Brazil: Where were the FCPA Whistleblowers?


Brazil may be the next hotbed of FCPA activity for the SEC and, based on early reports, there wasn’t an uptick in the number of international whistleblowers tips coming from the country concerning suspected violations. If the goal of the SEC whistleblower program is to alert regulators to areas of concern before they become public knowledge, then this disconnect should be concerning.

The Foreign Corrupt Practices Act bars U.S. companies and U.S. issuers from making payments to foreign officials to obtain or retain business. It also prohibits the lack of internal accounting controls that allows employees, subsidiaries and intermediaries to make prohibited payments. Five years ago, the Dodd-Frank Act authorized rewards to whistleblowers who provide information about FCPA and other securities law violations to the U.S. Securities and Exchange Commission.

The FCPA Blog keeps track of the countries where companies have disclosed internal investigations into potential FCPA violations. On the January 2015 list, Brazil was #2 overall. It received mentions in the disclosures by ten companies. Only China had it beat (and substantially so) with 40 mentions by businesses.

The news coming out of Brazil suggests that this number has the potential to explode upward. The Brazil government is now looking into allegations concerning two multi-billion dollar corruption scandals. State owned oil giant Petrobras has been in the news for a couple months now. But only last week, authorities there announced a tax fraud scheme involving the tax appeals board at the Finance Ministry. The government is investigating seventy companies across a number of different injuries for bribing tax officials.

Brazil is also spending substantially to get ready for the Olympics, and corruption has been suspected in some of these contracts as well. Bilfinger, a German engineering firm covered by a deferred prosecution agreement in 2013 with the Justice Department for FCPA violations in Nigeria, said that the company discovered possible compliance violations related to its provision of monitor walls for security centers.

It seems only a matter of time before US companies come forward based on their activities in Brazil. Although the corruption scandal has predominately involved Brazilian companies, other international companies with operations in Brazil have disclosed problems and investigations. InBev disclosed it was under investigation by Brazilian authorities for hiring a former government official. The SEC also extended the deferred prosecution agreement for orthopedic device manufacturer Biomet last month in light of the company’s disclosure of potential additional violations related to the company’s operations in Brazil and Mexico.

Our SEC whistleblower attorneys throughly analyze the reports released by the SEC Whistleblower Office every year.  We now have three full years of data on the countries of origins under the securities whistleblower law. During Fiscal Years 2012 to 2014, there have been only 13 tips from individuals located in Brazil. This data, because of the fiscal calendar of the U.S. Government, runs from October 1, 2011 through the end of September 2014.

With only 13 tips, Brazil is not even the leading country in South America and substantially behind its BRIC peers. Argentina (22) and Mexico (14) both are head of Brazil. India (120), China (111) and Russia (32) outpace the country by a wide margin.

If the goal of the whistleblower program is to provide early warning to regulators about problem areas, then we would have expected this to be an area of high activity over the past few years. Given the reports of widespread corruption in Brazil, that is not being disclosed should have been reported.

At the end of last year, we posted about the OECD Working Group on Bribery report on whistleblowing in Brazil. The report commented on the lack of investigations opened by Brazil as a result of whistleblowers. It offered a cultural aversion to and suspicion of the government as possible explanations.

There are two additional possible explanations for the lack of tips to the SEC whistleblower program besides the obvious possibility that US and multinational companies simply aren’t engaged in bribery in the country. It may be that individuals aren’t aware of it. The publicity about the program here in the United States doesn’t necessarily reach the general Portuguese-speaking public in Brazil. Additionally, some of those fully informed about the option might choose to decline to participate because of the lack of extraterritorial application of the anti-retaliation provisions offered by the Dodd-Frank Act.

There are many other potential explanations for the difference between the number of tips received by the SEC and the number of news stories about corruption coming out of the country, including the possibility that U.S. and multinational corporations operating in Brazil haven’t actually been involved in the bribery of public officials. The SEC whistleblower program is also still in its infancy. The 5 year anniversary of the Dodd-Frank Act is this year and the securities regulator is still getting the word out.

So it is far too early to draw any firm conclusions in this area. It is simply a preliminary hypothesis based on the news reports that we have seen and the data that has been provided by the U.S. Government. If you have other thoughts, our FCPA whistleblower attorneys would love to hear them.

