Lawyers warn SFO whistleblowing rewards could backfire

The UK government is consulting on reforms to whistleblowing laws that would empower the Serious Fraud Office (SFO) to offer rewards to individuals who report economic crime. However, legal professionals are raising concerns that these incentives could have unintended negative consequences.

Research by Ronghuo Zheng, an associate professor of accounting at the McCombs School of Business at The University of Texas at Austin, and Lin Nan of Purdue University, suggests that while moderate rewards can encourage reporting, excessively large payouts may backfire. Their theoretical economic model indicates that overly strong incentives can reduce whistleblowing by discouraging internal communication within companies.

According to Zheng, when whistleblower rewards are too high, employees are more likely to report issues externally rather than attempt to fix them internally. Anticipating this, managers may restrict access to information, leading to less transparency. This reduced information flow, the study suggests, could allow serious problems to go unresolved, potentially leading to catastrophic outcomes, as seen in cases like Theranos where limited information sharing amplified harm.

Zheng advocates for a more calibrated approach by regulators, such as the Securities and Exchange Commission, which has awarded significant sums to whistleblowers. He suggests incentives should be strong enough to motivate reporting but not so high that they stifle internal communication and problem-solving.