Reprinted from neweconomicperspectives.org
I'm writing on the flight returning from the XIIth International CIFA Forum in Monaco. CIFA is an NGO. It is a confederation of independent financial advisor organizations that works with the UN in promoting the protection of investors. This means that their clients are often very wealthy and that many of the participants are speakers are very conservative or libertarians (or an admixture). One of the speakers, Dr. Hans Geiger, gave an impassioned denunciation of "bureaucrats" (which turned out to mean anyone who worked for the government) and the imposition of a duty on bankers to file criminal referrals when they had a "reasonable suspicion" that their clients had committed certain crimes. The official U.S. jargon for a criminal referral is "Suspicious Activity Reports" (SARS). Geiger was particularly distressed that the banker would not be allowed to inform his client that he was making the criminal referral (which FATF terms "Suspicious Transaction Reports" (STRs)) under the standard 21 proposed by the Financial Action Task Force in 2012.
21. Tipping-off and confidentiality- Advertisement -
Financial institutions, their directors, officers and employees should be:
(b) prohibited by law from disclosing ("tipping-off") the fact that a suspicious transaction report (STR) or related information is being filed".
The new requirement for criminal referrals will arise as nations adopt the FATF recommendations for financial policies. A number of nations have already done so. Geiger is a leader of the effort to convince the Swiss government not to adopt these provisions. He is part of an organization that encourages "tax competition" among nations. The goal is to minimize taxes and governmental spending by denying governments revenues. The aim is to encourage the wealthiest people to move that wealth and income to nations with the lowest taxes on wealth and income. Geiger is also a fierce austerian. The next day when I responded I wore my special austerian repellant tie -- it's resplendent with images of defaulted German bonds -- the equivalent of wearing a garlic garland to ward off vampires.
In this first installment of my written response prompted by Geiger's remarks I make only one point that I do not believe was made in a related context. FATF not only forbids the bank that makes the criminal referral against the client to inform the client, it labels such an act "tipping" -- tipping off the suspect to the potential criminal investigation so that the client can destroy documents and avoid making future incriminating statements and requests. FATF's language prohibiting tipping off the subject of the criminal referral comes from the f ederal banking agencies' rules that require banks that they regulate to make such referrals and forbids them to inform the subject of the referrals.
12 CFR 390.355 -- SUSPICIOUS ACTIVITY REPORTS AND OTHER REPORTS AND STATEMENTS.
(d) (9) Notification to board of directors--
(ii) Suspect is a director or executive officer. If the State savings association files a SAR pursuant to this paragraph (d) and the suspect is a director or executive officer, the State savings association may not notify the suspect, pursuant to 31 U.S.C. 5318(g)(2), but shall notify all directors who are not suspects.
The Dodd-Frank Act has provisions designed to encourage whistleblowers. The Chamber of Commerce, Financial Services Roundtable (FSR), and the American Bankers Association (ABA) hated the provision and made exceptional efforts to prevent the SEC from adopting a rule that would allow the whistleblower to notify the government of his corporation's misconduct without first notifying the corporation.
This was rather obviously nuts for all the reasons that have long led us to ban banks from informing their clients of criminal referrals and which were leading FATF to propose recommendations that every nation adopt a similar ban. The ABA and the FSR know full well about criminal referrals and why the bank is forbidden to tip off the customer (even if the customer is a corporation with a system of internal controls) about the criminal referral. The opponents of the SEC rule, however, were not treated by the media as if they were trying to reverse a long-standing policy that made eminent sense given the reality of what the controlling officers leading a corporate control fraud would do to thwart an investigation if the whistleblower were required to notify the people leading the felony that he wished to alert the government that he had detected a likely crime.
Indeed, the policy argument is far stronger in the whistleblower context because the leading manner in which the controlling officers leading a control fraud seek to thwart investigations is to retaliate against the whistleblower. The goal is to intimidate and harm the whistleblower, but the reprisal also allows the officers to label him "a disgruntled employee who was fired for his incompetence and lack of integrity." The "disgruntled employee" label is the favorite tactic of fraudulent officers seeking to discredit the whistleblower. The SEC rejected the demand that whistleblowers be required to tip off the alleged perpetrators of the crime, but that demand was overwhelmingly endorsed by the business community and by the SEC members who are Republicans. Their claim was based on the (implicit) assumption that control fraud does not exist and that the virtuous CEO needs to know of the crimes committed by his corporation's officers and employees that were spotted by the whistleblower so that the CEO could remedy the crimes.
The Oxymoron that is Modern Legal Ethics
Michael E. Clark, Special Counsel to the Duane Morris law firm of Houston, Texas did us all the favor of revealing a bit too much of the basis for the CEOs' rage against whistleblowers. The hostility is evident in the title he chose for his article: "The Dodd-Frank Act's Bounty Hunter Provisions."