by Stephen Kohn
The government has lived up to its end of the bargain. As of September 2016, the federal government paid whistleblowers more than $6.352 billion in rewards for reporting fraud in government contracting since the False Claims Act. These reward payments objectively demonstrate that whistleblowing works, and works remarkably well. The government pays only when the whistleblower’s disclosures are correct, result in admissible evidence, and demonstrate that corruption occurred. The whistleblower’s information is the key that unlocks the doors to well-hidden fraud. By living up to its end of the bargain, the government not only compensates whistleblowers for taking the risk of disclosing violations of law to the government but also provides an incentive to other employees to report similar frauds. That is a true game changer.
The government officials who managed these new whistleblower reward programs universally praised their effectiveness. In their own words:
Chair of the Securities and Exchange Commission: The “whistleblower program . . . has rapidly become a tremendously effective force-multiplier, generating high quality tips, and in some cases virtual blueprints laying out an entire enterprise, directing us to the heart of the alleged fraud.”
Attorney General of the United States: The “impact” of the reward laws “has been nothing short of profound. Some of these [cases] may have saved lives. All of them saved money.”
Associate Attorney General (responsible for civil fraud prosecutions): “The False Claims Act and its [whistleblower] provisions remain the government’s most effective civil tool in protecting vital government programs from fraud. . . . The dollars involved are staggering.”
U.S. Attorney, in U.S. v. Sun Ace Shipping, “An award to these witnesses . . . encourage[s] those with information about unlawful conduct to come forward and disclose that information to authorities—information otherwise difficult, if not virtually impossible, to obtain.”
Chairman of the Senate Judiciary Committee: “One of the smartest things Congress has ever done is to empower whistleblowers to help the government combat fraud. They get results . . . This is not rhetoric . . . The False Claims Act is, hands down, the most effective tool the government has to fight fraud against the taxpayers.”
Even the most notorious antiwhistleblower business-lobbying group, the U.S. Chamber of Commerce Institute for Legal Reform, in a 2015 report, lauded the False Claims Act as “the government’s most important tool to uncover and punish fraud against the United States.”
Conclusion
The new approach to whistleblowing unlocks a most powerful force critical to fighting corruption. It creates procedures that both promote insiders coming forward with high-quality evidence and provides the best protection possible for the whistleblower—compensation for doing the right thing.
These laws now cover much of the U.S. economy. They apply to all federal government procurement, leasing, and contracting. Medicare and Medicaid frauds are covered, as are tax frauds and underpayments. In the private sector, all violations of securities and commodities laws are covered, as are foreign bribery/violations of the Foreign Corrupt Practices Act. Reward laws also exist for auto safety cases, ocean pollution, and wildlife trafficking. Following the lead of the federal government, more than half the states now have reward laws, primarily based on the False Claims Act, covering fraud in state and local government contracting.
Employees who witness fraud or corruption should ask the following questions: Can you file a claim with the government anonymously or confidentially? Are the crimes or frauds you witnessed covered under a reward law? Could the wrongdoer be required to pay a significant fine or penalty if found guilty? If the answer to these three questions is “yes,” the modern whistle-blower laws may provide you with a safe and effective path to stopping frauds and obtaining rewards. Of course the risk of retaliation is real, and there is no guarantee that the government will investigate or prosecute your case, or that a company will be found guilty. But where they have been properly used, reward laws have worked remarkably well.
PRACTICE TIPS
• The reward-based laws are fully discussed in Rule 3 (overview), Rule 6 (False Claims Act), Rule 7 (Tax Fraud and Underpayments), Rule 8 (Securities and Commodities fraud), Rule 9 (Foreign Corrupt Practices Act), Rule 10 (Auto Safety), Rule 11 (Act to Prevent Pollution from Ships), and Rule 12 (Wildlife Trafficking).
• The Department of Justice’s statistics regarding recoveries under the False Claims Act 1987-2016 is located at https://www.justice.gov/opa/press-release/file/918361/download.
RULE 2Navigate the Maze
On January 28, 1986, the American public watched in horror as space shuttle Challenger exploded on national television. Among the seven dead astronauts was Christa McAuliffe, a high school teacher and the first civilian passenger permitted on a space mission.
After the explosion, NASA’s top manager for the shuttle program quickly proclaimed that there was “no pressure” to launch the Challenger and that “flight safety” was the program’s “top priority.” Neither was true. The statements were gilded and intended to mislead the public.
The American people soon learned that employees for one of NASA’s most important private contractors, Morton-Thiokol, had raised specific safety concerns over the design defects that caused the explosion. However, their internal safety warnings were ignored. High-ranking NASA officials intimidated these engineers, who kept their concerns from the astronauts who boarded that doomed flight and the millions of Americans who would watch the shuttle liftoff on national TV. When the Challenger first launched, the engineers actually prayed that the spacecraft would not explode. In less than two minutes after take-off, they and millions of others throughout the world, watched in horror as the Challenger exploded on national TV, killing all aboard and subsequently costing the taxpayers billions of dollars.
