The financial crisis and mortgage fraud: the unforeseen circumstances of the war on terrorism and the financial war on terrorism, a critical reflection

The article illustrates how the instigation of the ‘War on Terrorism’ and the ‘Financial War on Terrorism’ had a catastrophic impact on the ability of the Federal Bureau of Investigation to tackle mortgage fraud that was associated with the 2007/2008 financial crisis. Initially, the article identifies and demonstrates how President George Bush decided to prioritise tackling terrorism and the financing of terrorism following the al Qaeda terrorist attacks on September 11 2001. This was illustrated by the creation of the Department of Homeland Security in 2002, the extension of the remit of the Department of Justice and the redistribution of specialist white collar crime agents from the Federal Bureau of Investigation to enforce terrorist related legislation. The second part of the article illustrates the association between the financial crisis, subprime mortgages and mortgage fraud. The article then moves on to critically review the impact of the alteration in policy towards mortgage fraud that was introduced by President Barak Obama in 2009. Therefore, questioning the effectiveness of the policies adopted by President George Bush.


Introduction
The 2007/2008 financial crisis has attracted a great deal of research, debate and conjecture on the identification of its contributory factors. Many government commissioned reports have attempted to identify the root-causes of the financial crisis and have ascertained an embarrassment of complex and interwoven financial, legislative and regulatory factors that contributed to the largest financial collapse since the Wall Street Crash in 1929. For example, the United States (US) Financial Crisis Inquiry Commission Report (Financial Crisis Commission) concluded that there were several factors that caused the financial crisis.
This included weak financial regulation, the collapse of corporate governance and risk management, unwarranted borrowing combined with precarious investments, ill-equipped governments, a complete break down of accountability and ethics, collapsing mortgage lending standards, mortgage securitization, over-the-counter derivatives and the failures of Credit Rating Agencies (Financial Crisis Enquiry Report, 2011, p. xv-xxviii). Additionally, the US Department of Treasury (2008) stated that there were five elements: a complete breakdown in underwriting standards for subprime mortgages; a significant erosion of market discipline; flaws in CRAs; risk management weaknesses at many large financial institutions and ineffective banking regulation. The Federal Reserve identified more components that included a generalized run on global financial institutions; the dependence of many financial systems on short-term funding; a vicious cycle of market-to-market losses driving fire sales of asset backed securities; the realization that financial firms were pursuing flawed business models and were subject to similar risks and global swings in risk aversion supported by instantaneous worldwide communications and a shared business culture (2010, p. 6). In the United Kingdom (UK), the Financial Services Authority (FSA) concluded that "the origins of the greatest post-war financial crisis can be traced back to a combination of macroeconomic factors and financial market developments. The resulting exuberance in pricing credit and volatility risk developed into a self-reinforcing cycle, exacerbated by a failure to develop appropriate macro-prudential policy responses" (FSA, 2009, p. 5). In particular, the FSA identified six factors that included the macroeconomic imbalances increasing the complexity of the securitised credit model; the rapid extension of credit and falling credit standards; the property price boom; increasing leverage in the banking and shadow banking system; underestimation of bank and market liquidity risk, and self-reinforcing cycle of irrational exuberance (ibid, p. 7-12). Other well documented influences that triggered the financial crisis included the spectacular collapse of the US subprime mortgage sector (European 3 | P a g e Commission, 2009), weak and ineffective banking regulation models (Hutchins, 2011, p. 293), high levels of consumer debt and related over-indebtedness (Dickerson, 2009, p. 395), the sale of toxic debts (Arsalidou, 2010, p. 284), securitisation (Nwogugu, 2008, p. 316), deregulation of banking legislation (Levitin, 2009, p. 399), ineffective macroeconomic policies (Gevurtz, 2010, p. 113), weak consumer credit regulation (Schaefer, 2012, p. 741), the deregulation of consumer credit legislation (Choi and Papaioannou, 2010, p. 442) and the culture of some banking practices (Tomasic, 2011, p. 7). However, one of the most significant developments in the aftermath of the financial crisis has been the increasing recognition that white collar crime either triggered the financial crisis or was a significant contributory factor (Ryder, 2014;Huisman, 2012;Deflem, 2011;Herlin-Karnell, 2012;Hardouin, 2011;Creseney et al., 2009;Eng and Nuttal, 2009;Posner and Vermeule, 2009).
