The Fat Leonard scandal first broke almost ten years ago, but it’s still revealing corruption within the U.S. Navy. Whatever the tone at the top may have been, clearly the “mood in the middle” reflected, at best, hypocrisy within the military’s avowed culture of honor, loyalty and sacrifice.
Perhaps better aligned incentives could have prevented or at least foreshortened this scandal. Trends in the corporate world, spurred by recent financial services industry legislation, suggest that instituting whistleblower reward programs can be an effective means by which to incentivize employees to report compliance breaches and ultimately to trigger organizational reforms.
In the context of financial fraud, the Bipartisan Budget Act of 2018 added two benefits to the regulatory framework: eliminating double-taxation for securities fraud whistleblowers (Sec. 41107), and clarifying that tax fraud whistleblower rewards may include proceeds from civil recoveries (Sec. 41108).
Matt Reeder also has explored questions relating specifically to the SEC whistleblower program elsewhere.
Last month, the Society of Corporate Compliance and Ethics published our article which asked: Why can’t the Department of Defense (DoD) follow this trend and institute its own whistleblower reward program?
In addition to discussing the successes other organizations’ robust whistleblower programs, our piece considers the shift towards universal compliance standards, such as the ISO 37001, and proposes that the DoD could leverage these trends under the existing limits imposed by the Federal Acquisition Regulations. An easy method for accomplishing this might be to consider ISO certification in assessing contractors’ qualifications and selecting from among bids.
At the heart of these two programs — whistleblowing and internal compliance — is the functional imperative for early and effective detection of non-compliance. Adhering to global standards improves detection by enabling internal and external oversight and review, and by establishing agreed-upon criteria for gauging the rigor of compliance efforts.
Whistleblower programs enable detection in at least two key ways. First, whistleblower programs reduce barriers to reporting by offering a neutral venue. Second, they encourage reports by rewarding individual whistleblowers with a portion of the financial benefit realized by the parent entity.
Recognizing that instituting a whistleblower program would add overhead, we suggest that the Inspectors General of the various military departments — which already field whistleblower complaints — could administer the program with Congressional authorization to reward qualifying whistleblowers in amounts sufficient to incentivize participation without wasting taxpayer money or serving as golden parachutes out of an institution where upholding high standards of fiscal stewardship should already be the norm.
The positively correlated data and continued Congressional support suggest that government whistleblower reward programs are here to stay. Consequently, they are worthy of consideration by all departments and agencies looking to strengthen compliance. The DoD would do well to consider such a program, and in so doing to examine other corporate best practices like hewing closely to an internationally recognized anti-bribery standard. The increased prevention and detection that would result is likely to be considerable.
Rob Boudreau, pictured above left, is a prosecutor with the U.S. Department of Justice Tax Division in Washington DC. All views expressed herein are his alone and may not be contributed to the U.S. government or any of its components. He can be contacted here.
Matt Reeder, above right, currently is a civil litigator in the Department of the Navy. He recently completed an LL.M. in anti-corruption and business law at American University Washington College of Law and will be transitioning to private practice in Washington, DC this fall. All the views expressed in this post are his alone and do not reflect the views of the U.S. government or any of its components. You can find Matt here and contact him here.