Congress Must Protect Anti-Money Laundering Whistleblowers
On January 1, 2021, as part of the National Defense Authorization Act (“NDAA”), Congress enacted the Anti-Money Laundering Act of 2020 (“AML Act”). Congress recognized that whistleblowers would be key to enforcing the AML Act and included a new whistleblower reward law as part of the Act. The AML whistleblower law was intended to incentivize, protect, and reward whistleblowers. It was modelled on the highly successful Dodd-Frank Act (“DFA”) and includes a number of key provisions contained in the DFA, including strict confidentiality rules.
Despite Congress’s good intentions, the whistleblower law will not work in practice. It includes provisions that are counterproductive to whistleblowing. The Act deviates from key provisions contained in the False Claims Act and the DFA that make it impossible for the law to effectively incentivize, reward, or protect whistleblowers. The law’s numerous problems will result in a chilling effect on whistleblowers, especially when otherwise fully valid whistleblowers who have lost their jobs and careers are denied rewards due to loopholes in the law. It is imperative that Congress fix the AML Act in order to enable the United States government to detect and successfully prosecute money laundering.
Congress clearly recognized that money laundering is among the most dangerous of all corporate crimes. It permits the worst criminal elements, including drug kingpins and terrorists, to hide their money. It is an essential tool for tax evasion, bribery and corruption in the international banking system. Money laundering needs secrecy to succeed. Consequently, whistleblowers are perfectly situated to detect these crimes and provide the key evidence for successful prosecutions.
As explained below, the original Senate proposal for an AML whistleblower law conformed to the basic framework of the DFA. It contained a number of essential provisions that are also included in other successful whistleblower laws, including the IRS whistleblower reward law, and False Claims Act. However, the final version of the AML whistleblower law, approved by the NDAA House-Senate Conference, did not include seven provisions necessary to make the law work. The excluded provisions undermine the intent of the law, will result in the vast majority of whistleblowers not obtaining appropriate rewards, and will result in unchecked retaliation against employees at Credit Unions and FDIC insured financial institutions.
In order to effectuate the intent of Congress the AML Act must be amended consistent with the original Senate proposal.
Background to the AML Whistleblower Law
The National Defense Authorization Act of 2020 (NDAA) included a major section intended to reform the nation’s anti-money laundering (AML) laws. Part of the AML reforms was a whistleblower provision entitled “Whistleblower incentives and protections,” codified as Title 31 U.S.C. § 5323 (hereinafter, “AML Whistleblower Law”). During the drafting stage, both the House and Senate proposed whistleblower reforms to the AML Act. The Senate version mirrored, almost word for word, the highly successful Dodd-Frank Act whistleblower law. This version was approved by unanimous consent in the U.S. Senate and submitted to the House-Senate Conference Committee. See Vol. 166 Congressional Record S3599 (June 25, 2020).
In September 2020 the U.S. Securities and Exchange Commission (“SEC”) issued public findings based on an extensive review of the DFA over a 10-year time period. This review, published as part of a formal SEC rulemaking, confirmed that the DFA was a highly effective tool for the detection of frauds. Whistleblower information and cooperation had become a key component of the SEC’s enforcement program. Thus, at the very time the House-Senate Conference was debating potential changes to the Senate version of the AML whistleblower law, bi-partisan public statements made by every SEC Commissioner confirmed the importance and efficacy of the DFA whistleblower law.
Despite the demonstrated effectiveness of the DFA, the House-Senate Conference altered seven provisions in that law that collectively are critical to the success of any whistleblower reward law. The altered provisions include terms that have been included in all significant whistleblower reward or qui tam laws since 1791, including the False Claims Act, IRS whistleblower law, the Securities and Exchange Act’s whistleblower law, the Commodity Exchange Act’s whistleblower law and the Auto Safety whistleblower law.
Because, according to Congressional rules, the NDAA Conference Report could not be changed without reopening the entire package, it was not possible to fix the whistleblower provisions prior to the Conference Report being approved by Congress and sent to the President. President Trump vetoed the entire NDAA and Congress overrode the veto on January 1,2021. Consequently, the AML law (which included the flawed whistleblower provisions) became effective on that date.
