The Next Financial Reform Floodgate

A lot can turn on an active verb. Hamlet said, "To be or not to be -- that is the question." The same applies to the new Dodd-Frank financial reform bill's whistleblower provisions, signed by President Obama last week, which requires that any whistleblower providing "original information" leading to a penalty over $1 million "shall" receive between 10 and 30% of that collection.

For many companies, a world of hurt will soon turn on that single word, "shall," unleashing a whirlwind of decentralized private enforcement for a public issue that's taken even greater importance in the Obama administration and the Department of Justice's Criminal Division -- the nexus of corruption, bribery, and terrorism.

The Foreign Corrupt Practices Act of 1977 ("FCPA") was enacted to make it unlawful for certain classes of persons and entities to offer or provide money or anything of value to officials of foreign governments or foreign political parties with the intent to obtain or retain business.

This criminal statute, which permits jail time for its (often white collar) offenders, applies to all U.S. persons and certain foreign issuers of securities, as well as foreign firms and persons who cause, directly or through agents, an act in furtherance of such a corrupt payment to take place within the territory of the United States. The new bill will empower the SEC to reward FCPA whistleblowers financially.

For anyone who remembers the movie Syrianawith George Clooney and Matt Damon, the FCPA is often associated with shady dealings and government contracts in far-away places. With the new financial reform law, however, acts in distant countries will haunt businessmen here at home. These new whistleblower "bounty" provisions mean that well-meaning employees (or even disgruntled employees with a bone to pick), are now incentivized to do well by doing good -- collecting monetary rewards from Uncle Sam, while helping put U.S. executives in prison for violations of the FCPA.

This is partly about foreign policy. President Obama's foreign policy sees the roots of bellicosity in civil society, meaning that lawlessness abroad can become lawlessness exported. With the stroke of a pen, President Obama not only democratized the global fight against corruption, he created a new weapon against the sorts of cultures that breed violent extremism, whether in Afghanistan or Pakistan, India or Russia.

But foreign policy will be far from the minds of the most immediate beneficiaries of the new law. To be blunt, the word "shall" will open up a world of financial security for hundreds of potential new whistleblowers, rewarded for their candor and courage with potentially enormous payments. This is especially the case when you consider the penalties paid by companies for FCPA-related offenses. In 2010, BAE paid $400 million, and in 2008 Siemens settled a FCPA mater for a staggering $800 million. With settlements -- now mandatory -- likely to run the hundreds of millions, you don't need to be a mathematician to know a 10 to 30% cut will provide a prove powerful incentive to cooperate with the government.

For these new bounty-hunters, just as much turns on the word "shall," much will also turn on how the statute is translated into practice. Two major inflexion points will be: (1) the discretion exercised by the officials at the Securities & Exchange Commission, and (2) how whistleblowers can avoid the potentially adverse consequences of disclosing corruption.

Let's take those in turn. As the Securities Docket blog reports, "It will be interesting to see how the SEC exercises its discretion here."

We'll say. The legislation gives the SEC complete discretion to determine the amount of the award. They'll be considering factors such as the significance of the whistleblower's information and the degree of assistance provided. In other words, the decision to blow the whistle is only the beginning.

This all means that whistleblowers will need to ensure that they are as helpful (substantively and process-wise) to the SEC as possible in order to receive the maximum award.

The second question is even more pressing for the whistleblower, considering the hundreds of millions of dollars in penalties that firms have paid for FCPA violations.

With these stakes, the most vulnerable actors in the new system will be -- no surprise here -- the whistleblowers themselves. To cite another movie, anyone who saw The Insider (where Russell Crowe plays a whistleblower employed by a tobacco company) remembers the world of fear that can envelop someone exposing corrupt practices.

Experience shows that whistleblowers can be put through challenging and even dangerous experiences as a result of their actions. A recent study by professors at the University of Chicago and University of Toronto found that 82% of named whistleblowers experienced harassment or altered responsibilities. Many said, "If I had to do it again, I wouldn't."

True, the new law requires protections against retaliation. A wrongfully discharged individual will be entitled to reinstatement, twice back pay, litigation costs, and reasonable attorneys' fees.

With these stakes, however, it's likely that whistleblowers will decide that the greatest insurance is anonymity. The law provides that whistleblowers can submit information anonymously, as long as they are represented by counsel (and, of course, disclose their identity prior to receiving the award).

In the manure of corruption, let a thousand flowers bloom. By allowing counsel to represent such whistleblowers, Obama's financial reform bill will also empower a new generation of lawyers to do well by doing good -- helping fight corruption by helping whistleblowers bring these cases to light.

Michael Signer, a 2009 candidate for the Democratic nomination for Lieutenant Governor of Virginia, is managing principal of Madison Law & Policy Group PLLC, where he works on financial regulation matters. Mark Vlasic, a former prosecutor and head of operations of the World Bank's Stolen Asset Recovery Initiative, works on international and anti-corruption matters as a partner at Ward & Ward PLLC.