Transnational Whistleblower Litigation
October 11, 2023
American corporate fraud has long captured the international imagination. Ask people around the globe whether they have heard of Enron, Lehman Brothers, or the Madoff Ponzi scheme, and it’s likely the answer will be yes. The scale and consequences of these three cases alone often lead people to assume that the biggest frauds of our time have originated in the United States. But in fact, corporate malfeasance on the scale of Enron or WorldCom comes in many forms around the globe. Extractive companies lie to investors about the value of a mining concession; construction subcontractors fail to pay workers a living wage; oil companies pay bribes to earn oil field rights over competitors; forex trading companies promise impossible gains with the trade of currency; the list goes on.
The multiple documentaries, not to mention scripted TV series, about these U.S. heists certainly contribute to our awareness of these great American crimes. But there’s another reason, too—the United States has long had a unique whistleblower reward program infrastructure that incentivizes those with information about corporate fraud to expose it. We are one of a handful of countries that provide avenues for whistleblowers to receive rewards, and much needed protection, for bringing information to light. What many people don’t realize, however, is that U.S. whistleblower programs may also provide an avenue for corporate accountability around the world, assuming there is a whistleblower ready to tell the truth and a U.S. enforcement agency with jurisdiction.
U.S. Whistleblower Programs
There are, broadly speaking, two types of whistleblower programs in the United States. The False Claims Act (“FCA”) is the original whistleblower program, whereby a whistleblower with knowledge that a government contractor is cheating the government steps into the shoes of the government and sues a company on its behalf. There are both federal and state versions of the FCA. There is also a newer set of programs generally referred to as “agency programs.” These are tip programs run by various federal agencies that allow whistleblowers to come forward and tell the government about bad acts that fall within each agency’s jurisdiction. The process for each program is wildly different, but the general principle is the same: the U.S. government has well-worn mechanisms to allow for the reporting of corporate fraud, the protection of the whistleblowers brave enough to step forward and report, and potentially an incentivizing reward at the end of the process to further protect the whistleblower who took the risk.
False Claims Act
The FCA was originally signed by President Lincoln to stop civil war profiteering. The statute provides that anyone with information related to a company submitting false claims for payment to the government can step into the shoes of the government and sue on its behalf. The focus of the statute is thus on fraudulent government contractors. But what that alleged fraud looks like is as varied as U.S. government spending: oil companies coordinating their bids to drive up prices to the U.S. military; hospital chains manipulating patient data to falsely bill Medicare; military contractors overchargingfor the provision of goods; and technology companies providing video surveillance equipment with fatal security flaws.
The procedure of an FCA claim is different from any other lawsuit. Whistleblowers, called “relators,” file their complaints under seal and do not serve them on defendants. Instead, a copy is sent to the Department of Justice (DOJ) and the local U.S. Attorney’s Office. Because the claim is ultimately the government’s, the statute provides an under-seal period for the government to properly investigate the claim without alerting defendants or the public. The government uses all the standard tools available to it to do so—interviewing the relator, requesting documents and interviews from the company in question, reviewing its own data, etc.—before deciding if the government wants to take on the case. If so, the government presents its case to defendants and attempts to settle it. If it does not settle, the government will officially intervene in the matter, the case will come out from under seal, and the parties will enter litigation. If the government chooses not to intervene, then the relator can pursue the case on a non-intervened basis, although those cases are tough to win, and it is rare for relators to make that decision.
The FCA is a big hammer in the government’s toolbelt. Companies are liable for treble damages plus penalties, which can be hefty depending on how long the fraud has been ongoing. If the government succeeds in recovering funds based on the relator’s information, relators are entitled to a portion of that recovery as well, between 15-25% if the government chooses to intervene, and 25-30% if not. Successful relators are also entitled to have their attorneys’ fees paid by defendants.
There are also state versions of the FCA. Approximately two-thirds of states have some sort of statute, although some limit the relevant conduct to Medicaid fraud. Most of the state statutes work approximately the same as the federal version, although there are nuances. For example, in New York, you can bring an FCA claim based on unpaid state taxes, whereas tax cases are specifically disallowed by the federal statute. As some American states have economies as big as some countries, states often have the same foreign contractors and other transnational issues as the federal government.
Agency Programs
The agency programs operate differently. Whereas FCA complaints are filed in court by the whistleblower (albeit under seal and with no service), agency complaints are filed with the relevant federal agency as a “tip.” This means that the whistleblower submits information to a federal agency related to the agency’s regulatory scope. It is then up to the agency to investigate the whistleblower’s information—again, using the standard investigatory tools available to the government. The agency then decides whether to bring an enforcement action against the company. If the company chooses not to settle the matter, the agency may bring an action against the company. But the whistleblower is not party to the lawsuit. And if the agency does not pursue the matter, the whistleblower does not have the option to pursue it on her own.
Securities and Exchange Commission
The SEC has warmly embraced whistleblowers since the program’s creation as part of the Dodd-Frank Act. Agency officials freely admit that almost all the SEC’s best cases now come from whistleblowers. SEC whistleblowers can report any violations of securities laws to the agency. Most SEC cases concern material misstatements made to investors, but the agency’s jurisdiction is reasonably broad, covering a wide range of bad conduct. Whistleblowers can report investment advisors who pump up a stock only to receive a kickback for the stock’s rise; publicly traded companies that fail to disclose significant accounting errors; mutual funds that mislead investors about their investment strategies; or any of a number of other types of violations.
