Whistleblowers are the first line of defense against corruption, fraud, and wrongdoing and the single most effective source for information about fraud and other illegal activities. Despite the risk to their professional and personal lives, company insiders, government employees, and others with original information about illegal activity regularly come forward to report crimes that would otherwise go undetected.
Oftentimes the first to discover and report instances of fraud, whistleblowers have proven themselves to be invaluable in the detection of crime and enforcement of various laws. In a 2007 study conducted by PricewaterhouseCoopers, it was found that professional auditors only detected 19% of fraudulent activities at private corporations, while whistleblowers detected and exposed 43%. According to the study, surveyed executives “estimated that the whistleblowers saved their shareholders billions of dollars.”
A 2006 study from the University of Chicago Booth School of Business, Who Blows the Whistle on Corporate Fraud?, comes to the same conclusion, stating: 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. Some might be accomplices…but most are not.”
However, in order to ensure that whistleblowers do step forward with evidence of wrongdoing, a robust legal framework of protections and incentives is crucial. After the effectiveness of whistleblowers in rooting out waste, fraud, and abuse has repeatedly been demonstrated, stronger whistleblower laws and incentives are now appearing around the world. As of 2020, whistleblower protection laws have been enacted in at least 59 countries, as well as the United States. However, protections vary from country to country and are not created the same. Many of these laws contain one or two key elements of successful whistleblower laws, but few contain all the elements needed to properly incentivize whistleblower disclosures and protect whistleblowers from retaliation.
As the global expansion of whistleblower protections continues, it’s crucial that new laws incorporate and existing laws are updated to include all the key features of successful whistleblowing regimes, including confidentiality, rewards, and the option to report to an independent channel like a government whistleblower office. When whistleblowers have their identities protected and rewards are in place, they are incentivized to step forward and are able to effectively, and safely, blow the whistle through legitimate channels of reporting. The data bears this out: reward laws have been shown to be extremely effective in generating high quality tips that result in successful prosecutions. Examples of extremely successful whistleblower programs include those in the United States, Canada, and South Korea.
The United States is a leading influence in the global promulgation of these key whistleblower protections, stemming from its long history of whistleblower law. Not only are U.S. whistleblower protection laws among the strongest in the world, many of these laws can be applied transnationally, allowing whistleblowers around the world, U.S. citizens or not, to confidentially report fraud to U.S. law enforcement authorities, as long as it has a U.S. nexus.
In the United States, whistleblowing has been bolstered by strong protections and reward provisions, guaranteeing the thousands of whistleblowers that come forward channels to safely report fraud. These provisions are enshrined in laws like the False Claims Act, which has a qui tam provision that allows individuals to sue on behalf of the government, and the Dodd-Frank Act, which created whistleblower programs at the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) and strengthened the Foreign Corrupt Practices Act (FCPA), an important anti-bribery law.
These laws are proven to recover significant monies for the government and allow whistleblowers to come forward and expose wrongdoing. In Fiscal Year 2019 alone, whistleblower-initiated cases brought in $2.1 billion in False Claims Act settlements and judgements recovered by the government. Since the Dodd-Frank Act passed in 2010, the SEC and CFTC have recovered over $2 billion with more than $487 million being awarded to whistleblowers who assisted in the cases, and under the Foreign Corrupt Practices Act, the U.S. government has collected more than $7.2 billion in FCPA violations. The numbers and vast amount of recoveries stemming from whistleblowers’ disclosures speaks to the power of whistleblowing.
U.S. officials and agencies have confirmed the importance of whistleblowers to successful enforcement efforts. The former Chair of the U.S. Securities and Exchange Commission (SEC), Mary Jo White, has said that whistleblowers provide an “invaluable public service, and they should be supported,” while noting that the SEC sees itself as “the whistleblower’s advocate.” White’s comments came after the widespread success of the SEC whistleblower program, established in 2011, which as of 2020 has received 33,300 whistleblower tips from more than 123 countries. Other agencies that have similarly praised the contributions of whistleblowers include the U.S. Justice Department and the U.S. Fish and Wildlife Service.
Similar laws in South Korea and Canada have also shown tremendous success. Through South Korea’s whistleblower channel created by the Anti-Corruption and Civil Rights Commission (ACRC) in 2008, whistleblowers have assisted the South Korean government with USD $265 million in recoveries. And in Canada, which offers rewards to individuals who provide information related to “international tax evasion” and “aggressive tax avoidance”, whistleblowers in Canada helped the government collect USD $19 million in 2018 to 2019 fiscal year – the first year that awards were issued – alone.
Crucially, these laws also have a deterrent effect on wrongdoers. In a 2014 article in the Villanova Law Review, University of California-Davis professor of law and Chairman of the IRS Advisory Council Dr. Dennis J. Ventry explained that whistleblower disclosures have a major deterrent effect on corporate crime. In the article, Professor Ventry outlined the deterrent effect of whistleblowing: “Whistleblowers can do more than just uncover and report knowing violations of the law. They can also prevent noncompliance from happening in the first place. An effective whistleblower program…would add significant risk to noncompliance by increasing the probability of detection and the likelihood of potential penalties, the two most important variables in traditional tax deterrence models. In turn, increased aversion to noncompliance—due to increased fear of detection and palpable penalties as well as additional variables such as moral, ethical and reputational inputs—would result in increased revenue collection.”
To further document the powerful deterrent effect of whistleblowing, Professor Ventry surveyed the literature on crime deterrence and noted that objective, scholarly, and empirical studies had long documented the fact that the “degree of deterrence” of crimes can be “calculated as product of probability of detection.” Or, as first explained by the Nobel Prize winning economist Gary S. Becker, “for the individual to elect to engage in crime, the gain relative to its loss must exceed the odds of capture.”
In short, whistleblowing works. Stories like that of Howard Wilkinson, Bradley Birkenfeld and Sherron Watkins are testaments to the impact that whistleblowers can have. Wilkinson, relying on U.S. law, confidentially raised concerns of a $234 billion-dollar illegal money laundering scheme through Danske Bank’s Estonia branch. Now European authorities as well as the SEC, IRS and U.S. Justice Department are investigating the scandal and the CEO has resigned. Birkenfeld’s disclosures of illegal offshore Swiss UBS bank accounts held by U.S. citizens helped recover millions for U.S. taxpayers in fines and penalties, and over $5 billion in collections from those who held the illegal accounts. Birkenfeld’s efforts culminated in the Swiss government changing its tax treaty with the United States. And Watkins exposed corporate misconduct at Enron by pointing out accounting irregularities, contributing to the end of a company once considered to be a titan of industry. In coming forward, despite great personal risks, all of these whistleblowers changed the world.