For decades, the Justice Department has been encouraging voluntary self-disclosure as a way for corporations to help themselves and the federal government combat corporate criminal activity. The upside to the corporation of early voluntary self-disclosure is usually a deferred prosecution agreement for its self-discovered and voluntarily reported criminal activity. For the government, self-disclosure has saved the time of conducting an investigation and the associated costs of prosecution, as well as protected the public and the business world from unscrupulous bad actors.
However, as a reaction to recent public criticism that the DOJ was not holding individuals accountable for corporate misconduct — and having seen the success of whistleblower programs enacted by the Securities and Exchange Commission, Commodity Futures Trading Commission, IRS, and Financial Crimes Enforcement Network — in March the DOJ announced the Whistleblower Pilot Program, created to reward self-disclosure by individual corporate wrongdoers, similar to the way the DOJ Criminal Division’s voluntary self-disclosure pilot program rewards corporate self-disclosure.
The voluntary self-disclosure program for individuals rewards certain categories of culpable individuals who self-disclose wrongdoing and cooperate against other, more culpable targets. The intent was that it would complement the DOJ’s corporate voluntary self-disclosure program. Currently, there are two locations where the program is already in place — the Northern District of California (NDCA) and the Southern District of New York (SDNY).
The program serves, like many other whistleblower programs, as a recruiting tool for law enforcement to enroll new informants by offering nonprosecution agreements and immunity to individual malfeasants. The criteria for both programs in the NDCA and SDNY are identical and include specific criteria for participation.
These requirements include the following: (1) the misconduct must not previously have been made public and must not already have been known to the participating U.S. Attorney’s Office; (2) voluntary disclosure must be made prior to the imminent threat of disclosure or government investigation; (3) the individual must provide substantial assistance, full cooperation and testimony under oath; (4) the whistleblower must completely disclose all criminal conduct the individual has participated in and is aware of; (5) the individual cannot be an elected official or the head of a public agency, an official or agent of a law enforcement agency, or the CEO or chief financial officer of a private company; and (6) the whistleblower must have no prior felony convictions or a conviction of any kind for conduct involving fraud or dishonesty.
Most of the criteria for qualifying for the Whistleblower Pilot Program mirror the requirements for the corporate voluntary self-disclosure program, which include voluntary self-disclosure prior to the imminent threat of disclosure or government investigation and no prior disclosure of the misconduct.
The common theme underlying both the corporate and individual programs is the need to make the voluntary self-disclosure early and long before law enforcement has any knowledge of the illegal activity. Therein lies the rub, and the potential competition between the two programs.
As it is structured, the Whistleblower Pilot Program appears to directly interfere with internal investigations of potential corporate malfeasance. It disincentivizes an employee to internally report misconduct. Moreover, if during an internal investigation an individual wrongdoer is tipped off to the corporation’s intention to self-disclose, the individual could race to the DOJ to participate in the Whistleblower Pilot Program. Their self-disclosure could close the door on the corporation’s plans to voluntarily self-disclose and thereby obtain its own deferred prosecution agreement.
So how does a corporation self-police and prevent just such a race to the government? The answer is a simple one: Have an effective and robust compliance program in place that encourages and does not punish self-reporting by employees.
An effective compliance program is one that works proactively, is updated yearly, and has yearly mandatory training. Employees need to be aware of the rules governing the lawful operation of the company’s business and red flags regarding suspicious behavior and have the incentive to self-report any potential wrongdoing without fearing negative repercussions from making such a report.
Corporations need to be aware of how to evaluate and investigate these reports and ensure that the work environment doesn’t make coworkers constantly look over their shoulders in fear of being reported for even small violations of company policies. Self-reporting should become a way for all employees to take ownership in the company and view their obligation to self-report as a benefit to the company, not one that is simply in their own self-interest.
This is a process that can be achieved by any company. For example, in the SEC’s 2001 Annual Report to Congress, the commission noted that: “Approximately 60% of the award recipients in FY 2021 were current or former insiders of the entity about which they reported information of wrongdoing to the Commission. Of those recipients, more than 75% raised their concerns internally to their supervisors, compliance personnel, or through internal reporting mechanisms, or understood that their supervisor or relevant compliance personnel knew of the violations, before reporting their information of wrongdoing to the Commission.”
In the case of the SEC program, it appears that the companies ignored the self-reports and failed to capitalize on their own internal reporting mechanisms.
The following are simple steps to make self-reporting an effective tool for corporate governance and not a competition.
Have strong, explicit, visible commitment and support from senior management for the company’s compliance program, which is applicable to all directors, officers and employees.
Provide periodic communication and documented training for all levels of the company regarding the company’s compliance program.
Have appropriate disciplinary procedures to address noncompliance at all levels of the company.
Have effective procedures for providing guidance and advice that are available at all times and at all levels of the company.
Have internal and, if appropriate, confidential reporting procedures that will foster a climate of self-reporting within the company.
Take appropriate action in response to reports of violations of the compliance program.
Provide a periodic review of the compliance program in order to evaluate and improve the measures that are already in place.
