By Vincent McKnight, Shaun Rosenthal, Erica Roberts, and Savannah Shepherd
As we discussed in Parts I and II of this series, government agencies are severely lacking in funds and resources to fully investigate and combat fraud.
The Government Accountability Office (GAO) 2024 Report, “Fraud Against the Government,” estimates that the annual losses from procurement fraud range from $233 billion to $521 billion. And despite the Security and Exchange Commission’s (SEC) track record of enforcement success, it is severely lacking the necessary resources to keep up with fraud.
The Commodity Futures Trading Commission’s (CFTC) enforcement efforts are also hamstrung by budgetary concerns, despite the billions of fraud dollars that go unrecovered.
The CFTC Enforces the Commodity Exchange Act
Created in 1974, the CFTC established the Division of Enforcement (DOE) that same year, with the purpose of investigating and prosecuting violations of the Commodity Exchange Act (CEA) and its regulations. The DOE targets threats in the derivatives market (e.g., swaps, futures, and options) and prevents fraud and manipulation in the commodities market (i.e., the trading of commodities like agricultural products, metals, and oil).
Initially, the DOE focused on addressing price manipulation, insider trading, and other traditional market abuses. As the years have progressed, the division has expanded its enforcement activities within the derivatives and commodities markets to address energy markets, cybersecurity risks, money laundering, and cryptocurrencies. In taking enforcement action against individuals and companies that violate the law, the CFTC can recover the ill-gotten gains, impose fines, and seek injunctive and equitable relief, including trading bans. The CFTC’s Whistleblower Program, created in 2010, allows private individuals to submit tips to the CFTC in return for a percentage recovery. It has significantly assisted the CFTC in identifying fraud and recovering lost money.
The CFTC Recovers Billions of Dollars Annually
In fiscal year 2023, the CFTC filed 96 enforcement actions and recovered $4.3 billion in penalties, restitution and disgorgement. Major recoveries include:
- $3.4 billion in civil monetary penalties and restitution for victims who were defrauded by Cornelius Johannes Steynberg, in connection with retail foreign currency (forex) transactions and other CEA violations
- $45 million paid by HSBC Bank, for allegations of manipulative and deceptive trading related to swaps with bond issuers, spoofing, and supervision and mobile device recordkeeping failures
- $53 million paid by Goldman Sachs, JPMorgan Chase Bank, and Bank of America for swap data reporting and other failures relating to their business as swap dealers
The whistleblower program heavily contributes to these recoveries; tips from the program has led to the recovery of over $3 billion since its inception.
Fraud is Pervasive in the Derivatives Market
While there is not an overarching source for total fraud in the derivatives market, we provide a few examples to demonstrate fraud is pervasive and severe.
The CFTC has investigated and prosecuted Ponzi schemes in the derivatives market. A paper by Massimo Bartoletti et al. in the journal Future Generations Computer Systems analyzed Ponzi schemes on the Ethereum blockchain. In only reviewing a subset of the cryptocurrency landscape, they found 184 examples of suspected Ponzi schemes in the period between August 2015 and August 2017. There are also many more Ponzi schemes that use Fiat money, and which continue today, as a CFTC enforcement action announced this month exemplifies.
The CFTC has also dabbled in enforcing against using cryptocurrencies to launder money. Chainalysis, a blockchain data platform, found that tens of billions of dollars are laundered using cryptocurrencies. And some of that total may fall within the CFTC’s oversight.
As mentioned, the above are two small examples of types of enforcement actions. Taking into account the full scope of the CFTC’s enforcement, there is likely tens of billions of fraud dollars for the CFTC to recover.
The CFTC Has Had Budget Issues
The CFTC’s DOE has returned multiples on Congress’ investment into it. For instance, in 2024, with a budget of approximately $66 million, the CFTC recovered over $4 billion, a return of over 6000%. Indeed, the recoveries were over 12 times the entire CFTC’s budget of approximately $350 million.
With those outsized returns, the CFTC should not be challenged by a lack of funds. And yet, Congress has failed to allocate sufficient funds to the CFTC’s Whistleblower Fund. The Whistleblower Fund is used to pay both the whistleblower awards and to fund the Whistleblower Office. A significant whistleblower award would therefore deplete the Whistleblower Office’s administrative budget, representing a delicate budgetary balance. In 2021, President Biden signed an emergency bill to save the program, but the measure expired in September 2024, putting the program back in a perilous situation.
Like the SEC, this commission is being forced to do more with less. Its ability to fully enforce the CEA and recover funds from fraud is suffering as a result. This lag in federal enforcement efforts emphasizes the need for private assistance and forthcoming whistleblowers to strengthen the program.
If you have information about fraud against the government and believe you have a whistleblower claim, please feel free to fill out our online intake form to contact a whistleblower attorney at our firm today.