Assessing the Differences Between IRS and SEC Whistleblower Programs
When it comes to whistleblower laws, most U.S. companies have focused their attention on the U.S. Securities and Exchange Commission during the last year. But the $104 million reward recently paid by the Internal Revenue Service to a former UBS AG banker serves as a reminder that other agencies have their own reward laws for those who blow the whistle on wrongdoing.
The federal tax agency paid out the hefty award to Bradley Birkenfeld for providing information about the Swiss banks role in helping wealthy taxpayers hide money in offshore accounts. It was the largest reward ever given to an individual whistleblower, says Stephen Kohn, one of Birkenfelds lawyers who negotiated the reward with the IRS.
The reward laws have the best deterrent effect, says Kohn, a partner with Kohn, Kohn & Colapinto, a Washington D.C. firm dedicated exclusively to whistleblower cases. Kohn has published The Whistleblower's Handbook: A Step-by-Step Guide to Doing What's Right and Protecting Yourself (Lyons Press, 2011), which walks employees through the process of making a claim under the applicable IRS and SEC laws, as well as under the False Claims Act. Depending on which agency handles the claim, employers experiences will also differ. Experts point out some key differences between them.
Jordan Thomas, a former SEC assistant director, helped develop the agencys Dodd-Frank whistleblower program. Now chair of Labaton Sucharows whistleblower practice in New York, Thomas says that the IRS whistleblower program has made great strides in the last year. Its unclear whether theyre going to be the breakout star of the whistleblower programs, he says.
And theres a reason the IRS hasnt been getting as much whistleblower attention as the SEC: According to The New York Times, lengthy delays in processing cases led to a decline in the IRS whistleblower programs new cases reported and tax dollars collected last year.
Last month, the SEC issued the first rewardalmost $50,000under its year-old whistleblower program, mandated by the Dodd-Frank reform law. The five-figure award may pale in comparison to Birkenfelds bounty, but with the reward the SEC made clear that its whistleblower reward system is very much open for business. Sean McKessy, chief of the SECs Whistleblower Office, said in a press release that since its program was established in August 2011, about eight tips a day are flowing into the SEC.
Thomas says that for whatever reason, the IRS takes longer to work through cases brought by whistleblowers. The process of handling a claim might take the agency four to five years, he says, adding that the fact that the SEC issued its first reward just one year into the whistleblower program is one of the very positive things about the SEC.
The IRS enhanced its whistleblower program in 2006, increasing reward levels for individuals who offer information that leads to tax recovery. Because of the time it takes to work through a case, Thomas says we may see an increase in rewards in the near future.
The formation of the SECs whistleblower program renewed corporate concerns that employees would sidestep internal reporting mechanisms, preferring to take claims straight to the government. The False Claims Act and IRS whistleblower law are silent on incentives for reporting internally. But Kohn points out that the SECs final whistleblower rules encourage internal reporting, which offers companies a clear incentive to make internal compliance more effective.
Corporate worries about not getting first crack at a claim may be unfounded. According to a recent survey [PDF] conducted by the Ethics Resource Center, just one percent of employees at Fortune 500 companies made their first report of observed wrongdoing to an external authority. According to the survey, 45 percent of the employees had observed some type of misconduct. Lots of people know about misconduct, notes Thomas.
What companies need to be most concerned about, according to Thomas, is taking internal reporting seriously. Seventeen percent of the employees who reported internally ended up making a secondary claim externally. According to the survey, that happened most often when the employee wasnt satisfied with the companys own handling of the investigation. Make it a standard practice to follow up, Thomas advises.
The time it takes individual federal agencies to work through a whistleblower claim isnt the only difference between them. The IRS whistleblower law provides for payment of 15 percent to 30 percent of the amount collected, provided the amounts in dispute exceed $2 million. Dodd-Frank authorized the SEC whistleblower program to reward individuals for information that leads to a minimum of $1 million in sanctions ordered. SEC awards can range from 10 percent to 30 percent of the money collected.
The SEC and IRS also have different qualifications for reward recipients. As long as the whistleblower didnt plan or initiate the fraud, the IRS makes individuals eligible for a reward, even if they had some amount of participation in the fraud at issue. The SEC, on the other hand, doesnt permit a wrongdoer to benefit if they were criminally convicted in the case.
The law specifies that the SEC cannot disclose any information, including information the whistleblower provided to the SEC, that could reasonably be expected to directly or indirectly reveal a whistleblowers identity.
The IRS rules arent as clear-cut when it comes to protection of the whistleblowers identity. According to the agencys website, although the IRS will protect the identity of the whistleblower to the fullest extent permitted by the law, under certain circumstances, pursuing the investigation may
not be possible without revealing the informants identity.
Not all IRS rewards will be as large as Birkenfelds. Information he provided led to a recovery of more than $5 billion from the taxpayers who held the offshore accounts, according to the National Whistleblowers Center. The IRS also fined UBS $780 million as part of the DPA. The size of the reward was justified, Kohn says, because the fraud was the largest ever reported.
The bottom line for companies, he says, is that they need to take seriously the reality that whistleblowers have external options. If there is a culture of retaliation in a company, where people are afraid to come forward, he says, there are now enough government programs and options that that is where you will drive them.