Round-up on CFTC compliance

The Commodity Futures Trading Commission (CFTC) is the US regulator charged with supervisory authority over the futures and option markets. Created in 1974 by the Commodities Futures Trading Act, the CFTC is an independent regulatory agency with the purpose to monitor and protect the markets by prohibiting fraudulent activity or other misconduct and to control against risk from these. In the aftermath of the 2008 global financial crisis and the markets reforms which were implemented during the economic recovery, the CFTC has played a more prominent role in the largely unregulated general derivatives (contracts that derive their value from the performance of an underlying entity, such as an asset, index, or interest rate) and specifically, swaps (derivative contracts where two counterparties exchange cash flows of each other’s financial instruments) markets, to encourage transparency and gradually move toward a more stringent supervisory framework.

The CFTC’s principal mission is to ensure the successful and efficient operations of the futures markets, by keeping competition fair and preventing market abuse or other threats to financial integrity and efficacy. As the futures markets and particularly the derivatives and swaps markets are very international, the CFTC collaborates heavily with international partners and oversees a huge variety of diverse financial institutions and service providers, including exchanges, clearing houses, dealers, and commodity pool operators.

The CFTC has often been seen as the smaller, less powerful or prominent cousin agency to the Securities and Exchange Commission (SEC). However, as the CFTC refines its position within the financial regulatory landscape of the global markets and within the US economy, certain issues and emphases have emerged which distinguish the CFTC.

  • Bitcoin: The CFTC made headlines in November 2017 in paving the way for CME Group and Cboe Global Markets Inc to trade bitcoin futures contracts. Investors and markets professionals all over the world have been waiting for the first regulatory verdicts in the US on how cryptocurrencies markets may be handled. The CFTC has answered this boldly, indicating a permissive attitude toward the trading practices coupled with a strict expectation for robust monitoring and reporting to enable oversight of the famously volatile and active bitcoin trading markets. The CFTC had already declared in 2015 that it would treat bitcoin as a commodity, and the ensuing years have shown US financial regulators struggling to agree on what the cryptocurrency is in terms of financial markets and what risks and protections might be applicable for those wishing to invest or speculate in it. The CFTC has chosen to give the futures trading a yellow light, allowing it to go ahead with a cautious eye toward the intense enforcement and investor protection needs that could arise and obtaining assurances from the exchanges that they will proactively cooperate and share the necessary data with the CFTC: Bitcoin Futures Are Coming and Regulators Are Racing to Catch Up
  • Whistleblowers: While far outpaced by the SEC’s much more well-known and publicized whistleblower program, the CFTC’s program was created at the same time as the SEC’s, by the post-financial crisis Dodd-Frank Act in 2010. In 2017, while still modest in comparison to the SEC, the CFTC is having a banner year for payments of whistleblower rewards. These rewards come from sanctions imposed by the CFTC due to validated whistleblower claims against CFTC-covered organizations. This represents a reporting increase by whistleblowers to the CFTC of 70 percent over 2016, indicating that whistleblowers are recognizing the value of the CFTC as an enforcement body. Therefore this uptrend in handling of whistleblower claims could likely continue: Why Wall Street Should Worry About the CFTC Whistleblower Program
  • Deregulation: The overall trend in the US is toward a preference for fewer or more efficient and targeted regulations. This is a clear reversal especially in the financial markets, where in the years after the global financial crisis the momentum was toward more complex and far-reaching regulatory and supervisory oversight on the economy and market participants. This was a reasonable and necessary response to not only the recession but the numerous and varied financial scandals and frauds that were uncovered and damaged the markets and society’s trust in the financial systems. These risks and root causes of misconduct and abuse are still present, so balancing a regulatory posture which prefers a lighter touch against the need for investor protector and facilitation of transparent and equitable markets is a challenge for all regulatory agencies, including the CFTC: CFTC Enforcement Actions Drop Sharply in 2017
  • MiFID II: The revised Markets in Financial Instruments Directive, or MiFID II, is a wide-sweeping set of EU financial regulatory rules coming into effect in January 2018. These new regulations will have huge impact on the way banks and other financial institutions interact with and make money from the markets. While these are European laws, the globality of the markets means that regulators and market participants all over the world are contending with how to handle these new supervisory guidelines. The Futures Industry Association (FIA) has been actively lobbying the CFTC on behalf of its members, including large banks such as Goldman Sachs and Morgan Stanley, to confirm that the new European requirements will not bring expensive new limitations in the US as well: Wall Street Has New MiFID Migraine, Now in Futures Market
    In continuation of this, one important area in which the CFTC has already been deal-making with the EU in anticipation of the approaching MiFID II application is with derivatives trading venues. The European Commission and the CFTC have agreed upon mutual recognition of trading venues so that those in the United States can benefit from an equivalence decision recognizing them as eligible for compliance with MiFID II requirements by virtue of their satisfaction of CFTC requirements: EU and CFTC Implement Mutual Recognition of Derivatives Trading Venues
  • Blockchain: Apart from regulating bitcoin as a commodity, the CFTC hopes to benefit from the technology that underlies cryptocurrencies, blockchain. The CFTC has voluminous amounts of data from the diverse market platofrms and service providers that it supervises and has historically struggled to parse and study these huge troves of data efficiently and meaningfully. The CFTC hopes that the reporting reliability, transparency, and information security offered by the ledger technology blockchain can enable better review and analysis of this data. Traditional procurement requirements have often dogged attempts to implement more advanced or emerging technologies, but one of the priorities of the CFTC and other US government agencies currently is to leverage innovation such as from financial technology (fintech), regulatory technology (regtech), and supervisory technology (suptech): CFTC Looks to Blockchain to Transform How It Monitors Markets

