Bigger bonuses for whistle-blowers: Are they ethical?

Whistle-blowing is about to get more profitable.

Under proposed federal rules, now under review, whistle-blowers could collect as much as 30 percent of what the government recovers from violators. Payouts could be eye-popping: a $1 billion fraud, not unthinkable on Wall Street, could net $300 million for one whistle-blower.

Will fatter bounties for turning in one's co-workers and bosses improve the ethics of corporate America – or undercut them? The answer depends, in part, on whom you ask; in part, on how the new regulations are written; and, in part, on how one balances pragmatism and ethical ideals.

Substantial bounties are necessary to uncover fraud, according to Stephen Kohn, executive director of the National Whistleblowers Center in Washington and author of "The Whistleblower's Handbook" (2011). It's not that whistleblowers are motivated by money, Mr. Kohn says. Rather, they need to know compensation is waiting because they'll probably never work again in their field.

"It moves somebody from a concern to actually taking the risk," Kohn says.

Supporters of the proposed rules, which were mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, have high expectations for the added incentives. As a model, they cite the False Claims Act, which has been compensating whistle-blowers since 1986 for tips leading to recoveries in government-contracting fraud cases. Whistle-blower tips have accounted for 67 percent of recoveries, worth $18.2 billion, under the False Claims Act. An expanded bounty program under the Securities and Exchange Commission might bear as much fruit or more, according to Kohn, who worked with the SEC to draft the proposed rules.

Expanded bounties apply to more than financial institutions and large Wall Street firms. Rewards will go to insiders whose tips lead to $1 million-plus recoveries in any area regulated by the SEC. That includes all publicly traded companies – even those based overseas and traded on US exchanges.

Admittedly, paying someone to inform on their colleagues seems a little sordid, something more appropriate to policing the underworld than the corporate world. Worse, the new SEC rules could undercut corporate programs aimed at heading off corruption and other illegal activities, some critics say.

Beefed up since the wave of corporate accounting scandals in the early 2000s, these programs use anonymous hot lines and other methods to foster corporate cultures where wrongdoing can come to light and be taken seriously. But such programs won't be trusted or utilized, critics of the proposed rules say, unless workers are required to use them before going to the SEC, where big rewards await them.

"As soon as employees stop trusting management, or as soon as management stops trusting that employees are going to come to them when there are problems, you start to see a breakdown of the culture," says Patricia Harned, president of the Ethics Resource Center, a nonprofit research organization in Arlington, Va., funded by corporate foundations. "And you actually see more misconduct happen over time."

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