by Stephen Kohn
The 2009–2010 False Claims Act Amendments
To be sure, federal contractors fought every inch of the way to avoid liability under the False Claims Act. The biggest and best law firms in the nation turned their powers and intellect into an industry designed to convince courts to weaken the law. They were extremely successful and chipped away at the basic underpinning necessary to defend taxpayer monies under the FCA. Many of the court victories were on the most technical issues, almost impossible for ordinary workers to understand, such as the nature of a “presentment,” the definition of an “obligation,” and the impact of a “public disclosure” on the jurisdictional standing of an employee to file a qui tam. To understand the hypertechnical legal attacks on the law, you would not simply need to be a lawyer; you would literally need to have an entire law firm at your disposal.
By 2008 Congress was completely fed up by these successful legal challenges, and Senator Grassley, with strong bipartisan support, introduced the False Claims Correction Act. At the heart of the effort to fix the law was a recognition that “the effectiveness of the FCA has recently been undermined by court decisions limiting the scope of the law and allowing subcontractors and non-governmental entities to escape responsibility for proven frauds.” The urgent need to fix the FCA was further brought home by the increase in federal spending caused by the “economic crisis” of 2008 and 2009, which resulted in more than “$1 trillion” in additional expenditures designed to “stabilize” and “rebuild” the economy.
Consequently, numerous loopholes created by bad judicial decisions were closed by three separate amendments, one enacted in 2009 and two enacted in 2010. The entire False Claims Correction Act was not signed into law, but the major components of the act were.
What was the most effective fraud-fighting law in the United States became even stronger, and the ability of whistleblowers to obtain protection and rewards under the law was strengthened.
The New Qui Tams: Taxes, Securities, Commodities, and More
The False Claims Act has worked. Between 1986 and 2016, under this law over $54 billion was paid back into the U.S. Treasury. Countless billions of dollars were saved through better regulations and internal corporate oversight sparked by the fear of FCA cases. During this time period whistleblowers obtained $6.325 billion in payouts. Thousands of wrongdoers were being caught, and it was slowly becoming cost-effective to follow the law.
Based on these successes, Congress enacted new qui tam laws, covering taxes (2006), securities fraud (2010), fraud in the commodities futures market (2010), and auto safety (2015). Each of the laws is somewhat different, but given the breadth of coverage, numerous whistleblowers will be covered under their provisions. Taxpayers, honest investors, and contractors who play by the rules will be the big winners.
The ink was hardly dry on the federal tax whistleblower law before billions of dollars in claims were filed with the IRS. Most famous of these were allegations submitted by Bradley Birkenfeld, a banker who had worked for UBS bank in Switzerland. When Birkenfeld blew the whistle, UBS was the largest bank in the world. It had created a “major wealth” section that catered to offshore North American accounts. Over nineteen thousand Americans had stashed their wealth into this UBS program, where their income was hidden and taxes were evaded. Because the accounts were “secret,” the stock trades conducted on behalf of these millionaires and billionaires by the UBS bankers were all illegal. The North American program had $20 billion in assets, all in secret “non-disclosed” accounts that violated numerous U.S. tax laws.
Within months of the passage of the new IRS whistleblower law, Birkenfeld walked into the offices of the Department of Justice with thousands of pages of evidence fully documenting the UBS tax scheme. He provided all the details of the accounts, including the fact that the UBS bankers regularly traveled to the United States with encrypted laptops to transact illegal business with their American clients. The scandal that followed shook UBS and Swiss banking to its core.
When the Justice Department confronted UBS with Birkenfeld’s information, the bank immediately folded its hand and paid up. UBS agreed to a $780 million settlement with the United States. Moreover, they agreed, for the first time in Swiss history, to turn over the names of more than four thousand U.S. citizens who held illegal accounts with the bank.
Thousands of Americans with Swiss accounts feared being exposed to public shame, heavy fines, and criminal prosecutions. The IRS capitalized on these fears and initiated a one-time “amnesty program,” in which U.S. citizens with illegal offshore accounts could confidentially turn themselves in, pay reasonable penalties, and escape criminal prosecution. Over one-hundred thousand Americans took advantage of this program and paid the U.S. Treasury fines and penalties in the billions of dollars. As of January 2017, the United States recovered more than $14 billion in sanctions directly attributable to or triggered by the IRS tax whistleblower law.
What was the role of the whistleblower in the largest ever tax fraud case? That was the very question asked by the federal judge to the prosecutor in the Birkenfeld case:
The Court: Now, you said something that has great significance . . . but for Mr. Birkenfeld this scheme would still be ongoing?
The Prosecutor: I have no reason to believe that we would have had any other means to have disclosed what was going on but for an insider in that scheme providing detailed information, which Mr. Birkenfeld did.
