Want to be AML Whistleblower? Not So Fast

You work in the anti-money laundering department of a major bank or brokerage and overhear a conversation about how suspicious activity reports are not being filed on a particular client; how the transaction monitoring system is not working properly; or how wire transfers are being made to a country or individual on a US sanctions list.

Do you: a) tell your supervisor about your concerns of a potential regulatory violation and fine; b) forget what you heard; or c) call a regulatory agency and hope to win an award? Until now, choices a and b were generally the only practical ones available. Tucked in the recently passed US National Defense Authorization Act of 2020 is the Anti-Money Laundering Act which is designed to incentivize employees at financial firms to report violations of the Bank Secrecy Act (BSA), the 1970 regulation requiring US financial institutions to assist US government agencies with detecting and preventing money laundering. Nonetheless, tipsters need to think long and hard before they speak out. Payment is not guaranteed; it could take years to collect any money; and switching careers might become necessary. Financial firms typically don’t want to hire whistleblowers. Information has a way of being leaked and whistleblowers risk being blacklisted in the financial services industry.

Here is the rundown of what the new legislation is all about: Section 6314 of the new Anti-Money Laundering Act (AMLA) says that a tipster who reports violations of the BSA to the Treasury or DoJ can collect up to 30 percent of the value of the fine a financial firm pays to resolve an enforcement action for an AML violation. The collected fine must exceed US $1 million. Although the whistleblower provision of the AMLA is part of a bigger overhaul of the BSA it is winning lots of attention as a potential game changer in the US government’s fight against corruption and terrorist activities. The 30 percent potential award is higher than the current whistleblower program’s cap of 25 percent of the penalty or US$150,000, whichever is less with the government’s minimum recovery at US$50,000. “That modest amount has failed to encourage whistleblowers to risk their careers coming forward,” says Robertson Park, a partner in the white collar crime defense practice of the law firm of Murphy & McGonigle in Washington, DC. However. as he cautions, the higher potential payout comes with a catch. “The Treasury has discretion under the new measure to also provide as little compensation as possible as there is no minimum guaranteed amount,” says Park. By contrast there is a minimum award of 10 percent of the penalty in the US Securities and Exchange Commission’s whistleblower’s program on which the Treasury’s program is modeled. Unless corrected, the Treasury’s lack of minimal compensation in its whistleblower program could certainly be a disincentive to potential tipsters, caution legal experts.

For AML tipsters collecting a reward from the Treasury’s program will require a lot more than just filling out the right paperwork. The Treasury or DoJ needs lots of details to make a charge stick. The information also has to be “original.” That means that the Treasury or DoJ did not receive the same data from someone else and the tip can’t be derived from information in the public domain — the press or Internet. The Treasury must agree that the information led to a successful criminal enforcement action or recovery of money in a civil case. The problem in meeting the criteria for both originality and detail is that the whistleblower might need to find out a lot more information than he or she knows before submitting a report. Doing that could become problematic. “Whistleblowers can break non-disclosure agreements and provide confidential information at some modest legal risk to themselves, but they cannot hack databases they have no business accessing without serious legal risk,” says Park. “Tape recording conversations is also prohibited in some states without the consent of all parties to the talk.” (New York allows for only one party to a conversation to give consent). Keeping a diary of who said what to whom and when is significant. So is knowing where information might be stored and who might be aware of the alleged wrongdoing so subpoenas can be issued to access the data and get information from other employees.

Just who can collect a reward? Based on an initial read of the legislation, AML and whistleblower experts believe that employees of AML departments and financial auditors are eligible for whistleblower awards, as are foreign nationals working for US banks. In contrast to the SEC’s whistleblower’s program, compliance and audit managers can also qualify as AML whistleblowers. (The SEC whistleblower program permits compliance personnel and auditors to obtain whistleblower awards only if they meet certain criteria, such as reporting internally and waiting 120 days before reporting the violation to the SEC). It will likely take additional clarification from the Treasury in the form of implementing regulations to know for certain who is eligible for payment. What is certain is who is not eligible for a reward. That includes anyone convicted of the crime which the histleblower reported; anyone who doesn’t meet the Treasury’s criteria for winning an award; or anyone who works for the Treasury, or DoJ. If the Treasury or DoJ decides the information it received wasn’t useful to take an enforcement action, a tipster will not get paid. There is a lot of interpretation involved. However, a whistleblower who has specific and credible information about a violation of the BSA could also eligible for an award from the SEC or IRS’ whistleblower reward program. Until the Treasury adopts a rule implementing its new whistleblower reward program, whistleblowers might bring information about the AMLA’s violations to multiple agencies.

