On Sunday, June 27th, the G-20 Toronto meeting of heads of government issued a declaration in which anti-corruption initiatives figured strongly. The leaders recognized that corruption, particularly in the financial services sector, had played a significant role in bringing on the economic crisis of 2008/2009.
In addressing the relationship between strong anti-corruption measures and the health of the international financial system, the G-20 placed an emphasis on the importance of whistleblowers and set out the intention to cooperate in international efforts to protect those who stand up against corruption.
The declaration made specific reference to the UN Convention Against Corruption, which calls upon signatories to take active steps to shield witnesses from retaliation when they disclose corruption and fraud. Article 32 is explicit in assigning to member countries of the United Nations an obligation to provide for the physical safety of whistleblowers and victim/witnesses, as well as for their protection from “unjustified treatment,” i.e. reprisal.
Article 32. Protection of witnesses, experts and victims
1. Each State Party shall take appropriate measures in accordance with its domestic legal system and within its means to provide effective protection from potential retaliation or intimidation for witnesses and experts who give testimony concerning offences established in accordance with this Convention and, as appropriate, for their relatives and other persons close to them.
Article 33. Protection of reporting persons
Each State Party shall consider incorporating into its domestic legal system appropriate measures to provide protection against any unjustified treatment for any person who reports in good faith and on reasonable grounds to the competent authorities any facts concerning offences established in accordance with this Convention.
In the run up to the Toronto G-20, the US Congress agreed on a financial regulatory reform that also includes strong whistleblower protection at the US Securities Exchange Commission (SEC). The new legislation is designed to “encourage” whistleblowers because it:
Creates a program within the SEC to encourage people to report securities violations, creating rewards of up to 30% of funds recovered for information provided.
As we examine more closely the circumstances in the US financial services sector and its offshore franchises that preceded the meltdown of banks, investment firms and credit markets in 2008, we can see how important an early warning system could have been. In the banking and insurance sectors it is clear that as early as 2005, many experts realized that the coming collapse was only a matter of time – a question of “when” and not “if.” As the world’s political leaders assess global efforts to recover from the economic crisis, it is encouraging to note that the US financial reform package and the G-20 Declaration of the heads of government are recognizing the centrality of whistleblowers to maintaining stability in the financial system. Cooperation, not just among governments, but also among governments and international financial institutions, is essential to strengthening the recovery and ensuring that crises like the most recent one cannot recur.
Bea Edwards is the International Reform Director for the Government Accountability Project, the nation's leading whistleblower advocacy organization.
For the past two months, GAP has criticized the nomination of James Cole to be Deputy Attorney General at the Justice Department (DOJ). We have argued that because Cole, who served as Independent Consultant at AIG during the critical time period from 2005 through 2009, missed clear signals of malfeasance, he is unsuited to serve as the second-in-command at the DOJ.
Last week, after four senators requested Cole’s reports to DOJ about AIG, prior to deciding on his nomination, a DOJ spokeswoman defended Cole’s role at AIG, telling Main Justice that
Critics who suggest that Mr. Cole was somehow too close to AIG misunderstand his relationship with the company,” …. “His presence was imposed on the company by a federal court. In fact, as the [Congressional Research Service] report notes, AIG executives tried to have him removed.
“[Cole] was never a general overseer or monitor of AIG’s entire operation nor was he assigned to examine many of the issues involving AIG’s near collapse, such as credit-default swaps or retention bonuses…”
This statement did more to obscure Cole’s role at AIG than to clarify it. First, although it’s true that in late 2008, Chief Compliance Officer Suzanne Folsom mounted an effort to remove Cole, it was not because he was insisting on a tough compliance regime. Folsom wanted him out because he was pocketing too much AIG money. His costs, as Independent Consultant, included not just the $20 million paid to his law firm, but tens of millions more for the consultants, who, we understand, were both expensive and incompetent.
