Risk and reward – US corporate whistleblowing in focus

December 2024  |  FEATURE | FRAUD & CORRUPTION

Financier Worldwide Magazine

December 2024 Issue

White-collar crime, including corporate fraud and corruption, cause significant financial and reputational damage to companies around the world. The perpetrators of these acts are far from the stereotypical criminal; indeed, they may hold high office within an organisation. And many white-collar crimes are not reported to the appropriate authorities for investigation and prosecution. According to the Federal Bureau of Investigation (FBI), it is estimated to cost the US more than $300bn annually, for example.

Against this backdrop, governments are making efforts to overhaul their regulatory and enforcement frameworks. More countries are introducing or amending financial crime laws and bringing new types of businesses into the scope of existing laws.

Higher standards of corporate behaviour are being demanded by a wider range of stakeholders. How companies conduct internal investigations is receiving greater scrutiny from enforcement authorities, employees and other stakeholders.

First line of defence

A primary weapon in the fight against white-collar crime is whistleblowing. In most instances, whistleblowers are the first line of defence against corruption, fraud and wrongdoing, and the single most effective source of information about illegal activities. Despite the risk to their professional and personal lives, company insiders with information about suspicious behaviour regularly come forward to report crimes that would otherwise go undetected.

Though attitudes toward the practice have shifted in recent years, whistleblowing remains a controversial and emotive subject. Many high-profile cases have attracted media and regulatory attention.

Over the last decade, a slew of new whistleblowing laws have been introduced across a variety of jurisdictions around the world. In some countries, notably the US, whistleblowers can now gain financial benefits for reporting malfeasance. Though considered a controversial move by some, whistleblower incentive programmes, such as those operated by the US Securities and Exchange Commission (SEC) and the US Treasury’s Financial Crimes Enforcement Network (FinCEN), have yielded success stories.

Buckle up

In August, the US Department of Justice (DOJ) officially rolled out its Corporate Whistleblower Awards Pilot Program, which is focused on financially incentivising whistleblowers to report allegations of corporate crime. The Pilot Program contains a significant amount of small print that applies to prospective whistleblowers. Its requirements are detailed in a 14-page guidance manual and five-page questionnaire that whistleblowers must fill out to make a report.

The pilot scheme will run for three years and offer whistleblowers the chance to receive monetary awards for providing information about certain types of corporate crime to the DOJ’s Criminal Division.

The scheme is partly modelled on existing whistleblower programmes run by the SEC, the Commodity Futures Trading Commission and FinCEN, and is intended to fill gaps in those programmes by targeting certain forms of foreign corruption, domestic corruption, crimes involving financial institutions and healthcare fraud schemes. Violations of the Foreign Corrupt Practices Act by companies that do not issue securities in the US are not covered by the SEC programme, but will fall within the DOJ Pilot Program.

In recent years, the DOJ and other federal agencies have turned to whistleblowers to uncover and pursue enforcement actions. In February, the DOJ revealed that settlements and judgments under the False Claims Act (FCA), for example, exceeded $2.68bn in 2023. Whistleblowers initiated 712 qui tam suits, primarily focusing on civil investigations.

The DOJ’s enforcement activities have undergone a number of notable changes over the last decade, with an increasing focus on urging corporate actors to bring cases to the DOJ. Following the 2015 Yates memo, which officially stated the DOJ was focused on holding individuals accountable for corporate misconduct, the DOJ set out to incentivise self-reporting, with the idea that companies would both come forward early and identify individuals implicated by any potential wrongdoing.

The Pilot Program is the next phase in this evolution. Under the auspices of the Pilot Program, the DOJ will be offering incentives to encourage people to come forward, placing companies and individuals in competition to see who can bring pertinent information first.

The DOJ hopes that the Pilot Program will “supercharge” its corporate investigations and prosecutions, strengthen its other tools for corporate accountability and promote companies’ internal compliance programmes.

The programme sets out key requirements for whistleblowers. First, they must provide the DOJ with “original” information about the corporate misconduct, which in this context refers to facts that the DOJ did not already know and that have not been publicly disclosed, and with “very few exceptions” must be “first in the door”.

Second, the whistleblower must be an individual who submits his or her disclosure in writing, using the DOJ’s form and website, and swears to the truthfulness and completeness of the submission.

Third, the whistleblower must not lie, conceal or mischaracterise their role in the misconduct they report and must not have “meaningfully participated” in the malfeasance they are reporting.

Fourth, the whistleblower cannot be an employee who works in a company’s compliance department or internal audit.

Fifth, the whistleblower cannot be an officer, partner or director who was informed of the allegations of the corporate misconduct.

