Financial institutions that employ risk management practices tend to avoid or at least minimize punitive monetary damages stemming from a compliance or regulatory breach. But while internal audits and compliance departments often do an adequate job of self-policing employee activity, strained financial resources place restrictions on how effective that effort can be. Enter the whistleblower.
What is a Whistleblower?
A whistleblower is an employee (current or former) who reports the company’s illegal activity to an outside party, typically an attorney or regulator. The whistleblower may be entitled to a substantial monetary reward if the breaches lead to a recovery, meeting certain criteria.
Whistleblower Turns Down $8 million
Recently, CNN reported that a former Deutsche Bank risk manager Eric Ben-Artzi was awarded a settlement for uncovering an accounting fraud at the firm. The fraud came from executives who were inflating the value of their esoteric credit derivatives portfolio during the financial crisis.
The former risk manager was part of a group awarded a $16.5 million total award for their whistleblowing, which resulted in Deutsche Bank being fined $55 million. Amazingly, Mr. Ben-Artzi did not accept his part of the reward ($8.2 million) because the SEC did not bring charges against the individuals themselves who were orchestrating the fraud, as Mr. Ben-Artzi had hoped.1 Mr. He felt that the money would come from innocent victims such as current Deutsche Bank employees and shareholders.
Other Whistleblowing Examples
This is not the first time Deutsche Bank has had the whistle blown on its operations. In the fallout from the housing crisis, Deutsche Bank was ordered to pay over $202 million from a False Claims act regarding improper due diligence on FHA-insured mortgage loans.2 These loans were presumably later packaged and sold as mortgage backed or asset backed securities, taking the risk off their own books.
While we highlighted two financial whistleblowing on financial firms, we know that fraud is not confined to the financial industry. One industry that has seen explosive growth in fraud is healthcare industry, especially in regards to Medicare. A former risk manager at a hospital in San Diego filed a $50 million false claims lawsuit against his former employer. This is interesting because the alleged fraud is Medicare-related, which means the hospital was, allegedly, defrauding the government.
Rail-road company CSX had the whistle blown on it by a former employee and it was revealed that it had defrauded the U.S. government by not engaging in competitive bidding for materials and created shell companies to mark up and resell repair materials at higher prices.3
Benefits of Whistleblowing
Show Me the Money
Obviously the monetary benefits can be a huge windfall for whistleblowers. The $16.5 million award to Mr. Ben-Artzi’s group equates to 30% of the fine, the maximum award for a whistleblower when the Department of Justice does not participate in the case.4 If the Department of Justice does enter the case that the whistleblower began, the maximum award is 25% and a minimum is 15% of the funds recovered through the settlement.5 Fiscal 2015’s total whistleblower awards amounted to 21% of recovered funds by the government.6
If you are considering whistleblowing but are concerned about the repercussions of such an activity, there are a number of legal resources out there to help. Often attorneys who believe the case has merit may not charge any fees upfront, rather will collect a portion of any potential settlement, so they bear the risk of winning a judgement. Even if they are short on the resources there are numerous litigation finance companies devoted to funding lawsuits for individuals with limited financial resources. These companies can also help fund the attorneys themselves.
Many believe that just the threat of whistleblowers acts as the best risk management techniques a company could implement. Of course, the better way to prevent this is to address more individual penalties, the goal of Mr. Ben-Artzi’s suit, which would probably have a much greater effect on employee behavior.
The Department of Justice recovered almost $6 billion from false claims in 2014 alone. 2015’s total noticeably dropped down to roughly $3.5 billion.7 Is whistleblowing working to slow down financial crimes? Time will tell.
Downfalls of Whistleblowing
There are some serious drawbacks that should be considered by a company. Whistleblowing can alter the way employees interact and view their risk managers making them not want to be forthcoming. Employee morale can be harmed. Qui tam supporters will counter with the argument “if you aren’t doing anything wrong, there should be no issue”. While that argument is logical, the damage to corporate culture is still done.
If you uncover something a little softer than “fraud”, you may have to make a decision on whether to be a whistleblower or not. Some suggest taking your findings and concerns immediately to senior management and probably in-house legal counsel, if applicable.
Senior risk management specialist, Josh Hyatt gives some advice. Summarizing, if the indiscretion is “sloppy compliance” it’s something you might want to handle internally but if it’s a serious breach, such as attempting to defraud the government, whistleblowing could be the right step.8
If you do uncover a fraud at your company, and become a whistleblower, you could face career risk. If, in return, you experience harassment by the company, demotion or termination, it may be viewed as ‘retaliation’, which is illegal and itself subject to potential litigation. Eric Ben-Artzi sued Deutsche Bank for ‘wrongful termination’ in 2012. He was possibly a victim of retaliation.
The Ethics of Whistleblowing
Is it ethical for a risk manager to use their position, and the access to confidential material for gain. What is the duty or responsibility to the employer? There is a substantial battle going on in the legal space between the employers and employees over just this concern.
Also, depending on the situation, the risk manager may be obligated to report the fraud. If the fraud examiner or risk manager uncovers fraud and relays it to senior management, but nothing is ever done, the risk manager themselves could be individually liable and face fines or even criminal charges.
The CFA program deals extensively with ethics in its curriculum and they boil it down to always putting the clients interest first, even before your own employer. This is known as the fiduciary standard.
Online MBA in Enterprise Risk Management
If a career in managing risk for a business or organization sounds appealing, consider an online MBA in Enterprise Risk Management (ERM). The University of St. Mary’s online MBA in ERM teaches students to evaluate and measure risk in the corporate world. Equally appealing is the fact that students can finish the program in as little as one year from the comfort of their own home.
Upon completion, the degree puts candidates in the best position for lucrative, in-demand jobs as risk managers, insurance adjusters, compliance officers and auditors. The median pay for risk managers is over $82,000 according to Payscale.9 And you never know-you may find yourself the recipient of a whistleblower award in the future!