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Last summer the US adopted new whistleblower provisions under Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). The new rules have far-reaching implications for companies and would-be whistleblowers, and extend beyond the US to include any organisation within the reach of the US Securities & Exchange Commission (SEC). In addition to huge financial rewards for whistleblowers, the law broadens the scope of eligible claims and those able to bring them. Under Dodd-Frank, whistleblowers who provide ‘original’ information leading to a financial penalty of more than $1 million are entitled to 10-30% of total proceeds. Prior to Dodd-Frank, the SEC could only award bounties in insider trading cases, with a ceiling of 10% of the total fines. Another piece of legislation, the False Claims Act, permitted awards to whistleblowers, but for historical reasons, only in cases of fraud against the US government. Initial responses Case history shows that many whistleblowers are motivated by principle rather than financial gain; they commonly identify themselves, when they could remain anonymous. In this regard, Dodd-Frank may mark a major shift in mentality, as financial incentives become a key element of policy. There are early indications that Dodd-Frank has spurred an increase in the number of claims brought by whistleblowers to the SEC. From 12 August to 30 September 2011 – the only period for which official data is available – there were 334 whistleblower tips registered with the regulator. While the rise can partly be attributed to those rushing to capitalise on the new legislation, comments from regulators suggest that there continues to be a steady stream of claims. There has also been a rise in whistleblower cases at US law firms, with one newspaper survey in autumn 2011 reporting a 25% increase. As the introduction of the Sarbanes-Oxley Act spawned a cottage industry of compliance professionals, Dodd-Frank has been accompanied by a boom in law firms focusing on whistleblowing. The SEC reports that the quality of whistleblower claims has improved drastically, likely due to the involvement of law firms seeking to get their clients’ claims to the top of the pile. To date, most Dodd-Frank whistleblower claims have come from within the US, but there appears to be a growing awareness internationally; 10% of early claims originated overseas, with China and the UK leading the way. The number of international claims will likely increase with time, as those in foreign countries who do business with companies under SEC jurisdiction become aware of the lucrative opportunities under Dodd-Frank. While violations of the Foreign Corrupt Practices Act (FCPA) only accounted for 4% of claims in fiscal year 2011, that figure may rise too. Since the new provisions came into effect on 12 August of last year, the SEC has not announced any awards to whistleblowers. However, it is only a matter of time; from July 2010 to July 2011 alone there were 170 applicable enforcement judgments, and one could reasonably expect to see a major award in the coming months. Internal reporting Perhaps the most controversial aspect of the Dodd-Frank whistleblowing provisions is the lack of incentives provided for whistleblowers to use internal compliance procedures before approaching the SEC. While the SEC has indicated that larger awards may be paid to whistleblowers that use internal procedures first, it is not a requirement. Dodd-Frank’s monetary incentives and the readily available support from commission-based law firms are likely to encourage whistleblowers to make their claims externally. Many argue that Dodd-Frank has seriously undermined corporate compliance programmes, which have been reinforced over the past decade in response to legislation and changes in best practice. However, while there may be strong incentives for whistleblowers to bypass internal procedures, this does not mean that such internal regimes have lost their importance. On the contrary, robust internal compliance programmes – including whistleblowing measures – are more important than ever, with increased competition for whistleblowers to voice their concerns externally and a renewed urgency for companies to address potential problems before they come to the attention of regulators. In addition to the potential for larger rewards to be paid to whistleblowers who first report internally, Dodd-Frank includes other incentives for people to make use of internal mechanisms: if a whistleblower reports internally, they can file with the SEC within 120 days and their claim will be considered as of the date of their first internal report (effectively keeping their place in line); and if a company ultimately reports a broader set of concerns that result in a larger fine, the whistleblower is credited for additional related issues and will receive a larger reward. It may be astute for companies subject to SEC jurisdiction to communicate this clearly to employees as part of a transparent and robust internal compliance programme. The UK regime: cultural differences? In contrast to the US, the UK has taken a much softer approach. No legislation has been introduced to encourage external whistleblowing, though the Public Interest and Disclosure Act affords whistleblowers some protection from retaliation. In November 2011, the Serious Fraud Office (SFO) established a whistleblower hotline – dubbed SFO Confidential – opening a direct channel of communication with would-be whistleblowers. The SFO does not offer the financial incentives that are so central to the US regime; a result of cultural and political factors, as well as budgetary constraints. While the SFO has not published figures or commented on the hotline’s success, the absence of financial incentives and low profile of SFO Confidential are likely to generate limited take-up among potential whistleblowers. The SFO also admits it may not be able to guarantee the confidentiality of whistleblowers under all circumstances, particularly in criminal prosecutions. UK companies, like their US counterparts, are also required to provide employees with internal whistleblowing opportunities, including anonymous hotlines and an environment free of discrimination or retaliation. Whistleblowing procedures are a key pillar of the ‘adequate procedures’ outlined in the official guidance for the Bribery Act, and will be carefully examined in any prosecution under that Act. In a 2011 survey by a UK whistleblowing charity, 85% of respondents stated that they would blow the whistle internally, rather than stay silent or go to an external party. This can be expected to increase as more companies strengthen their internal procedures to comply with the Bribery Act. In the near to medium term, the UK is unlikely to follow the trend toward external and commercialised whistleblowing. Adam Ross Associate, Litigation Support
Published: 13th January 2012