U.S. Ends Bank Penalty Practice Called `Slush Fund' by GOP

(Bloomberg) -- The U.S. Justice Department is ending an Obama-era practice of allocating some Wall Street settlement money to advocacy groups that Republican lawmakers claimed were backing liberal causes.

Attorney General Jeff Sessions on Wednesday ordered that money collected as part of civil and criminal settlements may be used only to reimburse parties to the litigation or compensate victims. The restriction, which won't apply retroactively to previous settlements, could limit the scope of some of the government's largest Wall Street and environmental cases.

“When the federal government settles a case against a corporate wrongdoer, any settlement funds should first go to the victims and then to the American people -- not to bankroll third-party special interest groups or the political friends of whoever is in power,” Sessions said in a statement accompanying a one-page order to all Justice Department division heads and U.S. attorneys.

When the Justice Department under Obama settled with Wall Street banks over the sale of toxic mortgage bonds, the agreements included so-called soft money that funded mortgage relief for homeowners, rather than payments to investors who lost money.

Senator Chuck Grassley, Republican of Iowa and chairman of the Judiciary Committee, said in an October letter to then-Attorney General Loretta Lynch that the Justice Department was using settlement agreements with Bank of America Corp. and Citigroup Inc. to restore funding to left-leaning groups that Congress deliberately defunded.

Grassley told Lynch that the list of housing counseling groups the bank could choose from included organizations that Congress had cut funding for in 2011. The groups he cited were the National Council of La Raza, the National Urban League, the National Community Reinvestment Coalition and NeighborWorks America.

Republicans also questioned the government's recent settlement with Volkswagen AG for cheating on emissions tests, which requires the automaker to spend $2.7 billion to fund environmental remediation projects and another $2 billion on charging infrastructure for electric vehicles.

Under the new policy, it's unlikely that those terms would be available for automakers still facing similar investigations, including Daimler AG and Fiat Chrysler Automobiles NV. Republicans in the House have also introduced legislation called the“Stop Settlement Slush Funds Act of 2017."

--With assistance from David McLaughlin

To contact the reporter on this story: Tom Schoenberg in Washington at tschoenberg@bloomberg.net.

To contact the editors responsible for this story: Sara Forden at sforden@bloomberg.net, David S. Joachim, Peter Blumberg