In late 2023, the U.S. Department of Justice (DOJ) announced its plans to join its regulatory counterparts at the SEC, IRS and CFTC in enacting a whistleblower reward program aimed at offering expanded protections and even monetary awards to individuals voluntarily coming forward with pertinent information that leads to potential convictions against executives and firms contributing to corporate misconduct. The role of whistleblowing in the financial realm has been a driving force in identifying and mitigating fraud, insider trading and other forms of corporate wrongdoing for several years now, with individual programs enacted by the aforementioned entities each seeing significant early success in bringing about increased rates of prosecution and financial penalties against bad actors.

At the time of their initial announcement last October, the DOJ had set its sights primarily on cracking down on suspicious activity during the merger and acquisition (M&A) process with respect to companies acquiring businesses. DOJ representatives had maintained that they would not prosecute a firm making an acquisition, granted that this business voluntarily disclosed these potential improprieties within six months of their respective deal(s) closing. In exchange for timely reporting, the Department promised leniency and even immunity from prosecution for those coming forward. In the months since the program’s commencement, the DOJ’s criminal division also announced a separate pilot program that would give immunity to executives and lower-level employees who provide information about corporate misconduct they were involved in. In contrast to the “reward” program, the new whistleblower initiative will not offer rewards to whistleblowers who are eligible – this due to the fact that they themselves played a role in the nefarious activity they are denouncing, and to reward them would effectively translate to rewarding wrongdoing.³ Many had speculated that such a system could ultimately incentivize individuals to break the law and double their reward for doing so. Instead, this program’s incentive is giving corporate employees a way out if they find themselves entangled in illegal activity their  company was potentially engaged in, effectively entering whistleblowers into a so-called non-prosecution agreement that would see them freed of potential legal ramifications. Of course there are limits to what type of misconduct will be covered by this new whistleblower program, this as the DOJ reports the current iteration of the initiative will cover tips related to financial and healthcare misconduct such as fraud, money laundering, and corporate bribery.³

All told, the strategy behind the Justice Department’s latest measures is to encourage a culture of competition in a sense. The pressure is now shifted onto company higher-ups to report their own misconduct before their employees do, with this tone initially being set by employees seeking a reward for whistleblowing. In theory, the employees who are involved will want to get out ahead of any prosecution and escape with a clean slate before the walls close in on them. Time will tell if this new approach to dealing with corporate crime will pay off in the long term. To actually be a part of corporate crime and have guaranteed exoneration in exchange for information is undoubtedly the most enticing bait the Justice Department has offered to date in this regard.  

Morgan Stanley In Hot Water Over AML Screening Deficiencies

            American multinational investment banking and financial services staple Morgan Stanley came under fire from multiple federal regulators last week. Reports have indicated that the U.S. Securities and Exchange Commission (SEC), Office of the Comptroller of the Currency (OCC) and the Treasury Department are each investigating potential shortcomings in the firm’s wealth-management division’s vetting of potential clients and the origins of their wealth, limitations that investigators believe may have opened the door for dirty money originating from overseas sources to flow unimpeded into the U.S. financial system. These developments add to a growing list of recent issues facing the banking conglomerate, this after the firm agreed to pay nearly $250 million to the SEC to settle fraud charges amongst its block trading business in January alone. The Federal Reserve also launched a similar probe into misconduct within the company in November 2023, and in a separate action the Treasury’s Office of Foreign Assets Control (OFAC) sent an administrative subpoena to the firm requesting information on their sanctions policies and procedures late in 2023.¹

Morgan Stanley’s wealth management unit caters to high net-worth individuals and small to medium-sized businesses, providing them with brokerage, custody, investment advisory and financial planning services,² with its wealth management arm often producing relatively steady streams of income for its clients. However, given the firm’s prowess, many off its customers are located outside of the U.S., creating additional complications with respect to risk management during the onboarding process and beyond. Maintaining appropriate standards for customer due diligence at the international level can become taxing and costly for financial institutions, and has historically become an area of potential slip-ups for large firms who have viewed deficiencies in this regard (and the subsequent penalties to follow) as nothing more than the cost of doing business, specifically with respect to high-dollar customers. Also subject to the recent probes is how closely Morgan Stanley monitors the day-to-day financial activity of its clients, both domestic and foreign, which too are viewed as not up to par with current domestic AML standards.

Global RADAR will provide updates on further developments in these investigations in the weeks to come.

Citations

1. Andriotis, AnnaMaria. “Morgan Stanley’s Wealth Arm Probed by Multiple Federal …” Wall Street Journal, 11 Apr. 2024. 
2. “Morgan Stanley’s Wealth Arm under Probe by Multiple Regulators, WSJ Reports | Reuters.” Reuters, 11 Apr. 2024. 
3. Tokar, Dylan. “Justice Department to Flesh out Whistleblower Program …” Wall Street Journal, 16 Apr. 2024.