279 millions or the price to blow the whistle💰

The SEC announced on 5 May 2023 the largest award ever granted to a whistleblower: 279 million USD granted to someone “whose information and assistance led to the successful enforcement of SEC and related actions.” (SEC Press release - 5 May 2023). 

Of course, apart from wondering whether I chose the right career path to fast retirement on a tropical island, this is getting me thinking: what role do whistleblowers play in creating a safer and better world, what price do they most of the time have to pay for their courage and what learnings can we make from the design of reward programs in the US?

Why do we need whistleblowers?

Let me quote the Center for Whistleblower Rights & Rewards right here: 

“Companies and politicians that commit fraud, waste and abuse often do so quietly and out of sight of the public eye: companies falsify book records using impenetrable accounting methods, oil rigs dump waste into the sea under the veil of the night sky, and importers falsify customs forms to conceal illegal shipments of endangered wildlife. Without whistleblowers, many of the crimes being reported today would have gone undetected had they not provided secret, hidden evidence to law enforcement and public authorities.” (Center for Whistleblower Rights & Rewards on How to Fight Corruption).

The price to blow the whistle

And yet the act of alerting the world about a violation may still carry “connotations of betrayal rather than being seen as a benefit to the public” (Transparency International). We need to ask ourselves why this perception still exists in our brains, and most importantly what it hurts versus what it benefits.

Yet, thankfully, it seems that the paradigm in the perception of whistleblowers is progressively changing, for the better, as these people are actually heroes courageous enough to stand up for all of us as a society. 

In an interview to Northeastern Global News, Siri Nelson, the executive director of the US National Whistleblower Center and president of the United Women in Business national chapter stated: 

“we’ve seen whistleblowers go from being viewed as snitches, you know, whistleblowers are the problem, to whistleblowers being viewed as enforcement assets, as a source of great tips and as people who safeguard our society.”(How whistleblowers went from being viewed as snitches to people who help enforce laws and safeguard our society, Beth Treffeisen April 28, 2023).

And yet, unfortunately, the price to pay is still so high for people who take the risk to really do the right thing and disclose behaviors and practices that are down right harmful to our economy, our planet and our society. And I am not talking about remote parts of the world.  For example, in Germany (which has still not transposed the EU Whistleblowing Directive) ranks below Chile, Kosovo and Zambia in terms of protecting whistleblowers, some courts have ruled that employers’ interests and employees' duty of loyalty may actually be more important than the right to report a misconduct to the authorities or the public. This  is “contrary to standards developed by the UN, Council of Europe, Transparency International and many other organizations” (Mark Worth, Germany loves whistleblowers so long as they are not German, the German Spectator, March 2020). Read this article for a reality check on how some courageous whistleblowers have been treated after exposing really nasty practices.  

“Whistleblowers risk their career, their livelihood and sometimes their personal safety to expose wrongdoing that threatens the public interest. They may be fired, sued, blacklisted, arrested, threatened or, in extreme cases, assaulted or killed" (Transparency International). 

In the vast majority of cases, whistleblowers alert management internally, many times, and without success, before contacting the authorities or going public. “83% of whistleblowers report internally before going to the SEC (Westbrook, A. (2018). “Cash for Your Conscience: Do Whistleblower Incentives Improve Enforcement of the Foreign Corrupt Practices Act?” 75 Wash. & Lee Law Review, 1097: 1165), quoted in A Fresh Look at Whistleblower Rewards, Theo Nyreröd & Giancarlo Spagnolo, Stockholm Institute of Transition Economics).

Protection acutely needed

We do need to protect these courageous humans. Which is why the EU whistleblowing Directive has been passed to protect and provide a framework enabling just that, including covering how the whistleblowers can alert the authorities or go to the press when the concerns raised internally have yielded no proper response. And yet the transposition process has  been severely delayed (all countries should have enabled the transposition by December 2021), and we are still lagging behind on transposition, including in Germany (check the whistleblowing monitor for the latest status on transposition).  

For an example of what would be desirable instead, have a look at the Declaration on Whistleblower Rights, initiated by Whistleblowing International (The Hague) and the National Whistleblower Center (Washington, DC), deliberated at the World Justice Forum in The Hague on 31 May 2022. 

We are not there yet in Europe. As we can see it takes a LOT of risk and courage to actually stand up and defend what is right for society. Citizens are not even really sure of being granted actual protection, let alone of not facing threats, lawsuits, permanent unemployment and so on. And yet, we need those people as without them, many massive scandals would never be uncovered and stopped.  

Incentives to report 

What’s at stake for the whistleblower? Their jobs, their reputation, their lives, basically everything. What would it take for me, as an individual citizen, to put this in the balance? The beauty of doing the right thing? In light of the above risks, is one’s sense of justice enough to report? Probably not.

Tom Mueller, author of the 2019 book “Crisis of Conscience: Whistleblowing in an Age of Fraud”, writes that  we should really call the “reward” rather  “a net present value lump sum payment for a lost career”.

And for enough money to never have to worry again about ever needing a job, probably yes we would do this and take that chance. That’s where the US system makes a lot of sense in creating incentives that are high, because the cost to the whistleblower is high, and because the cost  to society of the misconduct carrying further is also really high.

