United States: Five Building Blocks For Effective Internal Controls To Comply With U.S. Whistleblower Protections

Global Crisis Management Series: This post is part 8 in a series concerning topics further elaborated on in Cleary Gottlieb's Global Crisis Management Handbook—a desk reference for spotting issues and avoiding common mistakes when faced with a crisis. The current version is available here.

U.S. whistleblower protections broadly provide public and private sector employees with protection from retaliation for reporting potential concerns about misconduct. Companies that are ill-prepared to handle complaints internally not only face potential lawsuits from whistleblowers, but also open themselves up to substantial regulatory scrutiny and perhaps enforcement actions.

Just recently, Wells Fargo faced a spate of whistleblower lawsuits from employees who raised concerns about the bank's alleged opening of fraudulent accounts to meet aggressive sales goals. Starting as early as 2005, whistleblowing employees alleged they were terminated in retaliation for raising concerns about the bank's practices. Wells Fargo also faced a number of regulatory investigations from federal and state agencies, at least partially as a result of those whistleblowers' concerns.

The number of whistleblowers whose complaints were allegedly given insufficient attention over the course of nearly a decade at Wells Fargo points to a potential failure in the company's internal controls. Companies would benefit from implementing effective policies and procedures to identify and investigate concerns internally, lest they face costly and prolonged lawsuits and regulatory investigations or even enforcement actions. While there are a number of ways to go about doing this, five building blocks can provide a foundation on which a company can guard against risk in this space.

Maintain Robust Anti-Retaliation Policies

Companies should maintain robust anti-retaliation policies emphasizing that intimidation and retaliation against employees who raise or report concerns will not be tolerated, regardless of whether those concerns might initially seem to lack merit. Absent an explicit policy statement, workplace concerns may go unreported, or worse, employees may eschew reporting concerns internally and instead go directly to regulatory agencies.

In addition, anti-retaliation policies should outline how the company receives and responds to employees' compliance concerns. Employees should not only be assured they can report concerns without fear of retribution, but they should also be told that those concerns will be taken seriously. While Wells Fargo purportedly emphasized its ethics code regularly during company trainings, reports suggest that employees who raised concerns may have been ignored or subjected to adverse employment action.[1]

Companies should also ensure that nothing in their anti-retaliation policies can be construed as restricting employees from reporting concerns to governmental or regulatory authorities. Any such restrictions would be viewed negatively by the relevant enforcement agencies. Indeed, the SEC has issued rules that expressly prohibit confidentiality and non-disclosure agreements from preventing employees from reporting concerns to governmental regulators.[2] Moreover, a number of companies have settled enforcement actions with the SEC for trying to limit an employee's ability to raise concerns with the SEC.[3]

Strengthen Management's Role

As is the case with all compliance-related matters, senior management plays a critical role in ensuring that policies and procedures related to U.S. whistleblower regulations are enforced. Simply put, tone at the top matters. Senior management must therefore be well-trained on whistleblower regulations, as well as a company's related policies and procedures. Most importantly, management must demonstrate a commitment to compliance, which goes a long way in ensuring that employees feel comfortable in reporting concerns.

At Wells Fargo, accounts differ as to when senior management became aware of employee concerns related to the bank's account practices. Multiple former employees allege that they reported concerns to management, including at least one concern raised directly with then-CEO.[4] Other information indicates, however, that while lower-level employees began raising concerns about the bank's practices as early as 2005, senior management only became aware of the alleged fraud in 2013.[5] Regardless, it is clear that employee concerns may have gone unnoticed or ignored for many years, suggesting that perhaps more steps could have been taken by senior management who failed to facilitate and participate in the internal reporting process.

Encourage Employee Engagement

Just as important as senior management's commitment to compliance is employees' buy-in to the culture. Through a combination of written policies, trainings, and management's urging, employees should be encouraged to report anything they expect could raise a legal or ethical concern. Encouraging employees to report concerns internally has the dual benefit of reinforcing good corporate citizenship and providing management the opportunity to address any deficiencies before regulators become involved.

Of course, companies must ensure that the encouragement it gives to employees is more than just rhetoric. Whistleblowers from Wells Fargo allege that their complaints to direct supervisors and through the ethics hotline were actively ignored, and instead, they were pressured to continue to open falsified accounts.[6] Absent true buy-in to a culture of compliance, employees will not be empowered to report concerns, which can result in a deleterious effect on corporate culture.

