Congress Must Fix The AML Whistleblower Law
This article was originally published by Law360.
On Jan. 1, historic reforms of anti-money laundering, or AML, rules became the law of the land as a result of Congress’ override of President Donald Trump’s veto of the National Defense Authorization Act. Part of the massive NDAA bill was the AML Act of 2020, a law that includes a whistleblower reward law.
At first blush, this new law appears to be modeled on the highly successful reward provisions of the Dodd-Frank Act. Unfortunately, the similarities between the AML whistleblower law and the Dodd-Frank Act illusionary. The new law will not work in practice and needs to be corrected by Congress.
Until Congress fixes the AML whistleblower law, whistleblowers must continue to report money laundering violations through the IRS and U.S. Securities and Exchange Commission whistleblower programs, both of which cover money laundering violations.
What Went Wrong
In the summer of 2020, the U.S. House of Representatives and U.S. Senate began to finalize their versions of the must-pass NDAA. The Senate version of the NDAA included the AML Act, and a whistleblower reward law modelled almost word-for-word on the highly successful Dodd-Frank Act. The Senate-approved provisions were then submitted to a joint House-Senate Conference Committee.
It looked like Congress was about to score a huge victory in combating money laundering. The Senate version of the AML whistleblower law was based on the highly successful Dodd- Frank Act reward law, that in September 2020 received strong bipartisan and unanimous support from every SEC commissioner and its Enforcement Division.
Everything was in place for Congress to approve an effective and proven law to incentivize and protect whistleblowers. But something went terribly wrong in the conference committee.
The result was the passage of one of the worst whistleblower laws in 25 years. Without explanation or justification, the House-Senate conference made fundamental changes in the law. These changes were highly technical but struck at the heart of the law, rendering it ineffective.
How the AML Law Differs From the Dodd-Frank Act
The following changes made and approved in the House-Senate conference undermine the AML whistleblower law.
Whistleblower payments are not funded or guaranteed.
The Dodd-Frank Act, like most whistleblower laws, is predicated on a very simple formula. Incentivize insiders to risk their jobs and report potential crimes to law enforcement. The key to this incentivization is the promise of a reward. The payment of the reward comes from the sanctions obtained from the corporate wrongdoer.
The reason for this rule is simple. If no whistleblower stepped forward, the criminals would have gotten away with their crime, and no fine or penalty would ever have been collected. But where the whistleblower’s original information resulted in a successful prosecution, the whistleblower would be awarded directly from the sanction triggered by his or her information.
The whistleblower is rewarded at no cost to the taxpayer. Instead, the reward comes directly from the sanctions obtained by the government due to the information provided by the whistleblower. Everyone, but the criminal, is a winner.
For this process to work, a portion of the sanctions obtained from the criminals must be set aside to pay the whistleblower. Under the Dodd-Frank Act, Congress established a self- financing fund to accomplish this goal. Sanctions obtained from whistleblower cases are placed in the fund and set aside to pay whistleblowers.
Thus, taxpayer monies are never utilized. The whistleblowers’ payments come directly from proceeds obtained by wrongdoers who are found guilty of major violations. It is a great day for accountability when the criminals pay the whistleblowers.
The use of this funding mechanism is completely non-controversial and has never been challenged. The Senate version of the AML Act established such a fund. But the NDAA Conference Committee struck it down. The AML whistleblower law limits the ability of the secretary of the U.S. Department of the Treasury to pay awards.
Awards can only be paid from “amounts made available in advance by appropriation Acts.” By eliminating the fund, the ability of the Treasury, or any other government agency, to pay whistleblowers was also eliminated. There is no process to set aside the monies obtained from whistleblower triggered cases to pay whistleblowers.
The need to ensure payments to whistleblowers who risk it all to serve the public interest is not controversial or disputed. But In complete violation of this fundamental bipartisan principle that underlies all successful whistleblower qui tam or reward laws, the final version of the NDAA-approved whistleblower law eliminated the Senate-proposed fund in its entirety.
Instead, it places the payment of whistleblower rewards at Congress’ discretion. Congress would have to specifically authorize appropriations earmarked for whistleblower rewards as part of the appropriations process. Incredibly, Congress would have to earmark taxpayer monies to pay awards and funds that it could allocate for any other purpose.
Congress would have the ultimate and complete discretion to allocate whatever funds it decided to pay whistleblowers. No matter how much money was obtained by the U.S. government due to a whistleblower case and regardless of how much hardship a whistleblower suffered for serving the public interest.
Who would lobby for these payments? What chance would a whistleblower have to obtain meaningful rewards when they would have to directly compete against powerful special interests that work tirelessly to have taxpayer monies allocated to their programs?
The NDAA conference agreement stripped the very foundation necessary for the law to work. Whistleblowers would not be paid based on the usefulness of their evidence or from the sanctions their information was used to collect. Instead, whistleblowers would be at the mercy of the arcane and highly competitive appropriations process. This process eliminates any chance that a whistleblower could be guaranteed any reward whatsoever.
This one change, standing alone, decimated the AML whistleblower law. But it gets worse.
The AML Act eliminated a right to a minimum reward.