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Second SEC Whistleblower Denied Award in Latest $3 Million Payout


The Securities and Exchange Commission today announced its third highest award under the Dodd-Frank whistleblower program, as $3 million reward to a corporate insider who helped the agency crack a complex fraudulent scheme.

The announcement is a fitting way to celebrate the 5th Anniversary of the creation of the SEC program on Tuesday. Over the past five years, it has helped the U.S. Government collect more than $100 million in enforcement actions against companies and individuals engaged in misconduct that violates the federal securities laws. The program has paid out more than $50 million in financial incentives since the Whistleblower Office was opened in 2011.

Although we may never know more about this case due to the confidentiality provisions involved, the award determination does include a footnote that a second claimant was denied an award for not providing original information as it is defined by the SEC Rules and the Dodd-Frank Act. I’ll have to go back and check, but this may be the first instance of a securities whistleblower denied an award while another received one.

Footnote 2 indicated that the second claimant did not provide information that led to successful enforcement. Based on the laws cited, I suspect that the tip (a) happened during the investigation and didn’t significantly contribute to its success and (b) didn’t lead the investigation to inquire about different conduct than it was already investigating.

Of course, there are a few other options but this is probably the most likely one. Since the award determination release notes the delay before the individual reported the fraud to the U.S. Government, it is also possible that the tip came first but wasn’t sufficiently specific or credible enough to move the SEC to action. Additionally, it could be that the tip involved a second area not covered by the investigation and the government simply decided not to pursue an action against the company for it.

Nevertheless, this award denial re-emphasizes the importance of being the first one to provide a tip to the SEC or CFTC.

If you have questions about the importance of being the first to file, contact one of our whistleblower attorneys. An attorney can be reached by our contact form or calling 1-800-590-4116.

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Rule 10b-18 Stock Buyback Violations: A New Avenue for Whistleblower Tips?


If pressure from Congressional leaders and politicians on stock buybacks continue, whistleblowers may find the SEC more receptive to information about violations of the voluntary safe harbor in Rule 10b-18.

SEC Rule 10b-18 allows companies to repurchase their stock without fear of rules against market manipulation. To qualify, they must satisfy four conditions on every buyback in a day. These include using a single broker or dealer, have specified the highest price to be paid, to limit the amount of common stock repurchased according to volume restrictions, and timing limitations to the period outside of the opening and the last thirty minutes of trading.

A letter from Senator Tammy Baldwin questioned SEC Chair Mary Jo White earlier this year on the potential use of share repurchases by executives to boost the value of their stock-based compensation. White’s response, according to a media report, is that the SEC doesn’t collect information that would allow them to discover violations of the rule and that even if it did, a rule violation is not necessarily evidence of market manipulation.

In an interview with the Boston Globe back in June, Senator Elizabeth Warren expressed concerns that corporations are using stock buybacks to boost their stock price in the short term and ignoring the long-term investments in their company that would allow them to actually improve shareholder value. As Warren detailed, prior to the adoption of Rule 10b-18 in 1982, the repurchase of large quantities of stock was considered manipulation. Warren wants to undo the SEC and treat buybacks as stock manipulation again.

Whistleblower tips are ultimately reliant on enforcement actions brought by the Securities & Exchange Commission for success. So if the SEC doesn’t see stock buybacks as manipulation, then it won’t be a fruitful area for whistleblowers to pursue. However, to the extent that Presidential Candidate Hillary Rodham Clinton, Senator Warren and others continue to make stock buybacks a priority issue, and the SEC is given information about a company that falls outside this safe harbor for market manipulation, it could very well be an area that the SEC decides to pursue.

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Whistleblowing Across the Pond


As one of our writers recently crossed the Atlantic to find out more about governance in Europe, she coincidentally came across this poster. Occupying ad space in numerous places on one of London’s major streets, the poster promotes blowing the whistle on housing fraud. While blowing the whistle on housing fraud is not our only focus, we were happy to find a poster which advocated whistleblowing, regardless of how specific the whistleblowing case may be.

