case and made getting MacDonald's
money back, not prosecution, his main priority. He is still fighting
to help MacDonald get back her savings.
A judge ordered the man to pay MacDonald more than $1.4 million
last year. The man filed for bankruptcy. He hasn't been charged
with a crime.
'Dead on arrival'
Tensions
were growing inside Robert Mueller's inner circle. In the months
after 9/11, when the first waves of agents were funneled into
counterterrorism, the FBI director was made aware of the consequences
to come.
Without a major influx of new agents, there was no way to
maintain the bureau's grip on a long list of traditional crimes,
particularly time-consuming fraud investigations.
Mueller asked for help from two attorneys general -- John
Ashcroft and his successor, Alberto Gonzales -- only to be rebuffed
each time.
"We were told to do more with less," said David
Szady, a former FBI assistant director who stepped down last
year as head of counterintelligence.
"There was always discussion on backfilling," Szady
said. "Always the push that we need to ask for more bodies."
Dale Watson, who left in 2002 as the FBI's executive assistant
director over counterterrorism programs, also blames the White
House Office of Management and Budget and the Justice Department
for failing to heed the warnings.
"The budget should be backfilled with additional agents,"
Watson said. "We've got to do this. But you could request
2,000 agents for white collar, and it would never see the light
of day at OMB."
By the time the bureau started putting together its fiscal
2007 budget in mid-2005, "we realized we were going to have
to pull out of some areas -- bank fraud, investment fraud, ID
theft -- cases that protect the financial infrastructure of the
country," the retired top FBI official said.
Also in 2005, the FBI sent a five-year, strategic plan to
the Justice Department that Szady called "the director's
attempt to get this agency where it needed to be, including a
robust criminal footprint. I know for a fact that the Justice
Department beat that down. It was dead on arrival."
A report in September 2005 by the department's inspector general
asserted that in addition to the 1,143 agents transferred away
from traditional crime programs, the FBI used 1,279 agents on
counterterrorism work, even though they were on the books as
criminal-program agents. The inspector general concluded that
the FBI "reduced its investigative efforts related to traditional
crimes by more than 2,400 agents."
More recently, scaled-back staffing requests weren't granted.
In fiscal 2006, the bureau sought 250 to 350 new agents. It was
given money for fewer than 75, a former official said. Over the
past eight years, the ranks of FBI agents have increased, from
about 11,000 to 12,575, and virtually all have been assigned
to anti-terrorism duties, records show.
Officially, the Justice Department and the Office of Management
and Budget assert that traditional criminal enforcement by the
FBI hasn't suffered in the wake of 9/11. They say federal law
enforcement agencies are working more efficiently to compensate
for the continuing emphasis on homeland security.
"The administration strongly disagrees that the FBI has
been anything less than effective in the years since 9/11 in
combating domestic crime issues," said OMB spokesman Sean
Kevelighan. "We have worked to achieve a balance between
the FBI's homeland security and criminal investigative missions."
"We'll just abide by what the president's budget is,"
said FBI Assistant Director Chip Burrus. "We work a lot
smarter than we have in the past."
Mueller, Gonzales and Ashcroft declined to be interviewed
for this story.
Burrus acknowledges that the bureau has reduced its efforts
to fight fraud. He likened the FBI's current fraud-enforcement
policies -- in which losses below $150,000 have little chance
of being addressed -- to "triage." Even cases with
losses approaching $500,000 are much less likely to be accepted
for investigation than before 9/11, he said.
There is "no question" that America's financial
losses from frauds below $150,000 amount to billions a year,
Burrus said. The top security official for a major American bank
agreed, saying unprosecuted fraud losses easily total "multibillions."
Citing the new policy, an informed source said the Seattle
FBI office would have rejected the MacDonald case, despite the
million-dollar loss, because she was the only victim.
Experts say American consumers are paying for banks' and businesses'
fraud losses; they are passed on through higher interest rates,
bank fees and retail prices.