The SEC Rulemaking Proceeding Demonstrated the Effectiveness of the DFA Model for Whistleblower Protection and Should Have Been Followed by the NDAA Conference
Empirical evidence supporting the effectiveness of the Senate version of the AML whistleblower law was placed on the public record in September 2020 as part of an SEC rulemaking proceeding. The timing of these bi-partisan statements praising the DFA is very significant, as these statements were made at the precise time the House-Senate Conference on the NDAA was considering the AML law.
The empirical evidence supporting the DFA framework was based on a two-year intense rulemaking review by the U.S. Securities and Exchange Commission (SEC). In 2018, the Commission proposed significant rule changes to the DFA, including a rule change that would have lowered the amount of rewards paid in large cases. The SEC’s proposal sparked numerous public comments from all interested parties, including corporate representatives, academics, investor advocates, and whistleblowers along with an extensive internal review by the Commission’s staff (including the Office of Legal Counsel and the Division of Enforcement).
Although the official rulemaking proceeding was supposed to close to public comment on September 18, 2018, the Commission continued to accept comments, and meet with experts on whistleblower law, for an additional two years. By engaging in an extremely open and thorough process, the Commission was able to review the effectiveness of the DFA in light of ten years of experience. Such a review of whistleblower reward laws had never before been accomplished. The rulemaking was not only based on numerous comments submitted by experts with intimate knowledge as to how whistleblower reward laws work, but was also based on insight from the Commission’s own enforcement staff. In the ten years since the DFA was passed, the Commission’s enforcement staff had received over 25,000 “tips,” had opened numerous major investigations, and had paid millions in rewards. In other words, the Commission was in a unique position to analyze the workings of a reward law in light of unique access to internal law enforcement documentation.
Thus, the Commission had unique insight as to how a reward law impacts the quality of information provided by informants, the willingness of these informants to work closely with SEC enforcement staff, and the usefulness of whistleblower disclosures in helping the Commission to successfully detect and prosecute corporate crimes. The Commission’s review was unprecedented in its scope and thoroughness.
After an extensive 27-month review, the Commission’s overall judgment on the DFA whistleblower law was unanimous and unequivocal. The law worked and worked remarkably well. The proposal to reduce rewards in large cases was unanimously rejected by all five Commissioners based on the recognized role these rewards play in incentivizing whistleblowers and discouraging misconduct based on a true fear of detection.
The unanimous and bi-partisan conclusions of the SEC speak for themselves and were clearly stated on the public record. For example, on September 17, 2020, Stephanie Avakian, the SEC’s Director of the Division of Enforcement, discussed the DFA whistleblower program. Ms. Avakian explained that the DFA’s structure and provisions proved to be an effective law enforcement tool, protecting investors, the public interest, and the whistleblowers who stepped forward to report wrongdoing:
[The Dodd-Frank Act’s whistleblower] program is critically important to the SEC and to the Enforcement Division. It is important to reward whistleblowers and to do it timely. Since the enactment of the program in 2011, whistleblower tips have resulted in numerous high-quality enforcement actions . . . Given the success of this program, we have been flooded with increasing numbers of quality tips.”
One week later, on September 23, 2020, all five SEC Commissioners (three Republicans and two Democrats) highly praised the DFA’s whistleblower reward law, and confirmed the assessment of the Enforcement Division. Mr. Jay Clayton, the Trump-appointed Chairman of the SEC, reflected the opinions of the entire Commission when he strongly and unequivocally praised the whistleblower reward law:
Over the past ten years, the whistleblower program has been a critical component of the Commission’s efforts to detect wrongdoing and protect investors and the marketplace, particularly where fraud is well-hidden or difficult to detect. Enforcement actions from whistleblower tips have resulted in more than $2.5 billion in ordered financial remedies, including more than $1.4 billion in disgorgement of ill-gotten gains and interest, of which almost $750 million has been, or is scheduled to be, returned to harmed investors.
I want to note our appreciation to whistleblowers who, sometimes at great risk to their livelihood, report suspected securities laws violations to the SEC. Our whistleblower program has been a success because of their efforts. Working together, we have stopped frauds and prevented losses for countless investors.
This view of the success and importance of the SEC DFA whistleblower program was echoed by the Democratic SEC Commissioners. For example, Commissioner Allison Herren Lee explained:
In recent times, it seems that nearly every day has provided us with an opportunity to appreciate the contributions of whistleblowers. Often, they display extraordinary bravery to expose fraud and wrongdoing, and to shine light in some very dark places. In doing so, they reinforce our fundamental values . . .
