July 16, 2010

New Whistleblower Statute Applies to FCPA Violations by Public Companies

Holland & Knight Alert
John L. Brownlee | Ronald A. Oleynik

The Wall Street Reform and Consumer Protection Act approved by Congress and set to be signed into law by President Obama next week contains a whistleblower provision that will have a significant impact on Securities and Exchange Commission (SEC) enforcement of the Foreign Corrupt Practices Act (FCPA). Under the new law, a whistleblower who provides information regarding a violation of the anti-bribery, books and records, or internal controls provisions of the FCPA to the SEC will receive an award of between 10 and 30 percent of the amount of any monetary penalty imposed by the SEC that results in monetary sanctions exceeding $1 million. Monetary sanctions include penalties, disgorgement of any profits gained from the bribe, and interest. Importantly, the information may relate to misconduct that occurred prior to the date of enactment of the statute.

Broad Application

The whistleblower provision applies broadly to violations of the securities laws by public companies.1 However, SEC enforcement actions for violations of the FCPA require companies to disgorge profits obtained from improper payments. Recent FCPA enforcement cases have resulted in very substantial disgorgement penalties: (i) Siemens: $330 million in disgorgement of profits; (ii) Halliburton/KBR: $177 million in disgorgement of profits; (iii) ENI S.p.A. and Snamprogetti Netherlands BVI: $125 million in disgorgement of profits; (iv) Technip SA: $98 million in disgorgement of profits; and (v) Daimler AG: $91.4 million in disgorgement of profits.

The determination of the amount of the award to the whistleblower, between 10 and 30 percent, is within the discretion of the SEC and is based in part on the significance of the information provided to the SEC. The award will be paid to the whistleblower if the original information provided by the whistleblower leads to a successful enforcement action by the SEC.

A whistleblower may submit information anonymously, provided he/she is represented by counsel and discloses his/her identity prior to payment of the award.

The new law also contains significant whistleblower protection against retaliation. Any individual who is wrongfully discharged will be entitled to reinstatement, twice the amount of back pay, litigation costs and reasonable attorneys’ fees.

The new law requires the SEC to issue final regulations implementing this provision no later than 270 days after enactment. However, the whistleblower may provide information to the SEC prior to the issuance of the regulations.

U.S. Companies: Strengthen FCPA Compliance Programs

This new provision increases the likelihood that information regarding improper payments will come to the attention of the SEC. Moreover, when combined with recent enforcement actions by the SEC that have held U.S. parent companies strictly liable for the improper conduct of their foreign subsidiaries, the compliance and enforcement risks for U.S. public companies engaged in overseas business activities cannot be overstated.

We strongly urge U.S. companies to take immediate steps to strengthen their FCPA compliance programs and undertake training of their employees and third parties, including agents and distributors. U.S. companies should also be proactive in conducting compliance audits of their overseas operations.

1 The FCPA provisions would apply to issuers that have a class of securities registered pursuant to Section 12 or that are required to file reports under Section 15(d) of the Securities Exchange Act of 1934. This includes companies with a class of securities registered on a national exchange.

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