Whistleblowers: the secret weapon for US enforcement worldwide

July 2018 | SPOTLIGHT | FRAUD & CORRUPTION

Financier Worldwide Magazine

July 2018 Issue

US securities enforcement efforts around the globe have been strengthened in a major way in the past eight years, and corporations worldwide are feeling the impact.

The biggest boost came from the US Securities and Exchange Commission (SEC) whistleblower programme, which has attracted more than 22,400 reports of corporate wrongdoing from individuals, including over 2600 from countries outside the US.

SEC officials have called the programme a “game-changer” in its enforcement efforts. While she was SEC chair, Mary Jo White said that the agency’s whistleblower programme “has had a transformative impact on enforcement and that impact will only increase in the coming years”.

Since the programme was created by the US Dodd-Frank Act in 2010, the SEC has ordered more than $1.5bn in sanctions as a result of whistleblowers and paid more than $266m in rewards to individuals for their information and assistance. This includes the largest SEC whistleblower award ever made to an individual outside the US, more than $32m, which went to an anonymous whistleblower in 2014.

The SEC, working with the US Department of Justice (DOJ), regularly exercises US extraterritorial rights to enforce US laws abroad when the offending companies fall under US jurisdiction, and corporate whistleblowers often provide solid information that underpins those actions.

No other country has a whistleblower programme that is as strong and effective as the SEC whistleblower programme. High-level corporate insiders who know the details of financial misconduct are attracted to the SEC whistleblower programme primarily for two reasons. First, the programme offers substantial rewards to whistleblowers for reporting financial misconduct. If a whistleblower’s report leads to a successful SEC proceeding with sanctions exceeding $1m, the whistleblower is eligible for an award from 10 to 30 percent of the amounts collected. Whistleblower awards are made out of an investor protection fund that is financed entirely through monetary sanctions paid to the SEC by securities law violators.

Second, the SEC is bound by law to protect the confidentiality of those who file whistleblower reports. The SEC is so committed to confidentiality that if a whistleblower works with an attorney to file a report with the SEC anonymously, it is possible that the SEC will not know the whistleblower’s identity until the time comes to issue the reward.

The SEC has never named any of the whistleblowers who have received awards, nor has it tied any particular enforcement actions against companies to whistleblower information. So companies that have been reported to the SEC do not know that the SEC launched an investigation because of information it received from a whistleblower, although in some cases they may suspect that is what has happened. The SEC does release information about aggregate recoveries from corporate wrongdoers due to whistleblower assistance, but in its public information about enforcement actions, it never distinguishes which ones were based on whistleblower reports.

Anyone who submits a whistleblower report with the SEC can qualify for a reward, regardless of nationality, the location of the offending company and where the wrongdoing occurred. The only eligibility requirement for a whistleblower award is that the individual provide information that assists the SEC in bringing a successful enforcement action with sanctions exceeding $1m.

The Dodd-Frank Act also protects whistleblowers from retaliation. The law provides that employers may not fire, demote, suspend, threaten, harass or otherwise retaliate against anyone who provides information to the SEC. Whistleblowers who suffer any form of employment retaliation can sue to be reinstated and receive compensation.

However, whistleblowers must report any wrongdoing to the SEC before the retaliation occurs in order to be eligible for the anti-retaliation protections that Dodd-Frank offers, according to a US Supreme Court decision issued in February. In Digital Realty Trust v. Somers, the Supreme Court rejected the SEC’s argument that whistleblowers who report corporate misconduct to company officials or through internal compliance programmes are entitled to the anti-retaliation protections of Dodd-Frank. The ruling means that whistleblowers are now much more likely to report financial impropriety directly to the SEC. To encourage employees to report internally before they go to the SEC, companies should consider establishing transparent internal channels for reporting impropriety and building trust with their employees, guaranteeing that they will not be retaliated against when they raise concerns about corporate actions.

The US law that often ensnares multinational corporations is the country’s powerful anti-bribery statute, the Foreign Corrupt Practices Act (FCPA). By providing insider information to the SEC, whistleblowers have strengthened enforcement of that law.

The SEC and DOJ jointly enforce the FCPA, which was enacted in 1977. The FCPA prohibits US companies and individuals from paying money or offering other perks to foreign entities in order to influence decisions, policies or otherwise win favourable treatment. While bribery might be the tacitly accepted way of doing business in certain parts of the world, it still runs counter to the rule of law and the broader, principled and normalised world of international trade.

“Foreigners who avail themselves of the American marketplace need to abide by our rules and standards,” said US DOJ deputy attorney general Rod J. Rosenstein in a speech in May. “When we speak of levelling the playing field for businesses, we mean levelling up to higher standards, not down.”

The SEC and DOJ have markedly stepped up their pursuit of foreign bribery cases in recent years, aided by over 2600 whistleblower reports about FCPA violations since 2012. In one of the largest FCPA settlements last year, Sweden-based telecommunications provider Telia Company AB paid $965m in a global settlement with the US, Dutch and Swedish law enforcement agencies to resolve charges of bribery of a Uzbekistan official to win business in that country.

Whistleblowers play an important role in keeping international markets open and transparent. And that is good for all businesses.

Sean X. McKessy is a partner at Phillips & Cohen LLP. He can be contacted on +1 (202) 833 4567 or by email: smckessy@phillipsandcohen.com.

Sean X. McKessy

Phillips & Cohen LLP