Check back in the future for more posts which will focus on the investigatory and enforcement priorities and interests of different regulatory organizations or initiatives. Namely, on December 28, there will be a round-up on US Federal Trade Commission (FTC) compliance. On January 16, the post will be about EU implementation of the General Data Protection Regulation (GPPR), major privacy ad data protection regulation by the European Parliament and Council of the European Union coming into effect in 2018.

Tips for conducting compliance investigations

The task of a compliance officer is not to “set it and forget it.” Apart from planning and advising on risk management strategies, and monitoring business implementation of the attendant policies and procedures, compliance professionals must remain vigilant about the potential for violations. Internal compliance violations can run the causal gamut – they could be because of internal controls failures, unwitting omissions due to lack of awareness, or outright misconduct and malfeasance.

Compliance officers should approach an investigation into a compliance exception thoughtfully and with careful preparation. If the planning for or administration of the investigation is flawed from the beginning then the investigation results will not be reliable. In many fields, such as scientific research, planning investigation tactics and strategy is a discipline all of its own, demanding special expertise in statistical methodology standards.

For purposes of the internal investigations of compliance officers, a common-sense approach, focused on fairness and transparency, can take the place of technical expertise in conducting informal internal investigations that will still generate reliable and meaningful results. Compliance professionals should keep the following fundamental themes in mind when designing an investigation effort:

  • Reject foregone conclusions: Compliance investigation inquiries can be sensitive and intimidating. Most people do not want to do the wrong thing and will be worried or even frightened by the possibility that they have broken rules or regulations. They will fear that their jobs are at risk or worry about the reputation of the company due to the misconduct. Therefore, take the investigation seriously, even if its scope is limited or it’s routine. Don’t decide the outcome before the information is gathered. Investigations should be motivated by intellectual curiosity, in the case of annual or planned investigations, or, in the case of ad-hoc or event-driven investigations, an objective desire to protect and promote integrity, which knows no master.
  • Work carefully: Sloppiness and poor preparation will doom an investigation from the beginning. Compliance professionals should work carefully and check their work as they go along. Simple errors such as directing queries to the wrong recipients or asking for information that is out of scope of the investigation can cause a terrible impression with stakeholders and disrupt the efforts of the investigation.   Communication is key, and information communicated to all parties throughout the investigation should be accurate, clear, and appropriate at all times.
  • Give support, not interference: Compliance often collaborates with other functions such as HR, Legal, and Risk; this collaboration should be encouraged, not complicated or avoided. In planning investigation strategy, work together with partners and stakeholders whenever possible (legal privilege and confidentiality, where it applies, must of course always be respected). Sharing information helps to make conclusions stronger and to avoid inefficient duplication of efforts.
  • Follow through with enforcement when misconduct is evidenced: Investigations are toothless when the results are just put on a shelf and forgotten. Enforcement action must come next, and in every outcome, there is appropriate follow-up. In instances where misconduct is discovered, whether it is from negligence or intentional wrongdoing, disciplinary action should be taken with concrete consequences. Substantive structural changes should be made also the risk control framework to seek to prevent or identify earlier the non-compliant behaviour whenever possible. Punishing the wrongdoer is not enough; addressing the root causes of the wrong-doing has to happen too.
  • Feed-forward when no malpractice is discovered: Not every investigation will be an open and shut case where there are good people and bad people and everything wraps up neatly. It may be that the investigation yields no evidence that anything material happened. It’s also possible that the investigation would show some unrelated deficiencies, such as in communication strategies or employee awareness. Finally, the investigation could produce inadvertent lessons for the compliance officer him or herself to take back to a future risk assessment and planning session. Whatever these conclusions are, don’t discard them just because they don’t lead to a punitive action. Feed them forward into risk controls improvements and future compliance program efforts.

Compliance officers who consider the above suggestions in planning their own investigation strategy will be focused on obtaining neutral, credible information. They will communicate clearly and engage stakeholders supportively. Enforcement actions stemming from the investigation efforts will be pro-active and productive. With these approaches, compliance officers can establish credibility and effectiveness in conducting internal investigations.

Whistleblowers in major US corporate organizations

This is the third of a three-part series profiling whistleblowers in different industries. The first of these posts was on October 13 and focused on the financial services industry, including Julius Baer and PricewaterhouseCoopers. Last Tuesday’s post covered whistleblowers in the pharmaceutical industry, with stories of exposing corporate fraud in the manufacturing and marketing processes at companies like Eli Lilly and GlaxoSmithKline.

Today’s post, the final in this set, will look at whistleblowers from prominent historic cases of business fraud or miconduct in major US corporate organizations. The actions of these individuals in speaking up to expose unethical or illegal business practices led to major media attention, legislative and regulatory scrutiny, legal actions, and deep review of corporate cultures of the organizations. In some of these cases, deep societal debate about or change of previously accepted practices and standards was kicked off by the information exposed by whistleblowers.

