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Should Employees Have FCPA Training?

John Peterson — Wed, 07 Feb 2024 16:33:00 +0000

Article by Managing Attorney, John Peterson

Whether you run a business or work in compliance, one of the most frequently asked questions on the Foreign Corrupt Practices Act (FCPA) is: Do I have to train employees on FCPA compliance?

In this article, we explain when a company has to train employees on FCPA compliance, which employees need to be trained, and provide guidelines for an FCPA compliance checklist. If you’re in a hurry, here are the takeaways:

The FCPA is a law that applies to all U.S. companies, both public and private. Fines for violating the FCPA are usually millions of dollars and can include prison time for individuals;
Determining which employees must receive FCPA training depends on whether the employee is exposed to bribery and corruption risks. It does not matter whether they are a foreign or domestic employee;
Publicly traded companies are likely legally required to train certain employees on FCPA compliance. Private companies, on the other hand, are much less likely to have an obligation to do so;
Regardless of whether there is a legal obligation to train employees on FCPA compliance, there are at least five good reasons for companies to train employees with an FCPA compliance checklist.

This article was prepared by FBR’s Managing Attorney John Peterson. John is an FCPA whistleblower attorney with almost a decade of experience advising on FCPA issues. John has represented numerous Fortune 500 companies in FCPA investigations and currently represents brave FCPA whistleblowers who anonymously report FCPA violations to the U.S. authorities. If you have a question on any material discussed in this article, please contact FBR here.

What is the FCPA?

The FCPA is a U.S. law that prohibits bribery of foreign government officials. The FCPA has two core principles that should be mentioned during FCPA training:

All U.S. persons and companies are forbidden from bribing foreign government officials. (This is referred to as the FCPA’s ‘anti-bribery’ provision).
Publicly traded companies must maintain a system of ‘internal controls’ to ensure financial misconduct (like bribery) does not occur (This is called the FCPA’s ‘internal controls’ or ‘books and records’ provisions).

Both provisions work in tandem to prevent bribery and ensure that public companies have accurate books and records that investors can rely on. For more background on these provisions, check out the Department of Justice’s (DOJ) FCPA resource guide, which functions as an FCPA Bible for compliance personnel. These resources, such as creating an FCPA compliance checklist, are ideal for FCPA training.

What is a Bribe?

The first core principle of the FCPA is that U.S. persons and companies are forbidden from bribing foreign officials. ‘Foreign official’ is a broad term that covers all foreign government employees, including government agencies and institutions. For example, even low-level employees of a hospital or university could be considered foreign officials if the institution is owned or run by a foreign government.

For the purposes of the FCPA, a bribe occurs when someone gives or promises ‘anything of value’ to a foreign official with the intention of gaining something in return. During FCPA training, you can emphasize that, usually, this happens when a company gives a foreign official something personally valuable to the official in exchange for favorable business treatment. Examples of bribery prohibited by the FCPA include giving cash, gifts, travel, entertainment, job opportunities, or charitable donations where the motivation is to obtain a business benefit.

An important point to remember is that bribes are not always initiated by the company; sometimes, they are explicitly requested by foreign officials. Simply because a foreign official requests a bribe does not exempt it from the FCPA– which is important to note during FCPA training. The exceptions to the FCPA’s anti-bribery provisions are extremely limited and rarely invoked but should still be a part of your FCPA compliance checklist.

What is a System of Internal Controls?

The second core principle of the FCPA is that publicly traded companies must have a system of internal accounting controls that ensure that the company’s money is spent in accordance with its policies and recorded properly in the company’s accounts. This provision of the FCPA tries to ensure that public companies have internal rules and procedures designed to stop financial misconduct and ensure that a company’s accounting records are accurate. FCPA training should emphasize your company’s system of internal controls.

The FCPA does not specify a particular model of ‘internal controls’ for public companies to use. It leaves it up to each company to design its controls based on the unique risks and circumstances presented by the company’s business. However, the DOJ and the Securities and Exchange Commission (SEC) have published detailed guidelines on what they view as the principles of a modern compliance program, and these guidelines should be read as instructions for building an adequate system of internal controls.

What are the Penalties for Violating the FCPA?

Proper FCPA training involves highlighting the potential penalties for any violations in your FCPA compliance checklist. The FCPA is enforced by the DOJ and the SEC. This means that both agencies can investigate and fine companies for violating the FCPA. For corporations, FCPA fines regularly cost over a hundred million dollars and, on a handful of occasions, have even surpassed a billion dollars. Individuals can also face fines as well as up to 20 years in prison for criminal violations of the FCPA’s anti-bribery provisions. If you are looking for a catalog of previous FCPA fines and offenses, Stanford University has a helpful database of prior FCPA fines that can be accessed here.

What is FCPA Training?

FCPA compliance education is training to help employees understand what the FCPA is, what the FCPA prohibits and requires, and most importantly, what a company expects an employee to do when faced with FCPA issues.

An FCPA compliance checklist should teach employees how to recognize FCPA red flags and how to deal with situations where FCPA concerns arise. This should include training on prior cases brought by the SEC and DOJ, which illustrate real-world examples of FCPA violations. This training provides a good opportunity to detail your company’s system of internal controls to ensure your employees understand the resources available to them.

FCPA training should be tailored to the role or business unit that the employee works in so that the training can address situations the employee is most likely to encounter. Training should also provide specific advice on what the employee should do in those situations and how to report potential FCPA violations.

Compliance training can take many forms, but ideally, it should be conducted in person by a compliance professional. While video instruction and online materials like an FCPA compliance checklist are helpful, there is no substitute for in-person training from an experienced compliance professional who can answer questions in real time. The FCPA training should take place in small groups where the employee is separated from their supervisor to give them the confidence and freedom to ask questions without fear of embarrassment or retaliation.

Does a Company Have to Train Employees on FCPA Compliance?

Generally speaking, if a company is private, i.e., not publicly traded, it’s unlikely that the company has a legal obligation under the FCPA to provide employees with FCPA compliance instruction. However, if a company is publicly traded, it’s more than likely that the company is required to provide FCPA training to certain employees.*

As mentioned above, publicly traded companies are legally required by the FCPA to have a reasonable ‘system of internal controls.’ There is no explicit rule stating that FCPA compliance education must form a part of this system, but if the company does business outside the U.S., it’s likely that the company has some exposure to the risk of FCPA violations. For example, any business outside the U.S. is likely to involve employees interacting with foreign officials who are customs officers, issuers of licenses or contracts, or who are in charge of purchasing goods on behalf of government institutions. These situations should be included in FCPA training or an FCPA compliance checklist, as they all present bribery and corruption risks and, therefore, FCPA risks.

When there is an obvious FCPA risk, authorities such as the DOJ and SEC are likely to consider a failure to train employees on FCPA compliance as a failure to maintain adequate internal controls. This would constitute a breach of the FCPA’s internal controls provisions.

*As companies are unique, there are various circumstances that could alter this analysis. Certain private companies without stock traded in the U.S. may, in fact, be legally required by contract, state, or industry rules to conduct FCPA training for their employees. Similarly, public companies may be able to avoid the obligation to train employees on the FCPA if compliance training on an equivalent foreign anti-bribery law is sufficiently similar or if they have no functional risk exposure to FCPA violations. At base, there is no substitute for tailored legal advice on this subject, and all companies should consult with experienced FCPA counsel before determining whether they have an obligation to train employees on FCPA compliance.