Since its inception, the Commission’s whistleblower program has enabled us to identify and pursue fraudulent conduct, ongoing regulatory violations, and other wrongdoing that would otherwise have gone undetected. Investors – including some of the most vulnerable – are the real beneficiaries. As a result of the success of our whistleblower program, we have been able to stop schemes in their tracks, and to return millions to victims of fraud.
The value of the program is evident from the staggering volume of tips we receive, and the number of awards claims submitted. Our program today is working well . . .
The findings of the SEC, reflected in the public statements made by the Commission’s enforcement staff and each of the five Commissioners, are absolutely essential to understand the significant problems within the AML Act, and the solution to these problems.
Major Deviations Between the AML, the DFA, and False Claims Act Whistleblower Laws that Renders the AML Law Unworkable
Set forth below is an outline of the material differences between the Dodd-Frank Act and the new AML whistleblower law. Based on the uncontradicted record, these loopholes and deficiencies are not supported, and would undermine essential rules necessary for an AML whistleblower law to work. These differences between the DFA and the AML law will nullify the whistleblower incentives and protections intended to be enacted by the Congressional sponsors of the AML Act.
A. THE SOURCE OF THE AWARD
Breaking with the tradition of all successful whistleblower laws, the AML Whistleblower Act requires that rewards be paid from “appropriations,” as opposed to directly from the sanctions obtained from wrongdoers. (31 U.S.C. § 5323(b)(1) and (2)). For example, under the False Claims Act, the payment to a whistleblower is approved as part of the sanction paid by the wrongdoer. The formula for these payments is simple. The whistleblower’s original information was the reason that a wrongdoer is held accountable and required to pay sanctions. But for the whistleblower, the case would not have been initiated or successfully prosecuted. The reward to the whistleblower comes directly from the person found liable for the sanction. No taxpayer monies are ever used to pay a whistleblower, and whistleblowers are paid outside of the formal appropriations process.
The Dodd-Frank Act followed this model. In order to ensure that the whistleblower reward would be paid directly from monies obtained from the wrongdoers, Congress established a special “fund.” (15 U.S.C. § 78u-6(g)). Sanctions obtained from wrongdoers are deposited into this fund, and these monies are thereafter used to pay the rewards. Just as in the False Claims Act, all payments to whistleblowers would come out of sanctions obtained based on the original information provided by the whistleblower. No taxpayer monies would be used.
Under this model, the taxpayers, government and/or victims of crime would always obtain between 70-90% of all sanctions obtained. Every relevant constituency wins. First, wrongdoers are held accountable (regardless of the amount of sanction). Second, the fear of detection results in a significant (and well documented) deterrent effect preventing future crimes from occurring. Third, sanctions are obtained from wrongdoers that, if not for the whistleblower, would not be obtained. These sanctions directly benefit the victims of crime and taxpayers. Finally, all rewards to whistleblowers are paid by the very criminals the whistleblowers turn in. Having the wrongdoers provide the money to compensate whistleblowers is true justice. Under a working whistleblower program, the “good guys” win.
The fact that a working whistleblower program provides ample funds to compensate taxpayers, victims and whistleblowers is demonstrated by the statistical information provided by the SEC. In August 2020, the Director of the Office of Enforcement of the U.S. Securities and Exchange Commission (“SEC”) publicly disclosed the amount of monies obtained from whistleblower cases under the Dodd-Frank Act, and how these monies were allocated. This disclosure confirmed that whistleblower reward programs are extremely profitable for the United States, provide ample monies to compensate victims, and provide for adequate rewards for whistleblowers.
As the Chairman of the SEC and the Office of the Whistleblower explained, as of September 23, 2020, the taxpayers and harmed investors were the big winners in whistleblower-triggered enforcement proceedings. The monetary results of these cases were as follows Director of Enforcement explained as follows:
$2.5 billion in ordered financial remedies from whistleblower cases;
$750 million has been, or is scheduled to be, returned to harmed investors;
$523 million paid to whistleblowers.
The original Senate version of the AML Whistleblower Law established a fund identical to the fund contained in the Dodd-Frank Act. The House-Senate Conference stated that the special fund had been approved in its “Joint Explanatory Statement of the Committee of Conference” for the NDAA. In that Statement, the conferees actually confirmed that it was their intent to establish such a fund: “The conference agreement provides new whistleblower protections for those reporting BSA violations and establishes an ‘Anti-Money Laundering and Counter-Terrorism Financing Fund’ to pay such rewards.”
