by Stephen Kohn
In FCPA cases, companies have been found guilty of books and records violations when they recorded a bribe in the corporate books as a “commission,” a “consulting fee,” “sales and marketing expenses,” “travel and entertainment expenses,” “rebates and discounts,” “service fees,” “miscellaneous expenses,” “petty cash” payments, and “write-offs,” among other obfuscations.
The accounting provisions do not apply to privately held companies but do apply to all issuers, including companies that trade securities on the national securities exchanges in the United States and foreign issuers that trade in ADRs. The requirements also apply to subsidiaries of publicly traded companies.
Third-party liability: The FCPA prohibits the practice of using “third parties or intermediaries” to pay the bribes. Companies cannot deny knowledge that a bribe was paid simply by using intermediaries to make the payments. The fact that a company may hire a foreign “agent” or attorney to conduct its business affairs does not insulate the company from liability for the actions of these agents or intermediaries. In order to demonstrate that the company knew or should have known that the third party was paying bribes, the DOJ/SEC look at various “red flags” to determine third-party liability, such as (1) “excessive commissions” paid to “agents or consultants”; (2) “unreasonably large discounts”; (3) “consulting agreements” that include “vaguely described services”; (4) use of a third party who is “related to or closely associated with the foreign official”; or (5) if a third party “requests payment to offshore bank accounts.”
Knowledge requirement: Corporations can be held liable under the FCPA under the “willful blindness” standard. As explained in the DOJ/SEC Resource Guide, “Because Congress anticipated the use of third-party agents in bribery schemes—for example, to avoid actual knowledge of a bribe—it defined the term ‘knowing’ in a way that prevents individuals and businesses from avoiding liability by putting ‘any person’ between themselves and foreign officials. . . . [I]t’s meant to impose liability not only on those with actual knowledge of wrongdoing, but also on those who purposefully avoid actual knowledge.” In its 1988 legislative history on the FCPA, Congress described the firm’s knowledge requirements as prohibiting “the so-called ‘head-in the sand’” defense, which would include “willful blindness,” “deliberate ignorance,” or other “unwarranted obliviousness” that should have alerted them to a “high probability” that the FCPA could be violated.
Red flags: According to the DOJ/SEC, the following “red flags” can trigger corporate liability for the actions of third parties, even if the corporation did not have any direct knowledge of a bribe: (1) excessive commissions to third-party agents or consultants; (2) unreasonably large discounts; (3) third-party “consulting agreements” that are vague; (4) close associations between consultants and foreign officials (especially if the consultant becomes part of the transaction at the request of the foreign official); (5) shell companies as third parties; and (6) payments made to the consultant or third party to offshore bank accounts.
Sanctions and fines: The amount of the sanction or fine paid under the FCPA is very important for whistleblowers, as the Dodd-Frank reward provisions only kick in if the government (or the SEC) obtains a total of $1 million or more in collected proceeds. The penalties for FCPA violations include fines up to $2 million for each violation committed by corporations or business entities and fines up to $100,000 for each violation committed by an individual.
The accounting laws have far higher penalty provisions. Corporations can be fined up to $25 million and individuals fined up to $5 million for these violations. Moreover, under the Alternative Fines Act, courts can impose “up to twice the benefit that the defendant sought to obtain by making the corrupt payment” as a penalty in an FCPA case. Even larger sanctions can be recovered under the accounting provisions of the Act, which permit the SEC to obtain “disgorgement” penalties equal to “the gross amount of the pecuniary gain to the defendant as a result of the violations.” There is no upper limit on a disgorgement penalty. The more profits a company made from paying a bribe, the higher the disgorgement penalty.
Statute of limitations: There is a five-year statute of limitations for the criminal violations of the FCPA, but acts committed beyond the five-year period may be still be actionable under a “conspiracy” theory if one or more of the actions were timely. Civil cases filed by the SEC also have a five-year statute of limitations, but, as explained in the DOJ/SEC Resource Guide, the five-year statute of limitations “does not prevent SEC from seeking equitable remedies, such as an injunction or the disgorgement of ill-gotten gains for conduct predating the five-year period.”
Other violations: An FCPA violation may also result in prosecution for other related crimes, including obstruction of justice, mail and wire fraud, tax violations based on how the bribes were reported to the IRS, securities violations related to the accuracy of corporate books, and the failure to disclosure liabilities to shareholders.
Under the whistleblower reward law, an original source is eligible for a reward based on all monies obtained in an FCPA case, including penalties obtained from “alternative remedies” and all criminal or civil proceedings prosecuted by any branch of the U.S. government. Reward claims under the FCPA follow the same procedures as those for filing securities claims with the SEC. See Rule 8 and Checklist 7.
PRACTICE TIPS
• The Foreign Corrupt Practices Act, 15 U.S.C. § 78m and § 78dd-1, et seq.
