Momentum Grows for Fixing the AML Whistleblower Law
This article features Government Accountability Project and was originally published here.
When the Anti-Money Laundering Whistleblower Act (“AML Act”) became law on January 1, 2021, some commentators praised it as a breakthrough. The law was modelled on the highly successful Dodd-Frank Act (“DFA”) and shared some of its important features, including confidentiality. Unfortunately, the AML Act deviated from core provisions in the DFA vital to the law’s effectiveness. These deviations will render the AML Act a disappointment to many whistleblowers. Ultimately, it will not incentivize key insiders to risk their reputations, jobs, and safety to report international money laundering.
Given these problems, on April 30, 2021, leading whistleblower rights groups, including the National Whistleblower Center, Public Citizen, Government Accountability Project, Project On Government Oversight, Whistleblowers of America, ACORN 8 and the National Whistleblower Legal Defense and Education Fund, sent a letter to the Chairman and Ranking Members of the House Financial Services Committee and the Senate Banking Committee demanding that the AML Act to fixed. Among the problems with the current law is its failure to protect employees at FDIC-insured institutions from retaliation if they report banking violations. Another is the failure to require that whistleblowers obtain any reward whatsoever.
This article explores one of the more troubling defects in the law: A requirement that a qualified whistleblower be compensated by a Congressional appropriation. See 31 U.S.C. § 5323(b)(1) and (2). This process is counter to every successful qui tam law designed to incentivize reporting, including the Dodd-Frank Act (“DFA”), False Claims Act, Securities Exchange Act, Commodity Exchange Act, and Internal Revenue Act. These laws tie the whistleblower reward directly to the sanctions obtained from fraudsters. In this manner, taxpayers never pay a reward.
Compensation comes directly from the fraudsters they turn in. The whistleblower only receives a modest percentage (maximum awards, which are also taxable, are capped at 30%). This process not only incentives reporting it also incentivizes whistleblowers to work closely with law enforcement in helping to obtain a successful prosecution. If there is no successful enforcement action, the whistleblower gets nothing. The money used to pay the award is outside of the appropriations process. Therefore, forcing whistleblowers to appeal to Congress for payment simply makes no practical sense and is not required under any other whistleblower reward law.
In 2016, the issue of whether or not all appropriations should be approved by Congress was the subject of proposed legislation and Joint Congressional hearings within the House of Representatives. The question examined the fact that various agencies had obtained authority to make expenditures from user fees, awards, and court settlements obtained outside of the Congressional budgetary process. Leading members of the House Freedom Caucus believed this delegated authority was inconsistent with the “power of the purse” wielded by Congress. As part of this debate, Congress looked at the unique role whistleblowers play in the law enforcement process and the long history of paying whistleblowers directly from the fines and sanctions obtained by the government in whistleblower-triggered cases.
Congressional Review of Source for Whistleblower Rewards
On December 1, 2016, a joint hearing of two subcommittees of the House Committee on Oversight and Reform took up the issue of whether whistleblowers should be paid by specific Congressional appropriations, or whether their rewards should be paid directly from the sanctions and fines obtained from the cases their information triggered. The hearing, “Restoring the Power of the Purse: Legislative Options, was chaired by the two subcommittee Chairman, Congressman Mark Meadows (R-NC), Chairman of the Subcommittee on Government Operations, and Jim Jordan (R-OH), Chairman of the Subcommittee on Health Care Benefits and Administrative Rules. The hearing was held to consider the Agency Accountability Act, a bill introduced by Congressman Gary Palmer (R-Alabama).
The Palmer bill was endorsed by the House Freedom Caucus. It would have required most federal expenditures (including those in whistleblower cases) to go through the Congressional appropriations process. If passed, the established practice of paying whistleblowers directly from the collected proceeds obtained from fraudsters would have been ended. The author of this article was one of the witnesses called to testify regarding the Agency Accountability Act.
