EU Whistleblower Protection Comments
Submitted by Erika A. Kelton, Esq.,
Phillips & Cohen LLP
These comments address the importance of broad-based protections for whistleblowers and explain how protecting whistleblowers benefits the general public, taxpayers, consumers, and investors. They further explain why whistleblowers should be encouraged, but not required, to report concerns to their employers, and why whistleblowers’ identities should be kept confidential to the fullest extent allowed by law. In addition, the comments contend that the best way to protect and support whistleblowers is to offer them financial awards for helping stop significant wrongdoing. The importance of financial incentives has been demonstrated by decades of experience in US whistleblower programs.
These comments are submitted as a supplement to the European Commission’s public consultation on whistleblower protection.
Summary
- Whistleblowers need protection across all industries. There is no question that their efforts benefit the public good, and that they should be protected from retaliation.
- Whistleblowers should not be required to report their concerns to employers before going to government enforcement authorities, as is required by some European countries. Mandating internal reporting would deter most insiders with significant knowledge of wrongdoing from coming forward since, in many cases, whistleblowers suffer lasting employment retaliation even in the face of anti- retaliation laws. Whistleblowers who raise concerns internally are often “blackballed” such that prospective employers will not hire them; sidelined so they no longer play a meaningful role in the workplace; reassigned to less desirable positions; or, terminated for vague and pretextual reasons, such as “poor attitude” or “not being a team player.” The fear of employment retaliation will stop many, if not most, whistleblowers from speaking up.
- Whistleblowers’ identities should be kept confidential to the extent allowed by law.
- Whistleblower protection also should be provided in the form of financial awards to individuals who provide regulators with information about significant wrongdoing and where funds are recovered or financial penalties are Experience has shown that financial incentives are essential for a successful whistleblower program. Whistleblowers risk not only their jobs and their careers but also their marriages, and family and social networks due to the emotional and social toll of whistleblowing. To expect individuals to set aside financial and personal considerations when deciding whether to blow the whistle is unfair and unrealistic. A well-structured whistleblower reward program must recognize the professional and personal risks that individuals take when they blow the whistle. A balanced approach of protection and financial incentives would greatly enhance anti-corruption enforcement efforts by bringing forward high-quality information from individuals who have knowledge of significant wrongdoing.
- Consideration should be given to modeling European whistleblower reward programs on effective, fraud-fighting laws that offer financial incentives to private citizens who blow the whistle on wrongdoing. Programs under the U.S. Department of Justice, the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Internal Revenue Service have not only exposed and stopped wrongdoing and recovered billions of dollars from wrongdoers, but they have spurred stronger internal compliance efforts by businesses and saved billions more through deterrent effects.
- Citizens of EC member states are turning to S. whistleblower programs in increasing numbers and reporting wrongdoing undertaken by institutions and individuals in the EU. Without a doubt, EU whistleblowers turn to U.S. whistleblower programs because of the financial awards and protections they may receive and that may compensate them for the risks they take as whistleblowers. In instances where U.S. enforcement authorities do not have jurisdiction, many, if not most, EU whistleblowers choose to keep quiet rather than report the matter to authorities in their own countries because of the absence of incentives.
A. Whistleblowers Should Be Provided Broad-Based Protection
The continuing parade of headline-grabbing business scandals demonstrates a clear need for more insiders to step forward and blow the whistle when they become aware of potential wrongdoing. However, most individuals will not do so unless there is strong, effective whistleblower protection.
Whistleblowing promotes transparency and exposes serious wrongdoing that otherwise would never have been known by the public. Whistleblower information and assistance have helped protect patients, consumers, investors and even military troops. Whistleblowers have helped stop massive mortgage frauds, gross securities mischarging practices, commodity price manipulation, and sophisticated money laundering schemes, among other misdeeds. Importantly, whistleblower enforcement has been a major reason why businesses in recent years have created or strengthened internal compliance efforts that are estimated to have saved additional billions of dollars for investors and taxpayers through deterrent effects.
