Concerning the Dodd-Frank Act and Financial Whistleblowing in the US (Part II)

In the U.S., there are a lot of passionate opponents to the idea of creating wide networks of financial informants. It's not just business representatives who fear that it will become more difficult for them to break the law.

Many doubt that the new system of snitching established by the Dodd-Frank Act will improve the functioning of the Securities and Exchange Commission. In the American press, there are numerous examples of cases in which "signals," which were reported to the Commission before the passage of the Dodd-Frank Act, did not lead to any decisive action to curb the abuses, but rather went unanswered. Thus, in the 2000s, the financier Harry Markopolos appealed several times to the Securities and Exchange Commission with warnings that Bernard Madoff's company was not conducting a real investment business and was "the world's largest Ponzi scheme," but his warnings went unheeded. As we know, the financial swindler Madoff ended up behind bars at the end of it all (sentenced to 150 years of incarceration). Over the course of many years, through his practically undisguised fraudulent activities in the financial market, he managed to lift a total of $13.2 billion from the pockets of 1,341 investors (the number of court cases filed by plaintiffs and the overall value of the claims). Markopolos called the Commission "a bunch of idiots" and recommended that he should go to work for them. In Feb. 2009, he said: "The Securities and Exchange Commission is also captive to the industry it regulates and is afraid of bringing big cases against the largest, most powerful firms."

Opponents assume that a wave of informant reports could overwhelm regulators, causing near-zero efficiency of work on that information. Ten companies, including Microsoft and Hewlett-Packard, sent a joint letter to the Securities and Exchange Commission asking to make it mandatory to first appeal to their internal control mechanisms in order to receive any reward. As they pointed out, in the opposite circumstance, the new rules not only undermine the effectiveness of corporate programs, but could lead companies to "tell the Securities and Exchange Commission about every case of securities law violations," without any consideration of their validity. As a result, the Securities and Exchange Commission will simply be inundated with information that it will not be able to develop and evaluate.

There is a large grain of truth in this appeal. It is sufficient to look at how Americans are fighting against terrorism today. The flow of information from ordinary citizens to such entities as the Department of Homeland Security, FBI, police and so on have snowballed in recent years. Despite the increase in government means and organizations working with citizen-reported information, specialists are in no position to get to the heart of incoming reports and separate the important ones from the unimportant ones, those which are credible and those which are just blatant misinformation. The number of terrorist acts for which there was timely information grows year after year. Society does not feel safer; the only winners are the officials of those government agencies and organizations who receive bigger and bigger budgets designated for working with informants' reports. At a glance, America demonstrated that in the agencies responsible for the war on terrorism and organized crime, the notorious Parkinson's Law is in full force. [Translator’s Note: Parkinson's Law states that "work expands so as to fill the time available for its completion."]

The Securities and Exchange Commission, judging from everything, will also soon be overloaded with a murky flow of information from thousands of anonymous and non-anonymous informants. Informants dreaming of quick riches, or at least annoying their bosses and possibly acting on behalf of the competition, create difficulties for the company.

Many U.S. analysts predict that with time, the Securities and Exchange Commission's experience with the use of informants could spread to other regulators of the U.S. financial markets. Most likely it would include the Federal Reserve, the Department of the Treasury (Office of the Comptroller of the Currency, Office of Financial Institutions), the Federal Deposit Insurance Corporation, the Commodity Futures Trade Commission and a few other organizations. There, the same thing could happen as with the Securities and Exchange Commission. Regulators in America (and in many other countries) are already overloaded today with various information flows. For example, every year there is a wave of information reports from banks and other financial and non-financial institutions which are required by government agencies responsible for countering the financing of terrorism and money laundering. In this data flow, finding the information that enables the government to prevent or stop criminal operations is as difficult as finding a needle in a haystack. For example, in a U.N. report on narcotics and organized crime, it was noted that government agencies of various countries manage to intercept 15 to 20 percent of the total amount of drugs trafficked. At the same time, it is estimated that they capture less than 5 percent of the drug money. This is a pretty vivid testament to the ineffectiveness of government forces in the prevention of the financing of terrorism, organized crime and even money laundering.

A whole series of American banks and companies, wishing to prevent the "leakage" of undesirable information up to the oversight and regulatory organizations, are trying to improve internal corporate systems of snitching. The substance of almost all of these improvements points toward raising material incentives for informants, so that their bonus policies are more generous (in comparison with government rewards).

Human resources specialists have correctly noted a disturbing tendency: Corporate employees think less and less of properly fulfilling their work obligations. They pay more and more attention to studying the various failings and violations in the company's activities, collecting and organizing this information and mulling over how to correctly "sell" it. There are three basic variants: handing it over to the company leadership, passing it "upward" to a watchdog organization and handing it over to competitors. In general, it turns into "the business of doing business," or "business in the workplace."

It is not necessary to point out that Dodd-Frank Act has provided yet another powerful impulse to for the development of snitching in America. Yet another step was taken to turn America into a country of continuous control, suspicion and snitching. Through the media, the American people are day and night bombarded with one idea: "You can only trust the government. To trust your fellow citizens is dangerous." It is the consistent application in life of the ancient principle of "divide and conquer." However, few in America today pay attention to this moral-psychological and socio-political side of the law. After all, as we have already said, snitching is an organic part of American culture.

