Association of International Bank Auditors
2nd Annual Compliance Seminar
June 14, 2012
What is Whistleblowing?
Legal Definition:
The disclosure by a person, usually an employee in a government
agency or private enterprise, to the public or to those in authority,
of mismanagement, corruption, illegality, or some other wrongdoing.
Dodd- Frank Definition:
Section 15 U.S.C. §78u-6(a)(6) of the Dodd-Frank Act defines
“whistleblower” as “any individual who provides, or 2 or more
individuals acting jointly who provide, information relating to a
violation of the securities laws to the Commission [SEC], in a manner
established, by rule or regulation, by the Commission [SEC]
SEC Definition:
A whistleblower is someone who, alone or jointly with others,
provides information to the SEC relating to a possible violation of the
federal securities laws that has occurred, is ongoing or is about to
occur (Rule 21F-2(a)).
Short Legal History
• Whistleblower Protection Act of 1989
• 2002 Sarbanes Oxley 2002
• Whistleblower Protection Act of 2007
• Dodd Frank Act of 2010
State Guidelines of Interest
 New York
 New Jersey
 Connecticut
Whistleblower Protection Act (WPA)of 1989
• The intent of the legislation was to:
• Strengthen and improve protection for the rights of Federal
employees, to prevent reprisals, and to help eliminate
wrongdoing within the Government by mandating that
employees should not suffer adverse consequences as a result
• Prohibited personnel practices;
• And establishing that while disciplining those who commit
prohibited personnel practices may be used as a means by
which to help accomplish that goal, the protection of
individuals who are the subject of prohibited personnel
practices remains the paramount consideration
Sarbanes-Oxley Whistleblower
• Section 806, commonly referred to as the SOX whistle-blower provisions,
provides a cause of action to employees of public companies who allege
that they were retaliated against for disclosing any conduct that the
employee reasonably believes violates any provision of federal law
relating to fraud against shareholders.
Some highlights:
• Makes it illegal to "discharge, demote, suspend, threaten, harass or
in any manner discriminate against" whistleblowers
• Establish criminal penalties of up to 10 years for executives who
retaliate against whistleblowers
• Require board audit committees to establish procedures for hearing
whistleblower complaints
• Allow the secretary of labor to order a company to rehire a
terminated employee with no court hearing
• Give a whistleblower the right to a jury trial, bypassing months or
years of administrative hearings
Whistleblower Protection
Enhancement Act of 2007
• On March 9, 2007, the House Committee on
Oversight and Government Reform reported H.R.
985 (110th Cong.) H.Rept. 110-42, the
Whistleblower Protection Enhancement Act of
2007, which would amend the Whistleblower
Protection Act (WPA) by providing protections for
certain national security, government contractor,
and science-based agency whistleblowers, and
by enhancing the existing whistleblower
protections for all federal employees.
The Dodd-Frank Wall Street Reform
and Consumer Protection Act
Signed into law by President Obama on July 21, 2010, includes
several new whistleblower protections available to employees
and others:
• Mandatory Rewards. In a unique new approach to encouraging
whistleblowing activity, Dodd-Frank provides a mandatory reward to those
who voluntarily provide original, independently derived information to the
Securities & Exchange Commission (“SEC”) or the Commodity Futures Trading
Commission (“CFTC”) relating to violations of the securities laws.
• Whistleblowing to the New Bureau of Consumer Financial Protection. The
Act also provides broad protection to employees who provide information or
testimony to the newly created Bureau of Consumer Financial Protection
within the Federal Reserve system.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
• Extends SOX Protections. Dodd-Frank extends the
whistleblower provisions of Section 806 of the Sarbanes-Oxley
Act of 2002 to cover employees of certain affiliates and
subsidiaries of publicly traded companies.
• Extends False Claims Act Protections. Finally, the Act
amends and clarifies the False Claims Act (“FCA”) to provide a
cause of action to “an employee contractor, agent or
associated others” against whom an adverse employment
action has been taken because of lawful actions undertaken
to stop a violation of the FCA.
Event Date
Losses ($m)
Audit Firm
Lehman Bros.