It is not the purpose of this article to identify the different types of white collar crime that caused the financial crisis, instead, it will uniquely concentrate on how the instigation of the 'War on Terrorism' and the 'Financial War on Terrorism' contributed towards the inability of US authorities to tackle the most prominent type of white collar crime to be associated with the financial crisis, mortgage fraud. The article begins by providing a brief overview of the instigation of the 'War on Terrorism' and the 'Financial War on Terrorism' by President George Bush, in September 2001. It then outlines and highlights how the al Qaeda terrorist attacks resulted in the transformation of the US white collar crime strategies to include the illconsidered merger between its anti-money laundering (AML) and counter-terrorist financing (CTF) strategies, and how this metamorphosis had a catastrophic impact on their ability to tackle mortgage fraud. The next section of the article illustrates the link between the financial crisis, subprime mortgages and mortgage fraud before moving to identify and critically considering the impact of the alteration in policy towards mortgage fraud that was introduced by President Barak Obama.

The war on terrorism and the financial war on terrorism
It is the hypothesis of this article that an unforeseen factor that contributed towards the financial crisis was the instigation of the 'War on Terrorism' and the 'Financial War on Terrorism'. Both of these were introduced by President George Bush following the terrorist attacks in September 2001. It has been suggested that the President associated the 'War on Drugs' with the 'War on Terrorism' after it was insinuated that the terrorist attacks in 2001 were partly financed by the profits of sale of illegal narcotics (Kenney, 2003, p. 187 It has been suggested that President Barak Obama declared an end to the 'War on Terrorism' in a speech in May 2013 when he stated that "every war has come to an end … we must define our effort not as a boundless 'global war on terror', but rather as a series of persistent, targeted efforts to dismantle specific networks of violent extremists that threaten America" (The White House, 2013). However, the Director of the Central Intelligence Agency, John Brennan, stated in 2015 that the 'War on Terrorism' would never end: If we were not as engaged against the terrorists, I think we would be facing a horrendous, horrendous environment … it's a long war, unfortunately. But it's been a war that has been in existence for millennia … so this is going to be something, I think, that we're always going to have to be vigilant about (Harvard University, 2015).
The most significant part of the US response to the terrorist attacks in September 2001 that would have a catastrophic effect on its ability to tackle mortgage fraud was the decision to pursue the development and implementation of a national strategy for homeland security. This was propelled by the announcement in 2002 for the creation of the Department of Homeland Security. In June 2002 President George Bush declared that his most important responsibility was to "protect and defend the American people" (Department of Homeland Security, 2002, p. 2). The Department of Homeland Security stated that "the President proposes to create a new Department of Homeland Security, the most significant transformation of the US government in over half a century by largely transforming and realigning the current confusing patchwork of government activities into a single department 5 | P a g e whose primary mission is to protect our homeland" (ibid). The Department of Homeland Security was established via the Homeland Security Act 2002 (Public Law 107-296, November 25, 2002), and its creation has been described as the biggest "reorganization of the federal government since World War II" (Thomson, 2010, p. 277  The creation of the Department of Homeland Security and the prevention of terrorism became the top priority for the Bush Administration and resulted in sweeping changes to how the Federal Bureau of Investigation (FBI) tackled white collar crime, and in particular mortgage fraud. The impact of this policy change following the terrorist attacks in September 2001 will be further explored and analysed in a later section of this article, but it now turns its attention to how the 'Financial War on Terrorism' also contributed towards the inability of the US to tackle mortgage fraud. 