Whistleblowing in the Compliance Era

• Publication year: 2020

Whistleblowing in the Compliance Era

Jeffrey R. Boles
Temple University

Leora Eisenstadt
Temple University

Jennifer M. Pacella
Indiana University

WHISTLEBLOWING IN THE COMPLIANCE ERA

Jeffrey R. Boles,^* Leora Eisenstadt,^† & Jennifer M. Pacellat^‡

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International events over the last year have propelled the importance of whistleblowers to the forefront. It is increasingly evident that whistleblowers provide immense value to society. Yet, for years, whistleblowers have been victims of retaliation, commonly experiencing threats, discrimination, and employment termination due to their reporting. Against the backdrop of a society heavily defined by compliance-focused initiatives—where organizations and industries construct robust compliance programs, internal policies, and codes of conduct—this Article highlights a significant gap in legal protections for would-be whistleblowers. While compliance initiatives demonstrate that active self-regulation is increasingly a staple of organizational governance, this Article pinpoints the problems that arise when such initiatives extend beyond applicable legal thresholds for retaliation protection. This over-extension leaves vulnerable employees and potential whistleblowers without legal recourse following adverse employment actions, even if they comply with their employers'

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internal policies and compliance programs. We examine this gap in legal protections in the context of compliance initiatives in three domains: equal employment opportunity and sexual harassment; securities fraud; and anti-corruption. We then compare these initiatives with the legal and regulatory compliance postures under Title VII of the Civil Rights Act of 1964, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the Foreign Corrupt Practices Act, respectively, to illustrate how most compliance initiatives fail to mirror the retaliation protections under those statutes. To remedy this gap in protections, we propose complementary solutions under contract and tort law frameworks, coupled with soft law initiatives.

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Table of Contents

I. Introduction....................................................................151

II. Blowing the Whistle on Harassment and Discrimination...............................................................157

A. THE DEVELOPMENT OF THE EEO COMPLIANCE INDUSTRY .....................................................................................158
B. EEO COMPLIANCE AND THE CREATION OF VULNERABLE WHISTLEBLOWERS.................................................... 164

III. Blowing the Whistle on Securities Fraud..............173

A. THE RISE OF THE ANTI-FRAUD & SECURITIES REGULATION COMPLIANCE INDUSTRY...................... 173
B. WHISTLEBLOWER IMPACT OF ANTI-FRAUD & SECURITIES REGULATION COMPLIANCE POLICIES........................ 178

IV. Blowing the Whistle on Corruption........................185

A. THE DEVELOPMENT OF THE ANTI-CORRUPTION COMPLIANCE INDUSTRY........................................... 186
B. ANTI-CORRUPTION COMPLIANCE AND WHISTLEBLOWERS ....................................................................................189

1. Facilitating Payments under the FCPA: Legally Permissible in the United States, Yet Widely Prohibited by Corporate Anti-Corruption Policies .......................................................................... 193
2. Commercial Bribery Payments: Legally Permissible in Some U.S. Jurisdictions, Yet Widely Prohibited by Corporate Anti-Corruption Policies.............................................................196

V. Proposed Solutions.......................................................200

A. ALTERNATIVES TO CONTRACT APPROACHES..............200

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B. TORT-BASED APPROACH: WRONGFUL DISCHARGE IN VIOLATION OF PUBLIC POLICY..................................209

1. The Public-Policy Exception's General Application......................................................209
2. Applying the Exception to Compliance Whistleblowers.................................................212

C. REGULATORY CHANGES CAN PROTECT WHISTLEBLOWERS FOLLOWING INTERNAL POLICIES 215

VI. Conclusion....................................................................218

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I. Introduction

By all accounts, the compliance industry has grown dramatically in the last several decades.¹ In response to various financial scandals, the passage of new legislation, and influential court rulings, both large and small companies have expanded their compliance programs and hired more personnel to combat financial fraud, avoid corruption, and eliminate workplace discrimination and harassment.² We now live in a compliance-focused world, where numerous companies proactively implement compliance policies and programs that exceed legal requirements.³ While this expansion may generally be viewed as a positive development for regulatory compliance, one key population of employees has been made significantly worse off in the process: whistleblowers.⁴ In the areas of financial fraud, corruption, discrimination, harassment, and diversity, employees who come forward to report violations of company compliance policies are often left unprotected by law and are vulnerable to retaliatory acts such as termination or demotion.⁵ In the rush to build more robust compliance apparatuses, whistleblowers—who serve a vital role in unearthing and preventing inappropriate, dangerous, unethical, and often unlawful behavior—have been left defenseless.⁶