Rewards programs in the US and what we can learn from them

“The Securities & Exchange Commission is authorized by Congress to provide monetary awards to eligible individuals who come forward with high-quality original information that leads to a Commission enforcement action in which over $1,000,000 in sanctions is ordered. The range for awards is between 10% and 30% of the money collected.” (SEC Office of the Whistleblower).

The scope is broad, as rewards can be allocated for exposing any material violation of the federal securities laws, from accounting or investment fraud to violation of the FCPA to insider trading to inadequate internal controls…. And this is of course not the only program (see rewards programs under the Commodity Exchange Act, the Internal Revenue Service (IRS) which rewards reporting tax fraud or underpayments and the False Claims Act program).

To be eligible one needs to “voluntarily provide the SEC with original, timely, and credible information that leads to a successful enforcement action, and adhere to filing requirements in the whistleblower rules” (SEC Press release 5 May 2023).

In fact since the beginning of the program in 2011, the SEC has awarded more than 1 billion to reward tips leading to enforcement actions, check this out on the SEC website directly:

The awards are actually paid from an investor protection fund established by the US Congress. This fund is funded by fines paid by violators. No impact on the investors. And a whole ecosystem of law firms has developed to help and support whistleblowers bring forward their claims.

What’s up with these amounts? Are they too big? I don’t think so, as the sacrifice for the courageous one who stands up for society is quite gigantic. Also, research has shown that small rewards don’t really work, again, because the price to pay is too high:

“Where potential informants lack a moral imperative to report, our findings further indicate that offering low rewards is the worst mechanism that regulators can offer, as it neither motivates high levels of reporting nor is perceived by most individuals as constituting good citizenship behavior. In fact, offering low rewards triggers less reporting than merely offering protection or establishing a duty" (Feldman, Y., Lobel, O. (2010). “The Incentives Matrix: The Comparative Effectiveness of Rewards, Liabilities, Duties, and Protections for Reporting Illegality”, 88 Texas Law Review, 1212.1155 quoted in A Fresh Look at Whistleblower Rewards, Theo Nyreröd & Giancarlo Spagnolo, Stockholm Institute of Transition Economics).

Does it work to award so much money? 

Yes, according to some Harvard researchers who worked  based on the False Claim Act, it DOES work: “we find that greater incentives increase the number of lawsuits filed with the regulator, the regulator’s investigation length, the percentage of intervened lawsuits, and the percentage of settled lawsuits” and “help[s] expose corporate misconduct” (Dey, Aiyesha and Heese, Jonas and Perez Cavazos, Gerardo, Cash-for-Information Whistleblower Programs: Effects on Whistleblowing and Consequences for Whistleblowers (April 30, 2021). Available at SSRN: https://ssrn.com/abstract=3837308 or http://dx.doi.org/10.2139/ssrn.3837308).

One argument against financial incentives tends to be that they would prevent people from using the internal reporting channels to rather go to the authorities directly, but we’ve seen that 83% of whistleblowers who went to the SEC had reported internally beforehand. This means people reported, and most probably nothing happened. What next? A proper incentive to continue and ensure the misconduct finds an end.

Theo Nyreröd & Giancarlo Spagnolo put it very sharply: 

“as for the more general argument that reward programs undermine internal compliance efforts, it assumes that when internal channels are utilized, they are effective and not used to identify and either punish or provide positive incentives to the whistleblower to not report externally. This assumption is questionable, and many consider reward programs a response to corporations' inability to self-regulate through internal controls”(A Fresh Look at Whistleblower Rewards, Theo Nyreröd & Giancarlo Spagnolo, Stockholm Institute of Transition Economics).

The EU whistleblowing directive does not cater for any rewards. And as we can see, the road is still long to reach an appropriate level of protection for whistleblowers, let alone rewarding them financially.

“As such, the European Directive may not fulfill its promise of enhancing enforcement of Union law to a desirable degree. This is unfortunate, as robust whistleblower incentives with proven enforcement benefits appear highly needed in Europe considering the corporate wrongdoing uncovered in the last decades. From HSBC’s money laundering for Mexican cartels, Dieselgate, the Danske bank scandal, to the most recent Wirecard debacle.“ (A Fresh Look at Whistleblower Rewards, Theo Nyreröd & Giancarlo Spagnolo, Stockholm Institute of Transition Economics)

So, I am actually very happy that in less than 3 years we have doubled the biggest amount ever awarded, and I hope that the design of US reward programs will be considered for inspiration in Europe and in the world.

To be fair, other countries than the US have reward programs (including notably Canada, Peru, Hungary, Lithuania, Slovakia, Ukraine, UK, Kenya, Malaysia, Republic of Korea, Pakistan, Taiwan, Vietnam etc.), but apart from South Korea, the UK, Canada and Nigeria who seem to have active programs, no reward has ever been issued for most of these programs.

As World Whistleblower’s day will take place on 23 June, maybe we can challenge old brain views of whistleblowers and whistleblowing, and raise our hats to people who actually have to courage to come forward with revealing some of the biggest violations of our modern times? 

This is also the opportunity for us as Ethics & Compliance Teams to ask ourselves, how do we truly enable a culture where people feel they can speak to us, and know that they will not only not be retaliated against, but even more, be supported?  And how can we enable our organization to actually really take action and change behavior when and where necessary, when serious concerns are raised?

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Love from Copenhagen 💜