  • Sherron Watkins, Enron Corporation: One of the most famous whistleblowers in modern business history, Sherron Watkins was Vice President of Corporate Development at Enron Corporation, the disgraced energy company which is often referred to as one of the biggest corporate scandals in modern history. In August 2001, Watkins reported suspicious accounting practices she observed in the company’s financial statements to Enron’s CEO, Kenneth Lay, who famously did not take action on the memo Watkins wrote on the issue. Enron, of course, filed for bankruptcy in December 2001, after the public disclosure of the fraudulent accounting practices that led to gross overstatement of the company’s financial condition. Watkins has spent the years since the Enron scandal writing and speaking about the problems within the corporate culture of the organization that allowed the fraud to occur and continue. For information on how Watkins sees her role in the Enron scandal more than fifteen years on, check out this Texas Monthly article from 2016.
  • Cynthia Cooper, WorldCom: Cynthia Cooper was the Vice President of Internal Audit at WorldCom, which at one time was one of the largest telecommunications companies in the US. Amid declining profits in the telecommunications industry and a thwarted merger with Sprint, starting in 2000 the company used fraudulent accounting practices to maintain the price of WorldCom stock in a decreasing market. In 2002, Cooper led a team of internal auditors which investigated and exposed this $3.8 billion accounting fraud. Cooper never intended for her internal audit memo to be publicized, and did not want public attention from it, as her feelings about exposing this fraud at a company where she had loved working were complicated. However, investigations by the Department of Justice and the Securities and Exchange Commission followed, which by the end of 2003 determined that the company’s assets had been inflated by an estimated $11 billion due to the fraudulent accounting. Have a look at this Q&A with Cooper from 2008.
  • Courtland Kelley, General Motors: For 30 years, Courtland Kelley worked at General Motors, ultimately as the national head of GM’s vehicle inspection program. For years, Kelley warned GM about design flaws in its cars and trucks that had gone unaddressed. To Kelley, the company seemed more interested in avoiding costly recalls and saving face in public than in making a relatively simple safety fix to the ignition switch system. In 2003, he sued GM under Michigan state whistleblower laws, hoping to expose this company inaction that led to manufacturing unsafe vehicles that were involved in crashes, some resulting in deaths. Kelley’s case was dismissed on procedural grounds, and in the aftermath, Kelley found that he was silenced and marginalized by GM in retaliation for speaking up. The company waited almost ten years before issuing a recall in February 2014. For an in-depth look at what happened at General Motors and to Kelley after he blew the whistle, read this Bloomberg Businessweek piece.
  • Mark Whitacre, Archer Daniels Midland: Mark Whitacre was president of the Bioproducts division at Archer Daniels Midland, a food and commodities trading corporation specializing in processing of grain and oilseed crops. For three years from 1992-1995, Whitacre was an FBI informant aiding in the agency’s investigation of ADM for price fixing (conspiracy arrangement between buyers or sellers to buy or sell a product at a fixed price only, irrespective of market conditions). The price fixing at ADM involved lysine, a chemical additive to animal feed. ADM was part of a cartel with four other companies that inflated prices on lysine because of their concerted market manipulation. Due to Whitacre’s initial reporting and subsequent acting as an undercover informant, the FBI collected a tremendous trove of information about the cartel’s activities and ultimately fined ADM $100 million, with many more hundreds of millions of dollars going from ADM to harmed plaintiffs and customers. Price fixing, once an overlooked practice in the industry which controlled prices without recourse, became a global investigation and enforcement priority. Whitacre himself was a complicated figure, as it turns out he was exposing one fraud while participating in others. In the course of the investigation, he confessed that he had been involved with arranging corporate kickbacks and money laundering schemes, and later pled guilty to tax evasion and fraud in connection with the embezzlement of $9 million, serving 8.5 years of a 10.5 year sentence. Whitacre’s story was dramatized in the movie The Informant!, which starred Matt Damon. For a profile on Whitacre from the time the movie was released in 2009, check out this CNN story.
  • Gregory Minor, Richard Hubbard, and Dale Bridenbaugh, General Electric:   Gregory Minor, Richard Hubbard, and Dale Bridenbaugh are known as the “GE Three.” They were a group of nuclear engineers at General Electric who turned whistleblowers in 1976 to alert the public of ongoing safety issues at US nuclear power plants. Their disclosures about the dangers of nuclear power received significant media coverage and Congressional attention. Minor, Hubbard, and Bridenbaugh timed their disclosures with resigning in protest from their positions in the GE nuclear reactor division. Nuclear power was at that time in wide use in the US; the GE Three raised huge concerns about insufficient controls within the industry due to vulnerabilities from human error and an engineering process that isolated individuals from the overall decision-making process. Their protest resignations and subsequent testimonies had a huge impact on society’s view of the safety of nuclear power and inspired activist campaigns against nuclear power and in favour of environmental safety and protection. Check out this 1976 report from the New York Times archive for the contemporary reaction to the GE Three.

Whistleblowers have been the impetus behind some of the most explosive and powerful disclosures of corporate fraud and malfeasance in recent history. Companies once admired and viewed as financial stalwarts have been shown to have deeply unethical business practices and a concerning lack of organizational and employee integrity below the surface. In an economy and culture which is increasingly dominated by large corporate interests, trust in and credibility of these major institutions is critical for the public. When this is violated by inaccurate disclosures, dishonest accounting practices, or fraudulent business arrangements, consumer and markets confidence is greatly impaired. Whistleblowers therefore perform an invaluable function in making the often personally difficult and professionally costly decision to stand up for the protection of these values when observing misconduct from within their organizations.

