The United Kingdom’s tax authority, HM Revenue and Customs (“HMRC”), is working on developing a program to pay awards to tax informers who provide information that leads to tax enforcement. This program is expected to be unveiled in November of this year. The Serious Fraud Office (“SFO”) is also working on developing a similar whistleblower rewards program. 

The UK is developing these programs because they have seen that the US whistleblower reward programs are highly successful. A report by Royal United Services Institute (“RUSI”) Fellow Eliza Lockhart examined the success of the US Whistleblower reward programs and found that these types of programs would also be effective in the UK.

A large part of why these U.S. programs are so successful is because they offer financial awards of 10-30% of the monies collected in enforcement actions that they significantly contributed to. These award laws work because they flip the calculus on white-collar crime. Economists have long found that white-collar crime and corruption are rational economic activities, which occur when the benefits outweigh the risks of detection and penalties.

To really change the calculus on corruption, it is necessary to flip the equation on its head and make whistleblowing itself a rational economic activity. This is where whistleblower rewards are critical: they increase the benefit and decrease the risk for whistleblowers exposing the truth. These laws treat whistleblowing as an essential part of an anticorruption system, rather than as an employment issue.

For these programs to work as intended, certain key design tenets must be included. These include reliable confidentiality protections, reliable paying of rewards to qualified whistleblowers, not reducing the effectiveness of rewards for the largest cases by including a cap on rewards, and ensuring that the whistleblower program has a guaranteed funding mechanism.

Confidentiality Protections

Confidentiality protections are necessary for any whistleblower rewards program to succeed. By allowing whistleblowers to remain confidential, whistleblowers can trust that providing information will not lead to retaliation against them. Retaliation can lead to whistleblowers losing their source of income, having their reputations tarnished through smear campaigns, and being blacklisted from their industry.

The strongest protections against retaliation for a whistleblower are confidentiality and anonymity. A company or organization cannot retaliate against a whistleblower if they do not know who blew the whistle, or even that there is a whistleblower. Confidentiality has the added benefit of making wrongdoers respond to the information about their misdeeds itself rather than attacking the whistleblowers who bring it forward.

US Dodd-Frank style whistleblower reward programs, including the Securities Exchange Commission (“SEC”), Commodity Futures Trading Commission (“CFTC”), and Financial Crimes Enforcement Network (“FinCEN”) whistleblower programs, are the gold standard for confidentiality and anonymity of whistleblowers. These programs are required by statute to allow whistleblowers to remain completely anonymous when using an attorney, and the identity of the whistleblower is required by statute to be guarded by the agency.

While the UK programs may have different constraints for how the program can be designed, and whether they can offer anonymity, it is important for the programs to have reliable protections for confidentiality that whistleblowers can safely rely upon. 

Mandatory Rewards

Whistleblowers face significant amounts of uncertainty and risk when blowing the whistle. By coming forward, they put their careers at stake and often face retaliation. In order to offset this risk and incentivize whistleblowers to come forward, especially whistleblowers with the most important information, the rewards offered by programs must be reliable. When rewards are discretionary and can be denied by a whistleblower office without recourse, whistleblowers view the rewards as insufficient for the risk they are undertaking and choose to not use the program. Whistleblowers face enough uncertainty without being unable to trust the programs they are meant to rely upon.

The United States programs have learned this lesson through trial and error, where discretionary programs failed and were replaced by successful programs that guaranteed rewards for qualified whistleblowers. The Internal Revenue Services’ (“IRS”) had a voluntary whistleblower rewards program that was a failure, which was made mandatory in 2006. The SEC’s discretionary program failed and was replaced by a program with mandatory rewards in 2010. The False Claims Act became successful when rewards for whistleblowers were guaranteed to be at least 15%. 

This precise issue was addressed most recently in the Anti Money Laundering (“AML”) Whistleblower Program, which was established in 2020 as a discretionary program and was updated in 2022 solely to make rewards mandatory. National Whistleblower Center (“NWC”) explained in the rulemaking comments that: “It is highly unlikely that persons with relevant information relating to illegal money laundering and financing terrorism will risk their livelihoods, reputations and the potential of high litigation costs without reasonable financial assurances.” This argument was accepted by Congress and the law was successfully amended in 2022. 

