The Rules for Whistleblowers: A Handbook for Doing What's Right
Stephen M. Kohn
440 pages, Lyons Press, 2023
Whistleblowing has proven to be a most effective anti-corruption tool, whose promise to deter frauds is almost unlimited. Whether it’s busting a billionaire banker illegally stashing money overseas, or a ship captain that ordered the dumping of oil overboard, blowing the whistle is how these crimes are detected and successfully prosecuted.
In writing Rules for Whistleblowers: A Handbook for Doing What’s Right, I looked to highlight whistleblower laws and programs that are getting it right. Each “Rule,” accompanied by our online Law Library, targets a different crime or industry and explains how whistleblowers are changing the rules of the game. No longer the “skunks at the picnic,” they are now essential players in stopping fraud, bribery, and white-collar crimes. Generous reward or bounty provisions, combined with state-of-the-art anti-retaliation laws, enable whistleblowers to hold the powerful accountable and obtain multi-million-dollar rewards for doing the right thing.
In the conclusion to Rules for Whistleblowers, titled “Can Whistleblowers Drive a Spike through the Heart of Corruption?” I reflect on the immense success of whistleblowing, and how it affirms the Nobel prize-winning economist David Becker’s theory on stopping corporate crime. I cite sociologist Edwin Sutherland, who warned that white-collar crime can undermine the social institutions necessary for people to trust their government in a democracy. Sutherland was extremely concerned that large-scale corruption would undermine the very fabric that holds society together. Empowering whistleblowers to detect and report crime is the surest way to create paranoia among would-be white collar criminals, and deter corruption at all levels.
As the frauds get bigger, we have an increased duty to educate, empower, and protect those coming forward with insider information. When treated properly, whistleblowers can change the world for the better.—Stephen M. Kohn
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Why has whistleblowing been such an effective tool in the detection and prosecution of fraud and corruption? To find the answer we need to go back in time to 1939, when the famous criminologist, Professor Edwin H. Sutherland, first coined the phrase “white-collar crime.” Sutherland explained the sharp distinction between crimes committed by corporations or government officials and what he termed simply as “street crime.” In so doing, he explained, for the first time, the types of violations modern-day whistleblowers would be best suited to expose and who was committing these crimes.
Shortly before the outbreak of World War II, the U.S. Armed Forces Institute published Professor Sutherland’s book Principles of Criminology, in which he first explained the unique characteristics of white-collar corporate crimes:
The danger from robbery or kidnapping is clearly realized, for they involve direct sensory processes. . . . [But] theft by [fraud] . . . affects persons who may be thousands of miles away from the thief. . . . These white-collar criminaloids, however, are the most dangerous to society of any type of criminals from the point of view of the effects on private property and social institutions.
Sutherland did not hold back on explaining who was behind white-collar crimes such as bribery and price fixing: They were committed by the “upper classes.” To Sutherland, the stereotypes of poor “slum dweller(s)” committing crimes did not apply to “the crimes of the business world.” Corporate crimes are “indirect, devious, anonymous and impersonal.” The difference between stealing from an individual by a personal theft and indirectly stealing from thousands of people by manipulating stock prices made white-collar crime unique. Sutherland observed that “persons practicing fraud have ordinarily felt no pangs of conscience, for the effects of fraudulent behavior have not become apparent in individual victims known to the defrauders but have been impersonal and diffuse.”
Professor Sutherland warned that white-collar crime can undermine the social institutions necessary for people to trust their government in a democracy. His words of caution are ominous, even today, given the rise in authoritarian leaders within numerous democratic countries. Sutherland was extremely concerned that large-scale corruption would undermine the very fabric that holds society together:
The financial loss from white-collar crime, as great as it is, is less important than the damage to social relations. White-collar crimes violate trust . . . lower social morale and produced social disorganization. Many of the white-collar crimes attack the fundamental principles of the American institutions. Ordinary crimes, on the other hand, produce little effect on social institutions or social organization.