 

Whistleblowers in the pharmaceutical industry

This is the second of a three-part series profiling whistleblowers in different industries. This started with last Tuesday’s post looking at the financial services industry, including UBS, HSBC, and Citigroup. Today’s post will be focused on the pharmaceutical industry, looking at whistleblowers who exposed fraudulent sales and marketing practices, ethical issues in the development and research phase, and more. The third and final post in this set on next Tuesday will be about whistleblowers who exposed high-profile corporate fraud in major companies such as Enron and General Electric.

Whistleblowers in the pharmaceutical industry make an important contribution to protecting consumer safety when they come forward to raise concerns about business practices in their organizations. Corporate misconduct in this industry has direct impact on patient care and individual health. Therefore the actions of whistleblowers can serve to not only shed light on fraudulent or abusive actions by organizations or individuals within them, but also to prevent future harm to scientists and researchers working in the business, third party partners within their supply chain, and end-user consumers.

  • Jim Wetta, AstraZeneca: Jim Wetta was a sales employee at AstraZeneca who blew the whistle over misleading marketing practices for the antipsychotic drug Seroquel. AstraZeneca had been approved by the US Food and Drug Administration only for treatment of schizophrenia and bipolar disorder. However, the company took on a major sales effort to market Seroquel for off-label use by children under the care of psychiatrists and elderly people suffering from dementia. The company used continuing education seminars, mandatory for doctors to maintain their licenses to practice medicine, to market the off-label uses of the drug which were not previously approved by the FDA. In 2010, AstraZeneca settled with the Department of Justice for $520 million and faced thousands of product liability claims over the marketing of Seroquel. Check out this New York Times article for more information on what happened in this drug marketing case. 
  • Robert Rudolph, Eli Lilly: Robert Rudolph also worked in sales, in his case Eli Lilly. Along with eight other whistleblowers, he went to the federal government with evidence of illegal sales practices by Eli Lilly in the marketing of Zyprexa, a drug approved, like Seroquel, for use in treating schizophrenia and bipolar disorder. In 2001, the company began to market Zyprexa for a variety of off-label uses, especially in the elderly. Apart from this marketing process, Zyprexa representatives also took names from patient lists at doctors’ offices to try to get them to switch to Zyprexa, a blatant privacy violation. Further, throughout this time the company inflated the stock price by counting drug samples as sales. Rudolph, a long-time employee at Eli Lilly who was at the end of his career, saw the corporate culture changing in a bad way and felt that the pervasion of these practices into the business needed to be stopped. In 2009, Eli Lilly agreed to a $1.4 billion fine in a DOJ settlement. For an idea of the reputational risk this case caused Eli Lilly, take a look at this 2009 opinion piece on the dangers of the company’s practices to society.
  • John Kopchinksi, Pfizer: Like Wetta and Rudolph, John Kopchinski was a sales representative, in his case at Pfizer. In 2003, Kopchinski filed a “qui tam” lawsuit under the False Claims Act, which allows whistleblowers to aid the government in recovering money stolen in frauds that resulted in the government losing money. Kopchinski exposed evidence that Pfizer was promoting 13 drugs, most prominently the arthritis drug Bextra, for off-label uses that the FDA had previously rejected and unapproved doses. Kopchinski was fired by Pfizer after reporting his claims, but continued with the lawsuit until 2009. Pfizer went on to settle with the government for $2.3 billion. For more about Kopchinski’s legal battle with Pfizer, read this 2009 NPR piece.   
  • Adam Resnick, Omnicare: In another qui tam lawsuit filed under the False Claims Act, in 2006 Adam Resnick sued Omnicare, a pharmacy providing drugs to nursing homes, for Medicare and Medicaid fraud carried out in a series of kickback schemes with nursing home operators. This corrupt practice could potentially lead nursing home administrators to make decisions about what kind of drugs they give to residents not based upon patient care, but rather based upon what pharmaceutical supplier has enriched them in exchange for their continued business. Omnicare and the involved facilities settled their cases with the government in 2010. Resnick himself has a challenging past: he was a compulsive gambler who went to prison for check-kiting which led the collapse of the bank where he worked. As part of his rehabilitation from engaging in fraud he dedicated himself to exposing it instead. For more information on the Omnicare case, look to this 2010 article from the Chicago Tribune.
  • Cheryl Eckard, GlaxoSmithKline: Cheryl Eckard was a quality assurance manager for GlaxoSmithKlein. In 2002, she reported evidence that the company was selling defective and mis-identified drugs from its Puerto Rico plant. Eckard lost her job in 2003 after repeatedly complaining, but the FDA and DOJ found so many issues in the plant that GlaxoSmithKlein became an example for other pharmaceutical companies for what not to do. Due to products being mixed up in the manufacture and distribution process, the antidepressant Paxil and diabetes medication Avandamet were tainted. Some of the pills fell apart while others did not have the active ingredient required for them to be effective treatment. The factory where they were made did not have an effective quality controls framework in place. GlaxoSmithKline paid $750 million to the DOJ for their oversight shortcomings. For more information on the production problems Eckard exposed, read this 2010 article from the Guardian.

