Main Image Credit Breaking cover: whistleblower reward schemes can be used to incentivise individuals to report financial crimes. Image: freshidea / Adobe Stock
Evidence of the impact of US whistleblower reward schemes gives cause to reconsider their implementation in the UK’s fight against financial crime.
The best source of intelligence is a living, breathing one. This is particularly true in the case of financial crimes, which can often remain hidden from the view of authorities for decades. Enter the whistleblower; in recognition of their unique role in unearthing financial crimes, US authorities have a long history of enticing them from their corporate hideouts by offering a financial incentive.
By way of example, perhaps the best known of the US whistleblower incentivisation schemes was implemented in 2011 by the US Securities and Exchange Commission (SEC) under the Dodd-Frank Act, which allows the SEC to pay whistleblowers up to 30% of any enforcement fine over $1 million linked explicitly to actionable intelligence received about securities fraud.
The scheme is viewed by the SEC as a success story, noting: ‘whistleblowers have played a critical role in the SEC’s enforcement efforts in protecting investors and the marketplace’. Such is the perceived success of this and other schemes that the US government has recently established a new Anti-Money Laundering (AML) whistleblower incentivisation programme to increase whistleblower reporting in AML cases.
Simply Not Cricket
The enthusiastic implementation of such schemes in the US is a direct counterpoint to the deep-seated antipathy towards their adoption in the UK, which can largely be attributed to a long-held British cultural norm that one should simply ‘do the right thing’ out of a sense of public duty.
However, in light of the lack of substantive progress in tackling financial crime in the UK, and with a second Economic Crime Plan waiting in the wings, it is perhaps time to revisit the 2012 recommendation of the UK Parliamentary Commission into Banking Standards (established in the wake of the 2008 financial crisis and Libor Scandals) to ‘undertake research into the impact of financial incentives in the US in encouraging whistleblowing, exposing wrongdoing and promoting integrity and transparency in financial markets’.
Debunking the Assumptions
In response to the Parliamentary Commission’s recommendation, the Financial Conduct Authority (FCA) reported back to the Committee in 2014, and ruled against the introduction of financial incentive schemes in the UK financial sector. Nearly a decade on, however, it is worth exploring whether these findings remain relevant.
Any future policy in this area must consider the balance between moral motivations and the substantial personal and professional costs paid by financial crime whistleblowers, who risk being blacklisted from lucrative careers for life
First, the FCA concluded that ‘there is as yet no empirical evidence of incentives leading to an increase in the number or quality of disclosures received by the regulators’. Since then, numerous empirical studies have concluded that such programmes drive high-quality reporting, including a 2021 Harvard Business School study into the US False Claims Act programme, which found that ‘whistleblowers respond to financial incentives by filing additional lawsuits, which the DOJ investigates for a longer period and that are more likely to result in a settlement’.
Second, the FCA concluded that ‘incentives offered by regulators could undermine the introduction and maintenance by firms of effective internal whistleblowing mechanisms’. The Harvard Business School research, however, did not ‘find that greater financial incentives decrease the percentage of lawsuits reported internally first before informing the authorities’, and research now available also suggests that there is a mathematically definable ‘sweet spot’ in the relationship between external rewards and internal reporting.
Third, the FCA noted concerns that operating such regimes comes at a hefty cost in terms of governance and management. Since then, research has suggested that – from a purely cost-benefit viewpoint – such investment pays off, including that cited in this article, which notes that ‘generally speaking, taxpayers bear the burden of paying for the operation of most government programs. But taxpayers pay nothing under Dodd-Frank’.
In summary, an emerging body of empirical research provides grounds for making the broad observation, as a 2021 meta-analysis did, that ‘the evidence for the effectiveness of reward programs is significant, and that common concerns about these programs have not materialized’. Added to the growing evidence of a measurable deterrent impact of such programmes, the FCA’s case for rejecting them now seems pretty thin.
From Numbers to Norms
However, as important as quantitative evidence is when considering such a scheme, policies do not operate in an academic vacuum. Any approach, particularly on an issue as divisive as this, must be situated within the less empirically orderly context of human motivation and societal cultural norms.
Any future policy in this area must therefore also consider the balance between moral motivations and the substantial personal and professional costs paid by financial crime whistleblowers, who risk being blacklisted from lucrative careers for life. When weighing up the implications of ‘doing the right thing’, offering a financial incentive may just tip the balance. Relying on people to act from the goodness of their hearts is simply naïve.
Given the high cost paid by financial crime whistleblowers, there is good cause to reframe the financial payment not as a ‘reward’ or ‘bounty’ but as compensation for a career burned and future earnings lost
However, equally naïve would be to ignore the cultural context in which such a scheme would operate in the UK. As rightly noted by the FCA in 2014, implementing such a policy in the UK would require ‘a substantial shift in UK policy norms, which are very different to those in the US’. Such cultural norms are rarely overcome by analysis of statistical data.
Changing the Tune
Implementing such a system in the UK would undoubtedly face opposition from those attached to the cultural norms currently in place. However, it would appear that even those opposed to incentivisation schemes generally can see the strength of the arguments when considering the case of financial crimes. As the whistleblower charity Protect notes, ‘providing rewards may not be the best arrangement for every regulator, but there may be arguments to have a scheme for regulators dealing with financial crime’.
Nevertheless, it is clear that implementing such a system could not be achieved through a simple ‘lift and shift’ of the statute, and would require policymakers to position such an approach in a way that fits the UK cultural context. Given the high cost paid by financial crime whistleblowers, there is good cause to reframe the financial payment not as a ‘reward’ or ‘bounty’ but as compensation for a career burned and future earnings lost. As put by whistleblowing writer Tom Mueller, we need to start viewing these payments as a ‘net present value lump sum payment for a lost career’.
In sum, while the US approach is undoubtedly a blunt instrument, the evidence is growing that it works. Although implementing such a system would likely confront a number of ingrained cultural norms in the UK, the evidence gives cause to objectively reconsider its potential place within the UK’s broader approach to tackling financial crime. If doing so provides a route to avoiding a future Libor or Wirecard-esque scandal, then it may be a price worth paying.
The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other institution.
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Former Senior Research Fellow