Have things gotten to the point where people believe deceptions and crimes are the normal way of doing business? Apparently so, says FBI director Robert Mueller. He gave a speech on June 2, 2009, before the Economic Club of New York, in which he addressed the issue of “groupthink and greed” that played a big role in the subprime lending crisis. He also spoke about the lack of integrity in the marketplace, the boardroom, and the halls of government, and the FBI’s role in combating it.

First, some mortgage fraud details (through April 2009) from the FBI:

• 63,173 total mortgage fraud suspicious activity reports in 2008; 40,901 in the first four months of 2009
• 2,440 current mortgage fraud investigations, more than double the number from two years ago
• 965 new cases opened in the first four months of 2009 (compared to 136 in all of 2004)
• 354 convictions in 2008
• $4 billion to $6 billion in estimated annual losses
• Top 10 states with significant mortgage fraud problems in 2008 (in descending order): Rhode Island, Florida, Illinois, Georgia, Maryland, New York, Michigan, California, Missouri, and Colorado

“The prevailing thought process seemed to be, ‘Everyone is making money, why should we miss the boat?’” Mueller said. “But few ever believed that the boat might sink.”

The most recent FBI bust was in May, when it charged 13 people with mortgage scams involving properties worth more than $10 million. “Many of those arrested claimed they were just making money the same way as everyone else (in the mortgage industry) . . . so they assumed it was the norm and therefore legal,” the FBI reported.

The “norm” was allegedly tricking homeowners into selling their homes to help erase their debts but often causing them to be evicted. They put false information on loan applications so they could flip properties for a profit. They promised to make mortgage payments for straw buyers only to renege and cause the buyers to default on their loans. All the while, they pocketed big bucks.

Other cases include one in April, in Maryland, where the FBI charged five defendants in a $70 million mortgage fraud Ponzi scheme. The defendants allegedly tricked homeowners into pouring money into the defendants’ business, with the false promise that revenue from that business would be used to pay off the homeowners’ mortgages.

In San Diego, 24 people were charged in connection with a scheme that included more than 220 properties, valued at more than $100 million. The alleged leader of the group is a documented member of a well-established and violent gang—the Lincoln Park Street Gang, according to Mueller.

In Milwaukee, a convicted drug dealer and his accomplices were running a house-flipping scheme, where they would obtain loan money and divide the proceeds. The loans would then go into default, and the homes into foreclosure.

“This is by no means the first financial crisis we have had, nor is it the first instance of bad business judgment or unadulterated greed,” Mueller said. But many of today’s financial crimes involve losses “that once would have been unthinkable.”

Mueller also discussed non–mortgage-related fraud numbers:

• More than 580 corporate fraud and 1,300 securities fraud investigations are open—some (like the Madoff case) involving billions in losses.
• More than 2,500 cases of public corruption are pending; since 2007, nearly 1,700 officials have been convicted of violating the public trust.

Looking into the future, he said the next wave of cases the FBI is expecting to see are fraud and corruption related to the TARP funds and the stimulus package.  

“These funds are inherently vulnerable to bribery, fraud, conflicts of interest, and collusion,” he said. “With trillions of dollars at stake—from the purchase of troubled assets to improvements in infrastructure, health care, energy, and education—even a small percentage of fraud would result in substantial taxpayer losses.”

Going forward, Mueller stressed the need for “independent board members, auditors, and outside counsel” to help keep organizations honest. “If this financial crisis has taught us anything,” he said, “it may be that it is time for a cultural shift—a ‘back to basics’ approach that incorporates sound business judgment, risk assessment, and integrity, from the top down.”

Read more of his comments at the FBI Web site.