Rise of the Tipster: Increased Rewards, Scrutiny for Whistleblowers

September 2012

IN THIS ISSUE

— Turning Hot Tips to Cash: Law Enforcement’s Increased Use of Tipsters
— A Fine Line: Corporate Challenges in Protecting Whistleblowers and Companies

GREETINGS!

Welcome to the September edition of our newsletter! In this issue, we’ll examine the effect of recently enacted whistleblower regulations, and look at the opportunity for rooting out fraud that is accompanied by the risks posed by tipsters who may have had an active role in frauds which they are now seeking to expose.

TURNING HOT TIPS TO CASH: LAW ENFORCEMENT’S INCREASED USE OF TIPSTERS

Tips from current or former employees have long been a leading source of predication for successful fraud investigations, and after both the accounting scandals of 2001-2002 and the financial collapse of 2007-2008, increased protections for whistleblowers were one feature of resulting reform legislation. While important, news-making tips generate great publicity for law enforcement agencies, risks exist both for those agencies and the companies which they are seeking to regulate.

Those risks and rewards came into focus earlier this month, when the U.S. Internal Revenue Service awarded former UBS banker Bradley C. Birkenfeld $104 million for helping the agency understand the Swiss bank’s efforts to aid its clients in evading billions of dollars in taxes. While Birkenfeld’s knowledge and information was reportedly essential in the case generating $5 billion in new revenue from UBS customers who had previously evaded taxation, Birkenfeld was hardly the conventional image of a concerned whistleblower who knew what was going on around him was wrong, such as Enron Corp.’s Sherron Watkins. Rather, Birkenfeld was described as having actively conspired in the fraudulent scheme, and served 2 1/2 years in federal prison as part of a plea agreement before receiving his reward.

A FINE LINE: CORPORATE CHALLENGES IN PROTECTING WHISTLEBLOWERS AND COMPANIES

Reports said Birkenfeld’s decision to come forward was motivated in part by a law requiring the IRS to pay informants at least 15 percent of any civil penalties received as the result of an investigation fostered by their tips. But such large rewards can create conflicts which can complicate those investigations — in Birkenfeld’s case, for instance, he aided a California real estate developer in hiding $200 million in offshore accounts. Was his willingness to cooperate motivated not only by possible financial gain but also the desire to make his illegal activity look smaller in comparison to that of his superiors?

Such concerns can present an opportunity for companies seeking to defend themselves against charges of fraud in which a whistleblower’s information plays a role. By carefully cataloging a whistleblower’s circumstance — including documenting any financial stressors that may also motivate a desire to earn a significant monetary reward — an investigator can add context to a whistleblower’s side of the story, and perhaps help mitigate some of the public relations damage that can occur from such claims being raised.