Ethical issues abound in the daily lives of all people.

Evaluating the impact of these

issues as well as determining the morally right course of action can vary widely among
cultures, social groups, and even among individuals within these larger groups. Some of
the most complicated and far reaching ethical dilemmas arise within the world of
business. Businesses carry the weighty responsibility of balancing not only the profits
for shareholders, but also the financial, social, and ecological impacts on the
stakeholders. In many instances, these stakeholders are not directly related to the
company but are associated through a complex web of investment through complicated
securities as well as corporate and organizational structures. As the web adds more
strands, corporate transparency decreases and opportunities for exploitation, abuse,
and flat out lying increases dramatically, resulting in a breeding ground for unethical
financial gain for a relative few at the expense, in many cases, of the many
stakeholders. However, these issues give rise to positive opportunities. Here, individuals
with strong ethical character have a chance to do what is fair, just, and right. These
individuals change the course of history and protect the exploited and disparaged by
shedding light on the misdeeds of those in authority. The righteous individuals, in this
case whistleblowers, risk their reputations, careers and sometimes even the well-being
of their friends and loved ones to do what they know is right. Utilizing a wealth of
resources, as well as an archetypal case, the trials, tribulations, and successes of
whistleblowing will be explored and the merits of encouraging individuals to speak up
against unethical behavior demonstrated.
The housing boom of the late 1990s and early 2000s culminated in peak housing
prices in 2006. During this period of time many financial institutions wrote a huge
number of residential loans with suspect terms and questionable documentation. The
common practice was for a homebuyer to receive a variable rate mortgage with an
initially favorable rate on the basis of a statement of income and general income data
for the buyers occupation and location. With the recent history of increasing home
prices across the board, these loans were approved. These mortgages were then
packaged up into residential mortgage-backed securities (RMBS), rated for their relative
safeness or risk, and sold in pieces or tranches. This new type of collateralized debt

obligation (CDO) became a very enticing menu item for one large player in the financial
world, Citigroup Inc. In 2006, Citigroup was the largest purchaser of residential
mortgages in the country. The company posted a net income of $21.2 billion (SEC
2007) and was trading in the $500 per share range (Yahoo! Finance). Their market
capitalization was at a company high of $240.3 billion. They also had $43 billion (Dash
& Creswell 2008) of these residential mortgage-backed securities on their balance
sheet.
Richard M. Bowen III, as a senior vice president and chief underwriter of Citigroups
Consumer Lending Group, was responsible for the completeness and validity of the
consumer loans Citigroup purchased or wrote. In 2006, Mr. Bowen had reached the
pinnacle of concern over the amount of defective and flat out bad loans in Citigroups
portfolio. He had observed that some 60% of the loans passing through the department
for which he was responsible were defective. This meant that 60% of Citigroups loans
were, in some combination, missing necessary paperwork, showed signs of fraud, or
were being given to unqualified buyers. Alarmed by this number, Mr. Bowen decided to
take action and request an external audit of his department to determine the root cause
of the problem as well as evaluate the overall impact of the situation. This action would
inexorably lead Mr. Bowen down the path to becoming a corporate whistleblower.
A whistleblower is any employee who reports an employers misconduct. This extends
from private corporate entities all the way to public entities such as law enforcement and
state and federal governments (Farlex 2016). Many whistleblowers struggle with the
process of drawing attention to the wrongdoings of their employer. Generally,
whistleblowers tend to have very positive feelings about their job, are high performers
within their organization, have long tenure with the company, and see whistleblowing as
a necessary function of their position. Despite such positive attributes and an overall
positive view of whistleblowing, the statistics surrounding whistleblowing are staggering.
A 2011 National Business Ethics Survey concluded that 45% of workers observed
wrongdoing at their workplace (McMillan, 2012). Of the 45%, 65% reported it. 22% of
those who reported the wrongdoing further reported retaliation from their company. 46%