David Weinstein is a partner in Jones Walker’s Litigation Practice Group and a member of the corporate compliance and white collar defense team. He draws on his prosecutorial experience to help clients avoid, respond to, and defend against law-enforcement investigations and lawsuits.
Impact of the new DOJ Whistleblower Pilot Program for individuals
The program serves as a recruiting tool for law enforcement to enroll new informants by offering nonprosecution agreements and immunity.
For decades, the Justice Department has been encouraging voluntary self-disclosure as a way for corporations to help themselves and the federal government combat corporate criminal activity. The upside to the corporation of early voluntary self-disclosure is usually a deferred prosecution agreement for its self-discovered and voluntarily reported criminal activity. For the government, self-disclosure has saved the time of conducting an investigation and the associated costs of prosecution, as well as protected the public and the business world from unscrupulous bad actors.
However, as a reaction to recent public criticism that the DOJ was not holding individuals accountable for corporate misconduct — and having seen the success of whistleblower programs enacted by the Securities and Exchange Commission, Commodity Futures Trading Commission, IRS, and Financial Crimes Enforcement Network — in March the DOJ announced the Whistleblower Pilot Program, created to reward self-disclosure by individual corporate wrongdoers, similar to the way the DOJ Criminal Division’s voluntary self-disclosure pilot program rewards corporate self-disclosure.
The voluntary self-disclosure program for individuals rewards certain categories of culpable individuals who self-disclose wrongdoing and cooperate against other, more culpable targets. The intent was that it would complement the DOJ’s corporate voluntary self-disclosure program. Currently, there are two locations where the program is already in place — the Northern District of California (NDCA) and the Southern District of New York (SDNY).
The program serves, like many other whistleblower programs, as a recruiting tool for law enforcement to enroll new informants by offering nonprosecution agreements and immunity to individual malfeasants. The criteria for both programs in the NDCA and SDNY are identical and include specific criteria for participation.
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These requirements include the following: (1) the misconduct must not previously have been made public and must not already have been known to the participating U.S. Attorney’s Office; (2) voluntary disclosure must be made prior to the imminent threat of disclosure or government investigation; (3) the individual must provide substantial assistance, full cooperation and testimony under oath; (4) the whistleblower must completely disclose all criminal conduct the individual has participated in and is aware of; (5) the individual cannot be an elected official or the head of a public agency, an official or agent of a law enforcement agency, or the CEO or chief financial officer of a private company; and (6) the whistleblower must have no prior felony convictions or a conviction of any kind for conduct involving fraud or dishonesty.
Most of the criteria for qualifying for the Whistleblower Pilot Program mirror the requirements for the corporate voluntary self-disclosure program, which include voluntary self-disclosure prior to the imminent threat of disclosure or government investigation and no prior disclosure of the misconduct.
The common theme underlying both the corporate and individual programs is the need to make the voluntary self-disclosure early and long before law enforcement has any knowledge of the illegal activity. Therein lies the rub, and the potential competition between the two programs.
As it is structured, the Whistleblower Pilot Program appears to directly interfere with internal investigations of potential corporate malfeasance. It disincentivizes an employee to internally report misconduct. Moreover, if during an internal investigation an individual wrongdoer is tipped off to the corporation’s intention to self-disclose, the individual could race to the DOJ to participate in the Whistleblower Pilot Program. Their self-disclosure could close the door on the corporation’s plans to voluntarily self-disclose and thereby obtain its own deferred prosecution agreement.
So how does a corporation self-police and prevent just such a race to the government? The answer is a simple one: Have an effective and robust compliance program in place that encourages and does not punish self-reporting by employees.
An effective compliance program is one that works proactively, is updated yearly, and has yearly mandatory training. Employees need to be aware of the rules governing the lawful operation of the company’s business and red flags regarding suspicious behavior and have the incentive to self-report any potential wrongdoing without fearing negative repercussions from making such a report.
Corporations need to be aware of how to evaluate and investigate these reports and ensure that the work environment doesn’t make coworkers constantly look over their shoulders in fear of being reported for even small violations of company policies. Self-reporting should become a way for all employees to take ownership in the company and view their obligation to self-report as a benefit to the company, not one that is simply in their own self-interest.
This is a process that can be achieved by any company. For example, in the SEC’s 2001 Annual Report to Congress, the commission noted that: “Approximately 60% of the award recipients in FY 2021 were current or former insiders of the entity about which they reported information of wrongdoing to the Commission. Of those recipients, more than 75% raised their concerns internally to their supervisors, compliance personnel, or through internal reporting mechanisms, or understood that their supervisor or relevant compliance personnel knew of the violations, before reporting their information of wrongdoing to the Commission.”
Read more: Commentary
In the case of the SEC program, it appears that the companies ignored the self-reports and failed to capitalize on their own internal reporting mechanisms.
The following are simple steps to make self-reporting an effective tool for corporate governance and not a competition.
David Weinstein is a partner in Jones Walker’s Litigation Practice Group and a member of the corporate compliance and white collar defense team. He draws on his prosecutorial experience to help clients avoid, respond to, and defend against law-enforcement investigations and lawsuits.
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