• The Department of Justice (DOJ) resource page on the FCPA is located at www.justice.gov/criminal-fraud/foreign-corrupt-practices-act.
• The best source of information explaining the requirements of the FCPA is the Resource Guide to the U.S. Foreign Corrupt Practices Act, available at https://www.globalwhistleblower.org or from the Department of Justice.
RULE 10Get a Reward! Make Sure Automobiles Are Safe
On December 27, 1994, the Chrysler Corporation fired safety executive Paul Sheridan. His discharge commenced a twenty-one-year battle to pass whistleblower protections for autoworkers. It wasn’t until 2012 that autoworkers obtained federal protections against being fired for simply raising safety concerns. Three years after passing these on-the-job protections, and in the wake of some of the worst auto safety scandals, including deadly airbags and malfunctioning ignition switches, Congress passed the first whistleblower law designed to pay rewards when employees exposed safety hazards.
Antiretaliation
Before anyone died from a defective liftgate latch used in the newly developed Chrysler minivans, Paul Sheridan reported the problems and risks they posed. He raised concerns with management (they were ignored). He filed an anonymous “tip” with an auto safety public interest group, and ultimately some of his concerns were reported in an industry newspaper. Sheridan told his bosses that he was going to report the defect to the National Highway Transportation Safety Administration (NHTSA). Chrysler’s reaction was brutal.
During the Christmas holiday season, Sheridan’s office was “raided.” Shortly thereafter, he was fired. Next Chrysler went to court “without notice and obtained an ex parte ‘muzzle order’ which threatened him with arrest if he disclosed what he knew about Chrysler safety defects.” Despite these attacks, Sheridan testified before NHTSA, which investigated his concerns and found them to be true.
Sheridan’s safety allegations were vindicated, but not in time to save some of the lives for which he risked his career. The liftgate latch defect was eventually linked to thirty-seven deaths.
During the NHTSA investigation, Chrysler increased its pressure to shut Sheridan up. The company amended its state law lawsuit against him, demanding money in addition to simply gagging him. Under pressure from the company’s lawsuit, Sheridan was forced to settle his own state whistleblower claims in exchange for Chrysler’s dropping its lawsuit. As the U.S. Senate investigation revealed, for trying to save lives, Sheridan “suffered untold sums in legal expenses and
personal trauma.”
Sheridan’s mistreatment prompted Congress to pass the first whistle-blower protections for autoworkers. In 2012 the Moving Ahead for Progress in the 21st Century Act, known simply as “MAP-21,” was signed into law. It should have been named “Sheridan’s Law.” Modeled on the Sarbanes-Oxley Act and the airline and trucker safety laws, it utilizes the DOL procedures outlined in the beginning of this Rule. It covers employees working for “motor vehicle manufacturer(s), part supplier(s) or dealership(s)” who are “discriminate(d) against” for reporting “motor vehicle” defects or “noncompliance” with auto safety laws to their employer or the Department of Transportation. The process is as follows:
• MAP-21 has a 180-day statute of limitations. This means that employees filing a whistleblower retaliation complaint must file their charge with the U.S. Department of Labor within 180 days of any discriminatory action.
• After a complaint is filed with the Occupational Safety and Health Administration, OSHA conducts an investigation. If the employee prevails, OSHA can order the employer to immediately reinstate the worker and pay back pay, economic and compensatory damages, and reasonable attorney fees and costs.
• Anyone losing before OSHA has a right to request a full trial on the merits of his or her case before a Department of Labor judge. A ruling by the Labor judge can be appealed within the Department of Labor to the Administrative Review Board, an agency body appointed by the Secretary of Labor. Only the review board has the authority to issue a final order, which is subject to appeal before the U.S. Court of Appeals.
• The law has a “kick-out” provision. If the Labor Department fails to issue a final order in a case within 210 days from the filing of the complaint (i.e., fully complete the three-step process outlined above), the employee (not the employer) can have the case removed to federal court, where it will be heard de novo before a U.S. District Court judge. The federal court process is completely independent of the Labor Department proceedings, which are automatically terminated once the case is moved to federal court. Either party can request the federal judge to have the case heard by a jury.
• A complainant who loses either before the Department of Labor or in federal court has the right to file an appeal with the U.S. Court of Appeals that has jurisdiction over the case.
Whistleblower Rewards
MAP21 helped with retaliation, but it wasn’t the solution to ending misconduct in the auto industry. Employees who suffered brutal retaliation, like Sheridan, could get relief, but the law did nothing to incentivize workers to blow the whistle. Scandals continued to plague the auto industry. Who would want to suffer as Mr. Sheridan had, even if you could eventually prevail in a wrongful discharge lawsuit? The antiretaliation law also had a major loophole: It did not cover employees who worked outside the United States, where many cars are designed and built. U.S. employment laws could not protect auto workers in Mexico, Japan, Korea, or Germany.