Extensive testimony was submitted regarding the history of qui tam laws that mandated compensation for whistleblowers and how these laws have worked in practice. The testimony outlined a number of qui tam laws enacted by the First Congress of the United States (in 1789), all of which required that the whistleblower be compensated directly from the sanctions obtained by his or her disclosures. Thereafter, the history of the False Claims Act was explained. This law was signed into law by President Abraham Lincoln during the Civil War. It provided for a qui tam reward to whistleblowers who filed claims exposing fraud in federal contracting and was designed to protect the integrity of Civil War defense contracts.
The testimony also included extensive empirical data demonstrating the effectiveness of the qui tam laws and the importance of paying whistleblowers directly from the sanctions obtained from fraudsters. Likewise, statements from responsible law enforcement officials were extensively quoted, such as the 2014 statement of the Assistant Attorney General responsible for civil fraud prosecutions, who described the qui tam laws as “the most powerful tool the American people have to protect the government from fraud.
Based on the questioning and comments from the House committee members, it was clear that they had carefully considered this testimony. Thereafter, all of the Committee members acknowledged the importance of paying whistleblowers outside the formal appropriations process on the official hearing record.
Initially, the Democratic leaders voiced strong opposition to the Palmer bill. They pointed to the harm the bill would inflict on whistleblowers. In his opening statement, the Ranking Democrat at the Joint Hearing, Congressman Gerald Connolly (D-Virginia.), explained the importance of paying whistleblowers directly from the sanctions obtained in the whistleblower-triggered prosecutions:
“One essential good governance mechanism to which this legislation would render serious harm is the protection of whistleblowers, a cause championed by this committee. Much of government fraud detection relies upon whistleblowers. We’ll hear from an expert today on how whistleblower funds sustained via agency collections are crucial to protecting and incentivizing those willing to shed light on fraud, waste, and abuse in our government, a mission that goes to the very core of this committee’s mission. We will hear that whistleblowers are only willing to risk their careers and blow the whistle if there is some protection in the form of an award. That’s why Congress authorized agencies to issue those awards to whistleblowers—to guarantee that one of the incentives for whistleblowers to come forward is never in doubt and never tied up in uncertain appropriations processes. The effects of this bill would be to gut the guarantees to whistleblowers and the services they provide.”
Congressman Connolly’s testimony was supported by Congressman Brendan Boyle (D-PA), who also strongly opposed compensating whistleblowers through the Congressional appropriations process:
“H.R. 5499 [the original Palmer bill] would damage mechanisms Congress has created to promote good governance. As my colleague Mr. Connolly stated, whistleblowers are crucial to government accountability. The bravery of whistleblowers to do the right thing and shine the light on fraud, waste, and abuse helps our government in its important efforts to increase transparency. H.R. 5499 would have the effect of disincentivizing whistleblowers from coming forward with helpful information. Make no mistake about it, this bill is reckless. It will cost taxpayers more money, because it will discourage whistleblowers from coming forward to expose fraud. If transparency is a goal of this bill, then I support that goal, but there are better paths forward that would do none of the harm this heavy-handed bill would cause.”
Following the statements from his Democratic colleagues, the Republican subcommittee Chair, Mr. Meadows, agreed that whistleblower payments should not be subject to Congressional appropriations and compensating whistleblowers should follow the historic practice of having them paid directly from the sanctions obtained from fraudsters. Congressman Meadows endorsed a “friendly amendment” to the Palmer bill carving out a whistleblower exception to the requirement that Congress approve all appropriations: “[W]histleblowers are a vital part of what we do, from an oversight standpoint . . . I believe that a friendly amendment that would protect our whistleblowers would be in order. And I know I’ve talked to the gentleman from Alabama about that very subject, and he seems very willing to accommodate.”