The Challenger disaster occurred at the very time other whistleblowers were exposing corruption in government contracting and absurd cost overruns (for example, the hundred-dollar hammers and thousand-dollar coffee pots). These scandals pointed to the sad reality that corporate managers and government bureaucrats were not capable of policing themselves. Employees with inside information knew of each and every abuse. They needed encouragement and protection if they had the courage to step forward. The status quo was not working.
Change would come. Within a month of the Challenger explosion, Congress amended the False Claims Act, an old and ignored Civil War–era statute, in order to protect employees of federal contractors such as Morton-Thiokol and permit these workers to obtain large financial rewards for “doing the right thing.” Who could have imagined that in less than twenty-five years thousands of whistleblowers would be using the FCA? Who could have imagined that by 2017 these whistleblowers would force corporations around the world to pay back to the U.S. Treasury more than $50 billion in ill-gotten gains?
New Laws of Protection
At last count over fifty-five different federal laws protect the majority of whistleblowers from retaliation, along with eight others permitting whistleblowers to obtain financial rewards. From truck drivers to airline pilots and from pipeline operators to corporate managers, figuring out the maze of protections is sometimes mind-boggling. Each law is different—some are strong and others weak. Moreover, these protections continue to expand. For example, it was not until 2008, after scandals related to the sale and importation of “toxic toys,” that Congress decided to protect workers who exposed safety problems in the products sold to American consumers. A powerful whistle-blower protection provision was added to the landmark Consumer Product Safety Reform Act, which provides coverage for over twenty million workers who produce, import, or sell manufactured goods. In 2009 another whistle-blower law was attached to the $800 billion stimulus package proposed by President Obama. It covers all federal contractors who expose wrongdoing in stimulus-funded projects.
Then in July 2010 Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. Thi
s law took whistleblower protections to a new level. The United States was just starting to recover from one of the worst recessions in modern history—a recession fueled by corporate greed, lax regulations, and multibillion dollar scandals. One of the worst was the revelation that a highly respected Wall Street investor, Bernard Madoff, was a thief. Madoff had created a $20 billion Ponzi scheme. Madoff’s fraud went well beyond what anyone could have imagined. But the Madoff scandal was only the beginning. In 2008 and 2009 some of the largest banks, and financial institutions were heavily involved in illegitimate or illegal schemes, went bankrupt, or needed a trillion dollars in government bailouts.
How could such large frauds go undetected year after year? In the Madoff case the answer was simple—a whistleblower, chartered financial analyst Harry Markopolos, uncovered the fraud and tried, on numerous occasions, to get the government to shut down the Ponzi scheme. The regulatory system was completely broken. Only after Madoff’s frauds were fully exposed, after thousands of people lost their life savings, and the failures of the government regulators were blasted once again in newspapers across the world, did Congress act.
The Dodd-Frank Act was a game changer for whistleblower protections. The Act contains major whistleblower laws, covering much of the private-sector economy, including two distinct monetary incentive provisions, enabling employees to obtain financial rewards for reporting corrupt corporate practices. It also contains three new antiretaliation laws, one protecting employees who expose fraud in commodities trading, another protecting employees who expose fraud in securities trading, and a third protecting employees who provide information on financial consumer fraud. But the law did not stop there. The Sarbanes-Oxley Act (another major antifraud law enacted in 2002 in the wake of the Enron scandal) was amended to guarantee whistleblowers the right to a jury trial and to expand corporate coverage under the act. Furthermore, the False Claims Act, the premier law that protects employees who expose fraud in government contracting, was strengthened three times in 2009–10, including one amendment tucked into the Dodd-Frank Act. New laws were also enacted improving coverage for federal employees and FBI agents (2016), permitting auto workers to obtain financial rewards (2015) and blocking companies from using “trade secrets” from silencing whistleblowers (2016).
The changes are also international in scope. Although our court system is not designed to protect foreign workers from being fired, the whistleblower reward laws apply across borders. Non-U.S. citizens have shared in major whistleblower reward payments under the Foreign Corrupt Practices Act, the False Claims Act, the Act to Prevent Pollution from Ships, among others. In 2014 the Securities and Exchange Commission sent a loud cross-boarder message in paying a non-U.S. citizen a $30 million reward.
Finding the Law(s) That Protect You
The scandal-driven history behind all whistleblower laws exposes the single greatest problem facing employees trying to figure out “what to do if the boss is a crook.” To this day Congress still has not passed a comprehensive national whistleblower protection law. Protections are based on specific issues that workers blow the whistle on: environment, government contracting, fraud against shareholders, defects in manufactured goods, and so on. There are radical differences in the level of protection under each law. Worse still, state legal protections are literally all over the map. Some, like Georgia, pride themselves in being “at-will” and provide their employees with almost no rights. While others, like New Jersey, enacted comprehensive whistleblower reforms. Thus, employees must carefully hunt down the laws that provide adequate coverage, many of which are obscure or even contradictory.