Where do whistleblowers fit into this analysis? Sutherland understood that the largest problem in fighting corruption was detection. Since these crimes are committed in secret with no direct victim, “arrests were seldom made.” He cautioned that “expert techniques of concealment have been developed . . . for the purpose of preventing” the detection of white-collar crime. Sutherland understood the problem, but it would take years before academia, or Congress, would recognize the most effective method to detect these crimes.
Sutherland took the first step in coming to grips with the cancer of big business corruption. The second step was taken by Professor Gary Becker, the University of Chicago Nobel Prize-winning economist. In order to develop a strategy for combatting white-collar crimes, it was imperative to also understand why top business leaders, wealthy individuals, and highly educated executives were willing to risk their positions and violate the law. Professor Becker’s answer to that question was radical, but ultimately based on common sense: White-collar crime was good for business. Without a realistic risk of getting caught evading taxes, paying bribes, or defrauding the government, committing white-collar crime was a rational economic activity. Only by understanding why committing white-collar crimes was a rational business decision would it be possible to develop tactics for fighting those crimes.
In his landmark 1968 paper, “Crime and Punishment: An Economic Approach,” Becker explained that crime was best understood as a rational economic activity. If a business could be more profitable by breaking the law, why not break the rules for profit? Without the risk of being detected (and a sufficiently high sanction if you were caught), breaking the law was a rational business decision, increasing corporate profits and making its owners wealthy.
Becker postulated a straightforward formula for understanding white-collar crime: The risk of detection plus the amount of punishment would equal the rate of crime. Or, as Becker explained in economic terms: “If the aim” was “deterrence,” by raising the “probability of conviction,” corporate executives could be deterred from committing these crimes. Under this formula, once the act of committing white-collar crime is viewed as a rational decision often made by highly educated and well-paid executives, only then can the tactics necessary to combat this crime be understood. If the risk of detection was high and punishment was severe, the rate of crime would be low. No rational executive would engage in corrupt activities if they thought they would be caught. The greater the risk, the greater the punishment, the lower the rate of criminal activity.
The key was increasing the risk of detection so that committing a crime “exceed(ed) the gain” obtained from breaking the law. A realistic fear of detection, coupled with strong sanctions against those who got caught, would deter a rational economic actor from engaging in white-collar corrupt activities. Instead of crime being profitable (and fully justifiable on a cost-benefit approach), by increasing rates of detection and penalties, crime could become a detriment to business profits and an impediment to the private accumulation of wealth.
According to Becker, if his formula was followed, criminal offenses properly targeted “could be reduced almost at will,” because “[f]or the individual to elect to engage in crime, the gain relative to its loss must exceed the odds of capture.” At the heart of his crime-busting theory was a fundamental premise: The government would have to figure out a method to increase its ability to detect well-hidden white-collar crimes. The government needed to create laws where a rational executive, when “contemplating whether to commit a crime,” is forced to take into “consideration not only the punishment they face if caught but also their chances of being apprehended.”
Without a realistic risk of detection and punishment, engaging in illegal corporate activities is a rational business decision. Those who are honest would be forced out of the market, forced to accept lower profits, or forced to join with their corrupt competitors in order to prosper. As will be shown, this is why whistleblowing is the cornerstone to ensuring fair competition, ensuring that all honest citizens and businesses can enjoy the benefits of a civil society, without being prejudiced by greedy corporate crooks.
The Detection Conundrum
Congress was not deaf to the problem of corporate corruption. In 1978 the U.S. House of Representatives Committee on the Judiciary, Subcommittee on Crime held a series of public hearings titled “White-Collar Crime.” Congress wanted to know why law enforcement’s efforts to tackle corruption were not working. Based on the testimony, it quickly became obvious that a principal impediment to enforcing laws governing corporate ethics was the inability to detect violations. Without detection there could be no cases to prosecute. The strictest laws protecting consumers, preventing fraud in government contracting, or punishing tax evaders would not work unless there was a method to find out who was breaking the law. Congress decided it was time to hear from the nation’s top prosecutors and demand answers.