What Employees Must be Trained On FCPA Compliance?

If a company is required to conduct FCPA training for their employees, the next logical question is: Which employees must be trained?

Any proper FCPA compliance checklist will maintain that compliance training is most likely required for employees who are at risk of committing, assisting, facilitating, or witnessing FCPA violations. In particular, this will include any employees who interact with foreign officials, approve discretionary payments or expenditures in foreign jurisdictions, or are involved with obtaining licenses or contracts from foreign governments.

When looking at foreign and domestic (U.S.) employees, the analysis does not change. Whether the employee needs FCPA training will depend on whether they are in a position to commit, assist, facilitate, or witness an FCPA violation. For the purposes of legal training obligations, it does not matter whether the employee is foreign or domestic.

From a practical perspective, however, FCPA compliance training is arguably more important for foreign employees than it is for domestic employees. This is because bribery of foreign officials usually takes place outside the U.S., meaning that foreign employees are more likely to witness the violation.

How do I Report FCPA Violations?

For employees, reporting FCPA violations can be a daunting prospect, even with quality FCPA training. Reporting to the wrong person or organization can seriously affect an employee’s legal rights and could expose them to harassment, retaliation, or worse. Even if a company provides a compliance hotline as part of their FCPA compliance checklist, which many companies do, reporting internally can mean the employee misses out on whistleblower protections or the potential to claim a whistleblower award for reporting the conduct. These legal protections can be critically important to help employees avoid retaliation, and FCPA whistleblower awards can be substantial. As an employee, it’s crucial to stay informed on FCPA issues. Providing yourself with FCPA training could mean the difference between missing a violation and earning a massive whistleblower award.

Any employee who has witnessed a potential FCPA violation or who is considering blowing the whistle on FCPA misconduct should speak to a qualified FCPA whistleblower attorney as soon as possible and before reporting internally. Most whistleblower attorneys offer a free and confidential consultation, which will give the employee all the information they need to make a decision on where, when, and whether to report the violation. As whistleblowers often face harassment and retaliation for reporting FCPA violations, speaking with an attorney with substantial FCPA training before reporting is essential to mitigate this risk.

For companies, reporting FCPA violations to authorities can also have major benefits, including avoiding prosecution and reducing fines. Companies who believe they may have violated the FCPA should immediately contact outside counsel who can investigate the potential violation and advise on whether reporting is needed.

Five Reasons You Should Provide FCPA Compliance Instruction

While not all companies are required to give FCPA compliance training, all companies should strongly consider it. At the very least, every employee should have access to an FCPA compliance checklist. Here are the top 5 reasons every company should provide FCPA training:

Training prevents violations. FCPA fines regularly run over $100 million, meaning that a company could be financially devastated if even one of its employees violates the FCPA. Giving gifts and paying for entertainment can be customary when doing business in some parts of the world, and it’s possible that even well-intentioned employees can breach the FCPA without intending to. Implementing a system of FCPA compliance instruction can significantly reduce the chances that employees breach the FCPA and, therefore, significantly reduce the chance that the company faces a multi-million dollar fine.
Training increases reporting. Sometimes, despite the company’s best efforts, employees engage in FCPA violations. However, if proper FCPA training was provided to other employees in the organization, even if an employee violates the FCPA, it is more likely that they will be in a position to recognize the violation and report it to the company. This increase in reporting gives the company a better chance at stopping further violations, mitigating the damage, and taking appropriate action to reduce the risk of prosecution. For example, if the company identifies the violation and reports it to the authorities, the company has a good chance of avoiding prosecution. An easy-to-reference FCPA compliance checklist can make these violations more obvious to trained employees.
FCPA training can lead to reduced fines. If a company has a robust corporate compliance program, this will be taken into account by authorities when deciding whether to prosecute an alleged FCPA violation and when determining how much a company should be fined, if a fine is appropriate. When a company has good FCPA compliance instructions, it increases the chances the company will avoid prosecution or receive a reduced fine.
Training can improve productivity. FCPA violations are not only costly because of the potential for fines, but they can also be an enormous waste of time and resources for a company. FCPA training allows employees to recognize and avoid situations that will potentially lead to FCPA complications. If business units don’t recognize FCPA red flags early, they can invest time and resources on deals and joint ventures that ultimately have to be scrapped because of compliance concerns. By pursuing opportunities that are more compliance-friendly, employees can save the company time and resources, thereby improving business unit productivity.
Training can enhance corporate culture. Failing to train employees on FCPA compliance can suggest that a company does not value corporate social responsibility. Corporate responsibility is increasingly being used by investors and prospective employees to select companies that they wish to invest in or work for. By investing in FCPA training, a company can promote a healthy corporate culture of ethics and responsibility, which can benefit the company from an investment and employment perspective.

More Resources on the FCPA

The FCPA can be intimidating to companies and employees alike, but it doesn’t have to be. Explore more articles about the FCPA, including past whistleblower cases, with the FBR Award Journal. If you are unsure if you’ve witnessed an FCPA violation and are thinking about blowing the whistle, take our award-winning evaluation before sending us an email.

Our expert team at FBR has extensive FCPA training, and we are passionate about bringing corporations to justice while supporting and protecting those brave enough to come forward with information. Depending on your responses to the evaluation, you may be informed of unique circumstances that could affect your eligibility for a whistleblower reward. Please contact our office for a free consultation to get specific legal advice.

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What is the SEC Form TCR?

John Peterson — Thu, 25 May 2023 17:04:09 +0000

If you are an SEC whistleblower, then it’s likely that at some stage you will come across SEC Form TCR. TCR stands for Tips, Complaints Referrals and the SEC Form TCR allows whistleblowers to provide information to the SEC and become eligible for an SEC whistleblower award. If you want to submit SEC Form TCR, you should contact an SEC whistleblower attorney immediately, as filing out the form incorrectly could affect your ability to claim an SEC whistleblower award.

The SEC

The U.S. Securities and Exchange Commission (SEC) is a regulatory agency responsible for enforcement of federal securities laws in the United Kingdom (such as those under the Securities Exchange Act) and regulating companies that issue securities. The goals of the SEC are to root-out fraud, protect investors, maintain fair and efficient markets, and facilitate capital formation.

The SEC’s primary mandate is to oversee the securities industry, which typically includes policing companies that have stock traded on the NYSE or NASDAQ. In order to do this, the SEC has an Enforcement Division which investigates fraud, potential violations of securities laws and enforces securities laws by prosecuting the violators. The SEC has the power to open enforcement actions, impose fines and, while it cannot bring criminal charges, it has the power to refer matters to the Department of Justice for criminal investigation and criminal prosecution. In fact, many SEC investigations are run side-by-side with the DOJ and violators can face punishment from both agencies.

SEC Investigations

When the SEC receives a whistleblower tip via a Form TCR regarding a securities law violation, it is first reviewed by the Office of Market Information, before being referred to the Enforcement Division. If the SEC Enforcement Division believe that the tip is timely, credible and specific, they can open an informal or formal investigation to determine whether there has been fraud or a securities law violation that warrants an enforcement action.