Fannie Mae
Gov’t takeover
Freddie Mac
Gov’t takeover
Wash Mutual
New Century
Bear Stearns
Major Problems with Current
Whistleblower Policies:
• Failure to adequately communicate
whistleblower policies
No meaningful reward for the internal
No guarantee of anonymity
Inability to communicate with anonymous
Lack of independent investigation of
whistleblower complaints (complaints referred
to internal audit, compliance, inside counsel –
who may not be seen as being independent)
Basic Elements of a Good
Whistleblowing Policy
• Corporate culture that supports ethical, law-abiding behavior
(Starts at the Top)
• Independent administration and investigations
• Effective Communication of the Whistleblower policy to all
• Absolute protection of the whistleblower’s identity
• Recognition of whistleblowers who wish to be identified
• A meaningful internal award
• Establish a Fraud Hotline
FDIC Guidance on Implementing a
Fraud Hotline
The FDIC provided guidance to financial institutions on implementing
a fraud hotline to minimize potential and actual fraud risks as part of
a bank's governance and enterprise risk management program.
• The FDIC encourages financial institutions to consider the benefits of
implementing a fraud hotline as a confidential communication channel to
identify fraud and reduce fraud-related losses.
• The Association of Certified Fraud Examiners – in its "2004 Report to the Nation" –
stated that organizations without mechanisms to report fraud suffered financial
losses that were more than twice as high as organizations with anonymous fraudreporting mechanisms.
• Awareness of the fraud hotline by employees, customers, contractors, service
providers, suppliers and other third parties is an important component in
ensuring a hotline's effectiveness.
• Confidentiality of tips reported on fraud hotlines must be guaranteed to ensure
that those reporting suspected wrongdoing can do so without fear of retribution
or reprisal.
Disincentives (Personal)
• Fear of retribution
• Dodd-Frank – 10% to 30% of
amount collected for violations of
federal securities law if monetary • Loss of reputation
sanctions exceed $1 million
• Social ostracism
• IRS – Mandatory awards of 15% to
30% of amount collected if
amounts exceed $2 million.
Discretionary awards authorized
below the $2 million mark
• Compromise career advancement
• Loss of Job
• Waiting period for award
• Anonymous employees fear
Ethics Resource Center (ERC)
Report December 2010
Specific Forms of Retaliation Experienced as a Result of Reported
• Other employees gave you a cold shoulder 60%
• Your supervisor or management excluded you from decisions and
work activity 62%
• You were verbally abused by your supervisor or someone else in
management 55%
• You almost lost your job 48%
• You were verbally abused by other employees 42%
• You were not given promotions or raises 43%
• You were relocated or reassigned 27%
• Any other form of retaliation 20%
• You were demoted 18%
• You experienced physical harm to your person /property 4%
Is Whistleblowing Working?
• Ethics Resource Center’s (ERC) annual National Business Ethics
Survey (NBES), widely considered the U.S. benchmark on ethics,
found that the share of workers who report negative behavior
rose to 63 percent in 2009, a solid gain from 58 percent in 2007.
(December 2010 report)
• Between 2000 and 2009 about 59 percent of employees on
average said that they observed and reported misconduct,
usually to an internal company authority.
• That’s encouraging because a lot of misconduct is being
• But it also means that there is still much work to do because
over the decade, four in ten employees who witnessed
workplace misconduct did not typically report it.
• James Holzrichter's worked as an internal auditor for Northrop Grumman’s Defense Systems Division in
Rolling Meadows, Illinois. While performing audits on large transactions for government projects, he
discovered that the company was falsely inflating its materials costs to increase its reimbursement
from the government. Jim confronted the company about these discrepancies, but Northrop responded
by firing and blacklisting him
At first glance, James Holzrichter's decision to tell the government his employer's dirty secrets appears
to have worked out rather well.
He won $6.2 million in 2005 under a federal law, the False Claims Act, that encourages whistleblowers
to report fraud against the government. When first contacted by The Huffington Post on Friday, he was
on a golf course near his home in Chicago and couldn't talk for long because he was about to play the
back nine.
