Imagine being a former banker, jailed for exposing the corruption you were a part of, only to later receive a $104 million reward for your efforts. Reading the story of this whistleblower and researching the topic of whistleblowing incentives gave me a deeper understanding to share. Whistleblowing is a powerful tool for exposing illegal and unethical practices, particularly in the financial and public sectors. It allows individuals to report misconduct and ensures that the right authorities take action. We will explore what whistleblowing is, the financial incentives that motivate individuals to come forward, and how different countries implement such mechanisms.

Is it worth whistleblowing?

Understanding Whistleblowing

Whistleblowing is the disclosure of information by an individual who reasonably believes that the information shows wrongdoing, such as breaking laws or ethical standards. This disclosure is made to a specific individual or authority to expose actions that would harm an organization. It is a powerful tool used to address fraud that may otherwise go unnoticed.

There are different types of whistleblowers: internal and external. Internal whistleblowers report wrongdoing within their own organization, usually their supervisor or an internal body. External whistleblowers report to authorities outside of their organization, such as government regulators, law enforcement agencies, or even the media. Both types are important for exposing corruption and holding organizations accountable, but they face different risks and motivations.

The role of whistleblowers is to promote transparency and accountability, especially in industries where unethical behavior can have far-reaching consequences. By reporting fraud or other forms of misconduct, whistleblowers improve how both public and private organizations operate. However, the decision to blow the whistle is not always easy, as it often comes with personal and professional risks, which is why financial incentives are often considered an important motivator.

Enabling Whistleblowing

Encouraging whistleblowing is important at every level: international, national, and company specific. This multi-level approach has been used so far to ensure its effectiveness in society. 

At the international level, organizations including Transparency International and the OECD promote the enactment of whistleblower protections at the national level. They use soft-law instruments, encouraging governments to establish legal frameworks for protecting whistleblowers. However, these guidelines are not binding.

The International Chamber of Commerce (ICC) has set out policies on whistleblowing. The ICC Guidelines on Whistleblowing and the ICC Whistleblowing and Whistleblower Protection Policy encourage companies to create internal reporting mechanisms. These mechanisms should promote whistleblowing and protect whistleblowers from retaliation. In 2019, the G20 adopted its High-Level Principles for the Effective Protection of Whistleblowers. These principles set global standards for protecting those who expose wrongdoing.

At the national level, many countries have passed laws with civil or criminal consequences to protect whistleblowers. In the United Kingdom, the Public Interest Disclosure Act of 1998 and the Employment Rights Act of 1996 serve this goal. In the United States, the Whistleblower Protection Act of 1989 covers federal employees, while the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010 focus on the private sector. France also created a strong legal framework by aligning with the EU Whistleblowing Directive in the late 2010s and early 2020s. These laws will be discussed in more detail later.

At the company level, internal procedures usually follow national laws. These procedures help companies balance the need to protect whistleblowers while also safeguarding sensitive data. Companies must respect employee loyalty and prevent the disclosure of trade secrets or confidential information. The goal is for legal frameworks to protect whistleblowers without compromising the employer’s interests.

Whistleblowing Financial Incentives

Beyond confidentiality, US laws, including the 2010 Dodd-Frank Act, provide non-negligeable financial incentives for whistleblowers. Under this Act, government agencies such as the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) are required to reward whistleblowers who provide high-quality, original information leading to enforcement actions resulting in sanctions exceeding $1 million. Whistleblowers are entitled to receive between 10% and 30% of the total sanctions collected. The exact percentage is mainly determined by the relevance of the information provided and the assistance offered.

A strong financial incentive more than encourages whistleblowing. When the reward is high enough, it also provides protection against potential backlash, including risks of prolonged unemployment or inadequate defense in a lawsuit.

For example, since issuing its first award in 2007 through June 2024, the IRS has paid whistleblowers over a billion dollars. These awards were based on the successful collection of more than $7 billion from non-compliant taxpayers.

UBS Whistleblower Exposing Tax Evasion

Bradley Birkenfeld is known for exposing the UBS scandal, one of the most famous financial whistleblowing cases.[1] In 2007, he revealed the bank’s illegal practices to the US Department of Justice. Under the Tax Relief and Health Care Act of 2006, he could have earned up to 30% of the recovered tax revenue. However, the former banker was later arrested for withholding essential information. He pleaded guilty to failing to disclose complete details. Among others, Birkenfeld had helped the US billionaire Igor Olenicoff evade $200 million in taxes.

Bradley Birkenfeld was convicted of conspiracy to defraud the US and sentenced to 40 months in prison, with a $30,000 fine. He also faced the possibility of arrest in Switzerland for violating Swiss banking laws due to his disclosures. After serving 31 months in prison, Birkenfeld received a $104 million reward from the IRS in 2012 for his whistleblowing.

Whistleblowing Reporting Channels

The protection offered to whistleblowers follows a structured process that should ideally be well-defined. In practice, reporting channels include both internal and external options. Whistleblowers are usually encouraged to exhaust internal channels before resorting to external ones. This approach is seen in the United Kingdom Public Interest Disclosure Act of 1998, which established a tiered system. According to this system, each successive tier requires meeting more conditions for the whistleblower to be protected. Similarly, the European Union Directive 2019/1937 proposes a three-tiered system:

1. Internal reporting channels within the organization.
2. Reporting to competent authorities if internal channels fail or are unlikely to work effectively. This could be the case when using internal channels would compromise the authorities’ ability to investigate.
3. Public or media reporting is allowed if no action is taken after reporting through other channels, or if there is an imminent or clear threat to the public interest or irreversible damage.

