Risks and consequences in the new whistleblower landscape

White Collar Crime Update

Last week a former executive of the Swiss bank Julius Baer, who worked for years in the Cayman Islands, handed over detailed financial information for 2,000 individuals and corporations to the controversial whistleblower organization WikiLeaks. 

 

According to the former Swiss banker who provided the documents to WikiLeaks on January 17, these financial records contain evidence of tax evasion and other crimes committed by a range of wealthy, high-profile clients of the bank, among them United States citizens.

 

This public disclosure of Julius Baer records is only the most recent in a string of whistleblower disclosures of internal corporate documents.  Because of the involvement of WikiLeaks, which became famous for its 2010 disclosure of a trove of classified military and diplomatic communications, the incident involving the banking records has received an outsized amount of attention and headlines. 

 

What may be less well known, however, is that the United States government has been encouraging this type of whistleblower disclosure for years.  In fact, the United States has numerous laws on the books that provide payments – sometimes in the millions of dollars – to individuals who divulge corporate secrets that lead to prosecutions for fraud, tax evasion and other criminal conduct.

 

The rise of Internet whistleblower sites such as WikiLeaks poses new and significant issues for companies and individuals.  Combined with pre-existing financial incentives from government whistleblower programs, these Internet sites provide additional opportunities for notoriety that may appeal to certain types of whistleblowers.  In addition, Internet whistleblower sites may disseminate confidential corporate information – including trade secrets, customer information, and public relations material – that government agencies might normally ignore and would also keep confidential at least during the pendency of an investigation.  In this new environment, corporate compliance programs, among other things, are even more critical.

 

This article will briefly review the legal landscape that governs whistleblower actions in the US, including in the areas of tax enforcement, securities laws, health care and government contracts.  In addition, it will analyze how the rise of Internet-based whistleblower outlets changes this landscape and how companies and individuals can prepare for and react to the disclosure of confidential information.

 

How the US encourages corporate informants

 

Since 1986, the United States government has paid out over $2.7 billion to informants for reporting fraud and abuse involving government contractors and suppliers.  Under the provisions of the False Claims Act, 31 U.S.C. § 3730, whistleblowers may receive up to 30 percent of any recovery resulting from their disclosure of fraud committed against the federal government.  Numerous states have also enacted similar statutes to reward informants who report fraud in the procurement and fulfillment of contracts with state governments.

 

Recently, the False Claims Act has been used as the primary weapon to combat the perceived rise in health care fraud, particularly fraudulent billing practices involving Medicare and Medicaid.  According to a recent United States Department of Justice press release, the US government recovered $2.3 billion in False Claims Act cases in fiscal year 2010, 83 percent of it from health care fraud claims.  Last year, the government awarded $385 million to whistleblowers as a result of these False Claims Act cases, and the Department of Justice acknowledged that “most of the cases resulting in recoveries were brought to the government by whistleblowers under the False Claims Act.”

 

Due largely to the success of the False Claims Act in encouraging whistleblower disclosures concerning government contracts and health care fraud, Congress has also given the Internal Revenue Service similar weapons to persuade potential whistleblowers to come forward concerning tax evasion.  In 2006, Congress amended existing whistleblower provisions to increase informant payouts to between 15 percent to 30 percent of any tax recovery exceeding $2 million.  These incentives have resulted in a significant increase in tips concerning large-scale tax evasion.  Between 2008 and 2009 alone, such tips increased by over 50 percent.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law by President Barack Obama in July 2010, provides even more incentives for whistleblowers to disclose internal corporate information and documents to the government.  The Dodd-Frank Act provides for significant payouts to whistleblowers who report potential violations of federal securities laws that result in more than $1 million in sanctions.  The whistleblower provisions of the Dodd-Frank Act include informant rewards for information provided about violations of the Foreign Corrupt Practices Act (FCPA), a federal statute prohibiting payments of bribes and gifts to foreign officials.  In the past five years, the government has levied several fines exceeding $100 million for FCPA violations.  These developments mean that companies with international operations are at heightened risk for disclosure of records relating to potential FCPA violations. 

 

Many of these whistleblower programs, including the Dodd-Frank amendments, have been criticized for undermining companies’ efforts to implement effective corporate compliance programs.  For example, companies worry that these programs offer incentives for employees to allow fraudulent conduct to occur without objecting internally, and then report their concerns later to the government in the hope of a large payout. The Securities and Exchange Commission is currently considering regulations to implement the Dodd-Frank whistleblower provisions that may partially address these concerns.1

 

The rise of Internet whistleblower sites and impact of unauthorized disclosures

 

In addition to the significant monetary incentives offered by the US government for individuals to disclose corporate documents relating to fraud in securities filings, taxes, government contracts, health care, foreign operations and other areas, the rise of Internet-based whistleblower sites may provide additional incentives for whistleblowers as well as an expansive international platform for disclosing company secrets.

 

Internet whistleblower sites present several new legal concerns.  Paradoxically, these sites offer both enhanced anonymity and enhanced notoriety.  Whereas informants under the False Claims Act must disclose their identity when filing a court action, and IRS informants may be called as witnesses at trial, Internet whistleblower sites offer tipsters an opportunity to disclose records without revealing their identity.  Some whistleblowers may find this anonymity attractive.

