While 2012 didn't bring the Mayan Apocalypse, it did live up to its promise as a good year to be a whistleblower. A former UBS banker imprisoned for tax fraud received a whistleblower award of $104 million — reportedly the largest individual federal payout in U.S. history. See http://goo.gl/vmHFe . The federal government boasted a new record in recoveries from cases filed under the False Claims Act (FCA), noting that whistleblowers initiated more new FCA matters in 2012 than any prior year on record. See http://goo.gl/Oi8NQ. And despite making only one award in its first year of business, the Securities and Exchange Commission's (SEC) Office of the Whistleblower reported receiving 3,001 complaints. See SEC Annual Report on the Dodd Frank Whistleblower Program Fiscal Year 2012, November 2012.
The wave of federal legislation continues to provide significant financial incentives and protections to whistleblowers for reporting corporate misconduct to law enforcement. And the wave shows no signs of diminishing in 2013. On Jan. 2, 2013, the new National Defense Authorization Act (NDAA) was signed into law, with enhanced whistleblower protections for employees of contractors and subcontractors working for other federal agencies. Notably, President Obama, who has been lauded for the whistleblowing protections enacted under his administration and who as recently as November signed a new whistleblower protection law for federal employees, objected that the provisions might be read to interfere with his authority to manage and direct executive branch officials. See http://goo.gl/i1tkD0 .
Whistleblowing and Compliance
Led by the promise of as much as a 30% payoff under the Dodd-Frank Act, Congress has continued to enact legislation expanding whistleblower protections to millions of employees and created irresistible financial incentives for plaintiff's counsel. At the same time, social media has provided a platform for a company's customers or employees to raise and discuss potentially damaging issues before the company is even aware they exist. And while it is no secret that regulators and plaintiffs' counsel can and do rely on intelligence found in social media, companies have been slow to engage on this issue. In a 2012 PriceWaterhouseCoopers survey of corporate directors, almost 70% responded "not at all," "not sufficiently," or "don't know" when asked how their companies employ social media use training and policies, and how their companies monitor social media for adverse publicity. See http://goo.gl/9ulXp .
With all the attention on whistleblowing and compliance, many companies have already invested in their governance and compliance policies. Yet retaliation claims continue to surge: data released by OSHA show that whistleblower cases have steadily risen since 2009; in 2010, retaliation claims filed against U.S. companies outnumbered race discrimination claims for the first time; and in 2011, more than one-third of discrimination claims consisted of retaliation claims. See www.whistleblowers.gov/wb_data_FY05-12.pdf .
Regulators may be skeptical of company responses. In a November 2012 interview with The American Lawyer, the Chief of the SEC Office of the Whistleblower warned that he viewed inquiries from companies and their counsel about how to draft polices and agreements to prevent employees from reporting to the SEC as symptoms of potential violation of the rules. See Susan Beck's Summary Judgment: SEC's Whistleblower Chief Disappointed in Questions from Corporate America, AmLaw Litigation Daily, Nov. 26, 2012.
In this new landscape, it is not enough for a company to state a policy of non-retaliation against whistleblowers, then cross its fingers and hope for the best. A company's best asset for defending against or avoiding governmental inquiries and their resulting consequences may be, paradoxically, a whistleblower — a good-faith employee who sees an issue that she wants the company to address. A company is best off when it partners with its employees to ensure that the company becomes aware of legitimate governance, regulatory and compliance issues before receiving a regulatory inquiry or letter from a plaintiff's attorney. By proactively engaging employees across every level of the organization, up to and including the C suite, management can create an environment where whistleblowers report up — instead of outside the company — to remediate non-compliant practices.
The Statutory Menu for Whistleblowers
Beginning with legislation designed to address issues within specific industries, the menu of whistleblower statutes has expanded to encompass a wide array of corporate activity. Probably the most highly publicized of these, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 provides powerful financial rewards to employees for reporting suspected violations of securities law, commodities law or the Foreign Corrupt Practices Act (FCPA). Whistleblowers are entitled to 10% to 30% of fines of at least $1 million collected by the government in enforcement actions resulting from original information they provided to the SEC. The financial lure works. In 2012 alone, the SEC received more than 3,000 tips from whistleblowers and paid out its first whistleblower award under the statute. See www.sec.gov/about/offices/owb/annual-report-2012.pdf .