Benjamin Civiletti, the deputy attorney general, reported that government contractors were knowingly selling defective airplane parts to the Air Force and subjecting impoverished Medicaid patients to unnecessary medical tests simply to make more money. Like Professor Sutherland, Civiletti warned that public corruption creates a “deep sense of betrayal and disappointment” in the government, fueling widespread public cynicism. He was blunt:
[T]he impact of white-collar illegality extends beyond simply pecuniary loss. Corruption of government officials can affect the quality of our food, and the safety of our homes. Such illegality also has invidious effect on the public’s perception of the integrity of our political, economic, and social and governmental institutions. Official corruption invariably involves breaches of trust, either in a legal or moral sense, and such offenses generate in the public a deep sense of betrayal and disappointment. . . . Such public perceptions are fertile ground for the development of widespread public cynicism and a conviction that the entire economic and political system is corrupt and lacks integrity. . . . [W]hite-collar offenses have the capacity to subvert the basic assumptions of our institutions and drain our national will . . .
Civiletti testified that methods to detect corporate crime must be improved. The “crime detection techniques developed in response to so-called street crimes” simply are not applicable when enforcing anti-corruption laws: “Investigators must look at not merely a single discrete act constituting the offense, but an entire course of conduct spanning months and even years. Relevant evidence may be spread out across the nation or around the world. Unlike street crimes where the crime is evident and the investigation focuses on establishing the identity of the culprit, an investigation of white-collar illegality centers primarily on determining if a crime actually occurred.”
He further testified:
[White-]collar offenses are low visibility crimes. Victims may never be aware of the victimization . . . the covert nature of white-collar illegality requires us to move from a reactive enforcement posture [i.e., an investigation triggered when the victim of a crime makes a complaint] . . . to a enforcement posture in which we affirmatively seek out and pursue evidence of white-collar illegality even if no victim ever files a formal complaint. This would include using undercover techniques.
Other witnesses confirmed the hidden nature of criminal corruption, describing white-collar crime as invisible. For example, Herbert Edelhertz, former chief of the Fraud Section, DOJ Criminal Division, testified that a white-collar crime investigation is “an exercise which can only be compared to an archeological excavation—the tombs are carefully hidden and constructed with fake passages and antechambers to divert the search. The search itself is so laborious and complex an effort that it can easily destroy the trail it seeks to follow.”
Congressional witnesses read directly from Gary Becker’s playbook. They recognized that business executives would, consciously or not, engage in a rational cost-benefit analysis when considering whether to break the law for profit. Only if laws could be enacted that increased the risk of detection and increase the level of punishment could prosecutors successfully fight back. The U.S. attorney for the Southern District of New York testified that white-collar criminals were “smart enough to calculate the ‘risks-to-benefits’” before engaging in corrupt activities. But under the current system there was simply no effective deterrent:
They are very smart. They are committing these crimes not out of need but out of greed, and they are smart enough to weigh the risks-to-benefits before they go into the crime. The profit from this kind of crime is enormous. They know the risk of detection, even with everything the Federal Government is trying to do now, is very slight. The cases are very difficult to investigate and very difficult to prosecute. And if, at the end of all that, after you have investigated and prosecuted successfully, a Federal judge is going to give somebody 2 months in jail or probation. . . . [T]here is nothing to deter the next person for engaging in that kind of criminal activity.
The U.S. attorney for New Jersey agreed with this assessment: White-collar crimes are of a “premeditated, calculated nature” and their motivation is greed. Thus, “if we can, through law enforcement, demonstrate to would-be white-collar offenders that not only will they run the risk of criminal prosecution and perhaps incarceration or like treatment, but in addition they will simply not be permitted to retain their ill-gotten gains which we will seek to recover through pursuit of civil remedies, I think the deterrent effect will be greatly heightened.”
Eight years later Congress would approve a new technique for detecting white-collar crimes: incentivizing insider-whistleblowers to do the job.