Governments sometimes seek help from private parties to ensure that policy objectives are met or that governmental resources are protected from waste or theft. Whistleblower programs are one way that governments encourage knowledgeable individuals and businesses to voluntarily assist. Boiled down to their essence, these programs encourage people who know about fraud or waste to report it to the government.
In the United States, these programs are usually created by laws called statutes. It is important to keep in mind that this discussion deals with U.S. law, not the law of any other country. Here, in the United States, a statute is one of four binding sources of law.
Whistleblower programs exist at the federal and, in some instances, at the state level. This note deals with three federal whistleblower statutes each of which attacks a distinct variety of fraudulent behavior. The three statutes are the False Claims Act, Sarbanes-Oxley Act, and Internal Revenue Code.
The False Claims Act, in the U.S. Code at Title 31, Section 3729, attacks fraud in submitting claims to the federal government or to contractors who then submit claims to the federal government. Under this Act, private persons — individuals or companies — can effectively sue another private party (or sometimes a state or local government agency) on behalf of the federal government. These lawsuits are technically called qui tam suits.
Qui Tam is a short version of a Latin phrase meaning “who sues for the king and himself.” If the federal government collects a settlement or court judgment because of the information provide by the qui tam plaintiff (called the “relator”), the government is generally required to share the recovery, usually between 15 and 30 percent, with the relator. The amounts involved can be very large because the False Claims Act requires the defendant to pay the government treble damages plus between $5,500 and $11,000 per false claim. Relators can also recover reasonable attorneys fees and other costs of the claim.
Not just anyone, however, can sue. The relator has to be really close to the fraud. Generally, this means close enough to reach out and touch it. Personal knowledge of false billings to Medicare, for example, are about as good as it gets. To have that kind of knowledge, you pretty much have to be an insider of some kind. Relators who are involved in the fraud can also obtain a reward as long as they are not convicted of criminal wrongdoing. The Act also has features to protect employee-whistleblowers from retaliation by their employers.
Qui tam suits are different from normal civil suits in some ways. First, before filing the lawsuit, the relator is obligated to provide the Justice Department a summary of the evidence in the relator’s possession. Second, the relator’s complaint must be filed under seal, meaning that no one but the relator and the Justice Department are initially aware of the existence of the suit. Third, after the relator files the complaint under seal, the Justice Department has 60 or more days to conduct further investigation to decide if it wants to “intervene” as a party in the lawsuit. Typically, the DOJ takes about two years to evaluate a claim. During this investigatory period, before the complaint is unsealed, the relator must not communicate with anyone but the relator’s attorney about the case.
If the government intervenes, then it takes over the lead role in the case. If the government decides not to intervene, the relator can choose to move forward alone. Either way, the complaint will eventually be dismissed, settled, or unsealed and litigated. Without government intervention, the probability of the relator winning a qui tam case is significantly diminished. More insight into the Department’s approach to intervention is provided in this DOJ memo. The DOJ has also summarized statistical information about qui tam claims in this document.
If you believe that you have a valid qui tam claim and think you might be willing to assist the government in pursuing it, you should talk with an attorney immediately to find out what your exact rights and obligations are. A few examples of qui tam cases are provided in the False Claims Act Case Studies page.
Whistleblowing under the Sarbanes-Oxley Act, also known as SOX or Sarbox, isn’t nearly as sexy or remunerative as under the False Claims Act. SOX attacks fraud in public securities markets. Its whistleblowing features have the narrow purpose of protecting employees (of publicly traded companies only) who bring information to the SEC or Justice Department about fraud at their companies. Unfortunately for a SOX whistleblower, there’s no real reward offered for blowing the whistle except peace of mind (as in, “I am less likely to become the target of a federal investigation of the fraud”), compensation and reinstatement in case of retaliation.
Federal Tax Whistleblowing
Whistleblowing with the IRS is an opportunity for just about anyone to take a shot at tax collection. The IRS has long encouraged whistleblowing in a small way, but recently made it a bigger priority thanks to a little known provision in the Tax Relief and Health Care Act of 2006.
On January 14, 2008, the IRS issued “interim guidance” for blowing the whistle under its new program. The rewards for a successful whistleblower can be substantial — 15 to 30 percent of the tax the IRS collects in response to private information provided by a whistleblower who is not also a participant in the fraud.
Claimants who draw attention to public evidence of fraud — extracted by the claimant from judicial or administrative proceedings, government reports, hearings, audit or investigation, or the media — can also get an award up to 10 percent of the amount collected.
If the IRS denies a claim, the whistleblower can appeal to the U.S. Tax Court. Awards are fully taxable, but attorney fees and costs paid by or on behalf of the claimant are deductible above-the-line (for AGI) but only up to the amount of the award.
Monetary rewards for blowing the whistle on fraud can be substantial. On the other hand, the risks can also be considerable. If you have knowledge of a fraud that has been or is currently being perpetrated, you should speak with an attorney to ensure that you fulfill your legal obligations and preserve any reward or compensation to which you are entitled under the law. It is generally not a good idea to speak first with anyone other than an attorney. This is true, in part, because such disclosure to a non-attorney may stand in the way of a whistleblower award.