Whistleblowing has become an international phenomenon. While rules and regulations pertaining to whistleblowing are different across national borders, many policy-makers, organizations, non-profits, and advocates are encouraging their citizens to speak up about fraudulent activity that they have witnessed. The U.S. is known to have some of the best whistleblowing protections and rewards programs. Because qui tam laws in the U.S. both protect the whistleblower and reward the whistleblower with a monetary incentive to report fraud, other countries are beginning to model their laws after the U.S.’s. In recent years, UK policy-makers have thought to ramp-up legislation to protect and reward whistleblowers in a similar fashion to the U.S. system.

In the U.S. whistleblowers cannot be fired nor punished in their field for blowing the whistle. Under the most recent law protecting whistleblowers, the Dodd-Frank Act (the new Financial Reform bill), employers cannot “‘discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistle-blower in the terms and conditions of employment because of any lawful act done by the whistle-blower’” (for more information on the new U.S. law see “New Financial Reform Law Provides Incentives for Whistleblowers”). Because of these stringent protections, other countries are modeling after the U.S. law. However, it is not only the protections that the U.S. offers whistleblowers, but the monetary incentives that make the U.S. system a good model. In cases that involve recoveries of $1 million or more, the whistleblower must receive a minimum of 10 percent to a maximum of 30 percent of the recovery. (In order to receive a reward the recovery must total $1 million or more.) This means that the lowest possible reward a whistleblower can reap is $100,000.

Because of the advantages of the U.S. qui tam law, some lawmakers in other countries, such as the UK, would like similar protections and rewards for their citizens. It appears that the most recent law protecting whistleblowers in the UK is the Public Disclosure Act 1998, which amends the Employment Rights Act 1996. Under the 1998 Act, citizens can disclose illegal activity including, “a criminal offence; the breach of a legal obligation; a miscarriage of justice; a danger to the health or safety of any individual; damage to the environment; or deliberate covering up of information tending to show any of the above five matters.” Under Part V, “Protection from suffering detriment in employment,” of this law, 47B on “Protected disclosures” states that, “A worker has the right not to be subjected to any detriment by any act, or any deliberate failure to act, by his employer done on the ground that the worker has made a protected disclosure.” Detriment includes a range of punishments including “denial of promotion, facilities or training opportunities which the employer would otherwise have offered.” In this case, a whistleblower in the UK cannot be punished by his employer for whistleblowing if the whistleblower has made a protected disclosure. However, it appears that under these laws, whistleblowers are protected but not rewarded.

Seeing that rewards are what push many to become whistleblowers, UK government officials have questioned whether it should provide such incentives to its citizens. In the “Asset Recovery Action Plan” the Home Office of the UK presents arguments for and against enacting a program similar to the U.S.’s qui tam under the False Claims Act (FCA). Some promising features of the qui tam law that would support the creation similar program include:
• Whistleblowing laws in the U.S. have been “strikingly successful, particularly in defence and healthcare sectors, with many billions of dollars raised annually.”
• “FCA recoveries far exceed the cost of prosecuting fraud—it has been estimated that for every dollar the federal government invests in investigating and prosecuting these case[s], it receives $15 back.”
• It is believed that the law allows for cases to be brought to the attention of the government that otherwise may not have been reported.
• It is believed that, because of qui tam provisions, companies are more likely to comply with the law and avoid committing fraud.
These are advantages to the law in the U.S. that could influence UK policymakers to attempt to create a similar law that would be effective in the UK. However, there are obstacles to qui tam that would require the creation of a similar yet different law that would suit the UK. Qui tam types of provisions have existed since 1790 in the U.S., whereas they would be new to the UK. Legislative differences in U.S. and UK laws would make a law similar to the U.S.’s qui tam hard to implement in the UK because of how unusual it would be in the UK system. Additionally, “Some organizations representing the interests of whistleblowers in the UK have been skeptical about the Qui Tam approach, arguing it would discredit the practice generally.” Because of these similarities and differences the UK government has welcomed debate on the creation of a law similar to the U.S. qui tam law.

This more open debate has sparked further knowledge of whistleblowing and U.S. whistleblowing laws in the UK as it has been reported in The Guardian and other news sources throughout the country. The UK government has not changed its present law, but is certainly on the way to offering a better incentive to blow the whistle.

