boeWhen Congress passed the Dodd-Frank Act four years ago, one of the legislation’s signature features was the creation of potentially massive bounties for whistleblowers that reported financial fraud to the SEC. The possibility of recovering a bounty, which could range from ten to thirty percent of recoveries over $1 million, seems to have encouraged whistleblowers to come forward.  The SEC reported at the end of its last fiscal year that since the program’s inception in 2011, the agency had received over 6,500 whistleblower reports. Mary Jo White, the S.E.C. chairwoman, said last year that the program “has rapidly become a tremendously effective force-multiplier, generating high quality tips and, in some cases, virtual blueprints laying out an entire enterprise, directing us to the heart of an alleged fraud.”


So the Dodd-Frank whistleblower program is the kind of initiative that securities regulators in other countries would want to copy, right? Apparently not, at least if the recent analysis of UK regulators is any indication.


A July 2014 joint report of the UK Financial Conduct Authority (FCA) and the Bank of England Prudential Regulation Authority entitled “Financial Incentives for Whistleblowers” reports the agencies’ conclusion that “providing financial incentives to whistleblowers will not encourage whistleblowing or significantly increase integrity and transparency in financial markets.”


The UK regulatory agencies had undertaken a review of the possibility of providing financial incentives for whistleblowers at the request of the Parliamentary Committee on Banking Standards. Among other things, the agencies undertook a joint visit with several different U.S. regulatory agencies including the SEC and the Commodities Futures Trading Commission (CFTC), as well as the U.S. Department of Justice. The agencies also seconded staff to the U.S. regulators to observe the U.S. program in action.


Based on this review of the U.S. program, the UK regulators reached a number of interesting conclusions about providing financial incentives for whistleblowers. Among other things, the UK regulators concluded that because of the Dodd-Frank whistleblower bounty’s requirement that the whistleblower report must result in a successful enforcement action in order for the whistleblower to be eligible of the bounty, only a very small number of whistleblowers actually receive payments. The report notes in that regard that only 1% of whistleblower cases lead to financial penalties, suggesting that even the possibility of a bounty payment will arise only for a very small number of whistleblowers. The report concludes that the bounty schemes “reward a few individuals very significantly, but provide little or no protection to whistleblowers whose information does not lead to an enforcement outcome.”


Perhaps even more concerning, the UK agencies also reported their conclusion that none of the U.S. agencies “has seen a significant increase in either the number or the quality of reports from whistleblowers.”


The report also notes the UK agencies concern that the introduction of financial incentives in the U.S. has resulted in the creation of a “complex, and therefore costly, governance structure,” as well as the “imposition of significant legal fees for both whistleblowers and firms” (although the report does also note that many whistleblowers are represented by counsel on a contingent fee). Finally, the report also noted its concern that the introduction of financial incentives could “undermine the introduction and maintenance by firms of effective internal whistleblowing mechanisms,” which both the UK agencies and the Parliamentary committee want to foster.


The report also sets out what it describes as the “moral and other hazards” they perceive to be associated with providing financial incentives for whistleblowers: first,  financial incentives could result in “malicious reporting” from “opportunistic and uninformed parties passing on speculative rumors” which could result in “innocent parties” being “unfairly damaged as a result”; second, some market participants might seek to ‘entrap’ others in order to be able to blow the whistle and benefit financially; third, if the whistleblower’s report resulted in a criminal prosecution, the reliability of the whistleblower’s testimony could be challenged because the witness stands to benefit financially.


Finally, the report noted the agencies’ concerns about the public perception of large whistleblower payments. “Handing over large sums,” the report said, “would be a substantial shift in UK policy norms, which are very different from those of the US.” The report added that “paying significant sums to high-income individuals for fulfilling a public duty could reinforce perceptions that the financial sector is at odds with the rest of society.”


The report does acknowledge the important role whistleblowers can play in helping to bring financial fraud to light and recognizes the need for the agencies to do more to facilitate whistleblowers’ reports. The report lays out a number of mechanisms the agencies propose to institute to facilitate whistleblower reporting and also states that the agencies plan “to press ahead with the regulatory changes necessary to require firms to have effective whistleblowing procedures.”



I think the agencies’ report is correct to note the cultural differences between the UK and the U.S. when it comes to providing large financial incentives. Even before the Dodd-Frank Act created the whistleblower bounty program, there were several longstanding U.S. programs that provided for payment to those who reported fraud: for example, the False Claims Act has for many years provided for the possibility of those reporting the existence of fraud against the government to participate financially in the government’s recovery, and the IRS has for many years maintained a program providing for payment to those reporting tax fraud. These programs’ histories make the Dodd-Frank program seem much more acceptable in the U.S. than a similar program might be perceived to be in the UK.


What is more concerning is the report’s conclusion that among other reasons to reject the adoption of financial incentives for whistleblowers is that the incentives don’t work – that is, the existence of the bounty program has not resulted in “a significant increase in either the number or the quality of reports from whistleblowers.” This conclusion seems at odds with the many statements of representatives from the SEC about its whistleblower program. It is a serious enough assertion that it seems to me that the SEC really ought to respond.


It is even more concerning that the UK agencies concluded that the financial incentives for whistleblowers do not “significantly increase integrity and transparency in financial markets.” If existence of the financial incentives doesn’t materially improve market integrity and transparency, you really do have to question the point of having the whistleblower bounty program.


That said, I do think it is important to note that the UK agencies started their review of the question of providing whistleblowers with financial incentives with a bias against making such payments. If you read the report as a whole, it is pretty clear that from the very beginning the authors thought the idea of providing bounty payments is a bad idea. A cynical interpretation of this report is that it is the result of a process that was designed to confirm the authors’ starting assumptions and preexisting bias against providing financial payments.


On the other hand, it is a fair question to ask whether or not the provision of jackpot level bounty payments for a very small number of whistleblowers really is a good idea. Many other observers have asked before whether the existence of the whistleblower program (with the potential rewards going to those who report first) undermines the existence of companies’ internal reporting mechanisms and frustrates companies’ ability to address problems internally.


All in all, I think the UK report raises some serious questions about the whistleblower bounty program that the SEC and other agencies should not disregard. The US agencies have no choice about implementing and enforcing the Dodd Frank Act’s requirements but just the same it is fair to ask those agencies to respond to the concerns that the UK agencies have raised.


Time for Nominations to the ABA Journal’s Annual Blawg 100: It is once again time for nominations to the ABA Journal’s annual list of the top 100 law blogs. Everyone should take a moment to nominate their favorite law blogs for inclusion in the list. I would be humbled and grateful if any reader would be willing to nominate my blog. Nominations can be made here. Don’t delay, nominations are due by 5:00 pm EDT on Friday August 8, 2014.