The process for creating, manufacturing, and distributing pharmaceutical products is long and complex, with many decision points where individuals may make choices in a narrow ethical frame or a limited context which prevents them from seeing the consequences of unethical actions or even the existence of better possible choices. Whistleblowers can help to demystify this process and illuminate for public scrutiny the problems in the design of the system that may cause good people to make bad decisions.

Check back next week, Tuesday November 14, for the final post in this three-part feature on whistleblowers in historical events. Next Tuesday’s post will discuss individuals who exposed fraudulent business practices in landmark cases of corporate fraud and bad business practices.

Whistleblowers from significant scandals in financial services

This is the first of a three-part series profiling whistleblowers in different industries. This starts with today’s post, focused on the financial services industry, describing events where whistleblowers came forward to expose misconduct in investment banking, wealth management, and accounting. Next Tuesday’s post will cover the pharmaceutical industry, including AstraZeneca, Pfizer, and more. The post for Tuesday November 14 will be about whistleblowers who exposed high-profile corporate fraud in diverse companies such as WorldCom and Archer Daniels Midland.

Whistleblowers in the financial services industry have sparked reform for investor protection and shed light on the often secretive or mysterious culture within banking organizations, where trouble can be hidden from competitors and the public alike, as cultural problems deepen inside the organization completely unchecked by controls or encouraged by business strategy.

