While whistleblowers are often respected for their willingness to stand up for what is right and report corporate or workplace corruption, they sometimes face tough consequences for their actions. However, federal legislation like the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) include provisions to protect whistleblowers from retaliation. Some whistleblower activities are also safeguarded through Securities and Exchange Commission (SEC) and Internal Revenue Service (IRS) federal agency practices.
Under the 2002 Sarbanes Oxley Act (SOX), covered or qualified employees are given protection as whistleblowers for alerting the authorities to fraudulent or other illegal financial dealings by a company. For whistleblower purposes, SOX defines employees as people who have worked, do work or are applying for a position with a publically traded company.
The Dodd-Frank Act
The Dodd-Frank Act was enacted on July 21, 2010, in an effort to curb the overindulgent behavior that led to the government bailout of public U.S. financial firms and banks. A key provision of the act amends section 1514A of SOX to clarify who is covered under its whistleblower provisions. Protected employees, according to the Dodd-Frank clarification, now specifically include those (including agents and many independent contractors) reporting violations to their bosses who work for “subsidiaries or affiliates of a publicly traded corporate parent.”
Among other clarifications and changes, Dodd-Frank expanded the whistleblower protections of SOX by making whistleblower protections non-waivable by employees (for the most part), extending the statute of limitations, and creating SEC and Commodity Futures Trading Commission (CFTC) incentive programs for whistleblowers.
Dodd-Frank Incentive Program
To encourage people to bring forth credible information about regulatory violations, Dodd-Frank provides incentives and protections to whistleblowers. To be eligible for rewards, whistleblowers must be “qualified” persons who provide “original” information to the SEC or CFTC that leads “to the successful enforcement” of law. The information provided by whistleblowers must also result in sanctions of at least one million dollars paid to the SEC or CFTC. If these conditions are met, whistleblowers may receive awards of at least 10 percent, but not more than 30 percent, of the sanctions recovered by the agency as a result of the information provided.
Whistleblowers and the SEC
In addition, the SEC recently finalized its rules to implement the whistleblower provisions of the Dodd-Frank Act. These rules incorporate various laws to protect the identities of whistleblowers and to define award guidelines. However, whistleblowers who contact the SEC must meet certain conditions to be eligible for awards, like ensuring the matter reported is material to financial statements and violates the securities laws it enforces.
Whistleblowers and the IRS
The SEC and Dodd-Frank whistleblower provisions provide fewer incentives for reporting tax violations, however, when compared to existing IRS rules. According to an IRS official, whistleblowers seem to think there are more anonymity protections and greater rewards when reporting possible violations under IRS laws instead of SEC laws, and that there are fewer “materiality” conditions to satisfy. This makes the IRS more likely to investigate issues the SEC will not, and the IRS rewards whistleblowers with a higher percentage of the amount recovered from a tax-related case.
Generally, the IRS will pay an award of 15 to 30 percent of its recovery to people who blow the whistle on noncompliant taxpayers. To be eligible for an IRS whistleblowing reward, the whistleblower must provide “specific and credible information,” not an “educated guess,” that helps the IRS collect “taxes, penalties, interest or other amounts.” Also, to be eligible for an award, the IRS must collect in excess of $2 million or collect from a noncompliant individual taxpayer who has an annual gross income in excess of $200,000.
The IRS also may provide rewards for blowing the whistle on amounts less than $2 million or on individuals who earn less than $200,000 in annual gross income. Awards in this program are discretionary, however, and, at most, a reward will not exceed 15 percent of the recovery.
Protection From Retaliation
The risk of retaliation is usually one of the main concerns whistleblowers have, whether they report financial violations to internal management or to the SEC or the IRS. It is difficult for whistleblowers to know if the potential reward they may receive will outweigh the risk of blowing the whistle, in addition to any other potential consequences, until a case has been investigated and closed.
For whistleblowers’ protection, and to further encourage them to step forward with relevant information concerning violations, Dodd-Frank allows whistleblowers to provide information anonymously. Also, Dodd-Frank includes anti-retaliation provisions stating that employers are not allowed to “discharge, demote, suspend, harass … or in any manner discriminate against” whistleblowers for providing information to the SEC or CFTC.
The SEC extends whistleblower protections to reporting individuals who reasonably believe that the information that is being provided “relates to a possible securities law violation … that has occurred, is ongoing, or is about to occur.” As long as the information is reported in accordance with its rules, protections will extend to whistleblowers, regardless of whether they qualify for an award.
For its part, the CFTC does not require whistleblowers to first report violations to management within the company; instead, the whistleblower may report the violations directly to CFTC authorities.
If you are considering blowing the whistle on your employer, contact a local employment law attorney with experience in whistleblowers claims and protections.