This article originally appeared in JD Supra.
The United States instituted wide-ranging sanctions against Russian power elites in response to Putin’s war of aggression on Ukraine. These sanctions are the most aggressive ever unleashed by the United States. They could turn out to be a decisive weapon. However, for these sanctions to become truly potent, government regulators need to unwind complex financial instruments specifically engineered to hide the assets the United States hopes to locate. Figuring out who owns what is something governments are not well equipped to do on their own. This difficulty is because bankers, accountants, and lawyers usually do off-shore transactions behind closed doors, all of whom have financial interests in keeping the ownership secret. For example, banks intentionally kept the illegal off-shore bank accounts held by United States citizens secret for decades until a UBS banker, Bradley Birkenfeld, utilized the 2010 Dodd-Frank Act to turn in the names of thousands of United States citizens holding illegal off-shore accounts. It is safe to say that without the enactment of whistleblower reward provisions found in the Dodd-Frank Act, those off-shore secret accounts would have continued to evade government detection. The same holds true with the Russian sanctions currently being pursued by the United States.
The Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury administers and enforces sanctions established by the United States. Specifically, OFAC is tasked with the civil investigations and enforcement of sanctions. All U.S. persons and entities must comply with OFAC regulations, including all U.S. citizens and permanent residents regardless of location. These regulations cover all persons and entities within the United States, and all U.S. incorporated entities and their foreign branches.
The issue with enforcing sanctions, however, is that violations are increasingly challenging to detect. A primary means by which OFAC learns of violations is through voluntary self-disclosures. OFAC notes that these self-disclosures allow it to become aware of “apparent violations of which it otherwise would not have learned.” OFAC offers reduced financial penalties as means of incentivizing violators to self-report.
Given that OFAC is already heavily reliant on self-reporting, a whistleblower reward program would significantly enhance its enforcement efforts. Whistleblower programs have proven to be highly effective in incentivizing insiders with high-quality information about financial misconduct to come forward and cooperate with the U.S. government.
Congress recently recognized that a whistleblower reward program would significantly enhance the Treasury Department’s enforcement efforts in the related area of money laundering. The whistleblower provisions of the Anti-Money Laundering Act of 2020 (AML Act) were supposed to be modeled on the Dodd-Frank Act, which launched the highly successful SEC and CFTC whistleblower programs. But in truth, the AML Act lacks some of the Dodd-Frank Act’s key whistleblower provisions. For example, the Dodd-Frank Act mandates the payment of whistleblower rewards of 10-30% of the sanctions collected by the government to qualified whistleblowers who voluntarily provide original information, which led to the recovery. The Dodd-Frank whistleblower provisions also allow whistleblowers who are represented by an attorney to file their disclosure anonymously, helping to protect them from retaliation from their employer.
Unfortunately, the AML Act is a watered-down version of the Dodd-Frank Act. One fundamental defect is not including a mandatory whistleblower award provision. Incentivizing financial whistleblowers is key because the economic incentives to remain quiet and fear of retaliation are too great. If Congress regains its footing and models a sanctions whistleblower law off the Dodd-Frank Act, and not its much weaker cousin, the AML Act, the result will be an effective whistleblower program. Such a program will be capable of uncovering multiple times what the government would without the help of whistleblowers.
The SEC’s whistleblower program is immensely successful. Since the Dodd-Frank Act was enacted in 2010, the United States government recovered over $5 billion from fraudulent corporate activity. The program has been consistently praised by SEC officials from both sides of the political spectrum. In 2020, then-SEC Chair Jay Clayton noted that the whistleblower program “has been a critical component of the Commission’s efforts to detect wrongdoing and protect investors and the marketplace, particularly where fraud is well-hidden or difficult to detect.” SEC Chair Gary Gensler stated that the program “helps us be better cops on the beat, execute our mission, and protect investors from misconduct.”
Other whistleblower reward programs have been similarly successful. The IRS whistleblower reward law helped contribute to dismantling the illegal Swiss banking system. The False Claims Act offers monetary awards to whistleblowers who provide information on government contracting fraud and has been described as “the most powerful tool the American people have to protect the government from fraud.” False Claims Act whistleblowers have allowed the government to recover over $64 billion.
By establishing a sanctions whistleblower reward program modeled off the Dodd-Frank Act, Congress can significantly bolster the enforcement of sanctions. This enforcement, in turn, would ensure that the national security and humanitarian goals of sanctions are met.