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Attention Small Businesses: If You Don’t Have A Whistleblower Policy, You Should

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  • Posted on: Feb 24 2017

Like their larger siblings, small businesses that do business with the government, e.g., healthcare providers who receive reimbursement from Medicare or Medicaid, government contractors or subcontractors, and nonprofit companies that receive state or federal funding, are at risk of being the subject of a whistleblower claim. Given the risks, small businesses should have whistleblower polices in place – policies that can encourage employees to report misconduct internally and minimize the risk of financial, legal, and reputational harm to the organization.

Having an internal mechanism for addressing concerns about corporate/business wrongdoing, including an anti-retaliation policy, can help small businesses protect themselves from the risk of violating state and federal laws that provide protections to whistleblowers who report fraud and misconduct to the government, such as the False Claims Act (“FCA”), the Sarbanes-Oxley Act of 2002, and the whistleblower programs created under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”), and ensure that if there is a violation of law or unethical activity it will be investigated and corrected. Even small companies that have no government business should develop and implement a whistleblower policy to encourage employees to bring their concerns to managers without fear of retaliation.

What Is Whistleblowing?

A whistleblower is a person, often a current or former employee, who reports fraud on the government with the aim of ending the wrongful conduct. The individual who reports the misconduct is called a “relator.”

A whistleblower can report the fraud or misconduct a) within the company (assuming the whistleblower is an employee), b) to a government agency (e.g., the Securities Exchange Commission (“SEC”) or the U.S. Attorney’s Office), or c) both within and without the company. The circumstances surrounding the alleged misconduct, including the nature of the wrongdoing alleged, the relationship between the whistleblower and the company, the scope and effectiveness of any company compliance program, the desire of the whistleblower to maintain anonymity, the risk of retaliation, and the desire for a monetary reward, often dictates to whom the disclosure will be made.

A business can encourage employees to report misconduct internally rather than externally by having an effective whistleblowing policy that is rooted in open communication and integrity, assuages employee fears of retaliation, and enhances employee trust in management’s ability to address the allegations or concerns.

Encourage Internal Whistleblowing

It is no surprise that the “tone at the top” drives the effectiveness of whistleblower policies. Indeed, the 2013 National Business Ethics Survey® (“NBES”) found that “[e]mployees report misdeeds 71 percent of the time when they believe top management is committed to ethics and 69 percent of the time when supervisors are committed to ethics, compared to 56 percent of the time when ethics appears to be a lower priority.” Business owners and managers, therefore, must communicate not only that illegal activity and unethical behavior will not be permitted within the company, but that internal reporting is encouraged and necessary for maintaining the integrity of the organization. The 2013 NBES survey supports this view, finding that “[e]ighty percent of employees report observed misconduct when ethics cultures are strong, compared to 55 percent in weak ethics cultures.”

In addition, business owners and managers can encourage employees to report concerns internally by taking reports of wrongdoing seriously and responding quickly and effectively to them. By doing so, business owners and managers not only communicate to the whistleblower what action is being taken to investigate the issue, but also maintain consistency in enforcing the law or company policy and disciplining employees who are found to have violated them.

Incentivizing Internal Reporting

Encouraging employees to report misconduct internally can be a challenge for businesses, especially given employee fears of retaliation, distrust of management’s ability to investigate and correct problems, and the financial rewards available to whistleblowers under the FCA and SEC/CFTC whistleblower programs. To address these challenges, some businesses provide monetary and non-monetary incentives for employees to report illegal or unethical activities internally rather than to the government. The 2011NBES found that “72 percent of employees who agreed their companies reward ethical conduct did report; but far fewer employees (57 percent) who do not see ethics rewarded choose to report.”

What to Include in the Whistleblower Policy

Business owners should adopt comprehensive whistleblower policies. Such policies should accomplish, at least, the following:

  • Set the “tone at the top” – build a culture that encourages employees to raise concerns or complaints about wrongful conduct internally.
  • Review company policies, codes of conduct and agreements to ensure that they do not contain language that discourages employees from whistleblowing internally or to the government. (This Blog has repeatedly reported on the SEC’s efforts to enforce Dodd-Frank’s prohibition against such language. Here. Here.Here. Here.)
  • Encourage employees to report the alleged wrongdoing through hotlines, to compliance and/or human resource departments (if any), or directly to their supervisors or the owner(s) of the company.
  • Guarantee the whistleblower’s anonymity.
  • After receiving a report of wrongdoing, the business should promptly and thoroughly investigate the matter and explain the findings to the employee, even if the investigation proves there was no wrongdoing.
  • Have an attorney perform the investigation of the alleged wrongdoing so that employees can be assured that any information that is shared is privileged and will not be used against them.
  • Protect the whistleblower from retaliation.
  • Periodically evaluate the effectiveness of the policy.

Takeaway:

An effective whistleblower policy protects both the company and its employees. It increases the probability that the company will learn about existing or potential problems before law enforcement officials or regulators. Additionally, it sends a strong message about the company’s commitment to lawful and ethical behavior and fosters a culture of accountability and employee empowerment.

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