THE GOLDEN WHISTLE
The Sydney Morning Herald, 30 January 2019
When investigative journalist Bastian Obermayer received the millions of leaked files from Panamanian law firm Mossack Fonseca, he was not having a good day. As the German reporter told Fraud Magazine, the rest of his family were sick, and he had just changed his sons’ sheets when the email arrived. ‘It went from being a bad day to a very good one’.
The Mossack Fonseca leak showed that the Panamanian law firm had established shell companies that were being used to perpetrate tax fraud and dodging global sanctions. The Icelandic Prime Minister resigned, as did other prominent officials. The Australian Tax Office began investigations into 800 people identified in what became known as ‘the Panama Papers’.
Just knowing an insider might blow the whistle makes firms less likely to break the law. A recent study of Israel’s tax whistleblowing scheme concluded that it significantly increased the amount of tax paid; particularly in industries that are more prone to tax evasion. The scheme had a powerful deterrent effect on tax dodging. Once firms knew that there was an incentive for employees to report wrongdoing, they were more inclined to pay what they owed. Tax revenue increased by more than one-quarter.
Whether it’s tax or other kinds of corporate fraud, whistleblowers are crucial. A study by Alexander Dyck and coauthors analysed hundreds of US corporate fraud cases. They found that the Securities and Exchange Commission caught just 7 percent, while auditors detected only 10 percent. By contrast, the media uncovered 13 percent of fraud cases, while the employees exposed another 17 percent.
When it comes to whistleblowers, two things are critical. First, someone who exposes wrongdoing should not be subject to punishment. Protecting whistleblowers from blowback is critical if we want people to reveal misconduct. Four-fifths of employees who disclosed corporate fraud were fired, quit under duress, or had significantly altered responsibilities. Given these costs, as Dyck and his team note, ‘the surprising part is not that most employees do not talk; it is that some talk at all.’
The second critical component is rewarding whistleblowers. Since Roman times, some countries have permitted ‘qui tam’ lawsuits, in which informers are able to get a share of the penalty. In the modern era, such provisions have been used most extensively in the United States, under the False Claims Act (or ‘Lincoln’s Law’). Americans who reveal fraud against the government can collect between 15 percent and 30 percent of the money recovered. Since being revamped in 1986, the False Claims Act has recovered more than $40 billion from people who rip off the federal government. A similar whistleblower program for tax cases has paid out millions of dollars to informants who reveal tax evasion.
Following these models, a Shorten Labor Government will change the law to provide greater protection for whistleblowers who report on entities evading tax to the Australian Taxation Office. In addition, where whistleblowers’ information results in more tax being paid, we will allow them to collect a share of the tax penalty, with the reward ranging up to $250,000. Based on the US research, we expect it will help uncover tax fraud that would otherwise have remained hidden. And based on the Israeli research, we expect that the fear of being caught will cause other firms to decide it simply isn’t worth the risk of doing the wrong thing.
Tax evasion is stealing from the entire community. If a company doesn’t pay its fair share, society needs to make up the revenue through higher taxes, cuts to services or a bigger government debt. Tax avoidance by millionaires and multinationals, using tax havens like Panama, is a clear and present danger to the global tax base. Without the whistleblower who leaked data to Bastian Obermayer and his fellow journalists, some of Mossack Fonseca’s clients would still be bilking the Australian taxpayer.
Whistleblowers haven’t received sufficient recognition for their role in stopping tax dodging. But if the findings from corporate fraud apply, then they may be as vital as auditors and financial regulators put together. It’s time we protected – and rewarded – those who tell the truth about tax evasion.
Andrew Leigh is the Shadow Assistant Treasurer, and his website is www.andrewleigh.com.
Authorised by Noah Carroll, ALP, Canberra.