The biggest concern that whistleblowers have besides whether they are eligible for an award– retaliation from an employer — is addressed by the AMLA, which provides strong protection. If fired, the whistleblower can file a complaint with the US Department of Labor’s Occupational Safety and Health Administration (OSHA) and if the whistleblower proves his or her retaliation claim, he or she can be reinstated and get double back pay, emotional distress damages, attorney fees and other relief. To protect whistleblowers, the new AMLA whistleblower program permits a whistleblower to report a violation anonymously by providing information through an attorney, unless payment is made. “To be protected, the whistleblower does not have to report a potential AML violation to the Department of Treasury or Department of Justice,” says Jason Zuckerman, an attorney with Washington DC-based Zuckerman Law who represents whistleblowers. “Reporting a potential BSA violation to a supervisor will suffice to engage in protected conduct under the AMLA whistleblower protection law.” The AMLA prohibits a wide range of retaliatory acts beyond termination of employment. Prohibited retaliation includes demoting a whistleblower, harassing a whistleblower, blacklisting a whistleblower, and even threatening to take an adverse personnel action against a whistleblower. The whistleblower doesn’t have to prove that his or her report of potential wrongdoing is the sole cause of the retaliation, only that it was a “contributing factor.” That burden can be met by showing animus or resentment fo the whistleblower’s disclosure, inconsistent application of an employer’s policies, or a vague explanation of disciplinary action.

However, there is one catch to the protection from retaliation that has some attorneys concerned. Employees who work for credit unions or banks falling under the Federal Deposit Insurance Corp’s supervision are not eligible for protection from retaliation under the AMLA’s whistleblower protection law. They fall under weaker whistleblower protection laws that require the whistleblower to meet a higher burden to prove retaliation. Protection from retaliation also does not apply to a tipster from a foreign bank or the foreign branch of a US bank. However, where a disclosure of an AML violation also involves US securities or tax laws, the whistleblower could be protected under the robust anti-retaliation provisions of the Taxpayer First Act or the Sarbanes-Oxley Act. The 2019 Taxpayer First Act overhauls the IRS to make it more taxpayer-friendly while the Sarbanes-Oxley Act of 2002, passed in response to highly publicized accounting scandals, requires higher corporate accountability to ensure investors are not defrauded.

Last but not least, even if a tipster is willing to risk retaliation, and thinks he or she has sufficient information on which the Treasury or Justice Department can make a case that doesn’t result in immediate payment. Industry talk is that there are hundreds of tipsters waiting for payment from the SEC under its program. It remains to be seen whether the Treasury’s whistleblower program will fare better for whistleblowers. Since the first whistleblower was paid in 2012, the SEC has imposed US $2.7 billion in penalties in enforcement actions resulting from whistleblower tips, paying out US $731 million to only 123 individuals, according to the SEC’s Whistleblower Office’s annual report to Congress last year. Based on the thousands of tips the SEC receives each year, less than one percent of tipsters ever get paid. In September 2020, the SEC passed amendments to its whistleblower’s program that should speed the process for determining whether a whistleblower will receive an award. In fiscal 2020, $175 million was paid to 39 whistleblowers. That a whopping 200 percent increase in the number of individuals from the previous year and 39 percent more in payments.

“Whistleblowers are a special breed of employees,” says Zuckerman. “Money is a motivating factor, but they are also motivated to do the right thing. They have likely already reported internally and been ignored or suffered retaliation. They take the significant risk entailed in reporting the violation to the government because they want to see the violation remedied.” Zuckerman suggests that AML compliance directors should document their efforts to rectify AML violations for two reasons. “First, doing so would prove they engaged in protected whistleblowing under whistleblower protection laws,” he says. “Second, if they create a clear record of where they stood and what steps they took to rectify a potential violation if years later, a regulator is asking what the compliance director did, a memo documenting the issues and steps they took to comply with the law could exonerate the compliance officer.” The compliance director may be less likely to become the target of a government investigation if he or she alerted the government of the violation, Zuckerman noted.

What do AML compliance directors think of the AMLA’s provisions for whistleblowers? “It all sounds good, but it all depends on how well the Treasury administers the program,” says one AML compliance manager at a US bank. “The Treasury’s program still does not explicitly offer an AML compliance director who blows the whistle to management a safe harbor from personal liability in case the firm has violated the BSA and AML compliance directors.” Given a choice, say AML compliance managers, quitting a job sounds a lot easier than dealing with internal channels. Reporting to the Treasury or DoJ might be an even better idea. If compliance directors are indeed included in the category of whistleblowers eligible to receive compensation, compliance directors will have an even greater incentive to report their suspicions of wrongdoing to the government than their bosses.