Rewarding Whistleblowing to Fight Kleptocracy

Last February, Massachusetts Congressman Stephen Lynch introduced the Kleptocracy Asset Recovery Rewards Act (KARRA), which seeks to improve detection of stolen assets housed in American financial institutions by paying whistleblowers for reports that lead to the identification and seizure of these assets. The logic of paying rewards to whistleblowers is straightforward, and nicely summarized in the draft KARRA itself:

The individuals who come forward to expose foreign governmental corruption and klep­toc­ra­cy often do so at great risk to their own safety and that of their immediate family members and face retaliation from persons who exercise foreign political or governmental power. Monetary rewards and the potential award of asylum can provide a necessary incentive to expose such corruption and provide a financial means to provide for their well-being and avoid retribution.

Paying whistleblowers for information is a sound economic idea.  But in light of the cogent explanation for these rewards, the original draft of the KARRA legislation doesn’t go nearly far enough. Indeed, this original proposal provides much weaker incentives and protections for whistleblowers than several other existing US whistleblower rewards programs. It is unlikely that this bill has a real chance of being enacted in the current Congress, but if its introduction this year is a harbinger of a more sustained effort to enact legislation of this kind—and I hope it is—then I also hope that the next time around KARRA supporters will introduce a more ambitious bill, one that provides much higher potential rewards, fewer limitations on which whistleblowers are eligible for rewards, and more robust anti-retaliation protections.

There are many ways to design a whistleblowing program, as demonstrated by the spectrum of existing programs that use whistleblowing to tackle fraud in other domains. We can examine the effectiveness of the proposed legislation through comparison to existing whistleblowing programs:

First, the KARRA bill’s rewards for whistleblowers are not nearly generous enough given the amounts of money at stake and the risks that potential whistleblowers would run. The current version of KARRA appears to be modeled on two small State Department programs, the Transnational Organized Crime Rewards program and the Narcotics reward program, which offer money for information about wanted criminals. Like those programs, KARRA provides that the “Secretary [of the Treasury] shall, to the extent possible, make such payments using the stolen assets recovered based on such information before using appropriated funds,” but otherwise provides little guidance for the compensation rate.  Moreover, the KARRA draft caps the reward for any one whistleblower at $5 million (except in “exceptional cases”) and caps total annual payments at $25 million. That may seem like a lot, but consider both the fact that a whistleblower who reveals that a powerful kleptocrat has stolen huge amounts of money is taking an enormous risk, especially when the pool of potential whistleblowers is likely to be relatively small. And the KARRA bill’s caps are a tiny fraction of the assets stolen in many of these cases. Consider, for example, that the 2014 seizure of former Nigerian dictator Sani Abacha’s assets netted $480 million; KARRA’s proposed $5 million cap would mean that a whistleblower who exposed stolen assets of a comparable amount would receive only about 1% of the total recovery. In the case of the existing State Department programs, a $5 million cap may make sense in part because the money must come out of State Department funds, but when the U.S. government recovers hundreds of millions of dollars, there’s no good reason to impose a similarly stingy cap.

It would be preferable for KARRA to follow the alternative model used by several other whistleblower rewards programs, including the IRS whistleblower program, the SEC whistleblower program, and the False Claims Act (FCA), in which the whistleblower’s reward is proportional to the amount of money recovered. For example, the IRS whistleblower program includes a statutory guarantee of 15-30% of federal recovery, and the SEC whistleblower program similarly offers the whistleblower 10-30% of the sanction imposed on companies. KARRA would be more effective if it also employed a reward proportional to the recovery, perhaps in the 10+% range.

One potential objection or complication is that when the US government recovers assets stolen by a foreign kleptocrat, the US government has a legal obligation to return that stolen money to the government from which it was stolen, rather than taking 10% of it and giving it to a whistleblower. But as a legal matter, the UN Convention Against Corruption (UNCAC) specifies that states which recover assets rightfully owned by a foreign government may deduct “reasonable expenses” incurred in the recovery of those assets before returning the rest. And in many of these cases, the assets would never have been recovered at all but for the whistleblower, so proportional rewards are consistent with the spirit as well as the letter of UNCAC.

A second problem with the current version of the KARRA legislation is that it provides that the award amount can be reduced for individuals who participated in the theft or concealment of the illicit assets. This is a common feature of whistleblower programs. For example, the Dodd-Frank Act prohibits whistleblower awards if the whistleblower is convicted of a related criminal violation, and the FCA reduces the payout to the whistleblower if the whistleblower was partly responsible for the fraudulent conduct. However, in the case of the KARRA, this sort of provision might be more of a problem because of the limited number of potential whistleblowers, almost all of whom were involved in the wrongdoing in some way. This is not true to the same extent for other whistleblower programs. In many FCA cases, there are many non-participating individuals who can become whistleblowers. (For example, many FCA cases involve health care fraud, and in this context many employees at the relevant institution—say, a hospital—may become aware of the possible fraud.) In the SEC program, corporate employees may have access to private information about fraud without being responsible. But with kleptocrats hiding or laundering money in the US financial system, the most likely whistleblowers are deep insiders, mainly those who facilitated the misconduct. Thus limiting rewards to “participating individuals” might severely undermine the effectiveness of the program. A better version of the bill would mandate that all whistleblowers are entitled to a reward; it might make sense to reward participating individuals at a lower rate, but that lower rate should still be expressed explicitly as a guaranteed percentage of the recovery.

Finally, the draft KARRA bill contains very weak anti-retaliation measures: It only authorizes the Treasury Secretary to “protect” the whistleblower and his or her family, with no further guidance. This again parallels the vague language of the State Department program, but contrasts with the FCA and the Dodd-Frank program, which have explicit protections for whistleblowers. This is a much trickier situation: kleptocrats may have strong incentives to silence a whistleblower, while also being less subject to US federal laws. This legislation should be strengthened by mandating protective measures for whistleblowers, like asylum provisions and stipulations that the identity of the whistleblower be protected.

Whistleblowers can be valuable assets to the United States government in its efforts to root out fraud and crime. In the anti-money laundering context, a statute like KARRA might therefore prove very powerful and effective. However, the original version of the KARRA legislation appears to be modeled on the State Department criminal reward programs rather than the more powerful, successful domestic statutes. The KARRA could achieve much greater success by making the rewards more robust and certain, and providing stronger, clearer protections.

3 thoughts on “Rewarding Whistleblowing to Fight Kleptocracy

  1. Excellent analysis and recommendations that call for global whistleblowing best practices in multiple factual, country and cultural scenarios, although more emphasis on issues related to anonymous whistleblowing would even be more helpful. Thank you.

  2. Pingback: Rewarding Whistleblowing to Fight Kleptocracy | Matthews' Blog

  3. Pingback: Rewarding Whistleblowing to Fight Kleptocracy — GAB | The Global Anticorruption Blog | Solutions - Solutii

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