September 26, 2012

Blowing the Whistle On Whistleblowers

Hester Peirce

Former Senior Research Fellow
Summary

Whistleblower awards should be used judiciously, but Dodd-Frank and other whistleblower statutes do not give regulators the discretion they need to make appropriate rewards and withhold others. Handing over $100 million to someone who was personally involved in the scheme he revealed ought to make us rethink the parameters for whistleblower awards. When whistleblower awards go to people who, because of their role in the scheme or the nature of their job, had a duty to report it, we need to ask whether that is a good use of large sums of money that would otherwise be going into public coffers.

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Earlier this month, Bradley Birkenfeld, got a rich reward - a record $104 million check from the IRS for blowing the whistle on his former employer, the Swiss megabank UBS. Mr. Birkenfeld, after serving more than two years in prison for his role in facilitating tax evasion, recently was released for good behavior into home confinement. The award to Mr. Birkenfeld raises difficult questions of who ought to be eligible for whistleblower awards. These questions are likely to get further attention as whistleblower programs established under Dodd-Frank develop at the Commodity Futures Trading Commission and Securities and Exchange Commission.

The 2006 tax statute under which Mr. Birkenfeld was awarded prohibits the IRS from awarding individuals who "planned and initiated the actions that led to the underpayment of tax." As Mr. Birkenfeld's lawyers interpret it, that prohibition only applies to the "kingpin," and not to the other participants in the fraud. As his lawyers explained at a press conference, "It takes a rogue to catch a rogue. ... It's not a choir practice when you're doing tax fraud."

Dodd-Frank takes a harder line than the tax statute under which Mr. Birkenfeld received his award. Whistleblowers "convicted of a criminal violation related to the judicial or administrative action for which the whistleblower otherwise could receive an award" are not eligible for awards. Dodd-Frank nevertheless would allow reward money to go to a person who participated in the scheme and is subject to a civil enforcement action based on his role. Mr. Birkenfeld, who provided information to the SEC as well as the IRS, may even be eligible for a future award from the SEC if he is successful in his quest for a Presidential pardon.

Dodd-Frank's approach is troubling because it does not afford the SEC and CFTC discretion to look at circumstances in deciding whether to grant an award. Regulators may not distinguish between an opportunistic whistleblower egged on by lawyers eager for a cut of a large reward and someone whose participation in a scheme was coerced or inadvertent and comes forward as soon as possible because it is the right thing to do. Under Dodd-Frank, both would be equally entitled to a reward, although the latter might get a bigger reward. If a whistleblower's information leads to a successful enforcement action with monetary sanctions of $1 million or more, the SEC or CFTC must give the whistleblower "not less than 10 percent" and up to 30 percent of collected monetary sanctions.

Dodd-Frank also allows for the emergence of another controversial class of whistleblowers that may lead to some unsettling awards in the future. A whistleblower who works for a regulatory agency, the Department of Justice, or a quasi-governmental regulator cannot get an award. An interesting omission from this list, however, is members of Congress and their staff. With Congress' ready access to information - sometimes confidential -- from a variety of sources, a whistleblower tip coming from Congress is certainly a possibility. The prospect of a large reward should not be necessary to spur a tip from a participant in a fraudulent scheme whose conscience kicks in or a Congressional staffer who discovers a fraudulent scheme in the course of his duties.

Whistleblower awards should be used judiciously, but Dodd-Frank and other whistleblower statutes do not give regulators the discretion they need to make appropriate rewards and withhold others. Handing over $100 million to someone who was personally involved in the scheme he revealed ought to make us rethink the parameters for whistleblower awards. When whistleblower awards go to people who, because of their role in the scheme or the nature of their job, had a duty to report it, we need to ask whether that is a good use of large sums of money that would otherwise be going into public coffers.