In addition, the SEC has joint jurisdiction with DOJ over the Foreign Corrupt Practices Act (FCPA), which forbids companies from paying bribes to foreign officials for business benefits. When a publicly traded company is involved in the conduct, the SEC can bring a civil action against the company alongside any criminal action brought by DOJ. This means that many FCPA violations are reported to the SEC through the standard whistleblower portal.
Like the FCA, the SEC’s program welcomes whistleblowers who are both insiders to the scheme (usually former employees) and outsiders (usually analysts, short sellers, or other industry experts). The program was originally designed with outsider whistleblowers in mind—before its existence, an independent analyst repeatedly tried to warn the agency about Bernie Madoff’s Ponzi scheme and was ignored. The SEC’s program is also especially welcoming to international whistleblowers. In 2021, for example, 20% of SEC whistleblowers were from outside the U.S.
Commodities Futures Trading Commission
Alongside the SEC program, Dodd-Frank also created a whistleblower program for the CFTC. The CFTC program allows anyone with information related to fraud affecting the commodities futures market to report that information through a process similar to the SEC program. CFTC fraud covers, for example, manipulation of oil prices by inflating data regarding the value of a field, foreign exchange trading frauds through market manipulations or Ponzi schemes, or falsifications of gold prices by illegally bringing conflict gold to market. The CFTC has also taken the lead in regulating some of the most common cryptocurrency frauds, including stopping so-called “pig butchering,” whereby fraudsters use dating apps to manipulate targets to invest in fake coins or other crypto schemes.
Treasury Department’s Bank Secrecy Act and Sanctions Violation Program
The newest whistleblower program is run by the Financial Crimes Enforcement Network (FinCEN) and covers two types of bad conduct: violations of the Bank Secrecy Act (BSA) and violations of various sanctions regimes. The BSA is the set of rules governing how banks within the United States’ jurisdiction ensure that their services are not being used to launder money or facilitate criminal activity. This includes all basic know-your-customer (KYC) checks to verify customer identity and source of funds, as well as the requirement to monitor transactions regularly to ensure that any suspicious activity is appropriately reported to the authorities. In addition to banks, “money services businesses” (MSBs) must perform the same due diligence. MSBs include money transmitters like Western Union, and also most crypto companies or other facilitators of online cash-equivalent transfers.
In response to Russia’s invasion of Ukraine, the FinCEN program was expanded in December 2022 to include violations of three basic statutes governing the majority of U.S. sanctions: the International Emergency Economic Powers Act, the Foreign Narcotics Kingpin Designation Act, and certain provisions of the Trading With the Enemy Act. Whistleblowers with information related to, for example, sanctioned oligarchs using U.S. shell corporations to buy real estate, U.S. companies quietly doing business with foreign sanctioned financial institutions, or publicly traded corporations filtering sales to sanctioned entities via unscrupulous distributors, can now bring this information directly to the government.
Internal Revenue Service
The IRS holds the distinction of housing the United States’ oldest agency whistleblower program. Anyone with information related to tax violations may bring the information to the IRS. If the informant’s information results in tax collections of at least $2 million, that whistleblower will be entitled to a share of the proceeds. (The agency has a discretionary program for smaller amounts as well.) There is often a foreign connection in these cases. A whistleblower might report, for example, that a wealthy individual is misusing tax havens to hide U.S. income abroad or that a company is seeking to illegally lower its tax bills by offshoring income onto foreign subsidiaries.
Department of Transportation
The Department of Transportation created a somewhat unusual whistleblower program in 2015. Under the program, any employee of an automotive manufacturer or parts manufacturer or of a car dealership can bring information about a safety concern to the Department for a potential reward. Unlike the other programs listed here, the program is limited both in terms of eligible whistleblowers (only employees of businesses in the automotive industry) and scope (safety defects, not fraud more generally). The program is still relatively new. So far, it has only paid out one award—to a Korea-based engineer from Hyundai who reported serious safety defects in Hyundai and Kia engines.
Why We Need Whistleblower Reward Programs
The recent expansion of the whistleblower reward program infrastructure to include the FinCEN and Transportation programs speaks to an emerging understanding that enforcing our laws depends on the cooperation of persons with non-public information to help guide regulators and law enforcement and to tell them where to look for fraud. Without formal programs, even willing whistleblowers are often unsure how to report. And the government has historically been too quick to ignore the valuable information brought by informants. Creating formal programs provides a clear path for whistleblowers eager to share their information.
Many whistleblowers take significant risks in coming forward. Insiders and former employees risk employment retaliation or professional ostracisms. Whistleblowers with information related to bribes, money laundering, and sanctions violations may face threats to their physical safety. All whistleblowers need to confront the fact that cooperating with the government in what is usually a years-long process can be arduous, difficult, and occasionally frustrating. The reward programs offered by the United States provide a path forward for whistleblowers with a potential reward at the end of the process (and, perhaps, a blockbuster film).