Inexplicably, the final language of the AML Whistleblower Law conflicted with the understanding of the Committee of Conference, and simply cut out the proposed “Anti-Money Laundering and Counter-Terrorism Financing Fund” in its entirety.
Instead, there is no guarantee that whistleblowers will ever be paid, and there is no fund to pay them. Whistleblower payments would be subject to the Congressional appropriations process, and payments would only be available if Congress appropriated those monies. The AML Whistleblower Act confirms that payments to whistleblowers are dictated by the appropriations process. Title 31 U.S.C.‘§ 5323(b)(1) states that awards must be paid from “amounts made available in advance by appropriation Acts.” Similarly, Title 31 U.S.C.‘§ 5323(b)(2) states that the “source of awards” was “subject to amounts made available in advance by appropriation Acts,” even if the Secretary of Treasury wanted to pay a whistleblower directly from a sanction obtained.
Requiring that the funds for whistleblower rewards be approved through the appropriation process, with no relationship to the amount of sanctions obtained by whistleblowers, the hardships faced by whistleblowers, or the deterrent effect of an established whistleblower reward program, guarantees that the AML Whistleblower Act will not work.
B. LACK OF A MINIMUM AWARD
Unlike all other modern reward laws, such as the Dodd-Frank Act, the False Claims Act, the IRS reward law, and the Auto Safety whistleblower law, the AML Act does not require the Secretary of Treasury to make any minimum award. For example, under the Dodd-Frank Act the SEC must grant an otherwise fully qualified whistleblower no less then 10% and no more than 30% of a sanction obtained. (15 U.S.C. § 78u-6(b)(1)). The original Senate version of the AML Act contained an identical provision. However, the final House-Senate version simply stated that awards could, in the complete discretion of the Secretary of Treasury, be awarded “not more than 30%.” (31 U.S.C.‘§ 5323(b)(1) and (2)).
By not requiring a minimum payment, the decision to grant awards under the AML Act is completely discretionary. The Secretary of Treasury can effectively deny any whistleblower a meaningful award, for any reason whatsoever. Because whistleblowers cannot challenge the amount of an award in court, if the Secretary of Treasury decided to give a de minimus award to a whistleblower (as low as one penny), the whistleblower would have no appeal.
The failure to require a minimum reward payment was one of the major problems with the 1943 version of the False Claims Act, and was one of the major reforms approved by Congress in 1986. The 1943 law contained language that is identical to the recently approved AML whistleblower law. The failure to include a minimum reward in the 1943 version of the FCA was one of the principal reasons the law did not work. Billions were lost to frauds, many potential whistleblowers never filed any cases, and those that did were not paid.
“The new percentages . . . create a guarantee that relators [i.e., whistleblowers] will receive at least some portion of the award if the litigation proves successful. Hearing witnesses who themselves had exposed fraud in Government contracting, expressed concern that current law fails to offer any security, financial or otherwise, to persons considering publicly exposing fraud.
“If a potential plaintiff reads the present statute and understands that in a successful case the court may arbitrarily decide to award only a tiny fraction of the proceeds to the person who brought the action, the potential plaintiff may decide it is too risky to proceed in the face of a totally unpredictable recovery.
“The Committee acknowledges the risks and sacrifices of [whistleblowers] . . . The setting of such a definite amount is sensible . . . the Government will still receive up to 90 percent of the proceeds—substantially more than the zero percent it would have received had the person not brought the evidence of fraud
Prior to the passage of the Dodd-Frank Act, the SEC also had a discretionary reward program. Like the current AML Act, the SEC’s reward law did not require a minimum reward. In fact, the language of the older SEC law mirrored the “not to exceed” language of current AML whistleblower law. Rewards were “not to exceed 10 percent of such amounts, as the Commission deems appropriate.” Public Law 100-704 (Nov. 18, 1988). The SEC’s Inspector General reviewed the discretionary program and concluded it was a failure. In the twenty years before the Great Recession of 2008-10, the SEC had only paid rewards to 6 whistleblowers, averaging only $22,000 per/award.