The legendary system of Swiss bank secrecy was cracked wide open by one former employee turned whistleblower. One whistleblower forced the largest Swiss bank to shut down a $20 billion, highly profitable program and pay the U.S. Treasury a large fine. One whistleblower’s disclosure triggered widespread voluntary compliance with the tax laws, resulting in additional billions of dollars pouring into the U.S. Treasury. The first publicly known case under the 2006 IRS whistleblower law resulted in the largest tax fraud recoveries in U.S. history.
On August 6, 2012, Birkenfeld’s disclosures also led to the largest single payment to a whistleblower under a qui tam law ($104 million). Qui tam laws work.
The Bottom Line
Why are whistleblower reward laws so important? Worship of the “bottom line” triggers retaliation. Safety costs money. Honesty in contracting costs money. Paying your fair share of taxes costs money. Telling the truth to your investors costs money. Adhering to quality standards costs money. Cutting corners can be enticing and profitable. But in the end, someone pays when rules are violated.
It may take some effort to “follow the money” and determine precisely how your allegations may impact securities, commodities, tax, or government procurement requirements. But that effort is absolutely necessary in order to ensure that you have the best protections offered by Congress and the laws of the United States.
PRACTICE TIPS
• Checklist 1 offers a list of federal, state, and local qui tam laws, along with their official legal citation.
• Checklist 4 contains examples of frauds covered under the False Claims Act.
• Checklist 7 explains in detail the rules for filing reward claims under the Dodd-Frank Act’s corporate whistleblower reward laws.
• The International Toolkit sets forth the reward laws applicable to whistleblowers who live or work outside the United States.
RULE 4Find the Best Federal Law
How do you find the best federal law that will actually protect you? If a law has a qui tam provision, or lets you file a confidential rewards claim, great. These laws are now the “gold standard” for whistleblowers. They are so important that they are described separately in Rules 6–12. No whistleblower should proceed with either raising a concern at work or filing a case in court without carefully reviewing the reward laws.
But you also need to find the best laws that will protect your job and permit you to obtain justice if you are fired in retaliation for your disclosures. Any whistleblower law worthy of consideration must, at a minimum, reasonably define protected activit
y, cover your industry, ensure due process procedures, and permit you to obtain a complete “make whole” remedy, including reinstatement to your job, back pay, attorney fees, and reasonable damages.
What follows is a summary of major federal whistleblower protections. A list of federal whistleblower laws, including proper citations and references to important cases decided under those laws, are presented in Checklist 2.
Airline Safety
In 2000, after two Alaska Airlines planes crashed, Congress passed the Aviation Investment and Reform Act. For years airline pilots had testified on Capital Hill about the need for protection. In the wake of the dual airline tragedies, Congress finally acted and passed aviation whistleblower protections on par with the pre-2007 Surface Transportation Act. The law contains a ninety-day statute of limitations and broadly defines protected activity to include internal disclosures to management. Damages include reinstatement, back pay, compensatory damages, and attorney fees and costs. Complaints are filed with the Department of Labor and then investigated. Either party has the right to a full de novo trial on the merits before a DOL judge and two levels of appeal, first to the DOL Administrative Review Board and then to the U.S. Court of Appeals. The law also contains a preliminary reinstatement provision that requires the DOL to order whistleblowers back into their jobs if the initial investigation finds retaliation.
Banking and Financial Institutions
In addition to possible coverage under the Dodd-Frank and Sarbanes-Oxley (SOX) Acts, employees in the banking industry are also covered under three older whistleblower laws that protect employees working for credit unions, “financial institutions, FDIC-insured institutions, federal banking agencies, and the Federal Reserve.” The three laws are essentially identical in nature and protect employees who blow the whistle on “gross mismanagement,” the “gross waste of funds,” an “abuse of authority,” “possible” violations of any law or regulation, or specific dangers to the public health or safety. Whistleblowers file their claims directly in federal court. If they prevail they are entitled to reinstatement, compensatory damages, and other “appropriate” remedies. There is a two-year statute of limitations for filing a claim. These laws were enacted years ago; and they do not contain many of the modernized features of the SOX and Dodd-Frank laws, such as qui tam provisions. Also, the definition of protected disclosure was not updated to explicitly include internal disclosures. Consequently, a number of courts have narrowly defined protected activity, excluding protection for internal whistleblowing. Because of these issues, if possible, claims filed under the banking laws should be joined with other corporate protection whistleblower laws.
Bank whistleblowers may also be covered under a number of reward laws, including those covering taxes (Rule 7), securities, and commodities fraud (Rule 8), or under the Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”). FIRREA is described further on in this Rule.
Consumer Financial Protection Act of 2010
The Dodd-Frank Act did not simply reform the stock and commodities markets. It also contained an entirely new separate provision entitled the Consumer Financial Protection Act. The Act created the Bureau of Consumer Financial Protection within the Federal Reserve System. This bureau has sweeping jurisdiction over numerous federal laws governing consumer financial products and services such as mortgages and credit cards and debt collection. The official report issued by the Senate Committee on Banking described the role of this new consumer protection bureau: “to ensure that consumers are provided with accurate, timely, and understandable information in order to make effective decisions about financial transactions; to protect consumers from unfair, deceptive, or abusive acts and practices and from discrimination . . . to ensure that Federal consumer financial law is enforced consistently in order to promote fair competition. . . .”
