Rewarding whistleblowers financially for speaking up has been offered up by some as a panacea for fixing whistleblowing law. Here Protect volunteer Queenie Sit outlines our position, highlighting the severe limits of rewards in protecting and encouraging whistleblowers.
In the UK, whistleblowers bringing a claim under the Public Interest Disclosure Act 1998 (“PIDA”) before an Employment Tribunal may receive an uncapped award as a financial remedy for damage to their career, loss of job, or the mental or emotional toll of raising the concerns.
The Employment Tribunal process is about providing a remedy for damages suffered, rather than an amount of money equivalent to impact of the wrongdoing raised.
Providing a reward for whistleblowing is not common practice in the UK currently, nor is it being advanced across Europe as new whistleblowing laws are introduced. Only South Korea and the USA have advanced rewards systems in place.
Protect’s view is that whistleblowers must be adequately compensated for any harm – and uncapped damages must be kept in the Employment Tribunal. We are not opposed to rewards in addition to compensation, whether from employers, regulators or others who want to recognise the good work that whistleblowers do.
However, if a regulator would like to implement a scheme, we would recommend adopting a different framework from that of the USA. As we set out below, in the USA very few whistleblowers receive substantial rewards, and may wait many years for investigations to be completed before they do so.
In America the rewards schemes bring headlines of massive payouts to individuals, but rarely reveal how many whistleblowers receive nothing. There will be certain sectors (e.g. care sector) where rewards would be difficult to put in place due to the lack of fines as a corrective measure. There is also the argument of the potential perverse incentive not to raise a matter internally which we will address below.
At Protect, we want whistleblowers to raise matters with their employers, wherever possible, as the best and quickest way to get their concerns addressed. As Lord Borrie said at the Second Reading of the Public Interest Disclosure Bill, “the regulator is usually in the role of detective, determining responsibility after the crime has been discovered. Encouraging a culture of openness within an organisation will help: prevention is better than cure”.
What do we mean by rewards?
Rewards in the context of whistleblowing, is the idea that the whistleblower will receive part of a fine (or indeed a portion of the money recovered by law enforcement) against an organisation where the organisation is found guilty of wrongdoing or an offence, where the whistleblower has raised this with the authorities.
Rewards primarily consider the scale and impact of the wrongdoing that is being reported, and as such may bear little relation to the impact on the individual.
What do rewards look like currently?
In the UK
There are currently two reward schemes that we are aware of. One is run by Competition and Markets Authority (“CMA”) and introduced in 2017 as part of their “Cracking Down on Cartels” campaign. Whistleblowers can be given up to a maximum of £100,000 rewards for reporting on illegal cartel activity.
HMRC also runs a reward scheme for individuals and in 2020/2021, paid out nearly £400,000 on rewards for individuals who reported tax fraud, including fraud related to the COVID-19 relief schemes. These rewards are discretionary awards based on factors including the amount of tax recovered and the time saved in investigations.
The Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority (“PRA”) published a note for the Treasury Select Committee in 2014 rejecting financial incentives (which we have referred to as rewards) for whistleblowers working in industries they regulate.
From their findings, they concluded that introducing incentives has been accompanied by a complex and costly governance structure, significant legal fees, and undermines the introduction and maintenance of effective whistleblowing mechanisms by firms.
Combined with the lack of empirical evidence that incentives leads to an increase in the number and quality of disclosures made to regulators, they believed that the case for financial incentives has not been made.
In the US
There is no central employment law or system of protection for whistleblowers. Instead, there is a patchwork of protections across different sectors and industries with an emphasis on rewarding the whistleblower with a proportion of fines levelled at their former employer. As a result, whistleblowing protection is set by a combination of regulators, individual USA state and the Federal Government in some areas.
- The Dodd Franks Act allows a whistleblower to apply to claim between 10-30% of a fine if it is original information, leads to successful enforcement action and leads to a fine over $1 million
- The US Commodity Futures Trading Commission (“CFTC”) has the same rules but allows for multiple whistleblowers to come forward with concerns, though the limit on 10-30% of the fine still applies
- The False Claims Act which requires payment to whistleblowers of between 15-30% of the government’s monetary sanctions collected if they assist with prosecution of fraud in connection with government contracting and other government programs
- The IRS Whistleblower Law, which requires payment to whistleblowers of 15-30% percent of monetary sanctions collected if they assist with prosecution of tax fraud
The system is designed to incentivise whistleblowers to come forward with their concerns by giving them a portion of any fine levelled at the organisation: for example, in 2019, 5212 whistleblowing tipoffs were received by the Securities and Exchange Commission (“SEC”) alone, while in 2020 CFTC received 1030. #
This has created some huge sums of money for the whistleblowers: CFTC recently awarded nearly $200 million (approximately £148 million) to a single whistleblower, while the SEC since 2011 has awarded $60 million dollars to whistleblowers after recovering $2 billion in fines.
