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Message to the UK – Whistleblower Incentives Work

Posted  November 7, 2013

By Gordon Schnell and Jason Enzler

So it seems the United Kingdom is finally moving in the direction of serious whistleblower reform.  And it is looking to the U.S. experience for guidance.  In particular, it is considering whether the hefty financial incentives provided to whistleblowers under the False Claims Act (FCA) and Dodd-Frank Act are a good idea.  In a Call for Evidence put out by the U.K. Department for Business, Innovation & Skills, the British government has specifically solicited comments on whether the U.K. should adopt U.S.-styled whistleblower rewards.

The only problem is that the solicitation is premised on a fundamental misconception.  That is, the notion that “[t]he success of the[] [FCA and Dodd-Frank] incentives programs is unclear.”  To the contrary, the success of these programs could not be any clearer.  It is borne out in the unmistakable success of the FCA and Dodd-Frank whistleblower programs to which financial incentives are inextricably linked.  It also is apparent from an honest recognition of the character and purpose that drives most whistleblowers and the hurdles they face and sacrifices they make in standing up against fraud and misconduct.

The False Claims Act

The FCA is the linchpin of the U.S. whistleblower system.  It was enacted in 1863 by President Lincoln to combat fraud by unscrupulous government contractors during the Civil War.  But it was only after the 1986 amendments to the statute — which significantly increased whistleblower protections and financial incentives — that the statute began to show real results.  Since then the government has recovered more than $30 billion, with more than $10 billion recovered in the last few years alone.  [See DOJ stats.]  In fact, just a few days ago the government obtained $2.2 billion from J&J for its FCA violations in promoting certain drugs for uses not approved by the FDA.  [See DOJ press release.]  As with the J&J action, the vast majority of these recoveries were from actions spawned by whistleblowers.

There should thus be little dispute that the financial incentives of the FCA have been a driving force in the huge success of the FCA in combating fraud against the U.S. government.  This is a fact the Supreme Court and Congress have repeatedly emphasized.  In fact, each has explicitly said so in the context of the increased financial incentives provided for under the 1986 amendments.  See, e.g., Graham Cty. Soil & Water Conservation Dist. v. U.S. ex rel. Wilson, 130 S. Ct. 1396, 1409 (2010) (“We do not doubt that Congress passed the 1986 amendments to the FCA to strengthen the Government’s hand in fighting false claims,” and “to encourage more private enforcement suits”).  It is also inherent in the rising scale of whistleblower recoveries the FCA mandates if the government declines to join the whistleblower’s case (providing for 15-25 percent where the government joins and 25-30 percent where the government does not).

Dodd-Frank Act

The importance of financial incentives is also apparent from the recently enacted Dodd-Frank Act, which like the FCA, includes a whistleblower reward of up to 30 percent of any government recovery.  In passing this legislation, Congress saw the wisdom of providing financial incentives to encourage whistleblowers to come forward, recognizing that the SEC’s previously existing whistleblower program — which lacked any financial incentives — did not work.  Since the SEC created its whistleblower program with financial incentives, as required by the statute, the whistleblower tips have been flooding in.  The agency reports that it receives about 7 tips a day, with 2 or 3 of them meriting investigation.

Even more notable is how public the SEC has been in recognizing the importance of whistleblower rewards.  The $14 million award the agency made earlier in October, for example, was the exclusive subject of an SEC press release and trumpeted by the most senior officials to encourage future whistleblowers to step forward.  SEC chief Mary Jo White could not have been any clearer: “We hope an award like this encourages more individuals with information to come forward.”  The head of the SEC Whistleblower Office, Sean McKessy, was equally strong in his messaging, declaring how “gratifying” it was to make this payout and how “whistleblowers are coming forward to assist us in stopping potential fraud in its tracks.”

In recent interviews he gave with the Wall Street Journal and Reuters, McKessy all but promised more awards “with very big numbers” to come.  The SEC even identifies on its website those successful enforcement actions which are eligible for whistleblower awards.  The list grows larger and larger each week, and the SEC has created a $450 million reserve fund from which these future awards will be made.  This from an agency that prior to Dodd-Frank many believed was asleep at the switch.  There can be no question the SEC whistleblower program is working, and the financial incentives provided for under Dodd-Frank are a major reason why.

Just and Necessary Compensation

Aside from this empirical evidence from the FCA and Dodd-Frank programs that financial incentives work, there is also a simple policy rationale for their use.  They are just and necessary.  They are just because they compensate whistleblowers for what will almost certainly be a tiresome and unpleasant ordeal.  No question, the 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.  In fact, one recent study by the Ethics Resource Center says it is actually getting worse.  Financial incentives thus serve the very important purpose of providing some measure of just recompense for the significant financial, personal, and even physical hardships so many whistleblowers suffer for standing up and speaking out.

They also allow for whistleblowers to more easily find qualified counsel to represent them through the legal process.  The various whistleblower laws, particularly the FCA, are long and complicated 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 not only is of major importance to the whistleblower.  It is critical for weeding out those claims or complaints not worthy of the government’s involvement, and for packaging those that are worthy with the legal arguments and evidence that makes the most efficient use of the government’s limited resources.

Arguments Against Incentives Do Not Hold Up

There are two principal arguments typically made against financial incentives.  One, they lead to frivolous filings and a waste of government resources.  And two, they will interfere with a company’s internal compliance program.  Neither argument has held up when considering the U.S. experience.

There is no evidence from any agency that whistleblower rewards have led to frivolous filings.  And given the involvement of counsel with most whistleblower claims, and the threat of Rule 11 sanctions that accompanies any filing under the FCA, it is unlikely that there would be.  In any event, the relevant question is not whether financial incentives result in a greater number of whistleblower complaints the government decides to decline (even if some of them are in fact frivolous).  It is whether the incentives have resulted in a greater number of meritorious whistleblower complaints, leading to a greater number of successful prosecutions.  As discussed above, under the FCA and Dodd-Frank whistleblower programs, it is clear that they have.

The concern that incentives interfere with internal compliance programs is equally unfounded.  This was one of the major arguments the business community made in unsuccessfully attempting to defeat the inclusion of a whistleblower rewards provision under Dodd-Frank.  The truth is 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.  One study, also conducted by the ERC, found that only a tiny fraction of whistleblowers — a mere 3 percent — go directly to the government to report fraud or misconduct.  Instead, they first work within their company to expose and attempt to remedy the wrong.  According to the ERC study, it is only after they attempt to work it out internally that they then take their concerns to the government.

What explains this behavior is that with whistleblowers it is not all about the money.  No doubt, financial incentives are a critically important part of the equation.  But money is not what ultimately drives most whistleblowers to step forward.  It is a genuine interest in protecting the public from harm.  It is also a desire to keep their company out of more serious trouble.  Indeed, each of these motivations polled higher than money in the ERC study of what makes whistleblowers tick.  These findings go a long way in debunking the perception of the typical whistleblower as a greedy, grubby, and self-centered individual driven by the money with no real concern for the public good.  They should also discredit any argument that financial incentives will somehow corrupt or undermine an otherwise effective whistleblower program.

What can ultimately be drawn from the U.S. whistleblower experience is that the question of financial incentives should not even be a close call.  They are a just and necessary component of any whistleblower program and the U.K. would be wise to adopt them as it moves towards improving and expanding its whistleblower regime.  [To see a copy of our formal response to the Call for Evidence, please click here.]

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