The level of protection you have when you blow the whistle depends on the work you do, what you blew the whistle on, and in what state you reside. If your industry is not covered under a federal whistleblower law, and your state has not recognized whistleblower rights, you are out of luck. The fact that your company broke the law, or endangered someone’s life, is not always enough to guarantee protection.
Deciding which law best protects you is, in many ways, the single most important decision affecting the outcome of a case. It will determine whether your disclosures were legally “protected,” how much compensation you can obtain if you win your case, whether you can qualify for a reward, and whether you can file a claim confidentially or anonymously. It will determine if your case will be heard by a jury of your peers, or by an appointed “administrative” official. If you are going to blow the whistle, you must understand the complex maze of federal and state laws that govern your conduct, and ensure that you obtain the maximum legal protection. This Handbook walks you through the laws that may protect you, and some of the biggest pitfalls facing whistleblowers.
PRACTICE TIPS
There are checklists included at the end of this handbook to help guide you through the maze of potential protections. The following checklists cover the range of whistleblower laws:
CHECKLIST 1:
Whistleblower Reward Laws: This is a list of federal and state qui tam laws that provide protection and monetary rewards for whistleblowers.
CHECKLIST 2:
Whistleblower Protections Under Federal Law: This is a list of federal statutes that protect whistleblowers, along with citations to key cases helpful in understanding the laws.
CHECKLIST 3:
Whistleblower Protections Under State Common Law: This review of whistleblower laws in each state and territory of the United States includes references to state common law and statutory protections, along with citations to key cases in each state.
INTERNATIONAL TOOLKIT:
International Toolkit: Take the Profit out of Corruption: An overview of protections and reward laws afforded non-U.S. whistleblowers and anticorruption NGOs. Additionally, Rules 9, 11, and 12 focus on laws directly applicable to combating international corruption, pollution outside the United States, and wildlife trafficking.
RULE 3Follow the Money
The single most important rule for whistleblowers is very simple: Follow the money. Nine federal laws provide for the payment of rewards to whistleblowers who can prove that their employers committed fraud. These rewards can be large. Between 1987 and 2016 the federal government paid out to whistleblowers over $6.7 billion in compensation under five different reward laws. The laws are based on a medieval concept known as qui tam, that translates from its Latin roots as “he who brings a case on behalf of our lord King, as well as for himself.” Under qui tam citizens are encouraged to help the government enforce the law “in the name of the king.” The principle behind qui tam is simple: If your disclosure results in the recovery of money for the “King,” you obtain a portion of the monies recovered.
The qui tam or reward laws that provide financial incentives for whistle-blowers are:
• The False Claims Act: The oldest of the qui tam laws, it covers all federal procurement and contracting. The success of the FCA sparked numerous state governments to enact local versions, providing rewards for persons who blow the whistle on fraud in state and local government contracting.
• Section 406 of the Internal Revenue Code: Enacted in 2006, the IRS qui tam covers all major tax frauds and less devious cases of major underpayment of taxes.
• Section 21F of the Securities Exchange Act: The Securities qui tam law provides financial rewards for persons who disclose stock fraud and shareholder rip-offs. It also covers violations of laws policed by the Securities and Exchange Commission, including the Foreign Corrupt Practices Act.
• Section 23 of the Commodity Exchange Act: The commodities qui tam is modeled directly on the securities law and was enacted in 2010 as part of the Dodd-Frank Act. Whereas the securities whistleblower law covers all trading in stocks and bonds, the commodities qui tam covers trades in items such as oil, gas, foreign currency, agricultural products, and other items sold on the commodities futures markets.
• The Foreign Corrupt Practices Act: The Act prohibits American persons or publicly traded companies from p
aying bribes to foreign officials to obtain a business advantage.
• The Act to Prevent Pollution from Ships: The Act permits U.S. officials to enforce an international treaty prohibiting ships from polluting the ocean.
• Motor Vehicle Safety Whistleblower Act: The Act authorizes the secretary of Transportation to pay rewards to employees who report major safety defects in cars and other motor vehicles.
• The Lacey Act: The Act mandates that the secretaries of Interior, Commerce, Treasury, and Agriculture pay rewards to whistleblowers whose reports documenting illegal international wildlife trafficking result in a sanction. The Act covers animals, plants, fish, and illegal logging.
• The Endangered Species Act (and other wildlife protection laws): The ESA reward provisions are identical to those contained in the Lacey Act.
Together these reward laws encompass the entire federal public sector, the multi-trillion-dollar securities and commodities markets, and businesses that pay bribes in foreign countries. These laws demand that every potential whistleblower carefully “follow the money” and evaluate whether any of the misconduct uncovered by the employee concerns, directly or indirectly, frauds that may be compensable under these qui tam laws. Sometimes the fraud is obvious, such as a direct violation of material terms in a federal contract. But other times the frauds are far less obvious, such as the illegal marketing of a drug, which is later purchased by a patient but paid for with Medicare or Medicaid funds.
