Importance of Whistleblowers to Reducing Fraud

In October 2011, the Chamber of Commerce issued a proposal to limit rewards to whistleblowers who report fraud against taxpayers. The “caps” approach advocated by the Chamber would constitute a radical change to a working and effective whistleblower incentive system that has returned billions of dollars to the U.S. Treasury since the False Claims Act (FCA) amendments of 1986. The following report by economist Jack Meyer describes the deep flaws in the analytic assumptions underlying the Chamber’s proposal.

Any review of the Chamber’s caps proposal should involve consideration of the following key facts:
  • The False Claims Act works, and has worked well for 25 years, drawing praise from both sides of the Congressional aisle and returning over $30 billion to the U.S. Treasury in civil and criminal fines and penalties. Central to the 1986 FCA amendments were provisions incentivizing individuals with inside knowledge of fraud to come forward to report to the government.

    Since the 1986 amendments, returns to the taxpayer under the law have significantly increased, with government recoveries totaling over $3 billion in FY 2011 alone. The U.S. Department of Justice says the False Claims Act is a critical tool in fighting the war on fraud and notes that nearly 80 percent of all FCA actions are whistleblower-initiated.
  • The Chamber proposal is based on flawed analytic assumptions and presents misleading data. As detailed by Jack Meyer in the attached report, the Chamber analysis fails to account for criminal fines and state Medicaid recoveries associated with federal False Claims Act cases, assumes all cases are filed by single whistleblowers when that is not always the case, mistakenly assumes all whistleblowers will be successful, completely discounts the value of deterrence, and disregards 9 of the 10 risk factors that whistleblowers and their lawyers must weigh before bringing a case.
  • The Chamber proposal to cap whistleblower rewards would seriously weaken an incentive system with a proven track record and could substantially reduce returns to taxpayers. The current incentive structure encourages whistleblowers and their counsel to invest their resources in obtaining a full recovery for the government regardless of the magnitude of the losses to the United States. In contrast, the Chamber’s proposal would discourage whistleblowers and their counsel from seeking full recoveries for the United States when the taxpayers’ losses exceed $94 million, the maximum amount on which relators could receive a share under the Chamber’s proposal.

    Many FCA cases have settled for amounts far higher than $94 million, and numerous cases have involved many years, and millions of dollars of whistleblower and private attorney investment, prior to settlement. The Chamber report fails to provide any evidence that its cap proposal would not reduce whistleblower actions and truncate returns from fraudsters. As noted in this report, if a whistleblower reward cap resulted in only a 3 percent overall reduction in FCA judgments and settlements, the impact on recoveries would far exceed all of the purported “savings” the Chamber attributes to a reward cap.

The Chamber of Commerce report focuses on diluting whistleblower incentives instead of advancing initiatives to combat fraud. In short, there is no reason for abandoning the current FCA incentive structure and replacing it with an approach based on a flawed analysis with no track record of success.

Download the full report here.