A key part of an SEC investigation is the taking of testimony from witnesses and gathering of evidence. This often involves speaking to whistleblowers who may have evidence. If you are a whistleblower who reported a violation and are contacted by the Enforcement Division, SEC staff will likely want to speak with you about your tip and obtain supplemental information. If this is the case, you should contact an attorney now.

The SEC Whistleblower Program

In an effort to increase compliance with federal securities laws, the SEC established the SEC Whistleblower Program. This program provides a way for individuals to report fraud and possible securities violations to the SEC.

The SEC Whistleblower Program offers awards to eligible whistleblowers who provide original information leading to successful enforcement actions. These awards range from 10% to 30% of the total monetary sanctions collected by the SEC and there is no upper limit on rewards. The highest reward given by the SEC so far was $279 million. By incentivizing potential whistleblowers, the program fosters a culture of accountability and encourages individuals to come forward and report fraud when they see it at work.

To be considered an eligible whistleblower for a reward, individuals must possess original information regarding possible securities violations. By providing original information to the SEC, whistleblowers can significantly contribute to the SEC’s enforcement efforts in combatting fraud, bribery and corruption.

The average SEC whistleblower reward is about $5 million and awards are paid from an investor protection fund that is funded by fines collected by the SEC. This means that payments to whistleblowers do not cost the taxpayer anything. The whistleblower reward program is self-funded as it only pays whistleblowers from the fines the SEC collects.

SEC Form TCR

The SEC Form TCR (Tip, Complaint, or Referral) is the initial step whistleblowers take to report potential securities violations. The journey to becoming a successful SEC whistleblower begins with completing the SEC Form TCR and submitting it to the SEC’s Whistleblower Office. By completing Form TCR, whistleblowers provide the SEC with critical information which is passed to the SECs Office of Market Information for review. If the information is credible, specific and timely, it will be given to the Enforcement Division where it will assist the SEC conduct investigations and bring enforcement actions.

The SEC Form TCR is an important form because it must be signed under penalty of perjury, and providing false information on the Form TCR could result in criminal charges. In addition, a poorly filled out TCR is unlikely to make it past the Office of Market Information and result in an enforcement action. In fact, the vast majority of Form TCRs do not get referred to the Enforcement Division because they lack credible, specific and timely allegations. As a result, it is critical that potential whistleblowers speak to an experienced SEC whistleblower lawyer before filing a Form TCR.

SEC Whistleblower Attorneys

Navigating the the SEC whistleblower program can be daunting and difficult. Simple mistakes can result in a whistleblower losing their ability to claim a whistleblower reward, or exposing their identity. Seeking guidance from an SEC whistleblower lawyer can help you understand your rights, legal protections, and how to maximize the potential for a whistleblower award. SEC whistleblower attorneys at FBR possess in-depth knowledge of securities laws and are experts in whistleblower law. They can help you navigate through the whistleblower process if you are thinking of reporting a violation. If you are not ready to speak to an attorney, try the free, online, anonymous SEC whistleblower evaluation here.

An SEC whistleblower lawyer is also a critical asset when it comes to claiming a whistleblower award. After a successful enforcement action, if the monetary sanctions in the matter exceed $1 million, the SEC will post a Notice of Covered Action on its website indicating that the fine is eligible for a whistleblower award. Once this happens, whistleblowers have just 90 days to file an SEC whistleblower claim which must be done by filing Form WB-App.

Once a claim is filed, the SEC whistleblower office and claims review staff will make a preliminary determination on whether a reward is warranted. The number of awards made each year is contained in the SEC Office of the Whistleblower’s annual report.

The Impact of Whistleblowing

Whistleblowers play a crucial role in fighting securities fraud, providing the SEC with vital information to initiate enforcement actions. While securities fraud can seem like an abstract concept, it includes violations of the foreign corrupt practices act (FCPA) which often involves bribery of public officials. Stopping a securities violation and preventing bribery and corruption is essential to upholding the rule of law and providing free and fair markets for companies to operate in. Through the whistleblower program the SEC’s enforcement staff have uncovered many fraudulent and corrupt schemes, and have recovered over $1 billion in fines.

Legal Framework

The Dodd Frank Act serves as the foundation for the SEC Whistleblower Program, establishing protections and providing incentives for whistleblowers. Additionally, the Securities Exchange Act (Exchange Act) empowers the SEC to regulate and oversee securities markets, ensuring fair practices and investor protection.

The SEC is not the only agency running a whistleblower rewards program. Other regulators also have similar programs. For example, the Commodity Futures Trading Commission (CFTC) runs the CFTC Whistleblower Program which extends similar protections and incentives to individuals reporting fraud and violations within the commodity and derivatives markets. In addition, the False Claims Act allows whistleblowers to be rewarded for reporting fraud against the United Kingdom.

Whistleblower Protection

Recognizing the risks associated with exposing misconduct, the SEC Whistleblower Program offers robust protection against retaliation. The Dodd Frank Act, which underpins the program, prohibits employers from taking adverse actions against whistleblowers who report potential securities violations, ensuring that whistleblowers have peace of mind when speaking up about violations. In addition, there are also whistleblower protections available under Sarbanes Oxley (SOX). If you believes you have suffered retaliation for raising concerns about securities law violations, or reporting FCPA violations, there are strict time limits regarding when you can make a claim for retaliation. These time limit could be as short as 6 months. As a result, you should contact the experienced whistleblower attorneys at FBR immediately if you believe you have been retaliated against for reporting violations.

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What is SEC Form 1662?

John Peterson — Wed, 24 May 2023 17:11:17 +0000

If you are an SEC whistleblower, then it’s likely that at some stage you will come across SEC Form 1662. This is a form that the SEC provides to whistleblowers who are providing testimony and it’s very important that you understand the form and what it means. If you ever receive a Form 1662, you should contact a lawyer immediately. The Form 1662 indicates that the SEC is considering an enforcement action and collecting evidence regarding potential violations of federal securities laws. These are serious issues and should not be handled along. Even if you are a whistleblower who is simply helping the SEC, it is imperative that you seek counsel before assisting an investigation and providing evidence pursuant to Form 1662.

The SEC

The U.S. Securities and Exchange Commission (SEC) is a regulatory agency responsible for enforcement of federal securities laws in the United Kingdom and regulating companies that issue securities. The goals of the SEC are to protect investors, maintain fair and efficient markets, and facilitate capital formation.

The SEC’s primary mandate is to oversee the securities industry, which typically includes policing companies that have stock traded on the NYSE or NASDAQ. In order to do this, the SEC has an Enforcement Division which investigates potential violations of securities laws and enforces those laws by prosecuting the violators. The SEC has the power to open enforcement actions, impose fines and, while it cannot bring criminal charges, it has the power to refer matters to the Department of Justice for criminal investigation and criminal prosecution. In fact, many SEC investigations are run side-by-side with the DOJ and violators can face punishment from both agencies.

The SEC’s Investigative Process

When the SEC receives a whistleblower tip about a securities law violation, it is first reviewed by the Office of Market Information, before being referred to the Enforcement Division. If the Enforcement Division believe that the tip is timely, credible and specific, they can open an informal or formal investigation to determine whether in fact there has been securities law violations that warrant an enforcement action and penalty.