Enforcing civil rights laws has been a core FBI mission since
the Johnson presidency, but after 9/11 those efforts declined
substantially. The number of cases brought by the FBI to federal
prosecutors for any reason -- from getting subpoenas to seeking
charges -- fell 65 percent between 2000 and 2005, the P-I found.
While the FBI disputes the degree of the decline, the bureau's
own figures show drops in cases investigated, indictments and
convictions -- particularly hate crimes. Civil rights cases against
local police -- including allegations of brutality and misuse
of power -- also dropped following 9/11, but FBI data show a
rebound in indictments and convictions since 2005.
There were 24 percent fewer agents working on civil rights
cases in 2004 than in 2000, according to the 2005 inspector general's
report.
Sarah Dunne, legal director of the American Civil Liberties
Union of Washington, said the decline in civil rights investigations
means "people's rights are not protected."
"It's been sort of sad to see," said Dunne, a former
trial attorney in the Justice Department's Civil Rights Division.
"What type of message is the Bush administration sending
if they say this is not a significant concern?"
Increasing counterterrorism and security efforts may actually
lead to more situations in which police are violating people's
civil rights, said James Bible, president of the Seattle-King
County branch of the National Association for the Advancement
of Colored People.
"We're essentially put in a place that we're sacrificing
civil rights in the name of security," Bible said. "It
would seem that, as we build one, we necessarily have to build
the other."
John McKay, the former U.S. attorney for Western Washington,
said he is surprised that the FBI's post-9/11 trade-offs weren't
addressed years ago.
"I can't figure out for the life of me why, with the
war on terror, asking for more FBI agents isn't a priority,"
said McKay, who was one of eight U.S. attorneys fired last year
by the Bush administration. "If the president of the United
States, a law-enforcement Republican, is not going to propose
an increase in FBI agents -- what Democrat will? There's plenty
of blame to go around."
One leading Democrat, Sen. Joe Biden of Delaware, introduced
legislation in February that aims to address the problem. The
bill calls for hiring 1,000 agents at a cost of $160 million
a year.
"There's no doubt that fighting terrorism should be a
top priority for the FBI, but we can't forget about the risk
to our neighborhoods from everyday crime," Biden told the
P-I.
"To add insult to injury, President Bush hasn't replaced
the FBI agents who transitioned over from working criminal cases
to counterterrorism," he said. "The FBI is at a breaking
point. ... They're overworked and overburdened and, frankly,
they need some relief."
'Risk-free crime'
Eric Drew was near death when someone stole his identity.
Weak and in intense pain from leukemia and chemotherapy, he was
about to have a bone-marrow transplant at a Seattle hospital
in 2003 when collectors began calling, demanding payments on
credit-card accounts he'd never opened.
He got little response from Seattle police and called the
FBI. There, he said, a duty officer told him the FBI was focused
on national security and didn't deal with fraud anymore.
"Basically, I was in the hospital dying, and nobody would
lift a finger or even take a statement from me," he said.
Drew was furious. After his transplant, though sick and weak,
he tracked down the culprit himself. He got the Seattle addresses
where some of the fraudulently purchased merchandise had been
shipped, and he found surveillance footage from a hardware store
where some had been bought.
A local TV station picked up on his cause and aired footage
of the thief using a credit card opened in Drew's name. Tips
flooded in to Seattle police, and the guy turned himself in,
Drew said.
The culprit was Richard Gibson, a hospital worker at Seattle
Cancer Care Alliance who had had regular contact with Drew during
his hospital stay.
Drew, 39, said the FBI finally took the case -- but only after
it became a public spectacle that a dying man couldn't get law
enforcement to help him. Once the FBI took over, Gibson was swiftly
prosecuted.
Drew, who is now cancer-free after a 2004 stem-cell transplant,
believes that the FBI is the best agency to handle most identity-theft
cases because they often cross state lines.
But for now, he said, the message from the FBI and other law-enforcement
agencies is unsettling: "It's a risk-free crime. Go out
and steal identities. No one will come after you."
