Jonny Frank is a Partner at StoneTurn, a global professional services firm, and former Big Four Partner and Federal Prosecutor.
getty
At a recent white-collar crime conference, Department of Justice officials announced a 90-day sprint to launch a corporate whistleblower program to reward individuals who report corporate crimes. The DOJ program is the latest in a string of government whistleblowing initiatives. Designed to fill gaps in other programs, it sets up a whistleblower race to the government’s doorstep that should profoundly impact the investigation and prosecution of corporate crime. Separately, the DOJ launched a Pilot Program on Voluntary Self-Disclosures for Individuals, which allows participants in certain types of criminal conduct to blow the whistle for themselves in exchange for non-prosecution agreement if they meet certain conditions.
Whistleblowing has long transcended being a compliance issue; it’s a business issue. Failure to recognize the gravity of the issue can be costly to an organization’s reputation and, ultimately, the bottom line.
Winning Starts With Understanding The Terrain And Competition
Rationale
A notable distinction between economic and street crime is white-collar crime often involves secrecy. Unlike smash-and-grab retail theft, where the discovery of stolen goods prompts an investigation, concealment of the crime is usually a critical component of fraud and corruption schemes.
The government relies heavily on whistleblowers and corporate self-disclosure because prosecutors and law enforcement agents cannot investigate absent an allegation or suspicion to pursue. Hence, these agencies are eager to encourage individuals with knowledge of wrongdoing to speak up.
Contestants
The whistleblower race includes three contestant types:
• The first group are perpetrators of the misconduct.
• The second type are companies involved in the wrongdoing.
• The final group are individuals aware of, but not involved in, the misconduct.
Winner’s Prize
Depends on the contestant:
1. Perpetrators win no criminal prosecution for their crimes.
The DOJ Criminal Division and federal prosecutors in the Northern District of California and Southern District of New York recently launched pilot programs allowing individuals to receive a non-prosecution agreement for voluntarily self-disclosing their illegal conduct provided, among other conditions:
• The individuals are not public officials, CEOs or CFOs of a public or private company.
• They can provide substantial assistance in the investigation and prosecution of equally or more culpable individuals.
• The government does not already know the information.
• They truthfully and completely disclose all criminal conduct in which the individual has participated and the individual is aware of.
• They are not engaged in criminal conduct (e.g., violent crime or national security or sexual offenses) or have a previous felony conviction or a conviction of any kind for conduct involving fraud or dishonesty.
2. Corporations can avoid criminal prosecution through voluntary self-disclosure, provided the government is unaware of the misconduct and the company cooperates in the investigation. The policy also requires the company to engage in “timely and appropriate” remediation, including conducting a root cause analysis and implementing a compliance program that meets DOJ criteria.
3. Whistleblowers not involved in the misconduct earn a monetary award. Although the DOJ has not yet decided upon a formula, rewards will likely be substantial. The SEC has awarded over $1.9 billion in whistleblower rewards since the program’s inception in 2011, including an unprecedented $279 million reward in a single matter in 2023. The IRS generally issues rewards of between 15% and 30% of the collected proceeds attributable to the whistleblower’s information. In fiscal year 2023, the DOJ recovered nearly $2.7 billion through False Claims Act settlements, including whistleblower rewards ranging from 15% to 30% of the government’s recovery.
Second Place
The adage “if you’re not first, you’re last” may apply. It seems second-place finishers receive nothing. Although the DOJ has not finalized the program, it already announced the government will reward only whistleblowers who provide information previously unknown to the government. This policy puts a premium on speed, although it’s unclear whether whistleblowers who give additional details to the first-place winner can receive any benefit.
Implications Of The Whistleblowing Initiative
The DOJ is betting the program will increase corporate self-disclosures. Companies decide whether to self-report criminal conduct by weighing the likelihood of the government learning about misconduct and the potential penalties, including reputation loss, fines, forfeiture, disbarment and more. Given the success of other government whistleblowing programs, such as the Securities and Exchange Commission’s, I believe the DOJ program may substantially increase the likelihood of the government learning about misconduct.
The whistleblower race complicates the organization’s ability to assess consequences if it elects to self-disclose potential illegal behavior. Companies typically conduct an internal investigation before making a voluntary disclosure. However, internal investigations tip off potential whistleblowers, who, even if they lack direct knowledge, can deduce allegations from the nature of the investigators’ questions and document requests.
Given the uncertainties, companies and their counsel must take steps at the investigation’s outset to have the option to self-disclose at any point and must take potential whistleblowers into account as they structure the investigation. For example, while it might be less efficient and lead to bad feelings, internal investigation teams likely will try to keep the existence of the investigation secret as long as possible. This includes potentially not informing senior management or the board of matters they would have disclosed earlier.
The whistleblower race prioritizes early remediation, including root cause analysis, read-across, corrective action plans, discipline and testing. Many organizations wait for investigation results before commencing the remediation process. Delaying remediation is a critical mistake. For example, the DOJ Criminal Division requires companies to have fully remediated and tested the enhanced compliance program at the time of resolution to obtain the Corporate Enforcement Policy benefits. Worst, the DOJ Criminal Division explicitly directs prosecutors to consider imposing a monitorship if the “compliance program and controls are untested, ineffective, inadequately resourced, or not fully implemented at the time of a resolution.”
The implications of the DOJ’s corporate whistleblower program extend far beyond immediate rewards and penalties, as the program seeks to drive an enduring impact. By increasing the likelihood of corporate self-disclosures, the DOJ aims to foster a culture of transparency and accountability within organizations.
Yet, this race also introduces complexities, forcing companies to navigate the delicate balance between internal investigations, whistleblower concerns and the imperative for early remediation. In this evolving landscape, proactive measures and strategic decisions will shape the contours of corporate governance and compliance for years to come. How will your business prepare?
Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?
