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A time for whistleblowers

Given the strong financial incentives and the widespread press coverage of these events, firms should expect an increase in the number of whistleblower complaints that they receive internally and an increase in situations where the SEC commences an investigation based on a whistleblower complaint that it has received.

Recent developments in the U.S. have placed a spotlight on whistleblowers. The developments include:

  • The award of USD 104 million by the U.S. Internal Revenue Service to the ex-bank employee who reported U.S. citizens that were purportedly avoiding taxes through assets held in Switzerland.
  • The creation and implementation by the SEC of a whistleblower programme under The Dodd-Frank Act that is now receiving more than eight complaints per day. According to the SEC, complaints have been increasing in quality, both in terms of the accuracy of the allegations and the whistleblowers’ access to information within their organisations.
  • The recent decision by the SEC to make its first monetary award to a whistleblower under its new programme.

As a result, this may be a good time for firms to review their policies and procedures that deal with whistleblower complaints, focusing primarily on two questions: (1) do the policies and procedures provide adequate incentives and the appropriate tone to encourage employees to report complaints to the firm first before going to the regulators?; and (2) does the firm have in place robust policies and procedures to review, evaluate, and investigate whistleblower complaints?

In our view, firms can best manage their risk with would-be whistleblowers if potential issues are reported by employees first to the firm and are then sufficiently reviewed and investigated. In order to encourage internal reporting, firms would be well-served by devoting a portion of their employee training to the importance of raising issues internally first and highlighting the many reasons to do so, including that the SEC considers whether a complaint was reported internally in determining the amount of a whistleblower award. Moreover, an adequate response to an internal complaint may quickly solve an issue and forestall any report by employees to the regulators. Firms that have adequate review and investigation procedures in place may be in a better position to deal with the SEC if the regulator does commence an investigation. It is not hard to imagine that, with the increase in cases stemming from whistleblower complaints, the SEC may choose to use its limited resources to pursue most aggressively firms that have failed to adequately review and investigate issues raised by whistleblowers.

Additionally, because of the events described above, firms are likely to see an increase in cross-border whistleblowers – complaints from employees outside the U.S. who decide to become whistleblowers inside the U.S. In many countries, the culture may not be receptive to whistleblowing, but the monetary rewards that may now be available in the U.S. may erode any such cultural hesitation. Firms may want to consider reviewing policies and procedures to make sure that they adequately anticipate and deal with cross-border whistleblowers.

Given the strong financial incentives and the widespread press coverage of these events, firms should expect an increase in the number of whistleblower complaints

Legal and Regulatory Risk Note
United States