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Navigating Whistleblower Complaints: Best Practices and Pitfalls for Companies

Whistleblowers have become increasingly integral to financial regulatory enforcement efforts in recent years. Both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) regularly tout record numbers of whistleblower tips received and award payouts issued. For example, in FY2022 the SEC reported receiving over 12,300 whistleblower tips, narrowly exceeding the previous year's record amount. The SEC has explicitly acknowledged whistleblowers as "critical" to its enforcement success.

With whistleblower activity surging to unprecedented levels, it is more likely than ever that companies will need to address a whistleblower complaint. Effectively handling such complaints is critical, as regulators and prosecutors scrutinize companies' responses. Mishandling whistleblower issues can lead to harsher penalties and additional liability when misconduct is uncovered, beyond sanctions for the underlying wrongdoing itself.

For instance, in its December 2022 resolution of criminal charges related to anti-money laundering failures, Danske Bank paid over $2 billion in penalties to the Department of Justice (DOJ), SEC, and Danish authorities. The misconduct at issue had first been raised years earlier in an internal whistleblower report that Danske failed to adequately investigate and address at the time. Regulators cited this as a major aggravating factor warranting heightened punishment.

When a potential whistleblower surfaces, whether reporting internally or to the government, following best practices can help companies thoroughly investigate while avoiding even the perception of retaliation. But there are also pitfalls to steer clear of that commonly draw scrutiny. This article outlines best practices for handling whistleblower complaints, as well as key mistakes to avoid, in today's increasingly whistleblower-driven enforcement climate.

Best Practices for Handling Whistleblower Complaints

Creating an environment that encourages internal reporting first

An effective whistleblower program’s primary aim should be persuading employees to raise concerns internally before reporting externally. Internal whistleblowing brings numerous advantages. It allows companies to identify and mitigate risks at earlier stages before they metastasize into existential threats. Employees also often have insights useful for improving operations and compliance.

Critically, internal reporting provides companies the opportunity to self-investigate and voluntarily self-disclose potential wrongdoing to regulators and law enforcement. DOJ and SEC policies offer substantial benefits, including declinations of prosecution and dramatically reduced penalties, for companies that self-report credibly and comprehensively. But self-disclosure credit hinges on the company learning of misconduct before the government does through an external whistleblower complaint.

To encourage internal whistleblowing, companies should establish clear reporting channels, such as hotlines, web portals, and designated compliance contacts. Employees must be regularly informed of these options and reassured their concerns will be taken seriously without fear of retaliation. Policies strictly prohibiting retaliation should be widely disseminated and trained on. Fostering alternative communication paths through supervisors, HR, and internal audit is also key.

Investigating whistleblower complaints appropriately

Upon receiving a whistleblower complaint, companies should promptly acknowledge it and consider independent escalation to the board or senior management as warranted. Evaluating the need to retain outside counsel is often advisable to demonstrate impartiality.

The next imperative step is developing an investigative plan proportionate to the issues raised. It should address relevant document preservation, forensic data collection, sequencing of witness interviews, and estimated time to completion based on urgency. Counsel should provide Upjohn warnings that clarify representation of the company, not individuals. Detailed interview notes and summaries facilitate assessment of findings.

The investigation’s report must address all allegations, key findings, recommended remedial steps, and limitations. Appropriate escalation and implementation of changes should follow. The whistleblower can be updated on conclusions to provide closure absent retaliation concerns. Self-reporting obligations should be evaluated based on findings.

When complaints arise externally, timeliness is paramount as the government undertaking its own inquiry will expect swift internal investigation. Independence and avoiding bias are also critical when findings may be scrutinized by regulators. A timely, properly scoped, and demonstrably unbiased internal investigation can be decisive for the government in declining charges.

Pitfalls and Prohibited Practices

Retaliation

Adverse actions like terminating or demoting a known whistleblower are clear violations of anti-retaliation statutes. But retaliation may arise more subtly, such as through altered duties, exclusion from information, or active efforts to uncover a whistleblower's identity. Impermissible retaliation could even include performing poorly documented terminations of whistleblowers otherwise up for discipline.

While employment counsel should be consulted, their blessing alone does not inoculate retaliatory termination claims if the surrounding facts suggest punishment of the whistleblower. Anti-retaliation provisions in state laws also warrant careful review beyond federal prohibitions.

Pretaliation

In addition to overt retaliation, companies must avoid "pretaliation," meaning impeding individuals from whistleblowing altogether. SEC rules bar any action inhibiting communicating directly with the SEC about potential securities law violations. Requiring approval or notice to the company before speaking with the government or forfeiting whistleblower award eligibility may run afoul of this prohibition.

Seeking to discover if an employee contacted regulators or restricting their access to information could also constitute improper pretaliation. Employment and severance agreements should be reviewed to ensure no limitations on communicating with the government about potential misconduct. Manager training is key to avoid any conduct unintentionally stymying whistleblowing.

In summary, given today's proliferation of whistleblower activity, having rigorous policies and carefully handling any complaints is essential. Whistleblower program best practices help companies investigate appropriately and demonstrate a strong culture of compliance to regulators. Mistakes can significantly compound liability. Please contact Lucosky Brookman if you need assistance crafting whistleblower policies and procedures or conducting training. We regularly advise clients on navigating whistleblower issues and investigations.