Financial Services Industry Faces False Claims Act and Trade Secret Liability Risks

U.S. financial institutions are facing heightened scrutiny as federal authorities ramp up enforcement actions under the False Claims Act and other statutes aimed at protecting government programs from fraud and abuse.

This regulatory pressure comes at a time when financial services firms are already navigating complex compliance environments, making risk management increasingly challenging across the sector. Recent enforcement patterns suggest that government agencies are taking a more aggressive stance toward potential violations.

The False Claims Act, originally enacted during the Civil War to combat fraud against the Union Army, has evolved into one of the government’s most powerful enforcement tools. The law imposes liability on individuals and companies that defraud governmental programs and includes provisions that allow whistleblowers to file lawsuits on behalf of the government and receive a portion of any recovered damages.

For financial institutions, False Claims Act violations often involve allegations related to government-backed lending programs, including those administered by the Federal Housing Administration, Department of Veterans Affairs, and Small Business Administration. Common allegations include misrepresentations about loan eligibility, failure to comply with underwriting requirements, and improper certification of compliance with program rules.

“Financial institutions that participate in government programs must maintain robust compliance frameworks,” said Michael Johnson, a regulatory compliance expert at Georgetown University. “The consequences of False Claims Act violations can be severe, with potential damages reaching three times the amount of the government’s losses, plus additional penalties for each false claim.”

The Department of Justice has signaled its intention to pursue cases against financial institutions more aggressively. In fiscal year 2023, the DOJ recovered over $2.2 billion in settlements and judgments under the False Claims Act, with a significant portion coming from cases involving financial services companies.

Beyond False Claims Act risks, financial institutions are increasingly concerned about trade secret protection. As competition for financial technology and proprietary trading algorithms intensifies, firms are investing more resources in safeguarding their intellectual property.

The financial sector’s digital transformation has accelerated the development of proprietary technologies and methodologies that provide competitive advantages. These assets, which range from customer analytics models to high-frequency trading algorithms, often qualify as trade secrets under federal and state laws.

“The value of intellectual property in financial services has grown exponentially,” explained Sarah Williams, a partner at a national law firm specializing in financial services litigation. “As employees move between competing institutions, the risk of trade secret misappropriation increases, particularly in areas like algorithmic trading and wealth management.”

Recent litigation underscores these concerns. Several high-profile cases have involved allegations of former employees taking confidential information to competitors or using proprietary methodologies to launch competing ventures. Damages in these cases can be substantial, often including lost profits and, in some cases, disgorgement of the defendant’s gains.

Financial institutions are responding to these twin risks by enhancing their compliance and security protocols. Many firms have implemented more stringent data protection measures, including advanced monitoring systems that track access to sensitive information and detect unusual patterns that might indicate potential misappropriation.

On the regulatory compliance front, institutions are investing in more sophisticated audit procedures and training programs designed to ensure adherence to government program requirements. These measures often include regular assessments of loan origination processes, underwriting standards, and certification procedures.

Industry associations are also providing guidance to member institutions. The American Bankers Association and the Financial Services Roundtable have developed best practices for compliance with government lending programs and protection of intellectual property.

Experts recommend that financial institutions conduct thorough risk assessments to identify vulnerabilities in both areas. This process should include reviewing employee confidentiality agreements, examining data access controls, and evaluating compliance with government program requirements.

As regulatory scrutiny continues to intensify, financial institutions that proactively address these risks will be better positioned to avoid costly enforcement actions and litigation. The stakes are particularly high for institutions that participate extensively in government lending programs or that rely heavily on proprietary methodologies and technologies for their competitive advantage.