Crime squads tapped
In the late 1990s, the FBI in Seattle had at least 16 agents
working on two white-collar crime squads.
"It was like one-stop shopping," said Jason Moulton,
a former FBI official who ran one of those squads. "SPD
was there, the IGs were there, the 
Department
of Financial Institutions was there. IRS was there. They all
had desks in the space. We were running (wiretaps), doing complex
cases."
All of the agents "were extremely busy," and there
were still plenty of cases they couldn't get to, Moulton recalled.
By last summer, the effect of shifting agents to anti-terrorism
squads was clear: The FBI's white-collar effort had been whittled
down to four agents statewide. Hard-pressed agents are now routinely
urging banks or lawyers representing victims to do most of the
investigating themselves. Even then, the FBI won't necessarily
pursue criminal charges.
A few years ago, a Shoreline couple with a home-repair business
allegedly used phony financial information to get Columbia Bank
to loan them more than $2 million and then stopped paying it
back.
The bank sued, and a King County Superior Court judge ordered
the couple to pay more than $1.6 million. The couple moved to
Colorado and declared bankruptcy. There, a judge found that the
man -- and to a lesser extent, the woman -- purposely deceived
the bank.
A dogged Columbia Bank investigator put the case together
in a nice package to hand off to the FBI for possible criminal
charges, according to an FBI agent. The bureau, however, declined
to take the case.
The FBI also declines to investigate most cases of an increasingly
common financial crime that can leave victims financially and
emotionally drained: identity theft.
"When cases come in that you have to decline, you are
supposed to find a home for them," an FBI agent in Seattle
said. "But you've got a lot of balls in the air. You have
so much you are trying to do with so little resources."
Seattle police say they have been investigating more white-collar
crime cases in recent years -- partly because the FBI is handling
fewer, and partly owing to an explosion in identity theft and
Internet-related crimes.
"We're now really having to make hard decisions about
which cases will get worked, and when," said Lt. Mike Edwards,
who supervises the Fraud, Forgery and Financial Exploitation
Unit.
King County sheriff's detectives have also struggled to investigate
an increasing number of fraud cases without FBI help, Sgt. John
Urquhart said.
There are many reasons why federal agents are better suited
than the locals to conduct complex fraud investigations. The
FBI has agents around the nation and the world to run down leads.
Even if a local detective could get her chief to approve an investigative
trip across country, she has no jurisdiction in another state.
If agents need to subpoena business records, they simply call
a federal prosecutor, who can get an order easily. That's not
true in many state jurisdictions, including Washington, where
it can take a couple of days for the prosecutor to prepare documentation
and present it to a judge for a subpoena. Federal agents can
obtain warrants for wiretaps; local officers in Washington cannot,
except in rare circumstances. Locals need a court order for a
body wire; federal agents don't. FBI agents can record telephone
calls if one party consents without going to a judge; locals
can't.
And federal sentences for white-collar crimes are generally tougher
than those meted out in state courts. In Washington, for example,
the average federal money-launderer was sentenced to 35 months
in prison in 2006, while the average state court sentence was
probation.
The difference in penalties means that not only are fewer
people getting prosecuted for white-collar crimes, they are also
serving less time behind bars. And just when coordination among
state, local and federal law enforcement in Washington and other
states needed to be at its best, there were signs of major breakdowns.
In 2001, the FBI office in Seattle launched the King County
Fraud Investigation Team, which included investigators from the
Seattle and Bellevue police departments, the King County Sheriff's
Office and the Secret Service. Less than two years later, the
bureau dissolved it, according to a Seattle-area fraud investigator.
About the same time, FBI supervisors in Seattle also stopped
attending monthly meetings where they talked about fighting fraud
with executives from major retailers, such as Nordstrom and Costco.
Said one agent: "What did we bring to the table? We got
out of that game. Why go and give them a no?"
But the bureau's new mantra of doing more with less seems
to be paying off in the handling of bank robberies. The five
FBI agents in Seattle that had been assigned to bank heists have
been reduced to one, but there are no complaints of languishing
cases. The conviction rate last year was a lofty 85 percent.