The legislation also includes a feedback obligation for both authorities and businesses. They are required to respond to and follow up on a whistleblower’s report within three months when internal reporting channels are used. In addition, many organizations and governments have set up hotlines to facilitate whistleblowing, such as the SEC Referrals Portal in the United States.

Reprisals Against Whistleblowers

Reprisals against whistleblowers are a serious concern. These often include termination of employment, campaigns to discredit and isolate the individual, and severe financial and emotional strain. In some tragic cases, whistleblowers lose their lives. Such was the case for two Boeing whistleblowers, John Barnett and Joshua Dean, who raised concerns about the company’s safety practices.

Whistleblowers can also face immense pressure from supervisors. This pressure can include direct and indirect threats of violence and harassment, sometimes extending to their families. Other forms of retaliation include salary reductions, missed promotions, and attacks on their credibility. In cases involving client information, there is also the risk of legal action for breaching confidentiality. This is especially common in large corporations, where “gagging clauses” are often used.

These clauses, found in employment contracts or settlement agreements, attempt to prevent employees from disclosing information about their workplace. Some clauses require internal reporting before whistleblowers go to the authorities. Others force employees to waive any monetary awards, such as those offered under the Dodd-Frank Act of 2010. In some cases, whistleblowers may be accused of breaching confidentiality agreements in their contracts.

Studies have shown that fear of reprisal or retaliation is the main deterrent to whistleblowing. Legislation, such as the US Sarbanes-Oxley Act of 2002 and Title 18 of the US Code, provides protections against discrimination and retaliation for whistleblowers.

The experiences of high-profile whistleblowers like William Mark Felt and Edward Snowden illustrate the risks involved. Felt, the former FBI Deputy Director known as “Deep Throat,” helped expose the Watergate scandal. He kept his identity secret for decades and faced no consequences when he revealed himself in 2005 at 91. In contrast, Snowden, who exposed NSA programs in 2013, continues to live in exile in Moscow. His situation shows the harsh realities faced by those who blow the whistle on government or corporate wrongdoing.

Country Specific Case Implementations

United Kingdom Whistleblowing

The United Kingdom has robust whistleblower protection laws, primarily through the Public Interest Disclosure Act of 1998 and the Employment Rights Act of 1996, alongside rules set by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA). These laws protect whistleblowers from retaliation, particularly in the banking industry.

In 2015, the FCA and PRA introduced new rules requiring certain financial institutions to appoint a “whistleblower champion”. This non-executive director is appointed by a company to maintain effective whistleblowing systems and provide training for employees. These regulations aim to ensure that whistleblowers can report concerns in the public interest without fear of retaliation.

Moreover, the Public Interest Disclosure Act protects whistleblowers who report legal violations. It also safeguards against unfair dismissal. Whistleblowers can file complaints and seek reinstatement or compensation. Protection also extends to contractors, consultants, and temporary workers.

United States Whistleblowing

The United States has a comprehensive whistleblower protection framework, with key laws including the Whistleblower Protection Act of 1989, the Sarbanes-Oxley Act of 2002, and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. These laws protect whistleblowers in different sectors, whether they be federal employees, in private companies, and especially in the financial industry. The Dodd-Frank Act enables direct reporting to the SEC, provides financial incentives, and safeguards whistleblowers from retaliation. The Sarbanes-Oxley Act offers protection to employees of public companies and their subsidiaries, ensuring remedies such as reinstatement and back pay. Meanwhile, the Whistleblower Protection Act focuses on protecting federal employees who report misconduct. While these laws have significantly strengthened whistleblower protections, challenges in enforcement persist. The SEC is actively addressing efforts by companies to use agreements that could deter whistleblowing.

Whistleblower Protections in France

France has developed a strong legal framework to protect whistleblowers. This has evolved since the introduction of Law No. 2016-1691, known as “Sapin II.” Initially aimed at fighting corruption and increasing transparency, the whistleblower protections have been expanded over time, notably through the Law No. 2022-401 “Waserman Law”. These updates bring French law in line with the European Union Whistleblowing Directive.

Under the current framework, a whistleblower is anyone who, in good faith, reports illegal activities or threats to the public interest. They must do so without expecting financial compensation. The whistleblower protections also extend to those who assist whistleblowers, as well as people closely connected to them.

A major change in the law is the flexibility in reporting channels. Whistleblowers no longer have to report violations to their supervisors first. They can now report internally within their organization, externally to sector-specific authorities depending on the violation, or publicly under certain conditions. Public disclosure is allowed when there is a serious and imminent danger or when other reporting channels fail.

The law also provides strong protections against retaliation. Whistleblowers cannot be dismissed, discriminated against, or harassed. If retaliation occurs, whistleblowers can seek help from judicial or administrative authorities. Courts can order reinstatement or offer professional training for those affected. Acts that block whistleblowing, such as gagging clauses or abusive lawsuits, are punishable by fines or imprisonment. These reforms have made France a leader in whistleblower protection in Europe.

Whistleblowing is essential for holding people and organizations accountable, especially in areas prone to corruption. For whistleblowing to be effective, strong protections need to be in place at all levels of society. Over the past two decades, more countries and organizations have started implementing these protections. In addition, financial incentives are now often offered to encourage whistleblowers to report and reduce the fear of retaliation. While deciding to blow the whistle will always depend on the specific situation, improving the systems in place can help create a safer environment for those who choose to speak up.

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Reference

1. Birkenfeld, Bradley. Lucifer’s Banker Uncensored: The Untold Story of How I Destroyed Swiss Bank Secrecy. Greenleaf Book Group Press, 2016.