B. Whistleblowers Should Not Be Required To Report Their Concerns Internally
Whistleblowers should be encouraged – but not required – to report their concerns internally. U.S. whistleblower laws do not impose mandatory internal reporting requirements for good reason. Mandating that allegations of wrongdoing be reported to the suspected wrongdoer before being communicated to law enforcement authorities is bad public policy and would profoundly discourage individuals from stepping forward. In my experience, the most significant frauds are directed from the top, rather than by mid- or low-level employees. Requiring that a whistleblower first advance his or her allegations internally to those who may be the architects of the scheme places the whistleblower’s livelihood in peril. Practical experience shows that reporting high-level wrongdoing to those very wrongdoers is more often than not a fast track to termination.
Moreover, imposing a blanket internal reporting requirement is a solution to a problem that does not exist. Decades of experience with U.S. whistleblower programs shows that financial incentives do not systematically motivate individuals to opportunistically avoid reporting their concerns internally. Those who advocate for mandatory reporting requirements can offer no evidence of a widespread diminution in the use of internal reporting mechanisms. Indeed, to the contrary, it is the U.S. experience that the vast majority of whistleblowers do, in fact, raise their concerns first to either their superiors or compliance officers, and only avail themselves of statutory whistleblower programs when their concerns have been dismissed or unaddressed, or when they suffer retaliation.
Knowledgeable persons should be permitted alternative means of reporting their concerns, either internally or directly to regulators, because it increases the probability that violations will be reported, and thus increases the likelihood of compliance in the first instance. Indeed, it would be an extraordinary law enforcement paradigm that requires that potential wrongdoers be alerted first, before prosecuting officials learn of the potential wrongdoing. The following examples stand as reasons enough why a mandatory internal reporting requirement should not be imposed.
- Cheryl Eckard was terminated from her job after raising concerns that Glaxo SmithKline (“GSK”) was manufacturing prescription drugs containing Eckard, who was a company quality control manager, repeatedly alerted a string of GSK executives to a catalogue of breaches. After she was fired in 2003, she phoned JP Garnier, then-CEO of GSK, to speak about her findings. Garnier declined to take the call. After Eckard provided information to the U.S. Department of Justice about the contamination, GSK paid $750 million in civil damages and criminal fines to resolve the allegations in October 2010.
- Bruce Boise was terminated and blackballed after complaining about illegal marketing of prescription drugs by his employer, Cephalon. The company later paid $425 million to the Justice Department to resolve the
- Some of the most recent examples of whistleblower retaliation concern Wells Fargo, which admitted last year that it had fired 5,300 employees over many years for creating phony customer The employees were under pressure to achieve unrealistic sales goals. Many of the terminated employees have said they were fired after reporting concerns about the bank’s practices internally. For instance, Bill Bado, a former Wells Fargo banker in Pennsylvania, told CNN that he raised concerns with the company’s ethics hotline and human resources department about being instructed to open phony bank and credit accounts. Eight days after he reported internally, Bado was fired – putatively for tardiness.
It is important to note that in these cases – as in most cases of significant wrongdoing – the fraudulent schemes are initiated or directed at the top levels of an organization. Critics of whistleblowers suggest that internal reporting is best at addressing and stopping fraud. Not only is this view simplistic, it also ignores the observed fact that the architects of most egregious frauds sit at or near the top of an organization. Requiring formal internal reporting as a threshold qualification would not deter corporate wrongdoing. But it would succeed in discouraging potential whistleblowers from alerting regulators to serious wrongdoing.
C. Financial Awards Protect Whistleblowers And Help Motivate Individuals To Take The Risks Of Stepping Forward
Critics of financial awards for whistleblowers often contend that people should blow the whistle simply because it is the “right thing” to do. Such a categorical position ignores the heavy price that comes with whistleblowing. “Doing the right thing” does not put food on the table or pay the mortgage once a whistleblower is sacked for reporting wrongdoing. In the more than 25 years that I have represented whistleblowers, our firm’s clients have been retaliated against, terminated by their employers and suffered “blackballing” – despite whistleblower protection laws – making it impossible for many of them to find work in their chosen professions.
