The New BSA Whistleblower Provision – From the Whistleblowers’ Perspective

Constantine Cannon whistleblower attorneys Mary Inman and Carolina Gonzalez were recently guest bloggers at Money Laundering Watch from Ballard Spahr.  Ballard Spahr attorneys Peter D. Hardy and Meredith S. Dante posed questions to Inman and Gonzalez about recent amendments to the Bank Secrecy Act that provide new options for whistleblowers reporting anti-money laundering violations.  With the kind permission of Money Laundering Watch, we include that exchange here for our readers.

What is your general reaction to the new BSA whistleblower law?

The Treasury Department’s new whistleblower reward program for violations of the BSA has the potential to be a game-changer for AML enforcement.  As the success of the SEC’s whistleblower program (on which the Treasury’s program is modeled) has shown, whistleblowers, properly incentivized and protected, are incredibly effective tools for alerting regulatory agencies to fraudulent schemes that are otherwise difficult to detect.  According to its latest Annual Report to Congress, in Fiscal Year 2020, the SEC’s Whistleblower Office received over 6,900 tips from whistleblowers across the U.S. as well as in 78 foreign countries.  With the advent of its new AML whistleblower reward program, the Treasury Department now has a force multiplier, a global citizen army of whistleblower watchdogs poised to root out violations of the BSA.  Because many of these whistleblowers will have worked inside the organizations engaged in or enabling the wrongdoing, they will be able to provide the Treasury Department and Financial Crimes Enforcement Network (“FinCEN”) with a roadmap to the fraud.  Similarly, given that money laundering is often a transnational crime, international whistleblowers, who are increasingly alive to the idea that they may use the multitude of U.S. whistleblower reward programs to alert U.S. authorities of international wrongdoing with a U.S. nexus, will prove indispensable to the Treasury Department’s efforts, as the recent Danske Bank and Wirecard scandals demonstrate.

What are its strengths and weaknesses from your perspective?

One of the strengths of the new AML reward law is its expansion of the types of whistleblowers eligible to report violations and receive an award.  Unlike the SEC program, whose rules limit the conditions under which individuals involved in internal audit and compliance functions can be eligible as whistleblowers, the new AML reward law defines “whistleblower” to include, without restriction, individuals who are required to provide information concerning a BSA violation as part of their job duties.  In so doing, compliance officers and internal audit staff, individuals who are uniquely positioned to detect money laundering violations within their organizations, are invited to step forward and submit a tip to the Treasury Department.  In contrast, under the SEC’s whistleblower program, compliance officers and internal audit personnel are only eligible to become SEC whistleblowers in limited circumstances, e.g., if they can show their disclosure may prevent substantial injury to the company or investors; the company is engaging in conduct that will impede an investigation; a 120-day waiting period has elapsed since they reported to their supervisor or audit committee.  As a result, over the course of the 10-year history of its Dodd-Frank whistleblower reward program, the SEC has only paid awards to three whistleblowers with compliance or internal audit responsibilities out of the total 142 whistleblowers it has rewarded, a disappointing two percent of the SEC’s total successful whistleblowers.  Free of such limitations, the Treasury Department’s new AML reward program is poised to capitalize on this rich source of information and empower more compliance and internal audit personnel to step forward.

A fundamental weakness in the new AML reward law is that, unlike the other U.S. whistleblower reward programs at the IRS, SEC, CFTC and DOT, which specify the precise award range a qualifying whistleblower will receive (i.e., 10% to 30% of the fine imposed), it states only that qualifying whistleblowers will receive a mandatory reward of up to 30% of the collected penalty; there is no floor on the percentage.  In deciding whether to report wrongdoing, whistleblowers typically undertake a risk-reward calculus that involves balancing the considerable personal and professional risks posed by being a known whistleblower in their industry against the prospect and amount of a financial reward.  In our experience, for many whistleblowers, the inability to know in advance the available minimum award s/he can receive under the new AML whistleblower reward program will inject a level of uncertainty that tips the scales against reporting.  To appreciate this dynamic, one need look no further than the abysmal track record of the reward programs that predated both the SEC’s and Treasury Department’s current mandatory reward programs.  Prior to the passage of Dodd-Frank in 2010, the SEC managed a whistleblower reward program under which both the availability and amount of an award was solely within the SEC’s discretion.  During the 11 years of this fully discretionary program, from 1989 and 2010, the SEC paid out less than $160,000 in whistleblower rewards.  In contrast, since Dodd-Frank and its guarantee of an award with a range of 10% to 30% for qualifying whistleblowers, the SEC has awarded over $763 million to 144 individuals.  If the Treasury Department is serious about attracting whistleblowers with high quality tips, it must seek to address this weakness in its enacting regulations and provide a guaranteed 10% floor for whistleblower rewards.

