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Compliance Risk

SEC enforcement efforts prove resolve to protect whistleblowers

Tiffany Robertson

23 Jan 2017

Photographer: Grigory Dukor

The U.S. Securities and Exchange Commission continues to beef up its scrutiny of employment agreements seeking to prevent employees from sharing details of corporate wrongdoing with the government.

Many companies use such agreements hoping to avoid surprise government investigations by employees who bypass internal reporting procedures.

In reality, most whistleblowers attempt to report their concerns internally before contacting regulators.

As a result, employers that facilitate the employee-reporting process stand a much better chance of avoiding a government inquiry and potential fines, penalties and liability.

Employers exhibiting a commitment to compliance and that make employees aware of the reporting mechanisms available are more likely to receive internal tips regarding misconduct and address it appropriately.

Thomson Reuters’ Conduct Risk Suite is an easy and effective method of communicating whistleblowing laws and procedures as one of eight topics designed to mitigate conduct risk and encourage ethical behavior.

In recent months, the SEC announced a string of enforcement actions against companies seeking to keep employees from cooperating with the government regarding corporate misconduct.

Photographer: REUTERS/Lucy Nicholson

Severance agreements requiring waiver of whistleblower incentives

In August 2016, the SEC announced two settlements within less than a week of each other imposing fines of $265,000 and $340,000 for using severance agreements to thwart tips to the government by outgoing employees.

According to the SEC, the companies attempted to circumvent its August 2011 rule prohibiting “any action to impede an individual from communicating directly with the commission staff about a possible securities law violation.”

In each case, the agreement specifically stated it did not bar departing employees from submitting tips to regulators or participating in a government investigation.

However, in order to receive severance payments and/or other post-employment benefits, outgoing employees must waive their right to monetary awards under the SEC’s whistleblower program.

Noting such provisions effectively remove the incentive for making tips and helping investigators, SEC officials accused the companies of “directly targeting the commission’s whistleblower program.”

Brewer threatens heavy fine for disclosing misconduct

In September, the SEC announced a $6 million settlement with the world’s largest brewer in part for using a severance agreement to “chill” a whistleblower’s activity concerning violations of the Foreign Corrupt Practices Act (FCPA).

According to the SEC, company representatives sought to increase sales and production through improper payments to officials in India and inappropriately recorded such payments as legitimate expenses.

The whistleblower raised concerns regarding such transactions on several occasions in 2011 and 2012.

The company terminated him in early 2012, after which he signed a separation agreement providing for a $250,000 penalty if he disclosed any confidential information about the company.

Although the whistleblower had started cooperating with an SEC investigation into the suspected violations, he discontinued such contact after signing the agreement.

The company agreed to settle the charges by paying a $3,002,955 penalty, together with $3,005,336 in disgorgement and interest.

First standalone SEC whistleblower retaliation case

Within days of the brewer’s $6 million settlement, the SEC announced its first standalone enforcement action for whistleblower retaliation.

A casino-gaming company agreed to pay $500,000 for retaliating against an employee who raised concerns about potential distortions in the company’s cost-accounting model.

Within weeks of doing so, the company removed him from a significant project and barred him from attending a major industry convention, subsequently terminating him several months later.

Although the SEC carried out its first whistleblower retaliation action in 2014, it involved retaliation against an employee for reporting underlying securities violations.

This case, on the other hand, alleged only retaliation, thus highlighting the agency’s commitment to preventing any impediments to its whistleblower program.

Photographer: Alexandra Beier

Culture of compliance more effective at increasing internal reporting

Fostering an environment in which employees are comfortable voicing their concerns is a far more effective approach to encouraging internal reporting than contractual requirements.

It not only helps highlight deficiencies, thereby allowing employers to address problems before they become widespread, but increases productivity and effectiveness, enhances employee morale and loyalty, as well as provides a stronger defense to outside challenges or legal inquiries.

Thomson Reuters’ online training courses on Whistleblowing, Ethics and Compliance Essentials and Avoiding Retaliation are useful tools for demonstrating your organization’s commitment to compliance and familiarizing employees with relevant laws and issues that could lead to violations.

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