DOJ Pilot Starts Race to Disclose Potential Criminal Misconduct

Earlier this month, the Department of Justice announced the latest tool in corporate enforcement—the DOJ whistleblower awards pilot program. The new pilot program relies on the US Attorney General’s statutory discretion to distribute “awards for information or assistance leading to a civil or criminal forfeiture” to incentivize whistleblowers to come forward regarding corporate misconduct.

Through this initiative, the DOJ seeks to address gaps in existing whistleblower programs, including those run by the Securities and Exchange Commission, Commodity Futures Trading Commission, IRS, and Financial Crimes Enforcement Network.

The new pilot offers a potential award only for information relating to specific categories of federal criminal activity: crimes involving financial institutions, domestic corruption involving companies, foreign corruption involving companies, and health-care violations involving private actors.

The DOJ stated that one goal of the program is “incentiviz[e] companies to invest in strong internal reporting structures and to report crime when they learn about it.” The pilot program thus includes many features that will impact corporate compliance and risk functions in several ways.

First, the pilot program will increase the number of internal whistleblower reports. Recognizing the value of internal reporting, the DOJ explicitly “designed the pilot program to encourage employees to report misconduct internally before submitting information.”

Several aspects of the program encourage internal reporting. The program permits awards where whistleblowers report internally first, so long as they provide the same information to the DOJ within 120 days of the internal report.

The DOJ also states in guidance that it will consider whether whistleblowers reported potential misconduct internally and cooperated with any resulting internal investigation as a positive factor that will increase the amount of any award. Although not required under the program, those provisions together provide clear incentives for whistleblowers to report internally first, prior to bringing information to the DOJ.

Companies should make sure they have effective mechanisms—such as anonymous hotlines or submission portals—to process the potential increase in internal reports. Ensuring compliance functions have adequate capacity to process new reports will enable companies to make informed decisions on whether to report to the DOJ—a decision that’s now subject to additional time pressure.

Second, the pilot program creates a race to disclose corporate misconduct. In conjunction with implementing the program, the DOJ has amended its corporate voluntary self-disclosure policy. That policy generally offers companies reduced penalties—including declinations—when they timely report wrongdoing, cooperate with the government’s investigation, and undertake appropriate remediation.

Under the DOJ’s amendment to the its voluntary disclosure policy, a company that receives an internal whistleblower report remains eligible for the full benefit of the voluntary disclosure only if it discloses allegations to the DOJ within 120 days of receiving them (and before the DOJ reaches out proactively). This effectively imposes a 120-day reporting requirement—and effectively pits whistleblowers and companies against each other in a race to disclose potential misconduct to the DOJ.

The narrow 120-day window—which may be further reduced if the DOJ reaches out proactively—puts significant pressure on companies to quickly review potential reports. And because whistleblowers must report their allegations to the DOJ within the 120-day period to be eligible for an award, companies should expect the DOJ will become aware of the allegations regardless of whether they self-disclose.

To ensure they can take advantage of the benefits of the policy, companies must receive, review, and evaluate internal whistleblower reports within at least 120 days of receipt. There are practical difficulties and factual complexities in reviewing all internal reports within that condensed timeline.

Companies may need to revise their internal policies and procedures to ensure complaints are reviewed and escalated quickly. It might also be necessary to revise the timelines for seeking outside counsel’s input regarding the decision to self-disclose.

Finally, the program also raises the prospect of additional multi-agency inquiries related to the same underlying conduct. Although the program generally covers misconduct that wasn’t covered by existing whistleblower programs, some overlap exists.

For example, the SEC whistleblower program covers certain foreign corruption violations, including where a US issuer violates the Foreign Corrupt Practices Act. As whistleblowers struggle to determine which program applies to their allegations, they may decide to file with multiple agencies.

The DOJ’s guidance explicitly encourages that approach. That guidance explains that whistleblowers will not be eligible for an award under the pilot program to the extent they “would be eligible for an award through another U.S. government or statutory whistleblower, qui tam, or similar program” for an identical report. It clarifies, however, that whistleblowers may “submit information to [multiple] programs” to the extent confusion exists regarding whether a violation is covered by an existing program. That instruction will likely make multi-agency submissions more common.

Regulators frequently coordinate regulatory responses to avoid wasting government resources. But practical hurdles and the reality of inter-agency competition regarding certain enforcement areas preclude efficient solutions in every case. The prospect of more multi-agency reports thus presents the risk that companies will be forced to coordinate responses to multiple agencies regarding the same conduct more frequently.

As a result of this new program, companies face greater pressure to implement compliance procedures that can efficiently and effectively review internal complaints and, where appropriate, report potential misconduct to the government. Companies must be capable of performing that review and preparing a potential disclosure on an expedited timeline.

Adjustments may be necessary to resource-allocation and internal compliance procedures. While those adjustments may come with costs, any additional expense must be weighed against the threat of DOJ scrutiny and loss of potential benefits under the government’s existing self-disclosure policies.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Walter H. Hawes is an associate at MoloLamken, where he represents companies and individuals in whistleblower litigation, white-collar matters, and investigations.

Caleb Hayes-Deats is partner at MoloLamken, where he represents companies and individuals in whistleblower litigation. He served as an assistant US attorney in the Southern District of New York.

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