Equally deleterious to the success of the Treasury Department’s new AML reward program and its ability to attract high-quality whistleblowers is the fact that it excludes certain types of recoveries from the award amount in which the qualified whistleblower is entitled to share.  Specifically, sanctions that are labeled as restitution, forfeiture, or victim compensation payments are exempt from the whistleblower award calculation.  This loophole leaves whistleblowers who have upheld their half of the bargain and provided the Treasury Department with a tip that has led to the imposition of a sanction exceeding the $1 million threshold in the unhappy position of being subject to the vagaries of how the government chooses to structure its sanctions in deciding whether or not they are entitled to an award.  If the sanction takes the form of penalties or disgorgement, a whistleblower gets up to 30 percent of that amount as an award; however, if the sanction takes the form of forfeiture or restitution, that same whistleblower is out of luck.  Since forfeiture and restitution are popular remedies for many money laundering enforcement actions, this loophole adds a level of  uncertainty to prospective whistleblowers that will further discourage whistleblower tips.

How does the new law compare to the Dodd-Frank whistleblower regime?

Modeled as it was on the SEC’s and CFTC’s whistleblower reward programs under Dodd-Frank, it is not surprising that the Treasury Department’s new AML reward law contains many of the same hallmarks that have made the SEC and CFTC programs so successful.

• Multiple whistleblowers can receive a shared reward of up to 30% of the respective government agency’s recoveries exceeding $1,000,000 as well as recoveries from related actions by other government entities, foreign and domestic (e.g., DOJ).
• Whistleblowers may supply information anonymously, as long as they are represented by an attorney.
• Whistleblowers do not have to be insiders. They may receive awards based on their independent knowledge or independent evaluation of publicly-available information, as long as the government is not already aware of the information.
• Employee-whistleblowers may, but do not need to, first report their information through internal compliance procedures.
• Whistleblowers are not required to be U.S. citizens or residents but can include foreign nationals and individuals living abroad. As long as there is sufficient nexus to the U.S., the predominant illegal conduct does not have to have taken place in the U.S.
• Whistleblowers may receive an award even if their information relates to an existing government investigation.
• Whistleblowers are generally entitled to protection from retaliation by their employers based on their reporting of violations of the laws the respective government agencies seek to enforce (i.e., violations of securities law, violations of the Foreign Corrupt Practices Act (“FCPA”), violations of the Commodity Exchange Act and violations of the BSA).

Despite the considerable similarities, the new AML reward law departs from the SEC’s and CFTC’s programs in ways that both surpass and lag behind those programs.  As discussed above, the Treasury Department’s new AML reward law helpfully includes a broader class of eligible whistleblowers, welcoming those working in both the compliance and internal audit functions, without limitation.  The AML reward law also avoids the unfortunate fate of the recent limitation of the SEC program’s whistleblower retaliation protections.  Whereas the U.S. Supreme Court in the Digital Realty case interpreted the SEC program to require whistleblowers to first report to the SEC before receiving protections against retaliation, the new AML reward law wisely eliminates any such precondition.  However, the failure to include a minimum award percentage for whistleblowers and the exclusion of forfeiture and restitution from the types of sanctions in which a whistleblower can share are serious obstacles to whistleblowers seeking the certainty needed to offset the considerable risks involved in speaking out.

You reside in your firm’s London office and handle international cases arising in both Europe and emerging markets like Latin America.  What are some impressions on AML compliance in the U.S., from the perspective of the U.K., E.U., and Latin America?

Over the past 10 years, whistleblowers outside the U.S. have grown to become an important source of tips to the SEC, CFTC, IRS, and DOT whistleblower programs.  Since its inception in 2010, the SEC’s whistleblower program reports it has received tips from 130 countries.  As of last September, the largest number of SEC whistleblower foreign tips came from the U.K., Canada, China, Australia, India, and Germany.  In Latin America, the countries of Mexico, Brazil, Chile, Argentina, Colombia, and offshore centers like Curacao supplied the most tips.  These trends have prompted whistleblower firms like ours to establish overseas offices to educate potential international whistleblowers on their ability to utilize the U.S. whistleblower reward programs and attract such global whistleblower clients.  So valuable are international whistleblowers that the CFTC’s Office of the Whistleblower undertakes similar outreach to such prospective whistleblowers, exhibiting in trade booths at international conferences like FIA’s International Derivatives Expo in London.  Given the transnational nature of money laundering, the Treasury Department’s new AML reward program will undoubtedly be a beneficiary of this increased awareness among international whistleblowers of the availability of U.S. whistleblower reward programs.

