Home Banking The AML Whistleblower Program: A New Era for Money-Laundering Enforcement

The AML Whistleblower Program: A New Era for Money-Laundering Enforcement

by internationalbanker

By Stephen M. Kohn, Founding Partner, Kohn, Kohn & Colapinto LLP

 

 

 

 

In the final days of 2022, US President Joe Biden signed a $1.7-trillion omnibus spending bill into law. Tucked away in the sprawling spending package was a comparatively small bill, but one that stands to have massive impacts: The Anti-Money Laundering (AML) Whistleblower Improvement Act establishes for the first time a best-practice whistleblower award program for individuals reporting money laundering.

In recent decades, whistleblower award programs have revolutionized enforcement efforts in other areas of corporate crime. Programs with mandatory monetary awards and strong anonymity protections have effectively incentivized insiders with direct knowledge of misconduct to come forward and cooperate with authorities.

Inspired by the success of whistleblower award programs in areas such as tax and securities fraud, Congress extended the model to combat money laundering, a notoriously difficult crime to detect. Now, individuals with knowledge of money laundering and other violations of the Bank Secrecy Act (BSA) have real incentives to come forward despite the immense risks accompanying blowing the whistle.

Furthermore, in light of Russia’s invasion of Ukraine and the importance of an effective sanctions regime against Russian oligarchs, the AML Whistleblower Improvement Act expanded the scope of the AMLA (Anti-Money Laundering Act) Whistleblower Program to cover sanctions violations. Now, institutions enabling “sanctions busting” are in danger of having an insider come forward and report them to US authorities.

Understanding the AML Whistleblower Program is crucial for understanding the future of banking enforcement. Some specifics of the program are still to be ironed out, however, as the U.S. Department of the Treasury and FinCEN (Financial Crimes Enforcement Network) are currently drafting regulations for the program. These regulations will be immensely consequential in determining the full extent of the program’s success.

The establishment of the AML Whistleblower Program

While widely seen as a modern phenomenon, the whistleblower award model in the United States dates back to the American Civil War and the enactment of the False Claims Act (FCA). Designed as a mechanism to crack down on government-contracting fraud, the law’s qui tam provisions enable whistleblowers to receive a share of the government’s recoveries from any frauds they have helped disclose.

However, the true power of whistleblower awards has been demonstrated in recent decades. In 2006, Congress modernized the IRS Whistleblower Program to offer monetary awards to tax whistleblowers. The widespread impacts were soon felt. Soon after the program’s creation, Swiss banker Bradley Birkenfeld, a wealth manager with UBS, voluntarily came forward to the IRS (Internal Revenue Service) with detailed information on illegal tax shelters run by UBS Group.

Dennis J. Ventry Jr., a University of California Davis School of Law professor, explained the wide-ranging benefits of Birkenfeld’s whistleblowing: “Thanks to [the] whistleblower . . . the U.S. government (take a deep breath) received: $780 million and the names of 250 high-dollar Americans . . . another 4,450 names and accounts of U.S. citizens . . . 120 criminal indictments of U.S. taxpayers and tax advisors . . . the closure of prominent Swiss banks . . . $5.5 billion collected from the IRS Offshore Voluntary Disclosure Program (OVDP), with untold tens of billions of dollars still payable . . ..”

Inspired by the success of the IRS program and by the enforcement failures surrounding the Bernie Madoff scandal, Congress created the SEC (U.S. Securities and Exchange Commission) Whistleblower Program in 2010 with the passage of the Dodd-Frank Act (Dodd-Frank Wall Street Reform and Consumer Protection Act). The program was built upon a model of mandatory monetary awards, anonymous reporting channels and strong anti-retaliation programs.

The SEC Whistleblower Program has, by all accounts, been a massive success. Whistleblower tips have allowed the agency to collect more than $6 billion from fraudsters, and officials from both sides of the political aisle have recognized the program as an integral part of the agency’s enforcement efforts.

It was a logical step, then, to take the Dodd-Frank model and apply it to money-laundering violations. The concept that a whistleblower could expose massive money-laundering schemes was not an unproven theory. In fact, Howard Wilkinson, a former banker at Danske Bank, exposed the largest-known money-laundering scheme in history: a $230-billion plot in which rubles were transferred out of Russia, converted to dollars at the Estonian branch of Danske Bank and then moved to New York with help from Bank of America (BofA), J.P. Morgan and Deutsche Bank.

Thus, in January 2021, Congress established the AMLA Whistleblower Program by passing the Anti-Money Laundering Act (AMLA) of 2020. The problem was, however, that the law differed from the Dodd-Frank Act in several key ways. Most notably, it lacked mandatory awards for qualified whistleblowers. Given these loopholes, the program struggled to attract insiders and failed to get off the ground.

Thankfully, Congress corrected its mistakes a little under two years later by passing the Anti-Money Laundering (AML) Whistleblower Improvement Act, partially in response to a grassroots campaign by whistleblower advocates. The bipartisan bill fixed the loopholes undermining the program and expanded it to include sanctions violations.

With that bill, the United States has changed the landscape of money-laundering enforcement. Insiders now have real incentives to come forward. While the specific effects are still to be seen, there is no doubt they will be far-reaching.

How the AML Whistleblower Program works

While some of the specific mechanics of the AML Whistleblower Program will be determined by the Treasury Department and FinCEN’s pending regulations, a broad outline of how the program works can be found within the law.

