FRAUDSTERS PAY – THE PUBLIC PROFITS: A Cost-Benefit Analysis of Whistleblower Reward Laws
Whistleblowing has always been controversial. But with the advent of whistleblower reward laws, anecdotal (pro and con) has been replaced by objective data. The costs and benefits of a whistleblower program can be evaluated based on the income obtained in whistleblower cases compared with the costs of operating a whistleblower office and paying compensation to fully qualified “insiders” who take the risk and blow the whistle.
The amount of sanctions obtained by the government in whistleblower cases is staggering. Under the False Claims Act alone over $48.22 billion has been collected directly from whistleblower-initiated lawsuits since the law was amended in 1986. Under the Securities and Exchange Act, which contains a relatively new whistleblower reward provision included as part of the Dodd-Frank Wall Street reforms, the Securities and Exchange Commission (“SEC) also recognizes the significant positive impact that paying rewards has had on the Commission’s ability to police Wall Street crooks. As recently explained by Commission Chair Gary Gensler, the SEC’s whistleblower program has already obtained over $5 billion in sanctions and directly paid to harmed investors over $1.3 billion in restitution. Likewise, the Internal Revenue Service (IRS) whistleblower reward program has leveraged whistleblower disclosures to recover multi-billions from Swiss banks and taxpayers who tried to hide their wealth offshore.
However, it is the whistleblower reward program sponsored by the Commodity Futures Trading Commission (“CFTC”) that provides the best empirical data to truly judge the profitability and impact of incentivizing whistleblowing. The CFTC’s program was created in 2010 as part of the Dodd-Frank Act. Although the SEC’s program is far more visible, and receives significant public attention, the CFTC program also soldiers on and meticulously obtains whistleblower complaints, initiating enforcement actions based on the original information or “tips” provided by whistleblowers. In short, the CFTC whistleblower program and the SEC whistleblower program are substantially identical, with one exception. The CFTC publicly reveals the costs of running its whistleblower program, something neither the Justice Department nor the SEC do. These costs are set forth in the annual reports published by the CFTC Whistleblower Office.
By looking at the actual costs of administering a Dodd-Frank based whistleblower program the monetary profit obtained by the taxpayers can be objectively understood.
On March 28, 2022 the CFTC issued a press release announcing the total amount of sanctions obtained from whistleblower triggered cases, along with the total amount of rewards paid to all whistleblowers since Dodd-Frank was passed. Like the reward programs sponsored by the Justice Department under the False Claims Act, and the SEC under Dodd-Frank, the numbers are very impressive:
Total Income (Money obtained from fraudsters paying sanctions in whistleblower cases): “Over $3 billion.”
Total Rewards Paid to Whistleblowers: $330 Million.
The CFTC is unique among federal agencies that sponsor whistleblower reward programs. In its annual reports the CFTC publishes the yearly costs incurred by its Whistleblower Office. As set forth in Chart 1, the total costs of administering its Dodd-Frank whistleblower reward program since its inception has been $20,982,000.
Now comes the fun part. How much profit did the taxpayers make as a result of incentivizing whistleblowers to report evidence of fraud in the commodities markets? As set forth in Chart 2, the total profit was $2,649,018,000.
From the perspective of a cost-benefit analysis, it is hard to imagine any other government program that has such a high rate of return. This does not include other major benefits obtained by the program, such as long-term savings based on the deterrent effect of successful prosecutions (and the fear of being detected by a whistleblower), increased compliance requirements (often required as part of a deferred prosecution agreement), and the primary goal of all criminal laws: holding wrongdoers accountable.
Generally speaking, taxpayers bear the burden of paying for the operation of most government programs. But taxpayers pay nothing under Dodd-Frank. Instead, they reap the vast majority of the benefits derived from the program. To qualify for a reward Dodd-Frank whistleblowers must act on a purely voluntary basis. They cannot receive any up-front consideration or payments in exchange for their information. The risk of coming forward is 100% on their shoulders. Under Dodd-Frank, if a whistleblower is not fully voluntary, they are not eligible for a reward. There are no up-front taxpayer costs.
Next, a whistleblower is only paid if their unique and valuable “original information” results in a fraudster being found guilty and paying a sanction. If no sanctions are obtained, no rewards are paid. Under Dodd-Frank, no rewards are paid unless sanctions of over $1 million are ordered to be paid. Thus, the law incentivizes whistleblowers to provide the best evidence possible on large frauds. Again, the taxpayers are not at risk for paying one penny to a whistleblower. All whistleblower payments come directly from the sanctions paid by those committing the crimes.
Finally, the law is structured so that the taxpayers always obtain the largest profit from a successful whistleblower case. Dodd-Frank caps the maximum payment available to a whistleblower at 30% of actual money received by the government. In reality, most rewards are far below the 30% maximum. In looking at the reward payments confirmed in the CFTC’s March 28, 2022 press release, the average percentage payment in the whistleblower cases was 10.6%. Thus, the taxpayers recovered approximately 90% of the monies obtained in all of the whistleblower cases. Furthermore, reward payments are fully taxable as income, and are generally paid at the highest tax rates.
Whistleblower laws are not just about the money. They are about accountability, fair competition, and deterrence. Holding a fraudster accountable for their wrongdoing has intrinsic value – ultimately far greater than simple dollars and cents. Using the fines paid by a fraudster to compensate a whistleblower is an ingenious procedure that serves the public interest, without placing any burden on taxpayers. The opposite is true. The profitability of Dodd-Frank based whistleblower laws, when properly administered (as has been done by the CFTC), is truly remarkable.
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