The Importance of Whistleblowers to Financial Transparency

July 17th, 2013

This week Edward Snowden, the whistleblower who leaked information about the National Security Agency’s data collection program, may be allowed to leave his temporary station at the Moscow International Airport, where he has been staying since he fled Hong Kong in June. Snowden’s leak has brought the concept of whistleblowing into sharp focus in our headlines lately, including the controversies over the relative benefits and costs of these individuals and programs that support them. As in the case of Snowden, the concept of whistleblowing can be controversial, and it is always painful for the entity or government who is having the whistle blown on it.

In many cases, whistleblowing has proven an effective tool for improving democracy and transparency—it increases information and public engagement, encourages debate, and strengthens oversight. These concepts all have particular importance to some of the issues the Financial Transparency Coalition faces. Transparency, information, engagement, and oversight are critical to each of our recommendations. As such, whistleblowers have often proved critical to fostering these values.

Here are a few of the important whistleblowers in the history of our causes, namely in tax evasion and corruption. As always, this list is representative and not exhaustive.

Bradley Birkenfeld, Former Employee of UBS. For over ten years, Birkenfeld was a banker in Switzerland, where he was employed by Credit Suisse, Barclays, and later UBS. While at UBS, Birkenfeld’s job was to promote his bank’s services among wealthy U.S. clients, who would enjoy, among other benefits, lower tax dues. In 2007, Birkenfeld gave information to the U.S. Department of Justice on these operations of UBS. Eventually, his information led to a criminal investigation of UBS, several criminal prosecutions, and a fine of $780 million. In many ways the case also incited a sea change for Swiss banking secrecy—which today is greatly diminished from its powers in 2007.

Birkenfeld’s story is not without controversy. In 2008, he stood before a federal judge in Florida and pled guilty to conspiracy to defraud the United States. He was sentenced to 40 months in prison. In late 2012, however, the IRS paid Birkenfeld $104 million for acting as a corporate whistleblower. It was the largest amount ever awarded by the agency.

Anonymous Whistle Blower, International Consortium of Investigative Journalists. After a three year investigation, the International Consortium of Investigative Journalists and their director, Gerald Ryle,  published information about the illicit and questionable dealings of 10 offshore jurisdictions including the British Virgin Islands, the Cook Islands and Singapore. In part, we can credit the results of this investigation to the anonymous whistleblower who sent the ICIJ the 2.5 million electronic files with the data the journalists analyzed.

The hard drive held about 2.5 million files, including 2 million e-mails, which track the offshore industry over years. The data include details on 122,000 offshore companies or trusts, nearly 12,000 intermediaries, and 130,000 records on the people and agents who are behind these companies, either secretly or otherwise. Armed with these data, 86 investigative journalists from 46 countries mined the information and published stories about tax evaders and other criminals, in what is now the largest cross-border investigative collaboration in journalism history.

Rudolf Elmer, Former Employee of Julius Bär. Elmer was an employee of the Swiss bank Julius Bär for nearly two decades. For eight years of his tenure, he oversaw the bank’s Caribbean operation. He was fired in 2002. In 2008, Elmer gave secret banking documents to Julian Assange, founder of Wikileaks, which detail the activities of Julius Bär in the Cayman Islands, including information prominent individuals and companies engaged in tax evasion and other crimes.

Of his role, Elmer wrote: “It is a global problem, and I am only the messenger who provides the bad news, or even better, the truth. Offshore tax evasion is the biggest theft among societies and neighbor states in this world.”

Honorable Mention: Dodd Frank Act Whistleblower Provisions for the Foreign Corrupt Practices Act. I’ve often touted the benefits of the Dodd-Frank Wall Street Reform and Consumer Protection Act–also known as the “financial overhaul bill.” In particular, I have noted the benefits of the Energy Security Through Transparency (ESTT), which requires companies listed on the U.S. stock exchange to disclose payments to governments for oil, gas, and mining. But the Dodd-Frank Act has another important anti-corruption provision: Section 922, which requires the Securities and Exchange Commission to pay a reward to whistleblowers who voluntarily disclose information regarding violations of the Foreign Corrupt Practices Act.

So far, there have not been any whistleblower awards in connection with the FCPA, but enforcement actions are often slow and we likely haven’t seen full impact of the provision yet. Nonetheless, many experts anticipate the provision will have a significant impact on compliance and enforcement of the FCPA.

While often controversial, in matters of tax evasion and corruption, whistleblowing can prove to be a crucial tool. The Internal Revenue Service and the Department of Justice have recently reveled in its merits, using the strategy of “it takes a rouge to catch a thief.” In a recent paper on whistleblowing effectiveness, Goel and Nelson (2013) find that whistleblowing laws are “important governance tools in both the public and private sector,” and that awareness of these laws is effective in exposing corruption. Without these individuals, and their indispensable tools, the cause of transparency would surely be a bit further behind.


Written by Ann Hollingshead

Follow @FinTrCo