Cultivating a Reporting Culture

While many organizations view whistleblowers as disgruntled employees looking for revenge and monetary rewards from the SEC, this is generally not the case, according to a recent study.

According to “Embracing Whistleblowers: Understand the Real Risk and Cultivate a Culture of Reporting,” by The Network, whistleblowers most often turn to the U.S. Securities and Exchange Commission only after they have tried reporting internally, or if they are concerned about retaliation by their company. In fact, only 20% ever reported to someone outside their company.

Organizations can do much to protect themselves, while also looking after employees. Since the majority of employees go to the company first with their concerns, organizations have an opportunity to address issues before regulatory involvement.

According to the report:

The fact that whistleblowers may prefer to keep things in the company doesn’t mean they won’t turn to the government or media if they think it necessary. Sixty-five percent of surveyed employees would be willing to report externally, “if my company didn’t do anything with my internal report.” An even higher percentage would report externally, “if keeping quiet would cause possible harm to people” or “if it was a big enough crime.”

How can companies manage this risk? By encouraging a strong “reporting culture,” they can learn about, and take care of potential problems through quality hotline reporting programs, The Network said.

Hotline programs have been around for years, but are more important than ever in today’s regulatory and business environment. Compliance teams should stop thinking of hotlines as purely telephonic; they’ve grown to include mobile and Web-based reporting solutions that give employees and others a safe and reliable way to raise their concerns internally via whichever method is most comfortable for them. They also give the compliance team important insight into what is going on inside the company.


Officer Requirements When Blowing the Whistle on SEC Violations

Over at Risk Management, we have a new article on some of the considerations corporate officers must consider before blowing the whistle on their own companies. With the new SEC Whistleblower Program, there are some new nuances but the core advice remains the same as common sense would suggest: officers should first try to report the problem internally but if that isn’t possible (for example, because the violations are occurring at the very top or the officer fears retribution) then they should by all means inform the SEC.

Here is more from article authors Lawrence A. Hamermesh and Jordan A. Thomas.

It is when the internal reporting system breaks down that the most serious problem for officers arises: the officer reports misconduct through the appropriate channels, but the report is ignored or the response is otherwise inadequate. In that situation – and also when the officer has a reasonable belief that reporting internally will be inappropriate or futile — the officer must determine whether to report the matter to an outside party, such as the SEC or another law enforcement authority. It is here that the officer’s fiduciary duty of loyalty intersects with the potential for an SEC whistleblower award. Would the officer’s duty of loyalty prohibit him or her from reporting the misconduct to the SEC, where such reporting is at least partly motivated by the hope of receiving a monetary award?

For several reasons, the most likely answer is “no.”

The duty of loyalty does not prohibit self-interested conduct by officers; it simply prohibits such conduct if it unfairly affects the corporation. Yet, in at least some cases, external reporting will actually be in the best interest of the corporation: while a whistleblower submission could lead to an eventual enforcement action against the corporation, it might result in substantially smaller sanctions and related private settlements than if the officer remained silent and the illegal conduct was allowed to continue and grow larger.

Related to that, adverse effects on the corporation’s reputation might be minimized by limiting the reach of corporate misconduct.

Whistleblowing Pays

Sure, sure, whistleblowing pays off by relieving one’s conscious. But did you know it now also pays a much higher monetary reward?

With the Dodd-Frank Wall Street Reform bill now in place, whistleblowers will not only have even more protection from their employer seeking revenge, they will also be rewarded financially at a much greater rate than in the past. According to the recent reform, successful informants will be entitled to collect “10% to 30% of the wrongdoers’ payout” to the securities and exchange commission.

Historically, the SEC could only reward whistleblowers who were involved with insider trading cases. And apparently, they weren’t very generous.

During its 20-year existence, the SEC’s whistle-blower program has paid out only $159,537 to five claimants. No wonder observers of securities fraud have had little incentive to spill the beans. “Basically, [whistleblowing] ruins your life,” says Luigi Zingales, a professor at the University of Chicago Booth School of Business who has studied the issue of whistle-blowers. “What is worth your life getting ruined? It’s pretty expensive.”

Expensive no more?

That’s what many interpret from the new financial reform bill. Besides generous monetary rewards, the new law also greatly expands whistle-blowers’ rights. Now, if you tell on your employer, you are allotted a whopping six years to bring your case to court, as opposed to a mere 90-day statute (the rule under Sarbanes-Oxley).

The National Whistleblowers Center was nice enough to compile everything pertaining to whistleblower protections from the Dodd-Frank Act. Also, our own Jared “Dubs” Wade blogged about the topic — and included a sweet example of his photoshop skills.


Turning Whistleblowers into Millionaires

The U.S. Foreign Corrupt Practices Act is not new. Founded in 1977, the act’s main mission has always been to curtail improper accounting practices by companies operating internationally and prevent bribes. Thus, the “corrupt” aspect. In many parts of the world, there is a thin line between a “gift” and a “bribe,” and this regulation is designed to better demarcate that line and ensure that those businesses that overstep it have to pay a penalty for doing so. (Here’s a more detailed explanation if you’re into reading legalese.)

Only in recent years, however, has the act started to gain any real teeth.

Dow Jones reports on the expansion of the FCPA of late.

There have been a rising number of FCPA enforcement actions in recent years…with 34 prosecutions netting $435.3 million in penalties in 2009, according to the Department of Justice. In 2008, Justice said 17 prosecutions netted $497.6 million in penalties.

Because of this ramped up enforcement, companies should be sure to revisit compliance efforts. In fact, we ran a piece by Jonathan Marks of Crowe Horwath on that very topic last November, offering 10 tips on how to make sure your foreign operations are on the up-and-up. (“Global Presents”/global presence … Get it? We’re very clever … We know.)

Thus, the real news now is not more fines — it is the coming overhaul of the incentives that will be awarded whistleblowers going forward. The Senate and House bills for financial regulation differ on the matter somewhat, but both will create what is being termed a “bounty program,” in which the person who reports the FCPA violation would receive a percentage of whatever the related fine ends up being.

The final percentage will obviously hinge on what is actually written into legislation, but regardless, it has the potential to turn a whistleblower into a millionaire overnight.

Among key language differences between the bills, the House version, which passed in December, has no set minimum percentage of the collected funds in a case for the SEC to pay to a whistleblower. The SEC has greater discretion in determining the bounty than it does under the Senate’s version, which has a 10% minimum. Both have a 30% maximum payout.

Theoretically, a whistleblower could come into a huge windfall based on this formula. Consider the case of Siemens AG, which paid $800 million in fines to the SEC and the DOJ in 2008 after pleading guilty to violating the FCPA. Had those penalties been the result of information obtained by a whistleblower, the person could have received a $240 million payout, or a minimum bounty of $80 million based on the Senate language.

$80 million for tipping off the G-men about a foreign infraction? That’s a lot of coin. Certainly enough to motivate employees, you would think.

Mike Koehler, an assistant professor of business law at Butler University in Indiana, who is an expert on FCPA-related issues and blogs under the name FCPAProfessor, sees such sums being an effective incentive.

“Any time you incentivize rank-and-file workers with a lot of money, rational actors are going to respond. You’re going to see an increase in enforcement activity regardless of whether the action violates the law,” Koehler said.

I know I’ll be on the look-out


The future whistleblowers of America?