Tag Archives: whistleblower rewards

Should Culpable Whistleblowers Be Eligible for Rewards?

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John Doe is a whistleblower who provided critical information to the U.S. Securities and Exchange Commission (SEC) regarding an international bribery scheme, assisting the agency in bringing a successful enforcement action. Doe timely filed an application for reward under a provision of federal law that directs the SEC to pay an award to whistleblowers who voluntarily provide original information to the agency, contingent on such information leading to a successful SEC enforcement action with monetary sanctions exceeding $1 million. Yet, in Doe’s case, the SEC denied his application for a reward—and the courts upheld this denial—because Doe himself had already pleaded guilty to bribery charges related to the same scheme he helped expose. Under the relevant statute, the SEC is barred from paying an award to any whistleblower who is convicted of a criminal violation “related to the [enforcement] action for which the whistleblower otherwise could receive an award.” In other words, if a whistleblower provides the SEC with information on a particular corruption scheme but is convicted of a crime related to that same scheme, as in Doe’s case, they are ineligible for reward.

What about whistleblowers who are culpable in the unlawful scheme they help expose, but who have not been criminally convicted in connection with that scheme? The SEC has explicitly declined to institute a rule barring culpable but non-convicted whistleblowers from receiving an award. Therefore, participants in an unlawful scheme, including a bribery scheme, may still receive an award if they blow the whistle on the offense, so long as they are not convicted for their role. The SEC’s position has been criticized as both unfair and potentially harmful. During the agency’s rulemaking process, several commenters, including a group of senior corporate executives and the American Bar Association, advocated for a more stringent rule in order to avoid incentivizing violations of securities laws. Recently, a Bloomberg Law article branded the program as “enrich[ing] fraudsters,” reflecting the continuing sentiment that no culpable whistleblower should be eligible for reward.

These criticisms are misplaced. While it is undoubtedly important to ensure that whistleblowers cannot profit from their own wrongdoing, it would be unwise to implement a more stringent standard than the one set out in the SEC’s current rule.

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When and Why Do Whistleblower Reward Programs Succeed?

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It is often difficult to expose and unravel corruption schemes without the cooperation of insiders. Yet would-be whistleblowers are frequently deterred from making disclosures due to the personal and professional risks of doing so. One increasingly popular way that countries are addressing this problem is through whistleblower reward programs. While such programs vary widely in their specifics, most operate under the same basic framework, offering a whistleblower who discloses material nonpublic information that leads to an enforcement action a monetary reward—typically, a percentage of the fines imposed on the liable parties—as an inducement to come forward.

In the United States, which pioneered this mechanism, whistleblower reward programs have seen broad success. Between 1986 and 2020, whistleblower cases under the False Claims Act (FCA) brought in $46.5 billion in penalties, with whistleblowers receiving $7.8 billion in rewards. And this is only under the FCA—other U.S. whistleblower reward programs have also led to the recovery of significant additional sums. For example, under the whistleblower program created by the Dodd-Frank Act, which was created in 2011, whistleblower tips have contributed to at least $2 billion in financial remedies for violations of the securities laws, with over $720 million awarded to whistleblowers. The success of whistleblower reward programs in the United States has inspired similar programs in several other countries, including South Korea, Canada, Nigeria, Ghana, Hungary, and Kenya. But not all of these programs have been similarly successful. For example, in Ghana, the first country in Africa to introduce a whistleblower reward program, no rewards are known to have been issued—in fact, few have made use of the Ghanaian Whistleblower Act’s provisions at all.

What factors help explain when a whistleblower reward program will work as intended? There is no easy or simple answer—the issue is complex, and the effect of any given program depends in part on details of the program’s design, including the prerequisites for receiving a reward and the scope of the program, as well as the country’s culture around whistleblowing. That said, two factors stand out as key indicators of whether a whistleblower reward program will succeed in encouraging substantial numbers of whistleblowers to come forward:

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It’s Not Just the Corporate Transparency Act: Other Reasons To Welcome the Passage of the U.S. NDAA

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Last week I posted about the Corporate Transparency Act (CTA), the new law requiring companies to provide the government with information about their ultimate beneficial owners. The CTA, which was passed (over President Trump’s veto) as part of the National Defense Authorization Act (NDAA), has been getting a lot of attention in the anticorruption and anti-money laundering (AML) community, and rightly so. The product of decades of tireless and shrewd advocacy, the CTA—despite its limitations and imperfections—will make it substantially harder for kleptocrats, terrorists, organized crime groups, and others to abuse corporate structures to facilitate their crimes and hide their loot. But the CTA is not the only part of the NDAA that may have a substantial positive impact on the fight against corruption and money laundering. And while it’s entirely understandable that most of the attention (and celebration) in the anticorruption community has focused on the CTA, I wanted to use today’s post to highlight several other provisions in the NDAA that may also prove important in combating corruption and money laundering. Continue reading →

