AML enforcement needs more whistleblowers

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In recent weeks, major anti-money-laundering enforcement actions have highlighted the critical role of whistleblowers in government efforts to curb illegal movement of funds.

The German raids of Deutsche Bank, U.S. indictments of three employees and a client of Panamanian law firm Mossack Fonseca, and an earlier Danske Bank money-laundering investigation were all attributable to whistleblowers.

Together, they demonstrate why Congress should act to create whistleblower protections and incentives to encourage individuals with information about illegal money laundering to come forward. Legislation modeled after existing whistleblower reward regimes would deter wrongdoing even where traditional compliance programs and law enforcement are inadequate to the task.

Financial institutions know just how hard it is to combat money laundering. In recent years, money laundering has grown with the internationalization of our financial systems, and AML compliance requirements have grown along with it. As a result, banks have been pouring increasing resources into compliance departments, fulfilling “know your customer” requirements and investigating specific identified transactions, at enormous costs.

Recognizing the difficulty of combating these transactions, other financial institutions are now looking to artificial intelligence to help process the extremely large amounts of data involved. In the past year, several major banks have adopted AI systems to sift transactions records and, in some cases, monitor in real time to look for money laundering.

Although these advanced methods can make AML compliance more effective, KYC and AI are not magic solutions. As the head of the U.K.’s Financial Conduct Authority’s financial crime department has stated, “Any bank hoping for a black box in the corner that will sniff out the launderers will be disappointed.”

Multinational financial institutions based in the United States face a particularly daunting task. While they may institute robust compliance mechanisms in their domestic offices, offshore subsidiaries and affiliates present a bigger challenge. Not only are such far-flung operations more difficult to monitor and police, but local cultural norms and lax law enforcement may not provide an adequate deterrent to accepting deposits of questionable provenance.

Even with robust law enforcement efforts, the likelihood of detection is low. The more criminals and tax evaders rely on secrecy jurisdictions to hide assets and move money, the harder it is for law enforcement to track them. The rise of cryptocurrency, which permits anonymous financial transactions almost anywhere, only compounds the problem. Even traditional transactions pose difficulties to law enforcement, because they lack the direct access to financial records that financial institutions possess. As a consequence, the worldwide money-laundering problem is now massive, and not limited to garden variety rogues. According to the International Consortium of Investigative Journalists, “$8.7 trillion, 11.5 percent of the world’s wealth, is hidden offshore.”

But whistleblowers have changed the risk calculus. The Mossack Fonseca indictments and Deutsche Bank raid were the direct result of a collection of documents that came to be known as the Panama Papers, provided by a whistleblower to the ICIJ and the German newspaper Süddeutsche Zeitung. Together with the Paradise Papers release that followed, the reporting and underlying documents highlighted the hidden financial dealings of various wealthy and powerful individuals, as well as corporate entities, some of which included corrupt or criminal actors engaged in drug trafficking, arms deals and tax evasion.

These whistleblowers had access to inside knowledge that made the use of special compliance programs and exotic computer models, whether by financial institutions or law enforcement, completely unnecessary — the insiders were able to provide detailed information about specific fraud, allowing forensic methods to be deployed in a targeted way. These whistleblowers are excellent examples of how insider information can spark investigations that would otherwise be impossible.

This raises the question of how to provide greater incentives for such persons to step forward. The answer was highlighted only last month, when the Securities and Exchange Commission issued its annual report to congress on the remarkable success of its whistleblower rewards program, which just experienced a “record year” for whistleblower tips and rewards. Like its sister program at the Commodity Futures Trading Commission, the SEC program frequently rewards financial professionals for bringing to light illegal or fraudulent behavior.

The successes at the SEC and CFTC are consistent with the Justice Department’s whistleblower tool, known as the False Claims Act, which has netted the Treasury over $40 billion in whistleblower-originated fraud recoveries since its enactment in 1986. And the Internal Revenue Service whistleblower program has recovered $3.6 billion in unpaid taxes and penalties since 2010. These agencies have seen that effective enforcement depends on providing support and incentives to whistleblowers to come forward with evidence of fraud.

Had the whistleblowers behind the Panama and Paradise Papers pursued awards with the IRS, they could potentially stand to receive large sums from resulting tax evasion investigations, audits or prosecutions, if the U.S. is able to recover funds that should have been paid into the Treasury. Similarly, a submission to the SEC involving banks or companies under the SEC’s jurisdiction could have led to a reward under the SEC’s robust whistleblower program.

But there is no similar incentive for rooting out the criminal money-laundering that constitutes most of the illegal activity revealed by the Panama and Paradise Papers, activity that did not necessarily violate U.S. tax or securities laws. That creates a large enforcement gap.

Although federal regulations permit the Treasury to make an award to an individual who provides information leading to successful enforcement of the AML provisions in the Bank Secrecy Act, the program is moribund. The provision receives little, if any, attention, and the award is both discretionary and limited to the lesser of $150,000 or 25% of the fine or penalty. Given that whistleblowers may face severe retaliation, the chance they might receive a small award does not compensate them for the risks they undertake.

The solution is straightforward: Congress should enact an anti-money-laundering whistleblower program. Although money laundering is a crime, there is no statute that provides a clear incentive to whistleblowers to bring forward information about it. It would be straightforward to create such a program modeled on the existing SEC, Justice Department and IRS whistleblower reward programs.

Under such a regime, whistleblowers would receive a portion of any money-laundering fines and penalties collected from violators. The program could be overseen by the Justice Department, which prosecutes money-laundering cases and has over thirty years of experience with the False Claims Act, which rewards whistleblowers who report fraud committed in connection with federal programs. The regime would, like the SEC and the Justice Department statutes, also protect whistleblowers from retaliation, a critical piece of successful whistleblower programs.

Law enforcement agencies need help to build on these recent successes: not just through additional funding and the cybercrimes-focused task forces that some of them have created, but by incentivizing whistleblowers. Properly protected and incentivized, individuals with first-hand knowledge of how scams are working, who is laundering money and where it is going will come forward to blow the whistle, and they will be an invaluable asset to law enforcement.

Eric Havian

Eric Havian is a partner at Constantine Cannon LLP in San Francisco specializing in whistleblower matters.

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Michael Ronickher

Michael Ronickher

Michael Ronickher is of counsel at Constantine Cannon LLP in Washington, D.C., specializing in whistleblower matters.

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