In keeping with “tradition” (even if it is a one-year tradition), I like to start out the year looking back on the person of the year in 2012.  As we look through the developments of 2012, there is no question of the increasing importance – and protection of – whistleblowers is the most important trend from 2012.

The government is always looking for new sources of information to prosecute companies and individuals.  For many years, so-called “disgruntled” employees were the primary sources of information.  The only established whistleblower program has been qui tam relators involving false claims.  Whistleblowers are a way of life when dealing with government contracts and spending.

On Capitol Hill, there is a strong bi-partisan constituency which aims to protect whistleblowers and encourage whistleblowers as a mechanism to improve the quality of government operations.  For many years, the focus of whistleblower legislation and programs was to enhance the protection of whistleblowers.  Much of that agenda has been enacted into law.

The new and cutting edge area of whistleblower policy is creating incentives and reward programs for whistleblowers to report wrongdoing.  It does not take a rocket scientist to figure this out – if you offer people money, they will respond.   The same goes for whistleblowers.

The sea change in whistleblower policy occurred with Dodd-Frank which created the SEC whistleblower office and program.  It opened up a reward program and created government-funded incentives for reporting securities violations, including FCPA violations.  A cottage industry of whistleblower attorneys and whistleblowers is the growing trend.

Corporate interests recognized the impact of such a program.  In fairness, companies raised serious concerns about whistleblowers incentives to report violations of law and corporate policies internally before running to the government to report such concerns.  Companies have a good point but unfortunately they lost the battle and are now fighting the rules in court.

The SEC’s recent annual report confirmed the rise of the whistleblower.  In the first year, the SEC received approximately 3000 whistleblower tips.  Interestingly, only 3.8 percent or approximately 115 tips related to FCPA issues.  The most common complaints related to corporate disclosures and financial statements (18.2 percent), offering fraud (15.5 percent) and manipulation (15.2 percent). Even insider trading allegations were made in 6.3 percent of the complaints.

It is clear that perhaps the greatest risk that companies now face is whistleblowers.  Many companies understand that risk but many do not know how to respond.  Companies can no longer rely on outdated whistleblower programs, which often incorporate human resource personnel, policies and practices.  A new proactive approach is needed.

Companies need to implement the following:

• A detailed whistleblower protocol which establishes detailed policies and procedures for dealing with whistleblowers.  The protocol should be built on a multi-disciplinary approach – legal, compliance, human resources, and auditing offices.
• A specific whistleblower triage program for identifying and prioritizing whistleblower complaints in order to investigate, assess and respond to potential issues.
• An internal investigation policy and protocol for preliminary assessments of potential whistleblower complaints.

Whistleblowers are here to stay and create unique and significant risks.  Companies need to respond to these risks and plan for the “whistleblower era.”