Russian Companies and Officials in the Crosshairs of the Dodd-Frank Act

There are possible consequences for Russia. The provisions of the Dodd-Frank Act on paid snitching include not only Americans, but also foreign companies that are listed in U.S. markets. This includes Russian companies — for example, Mechel, Lukoil, Vimpelkom, MTS, Yandex and STS Media. It also includes companies that are registered in Russia and established subsidiaries in American companies and foreign companies with listings in the American markets. All these types of companies might be called "non-sovereign" businesses: By law, they are Russian, but they fall under the de facto authority of not only Russian, but also American law. The employees of such "non-sovereign" Russian companies might now hand over information on violations that they know about directly to the U.S. Securities and Exchange Commission. For example, it can be about bribes, tax evasion, money laundering, use of insider information, falsification of financial reports, cartel conspiracies and so forth. It is possible to do this right on the website www.sec.gov, filling out a special form and attaching documents in electronic form.

This law could also extend to Russian officials who offer bribes to American companies (and even foreign companies listed on the U.S. stock exchange). It also could affect subsidiaries over American and non-American companies registered and operating in Russia. Payment of bribes to foreign government employees is among the violations that informers working in American and non-American companies might report on, as it is a crime according to the American law on overseas corruption (the Foreign Corrupt Practices Act). There were already precedents of using the Foreign Corrupt Practices Act against Russian companies. At the end of Mar. 2010, the U.S. Justice Department accused the German automaker Daimler AG of corruption. The company was said to have violated U.S. laws in at least 22 countries from 1998 to 2008. The investigation was started in 2004 after a fired Daimler AG employee told American officials of secret accounts and the practice of bribery.

Russia turned up on one of the first lines of the list. There the German company has the subsidiary ZAO Mercedes-Benz Rus. By April of that same year in a Washington court, Mercedes-Benz Rus pled guilty, agreeing to pay over $27 million in the form of a fine for bribing Russian officials and their relatives. The bribes enabled our agencies to sell cars at inflated prices. (4)

It is understood that in such situations, the blow is carried out not only against companies operating in Russia, but the ricochets also reach Russian officials. There can be no doubt that Russian officials figuring in such stories would end up on "blacklists," which are legal today in the U.S. This summer, the U.S. Congress passed the so-called Magnitsky Law which provides for barring entry into the U.S. of corrupt Russian officials and their families, who are included on a special list. Additionally, their bank accounts and other property can be seized. One can expect a great synergetic effect from the interaction of the Dodd-Frank Act with the Magnitsky Law: U.S. authorities will have, in the personages of colleagues working in Russian and U.S. companies, voluntary informants who can report corrupt deals in which Russian officials are participating.

There is yet another unpleasant effect for "non-sovereign" Russian businesses. Russia just ratified a protocol to join the World Trade Organization (on July 10). Any violation of World Trade Organization rules by a "non-sovereign" company operating in Russia could quickly become known in Washington. For example, let’s say that our metallurgy giant Mechel receives government subsidies to support its position in the market and informers make this fact known to the American Securities and Exchange Commission. And what the Securities and Exchange Comission knows is immediately known to the World Trade Organization. And our metallurgy company has to pay a fine to two addressees: the U.S. Treasury and the World Trade Organization.

It is known that sometimes the war is won by the side that has the better intelligence. So America, through the passage of the Dodd-Frank Act, has established yet another network of intelligence agents throughout the world, including in Russia. The central residency of this network is the U.S. Securities and Exchange Commission.

The American Experience of Snitching and Russian Tradition

It is possible that some readers of this article will find that snitching (including financial snitching) has its pluses. Other Russian authors are simply fascinated with the American system of snitching and have proposed the study and use the U.S. experience on Russian soil — for example, to fight for raising taxes, as well as the struggle against corruption, embezzlement, terrorism, drug trafficking, money laundering and so on. At the same time, they actively recommend the cultivation of internal snitching as an important element of the new corporate culture. (5)

Personally, I prefer another position, which was spelled out by an author on LiveJournal: "What is really dangerous is this tendency for snitching in society. Earlier, in any healthy society, people tried not to report on what they saw and resolved problems independently. Everyone understood the inherent danger of a society of snitches, in which people snitch not from a concern for security, but sooner from thoughts of profit — social, financial and psychological most often of all. It’s because of an almost Pavlovian need to be rewarded for obeying the dominant trend, for obeying the “authorities.” With time, this establishes a controlled society, in which citizens willingly feel that they have the right to regulate the actions and ideas of others." (6)

We have, unfortunately, not outlived the fashion of "borrowing" the Western experience, not understanding that there is a different culture in Russia. In the area of establishing networks of informants, the attempts of our government agencies have been met with almost zero success. Here and there, there were attempts to establish funds for the material reward of informants as police "assistants." Comparatively recently, in 2009-2010, there was a trend for orders regulating the procedure of snitching. At that time, a large number of ministries and departments adopted rules for combating internal corruption. Within days, the leadership had to be informed of attempts to bribe all Russian militia (police), prosecutors, employees of the Ministry of Industry and Trade, tax and customs officials and employees of the Treasury. ... Then-Mayor of Moscow Yuri Luzhkov proposed establishing a special department where officials would have to report bribery attempts in writing. Analogous decisions were adopted by the leaders of a few other regions. To this day, there have been no signs of the effectiveness of these measures. Many say that the reason for this low effectiveness is the lack of any guarantee of safety for the informants. I cannot find any fault with that argument. But one must not discount the Russian person's inherent aversion to snitching.

