What you need to know:
A recent $104 million whistleblower award indicates that government enforcement agencies are taking advantage of the substantial bounty provisions found in recent legislation in an effort to better discover and punish corporate fraud. The award is also likely to motivate future whistleblowers.
What you need to do:
Public companies should reassess the adequacy of current compliance and reporting systems, create a working environment in which employees are inclined to first report issues internally, and investigate complaints quickly in order to determine whether self-reporting to the government is appropriate.
Within the last month, the Internal Revenue Service awarded $104 million to a banker-turned-whistleblower who helped the government uncover conduct in which the Swiss bank UBS helped its American clients avoid taxes. In what is believed to be the largest-ever whistleblower payout to an individual, Bradley Birkenfeld, a former UBS banker, will receive a massive award in return for his cooperation with US authorities.
First coming forward in 2007, Birkenfeld provided prosecutors with detailed descriptions of how UBS, Switzerland’s largest bank, functioned as a tax haven for wealthy Americans. His tips paved the way for a 2009 settlement between the United States government and UBS under which the bank admitted to fostering tax evasion from 2000 to 2007, agreed to turn over the account information of over 4,000 US clients, and paid $780 million in penalties.
Since then, over 35,000 Americans have participated in amnesty programs in which they disclose and repatriate undeclared offshore accounts, resulting in over $5 billion being paid to the US government in back taxes, interest and penalties.
In 2006, Congress passed a tax whistleblower statute in the hopes of reducing tax fraud and increasing tax recovery for the US government. Under this law, whistleblowers are entitled to 15% to 30% of proceeds collected. Birkenfeld’s $104 million award is 26% of the $400 million in tax paid by UBS to the IRS as a result of the 2009 settlement.
Although Birkenfeld himself received a 40-month prison term in 2009 for his part in UBS’ tax evasion schemes, he is not disqualified from collecting his bounty because the IRS Whistleblower Program only prohibits awards to individuals who “planned and initiated the actions that led to the underpayment of tax.” This is in contrast to the comparable provision in the Dodd-Frank Act, which is applicable to securities fraud whistleblowers and states that “no award . . . shall be made . . . to any whistleblower who is convicted of a criminal violation related to” a securities enforcement proceeding in which the sanctions are collected.
Foreshadowing of Dodd-Frank Whistleblower Claims
Although the $104 million Birkenfeld award was made as part of the IRS Whistleblower Program, this recent enormous payout could be a sign of things to come for other whistleblower programs, particularly the Dodd-Frank program, which is modeled after the IRS’ bounty regime and reaches a much broader range of conduct and issues. Plaintiffs’ attorneys have been educating employees about the whistleblower bounty program, and most observers predict a dramatic increase in whistleblower complaints and lawsuits.
The head of the SEC’s Whistleblower Office recently stated that since the program was established in August of 2011, his office has been receiving approximately eight verifiable tips daily. In August of 2012, the SEC announced that it made the first payout under its year-old whistleblower program to an unidentified person who helped stop a multimillion-dollar financial fraud.
Although this first Dodd-Frank award was relatively small—$50,000—the program is still young, and there has been little time to complete an investigation of a major case. In the coming years, after complex cases have been fully investigated, you can likely expect to see much larger payouts more on par with the Birkenfeld award.
Minimizing the Chance of Whistleblowers
In light of recent whistleblower awards and the public recruiting efforts of plaintiffs’ law firms, companies should expect an increase in whistleblower activity. Companies with compliance programs that effectively prevent major violations, and identify and address violations that do occur, may be able to avoid many of the problems—and costs—that can result from those seeking to cash in on whistleblower bounties.
Employers subject to federal securities laws should examine and reassess the adequacy of existing compliance and reporting systems. Moreover, employers should train their managers to be receptive and responsive to employee complaints so that potential whistleblowers have an effective way to communicate concerns, and thus will be more inclined to report internally before going to the SEC. Employers should also ensure that they have sufficient reporting channels in place so that complaining employees do not have to go through the individual or individuals who are the subject of the complaint. Finally, even if employees do report internally first, companies should investigate quickly in order to determine whether self-reporting to the government is appropriate.