Comments to the Australian Parliament: Reward your Whistleblowers

By Gordon Schnell and Rosie Dawn Griffin

australia parliament inquiry (1)Good news for whistleblowers down under: the Australian Parliament is considering whether to enact legislation to protect and reward those who blow the whistle on corporate, public, and not-for-profit wrongdoing. Such legislation would correct serious deficiencies in Australia’s current system, where whistleblowers assume great personal risk for no personal gain. As a first step, a Parliamentary Joint Committee published and solicited commentary on a number of related Terms of Reference. We answered the Committee’s call for submissions, limiting our response to a single Term of Reference—compensation arrangements in whistleblower legislation across different jurisdictions, including the bounty systems used in the United States of America—and urged Australia to implement a system of financial incentives for whistleblowing akin to the US system, where the success of the whistleblower regime is clear.

The False Claims Act

The False Claims Act (FCA) is by far the most widely used vehicle through which whistleblowers report financial frauds against the US government. The law, enacted in 1863, began to show real results after 1986 amendments that significantly increased whistleblower protections and financial rewards. By the mid-1990s, hundreds of millions of government dollars were recovered under the FCA every year, with tens of millions in rewards going to whistleblowers. By 2000, annual recoveries extended into the billions as the law’s reach expanded to frauds in healthcare and banking.

The past eight years have seen an even greater increase in FCA enforcement. Total government recoveries since 2009 have topped $31.3 billion, and account for roughly sixty percent of all recoveries since the 1986 amendments to the Act. In 2016 alone, the government recovered more than $4.7 billion, with nearly $3 billion originating from qui tam suits brought by whistleblowers. There were more than 702 such whistleblower lawsuits filed last year, and roughly $519 million doled out in whistleblower rewards in the same period.

Financial incentives are clearly a driving force behind the FCA’s demonstrated success in combating fraud against the US government. Indeed, the United States Department of Justice (DOJ), Congress, and Supreme Court have repeatedly emphasized this fact. Frequent DOJ press releases laud the statute’s incentive structure and trumpet whistleblowers’ role in helping the government fight fraud. Congress and the Supreme Court have likewise highlighted the important role whistleblowers and whistleblower rewards have played in strengthening the Act.

The Dodd-Frank Act and the SEC Whistleblower Program

In July 2010, in response to the 2008 financial crisis, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act, known colloquially as “Dodd-Frank.” One of the most important components of this broad overhaul of the US financial regulatory system was the enactment of the SEC Whistleblower Program, through which those with knowledge of securities laws violations are financially incented to share this information with the SEC. Like the FCA, the Dodd-Frank Act provides a whistleblower reward of up to thirty percent of any government recovery. In passing this legislation and overhauling an SEC whistleblower program that had previously lacked financial incentives—and by all accounts had not been successful—Congress recognized the critical role a bounty system plays in encouraging whistleblowers to come forward.

Since the passage of Dodd-Frank, whistleblower tips have flooded into the SEC, and recoveries and awards have been substantial. From the beginning of the SEC whistleblower program through the end of 2016, information and assistance provided by the thirty-four whistleblowers who received awards led to $584 million in financial sanctions against wrongdoers, including $346 million in disgorgement of ill-gotten gains and interest. In 2016 alone, awards exceeded $57 million—more than all award amounts issued in previous years combined. All indications suggest the number of awards will continue to grow in coming years.

The SEC made clear in its most recent annual report on the whistleblower program that financially incenting whistleblowers is of paramount importance to the program’s success:

“We believe that the continued payment of significant awards, like those made this past year, will continue to incentivize company insiders, market participants, and others with knowledge of potential securities law violations to come forward and report their information to the agency.”

The SEC further credits its whistleblower program as having “bolstered the agency’s enforcement efforts and aided harmed investors.”

Just and Necessary Compensation

A simple policy rationale underscores the clear empirical evidence that the US whistleblower reward system works. Rewards are just and necessary because they compensate whistleblowers for what will almost certainly be a tiresome and unpleasant ordeal. No question, laws protecting whistleblowers have vastly improved in recent years. But the risk of retaliation or some form of estrangement, alienation, or even blacklisting remains very real. Financial incentives not only encourage whistleblowing, but also provide some measure of just recompense for the significant hardships so many whistleblowers suffer for speaking out.

Financial incentives also allow whistleblowers to more easily partner with qualified counsel to represent them through the legal process. The various whistleblower laws, particularly the FCA, are long and complex, with innumerable requirements and restrictions on the type of fraud or misconduct that is covered and the way the complaint must be presented to the government.  Only through the promise of a sizeable reward will most whistleblowers be able to afford counsel or entice them to take up their representation. The involvement of counsel is not only critical for weeding out claims or complaints unworthy of the government’s involvement, but also for packaging serious claims with the legal arguments and evidence that make the most efficient use of the government’s limited resources.

Arguments Against Incentives Are Easily Defeated

Two principal arguments are typically made against whistleblower rewards:

  1. rewards lead to frivolous filings and therefore waste government resources
  2. encouraging whistleblowers to bring information to the government will discourage internal reporting and undermine internal ethics and compliance programs.

Neither argument holds up in the US experience.

First, no evidence from any US agency supports the assertion that whistleblower rewards have led to frivolous filings. And given the involvement of counsel with most whistleblower claims, and the threat of court sanctions that accompany any frivolous filing under the FCA, it is unlikely there would be. Instead, and more importantly, under the FCA and through the SEC whistleblower program, successful enforcements have clearly increased.

Second, the concern that government incentives interfere with internal compliance programs is equally unfounded. This echoes one of the major arguments the business community made in unsuccessfully attempting to defeat the Dodd-Frank whistleblower rewards provision. There is no evidence that financial rewards drive whistleblowers directly to the government at the expense of reporting internally to their employers. In fact, studies show just the opposite: in most cases, individuals who blew the whistle to the government only did so after attempting to work out issues internally.

Read our formal submission to the Parliamentary Joint Committee on Corporations and Financial Services here.