At the beginning of this article, I already said that snitching in America is a sign of valor. Not only does the informant not experience moral torment, but quite the contrary, he begins to feel like a hero. Igor Simonenko, in his expatriate impressions of America, writes: "Not only are snitches folk heroes here. Take, for example, the Unabomber, a famous terrorist and psychotic. Over the course of several years he was elusive, until they offered a bounty of a few hundred thousand dollars. They caught him on the very first day. And who gave him up? His own brother. He became a hero. This American Pavlik Morozov was shown on national television and had interviews in all the current newspapers." (7) [Translator’s Note: Pavlik Morozov was a Soviet boy who, the famous story goes, turned in his own father to the secret police and then was killed by his own family, becoming a martyr to the Soviet Union. The story has little verifiable basis in fact.] I believe that even if something similar happened in Russia, our Russian snitch would hardly want to appear on television. Our society, much degraded in recent years, nevertheless would scarcely accept such a snitch as a "hero."

At the very end of his presidency, in March 2012, Dmitri Medvedev discussed the "eternal" question of the fight against corruption in his last blog entry. One of his correspondents proposed solving this problem by using the approved-in-America instrument of paid informants. His reaction to this proposal was the following note: "It is almost a Biblical theme — whether “snitching” for money is good or bad, and how one must “snitch” — loudly or quietly? You know, I don't have the answer to that question." Medvedev added that he, like any other person, had the idea that snitching for money "summons up, mainly, a feeling of disgust."

Maybe there are some pluses to snitching, I won't quibble with that. There has to be some particular mechanism to inform the authorities of serious threats to the government and to society. For example, without networks of agents, it is hard to imagine the effective work of intelligence, counter-intelligence, police departments fighting organized crime and organizations fighting drug trafficking, etc. But the information in such cases has to come mainly from a feeling of civic duty and patriotism. Material motivation can never dominate. Otherwise, like rust, it will begin to eat away the government mechanism for ensuring the public safety. We have had documented cases of police, in issuing "rewards" to informants, demanded "kickbacks" from them in the form of part of the reward. Thank God, such cases are rare.

In Old Rus, they used to say, "What is good for a Russian is death to a German" — and the other way around. But today, instead of "German," we should say, "American." Incidentally, I am not certain that paid snitching is even good for the Americans, especially in the long term. I have already said at the beginning of the article that snitching is as old as the world. I will allow myself to cite the historian Irina Sventsitskaya: "Snitching and snitches existed, apparently, throughout history, from the time when governments and sovereign authorities first arose. In Greece, where there were no public prosecutors, the snitch — he was called a sycophant — could bring a case in court for various charges if the misconduct was damaging to the city-state (for example, charges of contraband). If he won the case, he received a certain reward. Sycophants were professionals, and the profession could be handed down: In Aristophanes' “The Birds,” a snitch says that his great-grandfather, grandfather and father were also snitches. But this was not a respectable profession. In “The Birds,” the hero also advises the snitch to take up honest work (Author's Note:italics mine -V.K.)." (8)

Judging from everything, today many modern Americans feel that their vocation is that of a sycophant. But America, having cultivated snitching and snitches, has let the genie out of the bottle. Irina Sventsitskaya, analyzing the policies of Roman emperors in promoting sycophants and egging them on to make false reports, came to a conclusion: In the Roman Empire, there was an atmosphere of general distrust, endless intrigue, conspiracies and deals. The aristocracy began to actively destroy each other, and the common people followed suit. All of this hastened the crisis and fall of the Roman Empire. Snitching destroyed the Pax Romana. It might yet destroy the Pax Americana.

(4) P. Spelova. A Lot of Money into Bribes. // Vzgliad. 28.04.2010.
(5) See, for example: V. Badakirev. Snitching or Informing? // PR-Dialogue, No. 3, 2004; D.I. Cherkaev. Snitching and Informing: Bad or Good for Russian Companies? // Stock Society No. 3 (22), 2006.
(6) http://magnison.livejournal.com/13051.html
(7) Constantin Simonenko. Good-For-Nothing Notes on the U.S. // Internet, 2005. [Translator’s Note: The title is a play on words and is written to suggest "Un-Travel Notes on the U.S."]
(8) I. Sventsitskaya. The Snitch and the Philosopher. (Roman Empire volumes I-II). // Incident. Individual and Unique in History. Fifth Edition. OGI, 2003, p. 77.