Can Whistleblowers Stop Money Laundering? An Analysis Of The Illicit Cash Act’s Whistleblower Provision
This article was originally published in Mondaq
Currently pending in the U.S. Congress is Senate Bill 2563, the Illicit Cash Act. This bipartisan bill was introduced by eight members of the Senate Banking Committee (four Republicans and four Democrats) and is intended to increase the enforcement of anti-money laundering laws. As explained by the sponsors, the bill is designed to “help law enforcement combat illicit financial activity being carried out by terrorists, drug and human traffickers, and other criminals. It would “update decades-old anti-money laundering” laws by giving “law enforcement the tools they need to fight criminal networks.”
The whistleblower provision in the Illicit Cash Act is based on the False Claims Act, a highly effective anti-corruption law originally signed into law by President Abraham Lincoln during the height of the Civil War. The False Claims Act was modernized in 1986 and is the model for all other effective anti-fraud whistleblower laws approved by Congress, including whistleblower laws in the Securities Exchange Act, Commodity Exchange Act, and Internal Revenue Act. These laws are based on a medieval concept known as qui tam, which translates from Latin to “in the name of the King.” Qui tam laws empower citizens to make reports on violations of law, assist in the prosecution of wrongdoers, and obtain a reward only if their allegations are vindicated and the wrongdoer pays a sanction.
The False Claims Act and its prodigy are designed to empower whistleblowers who have firsthand knowledge of frauds/violations to report them to the appropriate government officials, even if they risk losing their jobs. Whistleblowers are compensated not on the basis of how much they suffer, for instance if they are fired or blacklisted. Instead, they are compensated based on the quality of their information, and whether their original information results in benefits to investors, taxpayers, and the public. Whistleblowers are compensated directly from the fines and sanctions obtained by the government that were directly obtained based on the information provided to law enforcement. Regardless of the size of any award, taxpayers always obtain between 70% and 90% of the sanctions obtained from the whistleblower’s information.
Do Whistleblower Laws Work?
The success of the qui tam whistleblower laws are well-documented. Modern whistleblower reward laws require employees to provide their information directly to the law enforcement officials with responsibility to police fraud and corruption. Consequently, these officials are in a position to evaluate the evidentiary contributions made by whistleblowers to the impact of the qui tam laws on motivating “insiders” to risk their jobs and careers in serving the public interest. These officials are able to evaluate the very specific contributions whistleblowers make in enabling successful prosecution of crimes that are otherwise very difficult to prove, such as terrorist financing, tax evasion, and bid rigging. The fact that “insiders” often have the best access to information necessary to prove economic crimes is exemplified by the Danske Bank case, in which a whistleblower was responsible for reporting the largest money laundering case in history ($230 billion laundered from the former Soviet Union into Western banks using phony partnerships and shell companies).
Former SEC Chairman Mary Jo White (who also served as a top federal prosecutor) explained why her agency enthusiastically supported paying rewards under the newly-created securities fraud qui tam program:
They persuade people to step forward. They put fraudulent conduct on our radar that we may not have found ourselves, or as quickly. And they deter wrongdoing by making would-be violators ask themselves – who else is watching me?
Chairman White also explained that the SEC “know[s] that the [whistleblower] regime does, in fact, create powerful incentives to come to the Commission with real evidence of wrongdoing that harms investors and it meaningfully contributes to the efficiency and effectiveness of our Enforcement program.” She described the highly credible and important evidence that whistleblowers often bring to the table, noting that the SEC “whistleblower program . . . has rapidly become a tremendously effective force-multiplier, generating high quality tips and, in some cases, virtual blueprints laying out an entire enterprise, directing us to the heart of an alleged fraud.”
Her support for the program was echoed in a formal statement by the current SEC Chairman Jay Clayton, who found that the “whistleblower program . . . has proven to be an invaluable component of our enforcement efforts.” The 2019 Annual Report SEC Office of the Whistleblower, issued simultaneously with Chairman Clayton’s praise of the program, provided further explanation as to the effectiveness the qui tam law: “The whistleblower program continues to have a significant positive impact on the Commission’s enforcement efforts and protection of investors and markets, including assisting the Commission with actions that resulted in the return of hundreds of millions of dollars to harmed investors.”
