The Securities and Exchange Commission’s whistleblower rewards program has prompted over 50,000 tip-offs in the last decade that have led to public companies paying almost $5 billion in fines and penalties.
This is an embarrassing and costly state of affairs for some of the world’s most innovative companies, and something needs to change. If public companies want to stem the flow of fines, the solution is simple: Companies need to incentivize whistleblowers to report internally.
Self-Reporting Is Needed
Since the 2007 financial crisis and the introduction of the SEC whistleblower program in 2012, the chances of a company being fined for corporate misbehavior have increased dramatically. Self-reporting violations is the best way for companies to reduce fines and defuse the risk associated with employees reporting to regulators.
Self-reporting gives companies significant advantages when negotiating with regulators. The Justice Department recently issued guidance directing all its divisions to memorialize the benefits of self-reporting. Some of these benefits are already contained in prosecution guidelines, but others are more intrinsic, and include declinations, reduced fines, avoiding a monitorship, and reducing legal fees.
A company can obtain a declination if they self-report, which means the company can avoid prosecution, fines, and penalties. Declinations, which are decisions by prosecutors not to pursue charges, also reduce legal costs and the risk of ancillary litigation such as shareholder lawsuits.
In short, a declination could save a company millions of dollars.
Even if a declination is not available, the DOJ prosecution guidelines provide that corporate wrongdoers who self-report can obtain up to a 50% reduction in penalties.
A growing trend in regulatory settlements is the imposition of monitorships, where the DOJ appoints an independent third-party to oversee a company’s compliance. But these are lengthy, costly, and occupy enormous compliance bandwidth. Self-reporting is the best defense against monitorships, as it shows that the company already has a functioning reporting channel.
Major investigations can cost up to a million dollars a month in legal fees. Self-reporting increases the chances of both shorter and narrower investigations.
When a company self-reports, authorities are far more inclined to limit the scope of the investigation. When authorities learn about a violation from a whistleblower, the investigation is more likely to be broad and far-reaching.
Whistleblowers Need Internal Incentives
With employees having better access to information, the benefits of the SEC whistleblower program have become widely known. For example, if an employee reports to the SEC, they can expect to receive legally enforced anonymity, statutory protections against retaliation, possibility of a multimillion-dollar reward, and functionally free legal representation from whistleblower attorneys, almost all of whom work on contingency.
On the other hand, employees who only report internally can expect no possibility of reward, no enforceable anonymity, no free legal representation, risk of exposure, and less legal protection against retaliation than had they reported to the SEC.
Companies who believe employees will report internally without incentives are deluding themselves, and they need to rebalance the incentives being offered to employees.
Employees are increasingly relying on the growing bar of whistleblower attorneys to get advice on whether they should report to regulators, and companies need to take advantage of this.
Whistleblower attorneys substantially increase the likelihood that a whistleblower will act rationally, and attorneys are obliged to advise the whistleblower on the most prudent course of action. When a company does not offer incentives to whistleblowers, an attorney will have little reason to advise an employee to report internally.
However, if a company has a whistleblower rewards program, the attorney will be obliged to explain the benefits of that program, and potentially, advise the employee to report internally.
How a Rewards Program Looks
A company cannot hinder employees from reporting to the SEC. As a result, a corporate whistleblower rewards program should offer financial incentives to employees who report internally before or at the same time they report to regulators.
If a whistleblower reports to the SEC and their company at the same time, the company will have a window to conduct a preliminary investigation and self-report before the SEC reaches out. This is because it typically takes at least two to three months from the SEC receiving a tip to contacting the company.
This time period gives the company a chance to claim valuable credit for self-reporting, which it can then share with the whistleblower in the form of a financial award.
The final piece of the puzzle is how the whistleblower can maintain anonymity while interacting with the company. Companies can solve this issue the same way the SEC did, by incentivizing whistleblowers to engage counsel.
The SEC does not allow whistleblowers to file tips anonymously unless they have engaged counsel, and companies should do likewise. The involvement of counsel can ensure that the whistleblower follows the rules of the company’s rewards program while also allowing the whistleblower to remain anonymous throughout the process.
Companies brave enough to implement a whistleblower rewards program should test the program in areas like antitrust and the Foreign Corrupt Practices Act, where fines are significant and the benefits of self-reporting are codified. Once the program shows success, it can be expanded to other areas where the company is focused on increasing compliance.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
John Joy is the managing attorney of FTI Law, a whistleblower law firm in New York specializing in securities laws and whistleblower awards. He has worked for almost a decade on financial crime, corruption, and FCPA cases around the globe.