All is not lost for CEOs, however, because Dodd-Frank still provides an incentive for employees to escalate their concerns to corporate management, or at least seeks to neutralize any financial disincentive to do so. The SEC will hold a tipster's place in line as of the date she made her internal report for the purposes of determining whether the information is original. Additionally, if a company investigates the whistleblower's allegations and then self-reports the violations to the SEC, the SEC will credit the whistleblower with having provided all of the information reported by the company when considering where within the 10% to 30% range the whistleblower's award should fall. See Rule 21F-4(b)(7) and 21F-4(c). As discussed below, companies whose ethics and compliance programs include clearly defined employee reporting procedures are best positioned to hear about (and remediate) issues first.
Like Dodd-Frank, the Tax Relief Act passed in 2006 significantly enhanced the IRS's whistleblower program by providing whistleblowers with the opportunity to reap large monetary rewards by reporting tax evasion and underpayment. Under the Act, whistleblowers who provide information leading to IRS enforcement actions can receive 15% to 30% of the proceeds collected by the government, including penalties and interest. See www.irs.gov/uac/Whistleblower—Informant-Award . The well-publicized $104 million dollar award paid to the whistleblower in the UBS case suggests that more whistleblowing cases in the tax enforcement arena can be expected.
While not all whistleblower statutes provide monetary enticements, numerous other programs protect whistleblowers from retaliation and provide a roadmap and additional forums for such claims. These statutes are often directed at high risk industries or funding programs perceived as ripe for fraud. The recently amended National Defense Authorization Act (NDAA) enhances whistleblower protection for workers for the Department of Defense and NASA and includes a pilot program extending protection to employees of contractors and subcontractors working for other federal agencies. Similarly, the Food Safety Modernization Act of 2011 (FSMA) has been touted as one of the strongest whistleblower protection laws ever passed. Expanding the scope of protected activity, the FSMA encompasses employees with a reasonable belief that a violation has occurred anywhere in the food chain.
Whistleblower provisions are now regularly attached to new legislation where government funding may be improperly diverted. The American Recovery and Reinvestment Act of 2009 provided billions of dollars in funding and tax credits to healthcare, infrastructure, education, energy, and Homeland Security programs. In an effort to deter fraud and waste, the statute protects whistleblowers who report the misuse of government funds from discharge, demotion or discrimination based on their disclosures.
Creating a Culture of Compliance
The result of this flurry of legislation is that the pool of employees eligible for whistleblower protection has dramatically expanded, together with the potential monetary incentives for doing so. This environment presents risks, but also an opportunity to reassess ethics and compliance programs so that non-compliant practices are escalated and addressed within the company. Rather than view employees as potential adversaries, corporate leaders need to recognize that the vast majority of employees are invested in seeing their companies succeed and their employment secure.
Many whistleblowers claim that they tried repeatedly to report their concerns internally before taking external action. A 2010 study found that almost 90% of employees who filed FCA suits had initially reported their concerns to compliance departments or supervisors. See National Whistleblowers Center, Impact of Qui Tam Laws on Internal Compliance: A Report to the Securities Exchange Commission (Dec. 17, 2010), www.sec.gov/comments/s7-33-10/s73310-212.pdf .
Whistleblowing should be a last resort, used only when employees feel their legitimate concerns are being affirmatively ignored by corporate management. By adopting best compliance and employment practices to ensure the reporting and remediation of these types of issues, companies can partner with their employees to identify issues early and avoid regulatory missteps that inevitably devour corporate resources and tarnish the company's reputation.
A good-faith employee who is genuinely concerned with conduct at the company, and who is hopeful that the company will address her concerns, should be seen as an important asset. There will always be disgruntled employees and Internet chatter; if a company also happens to have a substantive issue, the company is far better off having engaged, proactive employees who will alert it to the issue and help work to resolve it.