“Asset Recovery Action Plan.” Home Office, the National Archives. 24 May 2007.
“Asset Recovery Action Plan: A Consultation Document.” Home Office. May 2007.
“Employment Rights Act 1996.” The National Archives.
Henning, Peter J. “Come Blow Your Horn for the S.E.C.” The New York Times
DealBook Blog. 26 July 2010.
Laytons Solicitors. “Whistleblowing.” UK Employment Law. 2005.
“Public interest Disclosure Act 1998.” The National Archives.
Walker, Peter. “Fraud whistleblowers could get cash rewards.”
24 May 2007.
Wylie, Ian. “Whistleblowing that pays.” Money Blog. 1 Feb. 2008.

SEC launches Investigation Over Soccer Bribery


The SEC has reportedly launched a civil investigation into several companies with links to FIFA or other soccer bodies under the Foreign Corrupt Practices Act, according to Reuters last week.

When the FIFA bribery scandal first broke and the DOJ filed charges, we discussed whether a whistleblower in the case could get a reward for providing information. One of the issues that we discussed was that the DOJ did not have a reward program for FCPA violations. As such, we speculated that there would have to be a tie-in to the SEC whistleblower program. If enforcement actions happening because of this investigation result in fines of $1 million, a reward is a definite possibility.

Although there has been no explicit mention of which companies are under investigation, one of the companies that had been identified by the media previously was Nike, which had a contract with a Brazilian soccer organization. It is not yet known whether Nike is part of the current investigation.

In other news, Louis Berger agreed last week to pay $17.1 million to settle bribery charges brought by the Department of Justice. The charges stemmed from $3.9 million in bribe payments made to foreign officials in countries which included India, Indonesia, Vietnam and Kuwait. The bribes paid by the New Jersey construction management company and its employees happened from 1998 until 2010.

The FCPA is jointly enforced by the SEC and DOJ. The Justice Department has the power to enforce it against domestic companies and U.S. citizens while the SEC enforces against the companies that it regulates (“issuers” under the law).

If you would like to speak to a whistleblower attorney concerning suspected violations of the law, a lawyer can be reached by our contact form or calling 1-800-590-4116.

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Third Circuit Allows Enforcement of Arbitration Agreement Against SEC Whistleblower


The Dodd-Frank Act prohibits the enforcement of predispute arbitration agreements for SOX and CFTC whistleblowers. However, whistleblowers to the Securities and Exchange Commission must arbitrate their retaliation claims instead, according to the Third Circuit in Khazin v. TD Ameritrade Holding Corp., No. 14-1689 (3rd. Cir. Dec. 08, 2014).

The plaintiff, Boris Khazin, signed an employment agreement to arbitrate all disputes arising out of his employment. Subsequently, he brought to the attention of his supervisor a mispriced financial product and recommended a correction that would cost the company more than $1 million in lost revenue. He was told to ignore the issue. Following termination because of a purported billing irregularity, he eventually filed a Dodd-Frank retaliation lawsuit in Federal Court in New Jersey. He appealed the decision to the Third Circuit.

The lower court required him to arbitrate his claim. It held that Dodd-Frank did not alter the enforcement of arbitration agreements signed prior to Dodd-Frank’s adoption by the U.S. Government. It concluded that the presumption against retroactivity did not warrant altering existing contractual rights agreed to prior to the law. On appeal, the Third Circuit affirmed the decision on a different line of reasoning.

The Third Circuit found that the text of the Dodd-Frank Act did not bar employers from requiring SEC whistleblowers to arbitrate there claims. The prohibitions on predispute arbitration agreements in Dodd-Frank applied only to whistleblower protection lawsuits filed under the Sarbanes-Oxley Act and the Commodity Exchange Act.

The SEC was confronted with this omission in the text of the law prior to issuing its final rules for implementing the whistleblower program. However, the securities regulator concluded that no rule was necessary. In Release No. 34-64545, the SEC declared that Section 29(a) of the Exchange Act prohibited employees from limiting their right to file anti-retaliation litigation under Section 21F in an appropriate District Court.

The Third Circuit disagreed. In footnote 5, it dismissed the SEC’s argument that Section 29(a) prohibits enforcement of the arbitration agreement. The Supreme Court has unequivocally held that “Congress did not intend for § 29(a) to bar enforcement of all predispute arbitration agreements.” Khazin, slip op. at *14n.5 (quoting Shearson/American Express Inc. v. McMahon, 482 U.S. 220, 238 (1987)).

