In this Blog, Protect volunteer Michelle Muno reviews the key findings of new research which suggests there is a fundamental conflict of interest in the US rewards system.
On the 29th July 2022 Alexander I. Platt of University of Kansas School of Law published an updated paper on his research looking at use of rewards to incentivise whistleblowers in the United States of America titled The Whistleblower Industrial Complex. This blog looks at the background to whistleblowing programmes and the findings of the new research.
Background: What are the Whistleblowing Programmes (WBP)?
In 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act. established whistleblower reward programs within the Securities and Exchange Commission (SEC) and the Commodity Futures and Trading Commission (CFTC). New ‘Whistleblower Offices’ were established to receive tips from and make financial payments (bounties) to whistleblowers who report violations of the securities laws or the Commodity Exchange Act. Whistleblowers were given the right to file tips anonymously and the right to file an anti-retaliation lawsuit against their employer if they are dismissed as a result of their tipping.
How do the WBPs work?
The programmes financially incentivise whistleblowers who provide the SEC and CFTC with actionable information. In other words, not every piece of information or tip will be acted on. Success depends on the agencies sifting through a mountain of tips to determine the ones worth investigating or pursuing. Successful whistleblowers can receive rewards of 10 to 30 percent of the amount the government collects in successful enforcement actions over $1 million. The SEC and CFTC determine the amount of the reward within the 10% – 30% range, taking into account the significance of the information, and the degree of assistance provided by the whistleblower and their lawyer.
Issues with the WBPs found by the research
There are a number of pressing issues surrounding these whistleblowing programmes which throw doubt on whether they promote effective whistleblowing.
Tip sifting
A key problem is the way that the SEC and CFTC sort through the information they receive to identify which ones to investigate. With an average of 49 tips received every day there is the, e possibility of failing to detect a major misconduct due to an oversight or failing to assign an appropriate level of agency resources to investigating it. Only around 1 in 250 tips from whistleblowers lead to awards. This raises significant doubts about whether the goal is really to correct workplace wrongdoing, as only a select few tips are considered worthy of investigation.
Faced with such challenges to resource the tip-sifting, the research found that the SEC and CFTC rely on private lawyers to identify high quality tips. The research suggests that the tip-sifting process has been effectively privatised or outsourced to private lawyers.
The assumption is that these private whistleblower lawyers improve tip-sifting by investing their own investigatory resources to filter out low quality tips and ensure that high quality tips receive the most careful attention by the agencies.
While this may appear a good use of scarce agency resources, the research shows that the lawyers are not always independent and impartial. Lawyers doing the sifting often simultaneously represent some, but not all, of the whistleblowers who provide the tips. If a whistleblower they represent is deemed to have provided useful information to the CFC or SEC both they and the whistleblower are financially rewarded. As such, the lawyers doing the sifting have an incentive to promote tips from the whistleblowers they represent even if they provide low quality information, and to dismiss the tips of whistleblowers they don’t represent, even if they provide high quality information. The researchers’ freedom of information (FOI) requests sent to the SEC and CFTC whistleblower programmes revealed that whistleblowers represented by lawyers significantly outperform unrepresented ones. Furthermore, whistleblower-clients of lawyers who have previously won at least one WBP award outperform first-timers; and lawyers who used to work at the agencies (SEC or CFTC) outperform everybody.
The research concludes that it is private lawyers who gain the most from this system, not the whistleblower. Private lawyers receive one third of the total pay-outs, estimated at roughly $300 million dollars. This is a huge sum of US public funds which is going to private lawyers, not whistleblowers. Although the programme successfully generates many tips and boasts about the impressive amounts paid to whistleblowers, the research suggests that the system is dominated by the financial interest of private lawyers and fails to properly encourage whistleblowers to come forward with good information or listen to them when they do.
The research also criticises the is the secrecy which shrouds the tip-sifting process. Private whistleblower lawyers operate free from all public accountability, transparency, or regulation. They are not required to disclose any information regarding the number of tips they receive, the number of tips they choose to pass along to the agencies, or the number or value of awards they receive.
Are there similar reward programmes in the UK?
Away from Platt’s research, UK regulators including the Competition and Market Authority and the HMRC also run reward schemes, albeit the rewards are nowhere near as large as those in the US. Protect has always maintained the view that regulators could, where they feel appropriate, create and offer fair reward schemes, but they should monitor carefully whether they result in more or better disclosures. So far, there is no evidence of rewards leading to an increase in the quality of disclosures in the US or the UK.
With a greater focus on tackling corruption in the UK, some have proposed that rewards should be introduced here. Our 2021 You Gov research suggests a lack of appetite from whistleblowers in the UK: only 2% said that they would raise a concern if a financial reward was offered and 43% said they would raise a concern regardless of the risks to themselves.
Reforms?
The above issues were found to undermine the effectiveness of WBPs as a means of actively correcting workplace wrongdoing. Instead, the research found, the programmes commercialise whistleblowing; encouraging whistleblowers to ignore ‘small’ concerns (which may actually be impactful) for big-ticket concerns.
The research concludes with a look at how reforms might improve the US system. These include regulating private lawyers – requiring disclosures or capping their fees. The research suggests that agencies should not make statements about large pay-outs to whistleblowers which can be misleading – they fail to account for the substantial proportion of sums that are paid to private lawyers