The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) is expected to be signed into law by the President this week. The Act constitutes a comprehensive overhaul of our financial regulatory system on several levels. One little known provision tucked into the legislation may have enormous and costly consequences for many corporations operating internationally. Specifically, the Act includes a whistleblower program that rewards individuals who assist the Securities and Exchange Commission (SEC) to uncover securities violations, including violations of the Foreign Corrupt Practices Act (FCPA). For an eligible whistleblower, the payoff is a reward of at least 10 percent and up to 30 percent of the fines collected worldwide as a result of FCPA violations. That means if the case results in a $100 million penalty, the whistleblower gets at least $10 million and perhaps as much as $30 million. We anticipate this provision will significantly impact investigations, disclosures, and countermeasures required to protect a company from exposure to crippling investigations and penalties, and will create an environment that rewards informants. What follows is a brief description of the program and an analysis of some of the ramifications of it for companies subject to the FCPA and other securities laws. We will provide additional analysis in the coming weeks.
Summary of the Whistleblower Provision
§ 922 of the Dodd-Frank Act adds a new Section 21F to the Securities Exchange Act of 1934 (Exchange Act). The new Section 21F is entitled “Securities Whistleblower Incentives and Protection.” It is designed to incentivize and protect individuals who provide "original information" to the SEC, relating to any violation of the securities laws (including the FCPA), that results in monetary sanctions exceeding $1,000,000.
The term “original information” means information that is (a) derived from the independent knowledge or analysis of a whistleblower; (b) not known to the SEC other than by the whistleblower as the original source of the information; and (c) not exclusively derived from an allegation made in a judicial or administrative hearing, in a government report, hearing, audit, or investigation, or from the news media, unless a whistleblower is the source of the information.
The term “monetary sanctions,” derives from any judicial or administrative action, and includes (a) any monies, (penalties, disgorgement, and interest) ordered to be paid; and (b) any monies deposited into a disgorgement fund or another fund pursuant to Section 308(b) of the Sarbanes-Oxley Act of 2002 (SOX) as a result of such action or any setback of such action.
Included are “monetary sanctions” obtained in related actions by the Attorney General of the United States, an appropriate regulatory authority, a self-regulatory organization, a State attorney general in connection with any criminal investigation, any appropriate State regulatory authority, the Public Company Accounting Oversight Board, a foreign securities authority, or a foreign law enforcement agency.
The Act creates an SEC “Investor Protection Fund” in the U.S. Treasury to fund these payments.
As noted above, qualified whistleblowers shall receive payment of 10 to 30 percent of the monetary penalty collected, at the discretion of the SEC, based upon a number of criteria, including the significance of the information provided, the degree of assistance provided, the "programmatic interest" of the SEC in deterring violations of the securities laws by making awards, and such additional relevant factors as the SEC may establish by rule or regulation.
Excluded from participation in the program is any whistleblower who, at the time the whistleblower acquired the original information submitted to the SEC, was a member, officer, or employee of an appropriate regulatory agency, the Department of Justice, a self-regulating organization, the Public Company Accounting Oversight Board, or a law enforcement agency.
A Whistleblower is not eligible to be compensated under certain circumstances if:
- The whistleblower is convicted of a criminal violation related to the judicial or administrative action for which the whistleblower otherwise could receive an award under the program;
- The whistleblower gains the information through an audit of financial statements required under the securities laws and for whom such submissions would be contrary to Section 10A of the Exchange Act; and
- The whistleblower fails to submit information to the SEC in such a form as the SEC may, by rule, require.
Whistleblowers are allowed to anonymously provide information through counsel, but must identify themselves prior to receiving any award.
The Act also creates a private right of action for whistleblowers against employers who discharge, suspend, threaten, harass, or discriminate against whistleblowers, and makes favorable changes regarding whistleblower laws under SOX Section 1514a, such as extending the limitation period and providing for a jury trial in federal court. The SEC is required to establish a separate office to administer the program; issue rules to implement the program within 270 days after enactment; and report annually to Congress on the program.
Potential FCPA Ramifications
As a result of this new legislation, whistleblowers, including company employees, are eligible to receive huge rewards or bounties of at least 10 percent and up to 30 percent of the fines collected worldwide as a result of FCPA violations. To put this in context, the fees collected worldwide in the recent Siemens FCPA investigation amounted to approximately $1.6 billion. Accordingly, a qualified whistleblower could have potentially received up to $480 million under this new program. The substantial financial incentives to potential whistleblowers will likely result in a significant increase in FCPA investigations intitiated by the government as employee or informants perceive a big pay-off for information.
It will also likely result in the development of a “cottage industry” with law firms and consultants stepping up to solicit potential FCPA whistleblowers. We have seen this before with Qui Tam/False Claims Act cases and shareholder derivative suits. A similar program by the Internal Revenue Service has fueled the development of a "cottage industry" in the legal profession catering to potential whistleblowers.
This legislation will change the dynamics of determining when and if to “self-disclose” potential FCPA violations to the government. Adopting a "wait-and-see" approach to FCPA disclosure will become a much riskier approach, as a company will not know if a whistleblower has already contacted the government.
Whistleblowers who are still employees of the company could potentially act as the government’s “eyes and ears” inside the company during the course of an investigation. Consider the impact of a confidential government informant providing information on an ongoing internal investigation. It may well increase the likelihood of actions being brought against individuals as well as the company.
Finally, if a potential whistleblower exaggerates the extent or nature of potential FCPA violations, the company may be forced to expend significant time and resources in order to establish the true extent and nature of any problem (i.e. proving the negative will be expensive).
As a result, preemptory self-reporting may well become standard practice for many companies with significant FCPA exposure.
Companies need to proactively manage this increased risk with strong FCPA compliance and training programs. They should also have clear and well-known procedures for employees to report potential FCPA violations and have a “rapid response” plan in place to investigate potential FCPA violations when and if they arise. It will become critical to establish clear and comprehensive procedures regarding privileged corporate information and take affirmative steps, possibly including contractual provisions in employment agreements, requiring employees to first report potential FCPA violations to the company.
This legislation comes into effect just as the SEC and the Department of Justice are significantly expanding their FCPA capabilities after numerous high-profile FCPA cases that have resulted in significant financial penalties.
Some commentators have referred to Section 922 of the Dodd-Frank Act as “throwing fuel on the FCPA fire,” which, under the circumstances, appears to be exactly what Congress intended.