A substantial part of the consulting fees apparently went to DLA Piper, the law firm where Anastasia Kelly, AIG General Counsel, parked herself in 2010, after fleeing AIG in order to avoid pay caps imposed by the TARP regulations.
Second, although it’s also true that Cole was not a general overseer of AIG, he failed to object when Folsom dismissed half the team that was working on compliance and oversight just after AIG had to be rescued by taxpayers in 2008. Many of these people had written to the board and to the CEO to expose AIG’s weak compliance program before the meltdown. When Cole did finally interview them, he acceded to Folsom’s demand that she or her designee be present to observe the conversations. This collaboration is simply inconsistent with the responsibility of an independent monitor.
Fourth, Cole was assigned under the 2004 deferred prosecution agreement to review five years of transactions effected by the problem division, AIG-FP. This assignment would specifically have included credit default swaps as well as other fraudulent maneuvers designed to conceal liabilities.
Finally, no one has suggested that the retention bonuses paid in 2009 were involved in AIG’s near collapse. The bonuses were paid after the collapse, and critics questioned the propriety of paying bonuses to those responsible for the crisis. More cynical critics have instead suggested that the putative ‘retention bonuses’ were, in fact, hush money, since a number of people who received them have left the firm. Critics are also wondering if the second round of retention bonuses was paid in 2010.
The Senate Judiciary Committee held James Cole’s confirmation hearing yesterday morning for the post of Deputy Attorney General. It was not exactly an aggressive interrogation. Democratic members of the committee sought Cole’s commitment to continuing the reforms at the heretofore highly politicized Justice Department (DOJ), and Republican committee members wanted assurances that Cole, as the new Deputy Attorney General, would not guarantee Miranda rights to suspected terrorists. There were three or four allusions to Cole's role as an independent monitor at AIG in the years leading up to the financial crisis that brought the company down and wrecked the US economy, but no specific questions were forthcoming. Not from anyone.
In fact, the entire proceeding had the feel of a pro forma procedure along the way to confirming James Cole to be the second-in-command at DOJ. There were various ironic moments, however. For one thing, a number of senators sought assurances from Cole that he would hold BP accountable for the damage now being sustained by states along the Gulf coast as a result of the ongoing oil spill. For his part, Cole guaranteed that, if confirmed, he would make every effort to extract compensation from BP for those whose livelihoods were endangered by the thickening and widening slick of scum.
Asking Cole about corporate accountability in the BP case is like asking “Brownie” how he would handle another hurricane in New Orleans. It’s beside the point. Cole has a five-year record of responsibility for corporate oversight and compliance at AIG, where he failed to hold either individual managers or the corporation itself accountable for the catastrophe they visited upon US credit markets. In throw-away comments at yesterday’s hearing, Cole assured the committee that as Deputy Attorney General he would dedicate himself to combating mortgage fraud and financial fraud. When he made this statement, neither he nor his questioner (Senator Ted Kauffman, D-De.) made any reference to his recent past at AIG, where the Financial Products Corporation encumbered the corporate balance sheet with tens of billions of dollars in worthless real estate bonds as Cole looked the other way.
Inside Sources Prompt Questions about James Cole’s Record at AIG as Independent Monitor
The Government Accountability Project (GAP), which has been critical of the nomination of James Cole since he was rumored to be on the short-list for Deputy Attorney General, has posted mock questions for members of the Senate Judiciary Committee to pose to Cole at his confirmation hearing later today.
Cole was nominated by the Obama administration last month to be second-in command at the Department of Justice. For years, Cole has served as the Independent Consultant (IC) stationed at insurance behemoth AIG as a result of two deferred prosecution agreements (DPAs) between the corporation, the SEC, and the Department of Justice in 2004 and 2006. The DPAs were put in place as part of a settlement when AIG previously faced massive fraud charges.
