Big banks get a big break on pending whistleblower law

Congress is poised to approve a new whistleblower law as part of the anti-money laundering provisions included as Section 6314 of the 2021 National Defense Authorization Act [“NDAA”]. Modelled on the highly successful Dodd-Frank Act that covers securities frauds, the NDAA whistleblower law includes two loopholes that will undermine its effectiveness and cause untold hardship to future whistleblowers. These loopholes must be closed.

The purported goal of Section 6314 is to encourage whistleblowers to report money laundering to the Department of Treasury. On its face it incentivizes disclosures by permitting the Department of Treasury to pay employees who take the considerable risk of becoming whistleblowers. If an employee’s “original information” results in a successful prosecution, whistleblowers would be entitled to a reward. Similar reward programs covering tax evasion, foreign corruption, government contracting, Medicare fraud and securities frauds are incredibly successful, and have triggered billions in recoveries paid to taxpayers and victims of fraud.

However, none of these successful laws contain the loopholes the banking industry is about to receive under Section 6314 of the NDAA.

On its face Section 6314 appears similar to the other highly effective whistleblower laws, such as the False Claims Act (FCA) and Dodd-Frank Act (“DFA”).  Most of its provisions are taken word-for-word from the DFA.  But upon careful review Section 6314 contains a major whistleblower-killing loophole.  This loophole is laser focused and target essential provisions needed for a whistleblower reward law to work.

The loophole permits the Department of Treasury to deny a meaningful reward to any qualified whistleblower. The second loophole excludes from coverage under the laws anti-retaliation provisions employees at FDIC insured institutions.  These loopholes could result in the majority of potential whistleblowers being excluded from benefiting from the whistleblower law. As written, the law could sabotage itself.  In the process it will discredit other whistleblower programs and continue to erode American’s faith in democratic institutions. 

The two loopholes target the amount of an award a whistleblower can obtain and who can qualify as a “whistleblower” under its anti-retaliation provisions.   These two exceptions make the new money laundering whistleblower law radically distinct from the current Dodd-Frank Act’s rules.

Under the DFA if a whistleblower’s original information triggers a successful enforcement action the whistleblower is entitled to between 10-30 percent of the monetary sanction obtained by the government. This process is a win-win-win. The government obtains evidence needed to prosecute a fraudster. This is a win for accountability. The government collects the sanction that is paid by the fraudster (no taxpayer money is involved). This is a win for the taxpayers and victims of crime who are entitled to restitution payments. Finally, the whistleblower obtains a share of the recovery (only if his or her information played a key role in the successful prosecution). This is a win for the whistleblower. The heart of this program is a guarantee of payment to the whistleblower.  Under the DFA he or she must obtain no less then 10 percent of any recovery, and no more than 30 percent of any recovery.

Unlike other whistleblower laws, Section 6314 of the NDAA breaks the promise of a meaningful payment. The law would grant the Department of Treasury (an agency with no record of ever supporting whistleblowers) the unlimited discretion to set award amounts below 30 percent. Pursuant to Section 3614, if an employee lawfully reports a massive fraud and the government collects large sanctions from the fraudsters, the Treasury Department is given the complete discretion to set an award amount far below the 30 percent maximum, and issue a de minimus award. As incredible as it sounds, if Treasury collects a $100 million sanction based on a whistleblower’s information the Treasury Department is free to grant the whistleblower an award as low as one penny.  In such a case the whistleblower would have no right to object.  Minimum awards cannot be appealed.

The ability of the Treasury Department to eviscerate awards will have a chilling effect on the willingness of employees who work for the banks to report money laundering and other violations of law. Moreover, responsible lawyers would have to warn potential whistleblowers of this possible outcome when giving advice as to whether or not to risk their careers by reporting crime.

This was the precise problem Congress faced in 1986 when the False Claims Act was amended.  The original False Claims Act signed into law by President Abraham Lincoln promised all successful whistleblowers a mandatory reward. In 1943 that law was amended, and language identical to that contained in Section 6314 was added to the law. After 1943 the False Claims Act stopped working. Most whistleblowers never filed any cases, and those that did were not paid. 

This regressive anti-whistleblower provision was one of the major targets of the 1986 False Claims Act reform efforts. In amending the False Claims Act Congress wanted to ensure that every qualified whistleblower would obtain a reward no less then 15 percent of the sanctions he or she was responsible for recovering. The Senate Report discussing the 1986 amendments made this perfectly clear:

“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 law all make it certain that the government will make minimum payments to fully qualified whistleblowers. All of these laws work and have all been highly praised. Why should banks engaged in money laundering have a new set of whistleblower rules that are highly prejudicial and will undermine law enforcement objectives?

The second loophole kills the bill for employees who work at employers insured under the Federal Deposit Insurance Act. These employees cannot take advantage of the bill’s new and modernized anti-retaliation provisions, but instead will force these employees to seek relief under older laws that have not worked in practice.

No other modern whistleblower qui tam or reward law gives agencies the discretion to deny otherwise fully qualified whistleblowers of an award. No other modern whistleblower law denies a majority of potential whistleblowers the ability to protect themselves from retaliation under improved anti-retaliation laws designed to fix otherwise broken laws. These exclusions are highly confusing and subject to abuse. They will result in whistleblowers who are fully deserving of a reward being denied a reward for no good reason.  They will result in other whistleblowers being denied relief when they are fired.

The original Senate version of the anti-money laundering whistleblower law, S-2563, did not contain these two loopholes. Instead, it was modelled directly on the Dodd-Frank Act and included all of the key provisions that make the DFA successful. S-2563 had broad  bi-partisan support and was sponsored by senators including Mark Warner (D-Va.), Tom Cotton (R-Ark.), John Kennedy (R-La.), Jerry Moran (R-Kan.), Doug Jones (D-Ala.), Kyrsten Sinema (D-Ariz.), Jon Tester (D-Mont.), Lisa Murkowski (R-Alaska), Mike Rounds (R-S.D.), and Robert Menendez (D-N.J.). An analysis of S-2563’s whistleblower law confirmed that the law included all of the provisions necessary for success.

If Congress should immediately close the two loopholes prior to approving the NDAA. Regardless of how these loopholes came to be included in the current version of the NDAA, fixing them is a relatively easy drafting issue. One short section needs to be cut, and one short phrase needs to be added. Simply follow what the Senate had proposed in S-2563 and the NDAA money laundering whistleblower law will become a centerpiece in fighting corruption.

Stephen M. Kohn is a partner in the whistleblower law firm of Kohn, Kohn and Colapinto and the Chairman of the Board of Directors of the National Whistleblower Center.