His court complaint, filed in 1989, languished for years, and so did Holzrichter. He wasn't able to find
work as an auditor. He received more than 400 rejection letters from employers who weren't
interested, he believes, in hiring a snitch. Desperate to support his wife and four children, he scrubbed
toilets and delivered the Chicago Tribune. At his lowest moment, he moved his family into a homeless
Holzrichter said his attorneys received 40 percent of his award, and the government claimed a hefty
share in taxes. That left him with $2.3 million -- enough to live comfortably on, but in his view, barely
fair compensation for 17 years of unemployment and underemployment
In fact, his decision to sue a former employer, Northrop Grumman, under that federal law cost
Holzrichter his profession and nearly two decades of his life.
"Was it worth it?" Holzrichter said when reached by phone last week, repeating a reporter's question. "I
don't know if it was worth it. I have the money, but how can I give my children their childhood back?"
International Bank Case Study
As reported March 2012 in Various Press Accounts
Whistleblower Joseph Insinga suing IRS for not being paid a reward.
Joseph A. Insinga was the ultimate whistleblower. The former executive with a
Dutch bank says he divulged to the Internal Revenue Service details about how
for years his employer helped U.S. companies dodge taxes.
Insinga had a 31-year career in banking and joined Rabobank as a finance
specialist in 1990. He said he told IRS officials about the bank’s misdeeds on
behalf of a variety of U.S. companies from the late 1990s until 2004.
Now Insinga is taking tax authorities to court for failing to give him a reward
that he says he is owed by the federal government
Press accounts from 2008 reported that Joseph Insinga assisted the IRS as it
scrutinized Rabobank's promotion and financing of numerous transactions
worth billions of dollars that helped shelter the U.S. income of nearly 100
major companies.
Those companies and others used Rabobank as a third-party intermediary to
engage in discounted accounts receivable sales and prohibited intermediary
midco transactions.
Insinga filed a whistleblower claim with the IRS in 2007, a year after Congress
passed a law to help the government uncover tax cheats by encouraging
informants to come forward.
Those with inside information could receive up to 15 to 30 percent of any
taxes, fines, penalties and interest the IRS collected from a taxpayer who was
illegally sheltering taxes, usually a corporation.
Several of the companies under scrutiny settled with the government,
including $425 million for General Mills and almost $180 million from Cardinal
Do the Math:
15% of $606 million = $90.9 million
30% of $606 million = $181.8 million
Insinga, was shocked when the IRS Whistleblower Office told him no award would
be immediately paid because it was getting more information from field offices on
possible other sources behind the investigations
Stephen Whitlock, director of the agency’s whistleblower office, has said that the
time frame for payouts is five to seven years, because the government cannot
make an award until all outstanding taxes have been collected and appeals by the
taxpayer are resolved.
The IRS official in charge of his case said the government remains “open for an
award determination,” according to a letter sent to lawyer Andrew Carr in
But three months earlier, the same official had indicated that an award was
unlikely based on “other sources” of information that the IRS received about
Rabobank’s dealings with U.S. corporations, according to documents filed with the
New York
New Jersey
Labor Law §740 public and Public and private employers cannot discipline or
& Civil Service private
take retaliatory action against employees who
Law §75-b
employers disclose or threaten to disclose activities, policies
or practices that violate laws or regulations or
threaten public health or safety.
§34:19-3 et seq. public and The Conscientious Employee Protection Act
and case law
(CEPA) prohibits a public or private employer
employers from taking retaliatory action against an
employee who discloses or threatens to disclose
to a supervisor or public body an activity, policy
or practice that the employee reasonably
believes is in violation of a law or rule; or
provides information or testimony to a public
body investigating a violation; or objects to or
refuses to participate in an activity, policy or
practice that the employee reasonably believes is
a violation of law, fraudulent or criminal, or is
incompatible with a clear mandate of public
policy related to health, safety, welfare or
protection of the environment.
§§31-51m & 461dd
public and It is unlawful for a public or private employer to
discriminate against an employee, including
employers discharge, discipline or penalty, for reporting to a
public body a violation or suspected violation of
any state, federal or local law. Employees
knowingly making a false report are not
protected and can be discharged.
Chris B. Harris CPA
Director, ICS Consulting Partners
1350 Broadway, Suite 602
New York, NY 10018

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