Financial Services Sector Faces Growing Risks from False Claims Act and Trade Secret Violations

Financial services companies are increasingly finding themselves caught in the crosshairs of False Claims Act (FCA) investigations and litigation, marking a significant shift in regulatory enforcement priorities. This trend represents a substantial risk for institutions that interact with federal funding or programs, with potential consequences extending beyond financial penalties.

The U.S. Department of Justice has ramped up its focus on FCA violations across the financial sector, targeting organizations that allegedly submit false claims for government payment or improperly retain government funds. This enforcement push comes as federal spending has expanded dramatically in recent years, creating more opportunities for regulatory scrutiny.

Banking institutions face particular exposure when participating in government-backed lending programs, such as those administered by the Small Business Administration, Department of Housing and Urban Development, and other federal agencies. Cases typically involve allegations that financial institutions misrepresented compliance with program requirements or failed to follow proper protocols when originating federally-backed loans.

“We’re seeing a significant uptick in whistleblower-initiated cases against financial services firms,” said Rachel Geman, partner at Lieff Cabraser Heimann & Bernstein, who specializes in representing FCA whistleblowers. “Former employees with inside knowledge of questionable practices are increasingly coming forward, often after raising concerns internally without resolution.”

The statistics underscore this growing threat. The Justice Department recovered over $2.2 billion from FCA cases in fiscal year 2022, with a notable portion coming from financial sector cases. Whistleblower-initiated lawsuits accounted for approximately 75% of these recoveries, highlighting the critical role insiders play in bringing potential violations to light.

Penalties for violations can be severe. Companies found liable under the FCA may face treble damages—three times the government’s losses—plus penalties ranging from $12,537 to $25,076 per false claim. These financial impacts are often compounded by reputational damage, loss of government contracts, and potential debarment from future federal programs.

Beyond FCA concerns, financial institutions also face mounting challenges protecting their trade secrets in an increasingly digital and mobile workforce. The financial services industry relies heavily on proprietary algorithms, customer data, investment strategies, and technological innovations that provide competitive advantages.

Recent court cases highlight the vulnerability of this intellectual property. In one notable example, a major Wall Street firm pursued litigation against former employees who allegedly took confidential trading strategies to a competitor, resulting in a multi-million-dollar settlement. Another case involved a fintech company that successfully obtained an injunction against former developers who attempted to replicate proprietary code at a startup.

“The combination of high employee turnover, digital work environments, and increasingly sophisticated means of data exfiltration creates perfect conditions for trade secret theft,” explained Mark Krotoski, partner at Morgan Lewis and former prosecutor with the Justice Department’s Computer Crime Section. “Financial institutions need robust protective measures that address both technical vulnerabilities and human factors.”

Industry experts recommend implementing comprehensive compliance programs that address both FCA and trade secret risks. For FCA compliance, this includes regular training, clear documentation procedures, rigorous quality control, and accessible whistleblower channels. To protect trade secrets, companies should employ technical safeguards like access controls and monitoring systems alongside legal protections such as well-crafted confidentiality agreements and prompt enforcement actions.

The regulatory landscape continues to evolve, with federal agencies signaling increased scrutiny of financial institutions’ interactions with government programs. The SEC has also strengthened its whistleblower program, potentially encouraging more employees to report suspected violations externally.

Financial institutions would be wise to conduct thorough risk assessments addressing both FCA and trade secret vulnerabilities, experts say. Proactive measures—including robust compliance programs, comprehensive employee training, and systematic monitoring—represent the best defense against these growing threats in an industry where trust and proprietary information remain paramount assets.

As one compliance officer at a major bank noted on condition of anonymity, “These aren’t just legal issues—they’re existential business risks that deserve attention at the highest levels of the organization.”