Whistleblower advocates have long argued that a key benefit of whistleblower award laws are the deterrence effects they have on potential wrongdoers. Not only do whistleblower award laws enable authorities to police hard-to-detect misconduct, they also deter others from engaging in the misconduct due to the increased risk of detection.
A new study by researchers from multiple universities found that the tax whistleblower award provision in New York’s state False Claims Act has radically increased deterrence of tax avoidance in the state. The study, “The Deterrence Effects of Tax Whistleblower Laws: Evidence from New York’s False Claims Acts,” was published in Management Science.
Under the law, whistleblowers who report tax fraud committed against the state are eligible to receive an award of 15-30% of the recovery.
In 2018, the cell phone carrier Sprint agreed to pay $330 million to settle allegations brought forward by a whistleblower under the law. The whistleblower was awarded $62.7 million for reporting the fraud and assisting the government in its investigation.
According to the study, since the law was enacted in 2010, it has brought in an extra 7.7% in state tax revenue, amounting to $281 million a year. When weighed against the cost of enforcing the law, researchers found that the whistleblower law had a 3,000% return on investment.
“These whistleblower laws do work, and they’re reasonably inexpensive from a government perspective,” says Aruhn Venkat, one of the study’s authors and assistant professor of accounting at Texas University’s McCombs School of Business.
The researchers note that both knowledge of the law itself and publicity around specific whistleblower cases work together to increase deterrence.
“They’re complementary,” Venkat says. “Just the passage of the law will deter state tax avoidance. So, you don’t need only whistleblower events to deter firms.”
Further Reading:
The Deterrence Effects of Tax Whistleblower Laws: Evidence from New York’s False Claims Acts