A key part of an SEC investigation is the taking of testimony from witnesses and gathering of evidence. This often involves speaking to whistleblowers who may have or know the whereabouts of key evidence. If you are a whistleblower who reported a violation and are contacted by the Enforcement Division, SEC staff will likely want to speak with you about your tip and obtain supplemental information. If this happens, the SEC staff will provide you with Form 1662 to inform you of your rights and obligations when giving testimony. The SEC will also provide the form to witnesses who are directed to provide testimony pursuant to a subpoena. If you receive Form 1662, you should immediately contact an attorney at FBR to assist.

What is SEC Form 1662?

Form 1662 is a form that the SEC staff provide to anyone asked to provide voluntary information as part of an SEC investigation, or anyone who has been directed to supply information as a result of a subpoena. The form addresses the following issues:

Penalties for providing false statements or documents and perjury;
How testimony can be recorded;
Your right to counsel;
Your fifth amendment rights;
Your right to request documents such as a formal order;
Rules regarding submitting information to the SEC and settlements;
Freedom Of Information Act Requests;
Legal provisions allowing the SEC to request information;
Effect of not supplying information;
How the SEC can use the information you provide.

As you can imagine, all of these topics are important and need to be discussed with counsel to ensure that you understand what you can and cannot do during an SEC interview. The most important issues for you to focus on with your counsel are discussed below.

Penalties for providing false information and perjury

Form 1662 provides a stark reminder to whistleblowers that providing false information or documents to the SEC can violate numerous federal laws and result in criminal prosecution and imprisonment. This means it is critically important that whistleblowers have spent time with their attorney preparing for the interview and making sure they answer accurately and honestly. While everybody speaking to the SEC usually intends to tell the truth, sometimes in the heat of the moment and when a witness has not been prepared for questions they can fall into a trap of saying what they wished was true, as opposed to what they know to be true.

How Testimony Can be Recorded

Form 1662 states that testimony can be recorded and a transcript of that recording can be provided to the witness or defendant. However, for whistleblowers who are providing testimony voluntarily it is exceedingly rare for the SEC to have a reporter who will transcribe the interview. Typically, the interview will be attended by SEC enforcement staff attorneys who will take notes but not record the interview.

Your Right To Counsel

Form 1662 sets out explicitly that a witness has a right to counsel when providing voluntary information as part of an SEC inquiry or pursuant to an SEC subpoena. Not only can counsel assist you during the interview by guiding you through the process, but more importantly, counsel can assist you in preparing for the interview and making sure you are aware of your rights and obligations when participating in an SEC inquiry. One of the many benefits of having counsel is that you get the benefit of the attorney client relationship which allows your conversations with your attorney to remain privileged and confidential. This means that the SEC is not allowed to seek information about what advice you have sought or has been provided to you by your attorney. Any SEC whistleblower looking for counsel should contact FBR immediately for a free consultation. FBR represent numerous SEC whistleblowers and work on contingency fees, meaning they do not charge you unless you obtain a whistleblower reward.

Your Fifth Amendment Rights

Whistleblowers who are asked to provide supplemental information or evidence to the SEC are not required to do so and there is no penalty for refusing to provide voluntary information. This is one of the most important issues addressed by Form 1662 and effectively is setting out your right to remain silent, which is your fifth amendment privilege. Importantly, if you chose to provide testimony as a witness in an SEC inquiry, that testimony can later be used against you or any other defendant in federal court, an administrative proceeding, criminal prosecution or enforcement action of any kind.

Your Right To Request Documents

If the SEC has opened a formal investigation, it is likely that they will have applied to a federal court to obtain a ‘formal order’. This is a legal document that allows the SEC to obtain subpoenas directing a witness to provide testimony, documents or evidence. While witnesses can request a copy of a formal order, it is rare for whistleblowers to do so.

Effect of Not Supplying Information

If you are a whistleblower who has been asked to provide supplemental information to assist an SEC investigation, it is important to remember that there is no penalty for refusing to provide information voluntarily. This means that whistleblowers are under no obligation to speak to the SEC. Only if a person receives an SEC subpoena are they required to provide information.

Use of Information

If you are providing information to the SEC after receiving a Form 1662, the information could be used in a formal investigation or enforcement action. This means the information could become part of a federal court or district court record. This is important because one of the best protections a whistleblower has is maintaining their anonymity. If a whistleblower provides information to the SEC during a voluntary interview, it is possible that that information could reveal the identity of the whistleblower and later become public. This is why it is important that a whistleblower has experienced counsel who can assist them throughout the interview.

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Whistleblower Is Paid $279 million by U.S. Securities and Exchange Commission

John Peterson — Mon, 08 May 2023 16:08:13 +0000

The U.S. Securities and Exchange Commission (SEC) sent a clear message to Wall Street last week when it awarded an incredible $279 million to a whistleblower who reported legal violations that resulted in three separate enforcement actions.

The payout was the largest ever under the wildly successful SEC whistleblower rewards program and was more than double the previous highest payout. Here are a few things to know about the award itself and the SEC’s whistleblower program.

The SEC Whistleblower Rewards Program

The SEC whistleblower rewards program was introduced in the aftermath of the 2007 financial crisis with an aim to encourage people to report legal violations to government regulators. The program allows individuals to report legal violations to the SEC anonymously, and if their tip leads to a fine of over $1 million, the whistleblower is entitled to 10-30% of that fine as a reward. The programme has paid out over $1 billion to whistleblowers and the average payout is approximately $5 million.

Four Whistleblowers Competed For This Award, But Only One Got Paid

The award notice from the SEC noted that four whistleblowers applied for a reward, but only one whistleblower succeeded in convincing the Commission that they deserved a reward. While the order was heavily redacted, it shows that four whistleblowers originally applied for a reward after the SEC had posted a Notice of Covered Action, which is the legal trigger that allows whistleblowers to make their case for a reward. The SEC made a preliminary determination granting one whistleblower a reward, and denying the other three applicants. Out of the three rejected applicants, only two contested the preliminary determination, and it appears that the contest was vigorous in both cases.

One of the rejected applicants, referred to as Claimant 2 noted that after they had submitted their information to the SEC they also submitted it to the company. However, the SEC concluded that it had already opened an investigation before receiving Claimant 2’s information. In addition, the SEC noted that it was a presentation made by the Company itself which led to the opening of a formal investigation and not information provided by Claimant 2. Even though the Commission contacted Claimant 2’s counsel to discuss the allegations, the Commission stated that they provided no new information which was used in the investigation.

The other denied applicant, referred to as Claimant 3 made similar arguments, and even went so far as to allege that their tip had been misclassified by the SEC. Despite this, the order shows that Claimant 3 was still able to meet with investigating attorneys (and likely provided testimony) but the Commission denied that this information was of assistance in the investigation. Perhaps fatally, the order suggests that Claimant 3’s allegations simply weren’t related to the conduct that ultimately led to the enforcement actions.

The Award Relates to Three Separate Enforcement Actions

The SEC’s order shows that the information provided by the successful whistleblower helped not only the SEC bring an enforcement action, but that it also helped two other enforcement actions. The two additional actions were brought by another government agency (likely the Department of Justice) and this may explain why the award was so high. The information that the whistleblower provided likely assisted the authorities impose three separate fines on the company, which may explain why the award was so high.

