The Background: Whistleblower reports to the Securities Exchange Commission ("SEC") have surged year over year, and corporate Foreign Corrupt Practices Act ("FCPA") resolutions have continued to include large financial penalties.
The Development: The SEC's recent award of more than $28 million to a whistleblower who provided information that led to settled FCPA enforcement actions, including a financial settlement of more than $281 million, was the 10th largest in whistleblower program history. The Biden administration has emphasized that the fight against corruption is a core national security interest, and FCPA enforcement is expected to be a continued focus by the SEC and the Department of Justice ("DOJ").
Looking Ahead: Given the heightened FCPA risk environment companies should address whether their internal compliance programs are structured to identify and promptly address any internal tips or reports of alleged FCPA violations.
On May 19, 2021, the SEC announced an award of more than $28 million to a whistleblower whose tip led the SEC and the DOJ to reach a combined $281 million FCPA settlement with a U.S.-based manufacturer of electronic systems for aircraft. This is the 10th-largest award ever from the SEC whistleblower program and the fourth known award for a tip that led to a corporate FCPA resolution. In 2018, the manufacturer resolved all FCPA-related charges in a settlement with the SEC that included $143 million in disgorgement and interest and a deferred prosecution agreement with the DOJ that included a separate $138 million penalty.
Under the SEC's whistleblower program, an individual who provides information that leads to a successful enforcement action may qualify for an award of between 10% and 30% of the total financial penalties collected by the SEC over $1 million. The financial incentives for whistleblowers to report conduct involving potential FCPA violations have never been higher.
Given these incentives, the number of whistleblower claims brought to the SEC has increased. In the SEC's fiscal year 2020 alone, as internal whistleblower reports dropped at many companies, whistleblower claims to the SEC surged by approximately 33% compared to the prior fiscal year. In May 2021, the Acting Director of SEC Enforcement stated that she expects even more whistleblower tips to the SEC in fiscal year 2021 as a result of continued remote work and the SEC's publicity of the program.
Part of the surge has also been attributed to the increase in the plaintiffs' lawyers offering to represent whistleblowers based on a success fee. Plaintiffs' counsel actively recruit employees at companies in targeted industries and high-risk jurisdictions, often through social media, to become whistleblowers. Based on public reports, several successful SEC whistleblowers were represented by counsel.
Meanwhile, the Biden administration has signaled within the first six months that FCPA will be a significant enforcement priority in 2021. On June 7, 2021, the Biden administration released a memorandum establishing the fight against corruption as a core national security interest and directed federal departments and agencies to make recommendations to significantly bolster the ability of the U.S. government to combat corruption. Separately, senior DOJ and SEC officials have noted a continued focus on FCPA enforcement.
Against the backdrop of significant incentives to report potential wrongdoing to the SEC and the continuing focus on FCPA enforcement, companies should consider taking steps to minimize the risk of external whistleblowing by having and publicizing mechanisms to report allegations of improper conduct internally, including the ability to report potential violations confidentially and anonymously. Next, a prompt, independent, and thorough investigation of any internal reports or tips of potential violations of the FCPA or other laws provides for effective opportunities to achieve timely remediation and to make sure that the reporter knows that his or her concerns are being taken seriously and addressed.
Notably, more than 80% of whistleblowers who received awards in fiscal year 2020 first raised their concerns internally to their supervisors, compliance, or other internal reporting mechanisms before reporting information about potential misconduct to the SEC. Even if the whistleblower later chooses to report to the SEC, the DOJ, or another regulator, a company that properly investigates all allegations when they are reported internally will be in the best position to demonstrate that it took appropriate steps in response and to defend itself in any subsequent external investigation.
Three Key Takeaways
- Publicity of the SEC's whistleblower program by the SEC and plaintiffs' attorneys, the impact of remote work, and the ever-increasing size of financial penalties in reported FCPA settlements will incentivize individuals to report potential violations of the FCPA to regulators.
- The Biden administration's emphasis on anticorruption as a core national security focus and the call for greater interagency and cross-border cooperation on anticorruption issues signal a continued focus on FCPA enforcement.
- Companies will want to consider the effectiveness of their compliance programs in addressing and responding to internal reports or tips involving potential FCPA violations, particularly when considering the risks and benefits of self-reporting.