INVESTIGATIONS

BankThink AML enforcement needs more whistleblowers

Pin it

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.

Michael Ronickher

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

BankThink AML enforce­ment needs more whistle­blow­ers

Log In or Create an account