The Third Circuit opinion leaves no room for the SEC to issue rules in this area to bar arbitration of retaliation disputes, either. It declares it unambiguously clear that Congress intended for arbitration of retaliation claims brought by SEC whistleblowers under the rules of statutory construction. By explicitly barring predispute arbitration contracts for the CFTC and SOX whistleblowers, the court concluded that Congress deemed arbitration permissible for SEC claims.

The conclusion that Congress wanted to allow arbitration of SEC claims while prohibiting enforcement for CFTC retaliation claims seems odd. The opinion offers no policy justification for this distinction and I am struggling to come up with one.

The SEC has routinely declared that protecting whistleblowers from retaliation is crucial to a successful incentive program. Concerns about arbitrator bias, low awards and the desire for whistleblower lawsuits to be litigated in a public forum all weigh against arbitrating retaliation claims.

The Third Circuit is the first appellate court to weigh in on this important question regarding the SEC program. While there is still the potential for another Circuit to answer the question against arbitration, it is a disappointing initial loss for whistleblowers. We will be revising our section on arbitration of retaliation claims soon to account for this decision.  In the meantime, please contact one of our SEC whistleblower lawyers for additional information about the state of the law.

Next FCPA Investigation From Brazil: Eletrobras


Eletrobras, the tenth largest power utility company in the world and the largest electricity provider in Brazil, has hired a law firm to investigate potential violations of the Foreign Corrupt Practice Act. For those that have been paying attention to the bribery scandals involving the country generally and Petrobras specifically, this should not be a big surprise.

Media attention may have shifted away from Brazil momentarily because of the breaking news over the FIFA corruption scandal. But the pendulum should swing back to the Latin American country soon. It seems that corruption is everywhere there.

Eletrobras delayed its annual report in April because of allegations that the chief executive of Eletronuclear, its subsidiary, took bribes. The investigation by law firm Hogan Lovells is focused on contracts with construction companies implicated in the Brazilian Government’s investigation and other large contracts entered into by the company.

The FCPA Blog is predicting that Petrobras and Eletrobras could yield a substantial number of enforcement actions by the SEC or the DOJ. Since they are publicly traded in the United States, they are subject to the FCPA, the U.S. anti-bribery law. And as state-owned enterprises, any individual or company that bribed them in order to obtain or retain a contract or other business would also violate the FCPA. So the potential is there for these two disclosures to kickstart enforcement actions against many other companies, if the corruption was widespread.

Are you considering blowing the whistle on bribery by a publicly traded company? Review our FCPA whistleblower guide and then contact one of our SEC whistleblower attorneys to have your questions answered. An attorney can be reached by our contact form or by phone at 1-800-590-4116.

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SEC Approves Whistleblower Rules


The SEC has approved the rules regarding the submission of SEC whistleblower claims pursuant to the Dodd-Frank legislation that was passed last year.

As reported By David S. Hilzenrath, here, The SEC approved rules Wednesday that could make it highly lucrative for Wall Street whistleblowers and other corporate insiders to alert the agency to securities violations. The agency was acting at the behest of Congress and President Obama, who mandated the rewards last year in legislation responding to the mortgage meltdown.

Whistleblowers will be entitled to receive 10 percent to 30 percent of the money they help the SEC collect through enforcement actions. Corporations had lobbied intensely for rules that would impose constraints on whistleblowers. But a majority of SEC commissioners rejected pleas by business groups that, before going to the SEC, whistleblowers should be required to notify the companies they are accusing and give those companies a chance to address the allegations.

“For an agency with limited resources like the SEC, I believe it is critical to be able to leverage the resources of people who may have first-hand information about potential violations,” Schapiro said in her prepared text. “And, it is especially important to investors whose savings or retirement funds may hinge on our ability to stop an ongoing fraud or obtain hidden evidence,” Schapiro said. Schapiro, an independent, and two Democratic commissioners voted for the rules over the opposition of two Republican commissioners.Republican commissioner Kathleen Casey said the SEC was overestimating its ability to triage and manage complaints from tipsters while underestimating the extent to which the rules will undermine companies’ efforts to police themselves through internal compliance programs.

