Recent court ruling increases chances that foreign employees for US firms will opt for external over internal reporting of misconduct
Compliance officers' jobs just got a little tougher. Last week, a federal appellate court dismissed an appeal of the New York Southern District Court's ruling in Liu Meng-Lin v Siemens last October, saying that Dodd-Frank's anti-retaliation protections cannot be applied extra-territorially for activity that occurred outside the US in a non-US company.
That's not surprising given the particulars of the case, in which a former compliance officer for Siemens' subsidiary in China -- and a Taiwan citizen -- said the German multinational engineering and electronics conglomerate violated Dodd-Frank's whistleblower anti-retaliation provision by firing him after he internally reported alleged corrupt sales practices in China and North Korea.
In dismissing the appeal, Judge William H Pauley III cited three missing factors that put the employee's firing beyond the reach of the anti-retaliation provision: it did not involve a US-based company, a US employee or actions that occurred inside the US. Had any of these factors been present, the court might very well have decided differently.
But this case raises questions for multinational companies with operations and employees of various nationalities around the world that are trying to implement uniform compliance and ethics policies throughout their operations.
'I'm not sure this is good for corporations. Essentially, corporations won the battle but may actually lose a more important war,' says Jordan Thomas, a partner and chair of the whistleblower representation practice at Labaton Sucharow, who's also a former assistant director of the SEC. Thomas believes more knowledgeable employees 'will choose to report externally and anonymously to the SEC and other law enforcement organizations as a result of this decision.'
Imagine the Liu case with just one difference – a US company instead of a German one. As Ed Ellis, co-chair of the whistleblower and retaliation practice at Littler Mendelson, points out, 'If GE was the defendant, it would be virtually impossible for a high-ranking compliance person to be acting totally independent of the US because everything rolls up to GE somewhere.' In other words, the Taiwanese compliance officer wouldn't have been on the hook alone but likely would have involved GE's chief compliance officer.
Still, the implications for non-US employees of a US firm are troubling if they aren't entitled to the same protection under the law that US employees have. 'Then an international whistleblower is almost forced, if they're concerned about retaliation and blacklisting, to report externally and anonymously because that's the best protection against retaliation and blacklisting,' says Thomas.
This isn't the first judicial outcome this year that arguably increases the likelihood of whistleblowers choosing to report wrongdoing externally rather than within their firms. In May, a Nebraska district court decided in Bussing v COR Clearing LLC that Dodd-Frank's whistleblower protections extend to employees who report externally to entities other than the SEC.
And the growing publicity around enticing bounties being paid to whistleblowers who report first to the government and whose actions result in large fines and penalties imposed on the company doesn't make internal reporting any more attractive.
'I do think sophisticated organizations should look at different ways to incentivize people into coming forward,' Thomas says. 'Why not experiment with small monetary awards? It makes sense.' While some organizations are troubled by the idea of employees being paid to do what they should be doing in the course of doing their jobs, 'more sophisticated organizations focus on results. How do we get people to do what we want and we want people to tell about bad things going on in their midst,' he adds.
