OUR THOUGHTS ON:

Dodd-Frank Whistleblower Mandate: A Bounty Has Been Placed On All Institutions

Risk Advisory/Internal Audit|Financial Services

By Donald Owens

In a recent Gallup poll, one in five Americans expressed trust in banks, half the level in 2007. In an environment where media and government officials are routinely vilifying institutions and others, animosity and distrust may be at all-time highs between employees and employers. That, in turn, begs the question - How likely are employees to call internal whistleblower hotlines and report suspected fraud or wrongdoing?

In reaction to public and political outcry, the Dodd-Frank Act enacts requirements that whistleblowers not be obligated to report knowledge of wrongdoing through their institution’s reporting channels. Instead, the Act mandated the establishment of external whistleblower programs that enable employees to bypass reporting such concerns through their institution’s whistleblower hotlines and directly report them to appropriate government agencies (Section 922 of the Dodd-Frank Act).

In addition, the Act established monetary rewards for taking such action. This places institutions at risk for investigations and resulting charges and penalties that may have been avoided if the institutions had been given the opportunity to self-investigate and report findings. The rule does exclude from reward eligibility senior managers with legal, compliance, audit, supervisory or governance responsibilities who may have learned of a reportable issue during the course of their duties.

In fulfilling the Dodd-Frank mandate, the SEC has established what has come to be known as “the bounty” program (whistleblowers may be entitled to awards of 10% to 30% of the total monetary sanctions imposed on an institution). The IRS and other governmental bodies have also established incentivized whistleblower programs.

These monetary inducements are contrary to the prior governance practices of internal self-governing and reporting. Despite best efforts to maintain and promote internal ethics and anti-fraud programs, many institutions fall short in making employees comfortable reporting potential misconduct internally. Does that imply that institutions should forgo promoting whistleblower programs? On the contrary, it is all the more critical that institutions have not just a whistleblower hotline in place, but a comprehensive program that deters unethical, fraudulent and other undesired behaviors.

The substance of a whistleblower program should include the following:

  • Communicate a strong “tone at the top” that emphasizes ethics, integrity and honesty in all areas and matters of the institution
  • Establish strong ramifications if an individual is found to engage in unacceptable activities
  • Ensure that the institution has comprehensive internal controls to prevent or timely detect wrongdoing
  • Challenge the actions of the risk management practices (internal audit, risk management, compliance, legal, etc.)
  • Acknowledge areas in which the institution may be lacking in knowledge and understanding and seek out counsel as needed

Programs that foster a culture of ethical behavior, encourage open and honest communication, and demonstrate an institution’s commitment to properly responding to reported wrongdoing can have a number of positive benefits. Employees will be more likely to first report concerns through internal channels, which allow institutions to quickly understand the issues and take steps to protect evidence while also considering how to most effectively stop further wrongdoing. Additionally, the SEC considers an institution’s programs for combating wrongdoing, and the actions taken by an institution when wrongdoing is determined to have occurred, when determining to pursue fines, penalties and/or charges.

In consideration of these and many other factors, there is no downside to embracing and maintaining the highest ethical standards in the conduct of business and ensuring that policies and practices demonstrate the same.

 

© 2012 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission. 

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2018 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

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