The amended AML Whistleblower Program followed the lead of the highly successful Dodd-Frank programs, where the whistleblower offices do not have discretion and must pay whistleblowers an award of 10-30% if the whistleblower is qualified under set criteria for the reward. See 31 U.S.C. § 5323(b)(1); 15 U.S.C. § 78u-6(b)(1); 7 U.S.C. § 26(b)(1). Discretion for determining the amount of an award between 10 and 30% is available based on set factors. See 31 U.S.C. § 5323(c); 15 U.S.C. § 78u-6(c); 17 CFR § 240.21F-6; 7 U.S.C. § 26(c); 17 CFR § 165.9. These discretionary factors help to incentivize certain behaviors of whistleblowers, such as cooperation with the investigation, prompt reporting of information, and cooperation with internal compliance systems. See 17 CFR § 240.21F-6(a)(2)(i)-(ii), (a)(4); 17 CFR § 165.9(b)(2)(i)-(ii), (b)(4).

We hope that the HMRC program, and other UK programs, avoid these early failures that US programs experienced. UK programs may require additional legislation in order to make rewards mandatory for qualified whistleblowers; however, there are non-legislative ways to ensure the dependability of reward programs.

If a program must be discretionary, the first way to increase the reliability of whistleblower rewards is by including in the program’s rules a presumption of paying an award to whistleblowers so long as: 

the whistleblower provided information in the manner designated by the program; 
the information initiated or significantly contributed to the collection of proceeds; 
sufficient proceeds were in fact collected; and 
the whistleblower does not meet any of the categories for disqualification. 

Including this clear presumption in the rules for the program will increase whistleblowers’ trust in the program by reducing the leeway for arbitrary denials of rewards.

A further way to reduce the chance of arbitrary award denials is to specify the reasons for which the whistleblower can be denied an award. See, e.g., 15 U.S.C. § 78u-6(c)(2). This gives whistleblowers guideposts for how they interact with the program and helps ensure consistency in both granting and denying awards.

These simple steps can increase whistleblowers’ trust in the program’s payment of rewards, even for programs that do not mandate rewards.

No Caps on Rewards

A further matter of importance is ensuring that there are no caps on amount of rewards. While reward caps may appear to be a fair idea – ensuring that whistleblowers are not paid what seems to be unduly large amounts – their actual effect is to deter the best whistleblower cases. 

The whistleblowers who have access to information on the scandals that will result in the largest collections by agencies and therefore the largest rewards, are often also very successful and highly paid executives – with much to lose by blowing the whistle. By capping rewards, these whistleblowers the rewards for blowing the whistle will not overcome the steep risks that they face. As described by Lockhart:

The need for large rewards is particularly relevant to cash-for-information schemes that aim to incentivise corporate insiders to report incidents of economic crime. The already substantial risks involved in becoming a whistleblower are magnified for financial and professional service providers, whose jobs prioritise confidentiality, privacy and trust. Disclosing sensitive information, even in the public interest, can result in the whistleblower not only sacrificing a highly remunerated position, but also becoming blacklisted from their chosen profession. 

Large rewards also play a key role in deterrence, making wrongdoers aware that their own employees are highly incentivized to report illegal activity rather than remain silent. This can even lead to a “race to report” the illegal activity.

Bradley Birkenfeld, a Swiss banker who blew the whistle on UBS and took down a US tax evasion scheme in Swiss banks, exemplifies the success that can result from offering large rewards. Birkenfeld’s whistleblowing led to a fine of $780 million paid by UBS, and a substantial IRS recovery of US taxes from US citizens who illegally hid their money in Switzerland. Due to the sheer scale of this whistleblowing case and the considerable recoveries, Birkenfeld received an award of $104 million. This case showed the promise of US whistleblower reward programs – for whistleblowers, regulators, and wrongdoers. Following this unprecedented reward, significantly more whistleblowers reported to US reward programs and the Swiss banking industry was put on notice that their own bankers had incentive to go to US regulators.

A similarly important consideration is ensuring that the size of an award does not affect the percentage of an award paid to a whistleblower. The SEC regulations specifically disallow using the size of an award as a factor when determining reward percentage for the same reasons as above: because it disincentivizes the best whistleblowers with the largest cases. See 17 CFR § 240.21F-6(d). 

Guaranteeing Funding for Programs

The final consideration is ensuring that a whistleblower program has reliable funding. After a program becomes successful, other areas of government may try to have the funds brought in by whistleblowers be allocated elsewhere, eventually bleeding the program dry. It is important to ensure from the start that some of the funds brought in by the program are used solely to fund the program itself. 

The report by RUSI found clearly that whistleblower reward programs are not just effective – but also cost-effective. The CFTC whistleblower program had administrative costs of $21 million from 2012 to 2022. “Deducting those costs and the total rewards paid to whistleblowers over that decade from the total financial recovery obtained from whistleblower-related cases results in a gross operating profit of more than US$2.6 billion.”

Conclusion

As the UK works to develop their whistleblower reward programs, we urge them to utilize the prior experience of the US programs to develop a program with these key tenets – there is no better way to ensure that the program will be trusted and utilized by whistleblowers.