whistleblowerswhistleblowers—rules and opportunities for compliance 10 since inception through...

Whistleblowers Rules and opportunities for compliance February 2018

Whistleblowers—Rules and opportunities for compliance Copyright © 2018 Deloitte Development LLC. All rights reserved. 2

Whistleblowing—A history 5

How Dodd-Frank Whistleblower Program works 9

Elements of an effective whistleblower program 15

Ten things about whistleblowing 22

Questions 33

Contents

Copyright © 2018 Deloitte Development LLC. All rights reserved. 3

Something to think about….

What if everyone in your organization had a significant financial interest in reporting elements of corporate wrongdoing, fraud, or other ethical violations?


Guess what? They do!

Financial benefits to whistleblowers are so potentially large, it’s now a race to report (and you can get there first).


Whistleblowing

A History


What is a whistleblower?

A person who informs on a person or organization engaged in an illicit activity.

Source: Oxford Dictionary, 2016


• Qui Tam Provisions—Middle Ages

• Colonial American Laws

• Civil War—False Claims Act Established

• IRS Whistlebower Office

• CFTC Whistleblower Program

• Dodd Frank—Office of the Whistleblower

An age old concept…still in use today

Whistleblowing—A history


• Karen Silkwood

• Frank Serpico

• Mark Felt

• Mark Whitacre

• Sherron Watkins

• Cynthia Cooper

• Daniel Ellsburg

• Edward Snowden

Well known whistleblowers

Whistleblowing—A history


How does Dodd-Frank Whistleblower Program work?


Since inception through September 2017, the Office of the Whistleblower has:

• Received over 22,000 tips

−From every state in the country

−From 114 foreign countries

• Returned as many as 2,800 phone calls from tipsters a year

• Issued almost 450 Final Orders

Statistics

SEC whistleblower program

Source: United States Securities and Exchange Commission – 2017 Annual Report to Congress, Dodd-Frank Whisteblower Program


• Purpose of SEC program

• Eligibility to qualify as a whistleblower

• Submission of information

• Awards

• Rights of whistleblowers/retaliation/pre-taliation

• Requirements of Office of the Whistleblower

How does it work?



• February 2018 Supreme Court Ruling

• Interpretation of anti-retaliation provisions of Dodd-Frank

• Individuals must report potential securities laws violations of Dodd-Frank to SEC

• Self reporting concerns

• Impact on compliance programs (we’ll cover this later)

• Impact on SEC enforcement

Whistleblowing— Digital Realty Trust Inc. vs. Somers


Awards process


Source: 2017 Annual Report to Congress on the Dodd-Frank Whistleblower Program, U.S. Securities and Exchange Commission

Analysis and investigation

Case filed/ penalties

ordered

Notices of actions posted

Tip submission

Whistleblower files claim

Awards determined

Payment


Awards

SEC whistleblower program – Top 10 Whistleblower Awards (inception to date)


$3.5

$4.0

$5.5

$5.0

$7.0

$14.0

$17.0

$20.0

$22.0

$30.0

0 5 10 15 20 25 30 35

May 2016

September 2016

May 2016

January 2017

January 2017

September 2013

June 2016

November 2016

August 2016

September 2014


Tip categorization (2017)



0

200

400

600

800

1000

1200

1400

Whistleblower tips by allegation type


30%

25% 7%

4%

19%

15%

Current Employees Former Employees Other Insiders

Industry Professionals Harmed or Prospective Investors Other Outsiders

Who are Whistleblowers?



Elements of an effective whistleblower program


• Reactive nature—entities don’t view fraud as a specific risk management issue

• Psychological forces— “can’t happen to me”, “we hire good people”

• Underestimate third party expectations

• Impact of “professional” whistleblowers

Potential mistakes

Effective whistleblower programs


• Tailorable to culture and risk appetite

• Publicity

• Tone at top

• Anonymity

• Anti-retaliation policy

• Training

• Fraud risk assessment

• Report on effectiveness

• Monitoring of key controls

• Effective reporting

Elements and attributes



Fraud risk assessment


Identify fraud risk

factors

Identify fraud risks

Identify fraud

schemes

Design controls


• Whistleblowers are financially incentivized and emboldened

• Companies should have robust internal control processes (hotlines, training, audits) to identify compliance lapses early and on a routine basis

