We need whistleblowers to protect investors, consumers and taxpayers from tax fraud and illegal conduct.

Our country’s recent history in the banking, finance, and investment industries demonstrates the importance of whistleblowers against tax fraud and other illegal conduct.

Through the 1980s and into the mid-1990s, our country experienced a banking crisis in the Savings & Loan (S&L) industry.   As a result of rapid expansion and investment in risky projects, S&Ls began to fail across the country. By the time the dust settled in the mid-1990s, over 700 S&Ls were closed and the taxpayers were left to cover losses estimated at around $124 billion.[1]

The S&L industry did not collapse only because of regulatory malfeasance and difficult economic conditions. Fraud and illegality played a big role. According to reporting by the N.Y. Times, by 1992, over 1,000 people were prosecuted for major S&L fraud and over 800 were convicted.[2]

By the late 1990s and early 2000s, the focus shifted from the corruption of banking institutions to publicly traded companies. The collapse of energy giant Enron, telecom giant WorldCom, and the theft of $150 million from Tyco International demonstrated the need for much tighter regulation and controls.[3] As The Economist observed at the time:” [t]he capital markets, and indeed capitalism itself, can function efficiently only if the highest standards of accounting, disclosure and transparency are observed.”[4] Consequently, these disastrous frauds resulted in regulatory changes, including passage of the Sarbanes-Oxley Act (SOX), which created whistleblower protection for employees of publicly traded companies. However, these reforms could not contain the fraudsters for long.

The mortgage fraud crisis next emerged. By 2008, the crisis was full blown and the economy of our country and much of the world was teetering on the edge of collapse. Through the Troubled Asset Relief Program (TARP) alone, our government committed $700 billion to help prevent the economy from collapsing. The government provided funds to bailout the big banks, mega-insurer AIG, and the automotive industry. Fortunately, most of these funds have been recouped with the net loss to the government currently estimated at between $28 and $37 billion.[5] This estimate does not include the personal losses of many families associated with home foreclosures, layoffs and the other economic impacts created by the crisis.

As we saw in previous crises, one of the major factors in the 2008 financial crisis was, as the Financial Crisis Inquiry Commission (FCIC) politely described it, the “systemic breakdown in accountability and ethics.”[6] The FCIC concluded:

Unfortunately—as has been the case in past speculative booms and busts—we witnessed an erosion of standards of responsibility and ethics that exacerbated the financial crisis. This was not universal, but these breaches stretched from the ground level to the corporate suites. They resulted not only in significant financial consequences but also in damage to the trust of investors, businesses, and the public in the financial system.[7]

How fraud becomes part of a corporate culture was aptly described by William Black, former senior regulator for several federal agencies during the S&L crisis.

The bank-compensation system also creates an environment that leads to mismanagement and fraud. No one has to tell someone they have to stretch the numbers. It is all around them. It is in the rank-or-yank performance and retention systems advocated by top business executives. Here, the top 20% get the bulk of the benefits and the bottom 10% get fired. You don’t directly tell your employees you want them to lie and cheat. You set up an atmosphere of results at any cost. Rank or yank. Sooner rather than later, someone comes up with the bright idea of fudging the numbers. That’s big bonuses for the folks who make the best numbers. It sends the message — making the numbers is what is most important. There is a reason that the average tenure of a chief financial officer is three years.

Compensation systems like I have just described discourage whistleblowing — the most common way that frauds are found in America — because the system draws upon the cooperation of everyone.

The basis for all regulation and white-collar crime is to take the competitive advantage away from the cheats, so the good guys can prevail. We need to get back to that.[8]

Our system depends on whistleblowers to assist in the enforcement of laws and regulations designed to protect customers, taxpayers and investors, as well as to help regulators stay ahead of the latest deceptions invented by those in the banking, finance and investment industries that are determined to sharply bend and break the rules for personal gain.

Protections and Incentives for Banking, Investment and Finance Whistleblowers

Following these crises, a number of federal laws and regulations were passed to protect employees who wish to disclose violations of laws, regulations or industry standards. In addition, the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), and the Internal Revenue Service (IRS) all created programs that offer rewards for information resulting in fines, penalties, and/or recoveries above certain thresholds.

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Taking the Next Step 

If you have been subjected to retaliation for disclosing or stating your intention to disclose information that you believe may reveal violations of any of the laws or regulations referenced above, contact us for a free assessment of your case. Similarly, if the information you have is likely unique, has not been disclosed, and may help the SEC, CFTC, IRS, Attorney General, or Federal Banking Agency establish one or more violations of the laws and regulations they are responsible for enforcing, we would welcome the opportunity to talk with you.

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