By Adrian Johansen
In many developed countries in the world, major corporations have been found guilty of committing tax fraud, using illegal tactics to evade paying their fair share of taxes. In the U.S., this illicit behavior results in billions of dollars of unpaid federal taxes to the Internal Revenue Service (IRS).
However, recognizing that there are power dynamics at play when it comes to corporate fraud, the U.S. has created protections for those who come forward about such instances. This has encouraged confessions from people involved in these crimes and helped the IRS recover billions of dollars from corporate tax evasion.
The people who report fraud are commonly referred to as whistleblowers, though the exact process involved for reporting corporate fraud depends on where you live. While fraud occurs everywhere, there are some differences between whistleblowing in the U.S. and the EU. This can be seen in their respective laws, as well as the frequency of tax fraud exposure in each area.
Whistleblowing in the U.S. vs. EU
Whistleblowing has proven extremely effective over the last several decades in helping to expose fraud, especially since federal protections have helped decrease the risks for those who come forward. Although it is often the job of internal auditors or those in management positions to expose fraud, these groups are responsible for under 15% of the fraud exposed, according to the Association of Certified Fraud Examiners.
Whistleblowers, on the other hand, help expose 43% of fraudulent instances. Although external auditors are responsible for inspecting a company’s accounts, these groups expose only 3% of fraudulent actions that are found. Many times, this is because companies hide information that could indicate that fraud occurred, which means a person needs to know exactly where to look to uncover the fraud as it’s happening.
However, accounts and numbers leave a paper trail, no matter how well the information is concealed. Evading taxes under any circumstance still considered tax fraud, and it can result in serious legal action, costing companies and their owners heavily. Due to the severity of consequences for people committing tax evasion, there is a lot of pressure on whistleblowers in the process of exposing corporate fraud, including months or even years of legal proceedings, as well as backlash from coworkers.
To encourage whistleblowing, several laws have been created in the U.S. to protect those who come forward. This includes the False Claims Act of 1863, the Whistleblower Protection Act of 1989, and the Sarbanes-Oxley Act of 2002, among others. Each of these laws helps protect whistleblowers from retaliation that may occur against them for incriminating others in their company. They also compensate whistleblowers between 10 and 30% of any amount over $1 million the government recovers from the tax evading company.
The U.S. Securities and Exchange Commission collects new information regarding fraud almost 10 times each day from whistleblowers. This is an effective source of tips for these government offices to explore cases of fraud and attempt to recover unpaid taxes.
However, while there are many offices and avenues for reporting fraud in the U.S., this is not the case in the EU, where there is a lack of laws to protect whistleblowers, as well as a lack of benefits for coming forward with information.
An article by Michael Knigge on Deutsche Welle suggests that most European companies have reporting systems in place for employees who believe fraudulent actions are occuring. However, these channels delegate specific people within the company to represent employee concerns and take complaints up a ladder to be addressed. They are not regulated by government entities, which often deters whistleblowing. In order to more effectively report instances of fraud, transparency campaigners insist more whistleblowing protections are necessary if the EU wants to expose fraud.
In many cases, attempting to address illicit behavior behind closed doors in secret settlements is ineffective, as it protects those who are committing criminal actions, which can potentially give them the freedom to continue the illegal behavior. Laws should not only protect whistleblowers but also potential future victims by publicly acknowledging criminal behavior.
Corporate Cases of Tax Fraud
Fraud is not uncommon; however, there are a few particularly famous instances of fraud due to the high-profile nature of the cases. These often result in public scandals and convictions of fraud and conspiracy for those at the top who were responsible.
Enron was a Houston, Texas, based gas company that was formed as a merger of two smaller businesses in 1985. The company became North America’s most successful vendor for natural gas by 1992, reporting a revenue of more than $100 billion by the year 2000. Although there were several years when Enron was legitimately successful, the unbelievably high revenues reported in 2000 were, in reality, false.
As a result of the use of market-to-market accounting, which provided them with a method to inflate profits to shareholders, the company was able to falsely report revenue growth from projects that were not truly proving successful. This false reporting went on for years until the end of 2001, when Enron finally declared bankruptcy. Several chief executives were fined to pay back millions and sentenced to prison time.
Although LuxLeaks was not quite the same as a traditional corporate fraud scandal, it gave rise to many questions and concerns about tax haven policies and regulations. November 2014 revealed a financial scandal as the result of whistleblowing and a journalistic investigation. The investigation revealed shocking information about the tax rulings provided in Luxembourg that allowed companies to pay less than 1% in taxes, saving billions.
However, due to the laws surrounding bank processes and the financial services provided by PricewaterhouseCoopers, no laws were technically broken by the financial institutions. Although these legal financial proceedings have been received with a large amount of concern, the whistleblowers were punished as a result of exposing the information, sentenced to fines and jail time.
Still, they opened the door to many important conversations about the tax haven policies that allow companies to avoid paying billions of dollars in taxes. This scandal also brought up the controversy of the importance of whistleblowers and whistleblower protections in the EU.
Whistleblowing is a heroic but often risky action to take, as it can help the government regain billions of dollars in corporate theft at the cost of a person’s career. In many cases, if someone realized and reported instances of fraud when they began, fewer victims would be affected as a result. Therefore, to encourage whistleblowing, those who come forward must be protected by the law, as they are providing a service to their governments.