A Closer Look at The Ethics Behind Whistleblower Rewards

In the wake of the CFTC paying the largest financial reward in the history of any whistleblower program, we’re taking a closer look at the pros and cons of such financial incentives.

EQS Editorial Team

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In October 2021, the US Commodity Futures Trading Commission (CFTC) announced that it had awarded nearly $200 million to a single whistleblower, the largest financial reward ever paid out under any whistleblower programme and a move that reignited the debate about rewards for whistleblowers. In this article, we explore the legal situation in different countries, examine whether whistleblower rewards work and if such high amounts can ever be justified. 

Illustration people walking to a mobile phone where another person is handing out coins.

United States: whistleblowing reward trailblazer

Most European governments have long been uncomfortable with the idea of paying monetary rewards to whistleblowers, though there are some notable exceptions including Hungary, Slovakia and Poland. Furthermore, the EU Whistleblowing Directive, which must be implemented by European member states by 17th December 2021, does not make provision for whistleblowing rewards. 

The situation is different in the United States where there are four main whistleblower reward programmes: the Securities and Exchange Commission (SEC) programme which rewards reporting violations of federal securities laws, the Commodity Futures Trading Commission (CFTC) programme which rewards reporting violations of the Commodity Exchange Act, the Internal Revenue Service (IRS) programme which rewards reporting tax fraud or underpayments and finally the False Claims Act programme which rewards reporting fraud against the government. While all of these have different rules and procedures, under the SEC programme, the government must recover at least one million US dollars from the whistleblower’s revelations in order to issue the reward and they typically receive between 10 and 30% of the amount recovered. Elsewhere, Canadian, Australian and South Korean regulators have adopted similar reward schemes.  

In the US, these programmes are experiencing an upward trend in reporting. In November 2021, the SEC programme reported that it paid out more in whistleblower rewards in fiscal year 2021 than in all prior years combined since it came into being just over a decade ago. 

Arguments in favour

The difference in attitudes to whistleblower rewards in Europe and the US combined with record amounts paid out has inevitably focused attention on the question of whether it is right to financially incentivise whistleblowing. 

Proponents of the argument say that whistleblowers suffer personally and professionally if they decide to speak out. They often lose their job and can be ostracised by their profession. As a result, they may need to retain counsel at significant personal cost as part of a process which could span many years. Whistleblower rewards, some argue, help to redress this financial burden. Tom Mueller, author of the 2019 book “Crisis of Conscience: Whistleblowing in an Age of Fraud”, writes that reward is the wrong word; any financial compensation for whistleblowers would be better described as “a net present value lump sum payment for a lost career”. 

In addition, studies conducted in recent years confirm that whistleblower reward programmes in the US have worked well and have increased detection and deterrence of crime in a cost-effective way. In April 2021, a Harvard Business School study looked at 1,600 employee whistleblowers who initiated False Claims Act lawsuits between 1994 and 2012. The study determined that when whistleblowers responded to financial incentives by filing more lawsuits, their allegations tended to be more serious and credible and, perhaps most importantly, the ultimate outcome of lawsuits improved. 

A working paper from the Stockholm Institute of Transition Economics, published in June 2021, made similar findings and also went further to refute the most commonly held objection to whistleblower rewards: that they undermine companies’ compliance efforts. The paper reports that 83% of whistleblowers reported internally before going to the SEC and 90% (113 out of 126) of those who filed claims under the False Claims Act programme) had first contacted a supervisor. 

Arguments against

Critics of the idea claim that financial rewards “crowd out” the intrinsic moral motivation of whistleblowers. Those that speak out should do so out of an unblemished sense of righteousness and civic duty, not because they might profit from it. Some observers have expressed concerns over the administration costs of reward programs and whether the costs outweigh the benefits received in terms of information on wrongdoing. Many say it could lead to spurious tips (although there is no evidence that this is true – in fact, many studies including Transparency International and the Stockholm Institute of Transition Economics have found the opposite). 

Calculating rewards for whistleblowers

In the financial sector it is relatively straightforward to calculate a reward – in most countries with whistleblower incentive schemes, whistleblowers tend to be rewarded with a percentage of the money that the government recovers as a result of the information provided. However, there has been little attention paid so far to how reward schemes could operate in other sectors. What would happen if the reported wrongdoing did not generate funding? Wrongdoing in other areas such as health and safety or damage to the environment could be considered just as serious, perhaps even more so from a public interest perspective, than financial abuse. Would the reward be calculated based on the public interest value of the information uncovered, and, if so, how can the public interest value itself be calculated? 

Structure and set-up of a whistleblowing incentives programme

So how could a formal whistleblowing incentives scheme work? 

How high a reward should be is a hotly contested topic. No-one disputes that the $200 million award paid by the CFTC in 2021 was a significant amount of money and consequently some commentators have actually questioned whether a lower incentive – for example $30 million – which the SEC actually considered - could have resulted in a similar result. However, would a maximum award of $30 million be incentive enough for someone who is on track to become a senior executive in finance, an individual who would expect to earn millions each year over a decade or more? 

When it comes to the non-financial sectors, David Hencke, an investigative journalist who focuses on whistleblowers in the UK health service, feels that incentives would provide a strong vote of confidence in the value of the information that whistleblowers provide. “Some structure of compensation would need to be developed which would help to offset damage to whistleblowers’ careers and the personal costs they incur”, says Hencke. “Many whistleblowers end up mortgaging their homes to pay for legal costs so a good starting point for any incentives programme would be repayment of costs.”  

Some commentators also feel that any strong whistleblower incentive programme also needs to include a deterrent which, they argue, would remove the concern that whistleblower incentives could lead to false tips. Buccirossi, Immordino and Spagnolo have argued that any incentives programme should focus on achieving a balance between attractive incentives and severe sanctions against defamation, perjury and information fabrication. It could also be controlled by the adoption of a stricter standard of proof for information provided by witnesses who stand to gain from a conviction.  

In summary

There is no doubt that countries that offer rewards send a positive signal to whistleblowers that their information is valuable and that their rights and protection are taken seriously.  

Ultimately, however, they remain an experiment in all countries. The US provides some positive evidence that rewards have been successful. The appropriate level of reward, how a rewards programme would look outside of the financial sector and whether deterrents are appropriate to discourage false tips are areas that require greater consideration, however.   

 

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EQS Editorial Team

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