An individual represented by a US attorney will be able to make an anonymous disclosure to FinCEN, which will then be tasked with investigating the alleged misconduct. If a whistleblower voluntarily provides original information (meaning information not previously known by US authorities) that leads to a successful enforcement action, he or she will be entitled to a monetary award of 10 to 30 percent of the funds collected by the government in the action.

Whistleblowers do not need to be “insiders” within the institutions on which they blow the whistle. Under the program, individuals who are “insiders” do not need to make any disclosures internally before reporting to the program. Furthermore, individuals with compliance roles can still qualify under the program.

Crucially, AML whistleblowers do not need to be US citizens or located within the US. Given the transnational nature of money laundering, the whistleblower can be located and the misconduct can occur overseas and still be covered under the program.

Under the AML Whistleblower Program, FinCEN and the Treasury Department are required to protect the confidentiality of whistleblowers and, thus, will not release any information that may lead to their identification. In instances where retaliation is experienced, the program extends anti-retaliation protections to certain whistleblowers. A major remaining loophole with the program, though, is that employees of FDIC (Federal Deposit Insurance Corporation)-insured financial institutions are not protected.

What is covered under the AML Whistleblower Program?

The AML Whistleblower Program covers violations of the Bank Secrecy Act (BSA) as well as various sanctions laws, including the International Emergency Economic Powers Act (IEEPA), Sections 5 and 12 of the Trading with the Enemy Act and the Foreign Narcotics Kingpin Designation Act (Kingpin Act).

Under the AML Whistleblower Program, whistleblowers may report institutions that fail to institute specific AML-compliance requirements outlined by the BSA. They can also blow the whistle on violations of know-your-customer (KYC) rules or other failures by institutions to supervise accounts adequately, especially when suspicious activities occur. Put simply, if a financial institution is enabling money laundering through willful or unintentional compliance failures, a whistleblower can disclose this misconduct through the AML Whistleblower Program.

The program’s scope extends into the broad sphere of sanctions violations, thanks to the AML Whistleblower Improvement Act. While originally aimed at Russian oligarchs, the law covers sanctions imposed on bad actors globally. Once again, any financial institution enabling sanctions evasion can be reported by employees or anyone with knowledge of their misconduct.

Furthermore, the AML Whistleblower Program covers cryptocurrency exchanges as well as traditional banks. FinCEN’s and OFAC’s (Office of Foreign Assets Control’s) recent historic enforcement actions against the Binance cryptocurrency exchange showcase the program’s scope. Binance agreed to pay a civil penalty of $3.4 billion for violating the BSA and “multiple sanctions programs”. According to the government, Binance’s failure to implement the BSA rules on money laundering—such as proper know-your-customer due diligence and suspicious activity reports (SARs) filing requirements—facilitated numerous criminal and terrorist entities to use its crypto-exchange and violate sanctions laws.

If a whistleblower’s disclosure assisted in the enforcement action—in keeping with confidentiality protections, FinCEN will not reveal which cases are assisted by whistleblowers—he or she would be entitled to a massive award.

The rulemaking process

Currently, the Treasury Department and FinCEN are drafting the regulations for the AML Whistleblower Program, though the program is still in effect while they are being drafted. These regulations will help shape just how effective the program is in fully incentivizing whistleblowers to report money laundering and sanctions violations.

Most important will be how the regulations treat the unique situations international whistleblowers face. Given the program’s transnational reach and the global scope of money laundering, there is little doubt that whistleblowers from across the globe will flock to the program. Under the SEC Whistleblower Program, for example, thousands of whistleblowers from more than a hundred countries have submitted tips to the agency. And the agency has issued several awards to whistleblowers located overseas.

But the SEC Whistleblower Program is a cautionary tale regarding how well the regulations work for international whistleblowers. During the program’s rulemaking process, the transnational reach of the program was not fully understood; thus, narrow rules for qualifying for awards were passed that have unfairly discriminated against international whistleblowers.

Most notably, the SEC’s definition of a “voluntary” whistleblower excludes an individual who first makes a disclosure to the news media, NGOs (non-governmental organizations), US embassies and foreign law enforcement, the exact places to which a foreign whistleblower who is unfamiliar with US laws is most likely to go.

The Treasury Department and FinCEN can learn from these mistakes and pass regulations that work well for international whistleblowers. Doing so is particularly important in the context of the United States’ anti-corruption efforts as laid out in the United States Strategy on Countering Corruption. One of the major pillars of the strategy is cracking down on money laundering, specifically calling on the government to fully leverage AML whistleblowers in doing so. Passing regulations that work well for international whistleblowers will help the Treasury Department comply with the strategy’s guidelines and help advance the US’ global anti-corruption efforts.

Conclusion

The passage of the AML Whistleblower Improvement Act has ushered in a new era of money-laundering and sanctions enforcement. Time and time again, whistleblowers have proven to be an indispensable tool in enforcement efforts across areas. For the first time, the US now has an effective AML Whistleblower Program. Fraudsters had better take note!

 

 

ABOUT THE AUTHOR
Stephen M. Kohn is a founding Partner of the whistleblower law firm Kohn, Kohn & Colapinto in Washington, D.C., and the Chairman of the board of directors of the National Whistleblower Center. He is the most published author on whistleblower law, including his most recent book, Rules for Whistleblowers: A Handbook for Doing What’s Right.

 

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