of those who observed a wrongdoing and did not report it claimed fear of retaliation as
the motivating factor in their decision to remain silent (US.Gov., 2015). Deciding to blow
the whistle is a complex process that requires careful consideration of the ethical nature
of behaviors being observed, the process by which reporting should take place, and the
potential fallout from choosing to report. The impacts can be far reaching and extremely
complicated.
In spite of the complexity of the issue, and the potential for negative results for the
individual, whistleblowing is on the rise. According to the US Department of Labor, the
total number of determinations for whistleblowing cases has risen from 1,902 in 2005 to
3,337 in 2015. That amounts to a 75% increase in total whistleblowing cases filed.
During the same period, there has been a steady increase in cases found to have merit
or that have been settled (McMillan, 2012). This means that the increase in cases is not
simply from frivolous or money seeking motivations, but more so from individuals who
are more willing to speak up against the unethical business practices that they are
witnessing.
Upon discovering the large number of defective loans on the books of Citigroup, Mr.
Bowen knew what he had to do. He saw that the company was shouldering inordinate
risk. He decided to begin by notifying the board of directors of the deficiency and
potential massive impact this would have on the company. He began writing weekly
reports, among other communications, to attempt to gain notice of the crippling losses
looming over Citigroup. These reports were ignored and operations continued as usual.
In 2007, Mr. Bowen decided to reach out directly and sent an email to the chairman of
the board, Robert Rubin, the chief financial officer, head auditor, and the risk
management officer advising them on the now 80% defective loans and the billions in
potential loss to the company if these practices were not ended and the damage
rectified. Again, Mr. Bowen was ignored. In addition to neglecting Mr. Bowens concerns,
Citigroup chose not to disclose this information to shareholders in direct contravention
of the Sarbanes-Oxley Act. Furthermore, the CEO, Charles Prince, certified, in writing,
that Citigroup was in compliance with Sarbanes-Oxley.

Whistleblowers are made, not born. Research shows that most employees who
observe wrongdoing do not blow the whistle. Employees tend to report wrongdoing
when they think its especially bad, and only after they confirm that it is actually wrongful
behavior (Near, Miceli, 2016). Interestingly, studies show that ethical judgment is not
directly related to actual whistleblowing (Mesmer-Magnus, Viswesvaran, 2005).
In the overwhelming majority of cases, employees will first blow the whistle internally,
usually to their direct supervisor or other managers (Miceli et al., 2008). Whistleblowers
usually move on to external whistleblowing only if the internal whistleblowing was not
successful or incited retaliation. (Near, Miceli, 2016). Although one could think that
reporting malfeasance internally first would be the right thing to do, whistleblowers
who choose to do so tend to pick the wrong person or part of the organization to report
to (Dworkin, Baucus, 1998). Internal whistleblowing occurs more frequently when the
work environment is more favorable to reporting bad behavior. Although supervisor
support may facilitate ones decision to blow the whistle, it can also inhibit the behaviors
required to actually blow it (Mesmer-Magnus, Viswesvaran, 2005). It has also been
shown that internal whistleblowing is less effective in bringing about change in
organizations than external whistleblowing is (Dworkin, Baucus, 1998). Even though it
is a precursor to external whistleblowing in the majority of cases, ineffective or internal
whistleblowing does not predict external whistleblowing. Many factors contribute to this
phenomenon, including fear of retaliation, which we will explore later in this paper.
Research shows that external whistleblowers have less tenure with the organization,
greater evidence of wrongdoing, and tend to be more effective in changing
organizational practices (Dworkin, Baucus, 1998). External whistleblowing occurs more
often when the wrongdoing is more egregious or the work environment more
unfavorable to internal reporting. As such, external whistleblowing requires tangible
evidence of wrongdoing. Retaliation occurs more frequently, and is more severe,
towards external whistleblowers (Dworkin, Baucus, 1998).
The Whistleblowers Handbook, written by Stephen Martin Kohn, Esq., now in its third
edition, may prove a valuable guide to anyone considering embarking on the often