The SEC is not the only agency whose officials have remarked on the exceptional success of the qui tamwhistleblower laws. Former Assistant Attorney General Stuart Delery, who oversaw the civil frauds program for the Justice Department, put it simply: “[Whistleblower reward laws are] the most powerful tool the American people have to protect the government from fraud.” (emphasis added). Two years later, in 2016, Acting Associate Attorney General Bill Baer agreed with this assessment, affirming that “[t]he False Claims Act and its [whistleblower] provisions remain the government’s most effective civil tool in protecting vital government programs from fraud schemes.”
Officials in the current Trump administration’s Justice Department also agreed with these conclusions. In December 2018, Assistant Attorney General Jody Hunt confirmed that “whistleblowers have played a vital role in unmasking fraudulent schemes that might otherwise evade detection,” and acknowledged that “taxpayers owe a debt of gratitude to those who often put much on the line to expose such [fraudulent] schemes.” In 2020, Huntfurther explained his support for qui tam laws: “Whistleblowers continue to play a critical role in identifying new and evolving fraud schemes.”
U.S. Congressional officials who have studied the whistleblower laws also strongly endorse qui tam provisions.The Senate Judiciary Committee, in a unanimously-approved report, concluded: “The need for a robust False Claims Act cannot be understated. . . [A] great deal of fraud would go unnoticed absent the assistance of qui tam relators.” The Committee confirmed “the critical role that qui tam relators play in uncovering and prosecuting violations.” Senator Charles Grassley, the leading expert on whistleblowing in the U.S. Senate, was blunt: “The modern-day False Claims Act . . . is the most successful piece of anti-fraud legislation in U.S. history, and it has always enjoyed strong bipartisan support. That is because it works, by nurturing that public-private partnership with whistleblowers and by incentivizing integrity.
All of these public statements are consistent with the objective statistics on fraud detection published annually by the U.S. Department of Justice. After the False Claims Act was modernized, whistleblower cases triggered the direct recovery of $44.7 billion in sanctions due to fraud, while the United States was only able to recover $17.3 billion without the help of whistleblowers. In FY 2019, 72% of the fraud recoveries were triggered by whistleblower disclosures.
Independent academic studies further reinforce the importance of qui tam whistleblower laws. The University of Chicago Booth School of Business conducted the most comprehensive and objective study of whistleblower reward laws, whether or not they work, and their value to enforcement efforts. The study focused on the False Claims Act, and was designed to “identify the most effective mechanisms for detecting corporate fraud.” It was based upon an “in-depth” study of “all reported fraud cases in large U.S. companies between 1996 and 2004.” Their conclusion was straightforward, finding that “employees clearly have the best access to information” and “a strong monetary incentive to blow the whistle does motivate people with information to come forward.” The study concluded that whistleblowers were a key to fraud detection: “Monetary incentives seem to work well, without the negative side effects often attributed to them.”
In testimony before the Senate Judiciary Committee Pamela Bucy, a Bainbridge Professor of Law at the University of Alabama School of Law, explained why whistleblower laws are crucial to stopping fraud: “Complex economic wrongdoing cannot be detected or deterred effectively without the help of those who are intimately familiar with it. Law enforcement will always be outsiders to organizations where fraud is occurring. . . They will not find out about such fraud until it is too late, if at all.”
The Long-Term Benefit of Whistleblower Laws
Qui tam laws have a massive deterrent effect on economic crimes. For example, in his comprehensive evaluation of the IRS qui tam whistleblower law, Dennis Ventry, a University of California-Davis professor of law and Chairman of the IRS Advisory Council, explained that whistleblower disclosures have a major deterrent effect on corporate crime:
Whistleblowers can do more than just uncover and report knowing violations of the law. They can also prevent noncompliance from happening in the first place. An effective whistleblower program (run either through a state’s FCA or as a standalone statute) would add significant risk to noncompliance by increasing the probability of detection and the likelihood of potential penalties, the two most important variables in traditional tax deterrence models. In turn, increased aversion to noncompliance—due to increased fear of detection and palpable penalties as well as additional variables such as moral, ethical and reputational inputs—would result in increased revenue collection.
