For the 2015 fiscal year, the Department of Justice secured more than $3.5 billion in settlements and judgments from civil cases under the False Claims Act (FCA). Of the new False Claims Act matters filed, 632 of the 737 were filed under the Act’s whistleblower, or qui tam, provisions. In such actions, the whistleblower, also known as the relator, receives up to 30 percent of any recovery. 

As the numbers show, the qui tam provision is a powerful incentive. Of the $3.5 billion total recovered this past fiscal year, approximately $2.9 billion (more than 81 percent) was received in connection with qui tam lawsuits filed in this and prior years.

In the past, the international trade community has managed to fly below the radar of FCA suits.  However, importers and exporters should be wary as the Department of Justice continues to identify the FCA as an additional enforcement tool on top of the administrative penalties imposed by U.S. Customs and Border Protection (CBP). Because the FCA provides damages resulting from false or fraudulent conduct that causes a person or company to conceal, avoid, or reduce payments due to the government, companies importing or exporting merchandise may be subject to FCA claims based on declarations made in connection with their import and export activities, whether by the company itself or its customs broker.

Examples of Customs-based FCA violations include:

• Misrepresentations of the country of origin of imported items for purposes of avoiding payment of anti-dumping or countervailing duties.
  
  Toyo Ink SC Holdings Co., Ltd. affiliates, including companies in New Jersey and Illinois, agreed to pay $45 million to settle a FCA qui tam suit brought by a competitor alleging that the company knowingly failed to pay anti-dumping and countervailing duties by misrepresenting the country of origin. The whistleblower recovered nearly $8 million in the settlement.
   
• Undervaluation of imported merchandise due to failure to report assists, which are items supplied directly or indirectly, and free of charge or at a reduced cost, by the buyer of imported merchandise for use in connection with the production or sale of merchandise for export to the United States. Assists include materials, components, machinery, parts, tools, dies, molds, or products consumed in the manufacture of the imported merchandise and even certain types of engineering, development, design work or art work undertaken in the United States and provided to your overseas manufacturer. Under most circumstances, the costs of these "assists" would not be included in the invoice, but must be declared to Customs as part of the imported merchandise's value for duty assessment purposes.
  
  Otter Products LLC (operating as OtterBox) paid $4.3 million to settle a whistle-blower suit alleging that its import practice violated the FCA. Pursuant to the qui tam action brought by a former employee, OtterBox allegedly underpaid customs duties owed to the US government when importing goods into the United States. The civil settlement was reached without any admission of liability by OtterBox but the whistleblower received $830,000.

FCA settlements and cases instituted by whistleblowers continue to be touted by enforcement authorities as well as the whistleblower bar and they both seek to promote whistleblower programs. As the numbers and types of whistleblower claims continue to grow, it is now accepted that whistleblowers will continue to confront management teams with claims carrying enforcement risk and attendant legal, financial, and business reputational costs and damage.

This article outlines suggestions for managing risk based on the hard lessons learned by companies exposed to enforcement as a result of whistleblowers. While by no means easy, our premise is that practical measures can be employed to effectively address this risk and reduce whistleblower claims and their consequences.

The Department of Justice (DOJ) now reviews all civil qui tam cases under the False Claims Act (FCA). Leslie R. Caldwell, Assistant Attorney General for the DOJ’s Criminal Division, announced that the DOJ’s Criminal Division Fraud Section would review all civil FCA actions for purposes of potential parallel criminal investigation and enforcement.

While this newer policy is consistent with the high priority being assigned to enforcement of whistleblower and other claims under the FCA, substantial questions remain as to whether it will translate to even more aggravated civil and criminal investigation of cases. The fact that whistleblower cases will be subject to review by experienced criminal fraud prosecutors should at least give pause to companies and officials who may not have taken the threat of whistleblower cases as seriously as they should have in the past.

While there is a stark difference between cases that are accepted for civil prosecution, and those satisfying the more exacting standards required to support a criminal action, experience suggests that more DOJ eyes on the same reported claims may bode for at least some additional risk to targets of whistleblower filings.

Proactive Management of Whistleblower Risk

It is simplistic to say that companies exposed to risk need to ensure they have effective ethics and compliance programs. Everyone knows that. The challenge is to address this area with meaningful and practical insights on what will really reduce risk of whistleblower claims and attendant exposure to penalties and other adverse consequences. The problem exposed by companies involved in whistleblower controversy is typically not that the organization lacked a corporate ethics and compliance program. Indeed, it is now rare for a significant company to lack a compliance program that generally satisfies the key compliance guidance. What tends to be missing falls within a fairly narrow set of common circumstances that allow significant problems to go without appropriate response.

The following are suggestions based on our handling or evaluation of a large number of whistleblower cases. The attention paid to each of these subjects will offer real and meaningful benefit to companies and responsible officers who are committed to avoiding these difficult claims.

The Failure To Understand What Prompts Whistleblowers

The nearly constant reason for whistleblowing stems from an employee’s actual or perceived inability to report a matter of concern internally and receive what comports with their expectations of fairness and non-retaliation. Without question, some budding whistleblowers cannot or will not work with the company. Everyone has encountered the “disgruntled” current or former employee situation. However, experience suggests that many, if not most, whistleblowers resort to FCA qui tam filings and external reporting only after they attempted to raise problems internally and were rebuffed, ignored or subjected to even worse treatment.¹

Notwithstanding corporate commitment to compliance, there are levels of management who do not know how to properly handle concerns or issues raised by their direct reports. In many instances, there is a failure by managers and other supervisors to elevate reported concerns to appropriate company officials for further evaluation and response.