treacherous process of whistleblowing. In addition to the Federal protections discussed

below, as of 2011, forty-nine states offer protection from retaliation against
whistleblowers under certain conditions and through variously defined processes; for
example, some states mandate that whistleblowers first report internally while others
require external reporting (Near, Miceli, 2016). It is therefore very important that
whistleblowers follow Federal and State law if they want to be afforded legal protection
from retaliation.
After Mr. Bowens repeated attempts to inform the board of directors and company
leaders, Citigroup decided that Mr. Bowen was no longer an integral part of the
organization. He was stripped of most of his duties and informed that his physical
presence in the office was no longer needed.
Throughout the majority of business history, individuals who brought to light unethical
dealings or suspect practices were considered snitches or informants. Due to the
negative impact on the company or high ranking members of the organization, there
was a generally negative connotation that went along with their decisions. In many
cases, individuals were persecuted for following their moral judgments and imperatives.
The persecution of whistleblowers is formally referred to as retaliation. Retaliation,
simply stated, is about creating fear. Companies create an overarching fear to assert
the basic rights of employees or to report any wrongdoings. Retaliation cases are based
on a simple set of criteria. First, it must be determined if there was a protected activity,
such as whistleblowing. Second, the company must have been aware of the action.
Third, the company must have taken certain steps that materially and adversely harmed
the employee. Finally, it must be shown that there is a causal relationship between the
protected activity and the resulting adverse harm to the employee. These criteria still
have a lot of ambiguity. As a result, Burlington Northern v. Sheila White (2006), made it
to the US Supreme Court. The result of the ruling in this case greatly expanded what is
considered retaliatory actions by a company. It broadened the long standing
interpretation that there had to be an employment decisions made for retaliation to
apply. Instead, the courts must take into consideration whether or not something such

as a move to a less desirable job within the company is retaliatory. Ultimately, the ruling
made it easier for employees to file and win retaliation cases.
The threat of persecution of whistleblowers led to the creation of protections and
incentives with the intent of encouraging employees to stand up and speak out against
unethical business practices in their organization. The US government has a long
standing history of protecting and encouraging whistleblowing. The False Claims Act
was enacted during the Civil War as an action to prevent and punish fraud against the
Union (Archambeault, 2015). This act carried a qui tam provision that allowed
individuals to file on behalf of the government even if they were not affiliated with the
government. This act encouraged whistleblowers within the companies performing fraud
and gave them an opportunity to take actions themselves. Whats more, the
whistleblower was also entitled to a portion of the damages. The Whistleblower
Protection Act amendments of 1989 sought to protect government whistleblowers who
spoke up against unfair or unethical government entity actions (Archambeault, 2015).
This strong stance from the government has bled over into the private sector granting
special protections to whistleblowers. Many whistleblowers fall victim to retaliation as a
result of having at-will status (meaning that the company or employee can terminate the
employment arrangement at any time and for no cause). Many state governments have
granted special protection to at-will employees who were terminated under the guise of
at-will after having blown the whistle on their employer. The IRS and SEC both have
whistleblower programs that encourage reporting of tax fraud and securities fraud
respectively. Both programs offer a financial incentive to the whistleblower in the order
of 10% to 30% of the recovered damages (Archambeault, 2015). Since 2007, the IRS
has recovered over $3 billion in lost tax revenue and awarded $403 million to the parties
responsible for bringing the wrongdoing to light (IRS, 2016).
The government has also led the way in providing legislation that aims to ensure the
ethical behavior of companies by forcing ranking individuals within the organization to
take personal responsibility for the information they are or are not providing. The
Sarbanes-Oxley Act amendment of 2002 established external auditing protocols as well
as forces senior executives to take responsibility for reported financial data. The DoddFrank Act established and funded the SEC Whistleblower program, aimed at protecting,

educating, supporting whistleblowers in private and public companies (SEC, 2016).