Numerous studies fully support Professor Ventry’s findings. These include: Niels Johannesen and Tim Stolper, The Deterrence Effect of Whistleblowing: Evidence from Offshore Banking (2017); Christine I. Wiedman and Chunmei Zhu, Do the SEC Whistleblower Provisions of Dodd-Frank Deter Aggressive Financial Reporting? (2017); Jaron H. Wilde, The Deterrent Effect of Employee Whistleblowing on Firms’ Financial Misreporting and Tax Aggressiveness (2017); Philip Berger and Heemin Lee, Do Corporate Whistleblower Laws Deter Accounting Fraud? (2019); Jetson Leder-Luis, Whistleblowers, The False Claims Act, and the Behavior of Healthcare Providers (2019); Theo Nyreröd and Giancarlo Spagnolo, SITE Working Paper, No. 44: Myths and Numbers on Whistleblower Rewards.
One study estimated that over a five-year period of time the deterrent value obtained from successful whistleblower-triggered prosecutions was 6.7 times higher than the dollar value obtained from directly sanctioning the wrongdoers. Jetson Leder-Luis’ study Whistleblowers, The False Claims Act, and the Behavior of Healthcare Providers carefully reviewed the market impact of four major health care enforcement actions that originated from whistleblower disclosures under the False Claims Act. She determined that the cases directly resulted in a total of $1.9 billion in government recoveries. However, the deterrent value of these cases over the next five years was calculated to be $18.9 billion. This led to the following conclusion: “Overall, these results indicate that the direct deterrence benefits of whistleblowing cases often exceed the settlement values many times over, and greatly exceed the retrospective damages used to compute those settlement values.”
The study conducted by Berger and Lee, professors at the University of Chicago Booth School of Business and the Zicklin School of Business at the City University of New York, exemplifies the conclusions of all of the major studies conducted on the deterrent value of whistleblowers. They concluded that there is “a high direct deterrence value of whistleblower cases.” Berger and Lee recognized the benefits of paying rewards, finding that the “opportunity for a large payout creates incentives for a whistleblower to come forward with their private information about fraud or misconduct, which can alleviate personal and professional costs arising from whistleblowing on one’s employer” and “creates a profit motive for rooting out impropriety.”
All of these studies and public statements lend support to this common sense finding of the Minnesota House Research Department: “When people believe they will be caught and punished, they are less likely to commit crimes.”
Significantly, in a major study published by the Stockholm School of Economics, Professor of Economics Giancarol Spagnolo and researcher Theo Nyrerod reviewed all of the major studies on whistleblowing and strongly endorsed the qui tam model as a highly effective anti-corruption tool. They concluded their study by acknowledging that there was “an urgent need to curb fraud and corruption,” and that “the evidence shows that whistleblower reward programs can be effective if designed properly.” They also reviewed literature critical of the qui tam programs, concluding that these anti-whistleblower arguments were clearly refuted and “spread unsubstantiated information to the disadvantage of policies that have proven effective in combating crime and corruption.”
Does the Illicit Cash Act Follow Best Practices?
Section 307 of the Illicit Cash Act, like the False Claims Act and other successful whistleblower laws, creates the framework necessary for the detection of money laundering and its successful prosecution. It is carefully constructed to address the specific legislative requirements that are needed to incentivize insiders to risk their careers (or even their safety) to report money laundering, terrorist financing, and other economic crimes to the proper authorities. The major qui tam provisions contained in Illicit Cash Act, all of which are found in the other successful U.S. whistleblower laws, are outlined below.
- The information obtained from the whistleblower must be “derived from the independent knowledge or analysis of a whistleblower.” This provision prevents opportunists from benefiting from the law and incentives true “insiders” to come forward.
- The information provided by the whistleblower is “not known to the Treasury, the Department of Justice, or an appropriate regulator, unless the whistleblower is the original source of the information.” This requires that the whistleblower provide true “original” information. In other words, without the contribution of the whistleblower, the government would not know of the underlying violations and/or would be deprived of material evidence necessary for a successful prosecution.