The solution: Create a rewards law. That is precisely what Congress did. Legislators took the language from the Dodd-Frank Act and IRS rewards law and crafted an auto safety reward law. Senator John Thune explained that his legislation was “modeled after existing statutory whistleblower protections that encourage individuals to share information with the Internal Revenue Service and the Securities and Exchange Commission.”
In 2014, the year before the auto safety rewards law was passed, the NHTSA recalled 63 million vehicles for safety problems, including GM cars that had faulty ignition switches and numerous models that used the deadly Takata air bags. Auto companies and suppliers paid $126 million in fines. Based on this record, which included “numerous injuries and deaths,” Congress looked towards the highly effective reward laws as a model. As stated in the Senate report, the law would “incentivize” workers to “provide information about defects, instances of noncompliance, and motor vehicle safety reporting violations as early as possible to help improve automobile safety.”
The auto safety rewards law tracks the Dodd-Frank Act but is somewhat weaker. Here are the major provisions:
First, to qualify for the reward the whistleblower must be an employee or contractor in the auto industry and the sanction obtained by the U.S. government must be at least $1 million. The reward range was set between 10 and 30 percent of the sanction. Thus, a $1 million fine would trigger a whistleblower reward of $100,000 to $300,000.
Second, whistleblowers must voluntarily provide “original information” to the Department of Transportation. Original information is explicitly defined in the statute, and a whistleblower seeking a reward should carefully review this definition and make sure the “disclosures” described in a claim conforms with this definition. The definition provides that the “information” must be “derived from the independent knowledge or analysis of an individual” and that this information [or analysis] was “not known to the Secretary [of Transportation] from any other source, unless the individual is the original source of the information.”
Third, the information must relate to a “motor vehicle defect, noncompliance, or any violation” (including reporting violations) that is “likely to cause unreasonable risk of death or serious physical injury.”
In determining the amount of a reward (if any) to give to a whistleblower, the Department of Transportation was mandated to consider the following factors:
Factors that can increase reward:
• Reporting the safety concern internally first.
• “Significance” of the original information.
• High “degree of assistance” provided by the whistleblower (or his/her lawyer) in the government investigation.
• Other factors identified by the Secretary of Transportation when the final rule on this law is published. The Department of Transportation has not yet published these rules.
Factors that will result in a reward being denied:
• Being convicted of a criminal violation related to the enforcement action he or she triggered.
• “Knowingly and intentionally makes any false, fictitious, or fraudulent statement” to the government.
• The same information was previously filed with the Secretary of Transportation. This is similar to the False Claims Act’s “first to file” rule.
• Failing to follow the procedures required by the Secretary of Transportation. The Secretary has not yet published these procedures, but Congress has mandated that the rules be published on or before June 3, 2017. Thus, it is critically important that before filing a claim under the auto rewards law you check to see if the Department of Transportation has published the whistleblower reward law rules. Once these rules are published, make sure that any claim is filed precisely how the Department of Transportation requires.
• If acting without orders from his or her boss, deliberately causing the violation he or she reported. This provision is fairly technical. The disqualification applies “to any whistleblower who, acting without direction from an applicable motor vehicle manufacturer, part supplier, or dealership, or agent thereof, deliberately causes or substantially contributes to the alleged violation of a requirement of this chapter.”
Internal Compliance Requirements
Unlike any other whistleblower reward law, the auto safety law requires that, under some circumstances, an employee first report his or her concerns within the company to be eligible for a reward. This provision conflicts with the right of whistleblowers to file confidential claims with the government, which is also protected under the law. It is very common for the boss to suspect that the employee who raised concerns internally became the person who later reported the company to the government. Additionally, the mandate could be highly problematic for whistleblowers outside the United States, where most countries lack any effective legal protections for whistleblowers.
The simple truth is that in whistleblowing, “no good deed goes unpunished.” Employees who have to let their company know about problems sometimes get fired before they have th
e time or wherewithal to report their concerns to the government. If they do eventually report to an authority outside the factory gates, they become the primary suspect for snitching on the company. This places employees in a difficult position: Risk being disqualified for a reward, or potentially give up your confidentiality.
Under the rewards law, if the auto company/supplier/dealership has “an internal reporting mechanism in place to protect employees from retaliation,” a whistleblower must use that mechanism in order to qualify for a reward. The provision sets a dangerous precedent. Historically, many companies have used internal reporting programs as a trap for whistleblowers. For example, many corporations delegate responsibility for internal compliance with the company’s general counsel. In doing so, the company can use attorney-client privilege to hide information from the government (see Rules 17 and 18) and use the program to put pressure on the employee to keep quiet.
The requirement to use internal corporate reporting mechanisms has important exceptions that demonstrate Congress was aware that many company compliance programs are problematic. These exceptions apply if:
• A whistleblower “reasonably” believes he or she would be subject to retaliation if the issues were reported internally through the company’s “mechanism”;