Incentivising Whistleblowers: What Can Other Countries Learn from the US?

On 14 January, The Sun, a UK tabloid newspaper, exposed the latest manifestation of the intermittent trans-Atlantic “don’t snitch” campaign. Posters had gone up on a South London estate warning residents:

The police are not your friends. They will say anything to make you snitch, then destroy your life. Be smart, don’t snitch!!

The posters disappeared faster than The Sun’s outrage, but they left hanging the question of who does snitch, and why. Snitching, which is the English colloquial version of “informing” has a pedigree back to Judas and Delilah. Opposition to it goes back just as far and is as prevalent today; a week after the South London poster campaign a Bedford man was shot after a Facebook entry suggested he was a police informant.

Many of us harbour a surprising ambivalence about snitching, well summed up in the admiring phrase “thieves’ honour”. Children are often discouraged from “telling tales” and in some communities keeping one’s mouth firmly shut is admired and supported. American law professor Alexandra Napatoff has recently condemned it in her book Snitching-Criminal Informants and the Erosion of American Justice, pointing out that it can have a grave effect on open justice and proper outcomes.

However, law enforcement depends heavily on the willingness of criminals to implicate their colleagues. Snitching is US government policy now, enshrined in the Sarbanes-Oxley Act (2002) and extended to the investigation of corporate fraud.

Imported Carrots and Sticks

In the UK there is an array of provisions intended to encourage people to report the criminal activity of others. In 1998, the Public Interest Disclosure Act created protection for workplace whistleblowers, the primary intention being that employees could safely report matters of concern to employers without fear of victimisation. It is doubtful whether this has made much difference-protection from victimisation is a fairly weak incentive-and the information does not primarily reach the hands of the state. However, the UK government has imported a number of US provisions that have had significant impact, forming a series of increasingly large sticks and carrots.

In 2002, the Competition Act imported a system of immunity for businesses that whistleblow on price fixing cartels. Under this scheme, there is total immunity for the whistleblowing company, which qualifies for Type A leniency, usually where there is no pre-existing investigation and the applicant did not coerce another business to join. This policy minimises the financial penalties and maximises the benefit of informing on a cartel. There are also reductions in fines for Type B (where the information advances an existing investigation) and Type C cases (adding significant value to an investigation). The Office of Fair Trading has developed a “marker system” for working out where a potential applicant would be in the system of Types.

The UK also applies Amnesty Plus, where a business under investigation for one cartel blows the whistle on another cartel of which the authorities are not yet aware. When the 2002 Enterprise Act criminalised cartels, it also extended the whistleblowers’ defence to individuals. This was a potent combination of “carrots”, conferring substantial advantage on the first individual to blow the whistle and their effectiveness is demonstrated by the significant number of cartels coming to light.

In 2002, the government created a very big stick with the Proceeds of Crime Act (POCA). POCA creates mandatory reporting requirements for people working in the regulated sector who came across money laundering. Failing to report a money laundering client is a criminal offence, even if the failure is merely negligent. Business professionals, including lawyers and accountants, do actually go to prison for not filling out that form on the SOCA website; this is a very big stick indeed.

But the stick approach is hard to operate outside a regulation framework for professionals. And the carrots weren’t very appetising.

Incentives for Criminals

In 2003, the Serious Organised Crime and Police Act (SOCPA) set out detailed provisions empowering a prosecutor to grant immunity where someone snitches on fellow criminals.

SOCPA also offers substantial sentence discounts for spilling the beans on other offenders. These discounts can be taken retrospectively by prisoners brooding in their cells; convicted prisoners can cough up information and return to court for a sentence reduction. These cases suggest that SOCPA sentence reductions have almost exclusively applied to traditional and serious crimes like contract killing and drug smuggling.

The biggest downside of the SOCPA regime, obviously, is that “only criminals need apply”. Given that criminal informants are generally as bad as the person they point the finger at, it is hard to achieve reliable outcomes. Australia, Canada, New Zealand and the United States and are just some of the countries that have had major problems after relying on the word of a serious criminal to convict a defendant. In the UK, some of the most appalling miscarriages of justice have stemmed from reliance on “cell confessions”, including the Carl Bridgewater murder.

Interestingly, SOCPA is very little used in the fraud context. This is probably because the chance of a prison sentence in a fraud case is too low, and even then the sentences too short, for defendants to find informing an attractive option. Taking these two issues-the traditional unreliability of criminals’ evidence and the irrelevance of SOCPA to white collar crime-it would seem that a more sensible option would be to increase the flow of information from the honest citizen.

Incentives for Honest Citizens

The Americans have long offered law enforcement incentives to individuals under the False Claims Act, which dates back to the Civil War. This allows a private individual to file a suit in the name of the US Government, charging fraud by government contractors and other entities that receive or use government funds. The accusing individual can then share in the recovery of up to 30 per cent of any monies recovered. This effectively privatises law enforcement and has proved a highly effective anti-fraud tool. Since 1986 there have been 2,400 law suits, which recovered US$2 billion for government and handed US$340 million to individuals.

Lacking similar incentives and a structure for handling reports of private sector fraud, the US Securities and Exchange Commission somehow missed or ignored numerous tips about Bernard Madoff’s massive Ponzi scheme. By incentivising the informant and creating a market for the information, they hope to encourage honest whistleblowers.

Accordingly, in November 2010, President Obama signed into law the Wall Street Reform and Consumer Protection Act. This program rewards people who provide information that leads to a successful Securities and Exchange Commission enforcement, with 10 to 30 per cent of the monetary sanctions over US$1 million. In effect it is a highly incentivised private market equivalent of the POCA reporting regime.

Linked to a more robust UK approach to financial penalties, such a provision could be a game changer. As such, it may commend itself enormously to UK regulators and might end up being the golden carrot.