Even if Congress voted appropriations to pay awards, the U.S. government is under no obligation to pay any whistleblowers compensation for their information.
All other successful whistleblower qui tam laws, including the Dodd-Frank Act, requires the U.S. to pay a minimum award to whistleblowers who otherwise fully qualify, as a matter of law, for an award. Thus, if a whistleblower follows all of the laws and procedures necessary to obtain a reward and is not disqualified from obtaining a reward due to misconduct, the Dodd-Frank Act mandates that the SEC pay the whistleblower an award of at least 10% of the monies actually obtained from the wrongdoer.
Under the Dodd-Frank Act the government will always collect between 70% and 90% of all funds obtained in a whistleblower case. The whistleblower will be guaranteed at least 10%. In this way, a whistleblower knows that if they do the right thing in reporting criminal activity, they will be entitled to some form of compensation.
It is this guarantee that incentives the vast majority of corporate fraud whistleblowers to step forward.
The Senate version of the AML whistleblower law contained this minimum award provision. The proposal unanimously approved by the Senate that an award to a whistleblower could not be “less than 10 percent, in total, of what has been collected of the monetary sanctions … [or] more than 30 percent.” The language precisely mirrors the Dodd-Frank Act.
However, the final version of the AML Act cut this provision, and replaced it with the vague authority of the secretary of Treasury to pay whistleblowers not “more than 30 percent.”
Furthermore, the law states that setting the award amount was within the secretary of Treasury’s complete discretion, and as long as the secretary issued an award of one penny or more, the whistleblower would be completely blocked from any judicial appeal. The statutes reads: “Any determination made under this section, including whether, to whom, or in what amount to make awards, shall be in the discretion of the Secretary [of Treasury].”
Any attorney advising a client about their rights under the new AML whistleblower law would be ethically bound to warn that client of its ineffectiveness. The prospective whistleblower would have to be told that even if they lost their job, lost their career and faced direct threats to their safety, the U.S. would be under no obligation whatsoever to pay the whistleblower anything more than a token amount of compensation.
Furthermore, the whistleblower would have to be warned that any payment whatsoever — even an award of one red cent — would also be predicated on an explicit appropriation by Congress of monies to pay awards, a result that is highly unlikely.
Finally, the prospective whistleblower would have to be warned that if they were denied an award, they could not realistically hold the U.S. accountable for fulfilling the promise implied in the AML law.
What rational economic actor would blow the whistleblower in the face of such uncertainty and risk? The answer can be found in other older whistleblower laws that were also discretionary in nature. They all failed.
Congress Fixed the Minimum Award Issue in 1986 and Should Fix it Again
This is not the first time that Congress passed a whistleblower reward law, but did not include a guaranteed minimum payment to otherwise fully qualified whistleblowers. In 1943 Congress amended an older Civil War era whistleblower law, the False Claims Act, and eliminated the mandatory minimum payment contained in the original FCA.
The 1943 FCA did not work. Billions were lost to frauds, while most potential whistleblowers never filed any cases, and those that did were not paid.
It should not be a surprise that when Congress, with the full approval of then-President Ronald Reagan, voted to fix the 1943 law, one of the major reforms adopted was enacting a minimum reward to ensure that all qualified whistleblowers would obtain a guaranteed minimum award: 15%. The 1986 Senate report explained why Congress was amending the law:
The new percentages … create a guarantee that relators [i.e., whistleblowers] will receive at least some portion of the award if the litigation proves successful. Hearing witnesses who themselves had exposed fraud in Government contracting, expressed concern that current law fails to offer any security, financial or otherwise, to persons considering publicly exposing fraud. …
If a potential plaintiff reads the present statute and understands that in a successful case the court may arbitrarily decide to award only a tiny fraction of the proceeds to the person who brought the action, the potential plaintiff may decide it is too risky to proceed in the face of a totally unpredictable recovery. …
The Committee acknowledges the risks and sacrifices of [whistleblowers]. … The setting of such a definite amount is sensible … the Government will still receive up to 90 percent of the proceeds — substantially more than the zero percent it would have received had the person not brought the evidence of fraud.
The False Claims Act, the Dodd-Frank Act and the IRS whistleblower laws all require the payment of minimum rewards — between 10% and 15% of the collected proceeds — to qualified whistleblowers. These laws have been recognized as key components of successful anti-corruption programs.
In the 10 years following the passage of the Dodd-Frank Act, the director of the SEC’s Enforcement Division explained the radical impact the mandatory reward program has had on protecting investors:
This program is critically important to the SEC and to the Enforcement Division. It is important to reward whistleblowers and to do it timely. Since the enactment of the program in 2011, whistleblower tips have resulted in numerous high-quality enforcement actions and whistleblowers have been awarded roughly $520 million. Given the success of this program, we have been flooded with increasing numbers of quality tips.
The elimination of the minimum mandatory reward provision from the original Senate version of the AML whistleblower law was a second nail in the coffin of an otherwise well- intentioned reform law. Congress should carefully review the AML whistleblower law and amend its various provisions to fully conform to the highly effective Dodd-Frank Act, the law in which it was modelled on.
