The Importance of Rewards

Whistleblower reward laws are the key to successfully combating fraud and corruption

Whistleblowers are the single most effective source of information in detecting financial fraud. According to a 2007 study by PricewaterhouseCoopers focused on economic crime: “While professional auditors were only able to detect 19% of the frauds on private corporations, whistleblowers exposed 43%.  Executives surveyed estimated that the whistleblowers saved their shareholders billions of dollars.”

However, the biggest barrier to whistleblowing is the long history of retaliation. For company insiders, the risk of losing one’s livelihood as a result of disclosing wrongdoing by top executives is substantial. Encouraging them to step forward requires a financial safety net.

The presence of reward laws sends a message to potential whistleblowers that their information is valued and can mitigate the risks of retaliation. They create a safe, effective, and highly successful method for employees to disclose fraud to the appropriate authorities.  Data shows that incentivizing whistleblowers is extremely effective in generating high quality tips that result in successful prosecutions.

In recent decades, the U.S. Congress has recognized the importance of whistleblowers and the risks they face, and it has passed a series of reward laws designed to protect and encourage insiders to report misconduct. Currently, more than half the U.S. states have also enacted whistleblower reward laws.

These reward laws are the key to a strong fraud detection program. Many law enforcement officials have stated that whistleblowers are critical to their work, and that rewards are an important part of any whistleblower incentives strategy. In 2015, the Securities and Exchange Commission (SEC) Chair Mary Jo White called their whistleblower awards program “a game changer”, commenting whistleblowers “provide an invaluable public service, and they should be supported.” She also stated that “whistleblowers increase our efficiency and conserve our scarce resources.”

A variety of laws provide financial incentives for whistleblowers to report evidence of wrongdoing, with the amount of rewards tied to how much the whistleblower contributed to the success of prosecutions. Critically, these laws also do not impose any costs on taxpayers. Rewards are paid from the monetary sanctions recovered from wrongdoers – sanctions that would not be recovered without the information supplied by the whistleblower.

Examples of these laws include:

  • The False Claims Act, which requires payment to whistleblowers of between 15 and 30 percent of the government’s monetary sanctions collected if they assist with prosecution of fraud in connection with government contracting and other government programs. Senator Chuck Grassley (R-IA), Chairman of the Senate Whistleblower Caucus and staunch whistleblower advocate, said in his 2016 testimony regarding oversight of the False Claims Act that, “The False Claims Act is, hands down, the most effective tool the government has to fight fraud against the taxpayers.” The False Claims Act is the most successful piece of anti-fraud legislation in history with 72% of fraud recoveries stemming from whistleblower disclosures.
  • The Dodd-Frank Act, which requires payment to whistleblowers of between 10 percent and 30 percent of monetary sanctions collected if they assist with prosecution of securities and commodities fraud.
  • The IRS whistleblower law, which requires payment to whistleblowers of 15 to 30 percent of monetary sanctions collected if they assist with prosecution of tax fraud.

Since 2011, law enforcement agencies implementing these programs have collected a staggering $30.6 billion for the benefit of taxpayers and investors and paid $4 billion in rewards to whistleblowers.

These reward laws are not just limited to economic crimes in the U.S. – many have transnational reach. Strong and effective whistleblower reward laws are now applicable to most of the worldwide publicly traded economy. Thousands of non-U.S. citizens, from over 120 countries, are now actively using U.S. laws to report serious economic crimes and corruption throughout the world and are eligible to receive rewards.

However, some proponents of big business allege that these reward laws lead to an increased number of false reports. There is no evidence to support the idea that offering rewards will cause individuals to step forward with false reports of wrongdoing – in fact, a study from the Booth School of Economics found the opposite. Rewards are only paid if a prosecutor vets the information, finds it to be credible, uses it to win a prosecution, and a court decides that it is important to the successful outcome of the case.

Why Rewards Work

Rewards laws are one of the government’s most important tools to uncover and prosecute fraud. These programs are effective for two reasons: (1) they promote positive behavior by employees who witness wrongdoing, and (2) they create a deterrent effect within the market through large award payments.

Promoting Positive Behavior

Rewards laws incentivize employee to come forward with original information on waste, fraud, and abuse by addressing both the short-term and long-term problems caused by the realistic fear about blowing the whistle.

Importantly, these rewards laws establish safe and protected channels for employee to report their allegations to law enforcement confidentially. These laws also permit employees who disclose allegations to the government to obtain protection from retaliation as government witnesses under criminal obstruction of justice laws, along with traditional employment discrimination laws.

By compensating whistleblowers for their contribution to successful prosecutions, these laws also help alleviate the risk to their career and financial stability. According to a study from Bradley University’s Dr. Tanya Marcum and Dr. Jacob Young, 69% of whistleblowers reported losing their jobs or being forced to retire, and 64% reported being blacklisted form getting another job in their field. By recognizing these risks and providing a solution, reward laws can incentivize employees to still come forward.

Deterrent Effect

Whistleblower rewards laws also have a powerful deterrent effect on economic crimes. As University of California-Davis professor Dr. Dennis J. Ventry has written, effective whistleblower programs make noncompliance by companies significantly riskier since they increase the probability of detection and the likelihood of penalties, which are the two most important variables in deterrence models.

Objective academic studies have verified this conclusion. For example, Jetson Leder-Luis’ careful study, “Whistleblowers, The False Claims Act, and the Behavior of Healthcare Providers” (2019), documented that the deterrent value of whistleblower cases is over six-times as great as the immediate enforcement value.

This line of thought has been a driving force behind the development of U.S. reward laws. In 2008, Congress reviewed the impact of the 1986 False Claims Act. Department of Justice officials with direct knowledge of the law’s progress over time testified on the positive impact of the whistleblower reward provisions had on deterring economic frauds. The theory expressed in the 1986 Senate Report, that strengthening the FCA would help deter crime, not just punish it, was clearly vindicated.

The larger the reward, the greater the deterrent effect. The higher the reward, the more likely it is that wrongdoers would perceive that other employees, or their co-conspirators, would be motivated to report an economic crime.

Real life case studies like that of UBS whistleblower Bradley Birkenfeld bear this conclusion out. In 2012, Birkenfeld received a historically large public award for his disclosures documenting illegal offshore banking in the Swiss bank UBS. After this award was announced, other Swiss bankers came forward to blow the whistle on their banks. By 2014, nearly every Swiss bank had executed a settlement or pled guilty to tax crimes, often based on whistleblower disclosures.

Donate Today