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In 1991, The New York Times published an article examining the compliance industry's expansion following the collapse of investment bank Drexel Burnham Lambert and the treasury bond "scandal" at Salomon Brothers.⁷ Suddenly, the author noted, "the attitude [was] that no amount of compliance policing is too much."⁸ She highlighted the growth of compliance departments, the dramatic increase in compliance executives' salaries, and the newly respected positions they began to occupy at banking and other firms.⁹

If the 1990s brought growth and new prestige to compliance departments, the twenty-first century has dramatically intensified that process, bringing a veritable explosion of the industry. By 2005, The New York Times reported that, in the wake of scandals at Enron and WorldCom and the subsequent passage of the Sarbanes-Oxley Act (SOX),¹⁰ "[c]ompliance is becoming an industry unto itself."¹¹ Whereas prior to SOX's passage in 2002, "there was no such thing as a chief compliance officer at most of the roughly 9,000 publicly held corporations in the United States[, n]ow in-house watchdogs . . . are required at all these companies."¹²

The growth of the compliance industry dramatically accelerated again after the Great Recession of 2007 to 2009.¹³ Experts largely attributed the recession to a lack of oversight and regulation of financial institutions, and this sentiment culminated in the passage of the Dodd-Frank Wall Street Reform and Consumer

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Protection Act of 2010 (Dodd-Frank).¹⁴ Dodd-Frank once again required expansion of policies, procedures, and personnel to ensure compliance with the new broad-based financial regulation.¹⁵ The New York Times dubbed the law "Dodd-Frank Inc.," referring to the "legions of corporate accountants, financial consultants, risk management advisers, turnaround artists and technology vendors," in addition to the lawyers, who would be hired in the wake of its passage.¹⁶ More recently, many industries see continued increases in compliance efforts related to anti-money laundering (AML), cybersecurity, and predictive analytics.¹⁷

In addition to regulatory changes in the financial arena, case law and related regulation concerning employment discrimination law and affirmative action spurred an equally dramatic compliance expansion in the equal employment opportunity (EEO) domain, with exponential growth in policies and personnel resembling that of compliance in the finance domain.¹⁸ A pair of U.S. Supreme Court opinions from the late 1990s created an affirmative defense to discrimination and harassment claims that incentivized the creation of elaborate policies and procedures to prohibit discrimination and harassment and respond to related claims that arise.¹⁹ In addition, arising partly in response to affirmative action requirements placed on government contractors and an increasing

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belief in the business benefits of diversity, the number of compliance personnel dedicated to diversity and inclusion has dramatically grown in the last several years with numerous companies appointing chief diversity officers and expanding their compliance departments to include discrimination, diversity, and related issues.²⁰ Finally, both the #MeToo and Black Lives Matter movements have catapulted companies' efforts regarding sexual harassment, anti-racism, and workplace culture issues, again leading to renewed attention to EEO compliance personnel, practices, and procedures.²¹

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While the growth of compliance departments and programs is often reactive to litigation, regulation, and statutory changes, current compliance initiatives often "go well beyond the dictates of law or industry rules."²² For example, anti-corruption initiatives—which aim at creating broad, globally applicable policies—often prohibit more conduct than federal law prohibits.²³ In addition, anti-fraud policies often impose internal reporting duties and other responsibilities on employees, which federal law does not protect.²⁴ Further, employee handbooks and EEO codes often describe discrimination, harassment and other inappropriate workplace conduct in ways that differ from federal statutes and case law and prohibit behaviors that are not unlawful under Title VII of the Civil Rights Act (Title VII)²⁵ or other anti-discrimination statutes.²⁶ From the perspective of risk management and ethical business practices, company initiatives that are more prescriptive than legal mandates...