• Anti-retaliation provisions don’t have extraterritorial application and may blunt protections where there is no domestic misconduct (FCPA)

• Prosecution considerations (examples)

−Nature and seriousness of offense

−Pervasiveness of wrongdoing of the corporation

−History of similar misconduct

−Timely and voluntary disclosure

−Existence and effectiveness of pre-existing compliance program

Department of justice views

Elements of whistleblower programs

Source: Department of Justice Presentation—“Trends in the Prosecution of Financial Crimes”—November 16, 2013


• Deferred prosecution agreements & Non-prosecution agreements

• Potential outcomes

−Criminal fines

−Civil penalties

−Disgorgement of profits

−Foreign fines

−Revisions to codes of conduct

−Revisions to compliance programs

−Enhanced internal controls

−Independent compliance monitor

Case dispositions


Source: Department of Justice Presentation—“Trends in the Prosecution of Financial Crimes”—November 16, 2013


• Pressure test existing compliance program

• Re-evaluate fraud risk assessment and risk mitigation plans

• Enhance internal whistleblower system to encourage internal reporting

• Analytics—implement/enhance transaction monitoring and detection for high risk areas

• “War gaming”—pre-plan investigation resources and protocols for quick response

What can companies do?



Ten things about whistleblowing


• No. 1 method of fraud detection (40% of all frauds are discovered by tip)—Per Association of Certified Fraud Examiners (“ACFE”) 2016 “Report to the Nations on Occupational Fraud and Abuse”

• Entities with hotlines discover 47% of frauds through tips per ACFE report, compared to 28% that do not

• That leaves 53% of frauds detected by other methods (analytics, internal audit, management review)

1. Tips are always appreciated


• Approximately half of all whistleblower calls are typically related to personnel or other minor matters

• Every whistleblower system has “noise”—do not let it distract you from what truly may be important

2. Don’t be distracted by noise


• Seven ways to take your whistleblower hotline’s temperature:

−Anonymous employee surveys

−Benchmarking

−Focus groups

−Exit interviews

−Feedback from hotline users

−Interviews

−Incident logs

3. How hot is your hotline?


• Rewarding whistleblowers may be necessary to compete effectively with the U.S. government’s rewards for tips relating to securities violations

−Some rewards might be published internally; others may be much more sensitive

−Fairness and generosity of rewards may help to attract employee support and generate more internal tips and reports

4. Carrots may help you hear the whistle


• 63% of employees surveyed said they reported misconduct when they saw it (Source: 2013 National Business Ethics Survey—The Ethics Research Center)

• Maintaining awareness of a whistleblower hotline, building willingness to use it and developing employees’ ability to identify potential wrongdoing are keys

5. Never hurts to over communicate


• Creating a supportive environment for whistleblowers can include:

−Development of rewards

−Non-retaliation policy and training

−Monitoring whistleblowers’ career, pay, and proposed discipline

−Timely investigation of alleged retribution

−Implementing a records retention policy for whistleblower reports, complaints and investigations

6. Protecting those who serve


• Potential barriers to whistleblowing include:

−Service hours

−Languages

−Constituencies

−Methods

7. Open wide


• “Whistleblower may have negative connotations for cultural, historical, and other reasons

• Two way communication system called a “helpline” or “guideline” or “ethics portal” may be less intimidating and can provide guidance before action is taken.

8. What’s in a name


• Taking an American whistleblower system and deploying it worldwide without customization may not generate the desired results.

• It can be helpful to involve local personnel to help tailor communication about the system.

• Providing alternative reporting methods such as e-mail, web, text or other forms may be much more attractive since they tend to be more popular in certain cultures

9. When in Rome….


• A leading practice is to have a clear line of reporting from the whistleblower system to a designated member of senior management with a reporting relationship directly to the board of directors or audit committee

• Defined roles and responsibilities for evaluating incoming reports

• Clear communication processes

• Pre-determined investigation protocols and plans

• Disciplinary committee

10. Be prepared to respond


Questions?


Contact information

Michael Brodsky Deloitte Financial Advisory Services LLP

200 Berkeley Street Boston, MA 02116

Tel: +1 617 437 3671 Email: [email protected] Twitter: @brodskyme

mailto:[email protected]

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Copyright © 2018 Deloitte Development LLC. All rights reserved.

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