Rewarding whistleblowers – a price worth paying?

As featured in The Banker

Financially rewarding whistleblowers is controversial. But it may be a necessary price to pay if London is to retain its position as a global financial centre, write Greg Glynn and Jorge Lopes.[1]

SHOULD corporate whistleblowers be financially rewarded? It’s a debate that is as timeless as it is controversial.  

Last May, the All-Party Parliamentary Group (APPG) on Anti-Corruption and Responsible Tax and the APPG on Fair Business Banking published an “Economic Crime Manifesto” (Manifesto), in which Dame Margaret Hodge MP and Kevin Hollinrake MP urged the government to take decisive action in part 2 of its Economic Crime and Corporate Transparency Bill.

Some of the APPG recommendations take inspiration from the US model, where reward-based whistleblower programmes have been in place for many years.

In particular, the Manifesto proposed the enactment of a Whistleblowing Bill, which would establish an Office for Whistleblowers to provide protection and proper compensation for those who speak out against or uncover economic crimes and other wrongdoing.

With its recent Economic Crime and Corporate Transparency Bill introduced to parliament, the UK government unfortunately passed on this worthwhile opportunity to address the APPG recommendations which, carefully crafted, could have helped to strike a balance between tackling the scourge of economic crime whilst protecting whistleblowers from retaliation.

Providing “proper” financial reward to informants is controversial and whilst some countries, notably the US, have embraced it, others have shied away.

How are other countries tackling whistleblowing?

In the EU, member states were required to transpose the EU’s Whistleblowing Directive into national legislation by December 17, 2021.  The Directive’s minimum standards require that individuals are protected against retaliation should they blow the whistle on breaches of EU law.

The EU framework is similar to the existing British regime in that it seeks to protect whistleblowers from retaliation and does not seek to reward those who make disclosures in the public interest.

In the US, whistleblower programmes such as those under the SEC[2] or the IRS[3] have rewarded those who provide valuable information with very significant sums of money.

In 2014, the SEC awarded $30 million to a foreign national which, at the time, was the largest award ever made to a whistleblower. [4] Two years ago, the SEC issued a $114 million reward to an individual.[5]The IRS has also rewarded significant sums, including a $104 million awarded in 2012 to former UBS banker, Bradley Birkenfeld, who exposed overseas tax evasion.[6]

Indeed, since 2007, the IRS has awarded over $1.05 billion based on the collection of $6.39 billion from non-compliant taxpayers.[7] The SEC has paid a similar amount to more than 200 people based on tips that resulted in fines of around $5 billion, since their programme began in 2011.[8]

A closer look into the British and American models

The number of whistleblowing tips made to the SEC in 2022 amounted to 12,300, up from 12,210 in 2020 and from 6,911 in 2020, a staggering 77% increase.

In comparison, the FCA, which is not a reward-based system, has so far received 519 reports in 2022, 1,025 in 2021 and 1,075 in 2020.

Interestingly, the SEC received 132 whistleblower tips from UK-based citizens in 2021 compared to 84 in 2020, a trend opposite to the one experienced by the FCA.  In fact, the number of whistleblowing tips from European countries such as the UK, Germany and France to the SEC have been increasing since 2011, as the chart below shows.

The benefits of financial compensation have long been a cause for debate, with UK authorities showing scepticism towards the American model in the past, questioning their cost effectiveness and concerned that reward-based can lead to a large backlog of claims, causing potential headaches for regulators.

Even if only a small number of whistleblowers end up being compensated, the increasing use of the US programmes – including by UK based whistleblowers – emphasizes how a potential large reward may attract more whistleblowers.

The UK is not entirely averse to reward-based programmes. The HMRC paid £430,000 in rewards for information that helped tackle tax avoidance and evasion, a 63% increase from the previous tax year.

This increase may indicate that rewards do encourage people to blow the whistle as opposed to relying solely on protection against retaliation.

The US government continues to apply a similar formula in other matters, including targeted actions involving the assets of Russian oligarchs. Last March the Treasury unveiled the Kleptocracy Asset Recovery Rewards Program, which can reward eligible individuals with up to $5 million for providing information leading to the recovery of “stolen assets” linked to foreign government corruption.

The UK government has also been highly vocal about its position in relation to Russia’s aggression in Ukraine and has even resorted to sanctions. However, the US government took a further step by adding even more weapons to its arsenal by including yet another whistleblower programme.

What next for the UK?

We now know that the APPGs’ whistleblowing proposals were not incorporated in the upcoming economic crime legislation, leaving a void that needs to be addressed by the UK.

London’s position as a global financial centre needs a regime that meets the challenges of economic crime both today and into the future.

Protection against retaliation for whistleblowers, who can suffer huge career and personal consequences even where they are protected, is non-negotiable.

But we believe the UK authorities should consider financially rewarding them too. The consequences for whistleblowers can be extensive and pervasive even with retaliation protections. Their (laudable) actions can result in ostracisation, and potentially compromise career progression and future earnings. Rewarding those who act in the public interest, leading to successful enforcement actions, can be a strong nudge in prompting more to come forward.

Furthermore,  proceeds from such fines could also go a long way in tackling the underlying funding issues of the UK’s enforcement agencies, not to mention provide investment for vital infrastructure such as hospitals, schools, and roads.

The UK is in a prime position to create a reward-based system, but the current upgraded Economic Crime Bill lost an opportunity to capitalise on this system.

Rewarding whistleblowers may be controversial, but it is a price the UK should be willing to pay to fortify its fight against white-collar crime.

[1] Greg Glynn is a principal and Jorge Lopes is a manager at Forensic Risk Alliance.

[2] SEC Office of the Whistleblower (“SEC OWB”).

[3] IRS Whistleblower Office.

[4] SEC Press Release 2014-206.

[5] SEC Press Release 2022-266.

[6] IRS Whistleblower Office Report, Fiscal Year 2012 Annual Report.

[7] IRS Whistleblower Office Report, Fiscal Year 2021 Annual Report.

[8] SEC Office of the Whistleblower, 2021 Annual Report to Congress.

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