  • Bradley Birkenfeld, UBS: Brad Birkenfeld is an American banker. His disclosures regarding actions by UBS Group AG that enabled US tax evasion led to a $780 million fine from the US Department of Justice against UBS and publication of information that exposed the previously mysterious world of Swiss private banking. Indeed, Switzerland amended its federal banking law in 2009 and over the years subsequent made significant contributions to cooperation with other countries regarding reporting of tax data of their citizens. In 2013, Switzerland signed the Convention on Mutual Administrative Assistance in Tax Matters, cementing this obligation to roll back banking secrecy in this treaty which over 60 countries signed. For more on Brad Birkenfeld, who both did jail time and received a $104 million reward for his disclosure, check out this Bloomberg profile of him.
  • Rudolf Elmer, Julius Baer: Rudolf Elmer worked for the Swiss private bank Julius Baer for almost twenty years. In his last role, he was the head of the bank’s Caribbean operations for eight years. In 2002, the bank discovered that internal data had been stolen and subjected all employees to a lie detector test. Elmer declined the test once and then took it and failed, leading to this termination. Following this Elmer spent several years trying to share the information he had taken, culminating in releasing a cache of documents to WikiLeaks in 2008 and again in 2011. These documents provided evidence supporting allegations that Julius Baer had facilitated clients’ tax evasion through banking practices in the Cayman Islands. Elmer was tried several times in court for breach of banking and business secrecy laws, which historically have been notoriously tough in Switzerland, but have begun to be rolled back or scrutinized in the wake of cases such as Julius Baer’s.   Elmer also faced charges of harassment and other nuisance offenses for public disputes he got into with the bank and its employees, which demonstrates the complex and sometimes problematic emotional impact whistleblowing can have on people and their relationships with their ex-employers and ex-colleagues. In 2016, Julius Baer settled a deferred prosecution agreement, related to aiding US citizens in the commission of tax evasion, with the US Department of Justice for $547 million. For more information on this, check out this Forbes article from 2016.
  • Everett Stern, HSBC: Everett Stern worked for HSBC Holdings PLC in their Delaware office. He was a compliance officer focusing on monitoring HSBC’s transactions in the Middle East for anti-money laundering purposes. In 2010 and 2011, Stern flagged many transactions he believed could be related to terrorist financing, but his supervisors did not take action on his reporting. He then disclosed his evidence to the FBI and the CIA, kicking off an investigation that uncovered further issues in the bank’s operations in Mexico, Iran, and North Korea also. This culminated in a December 2012 deferred prosecution agreement where HSBC paid a $1.92 billion fine for its insufficient anti-money laundering controls. Stern left HSBC in 2011 and now runs his own private intelligence firm. For more on the money laundering and sanctions accusations against HSBC, read this 2012 article in The Guardian: https://www.theguardian.com/business/2012/dec/11/hsbc-bank-us-money-laundering
  • Richard Bowen, Citigroup: Richard Bowen was a senior executive at Citigroup in the period leading up to the 2008 global financial crisis. He was the chief underwriter of the Consumer Lending Group unit, and in this capacity he was responsible for evaluating and maintaining the creditworthiness of the unit. From June 2006 on, Bowen warned the board of directors of Citigroup about major issues in the risky mortgages being bought and sold by the unit. Bowen reported evidence to the board that many of these mortgages were defective, fraudulent, or both. Despite Bowen’s weekly warnings via required reporting throughout 2006 and 2007, the board did not take action. Bowen requested outside investigations of the Consumer Lending Group unit which substantiated his reports and showed that the unit had been operating with insufficient controls against these risks since 2005. This information should have been provided to shareholders per the Sarbanes-Oxley Act, but it was not, despite the fact that the bank claimed compliance with the Sarbanes-Oxley Act during this period. In exchange for his whistleblowing, Citigroup took away most of Bowen’s responsibilities and eventually fired him. Bowen offered crucial testimony to the Financial Crisis Inquiry Commission in 2010. He is now a motivational speaker on ethical leadership and corporate culture within the banking industry. For a look at what happened to Richard Bowen after he blew the whistle on Citigroup, check out this New York times article from 2013.
  • Antoine Deltour, PricewaterhouseCoopers: Antoine Deltour was a French employee of PricewaterhouseCoopers who was involved in providing information to the press related to tax rulings in Luxembourg for multinational companies. The documents became known as the Luxembourg Leaks and were the focus of a global investigation conducted and published by the International Consortium of Investigative Journalists. The investigation showed that PwC and other major accounting firms were facilitating registration in Luxembourg by multinational companies in order to benefit from advantageous tax rulings for revene reallocation. The legality of these practices is questionable on a number of grounds, including anti-trust, market abuse, and tax deals as illegal state aid. As a result of the disclosures, Deltour and his fellow PwC employee who also released documents, Raphael Halet, received prison sentences (later changed to suspended or overturned) and fines, but have also received a lot of credit for helping to shed light on the secretive practices surrounding these Luxembourg tax rulings and brought greater attention to the need to identify and prevent state-sponsored tax avoidance and evasion. In this sense, like the Julius Baer case, the whistleblower helped to ignite an open dialog about whether banking secrecy laws serve the public interest. For more on this sentiment, check out this piece about the role of citizens in holding the EU accountable.

