Enhancing Fraud Detection Through Whistleblower Rewards

1. Public Hearing On Proposed Regulations 26 CFR Part 301: “Awards for Information Relating to Detecting Underpayments of Tax or Violations of the Internal Revenue Laws” Remarks of Dean A. Zerbe Senior Advisor, National Whistleblowers Center

2. NWC History • Founded in 1988, the NWC is a nonprofit tax-exempt advocacy organization with a unique history of protecting the rights of individuals who disclose wrongdoing in the workplace without fear of retaliation. • NWC Attorneys have authored leading legal treatises on whistleblower law and are globally recognized as the technical experts on whistleblowing.

3. Role of Employees in Fraud Detection

4. Association of Certified Fraud Examiners 2010 Global Fraud Study

5. “While tips have consistently been the most common way to detect fraud, the impact of tips is, if anything,understated by the fact that so many organizations fail to implement fraud reporting systems.” ACFE Report (2010)

6. A Crisis: Most Employees Do Not Report Fraud to the Appropriate Authorities

7. Little or No Progress in Voluntary Corporate Efforts to Increase Reporting

8. Of the 63% of employees who witnessed and reported misconduct, the following chart explains who they reported to

9. “One of the critical challenges facing both [Enforcement and Compliance] officers and government enforcement officials is convincing employees to step forward when misconduct occurs.” Ethics Resource Center Blowing the Whistle on Workplace Misconduct, 2010

10. Whistleblower Reward Programs: Do They Work?

11. “I have based [the False Claims Act] on the old fashion idea of holding out on temptation and ‘setting a rogue to catch a rogue’, which is the safest and most expeditious way of bringing rogues to justice.” Senator Howard, Congressional Globe, March 1863

12. False Claims Act Statistics From 1987 to 2010, False Claims Act recoveries have increased significantly due to whistleblower contributions

13. False Claims Act statistics 1987-2010

14. ADDITIONAL SOURCES * The importance of using financial incentives to promote corporate fraud disclosures was underscored in a published scholarly study by Boston University's Law Journal and the University of Chicago’s Booth School of Economics. * The Boston University study analyzed several possible methods of incentivizing whistleblowing and concluded that a qui tam model provides the greatest incentive for the whistleblower while exposing information that the government would not be able to detect on its own. "Qui tam cases bring out important inside information. Potential qui tam plaintiffs can offer information about inchoate or ongoing malfeasance of which law enforcement is unaware." After examining the potential disincentives that qui tam whistleblowers may confront, the article notes that "the bounty a relator stands to gain does, in many cases, outweigh the disincentives to being a whistleblower” See, Geoffrey Rapp, “Beyond Protection: Invigorating Incentives for Sarbanes-Oxley Corporate and Securities Fraud Whistleblowers,” 87 Boston University Law Review 91 (2007). * Similar findings were made at University of Chicago's Booth School of Economics, affirming that a qui tam rewards program is critical in order to incentivize employee reporting. Without this incentive the risk of facing retaliation will result in an massive underreporting of fraud.. See, Alexander Dyck, et al., “Who Blows the Whistle on Corporate Fraud,” University of Chicago Booth School of Economics (2008).

15. Communication • Administrative proceedings -- earlier • Purposes and benefits of tax administration • - lack of communication with wb top problem. • - Insinga and other cases – adds to IRS burden AND discourages whistleblowers. • IRS and WB served with clear communication of timing and status. • Applaud 90 day meeting as well as decline meeting – but additional steps necessary. • Improved communication will help the IRS and improve the whistleblower program’s effectiveness – accomplished through earlier administrative proceedings.

16. Awards • Congress expanded awards from 15-25% FCA to 15 to 30% -- clear indication of recognizing need to strengthen awards to encourage wb. • Inappropriate to start at 15% • Proper to start at 22% with plus ups and plus downs. • Only three plus ups under formula; starting at 15; and factors all weigh hard against award. • Policy is to encourage whistleblowers.

17. 3238 P Street NW Washington, DC 20007 Phone: (202) 342-1902/03 Fax: (202) 342-1904 Website: www.whistleblowers.org E-mail: contact@whistleblowers.org

18. Dean Zerbe For over 25 years Dean Zerbe was active in Congressional investigations of government waste, fraud and abuse. Dean left Congress in 2008 where his last position was as Senior Counsel and Tax Counsel on the Senate Finance Committee for Senator Charles E. Grassley.  Dean also served as Senator Grassley's Chief Investigative Counsel on the Finance Committee for a number of years prior to being appointed Senior Counsel. In his work for Senator Grassley, Dean was the driving force behind the drafting and passage of legislation that created the  Whistleblower Office at the IRS as well as changes in the tax code that greatly expand the rewards for tax whistleblowers. In addition, Dean was closely involved with the False Claims Act on behalf of Senator Grassley - who is the author of the modern False Claims Act/Qui Tam.  Dean was recognized by National Journal as one of the top staffers in Congress for his work - listed as one of the "Hill 100."Dean spearheaded for Senator Grassley a number of investigations including Department of Health and Human Services, Department of Defense, Internal Revenue Service, Enron, Corporate and Offshore Tax Shelters, Smithsonian, Red Cross, American University, Nonprofit Hospitals, and the Nature Conservancy. In these investigations, Dean worked successfully with many whistleblowers. Dean has a B.F.A. in Film Production from New York University; a J.D.  from George Mason University School of Law (High Honors); and, an LL.M. in Tax from New York University - the only individual to have both a film degree and an LL.M. in Tax from New York University. Dean also served as a rifleman in the 29th Infantry Division - Maryland Army National Guard. Dean is widely recognized by the press as a leader in tax and oversight matters - appearing on CBS Evening News and quoted in numerous publications including The New York Times, The Wall Street Journal, The Washington Post, The Financial Times, USA Today and the National Journal; as well as specialty publications such as Tax Notes and The Practical Accountant. In addition, Dean is a columnist for Forbes Magazine online.