Create Credible Reporting Avenues

Creating and maintaining multiple avenues through which employees can report concerns is an effective way to capture potential issues within the company and to demonstrate to regulators that the company has always taken seriously the need to empower its employees to express concerns up the chain. One of the most widely used compliance tools in this regard is an anonymous hotline. If an employee believes that wrongdoing is being committed by a colleague or supervisor, it is important that the employee has a way to report her concern without the knowledge of the alleged wrongdoers. A well-publicized and easy to access hotline is an effective tool that allows those employees to raise concerns within the company while also maintaining anonymity and confidentiality. For public companies, this is not just a good practice, but a requirement under the Sarbanes-Oxley Act.[7]

Employees, however, must have confidence that complaints made through a hotline will be kept strictly confidential and will be taken seriously. In the case of Wells Fargo, several whistleblowers reported raising concerns through the company's ethics hotline only to be terminated shortly thereafter.[8] Companies, therefore, would do well to ensure that the procedures for handling and investigating complaints are transparent and reliable.

Alternative avenues of reporting should also be provided to employees. For example, employees may be encouraged to report concerns to their supervisor or a designated compliance officer. Either way, companies should aspire to give employees multiple ways through which they could raise concerns.

Ensure a Transparent and Credible Investigative Process

The integrity of internal reporting depends on a transparent and credible investigation of each complaint. After all, employees would be justifiably wary of reporting concerns if they were not confident that those concerns would ever be reviewed. The process by which concerns are escalated and investigated internally should be memorialized in a company's anti-retaliation policies.

While the scope of each investigation may vary depending on the circumstances, it is important that companies give thought to their investigative process to ensure it is reliable and credible. Wells Fargo has suggested that one of the reasons it did not uncover the impropriety raised by so many of its former employees sooner was because each complaint lodged through its ethics hotline or other channel was investigated individually. It was not until 2013 that the company was able to piece together the broader scheme.[9] Companies should therefore consider whether the investigative process they have implemented would effectively expose the nature and scope of potential issues under a variety of circumstances.

Companies should also ensure that any investigative steps are thoroughly documented. This is important not only for transparency's sake, but also to have an evidentiary record of attempted compliance in connection with any future regulatory inquiries. Documentation of investigatory steps may go a long way in establishing credibility and a cooperative atmosphere with a regulator if it were to initiate an investigation.

Bottom Line

Companies should consider and from time to time reevaluate their policies and procedures for responding to whistleblower complaints. Failure to do so can be costly to the bottom line and company culture. The five building blocks identified above provide a good starting point for companies to assess their current policies and procedures. Moreover, they provide a foundation on which a company can build its internal controls and ensure compliance with U.S. whistleblower protections.

[1] Stacy Cowley, At Wells Fargo, Complaints About Fraudulent Accounts Since 2005, N.Y. Times: DealBook (Oct. 11, 2016), https://www.nytimes.com/2016/10/12/business/dealbook/at-wells-fargo-complaints-about-fraudulent-accounts-since-2005.html?module=inline.

[2] See 17 C.F.R. § 240.21F–17.

[3] See, e.g., KBR, Inc., Exchange Act Release No. 74619, 2015 WL 1456619 (Apr. 1, 2015); Health Net, Inc., Exchange Act Release No. 78590, 2016 WL 4474755 (Aug. 16, 2016); BlueLinx Holdings Inc., Exchange Act Release No. 78528, 2016 WL 4363864 (Aug. 10, 2016).

[4] Stacy Cowley, At Wells Fargo, Complaints About Fraudulent Accounts Since 2005, N.Y. Times: DealBook (Oct. 11, 2016), https://www.nytimes.com/2016/10/12/business/dealbook/at-wells-fargo-complaints-about-fraudulent-accounts-since-2005.html?module=inline.

[5] Id.

[6] Stacy Cowley, Wells Fargo Workers Claim Retaliation for Playing by the Rules, N.Y. Times: DealBook (Sept. 26, 2016), https://www.nytimes.com/2016/09/27/business/dealbook/wells-fargo-workers-claim-retaliation-for-playing-by-the-rules.html?module=inline.

[7] 15 U.S.C. § 78j-1(m)(4).

[8] Press Release, Osha Orders Wells Fargo to Reinstate Whistleblower, Fully Restore Lost Earnings in Banking Industry, U.S. Dep't of Labor, https://www.dol.gov/newsroom/releases/osha/osha20170403.

[9] Stacy Cowley, At Wells Fargo, Complaints About Fraudulent Accounts Since 2005, N.Y. Times: DealBook (Oct. 11, 2016), https://www.nytimes.com/2016/10/12/business/dealbook/at-wells-fargo-complaints-about-fraudulent-accounts-since-2005.html?module=inline.

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