“The administration is trying to deflect attention from Cole’s poor record of oversight at AIG in the years leading up to the financial crisis by claiming he was not asked to monitor the troubled subsidiary,” said Bea Edwards, GAP’s International Program Director. But in fact, it was Cole’s own decision that exempted that subsidiary from his scrutiny.”
When rumors of Cole’s potential nomination began to emerge in April, GAP began receiving frequent and disturbing calls from AIG alumni and current staff about serious problems with Cole’s actions during his tenure. Since then, Edwards has been steadily posting blog entries about Cole based on the disclosures we have received.
In advance of this hearing, Edwards has produced a primer on Cole’s role at AIG, followed by five questions GAP believes should be asked at the hearing.
Summary: An former worker at the West Virginia mine that exploded and killed 29 people in April has filed a whistleblower complaint, saying he was fired after telling his supervisors and the media about safety issues at the mine and another owned by Massey Energy. A preliminary investigation said that "there is reasonable cause to believe that [the whistleblower's] dismissal was motivated by his exercise of protected activities."
Summary: Two crewmembers from Japanese "research whaling" ships have come forward after witnessing the theft of whale meat by colleagues for personal consumption or sale, despite the fact that the meat is supposed to only be used for scientific purposes. While Japan argues "research whaling" is allowed under an international moratorium on whaling, the Australian government has filed a formal application with the International Court of Justice to stop any whaling in Antarctic waters.
Summary: Daniel Ellsberg, the Pentagon Papers whistleblower and closing speaker at GAP's recent Whistleblower National Assembly, is endorsing a candidate for Congress who was a legal researcher for him during the Pentagon Papers trial. The columnist explains what how meaningful an endorsement it is, coming from the patriarch of modern whistleblowing.
Reilly quoted Cole's defenders’ claim that “his work did not specifically include the major issue that nearly led to the company’s demise – namely credit default swaps.”
This explanation for Cole’s myopia and his astonishing ability to miss the unmanageable risk that brought on the meltdown at AIG is superficial and disingenuous. The key word is “specifically.” According to our sources, the problem was not simply credit default swaps (CDSs), but rather the way in which AIG-Financial Products (AIG-FP), the division that primarily generated and traded them, was exempted from compliance obligations and oversight. On May 26, 2010, Elizabeth Warren, Chairwoman of the Congressional Oversight Panel on TARP, said in her opening statement chairing the hearing:
“The company [AIG] was a corporate Frankenstein, a conglomeration of banking and insurance and investment interests that defied regulatory oversight."
In contrast to Warren’s opinion, Cole did not seem to perceive structural problems with regulatory oversight and legal compliance at AIG. On the contrary, when writing about AIG compliance in August 2008, he reported to DOJ and the SEC,
“Each compliance plan will be submitted to the OC (Office of Compliance) for review and approval to ensure that the plan has adequately provided controls for addressing all identified compliance risks.”
This, according to Cole, was a reasonable and achievable goal. Next to this text in his table of goals, Cole placed a green dot, meaning progress toward the goal was advancing without problems.
The BP oil rig disaster is quickly becoming one of the worst environmental catastrophes of our time. The parties involved are pointing fingers...but did someone have foresight into this type of event happening? On the latest episode of the Government Accountability Project’s Whistle Where You Work series, we look at how a whistleblower from a different BP oil rig has been trying to expose critical safety lapses for years – but his efforts seem to have fallen on deaf ears. The group representing the whistleblower filed a lawsuit in May against the federal government, attempting to force it to shut down this other rig. They say this rig could turn into an even worse disaster than the first.
What are the similarities between the problems of this rig, and the problems with the one that exploded? Why wasn't more oversight performed? Could this event have been avoided? What is the track record of the agencies in charge?
For our second segment, we revisit the first day of the National Whistleblower Assembly on May 24, 2010, where legendary NYPD whistleblower Frank Serpico, whose story is memorialized by the classic film that shares his name, gave the opening remarks.
Dylan Blaylock is Communications Director at the Government Accountability Project, the nation's leading whistleblower advocacy organization.