Sixth, the whistleblower should not have a management role or oversight of corporate officers and personnel involved in the misconduct.

Lastly, the whistleblower cannot use or rely on privileged information or information obtained illegally in violation of state or federal law.

Awards will not be made to individuals who meaningfully participated in, directed, planned, initiated or were convicted of the misconduct they report. Individuals who face criminal liability for certain misconduct may be able to report previously undetected issues to other DOJ offices that offer the possibility of non-prosecution agreements, subject to certain conditions. The DOJ may deny an award where the whistleblower held a management role over the personnel or offices involved in the misconduct, including a role as corporate executive.

There are some differences between the DOJ’s Pilot Program and other whistleblower incentive programmes in the US.

While others chiefly address civil violations, the DOJ’s scheme aims at tackling corporate criminal misconduct. In fact, the DOJ will only pay rewards if the reported information leads to a successful forfeiture of at least $1m in connection with a criminal prosecution, a corporate criminal resolution (such as a non-prosecution or deferred prosecution agreement), or a civil forfeiture.

At the DOJ’s sole discretion, successful whistleblowers may receive up to 30 percent of the first $100m forfeited and up to 5 percent of any net proceeds forfeited between $100m and $500m.

For whistleblowers, the appeal of the programme may be limited by the fact that payments will depend on the DOJ obtaining and collecting a forfeiture in conjunction with a criminal resolution. This process can be lengthy and uncertain, with no guarantee that a report will lead to prosecution.

Evaluation

In light of these new measures, pressure on companies has increased.

The DOJ’s programme has been designed to fill gaps in conduct not covered by other agencies’ whistleblower schemes. These gaps are narrow, and thus the programme does not have wide application for most corporations.

That said, as a starting point, companies should evaluate whether and to what extent their activities create new reporting possibiilites under the programme, and thus necessitate action. This will be important for companies that operate in one of the areas of focus.

The programme creates fresh incentives for whistleblowers, and companies must assess whether they are prepared to receive an increase in reports. They also need to acknowledge that a reporter may have already disclosed information to the DOJ.

Publicly traded companies subject to the Sarbanes-Oxley Act should already have systems in place to receive a report, investigate and determine whether to take action, including potentially making a voluntary self-disclosure. The DOJ’s new programme provides an opportunity to reassess the efficacy of those systems but should not necessarily require the creation of new ones. Companies with existing whistleblower programmes would still be advised to consider expanding those systems to cover new areas of focus.

Similarly, if a company submits claims to government payors, it is already subject to the FCA and likely has a compliance system in place. However, this system should now broaden its focus beyond government payors to include claims and conduct related to private payors, which are now eligible for whistleblower bounties under the DOJ programme.

For privately held companies operating in non-FCA-regulated sectors, it is crucial to conduct a thorough assessment of the risks posed by the Pilot Program. Depending on the outcome, companies should consider certain steps.

First is to establish or enhance internal reporting mechanisms to receive and assess whistleblower reports.

Second is to communicate the company’s expectation that employees promptly report concerns about potential legal violations or policy breaches internally.

Third is to protect employees against retaliation for good faith reports.

Fourth is to develop a process for investigating whistleblower reports, categorising them based on severity. Also important is setting clear processes for HR when handling reports internally, involving in-house counsel for more complex cases, and engaging external counsel when criminal exposure is possible. Investigations need to be timely, too – particularly when deciding on whether to self-report within the 120-day window for a presumptive declination.

Lastly, all companies must introduce a mechanism to swiftly and accurately evaluate whether to voluntarily disclose violations. This involves comprehensive analysis of factors such as the seriousness of the misconduct and the financial impact of the wrongdoing.

Regardless of the situation, the most crucial aspect of an internal programme remains obtaining precise information on the nature, extent and consequences of the alleged misconduct and then determining how to proceed moving forward.

To maintain compliance, companies should promote a speak-up culture, establish reporting routes, train employees to deal with reports and respond appropriately, implement anti-retaliation controls, and provide whistleblowers with adequate protection. Getting things wrong could have significant consequences.

Matters under review

It remains to be seen just how effective the DOJ’s new pilot scheme will prove to be and how many whistleblower reports it will generate. However it is judged, companies will have to respond by implementing measures necessary to minimise related risks.

The DOJ and other enforcement agencies in the US will continue to emphasise the importance of effective compliance programmes for corporations and seek to incentivise companies to self-report. The introduction of the DOJ Pilot Program may lead to an increase in whistleblower reports internally, and to the DOJ whether or not they have been reported internally first. Accordingly, companies should be wary of any matters currently under internal review but not yet self-reported, as they may now be brought to the attention of the DOJ.

© Financier Worldwide

BY

Richard Summerfield