However, of the 5212 SEC whistleblowers in 2019, only 8 received any reward, while the CFTC issued 16 payments in 2020 for the 1030 disclosures received. In both cases under 2% of those who came forward received anything.
The IRS latest report to Congress also suggests that there are significant delays – often of several years – in whistleblowers receiving compensation under their scheme: a reward scheme which is based on outcomes of successful prosecutions is not a quick fix. Under the SEC Whistleblower Program how much reward a whistleblower receives is based on several factors, including the significance of the information provided by the whistleblower. This places a burden on the whistleblower to produce as close to a ‘ready to fine’ case to the regulator as much as possible.
However in the UK, the principle behind PIDA is to put the responsibility on the employer to investigate and to do as much as possible to encourage the reporting of the concern to the employer.
What could rewards look like?
A rewards programme could be used in addition to the employment law rights and compensation offered by PIDA. Employers might consider rewarding individuals who have helped organisations tackle risks and wrongdoing, catching harm early and preventing reputational, financial or other damage to organisations.
A programme could be created by individual regulators if they had evidence that this might encourage greater or better disclosures from those working in the sector.
With regulators better resourced to deal with whistleblowers and with stronger regulation to drive accountability, Protect could support a reward scheme if the onus of investigation is firmly on the shoulders of the regulator or company.
There are two key hurdles to overcome with this adoption which we examine below:
- The reward system could create perverse incentives
- The reward debate largely focuses on whistleblowing in financial settings (fraud, money laundering etc.) but in our experience, this is only a small part of the whistleblowing landscape
Creating perverse incentives
There is a danger that the system creates perverse incentives where whistleblowers may hold off on raising concerns so there is a bigger fine as a result. It also creates an incentive to bypass the employer’s internal whistleblowing arrangements.
This may make it harder to improve whistleblowing practice within organisations, and is contrary to the development of UK law which has aimed to encourage a robust whistleblowing practice within organisations.
Furthermore, the current rewards system in the US operates on a ‘first come first served’ basis where there is no reward (and consequentially), no incentive to report if a whistleblower is aware that someone has already whistle blown on the issue.
However, given that whistleblowing is in the public interest, everyone should be equally encouraged to come forward with these disclosures and not only do so if they are the first person.
It is easy to jump to the conclusion that rewards could create perverse incentives, when on the other hand, it has been shown that there is “no empirical evidence of incentives leading to an increase in the number or quality of disclosures received by the regulators”.
Additionally, there is currently a high bar in order to qualify for a reward: in the US, only the whistleblower who presents the information first is eligible for the reward. As such, there is only a small number of people who qualify for a reward.
Protect would recommend that the reward system, if implemented, should work hand in hand with other changes we are proposing to the whistleblowing landscape, especially that of creating standards of whistleblowing practice within organisations.
As part of our recommended Bill, we want all employers with 50 or more employees (and select other employers) to introduce internal whistleblowing arrangements. This includes having a whistleblowing policy, proactively taking steps to prevent victimisation, and providing training to staff and managers.
Where an employer fails to comply with these standards it could be fined or sanctioned by the Whistleblowing Commission (a new statutory body created by Protect’s Draft Bill). The sums collected by the Commission might well be redistributed to support whistleblowers, whether through a reward scheme or by addressing the imbalance of power whistleblowers face in litigation.
Heavy focus on financial settings
Setting significant financial rewards for other areas – charities, health, education etc – is likely to be both unattractive in terms of public policy (e.g. is it appropriate to use of limited public services funding in this way), while sometimes being extremely difficult to put a monetary value on the disclosures. How much reward does a carer deserve for saving an elderly person from abuse, how much does a teacher get for exposing exam fraud?
This is a fundamental difference in the USA and UK system of remedies and rewards for whistleblowers. Whereas the USA has a patchwork system with different rules for different industries, the UK has a more comprehensive approach covering all sectors.
In the UK compensation awarded by tribunals, directly relates to the provable damage done to that person’s career regardless of the monetary impact of their disclosures.
Stigma damages and damages for injury to feelings are included in the uncapped awards, recognising that whistleblowers can suffer lifelong impacts on their careers and health. Importantly, the employer who has caused the damage is required to make the payment.
To reward or not to reward?
Providing rewards may not be the best arrangement for every regulator, but there may be arguments to have a scheme for regulators dealing with financial crimes. However, where there are regulators who would like to create a reward scheme, they should consider:
- What is the purpose of the reward scheme? What is the problem that rewards will solve?
- How will this scheme be monitored and put into place to ensure as much fairness as possible across different reward claims?
- How can this scheme work alongside Employment Tribunal hearings and settlement agreements to ensure whistleblowers are adequately compensated, without undue delay?
- How should the reward be calculated (i.e., flat sum, nominal amount, percentage of total fine) and justified?
- What other actions should be taken alongside the reward scheme to ensure that it does not drive perverse incentives?
Regardless, if rewards are implemented, they must come alongside other, more comprehensive reforms to whistleblowing law. See our campaign here.