 

Of course, many whistleblowers desire not anonymity but rather public vindication and, in some instances, fame.  The Internet whistleblower sites, with their worldwide distribution and current exposure in the media, are capable of focusing intense public scrutiny on companies and individuals.  In some cases, this scrutiny and the public pressure that flows from it may lead to investigations by government agencies and, potentially, civil and criminal litigation.  In these circumstances, it is critical to understand the informant’s motivation.  For example, in the Julius Baer case, the bank alleges that the informant is a disgruntled employee who was dissatisfied with his career advancement and who violated the financial privacy of bank clients for his own personal agenda.  Such issues of motivation are likely to influence any potential litigation.

 

As Internet whistleblower disclosures lead to criminal and civil investigations, courts will increasingly be forced to address whether information posted on Internet whistleblower sites is admissible in court.  Particularly to the extent that such information is posted anonymously, documents disclosed via the Internet do not carry the imprimatur of authenticity that courts require; in other words, there must be some evidence that the documents are legitimate and have not been fabricated or altered in any way.  In order for corporate records to be rendered admissible, moreover, a corporate witness must usually testify that they are kept in the ordinary course of business, which may be impossible if the only source of the documents is an anonymous Internet posting.  Furthermore, some government agencies may be hesitant to use documents that were illegally taken from a corporation as evidence in court, although prevailing law in some jurisdictions might allow the government to use these documents so long as the government did not play a role in the illegal seizure and so long as the documents are not protected by the attorney-client privilege.

 

Finally, information contained on whistleblower sites may not be of interest to government agencies because it does not implicate criminal or administrative regulations, but it may result in the disclosure of trade secrets or confidential financial information that poses a risk to a company’s competitive advantage or client relationships.  Under such circumstances, the company may be able to obtain an injunction against additional disclosure of the information, although attempting to reverse public disclosure on the Internet is often a fruitless task.  For example, in a prior disclosure by WikiLeaks in 2008, the bank Julius Baer succeeded in obtaining an injunction against the whistleblower site.  After interventions in the case by the ACLU and other entities, however, the injunction was reversed, and Julius Baer later abandoned its case.  Moreover, in many instances, other websites replicate and pass on the same information, and tracking it all down in hopes of eradicating it may prove impossible.  Because it is so difficult to reverse disclosures that have already been made on the Internet, a better option for companies is to make sure that confidentiality policies and the consequences for violating these policies are clearly communicated to employees.

 

Preparation for, and responses to, public disclosure of confidential records

 

Regardless of whether confidential records are disclosed to a government agency, internet whistleblower site, or other third party, companies should be prepared to address such a contingency with appropriate policies and responses:

  • An ounce of prevention…: Corporate compliance programs are essential both to prevent criminal conduct in the first place and to reduce the risk that any confidential material is disclosed outside the company.  A robust compliance program should include at least the following:
    • Risk assessment and training:  If your company does substantial international work, FCPA guidance should be at the core of any corporate ethics training.  Similarly, public companies have SEC reporting responsibilities that require employee education and oversight.  Risks will vary by size and type of company, and an initial assessment is critical to understanding where you should focus your risk management efforts.
    • Company information policies: Confidentiality provisions in the employee handbook are a start, but not usually sufficient.  Employee contracts with non-disclosure agreements are often necessary to prevent disclosure of trade secrets and sensitive company information.
    • Clear outlets for employees to report and complain: Disgruntled employees are the number one source of public disclosures.  Companies that have well-known outlets for employees to report their complaints – and who respond promptly and appropriately to such complaints – reduce the risk of unauthorized disclosures.
  • … is worth a pound of cure:  If sensitive company information is disclosed, it is essential to quickly assess the nature of the information to determine which course of action is best for the organization:
    • Internal investigation:  Have valuable trade secrets been disclosed to potential competitors?  Or has a company executive been accused of criminal conduct by a lower-level employee?  The answers to questions such as these will largely determine the company’s response to any disclosure.  In addition, determining the source of any leak may explain the motivation behind the disclosure and whether the discloser has violated any company policies or laws.
    • Judicial remedies:  An injunction may be available to prevent further disclosure of trade secrets, confidential financial information and customer records.
    • Government assistance:  Companies often seek assistance from government agencies to address, for example, criminal disclosure of trade secret information or the actions of a rogue employee.  An internal investigation by lawyers familiar with government practices can provide insight into the risks and benefits of government involvement.

 

 

Please read two of our recent Alerts to learn more about this subject:

Will proposed SEC whistleblower rules prevent the underminig of corporate compliance programs?

The extraterritorial reach of the new Dodd-Frank Whistleblower Law

 

You may also enjoy our reports on breaking developments in Dodd-Frank.

1 For more information on the regulations proposed by the SEC to address the Dodd-Frank legislation, please see “Will proposed SEC whistleblower rules prevent the undermining of corporate compliance programs?,” DLA Piper’s White Collar Alert published on November 9, 2010.