Whistleblower reward laws work, and they work remarkably well. Congress, the executive branch of government, and the business community should enact, support, and nurture strong whistleblower reward programs.

Since 1986, Congress has increasingly relied on whistleblower reward laws to incentivize and protect employees who risk their careers to disclose violations of law.((In 1986, the False Claims Act was amended to permit whistleblowers to recover monetary rewards for disclosing fraud in government procurement or contracting. The Internal Revenue Act was amended in 2006 to permit rewards for whistleblowers who disclosed tax fraud or the underpayment of taxes. In 2010, reward laws were added to the Commodity Exchange Act and the Securities Exchange Act. The most recent law reward law passed by Congress was in 2015, covering auto safety. An older rewards law, part of the Act to Prevent Pollution on Ships, has been increasingly used by the Department of Justice over the past 20 years to combat pollution on the high seas. In 2016, the Agency for International Development, in partnership with National Geographic, the Smithsonian Institution, and TRAFFIC awarded a whistleblower advocacy group a “Grand Prize” to publicize the availability of rewards for persons who disclose illegal wildlife trafficking.)) The essential question is simple, do these law work? If so, how should corporations, policy makers and Congress respond?

In 2008, the University of Chicago Booth School of Business published Who Blows the Whistle on Corporate Fraud?” by Alexander Dyck, Adair Morse, and Luigi Zingales, intended to “identify the most effective mechanisms for detecting corporate fraud.” The study included an “in depth” review of “all reported fraud cases in large U.S. companies between 1996 and 2004.” The study was not designed to bolster a positive view of whistleblowing, but instead to scientifically determine the best methods for effective fraud detection. The article’s conclusion was honest and simple: “Having access to information or monetary rewards has a significant impact on the probability a stakeholder becomes a whistleblower.”

Dyck et al. studied a large sample of fraud cases to determine which groups of potential reporters were the most effective in disclosing financial crimes and sought to understand their motivations.  After reviewing fraud cases filed under the False Claims Act (“FCA”) in the healthcare industry, the authors found that retaliation against whistleblowers was rampant, but that a rewards program could overcome the negative impact of retaliation and induce high-quality informants to come forward. Among their major findings were:

  • “Employees clearly have the best access to information. Few, if any, fraud can be committed without the knowledge and often the support of several of them.” 

  • “[I]n 82 percent of cases, the whistleblower was fired, quit under duress, or had significantly altered responsibilities. In addition, many employee whistleblowers report having to move to another industry and often to another town to escape personal harassment…Given these costs, however, the surprising part is not that most employees do not talk; it is that some talk at all.”

  • “Monetary incentives seem to work well, without the negative side effects often attributed to them.”  

Based on their findings, Dyck et al. recommended expanding the rewards program to the financial sector, permitting Wall Street employees who exposed securities fraud to qualify for rewards, like those available to government contractors under the False Claims Act. They concluded as follows: 

A natural implication of our findings is that the use of monetary rewards providing positive incentives for whistle blowing is the possibility of expanding the role for monetary incentives. As the evidence in the healthcare industry shows, such a system appears to be able to be fashioned in a way that does not lead to an excessive amount of frivolous suits. The idea of extending the qui tam((The term “qui tam” refers to the provision within the False Claims Act that permits employees to obtain a financial reward if their original information results in a successful enforcement action. The reward is paid directly from the monies obtained from the wrongdoer, at no expense to the taxpayers.)) statute to corporate frauds (i.e. providing a financial award to those who bring forward information about a corporate fraud) is very much in the Hayekian spirit of sharpening the incentives of those who are endowed with information.

A Rewards Program for Corporate Whistleblowers

In major corporations fraud is designed to be well-hidden. Unlike murder or robbery, the victims of well-executed securities fraud often never know they were victimized. As Dyck et al. demonstrated, without the whistleblower-insider it was very difficult to uncover these frauds. However, they also determined that under current laws there was no positive incentive to blow the whistle, and exposing a fraud could have catastrophic impact on an employee’s reputation and career. Based on their study of the False Claims Act’s whistleblower reward program, it was clear that financial incentives could break the corporate code of silence.

Shortly after publication of the 2008 study, the U.S. economy tanked—in large part due to securities fraud and the failure of regulators to detect corrupt investment and lending practices. As Congress and the U.S. Securities and Exchange Commission (SEC) searched for solutions to the never-ending Wall Street scandals, the findings published in “Who Blows the Whistle on Corporate Fraud” set the stage for a new whistleblower rewards program addressing securities frauds.

On July 21, 2010, the Dodd-Frank Act was signed into law. The law included a whistleblower reward program modeled on the False Claims Act program. Under Dodd-Frank, individuals who provided “original information” about securities frauds to the SEC would be entitled to 10-30 percent of criminal sanctions obtained by the U.S. government if the enforcement action was based on original information provided by the whistleblower. 

In its seven-year existence, has the Dodd-Frank whistleblower rewards program validated the predictions made by Dyck et al.?

Dodd-Frank’s Remarkable Impact

In June of 2011, the SEC approved rules governing the Dodd-Frank whistleblower program. The Commission agreed that corporate insiders could be the key to a strong fraud detection program, and explained that its rules were predicated on the “basic law enforcement principle” that it is “difficult for law enforcement authorities to detect and prosecute” “sophisticated securities fraud schemes” “without insider information and assistance from participants in the scheme or their coconspirators.” The Commission further explained that “insiders regularly provide law enforcement authorities with early and invaluable assistance in identifying the scope, participants, victims, and ill-gotten gains from these fraudulent schemes.”((76 Federal Register 34,356 n. 436 (June 13, 2011), available here.))

