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Whistleblower Incentives Strengthen Corporate Compliance Programs

Whistleblower reward programs help to combat fraud that otherwise would go undetected. They return funds to harmed investors, promote market integrity, and protect the public.

Paying whistleblowers for the tremendous risks in reporting fraud (including blacklisting) with penalties garnered from enforcement actions (rather than congressional appropriations) makes these programs a win-win for regulators and taxpayers. They enhance regulators’ ability to detect and halt fraud schemes before investor losses mount, and they combat complex frauds that threaten market integrity.

In light of this, Congress launched a whistleblower program to reward disclosures of money laundering and sanctions evasion, and that program is already attracting high-quality disclosures. Congress should give this critical enforcement tool to other agencies that protect consumers and combat fraud, including the Consumer Financial Protection Bureau and Federal Trade Commission.

What’s not to like about giving whistleblowers incentive to report fraud? Some attorneys argue that whistleblower reward programs undermine corporate compliance. Far from it—whistleblower rewards strengthen companies’ compliance programs in several important ways.

They actually deter fraud. Raising the likelihood of exposure encourages companies to genuinely police themselves. Before the Dodd-Frank Act, corporate compliance programs generally were ineffective. They failed to prevent the 2008 financial crisis that cost the US economy approximately $20 trillion.

All too often, companies swept fraud under the rug and either ignored whistleblower disclosures or retaliated against them. Independent investigations of whistleblower disclosures often focused more on investigating the whistleblower than the wrongdoing that had been disclosed.

SEC enforcement director Gurbir Grewal encapsulated the new paradigm in a May 23 speech, saying it’s a risky gamble for company executives to think, “we’ll just take our chances that the SEC doesn’t learn of a violation or, if they do, we’ll cooperate then.”

Due in part to the SEC’s whistleblower program, “it’s really no longer a question of if we’ll find out about a violation, but often when,” Grewal said. As the program generated more than 18,000 whistleblower tips in fiscal year 2023, an SEC-regulated entity will find it much more difficult to sweep a violation under the rug.

They encourage quality systems to detect violations. If a company’s compliance programs develop a reputation for taking concerns seriously, performing credible investigations, and protecting whistleblowers against retaliation, then employees are likely to report internally.

Conversely, employees at companies that retaliate against whistleblowers or perform sham investigations designed to protect wrongdoers are more likely to report violations directly to the SEC. Whistleblower reward programs give companies a powerful incentive to set the right tone at the top and encourage internal whistleblowing.

They break the corporate code of silence. Barring the use of corporate non-disclosure agreements and policies to silence whistleblowers empowers whistleblowers to expose wrongdoing.

Before the SEC created its whistleblower program, companies used NDAs and other agreements to silence whistleblowers by threatening to sue them or conditioning deferred compensation or severance benefits on their silence. The SEC now has a robust anti-impedance rule barring companies from impeding whistleblowing, and the commission has brought 18 enforcement actions to enforce that rule.

By authorizing whistleblowers to provide confidential (but not privileged) information and countering corporate bullying tactics designed to suppress lawful disclosures (otherwise known as SLAPP suits), the SEC has empowered whistleblowers to provide evidence of fraud that enables the government to hold wrongdoers accountable.

The SEC’s anti-impedance rule changes the calculus for companies that consider providing incomplete or misleading information—they must assume the risk that the SEC may receive the very evidence that the company wants to conceal courtesy of a whistleblower.

They incentivize internal whistleblowing. Exchange Act Rule 21F-6(a)(4) authorizes an increase in a whistleblower’s award percentage for reporting the securities violation through internal, legal, or compliance procedures before reporting it to the SEC.

Exchange Act Rule 21F-4(c)(3), meanwhile, enables a whistleblower to get an award for information disclosed by their employer to the SEC where the whistleblower’s internal disclosure prompted an internal investigation, the company provided information from that investigation to the SEC, and the whistleblower made a disclosure to the SEC within 120 days of reporting a violation to the company.

Data from the annual reports of the SEC Office of the Whistleblower reveals that around 80% of SEC whistleblower award recipients that disclosed violations committed by their current or former employers reported internally before notifying the Commission—contradicting the claim that such programs undermine internal compliance programs.

Whistleblower reward programs are an ingenious use of market forces to combat fraud and conserve limited enforcement resources. Companies that bemoan the success of these programs should stop blaming regulators and start strengthening their own compliance measures.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Jason Zuckerman is principal at Zuckerman Law in Washington, D.C. and represents whistleblowers globally.

Matthew Stock is director of the whistleblower rewards practice at Zuckerman Law.