These steps attempt to catch unethical behavior at the source by improving
transparency and removing the cloud of confusion that shrouds many unethical and
illegal behaviors.
Although the government has been proactive in addressing whistleblowing, ultimately
the law is simply the base level of expected moral behavior. Many organizations are
made up of complex structures with divisions and departments spread across countries
and even the world. It is unrealistic to believe that one person, be it a chairman or CEO,
can be ultimately responsible for all of the goings on within this complex environment.
Therefore, it is in the best interest of organizations to develop ethical behavior.
However, simply having a whistleblowing policy or code of conduct isnt sufficient
enough to create a culture that supports and encourages employees to make
disclosures. Organizations must get buy-in and commitment from top level management
and leadership. They must lead by example. Board members and other senior
managers must support and respect the policy in order to get employees at all levels to
implement it. There must be a champion who rallies the entire organization behind the
ideas of ethical behavior and accountability. Once the structure is in place, and
leadership is on board, this new culture of ethics must be disseminated and trained all
the way down to the entry level employee. As with any policy or procedure, there must
be regular measurement, review, and audit of performance. If the company is going to
take ethical behavior seriously, it must maintain the environment it is creating. Without
proper review and feedback, the program will fall apart. Finally, the company should
encourage and reward employees who observe unethical behavior and report up the
chain of command (Deringer, F. B., 2013). Rather than being threatened by potential
fallout, the company would be much better served to find out about the issues early and
actively address them. The longer an issue goes unchecked, the more potential there is
for damage and a higher likelihood that more people will attempt to cover up their role in
the issue.

In 2010, the Financial Crisis Inquiry Commission asked Mr. Bowen to testify against
Citigroup and their role in the financial collapse. In April of that year, Mr. Bowen regaled
the commission with the story of Citigroups behavior as well as his role in attempting to
stop the unethical practices.
All actions have consequences. In some instances, those consequences affect the
direct players, potentially through penalties to the company or retaliation to the
whistleblower. There are, however, also indirect consequences to the stakeholders. In
many instances, there is always some financial impact to the company. Either through
increased costs due to implementing appropriate processes and procedures or through
lost revenue due to the manner in which revenue is recorded or earned. These
consequences are almost invariably passed onto employees, suppliers and consumers.
When the company takes a financial hit the reaction could be to reduce headcount and
lay off employees. The relationship with suppliers can be strained through image issues
and financial concerns. Finally, one of the fastest ways to recover from a sharp increase
in costs is to raise prices. This immediate reaction damages consumers through
increased costs of products and services. In addition, there is generally a breach of law
in the mix, which results in increased cost to taxpayers and additional strain on the legal
system while the case is heard. These additional affected parties add to the complexity
of this issue. It may be morally right to blow the whistle, but it may have unintended
consequences that harm coworkers, friends and loved ones. (Watchdognation.com
2016)
When viewed at a high level, the concept of whistleblowing is one with which almost all
people at all levels of an organization would support. The idea that people should act
ethically, companies should provide safe working environments, or financial institutions
should not collapse an entire world economy on the basis of marginally larger profits for
the individual firm are all generally accepted principles. However, if we focus on a
specific case of wrongdoing and the details of the whistleblowing process within a
specific organization is evaluated, it can become much less clear what the right course
of action truly is. There are direct and indirect consequences that start to come into play

as an individual begins to make the decision to stand up to their employer. So long as

the individual has done their due diligence to identify the moral implications of the issue
at hand and have weighed the potential outcomes of the manner in which they will go
about reporting their concerns, whistleblowing becomes a moral imperative. Ultimately,
it is the responsibility and duty of all companies, governments, and leaders to build
environments that breed ethical behavior as well as provide safe and effective methods
of reporting when that ethical standard is breached.

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