6 | P a g e On September 24 2001, President George Bush famously declared "we will starve terrorists of funding, turn them against each other, rout them out of their safe hiding places, and bring them to justice" (The White House, 2001b). The 'Financial War on Terrorism' had begun, and this announcement was followed by frequent declarations of the freezing of the financial assets of terrorists and their supporters. The 'Financial War on Terrorism' resulted in a seismic shift in the white collar crime strategies of the international community away from money laundering towards the financing of terrorism (Harrison and Ryder, 2013, p. 39). This is a view strongly asserted by Alexander who stated that "terrorist financing only became of international concern following the al Qaeda attacks" (2003, p. 200). Therefore, as argued by Convention was to "enhance international co-operation among States in devising and adopting effective measures for the prevention of the financing of terrorism" (Abeyratne, 2011, p. 57). It is important to note that prior to the terrorist attacks, "only four States had acceded to the Convention" (O'Neill, 2012, p. 31). However, at the time of writing the International Convention has been implemented by 186 nation states. Terrorist financing was defined by the International Convention as including "assets of every kind, whether tangible or intangible, movable or immovable, however acquired, and legal documents or instruments in any form" (International Convention for the Suppression of the Financing of Terrorism (1999) Art.1 para.1). Terrorist financing has also been referred to as 'reverse money laundering', which is a practice whereby 'clean' or 'legitimate' money is acquired and then funnelled to support acts terrorism. Supplementary, the UN issued Security Council Resolution 1267 in 1999, which generated a sanctions regime that applied to people or entities that were associated with the Taliban, Osama bin Laden and al-Qaida (United 7 | P a g e Nations, 1999). This was followed by fulcrum of the 'Financial War on Terror', UN Security Council Resolution 1373, which was unanimously adopted by UN on September 20 2001 (United Nations, 2001). The scope and remit of Security Council Resolution 1373 has been amended by Resolutions 1390 (United Nations, 2002), 1456(United Nations, 2003 and 1566 (United Nations, 2004).
Additionally, the EU "adopted a framework decision on combating terrorism" (Brunt, 2008, p. 114 2005). However, it is important to note that prior to the terrorist attacks in September 2001, the EU had directed its white collar crime efforts on money laundering and not the financing of terrorism, thus adopting an identical stance to that of the UN. For example, the EU has implemented three Money Laundering Directives, the first of which concentrated on the tackling the laundering of the proceeds of drug trafficking through the financial system, and not the financing of terrorism (Council Directive 91/308/EEC). At the start of the new Millennia it became clear that the scope of the First Directive was too narrow and ineffective (Mitsilegas and Gimlore, 2007, p. 119). Therefore, the EU introduced a broader Second

The evolution of the US counter-terrorist financing strategy
It is important to note that prior to the terrorist attacks in September 2001, the US had concentrated its white collar crime resources on fraud and money laundering.  (Doyle, 2002, p. 279). The legislation that has become inherently associated with the US AML policy is the Currency and Foreign Transactions Reporting Act 1970, or as it is more commonly referred to the Bank Secrecy Act 1970 (Pub, L. 91-507-OCT. 26, 1970). The Bank Secrecy Act (BSA 1970) imposed a plethora of reporting obligations on a wide range of financial institutions, including currency transaction reports. The next notable development in the evolution of the US AML policy was its association with the 'War on Drugs' in the 1970s and 1980s (Ryder, 2012, p. 2). The AML policy was largely supported by a series of legislative measures that There are three legislative provisions that the US CTF legislative and regulatory framework is constructed on: the Trading with the Enemy Act 1917, Anti-terrorism and Effective Death Penalty Act 1996 and the Bank Secrecy Act 1970 (Donohue, 2008, p. 147). The Trading with the Enemy Act 1917 (12 U.S.C. § § 95a-95b) provides the US President with the power to supervise and/or constrain trade between the US and its enemies in times of war.
Additionally, the Trading with the Enemy Act 1917 criminalises conduct for any person in the US to trade with an enemy nation state (Aufhauser, 2009, p. 22). Therefore, the overarching aim of the 1917 Act is to enable to US to "exert control over financial transactions or impose sanctions against foreign countries and/or nationals" (Savage, 2001, p. 21). The second piece of legislation was the Anti-terrorism and Effective Death Penalty Act 1996(Pub. L. No. 104-132, 110 Stat. 1214. The purpose of the 1996 Act is to enable the US government "to prevent persons within the United States … from providing material support or resources to foreign organizations that engage in terrorist activities" (ibid). The Act was signed in April 1996, a year after the bombing of the Oklahoma City federal building by Timothy McVeigh. The legislation contained two important statutory provisions that permitted the victims of terrorism to sue to state sponsors of terrorism and prohibited fund raising in the US by terrorist groups ( § 303(a), 110 Stat. at 1250). The aim of the Antiterrorism and Effective Death Penalty Act 1996 was to "hold terrorist nations accountable 10 | P a g e and to create a civil remedy for victims of foreign terrorism" (Conway, 2002, p. 735).