The Commission directly cited to the Dyck et al. study when discussing its cost-benefit analysis of the whistleblower rules.

Since then, almost $1 billion has been recovered by investors and the U.S. Treasury directly tied to original information provided to the SEC under the Dodd-Frank Act’s whistleblower program. While impressive, this reported amount of collections radically underestimates the success of the program. For example, the majority of the thousands of cases reported to the Commission are still under investigation. Of the hundreds of cases successfully prosecuted, and for which sanctions have been obtained, the reward amount is still under review. Thus, the $1 billion in sanctions directly derived from whistleblower disclosures is, without exaggeration, the tip of the iceberg as to the ultimate impact the rewards law will have on successful recoveries.

As of January 2017, the Commission has paid over $100 million in rewards. An impressive start for the young program.

The Commission staff responsible for managing the whistleblower program has enthusiastically described the program’s impact. For example, on April 30, 2015,((SEC Chair Mary Jo White provided these remarks at the Ray Garrett, Jr. Corporate and Securities Law Institute-Northwestern University School of Law Chicago, Illinois on April 30, 2015.)) the former SEC Chair Mary Jo White declared:

“[T]he SEC’s whistleblower awards program…has proven to be a game changer.

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It has been nearly four years since the SEC implemented its whistleblower program…I am here to say that the program is a success.

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As the program has grown, not only have we received more tips, but we also continue to receive higher quality tips that are of tremendous help to the Commission in stopping ongoing and imminent fraud, and lead to significant enforcement actions on a much faster timetable than we would be able to achieve without the information and assistance from the whistleblower. The program has also created a powerful incentive for companies to self-report wrongdoing to the SEC–companies now know that if they do not, we may hear about the conduct from someone else.

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The bottom line is that is that responsible companies with strong compliance cultures and programs should not fear bona fide whistleblowers, but embrace them as a constructive part of the process to expose the wrongdoing that can harm a company and its reputation. Gone are the days when corporate wrongdoing can be pushed into the dark corners of an organization.”((Chair Mary Jo White, “The SEC as the Whistleblower’s Advocate,” Ray Garrett, Jr. Corporate and Securities Law Institute-Northwestern University School of Law Chicago, Illinois (April 30, 2015), available here.))

Chair White is not alone in her praise. The former SEC Director of Enforcement described the program as “transformative” in its “impact” “both in terms of the detection of illegal conduct and in moving our investigations forward quicker and through the use of fewer resources.”((Andrew Ceresney, Director, Division of EnforcementThe SEC’s Whistleblower Program: The Successful Early Years,” (Sept. 14, 2016).))

The findings and recommendations of Dyck et al. about the power of incentivizing reporting with monetary rewards have been substantiated. A robust and effective whistleblower rewards program will play a central role in any anti-corruption program.

It is now time to expand the use of whistleblower reward programs to other areas of the economy, both domestically and internationally, to strengthen enforcement and protect both the public fisc, public health, and safety and the environment.

Based on the success of the False Claims Act and SEC programs, whistleblower reward laws should follow the best practices of these two laws, and include the following features:

  • A qui tam provision that permits whistleblowers to directly sue wrongdoers if the government fails to act. Although the number of these lawsuits is very small, the ability of a whistleblower to hold the government accountable for failing to prosecute frauds is a very important tool. The False Claims Act contains several important checks on the potential abuse of this provision, which prevents frivolous suits.
  • The ability to file claims confidentially or anonymously. This feature of Dodd Frank has radically enhanced the quality of information, and the ability of high-placed executives, who otherwise would never risk their corporate positions, to become whistleblowers.
  • A minimum reward of at least 10-15 percent, with no upper cap in the amount of a reward. Although the average reward is in the $1.5 million range, the ability to obtain a large reward acts as the primary incentive for well-placed whistleblowers to risk their careers to come forward.
  • Judicial review of reward determinations. Whistleblowers need to know that if they follow the disclosure rules, and meet the qualifications to obtain a reward, they will be paid in a timely fashion. If the government denies a reward, or delays payment, whistleblowers need the opportunity to have these denials reviewed in court.

Former SEC Chair White understood the cultural resistance to whistleblowing within the business community. She noted that “there have always been mixed feelings about whistleblowers” and that “many companies tolerate, at best, their existence because the law requires it.” But after personally witnessing the positive impact whistleblowers have on fraud detection she urged companies to “stop wringing” their “hands about whistleblowers,” because whistleblowers “provide an invaluable public service, and they should be supported.” Chair White concluded, “we at the SEC increasingly see ourselves as the whistleblower’s advocate.” Others should follow the SEC’s example. 

Whistleblower reward laws work, and they work remarkably well. Wherever they have been properly implemented they have become the cornerstone of an effective anti-fraud program. Congress, the executive branch of government, and the business community should heed Chair White’s advice and enact, support, and nurture strong whistleblower reward programs.

(Note: Stephen M. Kohn is a founding director of the National Whistleblower Center. He served as the Director of Corporate Litigation for the Government Accountability Project from 1984-88 and is currently a partner in the law firm of Kohn, Kohn & Colapinto and an Adjunct Professor at the Northeastern University School of Law where he teaches a seminar on whistleblower law. In 1985, he published the first-ever book on whistleblower law, and his eighth book on the subject is the highly respected The New Whistleblower’s Handbook (Lyons Press, 2017).)