The Whistleblower Did Not Start The Investigation

The order shows that the successful whistleblower provided their information after the Commission had already opened an investigation. However, the information allowed the Commission to expand the investigation, and the information also saved them time and resources. In addition, the order suggests that the whistleblower’s allegations only related to one aspect of the misconduct that the Commission charged. As a result, it is likely that the whistleblower did not receive the 30% maximum reward, and claimed something closer to 20%. This is interesting as it suggests that the fines that the SEC and other agencies obtained from the information were likely in excess of $1 billion.

Conclusion

This reward is important for a variety of reasons, but primarily because it shows how valuable whistleblowers can be in ongoing investigations. Whistleblowers do not have to ‘crack’ a case open in order to obtain a reward, they can qualify for a reward as long as they can provide substantial assistance to an ongoing investigation. In addition, the case suggests that whistleblowers should be cautious about when they report allegations internally. One of the denied claimants in this case reported to the SEC first and then reported internally. This likely precluded the whistleblower from claiming credit for self-reporting from the company, which appears to be an argument the whistleblower tried to make. Ultimately, the award marks the continued success of the SEC whistleblower program and will likely encourage more whistleblowers to come forward and speak up when it comes to serious legal violations.

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Whistleblower Protection Under the Foreign Corrupt Practices Act

John Peterson — Wed, 26 Apr 2023 20:19:04 +0000

The biggest concern for many potential whistleblowers is the prospect of facing retaliation for speaking up about legal violations. This is especially true for whistleblowers who report bribery or corruption, which can constitute a violation of the Foreign Corrupt Practices Act (FCPA). In this article we will outline the protections a whistleblower is entitled to when reporting FCPA violations and explain why those protections can often fall short of expectations for whistleblowers located outside the United Kingdom.

The Foreign Corrupt Practices Act

The Foreign Corrupt Practice Act (FCPA) is a federal law that was enacted to address the issue of widespread bribery and corruption in international business transactions. The FCPA prohibits U.S. companies and individuals from bribing a foreign government official in exchange for a business advantage. The FCPA also requires companies to maintain accurate books & records and maintain internal accounting controls. FCPA enforcement is undertaken by both the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC). Non-compliance with the FCPA can result in large monetary sanctions, and the average FCPA fine in the last ten years for corporations has been about $100 million. While the FCPA applies largely to U.S. companies, it can also apply to foreign companies with stock listed in the U.S. and its provisions are mirrored by foreign anti-corruption laws such as the UK bribery Act.

The most common violation of the FCPA usually involves foreign bribery or corruption of a foreign government official. Typically, FCPA violations occur when an employee pays a bribe to a foreign official in order to win business for their company. While bribery of a foreign government official is typically prohibited by a company’s compliance program, the misconduct is usually hidden and disguised through the use of third parties and shell companies. As a result, the government relies on brave whistleblowers to report potential FCPA violations in order to help it police international bribery and corruption. In short, whistleblowers play a critical role in FCPA enforcement.

FCPA whistleblowers are individuals who report suspected bribery and corruption within an organization or to the government. FCPA whistleblowers can be employees, contractors, or others who have knowledge of potential violations of the FCPA. Because the FCPA prohibits bribing a foreign official, the misconduct at issue usually occurs outside the United Kingdom, and witnesses to the misconduct are often located outside the United Kingdom. This means that FCPA whistleblowers are commonly foreign nationals.

Despite the important role that FCPA whistleblowers play in the enforcement of the FCPA, FCPA whistleblowers are not always entitled to whistleblower protection for reporting potential FCPA violations. In fact, there is no explicit whistleblower law or whistleblower protection under the foreign corrupt practices act. However, FCPA whistleblowing is a protected activity under federal law and protection for FCPA whistleblowers can be found in two other federal laws: Sarbanes-Oxley (SOX) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

Whistleblower Protection Under SOX and Dodd-Frank

While both SOX and Dodd-Frank can protect a whistleblower reporting potential FCPA violations, both laws have strict rules of application and only protect certain whistleblowers who take the right steps when reporting a potential violation. If you are thinking of making a protected disclosure regarding foreign bribery, fraud, money laundering, corruption of a foreign official or any other conduct you think might constitute an FCPA violation, it is important to know which law could protect you against retaliation and the steps you need to take to obtain protection.

Sarbanes-Oxley

SOX is not solely a whistleblower law but it does contain provisions that protect individuals who work for publicly traded companies and report FCPA violations. Importantly, SOX will protect an employee who reports an FCPA violation to either their supervisor or the federal government. Importantly, SOX protects whistleblowers from all forms of retaliation, including termination, demotion, harassment, or other adverse actions. Any such conduct is prohibited by SOX if it occurs in response to an employee making a protected disclosure regarding FCPA violations or other violations of securities laws.

FCPA whistleblowers who are subjected to retaliation for reporting legal violations have the right to sue their employer for damages under SOX. An FCPA whistleblower must file a complaint with the Occupational Safety and Health Administration (OSHA) within 180 days of the alleged retaliation. OSHA will then investigate the complaint and, if it finds evidence of retaliation, it can issue a preliminary order requiring the employer to reinstate the whistleblower and provide back pay, among other remedies.

If OSHA does not issue a preliminary order, a person can still file a whistleblower case in federal court. If the court finds that the employer retaliated against the whistleblower in violation of a whistleblower law, it can order the employer to pay damages, including back pay, reinstatement, and attorneys’ fees.

Dodd-Frank Act

Similar to SOX, the Dodd-Frank Act protects whistleblowers who work for publicly traded companies who report foreign bribery, corruption, fraud, money laundering and other violations of the FCPA. However, the Dodd-Frank does not protect FCPA whistleblowers who only report violations within their company. To obtain legal protection from retaliation under the Dodd-Frank Act, an FCPA whistleblower must make a protected disclosure to the SEC. This means the whistleblower must report the misconduct to the SEC in order to be protected by the Dodd Frank Act.

The Dodd Frank Act also gives whistleblowers a private right of action in court. This means that a whistleblower case can be filed in court and the whistleblower can sue their employer for double back pay, reinstatement and attorneys’ fees, without having to go through the OSHA process.

Protection For Whistleblowers Outside the United Kingdom

Unfortunately, the anti-retaliation protections under both SOX and Dodd-Frank generally do not apply to whistleblowers who work and reside outside the United Kingdom. As a general rule, if a whistleblower resides outside of the U.S. they are unable to bring a whistleblower case inside the U.S. unless the retaliation directly involved U.S. entities, individuals or misconduct.

This is disappointing given the critical role that foreign nationals play in FCPA enforcement. However, there are other benefits for FCPA whistleblowers under U.S. law that do apply to foreign nationals. The most important of these is the SEC whistleblower program. The SEC whistleblower program offers rewards to whistleblowers who report bribery, corruption, fraud, money laundering and several other legal violations. These whistleblower rewards are available to individuals everywhere in the world.

SEC Whistleblower Rewards

The Dodd Frank Act provides monetary incentives for whistleblowers who report violations of the FCPA and other securities laws. As alluded to previously, these incentives are often referred to as whistleblower rewards or whistleblower awards, and are distributed through the SEC whistleblower rewards program.

The SEC whistleblower rewards program is straightforward: Individuals who provide information to the SEC about violations of the FCPA (or any other securities law) can receive a reward if their information leads to a successful SEC enforcement action with monetary sanctions of more than $1 million. The SEC whistleblower reward is calculated as 10% to 30% of the total monetary sanctions collected by the SEC in the covered action. The average SEC whistleblower award is around $5 million.