In part, because of the complete failure of the older SEC reward law, Congress repealed that law in its entirety in 2010. It was replaced by the current Dodd-Frank Act reward law. Like the 1986 amendments to the FCA, the DFA also corrected many of the defects in the older SEC law. This included requiring the payment of a minimum reward to all fully qualified whistleblowers. If a whistleblower followed the law, and his or her disclosures triggered a successful enforcement action, the whistleblower would be entitled to a minimum reward. This would protect whistleblowers from the unfettered discretion of a government bureaucrat or political appointee who may harbor animus toward whistleblowers or who may simply believe that whistleblowers should not obtain significant rewards. Additionally, employees would understand that if they took the considerable risk of becoming a whistleblower, they would be entitled to a minimum sum-certain. Without this guarantee, whistleblower reward laws will not work, and will not fully incentivize potential informants to step forward.
Based on the repeated failures of reward laws that did not mandate a minimum reward, and the tremendous success of the reward laws that do, all of the modern whistleblower reward laws now require the payment of minimum rewards (between 10-15% of the collected proceeds) to qualified whistleblowers whose original information triggered successful enforcement actions. These laws have been recognized as key components of successful anti-corruption programs, and have triggered billions of dollars in recoveries.
The lack of a mandatory minimum payment reinforces the problems caused by the failure of the AML law to create a fund to pay rewards. It creates two barriers impeding the payment of rewards. Thus, even in the unlikely circumstance that the Secretary obtains adequate appropriations to pay awards from Congress, a whistleblower is not entitled to any meaningful award as a matter of law.
C. EXCLUSION OF CRIMINAL CASES
The AML Whistleblower Act narrowed the scope of sanctions recovered from prosecutions which a whistleblower could be rewarded. Compare AML law, 31 U.S.C. § 5323(a)(2)(B) with the DFA, 15 U.S.C. § 78u-6(a)(4). Comparing the two laws demonstrates that the following exclusions on coverage were added to the AML law that are not part of the DFA: “forfeiture,” “restitution,” and “any victim compensation payment.”
These exclusions will have a radical impact on the scope of the whistleblower law. Specifically, all sanctions obtained in criminal cases are covered under the “victim compensation” tailspin. Thus, all criminal money laundering prosecutions are not covered under the whistleblower law. This is a radical disincentive on informants reporting criminal AML violations. It is a disincentive on whistleblowers to work with criminal agents in prosecuting AML crimes. Such a criminal exclusion does not exist under the DFA.
In the early days of the IRS whistleblower law, the Department of Treasury (the same department that will administer the AML law) argued that criminal tax violations were not included in the IRS whistleblower law. This interpretation was rejected by the Tax Court, and thereafter Congress amended the tax whistleblower law to ensure that whistleblowers who report criminal tax law violations were fully and unequivocally covered under the law. It was evident that whistleblowers should be encouraged to report both civil and criminal tax law violations, and both the Tax Court and Congress made sure that these policy objectives would be met.
The exclusion of criminal cases from the AML Whistleblower Act is effectuated by the provisions of the law that exclude sanctions that are obtained and designated for “victim compensation” from the basis for a reward. All federal criminal laws mandate that monies obtained from criminal prosecutions are placed in a “victim compensation” fund, even if there is no actual individual victim. The vast majority of the monies placed in these funds actually come from large fraud cases in which there are no actual “victims” that qualify for the mandatory compensation permitted under the law.
At the close of FY 2019, the Crime Victims Fund (CVF) had a balance of $6.353 billion. Additionally, because of the growth of monies in the fund, the scope of programs supported by the fund have been significantly expanded over time. Even with these expansions, Congress returned to the general treasury $1.5 billion in CVF monies.
In addition to the fact that the overwhelming majority of funds deposited into the victims fund is not used to compensate actual victims, the SEC disclosures related to its DFA program refute any assumption that paying whistleblowers rewards in criminal cases would negatively impact the ability of harmed persons to obtain compensation.
As stated before, the Dodd-Frank Act contains no criminal-case disqualification, despite the requirement that the SEC compensate victims of securities fraud from the sanctions obtained from cases. In the context of whistleblower-generated prosecutions, the SEC confirmed that the number of sanctions obtained in cases far exceeds the amount of monies needed to compensate victims. The monetary results of these cases were as follows:
$2.5 billion in ordered financial remedies from whistleblower cases;
$750 million has been, or is scheduled to be, returned to harmed investors.