Furthermore, the Anti-terrorism and Effective Death Penalty Act 1996 amended the foreign state immunity provisions of the Foreign Sovereign Immunities Act 1976. By virtue of the 1996 Act, the US government is authorised to designate an organisation as a foreign terrorist organisation if they determine that "(a) the organization is a foreign organization (b) the organization engages in terrorist activity … (c) the terrorist activity or terrorism of the organization threatens the security of United States nationals or the national security of the has been argued that these powers have been used to deal with a wide range or matters including "national emergencies as the Iranian hostage seizure, Sandinista activities in Nicaragua, apartheid in South Africa, terrorist activities in Libya, Iraq's invasion of Kuwait, and the crisis in Haiti" (Gantz, 1995, p. 1). The International Emergency Powers Act 1977 has been described as "one of the primary tools used in fighting the financial war on terror.
Although the [Act] … existed prior to the terrorist attacks of September 11 … it provides the legal framework to block assets of organizations that are deemed to be aiding and abetting foreign terrorist groups" (Ferrari, 2005, p. 205). The second type of terrorist related list was introduced by the Anti-terrorism and Effective Death Penalty Act 1996 (Donohue, 2008, p. 149 , 1997). Under this legislation, it is possible for the US government to designate individuals and groups as foreign terrorist organisations.
Specifically, the 1996 Act permits the Secretary of State, to liaise with the Secretary of the Treasury to "designate an organisation as a foreign terrorist organisation" (8 U.S.C. 11 | P a g e §1189(a)(1) (Supp. IV 1998)). It is possible for a body that has been designated as a foreign terrorist organisation to challenge this description within thirty days of its publication in the Federal Register (8 U.S.C. § 1189(6)(c)(1)). The final area of legislation was the BSA 1970, which "focused on creating a paper trail to help the state detect an investigate violations of tax and criminal law" (Donohue, 2008, p. 151).
It is important to note that from the early AML measures spawned the untimely and ill- where acts of terrorism do not generate a profit. The financial process adopted by terrorists to accumulate funds can be contrasted with that adopted by money launderers. For instance, terrorist financing has been referred to as 'reverse money laundering', which is a practice whereby 'clean' or 'legitimate' money is acquired and then funnelled to support terrorism (Ryder, 2013, p. 767). Conversely, money laundering involves the conversion of 'dirty' or 'illegal' money into clean money via its laundering through three recognised phases. The extension of the money laundering model to include terrorism must be queried because terrorism is not a profit based crime The first part of the article has discussed the impact of the 'War on Terrorism' and the 'Financial War on Terrorism' on US white collar crime strategies. The creation of the Department of Homeland Security resulted in an unprecedented reorganisation of how US authorities tackled terrorism, with approximately 40 percent of its special agents being reassigned to protect homeland security. Ultimately, this decision would cripple the FBI's 12 | P a g e counter mortgage fraud efforts in the build-up to and during the financial crisis. The second section of the article moves on to highlight the link between the financial crisis and mortgage fraud.

The financial crisis and mortgage fraud
The origins of the financial crisis can be traced to the collapse of the US subprime mortgage sector in 2007 (Financial Crisis Enquiry Report, 2011). A subprime mortgage has been defined as a "non-traditional, higher risk loans that frequently carry above market interest rates" (Slevin, 2007, p. 18). Many commentators have concluded that the collapse of the US subprime mortgage market contributed towards the financial crisis (Singh and LaBrosse, 2010, p. 55). The spectacular collapse resulted in financial institutions reporting record losses (International Monetary Fund, 2010, p. 10), a large number of corporate insolvencies, significant losses for investors and banks (Wen, 2011, p. 325), record number of property repossessions (Marshall, 2009, p. 2) and record levels of consumer debt (Ruben, 2009).