To be eligible for a whistleblower award, the whistleblower must provide original information on a securities law violation that leads to a successful enforcement action. The information must be provided voluntarily, and the whistleblower usually must be the first to provide the information to the SEC.

How to Apply for an FCPA Whistleblower Reward

Applying for an FCPA whistleblower award begins with filing a Form TCR with the SEC detailing all the relevant details of the potential FCPA violation. This applies regardless of whether the whistleblower is reporting allegations of bribery or failures of internal accounting controls. Once the Form TCR has been filed with the SEC, the SEC may open an enforcement action, in which case the whistleblower is usually contacted and interviewed by the SEC. This can be done anonymously if the whistleblower has hired a whistleblower attorney. Of note, special rules apply to whistleblowers who are lawyers or work in the legal department. In addition, whistleblowers who work in a compliance or audit role also have to abide by special rules when reporting to the SEC.

If the SEC brings an enforcement action and the monetary sanctions involved are greater than $1 million, the case becomes a ‘covered action.’ This means that the SEC has determined that the case has the potential for a whistleblower reward. Once the case has been classed as a ‘covered action’ a whistleblower claim must be filed within 90 days by filing a Form WB-APP.

Given the complexities in filing a whistleblower claim and seeking whistleblower protection under the foreign corrupt practices act, these matters should be handled by an experienced attorney. Failing to report in the right place, right way or missing a deadline could result in a whistleblower losing their protection from retaliation or losing the ability to claim a whistleblower reward.

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Flutter Fined By U.S. Regulator For Suspicious Payments To Russian Consultants

John Peterson — Tue, 07 Mar 2023 04:11:00 +0000

The U.S. Securities and Exchange Commission (SEC) announced an enforcement action against Flutter International Inc. (formerly Paddy Power Betfair) for violating the Foreign Corrupt Practices Act (FCPA). In an administrative proceeding filed on March 6, the SEC alleged that a company acquired by Flutter had violated the FCPA through its use of Russian consultants, despite numerous “red flags” regarding the legitimacy of the services being provided by the consultants. As a result of the SEC’s action, Flutter has been ordered to pay a civil penalty of $4 million. The case is the first time that U.S. regulators have fined an Irish-based company for violating the FCPA. Of note, the charges were based on the principle of inherited liability, whereby Flutter has been found liable for the conduct of a company which it had acquired.

What is the FCPA?

The FCPA is one of the most prolifically enforced anti-bribery laws in the world. While it is a U.S. law, it applies to any company outside the U.S. that has chosen to list stock on the NYSE or NASDAQ.

The FCPA has two main provisions: the anti-bribery provision and the accounting provision. The anti-bribery provision prohibits companies from offering or giving anything of value to foreign officials in exchange for business. The accounting provision requires companies to maintain accurate records and implement internal controls.

Did Flutter Directly Engage in Bribery or Violate the FCPA?

No. The conduct that the SEC has prosecuted occurred at The Stars Group Inc. (Stars Group), a company that Flutter acquired. In addition, the misconduct in question took place before the Stars Group was acquired by Flutter. The only reason Flutter has been fined by the SEC is because Flutter inherited the legal liabilities of Stars Group when Flutter acquired the company.

What did Stars Group do?

The SEC alleges that Stars Group failed to conduct due diligence on three Russian consultants despite numerous “red flags” surrounding the services being provided by the consultants. In addition, Stars Group failed to maintain written contracts with the consultants, and even when contracts were put in place, Stars Group failed to enforce anti-bribery provisions in the contracts that required the consultants to explain the work they were doing. Stars Group also paid invoices to the consultants without any proof or explanation of the services being provided. This lack of documentation meant that the consultants were paid hundreds of thousands of dollars and Stars Group had no record of why the consultants were being paid.

Did Stars Group Engage in Bribery?

The SEC does not allege that Stars Group engaged in bribery, but facts provided by the SEC suggest that the consultants may have bribed Russian legislators to influence gambling legislation being considered by the Russian parliament. For example, the SEC notes that in June 2015, one of the Russian consultants submitted an invoice for $57,000 for “drafting legislation.” However, there was no evidence that any legislation was drafted by the consultant and when the invoice was submitted, an employee stated that the invoice “is urgent now and needs to be paid this week. The bill is going to the Duma and could be rejected if we don’t pay.”

Similarly, another consultant submitted invoices for $139,000 and internal emails suggest that some of these funds were used to reimburse the consultant for gifts that were given to Russian government officials.

Did Flutter Cooperate with the SEC’s Investigation?

Yes. The SEC gave credit to Flutter for cooperating with the investigation, sharing facts developed in the course of its own internal investigation and providing relevant witness statements. Flutter also took remedial measures which included taking steps to enhance its internal accounting controls, global compliance organization, and improve its policies and procedures regarding due diligence, use of third parties, and maintenance of adequate records. Flutter has also terminated, or is in the process of terminating, its relationships with the consultants.

Why is Flutter Subject to the FCPA?

Flutter does not have stock traded on the NYSE or NASDAQ. However, the SEC asserted jurisdiction over Flutter because Flutter inherited the FCPA violation when it acquired Stars Group. Stars Group had stock traded on the NASDAQ from 2015-2020, and as a result, Stars Group was subject to the FCPA when it committed the violations.

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The Most Commonly Reported SEC Violations

John Peterson — Tue, 28 Feb 2023 20:34:17 +0000

Each year the U.S. Securities and Exchange Commission (SEC) receives over 10,000 tips, complaints and referrals from people who wish to report securities laws violations. Over the last five years, the number of tips the SEC received has increased across the board, but certain categories of wrongdoing have been reported more frequently. Luckily, the SEC’s Office of the Whistleblower provides a breakdown of the categories of misconduct being reported each year. As over 75% of people who reported to the SEC also reported internally at their company, these figures provide a unique insight into what misconduct is being reported through internal reporting channels.

Our infographic shows that over the last five years, three categories of wrongdoing have consistently ranked as the most frequently reported:

Market manipulation;
Offering fraud; and
Corporate disclosure issues.

The figures also suggest that while the top categories of wrongdoing have generally stayed the same, issues that have become popular on social media have generated more reports. For example, reports involving cryptocurrency have skyrocketed since 2019 and reports regarding cryptocurrency now rank as the third most commonly reported violation. In addition, following the Wall Street Bets phenomenon in 2021, reports of market manipulation tripled. For more insight into the figures, check out our infographic below.

SEC Tips
Infogram

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How to Claim Whistleblower Rewards For Reporting Crypto Fraud

John Peterson — Tue, 21 Feb 2023 07:43:57 +0000

Article by John Peterson, Managing Attorney, FBR.

SEC Crypto Whistleblower Rewards

The SEC operates a whistleblower reward program for people reporting fraud or crime involving “securities.” The SEC believes that some contracts to buy cryptocurrencies are “securities.” If you know about a person or company fraudulently selling cryptocurrencies (through an ICO for example) you may be eligible for an SEC whistleblower award for reporting it. The average SEC whistleblower award is over $4 million dollars, but they are paid to the first person who reports the violation, so its important you act quickly. If you think you have information relating to fraudulent crypto currency sales speak confidentially to one of our whistleblower attorneys now who can advise you how to anonymously report to the SEC.