As can be seen, the whistleblower programs, by greatly enhancing the ability of law enforcement to detect and prosecute corporate fraud, generates billions of dollars in sanctions, and easily provides full funding for victims. What is even more important, but for the whistleblower disclosures, all or most of these crimes would not be detected, the ability to successfully prosecute would be significantly prejudiced, and the victims would be the biggest losers. Pitting whistleblowers against victims of crime is a false and dangerous narrative, that only benefits corporate criminals.
Under the current law, even if a whistleblower is the original source of significant information necessary to successfully prosecute a person involved in money laundering, the whistleblower will not be able to obtain a reward based on any of the criminal penalties obtained in the case. This will disincentivize the willingness of whistleblowers to report serious violations of AML laws, and result in hardship when whistleblowers are denied rewards simply because the original information they provide is so valuable that it justifies prosecutions under the “beyond reasonable doubt” standard, as opposed to an easier to prove civil or administrative prosecution.
Disqualifying whistleblowers who provide evidence that results in successful criminal prosecutions is radically counter to the public interest. It has a perverse impact. In cases where crimes are the most egregious, and the frauds can be demonstrated “beyond reasonable doubt,” the whistleblower who reported the high-quality information necessary for the conviction would be denied a reward. Moreover, whistleblowers disclosing crimes within demonstrated criminal enterprises would be at the highest risk of retaliation and even physical assault.
D. STRIPPING COVERAGE BASED ON EMPLOYEES’ “JOB DUTIES”
The AML Act contains major loopholes that may kill the entire qui tam or reward law. The reward law contains a broad mandatory exclusion from coverage of any employee who, “acting in the normal course of the job duties,” reports illegal money laundering or other crimes covered under the Bank Secrecy Act. This exclusion is open to massive abuse and will result in the disqualification of the vast majority of all potential whistleblowers. It is unprecedented in any whistleblower law.
Even if this type of exclusion could be justified (which it cannot be), it is open-ended and subject to abuse. Any bank that wanted to ensure that a class of employees was blocked from becoming whistleblowers would simply make reporting AML violations part of the employee’s official job duties. In fact, such requirements are already standard in most major banks, and are often incorporated into an employee’s mandatory job duties through various ethical codes or compliance requirements. These requirements have not stopped money laundering. Ironically, it is the failure of “job duty” reporting requirements that have permitted money laundering to proliferate, and that justified enacting the AML whistleblower law in the first place.
The fact that all major banks have “job duty” reporting requirements is uncontested. For example, JPMorgan Chase requires all finance professionals to “promptly report” “potential or actual violations” as part of their mandatory duties. Even with this requirement, JPMorgan Chase was severely sanctioned for AML violations. Other banks have similar requirements. For example,
Bank of America requires all employees to “promptly report any knowledge or information about conduct by anyone that you reasonably believe to be a crime or illegal act . . . a dishonest or unethical act.” CITIBANK requires all employees to “report” “violations or potential violations of law, regulation, rule or breachers of policy.” HSBC requires all “employees to “identify, prevent, manage and mitigate money-laundering risks. Everyone must act to deter, detect, escalate, and report all financial crime.” Even the Bank of China includes reporting AML as a part of all employee’s job duties. Despite these requirements, money laundering has continued, on a large scale, in numerous banks.
No other whistleblower anti-retaliation, qui tam or reward law contains such an exclusion. The exclusion is absurd on its face, highly confusing and subject to abuse. In 2011 the SEC, in debating rules under the Dodd-Frank Act, considered the interaction between internal compliance rules designed to help corporations self-police, and the interest of having employees report violations directly to law enforcement. The SEC firmly rejected suggestions by corporations (including large financial institutions covered under the AML laws) that would have permanently blocked the right of employees to qualify for rewards based on their “job duties.”
Based on the SEC’s experience in monitoring the DFA, it concluded that whistleblower reward laws have no negative impact on internal compliance programs or internal “job duty” reporting requirements. In fact, strong reward laws actually increase the effectiveness of internal programs, as companies have a strong incentive to support these programs, instead of facing government investigations. The fact that reward laws enhance compliance programs was explained by the former Chair of the SEC, Mary Joe White:
Let me say a bit more about company compliance programs. When the Commission was considering its whistleblower rules, concerns were raised about undermining companies’ internal compliance programs. Some commenters urged that internal reporting be made a pre-condition to a whistleblower award. That was not done, but the final whistleblower rules established a framework to incentivize employees to report internally first. A whistleblower’s participation in internal compliance systems is thus a factor that will generally increase an award, whereas interference with those systems will surely decrease an award. And, a whistleblower who internally reports, and at the same time or within 120 days reports to the Commission, will receive credit for any information the company subsequently self-reports to the SEC.