- The evidence of wrongdoing “that led to the successful enforcement” action must be “voluntarily provided” by the whistleblower. This reduces the risk that opportunists will benefit from the law. Informants who are paid by the government or who provide information as part of a plea deal would be automatically excluded, as would informants who provide information based on a subpoena or other compulsory service. This provision incentives insiders to come forward well before the government has any knowledge of the crimes.
- The criteria for setting the amount of the award incentivizes behaviors necessary for the successful detection and prosecution of money laundering. When setting the amount of an award, the Treasury Department must take into consideration “the significance of the information provided by the whistleblower,” “the degree of assistance provided by the whistleblower,” and whether or not the whistleblower’s contributions will help in “deterring violations of the laws.”
- Whistleblowers can raise their concerns anonymously and confidentially. This provision permits insiders to keep their jobs, while providing essential information to law enforcement. If a company does not know who the whistleblower is, they cannot retaliate against the whistleblower.
- Consistent with the False Claims Act and all of the other modern qui tam laws, the whistleblower provision sets a minimum reward level (10%) and a maximum reward level (30%). This provides the government with discretion to promote reporting behaviors that serve the public interest, while also ensuring that the government retains the vast amount of monies obtained in sanctions that were derived from a whistleblower disclosure. By not paying the whistleblower from general funds, it ensures that the programs operate at little or no cost to the taxpayer, and in fact are large income-producing programs.
- The statute contains an anti-retaliation provision based on “best practices” found in other federal anti-retaliation laws, and thus provides some job protection to whistleblowers. However, retaliation cases are historically very difficult to prove, and damages are limited. Thus, the confidentiality provisions in the law will ultimately be the most important provision protecting the jobs and safety of the whistleblowers.
Will the Illicit Cash Act’s Whistleblower Provision have Transnational Application?
As explained in The Rise of International Whistleblowers: Qui Tam Rewards for Non-U.S. Citizens (Mondaq, Feb.3, 2020) U.S. whistleblower qui tam laws are transnational and international whistleblowers have obtained coverage under these laws. Unlike employment protection laws, which must be enforced in the country in which the adverse employment action occurred, reward laws are transnational. The violation can originate in any country, and the whistleblower need not be a U.S. citizen. As Fully explained in The Rise of International Whistleblowers, under the Securities Exchange Act/Foreign Corrupt Practices Act whistleblower law, between 2011-19 international whistleblowers from 122 countries have filed cases in the United States. The total number of claimants was 3792, and international whistleblowers have obtained millions in compensation under the Foreign Corrupt Practices Act, Securities Exchange Act, Commodity Exchange Act and False Claims Act.
In addition to these laws, the Department of Justice and Internal Revenue Service was able to prosecute and/or obtain non-prosecution agreements from numerous banks based on their violation of tax laws. For example, the Justice Department reached settlements with over 80 Swiss banks, many of them privately held, for violation of tax laws. As explained by the IRS Commissioner, the ability to prosecute these Swiss banks was triggered by a whistleblower: “The IRS’ serious efforts to combat offshore tax evasion, which had long been a problem, began in 2008 with our efforts to address specific situations brought to our attention in part by whistleblowers.” Most recently, the Swiss private bank LLB Verwaltung had to pay the Justice Department $10 million to resolve a case. Overall, billions has been collected from international banks.
Money laundering and terrorist financing are transnational crimes. The Illicit Cash Act will enable whistleblowers from countries that lack democratic infrastructures and/or well-functioning regulatory administrations, to take advantage of the U.S. reward program and safety file allegations of money laundering crimes confidentially to U.S. prosecutors. The importance of the potential international scope of the Illicit Cash Act cannot be understated. The law specifically targets money laundering in drug and terrorist cases The ability of non-U.S. citizens to safely and confidentially report evidence of these crimes to U.S. authorities is an essential ingredient toward policing money laundering.
Given the urgent need to stop money laundering and terrorist financing, the Illicit Cash Act is critically necessary legislation. Its whistleblower provisions follow best practices well-established under the False Claims Act, the Internal Revenue Act, and Securities Exchange Act, and will greatly aid U.S. law enforcement in the detection and prosecution of money laundering violations. Congress should pass the Illicit Cash Act and ensure that Section 307 continues to implement the best practices for whistleblower laws that are consistent with the other successfulqui tam laws.
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