The new Bureau wants whistleblowers. On their web page they make a plea for employees to come forward with information: “Do you have information about a company that you think has violated federal consumer financial laws? Are you a current or former employee of such a company, an industry insider who knows about such a company, or even a competitor being unfairly under-cut by such a company? If so, the CFPB wants to hear from you. Tipsters and whistleblowers are encouraged to send information about what they know to [email protected].”
In order to protect employees who blow the whistle on violations of the Consumer Protection Act, the act contains a strong antiretaliation provision modeled on the Sarbanes-Oxley Act and the Consumer Product Safety Acts. The scope of protected activity is broad, covering employees who blow the whistle on “any violation” of the Consumer Protection Act or other laws designed to prevent fraud in consumer financial products or services. Some of these associated laws are: the Consumer Leasing Act, the Equal Credit Opportunity Act, the Fair Credit Billing Act, the Fair Debt Collection Practices Act, the Federal Deposit Insurance Act, and the Truth in Lending Act.
It permits employees to provide information not only to the newly created Bureau of Consumer Financial Protection, but also to other regulatory authorities and state and federal law enforcement agencies. Like the SOX, it also protects internal disclosures employees make to their managers, and it covers employees who make disclosures in the “ordinary course” of their employment “duties.” Similar to other traditional whistleblower laws, the Dodd-Frank Consumer Protection Act prohibits employers from retaliating against employees who file charges, testify, or participate in enforcement proceedings under “any Federal consumer financial law,” and also protects employees who “object” to or “refuse to participate in” any violations of “any law, rule, order, standard or prohibition” that is “subject to the jurisdiction” of the newly created Bureau of Consumer Financial Protection.
The law is modeled on the Consumer Product Safety Act and works in the following manner:
• It covers “any individual performing tasks related to the offering or provision of a consumer financial product or service.”
• Any employee who believes that he or she was “discharged or otherwise discriminated against” in retaliation for engaging in protected activities must file a complaint with the secretary of the Department of Labor (DOL) within 180 days “after the violation occurs.”
• The Secretary of the DOL investigates the complaint. If the Secretary rules in favor of the employee, the Secretary must issue a “preliminary order,” which would include a requirement that the employee be reinstated. The reinstatement order would become immediately enforceable. Thus, if the whistleblower had been fired, the DOL can require that the employee be reinstated on the basis of the investigatory findings, and the company would have to reinstate the employee while the case moves forward on appeal.
• The investigation is supposed to be completed within sixty days. The DOL has historically never complied with these tight deadlines.
• Once the DOL completes its investigation and issues its preliminary findings, either the employee or the employer can appeal those findings and request a formal “on the record” hearing before a DOL administrative law judge. The appeal, along with “objections” to the investigatory “findings or preliminary order” must be filed within thirty days.
• DOL hearings are similar to trials conducted before federal judges, but they are tried without a jury. Under the DOL rules, parties can engage in pretrial discovery and have the right to call witnesses at the hearing. The rules of evidence are relaxed in these proceedings, the ability of the DOL to award sanctions against employees are limited, and employers cannot file counterclaims against employees.
• In order to prevail in the case, an employee must demonstrate that his or her protected activity was a “contributing factor” to an adverse action. The company can prevail if it can demonstrate, by “clear and convincing evidence,” that it would have taken the same actions against the employee even if the employee had not engaged in any protected activity. This burden of proof is designed to m
ake it easier for employees to prevail.
• A DOL administrative law judge conducts the hearing. After the judge issues a decision, either party can appeal that ruling internally within the DOL to the Administrative Review Board (ARB). These appeals are mandatory if an employee seeks judicial review of a final order of the DOL. The ARB is supposed to issue the final decision of the secretary of the DOL within 120 days. Again, this deadline is rarely followed and internal appeals can take years to decide.
• Once the ARB issues a final order, either party can file an appeal with the U.S. Court of Appeals for the judicial circuit in which the violation arose or the employee resided when the adverse action occurred. Appeals must be filed within sixty days of the “issuance of the final order.”
• After filing with the Labor Department, an employee can remove his or her case to an appropriate U.S. District Court. This removal can occur under two circumstances: “[I]f the Secretary of Labor has not issued a final order within 210 days” from the date the complaint was filed, or the employee can file in federal court “within 90 days after the date of receipt of a written determination” from the Secretary of the DOL.
• If a case is removed to federal court, the claim is heard de novo (Latin for “over again”). This means that the federal court is not bound by any of the rulings of the DOL and the employee and employer are entitled to a completely “new” proceeding. Furthermore, either party can request that a jury hear the claim.
• When an employee prevails in his or her claim, he or she is entitled to a complete “make whole” remedy, including injunctive relief, compensatory damages, reinstatement, back pay, compensation for special damages, and attorney fees and costs.