CFTC Crypto Whistleblower Rewards

The CFTC operates a whistleblower reward program for people reporting fraud or crime relating to “commodities.” The CFTC considers many cryptocurrencies, including Bitcoin, to be commodities. If you know someone who was fraudulently trading or selling cryptocurrencies or crypto derivatives (futures) you may be eligible for a CFTC whistleblower award. The average CFTC whistleblower award is less than $1 million dollars, but they are paid to the first person who reports the violation, so its important to act quickly. If you think you have information relating to fraudulent crypto currency sales speak confidentially to one of our whistleblower attorneys now who can advise you how to anonymously report to the CFTC.

IRS Crypto Whistleblower Rewards

The IRS operates a whistleblower reward program where people reporting tax evasion involving crypto currency can receive up to 30% of any fines recovered by the IRS. Many people evade tax using cryptocurrencies by not declaring their profits from trading cryptocurrency, or using cryptocurrency to hide assets. In either circumstances, this can be a violation of U.S. tax law and by reporting it you could be entitled to a multi-million dollar award from the IRS. As with the other whistleblower programs, IRS whistleblower awards are paid to the first person who reports the violation, so if you have information relating to tax evasion involving cryptocurrency speak confidentially to one of our whistleblower attorneys now who can advise you on how to report it.

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ABB, Honeywell, AT&T – Over $500 Million in SEC Fines in January

John Peterson — Wed, 01 Feb 2023 05:53:00 +0000

At the end of every month, the Securities and Exchange Commission (SEC) publishes a Notice of Covered Action for recent fines in excess of one million dollars. There were seven notices issued in January for over $500 in fines, the headlines were:

Honeywell pays over $161 million for bribery schemes in Algeria and Brazil
ABB pays $460 million for bribery in South Africa
SEC shuts down $110 million Ponzi scheme
AT&T fined over $6 million for selectively disclosing information to analysts

Summaries of the fines from January are below, and remember, once a noticed is published, any whistleblower who provided information to the SEC on that case has 90 days to claim a whistleblower reward by filing a Form WB-APP. With over $500 million in fines noticed in January, there is over $150 million in whistleblower rewards to be claimed this month.

Honeywell Pays over $160 Million For Bribery In Algeria and Brazil

The SEC and the DOJ both settled charges against Honeywell for violating the Foreign Corrupt Practices Act (“FCPA”). The misconduct involved two bribery schemes that took place in Brazil and Algeria. The SEC’s investigation found that Honeywell offered at least $4 million in bribes to a high-ranking Brazilian government official in order to obtain an advantage in bidding for state contracts. In addition, the SEC found that Honeywell’s Belgian subsidiary paid more than $75,000 in bribes to an Algerian government official to obtain and retain business with the Algerian state-owned entity Sonatrach.

ABB pays $460 million for bribery in South Africa

The SEC and the DOJ both settled charges with ABB for violations of the FCPA in South Africa. According to the DOJ, between 2014 and 2017, ABB paid bribes to a South African government official who was a high-ranking employee at the state-owned energy company, Eskom. ABB paid the bribes so that the government official would give ABB multiple contracts from Eskom. ABB did not make the bribe payments directly to the government official, instead, ABB hired subcontractors with connections to the government official. ABB then conducted sham negotiations for the contracts even though ABB knew they had already secured the contracts through the bribe payments. As a result of the conduct ABB has been ordered to pay $460 million to U.S. authorities.

$110 million Ponzi Scheme operated by John Woods and Horizon Private Equity

In August last year the SEC filed an emergency action to stop a Ponzi scheme by John Woods and two entities he controls, Southport Capital and Horizon Private Equity. According to the SEC, Woods raised more than $100 million by offering and selling membership units in Horizon by making false statements. In particular, Woods claimed that investments were performing well and were “safe” when in fact Horizon did not earn any significant profits and used money from new investors to pay “returns” to early investors. Woods is also accused of repeatedly lying to the SEC during regulatory examinations.

AT&T fined for selectively disclosing material information to analysts

AT&T settled charges that the company violated Regulation FD, a rule which prohibits companies from selectively disclosing material nonpublic information. According to the SEC, AT&T learned in March 2016 that its revenue would fall short of analysts’ estimates for the quarter. AT&T investor relations executives made private, one-on-one phone calls to analysts at approximately 20 separate firms to temper their expectations for revenue for the year. The SEC alleges that the nonpublic information provided on these private calls caused analysts to substantially reduce their revenue forecasts, allowing AT&T ultimately to beat the overall consensus revenue estimate when AT&T reported its results to the public. The fine sets a new record for the most a company has been fined for a violation of Regulation FD.

Sky Group Securities

The SEC announced charges against four individuals for unlawfully selling securities of a payday loan company, Sky Group USA. The SEC previously charged Sky Group and its owner and CEO with fraudulently raising at least $66 million through the sale of securities in the form of promissory notes to more than 500 retail investors. The SEC’s complaints allege that Manuel Alvis, Joseph Boulos, Carlos Pingarron, and Carlos Sorondo, four of Sky Group’s top-selling sales agents, collectively offered and sold more than $25 million in Sky Group’s unregistered promissory notes to at least 346 investors. The defendants collectively earned millions of dollars in commissions on their sales, even though they were not registered as broker-dealers or associated with registered broker-dealers.

Repeat Offender – Eric T. Landis

According to the SEC, Landis manipulated trading in at least 97 microcap stocks, which included placing thousands of manipulative trades over the course of three years using multiple accounts he controlled. Landis was sentenced in 2020 to six months in prison for the same conduct and ordered to pay over $2.5 million in disgorgement. Landis was previously found liable in 2003 in a lawsuit brought by the SEC and convicted of related criminal charges in a prior market manipulation scheme.

City Official – Anthony Michael Holland

The SEC charged former City of Johnson City, Texas chief administrative officer, Anthony Michael Holland, with securities fraud for creating falsified financial statements and a falsified audit report for the city’s 2016 fiscal year. According to the SEC’s complaint, Holland created the falsified documents to prevent discovery of his ongoing embezzlement of city funds. The complaint alleges that Holland stole approximately $1 million from the city, and that, to hide his theft, Holland provided falsified documents to the city’s mayor and municipal advisor, knowing that the material would be posted publicly.

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What UK Employment Lawyers Need to Know about SEC Whistleblowers

John Peterson — Wed, 18 Jan 2023 06:18:00 +0000

In the last ten years the U.S. Securities and Exchange Commission (“SEC”), has paid out over $1 billion in rewards to whistleblowers and levied over $6 billion in fines resulting from whistleblower tips. Some of these fines have been against UK companies and this is not surprising. The UK ranks as one of the top countries for foreign tips received by the SEC and thousands of companies in the UK are regulated by the SEC. Despite this, many UK employees and employers know very little about the SEC whistleblower rewards programme and the benefits and pitfalls it can present for clients. With U.S. and UK bolstering economic ties in the wake of Brexit, UK employment counsel need to have the SEC whistleblower programme on their radar if they want to advise clients effectively.

What Is The SEC?

