The payoff for society in rewarding whistle-blowers

A US program that pays for tips on company fraud helps highlight the role of employees as guardians of their firm's integrity.

Securities and Exchange Commission Chairman Jay Clayton testifies before a Senate committee June 27.

In late July, a government agency handed over nearly $2.5 million to one person and $1.7 million to another. If the payouts had been lottery winnings, they might have drawn big headlines. Yet the rewards were barely noticed because they went to individuals who had simply revealed financial misconduct to the US Securities and Exchange Commission.

The SEC did not disclose the names of the whistle-blowers or the companies involved. But the message was clear: For employees who uncover wrongdoing, honesty is a reward beyond itself. (And the benefits to them and society can far surpass those of government lotteries.)

Since 2012, when the SEC first began to offer a bounty for insider tips on fraud and other types of corruption, it has given $156 million to 45 whistle-blowers. And these cases have led to the recovery of nearly $1 billion in penalties. Former SEC Chair Mary Jo White says whistle-blowers have become “key sources of very significant cases” and their disclosures have a “transformative impact” on the enforcement of financial laws.

Congress has passed several laws since the 1970s aimed at protecting whistle-blowers from reprisals. But it was the Dodd-Frank Act, passed after the 2008-09 financial crisis, that called for a large monetary incentive for anyone who reveals credible and timely information about a company’s shenanigans – as long as they are not themselves culpable. Since the whistle-blower award program started, the SEC has received more than 14,000 tips, many from people in other countries. The information has triggered hundreds of investigations and improved the rate of convictions and the severity of sentences.

These acts of courage – despite a fear of possible retaliation by a boss – show that many employees see themselves as guardians of their company’s integrity. A rise in whistle-blowing is also improving the ethical behavior of companies. A recent study by University of Iowa professor Jaron Wilde showed a significant decrease in financial irregularities in companies after a whistle-blower incident. That sort of beneficial effect may be the reason that Steven Mnuchin, President Trump’s secretary of the Treasury, backs laws that support whistle-blowers.

Leaks that reveal financial misdeeds are improving more than American companies. Since the 2016 release of the so-called Panama Papers, which showed a mass abuse of offshore tax havens by politicians worldwide, corruption scandals have erupted in many countries. In Pakistan and Iceland, the prime ministers were forced to resign.

The big lesson in rewarding whistle-blowers is that the vice of financial wrongdoing can be curbed not only by punishment but also by highlighting the virtues of honesty and transparency. Justice over evil always requires a measure of goodness. And it can all start with one person’s brave call to the SEC.

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