All indications are that internal compliance functions are as strong as ever – if not stronger – and that insiders continue to report possible violations internally first. Although there is no requirement under our rules that the whistleblower be a current or former employee, several of the individuals who have received awards were, in fact, company insiders. Notably, of these, over 80% first raised their concerns internally to their supervisors or compliance personnel before reporting to the Commission.
Many in-house lawyers, compliance professionals, and law firms representing companies have told us that since the implementation of our program, companies have taken fresh looks at their internal compliance functions and made enhancements to further encourage their employees to view internal reporting as an effective means to address potential wrongdoing without fear of reprisal or retaliation. That is a very good thing, and, so far, we believe that the whistleblower program has achieved the right balance between the need of companies to be given an opportunity to address possible violations of law and the SEC’s law enforcement interests.
The volume of tips has been greater and of higher quality than expected when the program was first adopted. We have seen enough to know that whistleblowers increase our efficiency and conserve our scarce resources. Importantly, internal compliance programs at companies also remain vibrant and effective ways to detect and report wrongdoing.
There is no justification to exclude “job duty” related whistleblowers. The empirical evidence generated under the DFA program demonstrates that a vibrant reward program that explicitly includes all employees has a positive impact on compliance programs. It is no accident that no other whistleblower law contains such an exclusion.
E. BLOCKING MOST WHISTLEBLOWERS FROM COVERAGE UNDER EFFECTIVE ANTI-RETALIATION LAWS
Whistleblowers subject to retaliation for reporting money laundering violations under the new AML LAW face a nightmare scenario. The new law itself contains a strong anti-whistleblower provision. See 31 U.S.C.§ 5323(c). This includes protections for internal or “job duty” whistleblowers and protections for reporting violations to the Secretary of Treasury. However, a “carve out” contained in the AML law excludes all employees at FDIC insured institutions and credit unions from these protections. It is dumfounding that the AML law creates a procedure to file claims with the Department of Treasury, but does not prohibit FDIC insured banks from firing such employees. Likewise, the AML act bars “job duty” whistleblowers from obtaining a reward, but also denies any job protection for employees at FDIC insured banks who report violations as part of their job duties.
All other major reward laws simply protect all employees from retaliation for contacting the appropriate law enforcement agencies. This includes the False Claims Act, the IRS whistleblower law and the Dodd-Frank Act. Breaking from this precedent, the AML strips most employees of realistic protection. The AML Act contains a “carve-out” that covers two classes of employees. Those excluded are all employees at institutions insured under the Federal Deposit Insurance Act (“FDIC”) and the Federal Credit Union Act (“FCUA”). Because every major (and minor) bank and financial institution in the United States is an FDIC or FCUA insured institution, the overwhelming majority of all AML whistleblowers will have no job protection under the new law.
The carve-out reads as follows:
“This subsection [the new anti-retaliation law] shall not apply with respect to any employer that is subject to section 33 of the Federal Deposit Insurance Act (12 U.S.C. 1831j) or section 213 or 214 of the Federal Credit Union Act (12 U.S.C. 1790b, 1790c).”
As explained below, this carve-out will have devastating consequences on AML whistleblowers.
The scope of the carve-out is vast: First, all FDIC insured financial institutions and insured credit unions. The carve-out requires employees at FDIC and FCUA institutions to use older and highly ineffective laws, instead of the far superior employment laws contained in the AML Act.
Second, the carve-out requires that employees at FDIC or FCUA covered banks use two older anti-retaliation laws that were passed in the 1980s. These laws have had a terrible record, are weak, and have failed to protect bank whistleblowers. The weaknesses in these old and discredited FDIC and FCUA laws include:
The laws do not contain protections for internal disclosures. Most whistleblowers report violations to supervisors or compliance departments. Thus, employees who report violations as part of their “official duties” can be fired at will;
These older laws do not cover reports to the Department of Treasury, the IRS or FinCEN. These three agencies have significant responsibility for policing money laundering. Moreover, the AML Act directs employees to file claims with the Department of Treasury. It makes absolutely no sense to urge employees to file claims within Treasury, when they can be fired for doing so;
Unlike every other major anti-retaliation law, the FDIC and credit union laws do not contain a statutory attorney fee provision guaranteeing prevailing employee’s payment for the attorney fees. Without the ability to pay their attorneys, these laws cannot be used by the overwhelming majority of employees potentially covered;
The definition of adverse employment actions and potential recoverable remedies are far more limited under the older laws. Former employees and blacklisting are not included in the definition of adverse action;
There are no provisions for anonymously or confidentially filing reports of misconduct under the older laws;
There is no prohibition against the enforcement of mandatory arbitration agreements.