We have had clients who lost senior engineering positions at defense contracting firms and could only find work bagging groceries and mowing lawns. Others in pharmaceutical marketing lost their jobs for reporting fraudulent practices and for years earned income only sporadically by painting houses or selling insurance policies. In the financial services sector, employees who raised concerns about questionable business practices lost their careers despite exceptional work reviews. Retaliation against whistleblowers occurs globally, even in those countries that already have whistleblower protection laws.
To demand that a whistleblower set aside financial considerations is unrealistic. Consistent with my experience representing whistleblowers, academic studies also observe that while whistleblowers are motivated by the desire for greater integrity and ethics in business practices, few will risk the substantial downside of reporting wrongdoing to enforcement officials without relative certainty of a financial reward if successful. Individuals are more likely to step forward because it is the right thing to do and because they will receive a financial reward if their matters are successful.
A 2010 New England Journal of Medicine study took a careful look at the experiences of whistleblowers who reported wrongdoing, particularly those who suffered severe financial and emotional hardship. Researchers found that whistleblowers often are threatened with job loss and ongoing “blackballing” so that they are unable to work in their chosen field; the loss of savings and pensions; and the loss of homes and possessions. The NEJM study observed that whistleblowers face formidable emotional stresses and challenges as well, including divorce, estrangement from their families and social communities. These emotional strains can often lead to serious stress-related health problems.
Just as my own experience representing whistleblowers has shown, the study concludes that “a strong monetary incentive to blow the whistle does motivate people with information to come forward.” This is particularly true in banking and finance where the individuals with detailed information about wrongdoing tend to be those in highly paid positions. Their financial risk in blowing the whistle is extremely high, no matter how much they might want to do the right thing. At the same time, the growing sophistication and complexity of most significant financial frauds make it extremely difficult for enforcement and regulatory authorities to detect without the insight and expertise of well-placed insiders who are willing to come forward.
D. The U.S. Experience Shows That Whistleblower Incentive Programs Work
The United States has four federal whistleblower incentive programs: (1) The federal False Claims Act, which address frauds against U.S. government programs; (2) the Internal Revenue Service (“IRS”) whistleblower program, which addresses tax fraud and underpayments; (3) the Securities and Exchange Commission (“SEC”) whistleblower program, which addresses securities law violations; and, (4) the Commodity Futures Trading Commission (“CFTC”) whistleblower program, which concerns violations of the commodities laws.
The U.S. whistleblower reward programs have been enormously successful in helping expose fraud and corruption. Tens of billions of dollars otherwise lost to improper businesses practices have been recovered as a direct result of whistleblower information and assistance. The importance and impact of whistleblower matters, however, goes far beyond the large sums recovered: They protect patients, safeguard our military, and bring transparency and integrity to business practices that touch everything from advance weapons systems to employee retirement funds. Importantly, whistleblower enforcement has also yielded serious efforts to improve internal compliance within the business community and is estimated to have saved tens of billions of dollars through deterrent effects. The U.S. experience also shows that offering whistleblowers non-discretionary financial awards makes the difference in the willingness of individuals to blow the whistle on wrongdoing.
The False Claims Act’s whistleblower provisions, amended in 1986, were the first to provide non-discretionary financial incentives – in most cases, 15 percent to 25 percent of the amount the government recovers – to individuals who report fraudulent business practices that cheat the government. The government’s inability to discover most frauds against it was a primary reason that Congress adopted strong, nondiscretionary awards to incentivize individuals to assist in recovering the huge losses to government fraud. In adopting a mandatory percentage award structure, the U.S. Senate recognized that no matter what the award amount, the Treasury would receive significantly more than the “zero percent it would have received had the person not brought the evidence of fraud to its attention or advanced the case to litigation.” The False Claims Act’s award provisions, thus, “express[ ] Congress’ understandable willingness to forbear between 15 and 25 cents per dollar of the recovery in order to reclaim a defendant’s ill-gotten gain.”