Troubled by the inability of their own country’s regulators to protect their identities and properly investigate and sanction wrongdoers, many of our British and European whistleblower clients have turned to the U.S. enforcement agencies whom they perceive to be more embracing of whistleblowers and aggressive in taking action against wrongdoers.  In the U.K., for example, the Financial Conduct Authority (“FCA”) has been heavily criticized for its treatment of whistleblowers.  In January 2018, the FCA disclosed the identity of a whistleblower to a financial institution. A few months later, a financial institution CEO received a fine of less than 15% of his annual salary for his role in trying repeatedly to unmask an anonymous whistleblower who had raised internal concerns over one of his executive-level hires, whereas the institution walked away with no fine.  By contrast, the New York State Department of Financial Services found that this same institution had violated its own whistleblowing policies and imposed a $15 million fine.

Latin American whistleblower clients are even more suspicious of their regulators.  Although steps have been taken to modernize AML legislation in countries like Mexico, Brazil, Colombia, Argentina, and Peru, and there is increasing cooperation in money laundering and tax related investigations between financial intelligence units and FinCEN, there is still much to be done.  Weak enforcement environments and virtually non-existent whistleblower protections are major deterrents for Latin American whistleblowers.  However, the tide seems to be turning in countries like Brazil because of major corruption scandals and the FCPA’s international reach.  In 2019, comprehensive criminal legislation was passed to allow whistleblowers to confidentially report criminal violations (e.g., corruption, money laundering and other offenses) affecting Brazilian government entities, including state-owned enterprises, and be eligible to receive up to 5% of the amount recovered.

Before the adoption of the new AML reward program on January 1 of this year, we typically have come to learn about money laundering schemes from whistleblower clients bringing us information about violations of the FCPA, whose enforcement is overseen by the SEC and DOJ, with the CFTC also stepping in when bribery schemes impact the U.S. commodities market.  In some of these cases, international actors make corrupt payments by wire transfers through correspondent banks using the Federal Reserve system in New York.  In others, financial institutions have processed payments of entities and nationals sanctioned by the Treasury Department’s Office of Foreign Assets Control (“OFAC”), who are also engaged in corrupt activities.  In Latin America, foreign exchange controls like those implemented by Venezuela and Argentina have fueled trade-based money laundering cases implicating many multinational financial institutions.

U.S. authorities are currently investigating and bringing to justice those responsible for a $1.2 billion international money laundering scheme involving funds embezzled from PDVSA, Venezuela’s state-owned oil company.  Under the new AML reward program, Latin American whistleblowers will be able to anonymously report such money laundering violations to the Treasury Department and be eligible to receive an award.

What are some pitfalls that potential whistleblowers face?  What if they arguably were complicit in the conduct at issue?

As our clients can attest, the path of the whistleblower is a perilous one, littered with casualties and traps for the unwary.  For many of our clients, like those working in internal audit and compliance, raising concerns is a fundamental part of their job description.  Therefore, they often feel blindsided when, instead of praise, they are met with reprisals for sounding the alarm.  They describe themselves as “inadvertent whistleblowers,” having recognized themselves as whistleblowers only in hindsight after their supervisors and co-workers had chosen to treat them like one.  Overnight, employees who heretofore had stellar performance reviews are told they are no longer regarded as a team player and find themselves sidelined or, worse yet, the only employee included in an unexpected reduction in force.  In addition to facing retaliation from the employer they criticized, whistleblowers are routinely blacklisted by subsequent employers as word of their whistleblowing spreads.  A study of whistleblowers’ experiences in fraud litigation against pharmaceutical companies published in the New England Journal of Medicine reported a high personal toll from whistleblowing, with whistleblowers experiencing marital strain and divorce, blacklisting, isolation, substance abuse and stress-related health problems (e.g., panic attacks, insomnia and suicidal thoughts).

Even if they want to undertake the risks involved in reporting wrongdoing to authorities, many current and former employee whistleblowers are dissuaded from doing so by the presence of illegal gagging clauses in company confidentiality, employment and severance agreements that discourage employees from reporting securities violations to the SEC. While the SEC importantly has fined nine companies for including improperly restrictive language in their agreements with employees that could stifle whistleblowers’ SEC reports, more agreements remain and many employees, unaware that such clauses are unenforceable, are silenced by them nonetheless.  The abuse of such agreements was highlighted in the Theranos scandal where our client Tyler Shultz, the first Theranos employee to blow the whistle to the state regulator, was sued by Theranos for allegedly violating a confidentiality agreement and leaking trade secrets.  In response to this lawsuit, which required him and his parents to spend more than $400,000 in legal fees to defend, Mr. Shultz famously said, “Fraud is not a trade secret.  I refuse to allow bullying, intimidation and threat of legal action to take away my First Amendment right to speak out against wrongdoing.”  Few whistleblowers have the resources and support to fight such lawsuits.