Are Legislative Changes to US AML Rules Finally on the Way? Some Thoughts on Tomorrow’s Subcommittee Hearing

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Although the United States has been a leader in the fight against global corruption in some respects—particularly in its vigorous enforcement of the Foreign Corrupt Practices Act and, at least until recently, its diplomatic efforts—there is widespread agreement in the anticorruption community that the United States has not done nearly enough to address the flow of dirty money, much of it stolen by kleptocrats and their cronies, to and through the United States. Effectively addressing this problem requires updating the US legislative framework, a task made difficult by the checks and balances built into the federal legislative process, coupled with high levels of political polarization. Yet there are reasons for cautious optimism: Thanks in part to skillful lobbying efforts by several advocacy groups, and aided in part by the Democrats taking control of the House of Representatives in the most recent mid-term elections, it looks as if there’s a real chance that the current Congress may enact at least some significant reforms.

Three of the reform bills under consideration are the subject of a hearing to be held tomorrow (Wednesday, March 13, 2019) before the House Financial Services Committee’s Subcommittee on National Security, International Development, and Monetary Policy. That hearing will consider three draft bills: (1) a draft version of the “Corporate Transparency Act” (CTA); (2) the “Kleptocracy Asset Recovery Rewards Act” (KARRA); and (3) a draft bill that currently bears the unwieldy title “To make reforms of the Federal Bank Secrecy Act and anti-money laundering laws, and for other purposes” (which I’ll refer to as the Bank Secrecy Act (BSA) Amendments). The subcommittee’s memo explaining the three proposals is here, and for those who are interested, you can watch a live stream of the subcommittee hearing tomorrow at 2 pm (US East Coast time) here.

For what it’s worth, a few scattered thoughts on each of these proposals: Continue reading →

To Catch Big Fish, the World Bank’s Integrity Vice Presidency Should Pay for Tips

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The World Bank’s Integrity Vice President (“INT”), responsible for investigating corruption and fraud in World Bank projects, recently released its Fiscal Year 2015 Annual Update. INT had a busy year, opening 323 preliminary investigations, of which 99 were selected for full investigation, and closing 81 investigations, with three-quarters finding evidence of sanctionable conduct. (A primer on how INT conducts external investigations is here.) Some of INT’s recent cases, such as those brought against Alstom SA and SNC-Lavalin, involve large companies. Yet despite these examples, the data in the Annual Report raises questions about whether INT is sufficiently effective in uncovering corruption and fraud by large companies. The evidence suggests not: The firms debarred in FY 2015 are mostly small- and medium-sized enterprises—minnows, not sharks. The longest debarment leveled was for thirteen years on N.C. Sanitors and Service Corporation, essentially for paying public officials in Liberia and falsely claiming it collected trash that it never picked up. The challenged contract was worth about $350,000—not exactly a break-the-bank amount, especially considering the largest contracts the World Bank awarded last year were worth $438 million, $98 million, and $53 million (excluding government-awarded contracts funded by World Bank loans).

Perhaps large corporations with World Bank contracts and governments officials administering large World Bank loans are not engaging in corruption—but I doubt it. It’s much more likely that INT does not have the information that it would need to investigate and seek to sanction large companies. According to people familiar with INT’s intake system, while INT gets thousands of tips a year through its phone and online tip lines, many of which prove valuable (either individually or when aggregated), relatively few tips relate to large contracts where the amount of money at stake enhances the harm from corruption and bribery. INT should therefore develop methods to get actionable information on fraud and corruption related to large projects. My suggestion: pay for information.

One reason why INT may receive few tips about large contracts is that INT currently only offers confidentiality to protect whistleblowers. When it comes to large contracts, the likelihood that a whistleblower will face repercussions if her tip is revealed increases, changing the cost-benefit analysis of reporting. Some potential whistleblowers with actionable information might need some sort of additional material incentive to offset the potential risks. A well-structured system using payments to induce reporting might therefore increase the amount of actionable information INT receives about large-contract corruption.

What would such a system look like? How should it be designed? While this is not the place to lay out the proposal in all its details, the essential elements might work as follows: Continue reading →