Thereafter, Congressman Jordan agreed with Meadows (and Connolly and Boyle). While generally supporting Congressman Palmer’s bill, he acknowledged that the bill should be amended to exempt whistleblower payments from its requirement. Like Congressman Meadows, Jordan endorsed a “friendly amendment” designed to protect whistleblower payments: “Mr. Palmer, thank you for bringing a good piece of legislation forward. Thank you to our witnesses. . . There’s nothing wrong with an amendment that would carve out the whistleblowers.”
Thereafter, Congressman Palmer agreed to a friendly amendment carving out whistleblowers from the Congressional appropriations process. Directing his comments to the whistleblower advocates at the hearing, Congressman Palmer acknowledged the importance of directly paying whistleblowers from the sanctions obtained from fraudsters and explained that he would offer a friendly amendment to his legislation, ensuring that whistleblowers would be paid outside the formal Congressional appropriations process. Congressman Palmer stated: “I want you to rest assured. I’ve read your testimony, and I actually called my chief of staff and told him that we needed to make sure that whistleblowers are compensated and that that’s protected. So, you can rest assured that we’ll take care of that with a friendly amendment.”
After the hearing, the commitments made by Congressmen Meadows, Jordan and Palmer were fulfilled. The original bill, H.R. 5449, did not exempt whistleblowers from the appropriations process. Thereafter, all of the subsequent bills mandating the use of the Congressional appropriations process for federal expenditures included the whistleblower carve-out. Congressman Palmer amended his bill, and the importance of paying whistleblowers directly from the sanctions obtained in enforcement cases was well established, in a completely bi-partisan manner, based on the law, the historical record, the proven success of existing qui tam laws, and ultimately common sense. See H.R. 850 and S-1456.
Among the corrections needed to ensure that the AML Act will properly incentivize and protect whistleblowers is an amendment establishing a fund to compensate whistleblowers who report money laundering violations directly from the sanctions obtained in whistleblower-triggered cases. Leaving aside the fact that Congress has never appropriated any money to compensate even one whistleblower, the failure to have a process to ensure payment undermines the basic quid-pro-quo of all whistleblower reward laws. The whistleblower is asked to risk his or her safety, reputation, career, and job for a promise by the United States government to compensate the whistleblower, if and only if the information provided by the whistleblower triggered a successful prosecution. Without the assurance of payment, no rational economic actor will take the risk of being a whistleblower in exchange for potentially nothing. However, when such payments are guaranteed, whistleblower laws work remarkably well.
The need for AML whistleblowers to obtain guaranteed compensation when they follow the law and provide actionable information regarding money laundering is even more compelling than in other whistleblower laws. The overwhelming majority of whistleblowers who file claims under laws such as the False Claims Act and Dodd-Frank Act are U.S. citizens and fully protected against employment discrimination. All of the qui tam laws contain specific job protections for whistleblowers. Additionally, retaliation against these whistleblowers is prohibited under the criminal obstruction of justice laws. However, many (if not a majority) of AML whistleblowers are non-U.S. citizens. Money laundering violations often arise in international banking transactions. They are extremely common in cases of terrorism, drugs, human trafficking, and foreign bribery. Most AML whistleblowers will not be protected under U.S. employment or witness protection laws. Without a guarantee of compensation, these whistleblowers are left completely unprotected and at risk. Given the criminal nature of money laundering, AML whistleblowers not only risk losing their jobs but also face life-threatening risks to themselves and their families.
Congress took the first step in creating a framework for AML whistleblowers based on the highly successful Dodd-Frank Act. But the only way the AML law will work in practice is if it is amended to be consistent with the essential whistleblower provisions contained in the DFA, including the payment process. The AML Act needs to be fixed so that its entire compensation methodology conforms to the DFA. This starts with granting rewards based on all of the sanctions obtained in AML cases (civil, administrative and criminal), guaranteeing a minimum payout of no less than 10% of all sanctions obtained, and ensuring the money used to pay these awards comes from special funds obtained directly from the criminals the whistleblowers helped bring to justice.