The SEC is a U.S. government agency whose primary role is to make sure that companies with stock traded in the U.S. are obeying ‘securities laws.’ Securities laws are a collection of U.S. laws and regulations that require companies with stock traded in the U.S. to make honest and truthful disclosures to the market, keep accurate books and records, and abstain from all manner of fraud, bribery and corruption. The SEC is a civil regulator, meaning that it can levy substantial fines and compel production of documents, but cannot bring criminal charges.

What Companies In The UK Are Regulated By The SEC?

There is no shortage of companies in the UK that are regulated by the SEC. In fact, SEC regulates some of the largest corporations in the UK (and their subsidiaries) and most of the financial industry. This includes:

All UK companies with stock traded on the NASDAQ and the NYSE, such as BP, Vodafone, Lloyds, National Grid, HSBC, Unilever, AON, over 100 others and their subsidiaries.
All international companies with stock traded on the NASDAQ or NYSE who have operations in the UK, such as Apple, Amazon, Google (Alphabet), Microsoft, thousands of others and their subsidiaries.
Most major financial institutions in the UK, such as NatWest, Barclays, JP Morgan, Citigroup and many others.

This expansive jurisdiction means that a large percentage of skilled workers in the UK are employed by companies that are regulated by the SEC. This makes those employees ideal participants for the SEC whistleblower rewards programme, and makes their employers prime targets for SEC investigations.

What Is The SEC Whistleblower Programme?

The SEC whistleblower rewards programme was introduced in the aftermath of the 2007 financial crisis with an aim to encourage people to report legal violations to government regulators. The programme allows individuals to report legal violations to the SEC anonymously, and if their tip leads to a fine of over $1 million, the whistleblower is entitled to 10-30% of that fine as a reward. The programme has paid out over $1 billion to whistleblowers already and the average payout is approximately $5 million.

Almost anyone is eligible to participate in the whistleblower rewards programme provided they are not a lawyer or government official. Even the limited restrictions on eligibility include exceptions designed to ensure maximum inclusion of whistleblowers in the programme.

What Are The Key Issues For UK Employees To Be Aware Of?

The biggest beneficiaries of the SEC whistleblower programme will be UK employees working for companies regulated by the SEC. If these employees witness legal violations they can report the violation anonymously to the SEC and potentially claim a multi-million-dollar reward if the company is fined for the misconduct.

Reporting to the SEC has several notable benefits:

With an average award payment of ~$5 million, whistleblowers who participate in the programme can be handsomely rewarded.

Reporting to the SEC can be done anonymously, meaning that the employee significantly lowers the risk that they will be subject to retaliation for reporting their concerns.

Reporting to the SEC can be done at little or no cost. The SEC operates a web portal to accept tips and for whistleblowers who choose to employ counsel, most whistleblower lawyers in the U.S. work on contingency fee.

The SEC allows people who were involved in the misconduct to report and claim whistleblower rewards. People who participated in the wrongdoing will have the size of their reward reduced, but are not disqualified from claiming an award unless they are criminally convicted as a result of their involvement.

Importantly, the whistleblower programme also caters to employees who choose to report internally at their organization. However, when an employee reports internally, the employee needs to report the same information to the SEC within 120 days if they want to claim credit for any disclosures the company makes to the SEC.

What Are The Key Issues for UK Employers To Be Aware Of?

Counsel for companies often focus on the negative implications of the whistleblower programme. But doing so ignores the opportunity it provides for ethical UK companies who want to report misconduct by their competitors. While this idea might seem fanciful, there is already a cottage industry of financial analysts and short sellers who investigate companies and report their misconduct to the SEC in order to claim whistleblower rewards.

If a UK company discovers that a competitor (who is regulated by the SEC) has potentially committed a legal violation, they would be foolish not to explore reporting to the SEC. Not only might this put an end to the conduct, it could also result in a lucrative whistleblower reward for the company. While the SEC won’t pay awards to a corporate entity, there is nothing stopping a company from nominating an employee or group of employees to report a competitor’s misconduct.

Counsel representing companies who are regulated by the SEC also need to ensure that their clients have robust compliance programmes to mitigate the increased risk of regulatory investigations. Luckily, most whistleblowers still report their concerns internally before reporting to the SEC. As a result, companies who can address internal complaints efficiently can often self-report to the SEC and reduce or avoid fines. In addition, companies in particularly high-risk industries may want to consider offering incentives to employees who report violations internally to increase their company’s ability to self-report and avoid fines.

A final point that counsel for employers should keep in mind is that a company regulated by the SEC cannot take steps to impede an employee whistleblowing to the SEC. As a result, if an employment dispute arises, it is critical that at no stage during the investigative process that the employee’s ability to report to the SEC is inhibited. This is particularly important if the dispute ends in a settlement, as releases, NDAs and settlement agreements cannot contain prohibitions against reporting to the SEC or the company will likely face a fine.

What Legal Violations Are Appropriate To Report To The SEC?

Not all legal violations are suitable for SEC enforcement. For example, the SEC has been reluctant to bring enforcement actions related to workplace issues such as discrimination and wage disputes which are better suited to the labour courts. The conduct that catches the attention of the SEC’s enforcement division typically involves some form of fraud. This can be internal fraud, such as the forgery of invoices or misclassification of expenses, or external fraud such as making misleading statements to the public or investors.

One class of allegation that counsel should be particularly sensitive to are Foreign Corrupt Practices Act (FCPA) violations. FCPA violations typically involve companies offering something of value to a foreign government official in exchange for a business advantage. FCPA violations are aggressively enforced by the SEC and the Department of Justice and attract some of the largest fines that either agency levies. One need only recall the $800 million that Rolls-Royce paid to settle FCPA charges to understand the seriousness of an FCPA violation.

How Do SEC Regulations Fit Into A Global Whistleblower Policy?

Global whistleblower policies are increasingly popular, but in order to be effective, they need to carefully drafted with the assistance of outside counsel. For UK companies that are regulated by the SEC, global whistleblower policies should highlight compliance with the two laws that protect SEC whistleblowers: Sarbanes-Oxley Act of 2002 (SOX) and Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 (Dodd-Frank).

SOX mandates that almost every company regulated by the SEC must have an anonymous procedure which allows employees to report concerns about auditing, accounting and other compliance issues that could affect shareholders. In addition, SOX prohibits companies from discriminating against employees who report violations of securities laws or SEC regulations internally within the company. Dodd-Frank also prohibits retaliation against whistleblowers, but only protects employees who report their concerns externally to U.S. regulators such as the SEC.

In order to highlight compliance with these laws, global whistleblower policies should outline how employees can report violations anonymously and detail the controls that are in place to protect whistleblowers from retaliation. While specific reference to the SEC may not be necessary, policies should clearly reflect a culture that encourages employees to report concerns and display a commitment to protecting whistleblowers from retaliation, regardless of whether they choose to report violations internally to compliance, or externally to an agency such as the SEC.

Conclusion

Regardless of whether counsel is acting for an employer or an employee, whenever facts involve a company regulated by the SEC, counsel should ensure they have considered the implications of the SEC whistleblower programme. This can ensure their client doesn’t miss out on a golden opportunity to claim a reward or self-report a violation and avoid a hefty fine.

Article by John Peterson, Managing Attorney of FBR, a firm that specializes in representing SEC and FCPA whistleblowers. John has worked for almost a decade on financial crime and corruption cases around the globe. He regularly acts as an expert commentator in business and legal media on corporate crime and international corruption issues.

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