Revisiting Old Arguments Against Whistleblower Awards as UK Reconsiders Their Implementation

            In the United Kingdom, there is renewed interest in the possibility of paying monetary awards to whistleblowers who report financial crimes. In February, the new Director of the UK’s Serious Fraud Office (SFO) Nick Ephgrave QPM was direct with his opinion on the matter. ‘I think we should pay whistleblowers,’ he said during a speech at the Royal United Services Institute (RUSI) in London.

            Since then, Ephgrave has continued to advocate for the implementation of whistleblower awards in the UK. Furthermore, on December 10, RUSI released a landmark report arguing that the UK should end its 'long-held antipathy' towards paying whistleblowers because such a program could play a 'pivotal role' in reducing white-collar offences.

             Resistance to implementation of whistleblower awards has relied heavily on a 2014 report published by the Bank of England Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). This FCA/PRA report, which studied the implementation of the Dodd-Frank Act in the United States, was highly critical of awards and has been widely cited in the decade since. However, the FCA and PRA conducted research into the effectiveness of awards a mere four years after the US established its US Securities and Exchange Commission (SEC) Whistleblower Program with the passage of the Dodd-Frank Act in 2010.

            In the decade since the FCA/PRA report, a body of empirical evidence has emerged around the effectiveness of the SEC Whistleblower Programs' use of monetary awards. In our working paper, we revisit central arguments made against whistleblower awards in the FCA/PRA report in light of this evidence.

            Overall, the data disproves the main criticisms levied against whistleblower awards in the FCA/PRA report, supporting efforts in the UK across the globe to implement whistleblower award laws modeled on the Dodd-Frank Act.

            The seven debunked FCA/PRA report criticisms are

• ‘There is no empirical evidence of rewards leading to an increase in the quantity of disclosures.’
• ‘There is no empirical evidence of rewards leading to an increase in the quality of disclosures.’
• ‘Rewards Laws are unlikely to increase the number of successful prosecutions.’
• False Reporting; ‘Financial incentives might lead to more approaches from opportunist and uniformed parties passing on speculative rumors . . . The reputation of innocent parties could be unfairly damaged as a result.’
• Undermining Internal Compliance; ‘Incentives offered by regulators could undermine the introduction and maintenance by firms of effective internal whistleblowing mechanisms.’
• ‘Whistleblowers May Choose to Delay their Report Until the Last Possible Moment to Maximize Their Monetary Gain.’
• ‘Incentives benefit only a small number of whistleblowers . . . they provide nothing for the vast majority of whistleblowers.’

            The empirical evidence now clearly shows that the mandatory award structure of Dodd-Frank has resulted in a historic growth in both the quantity and quality of whistleblower disclosures. Furthermore, statistics released by the Department of Justice on False Claims Act settlements show that a majority of successful prosecutions under that law stem from whistleblowers.

            For example, since Dodd-Frank was enacted the annual number of Dodd-Frank claims has grown from 3001 in FY 2012 (one and one-half years after the law was passed) to 18,354 claims in FY 2023.

            The FY 2022 report issued by the Commission’s Office of the Whistleblower summarized the quantitative success of the program:

‘Whistleblowers have played a critical role in the SEC’s enforcement efforts in protecting investors and the marketplace… Enforcement actions brought using information from meritorious whistleblowers have resulted in orders for more than $6.3 billion in total monetary sanctions, including more than $4.0 billion in disgorgement of ill-gotten gains and interest, of which more than $1.5 billion has been, or is scheduled to be, returned to harmed investors.’

            As for whistleblower tips leading to successful prosecutions, since 1987, based on the statistics published by the DOJ, whistleblowers have been the direct source of 70.05% of civil fraud recoveries obtained by the United States under the False Claims Act.

            Furthermore, the empirical evidence does not support concerns that whistleblower awards would lead to false reporting, undermine internal compliance or lead to delays in reporting.

            Out of the thousands of persons participating in the Dodd-Frank program, there are only five documented instances of the Commission disqualifying individuals for abusing the process. Year-after-year, the SEC has documented that approximately 80% of all whistleblowers initially filed internal complaints and has reduced award totals due to unreasonable delay in a small fraction of award orders.

            Lastly, the FCA/PRA report criticism that the majority of whistleblowers do not benefit from the payments misses the point of the award laws. They are not intended to be the final answer to all issues related to whistleblowing. They target specific crimes and provide the best compensation and protection for whistleblowers who have actionable evidence related to those crimes.

Conclusion

            Fourteen years after Dodd-Frank was passed, and after over 85,000 whistleblowers have filed claims, and hundreds have collectively over $2 billion in compensation, empirical data exists to objectively evaluate the Dodd-Frank structure for incentivizing, protecting and compensating whistleblowers.

            Given this data, the forthcoming RUSI report on whistleblower awards in the UK will likely sing a different tune than the FCA/PRA report. This will be good news for whistleblowers and the UK public. But it will be bad news for corporate fraudsters.

The authors’ paper can be found here.

Stephen M. Kohn is an Attorney at Kohn, Kohn & Colapinto.

Melissa Revuelta is a Senior Law Clerk at Kohn, Kohn & Colapinto.

Geoff Schweller is the Communications Director for Kohn, Kohn & Colapinto.