Like the False Claims Act before it, whose legislative sponsors wisely noted “it takes a rogue to catch a rogue,” the SEC’s whistleblower reward program does not preclude whistleblowers who are complicit in the wrongdoing from coming forward.  In so doing, the SEC program greatly expands the pool of available whistleblowers with credible, specific, and high-quality information and better serves its regulatory and enforcement interests.  Nevertheless, culpability is one of the negative factors the SEC will consider in determining the amount of a whistleblower’s reward and will likely lead to a reduction in the award amount given.  Because whistleblowers with unclean hands are eligible for an award, it is therefore critical that such whistleblowers take the advice of criminal counsel to assess their possible criminal exposure before deciding whether to file a tip under the SEC program.  In this context, it is important to remember the cautionary tale of Bradley Birkenfeld, a whistleblower who received a $104 million award under the IRS whistleblower program for exposing UBS’s role in helping its clients evade their U.S. tax obligations via Swiss bank accounts, but nonetheless was charged by the DOJ for conspiracy in the fraud and was sentenced to 40 months in federal jail.

As attorneys who represent whistleblowers, do you have any advice for financial institutions?

Financial institutions should acknowledge that whistleblowers are here to stay.  If anything, in the months and years ahead, they can expect more whistleblowers to come forward because of what we perceive as a global whistleblower reward “spiral effect.”  The unparalleled success of the SEC and CFTC whistleblower reward programs, which themselves were modeled after the successful whistleblower provisions of the federal False Claims Act, has spawned more whistleblower reward programs both domestically, with the advent of the Department of Transportation’s Auto Safety Whistleblower program and Treasury’s new AML reward law, and abroad, with the Ontario Securities Commission’s whistleblower reward program. As more monetary rewards are awarded to whistleblowers by the DOJ, SEC, IRS, CFTC, DOT, OSC and now Treasury, more whistleblowers will be incentivized to come forward, helping law enforcement bring more and larger enforcement actions, leading to more whistleblower rewards, and inspiring yet more whistleblowers to report.  As more countries embrace whistleblower rewards like Canada and South Korea have done, the spiral will grow even stronger.  In Europe, where the European Union’s 27 member states have until December of this year to transpose into national law the EU Directive on Whistleblowing, lively debates have been sparked on the possible adoption of the North American approach to financial incentives for whistleblowers and anonymous reporting to competent authorities.

Fortunately, financial institutions are not helpless against this rising whistleblower tide.  If financial institutions are listening, the vast majority of employee-whistleblowers seek to report problems internally first and only file a complaint with law enforcement if they feel they have not been heard.  This matches our experience of whistleblowers as courageous individuals who want the best for their employers and are willing to speak up to fix a problem when they see something they believe is wrong. Many studies show that most whistleblowers report internally first before resorting to reporting externally.  According to data from the SEC whistleblower program, in FY 2020, 84% of the employee-whistleblowers who received awards raised their concerns internally “to their supervisors, compliance personnel, or through internal reporting mechanisms, or understood that their supervisor or relevant compliance personnel know of the violations,” before bringing their concerns to the SEC.  These figures underscore an unfortunate failure among financial institutions to listen up and meet their employee-whistleblowers half-way when they had the courage and fortitude to speak up.

It is incumbent on corporate leaders to cast off outdated stereotypes of whistleblowers as disloyal employees worthy of contempt and consider new research supporting a more progressive view of whistleblowers as valuable corporate assets, not liabilities.  A recent study by George Washington University Professor Kyle Welch and University of Utah Professor Stephen Stubben concluded, after analyzing data from Navex Global, the largest provider of corporate internal reporting mechanisms, that companies with active reporting hotlines are more profitable than those whose hotlines are underused.  This result supports a view held by behavioral scientists like Christian Hunt that whistleblowers, like the proverbial canary in a coal mine, are “forward indicators of risk,” alerting management to problems early on so the company can remediate and correct course before the problem becomes impossible to handle and thereby avoid costly lawsuits and regulatory actions.

To truly achieve a culture of compliance, financial institutions must understand the unique peril whistleblowers face by speaking up and take concrete steps to create an environment where they feel safe to do so.  Too often, whistleblowers face retaliation and scorn from their colleagues when they escalate their concerns internally.  This is the unfortunate by-product of the “group think” mentality common to many organizations.  We recommend that financial institutions try to walk a mile in the whistleblowers’ shoes and appreciate the risk they are taking with their career and professional reputation just by speaking up.  With this newfound respect, they may be persuaded to devise a new corporate strategy that seeks to encourage and utilize internal whistleblowers to quickly detect and resolve problems.

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