There is broad consensus that current UK whistleblowing protections are not fit for purpose and excellent work is being done in Parliament to promote the creation of an Office of the Whistleblower and update the current legal framework to create better protections for whistleblowers.
As experts and parliamentarians gather to mark this week’s Whistleblower Awareness Week, is it time to talk seriously however about the elephant in the room – whistleblower compensation, particularly for financial and economic crime?
There have been growing calls for whistleblower compensation for financial and economic crime to be seriously considered (see here and here), and for existing schemes such as that run by HMRC for tax fraud to be considerably expanded. Not everyone agrees, with whistleblowing charity Protect arguing that stronger requirements on employers to have proper protections in place and increased resourcing for law enforcement are better solutions.
Economic crime is calculated to cost the UK around £350 billion (compared to the roughly £14 billion lost to traditional property crime such as burglaries), and the government has committed to ramp up enforcement action on economic crime and corruption. A review of how whistleblower compensation could assist with tackling the scale of the problem is overdue.
The last review done into whistleblower incentives, by the Financial Conduct Authority (FCA) nearly nine years ago, ruled them out. A lot has changed in that time, with the US rolling out new schemes to incentivise whistleblowers to bring forward evidence on kleptocracy, sanctions evasion and money laundering over the past few years.
The danger is that the UK could fall (even more) seriously behind the US on economic crime enforcement and lose a lot of valuable intelligence to US authorities unless it looks seriously at this issue.
The US experience
In the US, whistleblowers can receive rewards of between 10-30% of fines and penalties imposed by US enforcement bodies where they provide credible intelligence that leads to successful enforcement actions.
The statistics on the impact of US reward schemes are impressive. From 1986 to 2022, 69% ($50.4 billion) of the $72.6 billion the US Department of Justice (DOJ) recovered through civil fraud cases involving government funds resulted from whistleblower tip offs. In 2022 alone, 86% of the $2.2 billion in settlements and judgments recovered by the DOJ through civil cases involving fraud and false claims against the US government were based on information received under whistleblower reward schemes.
The DOJ is not alone. The US Securities and Exchange Commision (SEC) has imposed penalties of $6.3 billion as a result of whistleblower information over the past 10 years. US tax authority, the Internal Revenue Service, meanwhile, has collected $6.39 billion of “non-compliant” tax since 2007 on the basis of whistleblower information. The Commodity Futures Trading Commission has imposed sanctions of over $3 billion as a result of whistleblower tips since 2014.
Most strikingly, the US has an open door policy to attract foreign whistleblowers. UK whistleblowers are the second biggest users of US whistleblower programmes, with 774 UK nationals giving tips to US authorities since 2012. Howard Wilkinson, the Danske bank whistleblower, is one such British whistleblower, whose information to US enforcement authorities resulted in a whopping $2 billion fine on Danske Bank in relation to a €200 billion money laundering scandal.
Growing evidence supports whistleblower compensation
As RUSI has pointed out, the academic and empirical evidence is growing that conclusions reached by the FCA back in 2014 no longer hold.
Recent academic research has shown that protection is not enough, and compensation or incentivisation works not just to detect crime and improve enforcement outcomes but also to deter it.
Two important working papers in 2018 and 2021 by the Stockholm Institute of Transition Economics by Nyreröd and Spagnolo looked at the increasing academic evidence on whistleblower rewards which show:
- Increased detection by employees from whistleblower reward schemes
A 2010 US study found that where whistleblower rewards are in place, 41% of fraud cases in the healthcare sector were detected by employees compared to just 14% in other sectors where no such schemes were in place. - Better intelligence for law enforcement
A 2017 study found that where whistleblowers were involved in financial fraud cases, monetary sanctions were higher, and enforcement actions were quicker, suggesting that whistleblowers improve the quality of intelligence brought to law enforcement. - The deterrent effect of whistleblowing on corporate crime and improved corporate behaviour that results
A 2020 study estimated that whistleblower cases under the US False Claims Act had resulted in deterrence worth $18 billion over five years. A 2017 study meanwhile showed that whistleblowing allegations decreased financial misreporting and tax aggressiveness in firms for up to two years. - Advantages of whistleblower rewards over “leniency” programmes which offer immunity from fines
A 2012 study found that cartels are less likely to be formed where whistleblower reward programmes are in place compared to leniency programmes.
The authors found that many of the objections made to reward programmes are not based on evidence, and laid out important design principles to make such programmes effective. They conclude that whistleblower rewards are “a promising tool to use in regulatory areas where non-compliance is prevalent, severe, supervision costly, and enforcement difficult … such as anti-money laundering, procurement fraud, and securities fraud.”
What next for the UK?
With evidence growing that reward programmes result in better enforcement outcomes and improve corporate behaviour, particularly for economic crime, it’s time for the UK to have a proper and serious public debate about whistleblower compensation. The government could do three things:
- Commission a full review of the options, based on extensive consultation, for what a UK whistleblower compensation scheme could look like.
- Bring forward amendments to the Victims Bill that is due to be published any day, to ensure that whistleblowers can be viewed as victims by the court and seek financial compensation in criminal cases.
- Work with law enforcement bodies to ensure that where companies enter into Deferred Prosecution Agreements or guilty pleas, any whistleblowers are compensated generously as part of any negotiation.
