Alpine Securities Corp., a penny-stock broker, wants the U.S. Supreme Court to weigh in on its tussle with the Securities and Exchange Commission about the agency’s power to enforce anti-money laundering reporting requirements. The SEC filed its opposition to Alpine’s petition for certiorari on Oct. 4. (Editor’s Note: The Supreme Court denied cert. in this case late Nov. 8)
Despite the case’s relative mundanity, the issue has surprising implications for Wall Street whistleblowers.
Some regulatory context is necessary to understand the case’s potential downstream effects.
The Bank Secrecy Act (BSA) is the U.S.’s primary anti-money laundering law. In its current form, the BSA and Treasury’s associated anti-money laundering (AML) regulations require broker-dealers to keep records and file suspicious activity reports (SARs) in qualifying circumstances. Violations can result in steep financial penalties and even prison sentences.
In addition, under Rule 17a-8, broker-dealer non-compliance with BSA/AML reporting requirements may serve as a predicate for an SEC enforcement action charging a books and records securities violation.
The overlap is not mere curiosity, given that the SEC carries a much heavier stick than Treasury. For example, relative to Treasury, the SEC’s liability standard is easier to satisfy while available civil penalties are steeper.
In early 2021, Congress expanded the scope of money laundering crimes and the government’s power to investigate wrongdoing with the passage of the Anti-Money Laundering Act of 2020 (AMLA).
SEC Whistleblower Program
Modeling off the SEC’s successful whistleblower bounty program—a program that, in only a decade, has awarded more than $1 billion to qualifying whistleblowers—the AMLA encourages whistleblowers to report money laundering to the government. It strengthens the BSA’s existing whistleblower protections from retaliation by their employers—statutory employment protections that cannot be waived by agreement.
And most significantly, for qualifying whistleblowers, the AMLA replaces Treasury’s award structure from a discretionary award capped at $150 thousand to a mandatory award of up to 30% of the monetary sanctions over $1 million imposed on BSA/AML violators.
The AMLA whistleblower program has a critical flaw. Treasury retained the discretion to make nominal payments to whistleblowers, and there is no right to appeal the amount awarded.
By contrast, the SEC’s successful program has a 10% floor on awards to a qualifying whistleblower and a presumption of a 30% award if the whistleblower’s information leads to sanctions under $5 million.
Risks for Whistleblowers
Potential whistleblowers, particularly well-paid financial professionals, seriously risk their professional and personal lives by speaking up in the face of misconduct. Unlike the possibility of a substantial financial award, depending on the circumstances, statutory employment retaliation shields may not change the calculus in a meaningful way.
While announcing recent whistleblower awards of $110 million and $4 million to two whistleblowers, respectively, SEC Chair Gary Gensler acknowledged the “assistance that whistleblowers provide is crucial to the SEC’s ability to enforce the rules of the road for our capital markets.” SEC Director of Enforcement Gurbir S. Grewal echoed Gensler’s comments and described the SEC’s whistleblower program as “instrumental” to the agency’s enforcement successes.
As the former head of a federal financial regulator’s whistleblower operations, I can say from personal experience that Gensler and Grewal were not exaggerating. Whistleblowers are indispensable for law enforcement. The AMLA’s failure to guarantee whistleblowers a minimum percentage of a qualifying penalty undermines its potential as a game changer for BSA/AML compliance.
Implications for Broker-Dealer Whistleblowers
With that context in mind, consider the SEC’s case against Alpine and its implications for broker-dealer whistleblowers.
In 2017, the SEC charged Alpine with thousands of violations of its reporting, record keeping, and record-retention obligations under Rule 17a-8—the SEC rule overlapping with the BSA/AML requirement. Alpine’s core defense was that the SEC’s enforcement action illegally usurped Treasury’s role in enforcing the BSA/AML rule. The district court upheld the charges and fined Alpine $12 million, the Second Circuit affirmed the verdict, and Alpine’s petition for certiorari is pending.
The judicial stamp of approval on the SEC’s authority to enforce broker-dealer anti-money laundering reporting requirements as a matter of securities law presented prospective broker-dealer whistleblowers and their counsel with a more generous whistleblower channel than Treasury’s—the SEC’s. The AMLA’s flawed award structure need not deter potential whistleblowers from speaking out because they can provide the incriminating information to the SEC and potentially be eligible for a more significant bounty.
The Supreme Court has yet to decide whether it will hear Aspen’s petition. Wall Street whistleblowers and their counsel ought to be paying close attention to the proceedings.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Ezra Bronstein is a whistleblower lawyer and class action litigator with Mehri & Skalet in Washington, DC. He previously directed the Federal Housing Finance Agency Office of Inspector General’s whistleblower operations and is a Certified Anti-Money Laundering Specialist (CAMS).