Companies can implement policies and practices that promote the internal escalation of compliance issues and avoid a whistleblower problem:
Encourage Employees to Report Internally
Reassess the company's code of conduct, ethics and whistleblower policies to ensure that they emphasize compliance as an organizational imperative. Develop robust policies setting an ethics-oriented tone from the top, including periodic reminders and compliance communications from executive management.
Make sure these policies are tailored to the specifics of your organization, and remain fluid and regularly updated. A dusty, outdated binder will be of little use.
Develop detailed written protocols for employees to escalate ethics and compliance issues to the legal department, corporate compliance and executive management. Provide multiple channels for reporting, including a hotline or other mechanism for anonymous reporting. Make sure that employees understand the policies and available reporting channels.
Train management and supervisors to communicate across the workforce that good-faith reporting of unethical conduct is the right thing to do and helpful to the company, not behavior that is grudgingly tolerated because of anti-retaliation laws.
Institute skip-level meetings between senior managers and staff to facilitate the escalation of issues.
Provide incentives for employees to raise ethics and compliance issues internally by making compliance a meaningful factor in the employee review, promotion and compensation process. Consider providing bonuses to employees based on the early detection of non-compliance.
Ensure that the internal audit function is adequately resourced with personnel who have relevant subject matter expertise. Unannounced audits should be used on identified compliance risk areas.
Manage Employment Issues Proactively
Provide whistleblower training for managers on their obligations to escalate issues and the prohibition against retaliation and discrimination based on a whistleblower's complaint. Educate managers on how to document decisions related to termination, suspension, changes in compensation, diminution of job duties and other adverse employment actions that could provide the basis for claims of retaliation or constructive termination by a whistleblower.
Take swift, decisive action to address performance issues from all employees, and document any employment actions in the employee's human resources file. Allowing poor performers to remain on the job will hinder the company's ability to dismiss these employees should they become whistleblowers.
Where possible, insulate employment decisions about a whistleblower from the investigative process. Reviews and employment decisions ideally should be supervised by a human resources professional or a higher level supervisor who is unaware of the whistleblower's report.
Conduct exit interviews of departing employees. Consider asking departing employees to disclose any violations of internal policy or state or federal regulations of which they are aware, and then certify that they have done so.
After the (Internal) Whistle Blows
Take immediate steps to thoroughly investigate any claims. Ensure that reports are investigated promptly by an objective, experienced investigator.
Depending upon the issue, investigations should be conducted under the direction of the General Counsel (unless her office is a subject) to ensure independence from management and to preserve the corporate attorney-client privilege. Upjohn warnings should be given as appropriate, and employee confidentiality should be preserved to the extent practicable. Document the investigation and any remedial action taken.
Consult with employment counsel to ensure that the company complies with any notice provisions requiring employees to be informed of their whistleblower protections under these various statutes. Preserve the status quo of the whistleblower's employment status during the pendency of the investigation to prevent claims for constructive termination. This may include placing the whistleblower on paid administrative leave while a claim is investigated.
Outside counsel should be retained to assist on matters that raise significant legal, regulatory or reputational risk to the company.
Ensure that adequate resources are in place to allow for prompt resolution of issues. Remediation should be comprehensive, sustainable and documented. Any employee discipline should be documented.
If possible, report back to the whistleblower. An employee who hears nothing will likely assume that nothing is being done. Consider hotline follow-up mechanisms or other reporting mechanism where a report was anonymous.
Track incidents, including corrective and preventative actions. A robust tracking system will help the company detect any potential pattern.
Conclusion
With enhanced financial incentives for whistleblowers and an active federal regulatory appetite for prosecuting corporate misconduct, companies are well advised to review their compliance and employment practices to encourage employees to raise their concerns internally without fear of retribution. By embracing their employee eyes on the ground and taking swift action to address problematic corporate practices, companies can enhance their way of business and avoid finding themselves on the wrong end of a regulatory enforcement action inspired by a whistleblower's wrath.
Originally published in the National Law Journal Online on May 2, 2013,
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