F. LACK OF A DEADLINE FOR PUBLISHING RULES FAILURE TO ESTABLISH AN OFFICE OF THE WHISTLEBLOWER
The AML Act gives the Secretary of Treasury the authority to implement regulations covering the new whistleblower law. However, the law does not require that any rules be implemented, and sets no deadline for publishing rules. This is in complete contrast to the DFA. The DFA required the SEC to implement rules, and set a deadline (270 days) for publishing the rules. 15 U.S.C. § 78u-7(a).
Because the AML Act (like the DFA) creates complex rights and procedures related to obtaining confidentiality, qualifying for a reward, and for filing reward claims, published rules are indispensable for the law to work in practice.
G. FAILURE TO ESTABLISH AN OFFICE OF THE WHISTLEBLOWER
Without proper management, a whistleblower reward law, like the one included in the AML Act, cannot work. Effective whistleblower reward programs, like the program created as part of the DFA, all have a designated office. See 15 U.S.C. § 78u-7(d) (“The Securities and Exchange Commission shall establish a separate office within the Commission to administer and enforce the provisions of [the whistleblower law] . . .”). It is absolutely essential that evidence being provided by whistleblowers to the government is properly handled and provided to the appropriate law enforcement offices. This is the core purpose of whistleblower laws, and without an Office and staff to ensure that this purpose can be achieved, the law will not work.
Additionally, the AML Act contains provisions to protect the confidentiality and anonymity of whistleblowers who provide information to the Secretary of Treasury. Without a centralized office coordinating the claims being filed, and ensuring that the law requiring the confidentiality of whistleblowers is enforced, the law will not work, and at times will be highly counterproductive.
The DFA required the SEC to create a formal Office of the Whistleblower, as did the IRS and Commodity Exchange Act reward laws. Given the numerous law enforcement agencies that would have an interest in AML allegations filed by a whistleblower, and the extreme risk that AML whistleblowers will take when they report violations (especially those who reside in foreign countries), the need for a highly professional whistleblower office, with a well-trained staff, is imperative.
G. DOUBLE TAXATION OF REWARDS
The final problem with the AML Act concerns the double taxation of awards. An anomaly in the federal tax law can result in a whistleblower being taxed on monies directly paid to counsel, even if the whistleblower never has control or possession of these funds, and even when the whistleblower’s attorney also pays the full tax on these funds. Thus, without an exemption that protects whistleblowers from double taxation, whistleblowers are taxed on the fees they pay their attorneys. All of the major reward laws prohibit this double taxation, including the False Claims Act, state False Claims Acts, the Dodd-Frank Act, the Securities and Exchange Act, the Commodity Exchange Act and the IRS whistleblower law. See, e.g., 26 USC § 62(a)(21). The AML Act should follow this lead. Whistleblowers should not have to pay a tax on the fees obtained by their attorneys in cases in which the attorney also has to pay such taxes.
Money laundering whistleblowers face the most severe risks for their personal safety than any other class of whistleblowers. Many persons who engage in money laundering are associated with organized crime, terrorism, sanction-busting, bribery, trafficking, and other criminal enterprises that traditionally have had a violent reaction to informants. A large amount of money laundering is initiated outside the United States, where America’s obstruction of justice laws are not applicable, and whistleblowers cannot be protected by agencies such as the FBI. Given the high-stakes in these cases, Congress must ensure that AML whistleblower laws follow the most strict, best practices that have proven to be essential in incentivizing and rewarding these anti-corruption heroes who often risk so much in the cause of stopping some of the worst crimes in the world. The current AML law was clearly well-intended. But it now holds out a temptation to potential informants without the ability to reward or protect them. Without amendment, the law will fail and whistleblowers will be placed in harm’s way.