Additionally, several studies have determined that the collapse of the US subprime mortgage sector highlighted an underlying association with mortgage fraud. For example, Nguyen and Pontell stated that their "investigations have found that the growth of nonprime lending attracted a great deal of [mortgage] fraud" (2011, p. 12). These authors cited research by Black (2010) and Costello et al. (2007) which "found that fraudulent misrepresentation existing in almost every [mortgage application] file" (Nguyen and Pontell, 2011, p. 12).
These studies were supported by the Federal Financial Institutions Examinations Council who stated that "industry experts estimate that up to 10% of all residential loan applications have some form of material misrepresentation, both inadvertent and malicious" (2009). The FBI stated that during the subprime mortgage crisis "mortgage fraud perpetrators … [took] advantage of industry personnel attempting to generate loans to maintain current standards of living" (2004). Therefore, the FBI concluded that the "subprime mortgage issues remain a key factor in influencing mortgage fraud directly and indirectly" (ibid). This is a view supported by McCann who noted that "mortgage fraud perpetrated by these unregulated private mortgage brokers may have contributed to the instability and loss in the residential lending market that contributed to the mortgage crisis" (2010, p. 352). Therefore, mortgage fraud became the most prominent white collar crime to be associated with the financial crisis.
It has been described as "the fastest growing white collar crime in the US" (FBI, 2006) and "one of the most pervasive problems in lending" (Jacobus, 2008, p. 188). Mortgage fraud has 13 | P a g e been defined as "the intentional misstatement, misrepresentation, or omission by an applicant or other interested parties, relied on by a lender or underwriter to provide funding for, to purchase, or to insure a mortgage loan" (Federal Bureau of Investigation, 2004). It also includes providing misleading information when making a mortgage application (Vacco, 20096, p. 248). There are two types of mortgage fraud -fraud for property and fraud for profit (O'Donnell and Planer, 2008, p. 54) (2011, p. 597). It is also interesting to note that "mortgage fraud, far from abating, has only expanded since the foreclosure crisis began" (Fisher, 2009, p. 121). The association between mortgage fraud and the financial crisis is also illustrated by an increase in the investigative and enforcement activities of the FBI. For example, since the start of the financial crisis we have witnessed a 400 per cent increase in the number of mortgage fraud investigations undertaken by the FBI (Heroy, 2008, p. 322). In response to the increasing Nonetheless, the reliability of the figures provided by the FBI has been questioned by the Department of Justice's Inspector General's Office who concluded that the total number of mortgage fraud related prosecutions could be less than expected (Richman, 2014, 265).
Black was also very critical of the response from the FBI and stated that "the elite frauds that drove the current crisis have not even been subjected to a serious investigation" (2012, p. 987).

An alteration of policy
The declaration of the 'War on Terrorism', the instigation of the 'Financial War on Department ill-prepared for the challenges of 9/11, into wartime Justice Department" (Ashcroft, 2009, p. 813). As a result of this alteration in priority, the FBI and a large number of US Attorneys' officers became responsible for "fighting the domestic portion of the War on Terror" (Richman and Stuntz, 2005, p. 583). This decision was questioned by commentators who argued that the Department of Justice "led by organized-crime The boundaries between war and law enforcement are now very blurry" (Baker, 2004, p. 310). It is very interesting to note that despite the necessity to promote Homeland Security and the related extension of the remit of the FBI and Department of Justice, the threat posed by mortgage fraud was recognised by many commentators before the start of the financial crisis. For example, the FBI warned that "if fraudulent practices become systemic within the mortgage industry and mortgage fraud is allowed to become unrestrained, it will ultimately place financial institutions at risk and have adverse effects on the stock market" (Federal Bureau of Investigation, 2009b). Furthermore, an assistant director of the FBI described the threat posed by mortgage fraud in 2004 as having the "the potential to be an epidemic [author's emphasis]" and that "we think we can prevent a problem that could have as much impact as the Savings and Loans crisis" (Federal Bureau of Investigation, 2004). These statements were also used by other media outlets including Reuters who warned that the FBI "after years spent focusing on national security, is struggling to find agents and resources to investigate wrongdoing tied to the country's economic crisis" (Michaud, 2008). Furthermore, the Los Angeles Times reported that "a massive shift of FBI agents to anti-terrorism and counter intelligence duties has undermined [author's emphasis] the work of fraud investigators, who are taking on fewer scam artists and corporate miscreants and taking longer to complete cases" (Eckard, 2004 This was a view supported by Black, one of the most vociferous critics of the US approach towards mortgage fraud, who famously declared that "an expanding epidemic of mortgage fraud existed. The Federal Bureau of Investigation … warned Congress … in September 2004 that an 'epidemic' of mortgage fraud was developing and predicted that it would produce an economic 'crisis' if it were not contained". Black added that despite this forthright statement from the FBI, "no one in the industry, including regulators, ranks of investors or creditors, or law enforcement personnel took effective action against the epidemic" (2011, p. 597).
