Recently, the trade community has seen an increase in the number of whistleblowers informing on their employers. The potential monetary reward, which can be in the millions of dollars, has created a large incentive for employees who come across company wrongdoing to bring this information to outside regulatory authorities. The message to companies is clear – take internal monitoring and compliance seriously before employees can cash in on the profitability of whistle-blowing.
The prosperity of whistle-blowing stems from the large monetary rewards provided by the Securities and Exchange Commission (SEC) whistleblower program contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the SEC’s whistle-blower provisions, informants who voluntarily provide original information about a potential Foreign Corrupt Practices Act (FCPA) violation that leads to a successful enforcement case may receive a reward between 10 and 30 percent of monetary sanctions collected by the SEC, in which the SEC obtains monetary sanctions exceeding $1 million. A whistleblower can also be awarded 30 percent of any additional monetary sanctions that the SEC collects in that matter. This translates to million-dollar rewards for whistleblowers, and a large incentive for employees to inform on their employers.
The SEC whistleblower program provides other incentives other than monetary gain, specifically protection from retaliation. Significantly, the SEC whistleblower provisions encourage, but do not require, whistleblowers to first report information to internal company compliance programs. This allows whistleblowers to take their concerns directly to the authorities, avoiding direct confrontations with their employers. However, a whistleblower can still obtain an award if the informant first reports the information internally and the company takes that information to the SEC. The program does encourage whistleblowers to take their concerns to internal reporting systems because voluntary participation is a factor that can increase the amount of an award, and a whistleblower’s interference with internal compliance and reporting is a factor that can decrease the amount of an award.
While the SEC’s whistle-blower program gives employees incentives to come forward with information relating to FCPA violations and securities fraud cases, the False Claims Act (FCA) also provides a hefty incentive for whistleblowers working for companies that have government contracts or subcontracts. The FCA prohibits a person from knowingly making or using a false record or statement material to a false or fraudulent claim to a governmental agency. Under the FCA, a whistleblower can receive 30 percent of the total amount recovered from the violating party.
Traditionally, the FCA has not been used to enforce export controls; however, the Department of Justice incited alarm and panic amongst the exporter community in October of 2010 by announcing the settlement of a $1 million FCA case against an exporter for violations of the International Traffic in Arms Regulations (ITAR). This settlement created a new potential avenue of liability for U.S. government contractors and subcontractors, and even vendors not doing direct business with the federal government. The FCA claim was brought against Rocky Mountain Instrument Company (RMI), a manufacturer of optical components that are used in certain sensitive military applications, for exporting ITAR-controlled technical data without a license. RMI resolved the FCA claim by agreeing to pay a $1 million settlement. This case was the first time the Department of Justice brought an FCA case for violations of the export control regulations, arguing that RMI’s failure to get an export license was a violation of its subcontract.
Even federal government agencies are not immune from whistle-blowing incidences. Earlier this year, an unnamed whistleblower brought information to U.S. Senator Charles Grassley (Iowa), the ranking Republican member of the Senate Committee on the Judiciary, that a NASA director may have broken U.S. export laws by providing foreign nationals access to an agency research facility. In a letter to the NASA administrator dated April 12, the senator questioned whether the director of the NASA Ames Research Center at Moffett Field, California, gave foreign citizens access to information controlled under the ITAR. The information provided by the whistleblowers led NASA to open an investigation into the allegations. The repercussions of this incident extend beyond NASA – all exporters, including federal agencies, must take compliance with export-control regulations seriously.
Companies participating in international trade should take this occasion to evaluate their compliance programs. Now that the whistle-blowing incentives have been put in place, companies should use this opportunity to evaluate the effectiveness of their trade compliance programs. Exporters should set up internal reporting mechanisms that foster and support whistle-blowing. Internal reporting mechanisms allow whistleblowers to bring information to the relevant in-house officials, who will be able to disclose the allegations to the proper authorities and cooperate with the investigation. Furthermore, companies will be able to conduct internal investigations and take corrective measures to ensure errors will not be repeated. Note, authorities are skeptical of internal in-house counsel investigations, but react more favorably to outside investigators hired by the company. Companies should also consider setting up anonymous tip hotlines that can aid in transferring information. Internal reporting mechanisms, along with other compliance best practices, will be looked at favorably as an attempt to prevent and rectify export-regulation violations.
Since the implementation of Dodd-Frank and the establishment of the SEC whistle-blower program, the incentive for employees to come forward with information of company wrong doing has increased. Companies involved in international trade should use this opportunity to enhance internal reporting mechanisms such as anonymous tip hotlines to increase the likelihood that employees will bring this information to their superiors, rather than regulatory authorities.