From 1943 until the False Claims Act was amended in 1986, the law provided only discretionary awards to whistleblowers. Only about six whistleblower cases were brought each year. The uncertainty of whether an award would be paid even in successful cases discouraged individuals from stepping forward with knowledge of frauds. In 1985, before the False Claims Act was amended to provide a robust whistleblower award structure, the Justice Department recovered only $27 million. Contrast that with 2016, when the Justice Department recovered more than $2.9 billion in False Claims Act cases initiated by whistleblowers. Information and assistance provided by whistleblowers and their counsel led to record-setting government settlements in 2012 with GlaxoSmithKline ($3 billion) and in 2009 with Pfizer Inc. ($2.3 billion). The financial incentives in the amended 1986 law, along with the certainty of payment in successful cases (with defined exceptions), moved the False Claims Act whistleblower provisions from near complete disuse to the central place in civil fraud enforcement. Since 1986 when the False Claims Act was amended, whistleblower incentives have encouraged more than 11,300 individuals to report instances of fraud against the federal government. As the successes and public awareness of the False Claims Act’s whistleblower provisions grow, the number of individuals stepping forward each year steadily increases. Last year alone, more than 700 whistleblower cases reporting fraud against the government were filed through the False Claims Act’s whistleblower provisions.
Similar “before and after” results were experienced with the SEC whistleblower programs. The SEC’s first program – an insider trading whistleblower reward program enacted in 1988 – was rendered virtually ineffective by a discretionary award structure that failed to encourage informed insiders to step forward. In 22 years, the original program only yielded six small cases and recovered an aggregate of $10.15 million.
Congress created the current SEC whistleblower program with non-discretionary whistleblower awards as part of the Dodd-Frank Act in 2010. The awards range from 10 percent to 30 percent of the amounts recovered because of the whistleblower’s information. The precise percentage share awarded to an individual within the designated range is determined by the significance of the whistleblower’s and his or her counsel’s contribution to the success of the enforcement action. This is the same measure used to determine awards in CFTC, IRS and FCA whistleblower cases as well. By structuring awards based on contribution, U.S. whistleblower programs create added incentives for continuing whistleblower collaboration with enforcement authorities during investigation and prosecution, long after the information is initially provided. This structure greatly enhances government enforcement efforts by bringing needed private resources to bear.
Whistleblower information and assistance have resulted in SEC enforcement actions totaling more than $953 million in financial remedies against wrongdoers. In the past six years, the SEC has received more than 3,000 whistleblower reports annually – including last year when it received 4,200 whistleblower reports. The SEC’s leadership has praised the program, noting that they are “seeing high-quality tips that are saving our investigators substantial time and resources.”
E. Financial Incentives Also Enhance Government Investigatory Resources
As noted above, each of the False Claims Act, IRS, CFTC and SEC whistleblower programs provides for awards based on a percentage of the recovery, and determined by the contributions the whistleblower and his counsel made to recover the funds. To ensure a successful result for the federal government, whistleblower counsel often partner with government prosecutors and investigators and invest heavily of their own time and funds. In United States ex rel. Alderson v. Columbia/HCA Healthcare Corp., and United States ex rel. Schilling v. Columbia/HCA Healthcare Corp., my law firm assembled a team of private lawyers to provide 30 full-time equivalent attorneys to litigate the matter, incurring over 66,000 hours of time and risking over $29 million in up-front expenses and attorneys’ fees. The Justice Department provided only five attorneys. The two cases, which the government would not have pursued without the whistleblowers’ legal team, settled for a combined total of nearly $720 million.
In the GlaxoSmithKline case, my firm took the lead in building a case to establish our clients’ allegations involving the illegal and dangerous marketing of a particular GlaxoSmithKline prescription drug. Largely as a result of the thousands of hours we spent working to help the US Justice Department, that portion of the case against GlaxoSmithKline returned $700 million out of GSK’s $3 billion settlement.
H. Conclusion
Thirty years of experience with whistleblower programs in the U.S. has shown that all of society benefits when whistleblowers are protected. But the evidence also convincingly shows that most whistleblowers with significant evidence of wrongdoing need the incentive of a nondiscretionary award that is commensurate with the value of the information they provide and the amounts recovered by law enforcement as a result. To be effective, a whistleblower program also should encourage, but not require, whistleblowers to report concerns internally, and should keep whistleblowers’ identities confidential or anonymous to the extent permitted by law.