A major emphasis in successful risk management is ensuring that an employee is satisfied that their concern has been heard and taken seriously, regardless of whether the report reflects a valid problem requiring corrective action or further response. Moreover, alternative reporting options should be available to employees who may be dissuaded or fearful of reporting to their immediate superiors, a recurring problem that is aggravated in cases where the superior is connected to the employee concern.

Fleshing Out Potential Problems and Whistleblowers

Companies should better facilitate the internal reporting of problems through means including the following:

• Internal promotion of the compliance commitment and openness of the company to receiving reports of concerns at all levels.
• Creation of incentives for the reporting of compliance related concerns or problems, including the addition of compliance reporting to performance and compensation review criteria for managers.
• Internal messaging, from the top of the company, emphasizing that reported concerns will be addressed properly and reporters will be protected from retaliation of any kind.
• Tracking of hotline and other reporting by employees and monitoring to ensure reporting is actually working at levels in line with the company size and risk profile.
• Education of managers so they understand the reasons employees are reluctant to report and training to assist managers in the proper handling and appropriate further internal communication of reported concerns.
• Institution of compliance-related employee reporting review processes to ensure that matters raised are appropriately considered and addressed by qualified company officers.
• Expansion of reporting mechanisms and features, including externally hosted hotlines, to ensure employees have multiple options and resources to lodge concerns, on an anonymous basis if desired, and with options allowing for responses to reports of concerns or problems.

But more still can be done. For example, rather than the typical one-time orientation certification that an employee has agreed to comply with the corporate compliance program and code of conduct, consider an annual recertification process. In that process, employees are required to confirm (by checking off on a form) that they are not aware of any problems or conduct that is not in conformance with the company’s commitment to compliance or has not previously been brought to the attention of management. The form should also identify other options in cases where an individual has concerns or information that has not been reported internally, and requires disclosure of any such matters.

Evaluating the Whistleblower and Enforcement Risk Environment

Determining the effective compliance measures that will truly reduce exposure to whistleblowers, related investigation and enforcement action is a daunting task. And not all risks warrant the same level of concern or attention.

The ability to demonstrate that a company has devoted appropriate effort to the handling of reported problems and identification of key risks offers huge benefits in the effort to convince the government that the whistleblower case under review does not involve systemic problems or disregard of the law. As the government understands that no compliance program or company is perfect, well-developed records reflecting robust internal reporting, risk identification and compliance management are critical to success in heading off or resolving whistleblower and enforcement matters.

Making Compliance a Priority

“Tone at the Top” and “Culture of Compliance” may be overused phrases but they remain quite relevant in efforts to encourage internal reporting of problems. In the past, too many considered compliance a non-revenue-generating and, at best, tolerated function. Companies looking to reduce risk of exposure in this arena must ensure they have qualified compliance personnel on board and provide them with the resources and authority needed to do their job.

The Lessons of Whistleblower and Other Relevant Enforcements

Disseminating reported cases and settlement information may assist managers in understanding how whistleblower claims resulted in similar settings and how those problems could have been averted. These materials also help management to better understand the compliance expectations of enforcement authorities. Compliance requirements imposed in whistleblower cases inform responsible managers what is expected. Documented action of relevant changes to a company’s compliance efforts based on reported cases send an important message to enforcers that can greatly assist in driving a more favorable outcome to an investigation triggered by a whistleblower.

Focusing Audits and Monitoring

Effective management of whistleblower risk includes focused audit and monitoring of the priority risks faced by a given business. This documented activity, tied to the evaluation of internal reports and annual compliance work plans, helps demonstrate good faith efforts to operate in accordance with applicable law.

Using Disclosures to Preempt Whistleblowers

Disclosures in these and other circumstances are markedly increasing as companies strive to identify and remediate problems before they tempt reporting by whistleblowers or become the subject of enforcement.

Preparing for Internal and External Investigations

Risk managers are increasingly working to establish plans and mechanisms that allow for the prompt and effective review and evaluation of internally reported or discovered issues of concern. Plans for the internal investigation of significant matters include readying resources for the quick assessment of compliance problems, evaluations of credibility, preparation for potential enforcement response, and identification of any appropriate or necessary corrective actions. A competent plan will also protect the organization and its managers from claims of improper internal investigation and issues such as bias.

Conclusion

Companies have the opportunity to revisit and invigorate processes aimed at heading off whistleblower and enforcement risk. Indeed, there are growing numbers of cases where companies have avoided or mitigated enforcement risk and consequences through intensified internal reporting review processes and related compliance measures. In cases where more effective and sophisticated approaches are taken to encourage internal reporting by employees, and reported problems are properly evaluated and addressed, we are seeing companies reap substantial benefits.

¹ Aaron S. Kesselheim, David M. Studdert & Michelle M. Milla, "Whistle-Blowers’ Experiences in Fraud Litigation against Pharmaceutical Companies," 362 New Eng. J. OF Med. 1832 (2010).