On December 5, 2017 the Securities and Exchange Commission (“SEC”) awarded more than $4.1 million to a whistleblower for alerting the SEC to a multi-year securities fraud engaged in by his employer. The award is significant in that the recipient, a company insider who alerted the SEC to the securities fraud, is a non-U.S. national working overseas. This is not the first time that the SEC has awarded a large sum to a foreign whistleblower. The distinction for the largest award ever awarded goes to an award of $30 million awarded in 2014 to a whistleblower living in a foreign country. In that case the whistleblower provided the SEC with information about an on-going fraud that the SEC claimed was hard to detect.
This is a noteworthy trend and highlights another way that corrupt practices can come to light and lead to enforcement for U.S. and multinational companies exposed to U.S. jurisdiction. Between fiscal years 2011 and 2017, the SEC received tips from individuals in 114 foreign countries and in FY 2017 alone the SEC received tips from 72 countries. Since the whistleblower program began, the top five countries from where the SEC has received tips are the United Kingdom (438), Canada (357), China (238), Australia (198), and India (187). Of a total of 4,484 tips received in 2017, almost 5 percent related to violations of the Foreign Corrupt Practices Act (“FCPA”).
Whistleblower awards, incentives and protections are covered under section 21F of the Securities Exchange Act of 1934 (the “Exchange Act”), (15 U.S.C. § 78u-6) and the Whistleblower Rules (17 C.F.R. § 240.21F-1 to 21F-17). The Exchange Act rewards whistleblowers who provide original high-quality information that leads to a successful SEC enforcement action in which over $1,000,000 in sanctions is ordered. Awards are between 10 percent and 30 percent of the collections from monetary sanctions which have been imposed. The Whistleblower Rules prohibit retaliation by employers against employees who report possible wrongdoing based on a reasonable belief that a securities violation has occurred or is about to occur. The amount that can be awarded is dependent on several factors, such as the significance of the information provided by the whistleblower, the level of assistance, the law enforcement interests at stake and whether the whistleblower reported the violation internally through the firm’s internal reporting channels or mechanisms.
The SEC encourages whistleblowers to first report violations internally because it believes such internal compliance structures are an effective mechanism to address potential violation or wrongdoing. Of award recipients since inception of the program, almost 83 percent of whistleblowers raised their concerns internally to their supervisors, compliance personnel, or through internal reporting mechanisms, or understood that their supervisor or relevant compliance personnel knew of the violations, before reporting their information of wrongdoing to the Commission.
SEC enforcement action based on tips from non-U.S. persons should serve to reinforce the importance of anti-corruption internal compliance programs, particularly for multinational companies subject to the FCPA. Companies should be aware that there are multi-million-dollar incentives for their employees to share information on corrupt activities, fraud and faulty book-keeping with U.S. regulators where internal mechanisms do not quickly address the problem. This information can lead to SEC action, or be shared with other U.S. regulators or Department of Justice prosecutors.
The whistleblower trend offers another incentive for sound compliance practices, serious reaction to reports of wrongdoing, and where appropriate, voluntary disclosure to U.S. officials.