Government Whistleblower Programs Undermine Compliance Culture

Enforcement agencies have focused for years on the importance of companies investing in robust compliance programs, including internal whistleblower hotlines where employees can report suspected misconduct.

At the same time, government programs that offer monetary rewards for whistleblowers are thriving. The SEC has awarded a total of more than $1.9 billion through its whistleblower rewards program, including nearly $600 million in 2023.

The Commodities Futures Trading Commission awarded approximately $350 million under its program. And on March 7, Deputy Attorney General Lisa Monaco announced that the DOJ is in a “90-day sprint” to develop and implement a pilot whistleblower rewards program to begin later this year.

Are these whistleblower rewards programs a good thing? From the perspective of enforcement agencies, the draw is clear: more tips, more cases, more enforcement, and more fines.

From the perspective of an individual whistleblower, the benefit of these programs is unquestionable. They’re a financial bonanza. A potential reward of millions, and even tens of millions, of dollars is a powerful incentive. But for in-house compliance personnel, these government rewards programs are more of a blockade than a boon.

First, government whistleblower rewards programs undermine the compliance initiatives that regulators demand. Compliance professionals understand that employee buy-in and trust are key to an effective program and fostering a culture of compliance.

Ideally, employees want to believe the organization cares about doing what is right. There should be trust that the company will investigate and, if necessary, take corrective action when there are alleged violations. Employees develop this trust through their first-hand experiences with the compliance program, whether by reporting suspected misconduct and seeing it investigated, or being interviewed as part of an internal investigation.

But with the proliferation of government whistleblower rewards programs, and the eye-popping and disproportionate monetary rewards touted through news releases and government reports, how can an internal whistleblower hotline compete?

Unlike the government, a company can’t promise an employee that there may be a reward of millions of dollars for reporting misconduct. The government tells companies to develop robust compliance programs, understanding this requires commitment of significant financial resources—according to DOJ guidance, one of the three “fundamental questions” in assessing a compliance program is whether the program is “adequately resourced.” At the same time, by attracting whistleblower reports with promise of monetary rewards, the government undercuts these very programs.

Second, although whistleblower rewards programs may lead to more reports, investigations, enforcement actions, and fines, it isn’t clear that more enforcement statistics are a worthwhile standalone goal. Company shareholders ultimately bear compliance and other costs of criminal and civil enforcement actions against companies.

The DOJ recognized as much in its recent focus on compensation clawbacks, noting it considered “how policies may seek to potentially shift the burden of corporate financial penalties away from shareholders—who in many cases do not have a role in misconduct—onto those more directly responsible.”

Most companies want to do the right thing. But a large company with 50,000 or more employees is like a small city. Inevitably there will be some who don’t follow the rules. By providing financial incentives for employees to skip internal reporting systems, regulators have taken from well-intentioned companies the chance to effectively police themselves, and to identify and remediate instances of noncompliance without burdening shareholders with federal enforcement actions.

Third, it has long been recognized in our legal system that paying a witness for information can create incentives for false, shaded, or exaggerated information. That is why courts routinely instruct juries that they should consider the testimony of incentivized witnesses with particular caution, whether that incentive arises from a grant of immunity or payment for testimony.

These same biases apply to whistleblowers. While it’s true that the whistleblower rewards programs try to blunt this dynamic to some degree by paying rewards only when there has been a successful enforcement action, that protection—focused on the eventual outcome of a matter—does nothing to address the fact that even where charges aren’t ultimately brought (and therefore no whistleblower reward is paid), a company will still have to bear the cost and management distraction of defending a federal investigation.

And reward-minded whistleblowers have no incentive to self-censor by holding back where the transgressions may be minor or the evidence of wrongdoing questionable. From the whistleblower’s perspective, the way to increase the odds of hitting the lottery is to buy more lottery tickets by making a federal case out of everything.

Speaking in March about companies with a prior enforcement history, Monaco reiterated her admonition that companies should invest in compliance: “[N]ow is the time to invest—and reinvest—in your compliance programs. I can assure you the price of committing another violation will be far higher than the cost of preventing one.”

Unfortunately, with the increasing prevalence of government whistleblower rewards programs, it’s likely that companies will have to incur both the cost of prevention and the cost of enforcement.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jeffrey D. Clark is partner in Cadwalader’s global compliance, investigations, and enforcement practice, representing corporations and individuals in a wide variety of criminal and civil investigations and enforcement matters, including DOJ and SEC enforcement actions.

Paul Rodriguez is an associate in Cadwalader’s global compliance, investigations, and enforcement practice and represents clients in investigations and criminal and civil litigation.

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