Encouraging In-House Disclosures In a Whistleblower’s World

December 2012Articles Bio Process Executive

Compliance officials have a great deal to worry about. They are judged by results and loaded with stress over the latest changes in government guidance documents and internal budget pressures. They need to continually update their programs to stay abreast of those developments, including revisions that target in-house processes to encourage disclosures from whistleblowers. Failure to provide for such revisions places both a company and individuals at risk.

Whistleblower Protection Expanded and Includes Rewards

In response to the financial crisis of 2007–2008, Congress passed the Dodd–Frank Wall Street Reform and Consumer Protection Act in July 2010 (the “Act”). This legislation recognized that many of the ills that sunk the financial system could have been mitigated, if not prevented, if people “in the know” had spoken out. It was also acknowledged that many people refrain from speaking out when doing so could result in retaliation and a loss of their jobs.

The Act codified certain financial incentives to encourage people to blow the whistle while imposing additional protections for whistleblowers. Because the ultimate goal is compliance and not punishment, legislators included other incentives within the process. They also ensconced enforcement in the Securities and Exchange Commission (SEC).

The SEC subsequently adopted rules that provide for a “whistleblower's reward” to be given to people who notify it of compliance issues — even for circumstances in which internal corporate-reporting systems have not been used by the employee. For example, an employee who tells the SEC about a publicly traded pharmaceutical company's illegal promotion of off-label uses of its drugs can receive up to 30% of a subsequent settlement of the allegations. With settlements in the high millions and even billions, the reward serves as a wake-up call to corporate America.

Likewise, the rules apply to broker-dealers and investment advisers. Even private entities could be subject to these rules if they seek to raise capital under certain federal Securities Act provisions.

As with any rule, there are exceptions that might prevent a whistleblower from being rewarded. There are also provisions that prohibit certain staff members (attorneys, directors, officers, compliance staff, and internal audit personnel) from making disclosures for 120 days. That's intended to allow a company time to address any problems raised to those personnel. But the main points for corporate compliance professionals are that both incentives and protections have been enhanced.

Similarly, the federal False Claims Act (passed in 1863) makes it illegal to knowingly present a false or fraudulent claim for payment. Liability can bring a penalty imposed by the government — on a per-claim basis plus treble damages — or qui tam action. The latter involves a suit by a relator (a whistleblower), who brings a fraud action on behalf of the government and is allowed to keep a portion of damages recovered. Recent changes to the False Claims Act allow relators to sue based on a broader class of publicly disclosed information than previously had been the case.

Other statutes, such as the antikickback law, also can trigger a whistleblower's claim. That law makes it illegal to induce someone to purchase an item or service for which reimbursement can be had under a federal healthcare program. Such illegal actions can provide fodder for a whistleblower's disclosure. Fortunately, some trends exist that can make compliance easier for companies.

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