Special Agent Larry Carr now works with local detectives to
coordinate the investigations and determine whether defendants
will be prosecuted in state or federal court. Increasingly, the
cases are going to King County Superior Court.
"It is a testament to doing a lot more with a lot less,"
Carr said.
Scam artists unpunished?
A few years ago, more than 1,000 people across the country
invested roughly $70 million in a scam known as Resource Development
International, led by two men who set up headquarters in Tacoma.
Though victims in Washington urged the FBI to investigate,
the two men didn't face federal charges -- or even a criminal
case here in Washington, where they ran the scam.
The district attorney's office in Santa Clara County, Calif.,
ended up taking on the case after an elderly victim in the San
Jose area came forward. Deputy District Attorney Paul Colin prosecuted
the kingpins, John and David Edwards, a father-and-son team who
are now serving 27-year sentences in state prison, and two other
men who had sold the investments to people in California.
But dozens of others were involved in the scam -- six to eight
people who worked in the Edwardses' office, and 50 to 100 people
who sold the phony investments across the country, Colin said.
Most haven't faced charges. That includes nine Washington men
who, according to the state Department of Financial Institutions,
sold more than $6.6 million worth of the sham investments to
53 people in Washington.
"If the feds had taken this on, it might have been caught
sooner, and more of the people who assisted the Edwardses might
have been brought to justice," Colin said. "These scams
happen every day to the rich and the poor, and they should be
a priority of law enforcement -- particularly at the federal
level."
After trying several times, Lloyd Martindale Jr., one of the
Washington victims, finally got an FBI agent to meet with him
in August 2002. The agent showed up late, explaining that he'd
been out late dealing with terrorist activities and border issues,
he said.
"He wanted my evidence and a description of my role,"
he said. "It sounded like the FBI was going to take this
thing."
Mike Urban / P-I
Tacoma retiree Dick Mansfield put money into an investment that
promised 4 percent interest each month and that turned out to
be a sham. He told a special agent in the FBI's Tacoma office
of investing $175,000 from his state pension. "She did listen
to me," he said, "but nothing ever came of it."
Retired Tacoma schoolteacher Dick Mansfield, who said he was
persuaded by one of the scam's "slick operators" to
invest $175,000 from his state pension, also finally got a special
agent at the FBI's Tacoma office to hear his story.
"She did listen to me," he said, "but nothing
ever came of it."
Gina Davis, supervisory special agent of the Tacoma office,
said they didn't act because an FBI office in California was
already investigating the investment scam. But John Gliatta,
supervisory special agent in Fresno, Calif., said their investigation
was limited to two men in the Fresno area. One was charged with
perjury and sentenced to probation.
Mansfield and Martindale believe that many more people should
have been prosecuted, and Mansfield still struggles to explain
how devastating it is "to have your future ripped off."
"I feel angry that we don't have a culture that sees
the horror of financial theft," he said. "It is horrendous.
It is not taken seriously."
Tacoma retiree Dick Mansfield
put
money into an investment that
promised 4 percent interest each
month and that turned out to be a
sham. He told a special agent in the
FBI's Tacoma office of investing
$175,000 from his state pension.
"She did listen to me," he said,
"but nothing ever came of it."
WEB LINKS
To learn more about the effects of FBI's post-9/11reorganization:
The
inspector general's report on "The External Effects of the
Federal Bureau of Investigation's Reprioritization Efforts":
usdoj.gov/oig/reports/FBI/a0537/index.htm
The
IG's report on "Internal Effects of the Federal Bureau of
Investigation's Reprioritization": usdoj.gov/oig/reports/FBI/a0439/index.htm
General
Accounting Office reports on the "FBI Transformation":
gao.gov/new.items/d041036.pdf
(PDF)
P-I reporter Paul Shukovsky can be reached at 206-448-8072
or paulshukovsky@seattlepi.com. P-I reporter Tracy Johnson can
be reached at 206-467-5942 or tracyjohnson@seattlepi.com.
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