Congress could not have been any clearer in its statutory design. Nor the SEC any more outspoken in its revitalized approach to government enforcement. Whistleblower rewards work. Even more, they are an indispensable component of the modern regulatory scheme.
This is borne out in the unmistakable success of the Dodd-Frank and False Claims Act (FCA) whistleblower programs to which financial incentives are inextricably linked.
Yet a recent post on the FCPA Blog questioned whether whistleblower reward programs are really a good idea.
Even some of America’s more enlightened allies are having trouble appreciating the critical role of the whistleblower bounty. What the naysayers seem to have in common is a basic misapprehension of how well whistleblower rewards have worked. Not to mention the hurdles whistleblowers face and sacrifices they make in standing up to fraud and misconduct.
The False Claims Act was enacted in 1863 by President Abraham Lincoln to combat fraud by unscrupulous government contractors during the Civil War. But it was only after the 1986 amendments — which significantly increased financial incentives — that the statute began to show real results. Since then, the government has recovered tens of billions of dollars, with roughly three-quarters of the recoveries coming from FCA cases spawned by whistleblowers.
A similar whistleblower-driven success story is quickly emerging under the SEC’s still nascent Dodd-Frank whistleblower program.
Congress mandated whistleblower rewards, clearly recognizing the SEC’s previously existing whistleblower program — which lacked any financial incentives — did not work. Now the whistleblower tips are flooding in from all over the world, with the past year’s record numbers approaching the 4,000 mark. It is hard to dispute this ever-increasing whistleblower contribution has breathed new life into an agency that before Dodd-Frank was viewed by many as asleep at the switch.
The SEC has been very clear in its messaging that whistleblower rewards have been a vital part of its regulatory recharge. In the agency’s recent report to Congress, SEC whistleblower chief Sean McKessy highlighted the increasing number and size of whistleblower rewards as a strong marker of the whistleblower program’s clear success. And with every award the agency has made (22 and counting, worth more than $54 million), the SEC has heavily promoted them to encourage future whistleblowers to step forward.
But it’s not just this strong empirical evidence from the FCA and Dodd-Frank programs that demonstrate how well whistleblower rewards work. There is also a strong policy rationale for their use.
They compensate whistleblowers for what will almost certainly be a tiresome and unpleasant ordeal with a real risk of retaliation, alienation, blacklisting, and in some cases, even physical harm. And they are necessary for whistleblowers to find qualified counsel to represent them through what is typically a long and complicated legal process. This is important not only for the whistleblower but also for weeding out those matters not worthy of the government’s (or court’s) time.
As for the most commonly raised arguments against financial incentives. None of them hold up. There is no evidence rewards have led to frivolous filings or a waste of government resources. To the contrary, the SEC has trumpeted the regulatory boost it has received from whistleblower rewards.
There likewise is no credence to the claim that rewards compromise corporate compliance programs. Study after study show that the vast majority of whistleblowers still report to the government only after they first try to work within their company to expose and remedy the fraud or misconduct.
And then there are those amorphous concepts of ethics, society, credibility, psychology, greed and the like that some use to decry awards. While they may have some relevance to the debate, these nebulous notions cannot trump the real world results of whistleblower awards in FCA and Dodd-Frank enforcement.
Perhaps it all just comes down to a fundamental cultural divide on what it really means and what it really takes to be a whistleblower. But based on the U.S. experience with financial incentives, and the clear policy reasons for their use, this should not even be a close call.