Employees to be Paid for Blowing the Whistle on FCPA Violations

21 July 2010 Publication
Authors: Scott L. Fredericksen Jaime B. Guerrero Pamela L. Johnston Ivonne Mena King Michael P. Matthews David W. Simon John E. Turlais

Legal News Alert: Government Enforcement, Compliance and White Collar Defense

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. One section tucked into this major financial law will have important implications for companies that do business overseas — the Act contains a broad whistleblower provision that creates a right for whistleblowers to recover monies when they report securities violations to the SEC, including violations of the anti-bribery and books and records provisions of the Foreign Corrupt Practices Act (FCPA). The new section is patterned after the False Claims Act.

The Act’s Substantial Financial Incentives for Whistleblowers and Its FCPA Implications

Under previous law, the SEC only had the discretion to pay whistleblowers in insider trading cases, which it seldom did. Under Section 922 of the Act, however, whistleblowers will be awarded between 10 percent and 30 percent of any monetary recovery (including penalties, disgorgement of profits, restitution, and interest) exceeding $1 million, for bringing forward “original information” leading to the successful prosecution of a “covered judicial or administrative action,” defined broadly to include “any judicial or administrative action brought by the [SEC] under the securities laws.” This includes the FCPA.

The Act requires the SEC to take into consideration several factors when calculating the whistleblower’s award. These include the degree of assistance provided by the whistleblower, the significance of the information provided to the SEC, and the SEC’s interest in deterring violations of law. Whistleblowers who are convicted of related criminal violations will not be permitted to receive awards, nor are individuals who obtain the information by auditing financial statements as required under the securities laws or who are providing information discovered from a judicial or administrative hearing or from the news media. The information also cannot have been known to the SEC from another source. In addition to rewarding whistleblowers for reporting FCPA violations, the provision rewards whistleblowers for bringing forward other securities violations, including a company’s failure to disclose material information to investors in a timely manner and improper accounting.

The Act’s broad whistleblower provisions significantly increase the compliance risks companies doing business internationally face. Coupled with the fact that numerous recent FCPA enforcement actions have resulted in companies paying record fines — in many cases in the tens or even hundreds of millions of dollars — to settle enforcement actions, the Act will create enormous financial incentives for individual whistleblowers to report FCPA violations (or even speculative claims of a violation) to the SEC.

Given this important legislative development, there is no better time for companies to evaluate their FCPA compliance programs to ensure they are in line with current best practices. An effective FCPA compliance program both minimizes a company’s risk of violations and provides protection to companies by maintaining the components of an effective compliance and ethics program set forth in the U.S. Sentencing Guidelines.

To be considered “effective” by the enforcement authorities, an FCPA compliance program should include, at a minimum:

  • A clearly articulated corporate anti-corruption policy that encourages ethical conduct and compliance with the FCPA and other applicable laws
  • A system of effective oversight for the compliance program that gives the board of directors overall responsibility for the program and assigns day-to-day responsibility to one or more senior corporate officials within the organization for the implementation and oversight of the FCPA policies, standards, and procedures
  • A communication mechanism that ensures that the FCPA policies and procedures are effectively communicated to all employees and third parties
  • Comprehensive due diligence procedures for the vetting and oversight of third parties
  • Appropriate disciplinary procedures to address conduct that violates the FCPA and other applicable anticorruption laws as well as the failure to take reasonable steps to prevent and detect misconduct by others
  • Periodic audits and risk assessments to ensure compliance with the FCPA policies and procedures
  • An effective system for reporting suspected violations of the FCPA compliance policies and procedures

New Disclosure Requirements for the Extraction Industry

The Act creates additional disclosure requirements for publicly traded companies in the energy industry. Specifically, the Act requires companies in the “extraction industry” to disclose all business payments made to foreign governments in their annual reports filed with the SEC. This extends compliance requirements beyond the FCPA’s antibribery provisions by requiring the disclosure of legal payments, which may include payments made to further commercial development of oil, gas, or minerals, including taxes, royalties, license fees, and production entitlements.

For more information, and to follow the trends in FCPA enforcement, please visit http://www.FCPAenforcement.com.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:

Ivonne Mena King
Palo Alto, California

Jaime B. Guerrero
Los Angeles, California

Pamela L. Johnston
Los Angeles, California

David W. Simon
Milwaukee, Wisconsin

John E. Turlais
Senior Counsel
Milwaukee, Wisconsin

Scott L. Fredericksen
Washington, D.C.

Kenneth B. Winer
Washington, D.C.

Rohan A. Virginkar
Washington, D.C.

Alexander J. Kramer
Washington, D.C.

Barry J. Mandel
New York, New York

Seth L. Levine
New York, New York

Michael P. Matthews
Tampa, Florida

John B. Wynn
New York, New York