A clear link between the instigation of the 'War on Terrorism' and the benign neglect by the Bush administration towards mortgage fraud was the diversion of significant resources away from the FBI's white collar crime team towards tackling terrorism and maintaining Homeland Security. The reduction in white collar crime FBI agents was recognized by the Financial Crisis Enquiry Commission Report, who stated that the number of assigned agents towards white collar crime dropped from 2,342 to less than 2,000 (Financial Crisis Enquiry Commission, 2011, p. 5). The Commission added that in 2007 only 150 agents were available to investigate over 54,000 mortgage fraud related SARS filed with the FinCEN.
The direct association between the redistribution of its special agents and mortgage fraud was highlighted by Creseney et al. who described this process as becoming an "obstacle" that adversely affected the ability of the FBI to investigate allegations of mortgage fraud (2009, p. 238-239). Indeed, Creseney et al. concluded that by 2007 "the number of FBI agent's nationwide pursuing mortgage fraud had shrunk to about 100, in sharp contrast to the roughly 1,000 agents that were deployed on banking fraud during the Savings and Loans crisis of the 1980s and 1990s" (ibid). Similarly, Podgor condemned the decision by President George Bush to promote Homeland Security and stated that "the reduction in [FBI] agents likely resulted in the reduced number of white-collar prosecutions" (2010, p. 205). The diversion of resources resulted in the New York Times concluding that "the FBI is struggling to find enough agents and resources to investigate criminal wrongdoing tied to the country's economic crisis" (Lichtblau et al, 2008). Despite numerous pleas by law enforcement agencies and the Mortgage Bankers Association for more federal funding to tackle mortgage fraud, it was consistently and incorrectly rejected by President George Bush. This was acknowledged by Robert Mueller, the Director of the FBI, who informed the Financial Crisis Enquiry Commission Report that he had asked for more resources to tackle mortgage fraud but "didn't get what we had requested" (Financial Crisis Commission, 2011, p. 163). 17 | P a g e Additionally, it has been argued that the Bush Administration disregarded the threat posed by mortgage fraud and that they provided hardly any financial support for the FBI (ibid, p. 164).
However, the former Attorney General Alberto Gonzales argued that "I don't think anyone can credibly argue that [mortgage fraud] is more important than the war on terror. Mortgage fraud doesn't involve taking loss of life" (Financial Crisis Commission, 2011, p. 163). This statement is another example of the negligent attitude towards mortgage fraud that was afforded by the Bush administration. It is abundantly clear that despite warnings and requests for additional funding from the FBI, President George Bush adopted an apathetic stance towards mortgage fraud. The Act was also viewed as a "broad-based anti-fraud measure, designed to create more tools to prosecute fraud at all levels" and to "help protect Americans from future frauds that exploit the economic assistance programs intended to restore and rebuild [the] economy" (Lover, 2010(Lover, , p. 1129 parties the ability to recuperate money that has been lost to fraud. This measure has become one of the most significant anti-fraud devices utilsied by the government in civil fraud cases (Love, 2012(Love, , p. 1129.
The decision to provide additional funding for the Department of Justice and the subsequent increase in enforcement activities, as outlined above, represented a significant alteration in policy towards mortgage fraud from the previous administration (Smith, 2010, p. 474-475 to deal with the incoming tsunami of mortgage fraud cases.

Conclusion
The aim of this article was to provide an alternative commentary on the association of the terrorism. Terrorists will not use the proceeds of crime to disguise the true origins of the criminal offence; they will use the finances to commit acts of terrorism.