Adequate Procedures, All you need to know about self reporting, Money laundering - Written by Barry & Richard on Monday, May 30, 2011 23:44 - 2 Comments
Self reporting: Why Dodd Frank & the Bribery Act mean it’s set to increase
Dodd Frank and the Bribery Act adopt a carrot and stick approach to anti-corruption enforcement.
They are likely to result in more self reports.
The US carrot
The new US whistleblower system is hard for many outside (and inside) the US to come to terms with. It is a controversial new law.
Last week the Securities and Exchange Commission (SEC) approved final rules to implement the SEC whistleblower provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) on a 3-2 vote.
Whistleblowers who voluntarily provide the SEC with original information that leads to the successful enforcement resulting in more than $1 million in sanctions can receive a ‘bounty’ of between 10% to 30% of the SEC imposed sanctions.
To put that into perspective Dodd Frank could produce a bounty of US$240 million for a whistleblower on a Siemens like case.
Arguments that whistleblowers should not receive a bounty if they fail to report their concerns internally (giving the corporates the opportunity to self report and/or deal with the problem) fell on deaf ears.
Unsurprising then that least week while in New York we learnt that now US whistleblowers are submitting lengthy documents (measured in inches of paper) prepared by whistleblower counsel with exhibits.
Stories abound of whistleblower law firms using pop up internet ads targeted to appear on the computers of employees.
The result: if an employee approaches an employer with a concern – the race is now on: to get to the SEC first.
Under the final SEC rules:
- a whistleblower can still receive the bounty even if the whistleblower reports internally and the company informs the SEC about the violations; and
- information is “original” if not already known to the SEC the date the employee reports internally, IF the whistleblower provides the SEC with the same information within 120 days.
In practice there seems little point for a whistleblower to report internally first (or at all). It is doubtful that a company could conduct an internal investigation to address the alleged wrongdoing inside 120 days at which point an employee must report in order to claim a potentially eye watering bounty.
A knock on effect of the new rules is that businesses subject to SEC regulation and faced with an investigation are more likely to consider hiring external counsel to deal with the investigation. The DOJ has recently begun taking an extremely aggressive approach to the conduct of in-house counsel who will likely be concerned with the risk of claims of a cover up if they do it themselves and conclude there is no case to answer.
The head of the SEC’s Whistleblower Office, has said that Dodd Frank has produced “an uptick, not a flood” of reports noting that quality has increased.
For overseas (including numerous UK) companies who are US Issuers reporting to the SEC the impact of Dodd Frank is likely to be profound.
The UK stick
Under the UK Proceeds of Crime Act where bribery has taken place irrespective of the Bribery Act (or any defence under it) the company and its executives could still have criminal liability under POCA if they are aware of the problem and choose to do nothing about it.
For many years this has not been an issue since many UK Boards have been ignorant of such problems.
The implementation of Adequate Procedures to Prevent Bribery to trigger the defence under the Bribery Act changes all that.
Companies have been and will be forced to look for bribery as part of their risk assessment and ongoing monitoring and review in order to be Bribery Act compliant.
Learning of a suspected bribery problem will trigger section 328 of POCA.
Under this provision a fresh stand-alone offence is committed if someone enters into or becomes concerned in an arrangement which they know or suspect facilitates (by whatever means) the acquisition, retention, use or control of [our emphasis] criminal property by or on behalf of another.
A board of directors choosing to sweep the existence of a corrupt contract (learnt of through its Adequate Procedures) under the rug would be committing an offence.
Importantly, under POCA it will not matter if the corruptly obtained contract is entered into before or after July 1st. POCA has been in force for a decade and its penalties are, in part, more severe than those under the Bribery Act.
Under POCA, contracts and assets (wherever located in the world) acquired directly or indirectly as a result of a bribe will be at risk of confiscation. The amount subject to confiscation is not limited to net profits of the relevant contract but by its value. At a minimum, this means total revenues under the contract. The penalty of imprisonment under POCA is 14 years not 10 under the Bribery Act.
Happily there is a defence.
Disclosure of the facts to prosecution authorities if bribery is suspected, for example, in relation to obtaining a contract.
Or put another way – whistleblowing (with a priceless reward – liberty).
Using a carrot and stick approach Dodd Frank and the Bribery Act increase the pressures to self report.