Individuals like the above speaking up about misconduct they suspect or observe in the financial services industry have brought much-needed exposure and change to business practices. They have also often been punished, fired, criticized, or doubted for their bold decision to expose wrongdoing by their employer and/or colleagues. The 2009 US Dodd-Frank Wall Street Reform and Consumer Protection Act, which was intended to promote transparency and prevent fraud in the financial services industry, now prohibits retaliation against whistleblowers and expands the powers of the Securities and Exchange Commission in order to provide for other protections and rewards for whistleblowers who speak up about corporate malfeasance. Nonetheless, whistleblowers in the US continue to face retribution for their actions, and in Europe they remain open to legal liability in addition, as their disclosures break laws that some may say are designed to enable the concealment of other fraudulent or illegal practices.

Check back next week, Tuesday November 7, for the second post in this series of three about whistleblowers in historical events. Next Tuesday’s post will discuss individuals who exposed fraudulent business practices in the pharmaceutical industry.

Compliance practices for encouraging whistleblowers

Whistleblowers are people who speak up to expose information or activities indicating wrongdoing by individuals, departments, or organizations. They may reveal this information internally, such as to a supervisor or to a designated business unit or hotline. They may also reveal it externally, such as to regulators, supervisors, or the media. Corporate cultures should enable employees to have the courage and compulsion to act as whistleblowers in situations where it may be necessitated.

  • Set clear expectations for conduct: The most ethical corporate culture is one that has clear values and norms which can be expressed and reinforced at all levels. A culture in which expectations about employee and organizational integrity are expressed openly and referred to in justifying business decisions is a culture where employees will also be comfortable challenging behavior and choices which appears to fall outside of those expectations. An organization’s culture should be openly intolerant to unethical behavior and explicit about the right processes and practices. This way, deviations can be easy to see for participants and ethical blindness or responsibility shifting can be replaced with compliance awareness and individual accountability. People will have the confidence to speak up about wrongdoing if they are certain that they know and believe in what the right action should be.
  • Model speaking out from the top: The tone at the top is an important driver of whistleblowing. Employees should see that leadership also speaks up boldly against wrongdoing and admits to shortcomings or omissions. Senior management and/or supervisory board members should be visibly engaged in seeking to prevent, identify, and correct inappropriate conduct and practices. If employees see that those at the top of the organization are reinforcing the cultural principle of exposing problems, then they will respect the necessity of this role and be empowered to take it seriously.
  • Facilitate ease of access to reporting: A major reason why employees do not take action is because they do not know how. All employees should be provided with information about whistleblowing procedures and given the opportunity to ask questions and check understanding, including discussing dilemmas, about when whistleblowing would be appropriate or applicable. It is also imperative that the mechanism for the whistleblowing, once the employee endeavors to do so, is accessible and publicized. If there is a hotline, a dedicated mailbox, or a specific person to reach out to, then employees should be able to find and follow the procedure without being discouraged by undue difficulty of the process.
  • Provide active feedback: People will not act as whistleblowers if they believe nothing will come of their reporting. Organizations must actively recognize people who come forward and keep them as informed as possible of steps that are being taken. Employees must know that if they step up to report an issue, they will be listened to meaningfully and that the appropriate people will take action. Constructively listening to the person who is whistleblowing is the first necessary step. Then, the employee should be kept informed of what will follow and, once any investigations are complete, the outcome. This way the employee knows that taking on the responsibility and risk of stepping forward will be attended to with the appropriate seriousness.
  • Control against retaliation: Most importantly, whistleblowers should be protected and shielded from recrimination. While false claims or dubious motivations need to be discouraged, genuine whistleblowers who wish to reveal and stop harmful business practices should not be punished. In order to enable people to come forward as whistleblowers, organizations must adequately reassure employees that they will not face termination, demotion, harassment, or other mistreatment in response. Corporate cultures must forbid professional retaliation in any form in order to create an environment where an employee with evidence of unethical or fraudulent business practices could step out as a whistleblower.

The role of the whistleblower is extremely important in raising the legal, ethical, and compliance standards of organizations. Having a corporate culture in which this reaction to wrongdoing is promoted is, in and of itself, crucial for developing a controls framework which prevents and addresses misconduct effectively.