What I’m about to say is grossly oversimplified, but here goes: The Dodd-Frank Act’s whistleblower provisions have two primary prongs. The first says that an individual who voluntarily provides the SEC with original information resulting in an enforcement action in which the SEC collects over $1 million in sanctions will be eligible for a financial reward of 10% to 30% of the amount collected. The second says that an employer may not fire, demote, suspend, threaten, harass, or take any other retaliatory action against an employee who provides information in accordance with the whistleblower rules. The two prongs work in concert: without the second, the first would be much riskier to take advantage of. But they don’t carry all of the same presumptions regarding applicability overseas.
This is all preamble to a fairly significant decision issued by the U.S. Court of Appeals for the Second Circuit on August 14th in Liu v. Siemens AG. In that case, the court held the Dodd-Frank retaliation prong does not apply to whistleblowers outside the United States. As a result, foreign nationals employed by foreign companies abroad cannot claim retaliation under Dodd-Frank when the events at issue occurred abroad, even if the company in question has securities traded on a U.S. stock exchange. At least according to the Second Circuit.
I think this case is substantial for two main reasons. First, the SEC is counting on foreign whistleblowers to feed and grow its pipeline of FCPA cases. Because the core conduct in those cases is almost always overseas, the cases are hard to investigate and law enforcement has long relied heavily on voluntary self-reporting of violations. Eliminating retaliation protections for the sources of independent information about potential FCPA violations could put a real damper on the SEC’s FCPA enforcement program at a time when officials are fervently hoping employees outside the U.S. will step up and send in the tips.
Second, there’s a way for foreign whistleblowers to avoid detection and the need for retaliation provisions at all: skip reporting their issues to internal compliance departments and go straight to the SEC. This would not be a welcome result for companies with significant foreign operations. This is to say that while Siemens may have won the battle here, it may have done so in a way that weakens its position for the next whistleblower it doesn’t yet know about. That person may look at the Liu case and think surfacing internally may not be worth the risk. Going to the SEC could be much safer. Of course, the company then won’t have the chance to investigate and deal with the issues raised without the immediate threat of a government investigation. That could come later, if and when the subpoenas arrive. I think this puts even more of a burden on compliance departments at U.S. companies with significant foreign operations. Now, they have to go some way to convince their employees abroad that even though under Dodd-Frank the companies can retaliate against them, they wouldn’t actually do so. Better to take reasonable steps to keep those people inside the tent than to have the SEC and DOJ poking in.