The rules can be read in entirety by clicking here.


This is a victory for whistleblowers and investors alike.  If you have information concerning a violation of the SEC or the commodities market, contact an SEC whistleblower attorney at McEldrew Young today for a free CONFIDENTIAL consultation at 215-367-5151.

Improper Mutual Fund Distribution Fees Generate $40 Million Fine from SEC


A Securities & Exchange Commission initiative to protect mutual fund shareholders has settled its first case brought because of the SEC’s Distribution-in-Guise Initiative, started in 2013. The defendants used mutual fund assets to improperly pay for distribution-related services instead of paying for them out of their own resources.

This rendered the disclosures made by the mutual fund to the board and fund shareholders related to the payment for these services inaccurate. The investment adviser told the board that the payments were for accounting services, known as sub-transfer Agency fees. Sub-TA fees are paid to transfer agents to maintain account records and execute trades.

Payments from the fund can only come from fund assets if it is pursuant to a written Rule 12b-1 plan approved by a fund’s board. Rule 12b-1 of the Investment Company Act of 1940 was originally designed to allow for the mutual fund to pay advertising and marketing expenses.

In this case, the mutual fund advisers failed to uphold their fiduciary duty to their clients and were charged with violating the Investment Advisers Act and the ’40 Act. Earlier this year, Julie Riewe, Co-Chief of the Division of Enforcement’s Asset Management Unit, told an IA Compliance Conference that conflicts of interest like that exposed here are rife among Registered Investment Advisers.

The improper fees were paid from 2008 until 2014. According to the government press release, the settlement will be distributed to shareholders to compensate them for their loss.

The media has seized on the language in the press release to indicate that there will be more cases brought against either asset managers or broker-dealers similar to the one against First Eagle Investment Management and FEF Distributors. If this is the case, it could be a fertile area for a SEC whistleblower to report violations of the law to the U.S. Government. The whistleblower program would pay eligible individuals between 10 and 30 percent of monetary sanctions recovered when over $1 million.

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What Jobs Drive Whistleblower Tips to the SEC?


At least one of the top three may surprise you.

The Securities and Exchange Commission asks whistleblowers to provide information about their occupation when they submit a tip to the agency. Since 2011, when they launched the Office of the Whistleblower, more than 6500 people have filled out the form in the hopes of putting a stop to fraud and earning a reward.

The Wall Street Journal submitted a Freedom of Information Act request and gained access to the list of 3,600 job titles listed by whistleblowers. They published an article about the results on Monday and our SEC whistleblower attorneys examined it.

In third place, and one that we wouldn’t have guessed, were engineers. 138 have submitted tips about violations. In the article, a representative of the American Society for Engineering Education ascribed this to the code of ethics among engineers.

Practically, it may have more to do with the financial markets dependence on complex computer systems these days. Engineers are programming the systems used by financial institutions and the algorithms used by traders. If they are knowledgable about the rules, then they will know when the instructions they are given to program into the system don’t comply with the regulations.

Coming in second, submitting 290 tips, were investors. This should not come as a shock. A significant number of the enforcement actions pursued by the agency take aim at companies and individuals defrauding investors. Investors can run into an assortment of violations of the rules, from the illegal marketing of securities to misappropriated investor funds.

Occupying the top spot are the 365 tips submitted by retirees. There are two reasons this group is on the list. Ex-employees are more easily able to provide information about their former employer without worrying about the potential for retaliation. Retirees, specifically, do not have to worry about the potential impact on their career if their name becomes public.

The other reason is that retirees are frequently the target and victim of fraudulent enterprises. Like investors, if you regularly have people approach you asking for money, you are more likely to encounter a violation of the securities laws and regulations.

Also interesting are the professions that were not reported by the Wall Street Journal. These include some of the jobs that have been the most controversial for the program, including attorneys, compliance professionals and accountants. Traders were also not mentioned.

It’s possible that these individuals simply did not list their job title. Only 3,600 of the more than 6,500 SEC whistleblowers who have submitted tips did so. On the other hand, it may be that many in these professions are still hesitant to blow the whistle when they encounter misconduct.

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