The Department of Justice (DOJ) recently announced that it is embarking on a “90-day  sprint” to develop a whistleblower award program. This is a promising and welcome development for fairness and the rule of law in corporate America. Whistleblower programs at other federal agencies have been resounding successes, bolstering enforcement efforts against hard-to-detect crimes by incentivizing those with knowledge of misconduct to come forward.

As DOJ considers how best to construct this new program, it fortunately has a model of success to consider in the programs created under Dodd-Frank at the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC). 

Indeed in announcing the program Deputy Attorney General Monaco spoke about the success of these and other programs, noting the immense impact of those at the SEC and CFTC. “Ever since Dodd-Frank created whistleblower programs at the SEC and the CFTC, those agencies have received thousands of tips, paid out many hundreds of millions of dollars, and disgorged billions in ill-gotten gains from corporate bad actors,” she said.

To put some concrete numbers to that: since 2010, the SEC Whistleblower Program has received more than 80,000 whistleblower tips, awarded more than $1.9 billion to whistleblowers, and has recovered more than $6.3 billion in total monetary sanctions including more than $4 billion in disgorgement of ill-gotten gains and interest.  

This is a resounding success by any measure in leveling the playing field in favor of  those in corporate America (i.e., the vast majority) who play by the rules. It thus makes sense to carefully consider the key elements of the SEC program underpinning its success, not the least of which as experience has shown – is a transparent and reliable mandatory minimum award.  

Mandatory Minimum Awards

At the core of the SEC program is the reliable promise of a monetary award for qualified whistleblowers. Financial markets run on incentives — they are essentially a construct of the myriad financial incentives that our laws and regulations create. There is nothing new or novel about this concept, and harnessing the power of market forces through financial incentives is a straightforward and proven path to success. As DAG Monaco put it quite simply in her announcement “We recognized there’s another way we can encourage individuals to report misconduct: by rewarding whistleblowers,” she said. “And how do we do that? Money.”

Under the SEC Whistleblower Program, qualified whistleblowers, individuals who voluntarily report original information that leads to a successful enforcement action of at least $1 million, are guaranteed an award of 10-30% of the funds collected in action connected to their disclosure. This guarantee is crucial to overcoming the very real risks of retaliation that whistleblowers face as they weigh what to do when they discover misconduct. This is especially true when misconduct rises to the level of criminal violations.

History has demonstrated, time and again, that without guaranteed incentives, whistleblowers are far less likely to come forward. For example, prior to the passage of Dodd-Frank, the SEC had a fully discretionary whistleblower award law. In 2010, the SEC’s Inspector General released an audit of the law which found that in its 20-year history the law resulted in payments to only five whistleblowers, who collectively obtained only $159,537 in awards.

The contrast between the results of this discretionary law and Dodd-Frank’s mandatory award program could not be more stark. Similarly, under the 1943 version of the False Claims Act,  whistleblower awards were discretionary. The law failed to incentivize whistleblowers, so in 1986, Congress made the awards mandatory. Since then, thousands of whistleblowers have come forward, allowing for the recovery of over $52 billion from fraudsters.

DOJ is in a great position to leverage the invaluable insight afforded by these historical examples as it shapes its new program.   

Other Key Dodd-Frank Elements

There are numerous other elements of the Dodd-Frank whistleblower provisions which have contributed to the success of the SEC’s program. By incorporating these elements, DOJ can greatly bolster the effectiveness of its program at the outset.

• Anonymous and confidential reporting channels. As discussed above, whistleblowers come forward at grave risk of retaliation; protecting their anonymity is crucial.
• Dedicated Whistleblower Office. The SEC’s Whistleblower Office is a decidedly critical factor in the success of the program as it takes in, assesses, monitors, makes recommendations and provides deep expertise to the agency on these tips.
• Clear eligibility criteria. The SEC program outlines clear criteria for an individual to be eligible for an award. This kind of transparency bolsters confidence and predictability for whistleblowers.

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DOJ’s recent announcement is the latest in a series of thoughtful and wise approaches toward a goal we all support: fostering greater compliance with the rule of law in U.S. financial markets. I strongly support this impending new policy, and hope that the successful SEC program will prove a useful example in its design.