The Importance of Legal Counseling for Whistleblowers

By guest author Sercan Ercinler, who was born in 1987 in Istanbul, and currently lives in Vienna, Austria. He is a Certified Fraud Examiner (CFE) with a master’s degree in accounting and author of the two books: Corruption, Money Laundering and Financing of Terrorism (2017, English) and The U.S. Sarbanes-Oxley Act of 2002 and Internal Control (2016, Turkish).

Employees, who spare no sacrifice to report their organizations to competent judicial and/or administrative authorities because of the heir illegal activities, are widely appreciated by the public opinion in this day and age. According to the detailed information contained in the ACFE Reports to The Nations on Occupational Fraud and Abuse, the most common fraud detection method is tips from employees and some other parties such as customers or vendors when it comes to the financial crimes.

Whistleblowers come forward publicly when something illegal is going on in their organizations after they do not receive an acceptable reply through their organizations. This situation causes the risk of retaliation against a whistleblower by the employer. For this reason, authorities take legal measures to protect whistleblowers from retaliation.

Other than employer retaliation, whistleblowers face the risks of industry blacklisting, professional violations, legal consequences etc. Therefore, employees should get a legal counseling to minimize or eliminate the risks of being a whistleblower before reporting an illegal activity to competent authorities. Section 806 of the U.S. Sarbanes-Oxley Act of 2002 (the SOX Act), which is titled as “Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud” states that reports must be filed with some specific authorities in order for the reports to be handled properly. These authorities indicated in Section 806 are:

  1. a Federal regulatory or law enforcement agency;
  2. any Member of Congress or any committee of Congress; or
  3. a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct).

Otherwise, it will not be possible for the whistleblowers to be protected in accordance with the provisions of the SOX Act. A case which occurred in 2007 (Los Angeles Times, Two auditors not entitled to whistleblower protection, court rules, 4-May-2011) can be given as an example to the importance of legal counseling. The case involved two internal auditors assigned to assess Boeing’s compliance with stricter financial reporting regulations and safeguards imposed by the Sarbanes-Oxley Act. The two were fired after the Seattle Post-Intelligencer carried an article on July 17, 2007, headlined “Computer security faults put Boeing at risk.”

The story said Boeing had been unable for the previous three years “to prove it can properly protect its computer systems against manipulation, theft, and fraud.” These two auditors, Matthew Neumann and Nicholas Tides were not entitled to whistleblower protections because they leaked the information to a newspaper instead of the appropriate authorities indicated above.

Boeing legally fired Matthew Neumann and Nicholas Tides for the reason that they violated Boeing’s Company Principles:

  • PRO-3439* prohibits the release of company information to the news media without prior review by companies’ communications department
  • PRO-2227* considers information protection and
  • PRO-1909* considers companies’ reputation and its relation with the elements of business environment such as customers, creditors, and shareholders.

This case proves the importance of legal counseling in whistleblowing issues.

SILVERMAN, Circuit Judge:

We hold today that by its express terms, the whistleblower provision of the Sarbanes-Oxley Act, 18 U.S.C. § 1514A(a)(1), protects employees of publicly-traded companies who disclose certain types of information only to the three categories of recipients specifically enumerated in the Act—federal regulatory and law enforcement agencies, Congress, and employee supervisors. Leaks to the media are not protected

*Source: Tides and Neumann v. BOEING appeal of 2011 (13 pages, section OPINION)

Environment and misconduct. The Icelandic approach.

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Tourism a hundred years ago or so used to be totally different from what it is nowadays.  My maternal grandparents then also were no strangers to relocation and re-rooting.  They enjoyed travel thoroughly and up into their old age.  But their trips used to be longer – actually quite long, spanning often three, four or more weeks at a time. They immersed themselves and stayed in one place.  Their idea of holidaying was remotely resembling an anthropologist’s or ethnographer’s project, when the researcher “is going native” – which is a balancing act as they may lose objectivity. Suffice to say, my grandparents had a rather strong influence on what I would become…

As a result of very low airfares, seasonal collective escapism and the pressures of impression management, we see nowadays something that could be called fast food-style tourism.  Extended weekend trips, or even just a fifty hours visit, especially now at the year-end period, are becoming ever more common.

The Icelandic króna’s strength certainly contributes to this phenomenon.  Our weather here frequently welcomes travelers with wind speeds of 40-60 km/h which add to the issue.  Travelers tend to want to remain sheltered but enjoy the scenic views. Hiring the obligatory 4×4 and going on a selfie spree on moss in Icelandic lava fields seems a – sort of –  natural choice.

Tourists may not find the time to consult their travel guide and read up on the less exciting section with rules and warnings if they actually purchased one in the first place.  This is probably a by-product of being on some kind of budget and taking a short trip.  In addition, many may assume that a nation as widely fluent in English as Iceland, is rather very similar in their values and customs.  And this is where things potentially go wrong.

The legislation concerning off-road driving in Iceland is simple and warnings are issued in English, with hefty fines.  The number of cases has been increasing, though, and keeps making headlines.  Tourists have been found guilty of disrespecting and damaging the fragile nature by ignoring closed roads, by crossing rivers, and driving generally where they are not supposed to.  Extremely quickly changing weather conditions and tourists simply underestimating nature’s power have probably been playing a part in those incidents too.

The cases cover the whole range from amusing to quite unfortunate, some are just bizarre. Fines have been served, some rather steep, tourists have been rescued and an increasing number of warning signs and safety measures have been implemented.

Tourism risk (see also socio-cultural disadvantages such as social stress, United Nations Environment Program) goes both ways: tourists may be posing a risk to the environment but often also to themselves, which triggers more unfavorable comments as to the national rescue service (ICE-SAR) which is run by volunteers.  No doubt, tourism brings about change.  It raises awareness in those who travel and go back home, hopefully being rather more than less honest about misconceptions and cultural differences they were previously not so conscious of. But it also causes change in the locals.

Communication becomes the key to understanding what appears so hard to grasp – all the taken for granted, the common sense that appears to be missing in foreign tourists who litter, trample down what’s precious to nature and locals and ignore the rules that come naturally to the locals.  As often though, whether it is just a few “rotten apples” that give tourists a bad reputation in general or if it is a wider issue, perhaps even systemic, is not so easy to say. What seems to look like ignorance, arrogance, or inhibition thanks to being abroad and possibly intoxicated whether by alcohol, the scenery or else, is perhaps the root cause of this behavior. Again, this may be too simplified – but it is a common notion that shapes the discourse

Communication of values, expectations and boundaries is what is at the core of this issue. It could be argued that some of those may be reasonably assumed as shared across Northern European or even among Western industrialized nations.  But it may be a rather a misleading assumption that would overly rely on simplifications.

From within a most popular yet also very vulnerable tourist destination, I found the way Iceland has been handling the matter very persistent and it remains a curious aspect that may lead to wider subtle changes also among those visiting.  Iceland’s explicit encouragement to blow the whistle on misconduct is refreshing.   A nation that comprises of only 337,000 residents, yet expects 2.5 million tourists in 2017 simply needs to source its own crowd, more than any other nation, it seems.  It wouldn’t be the first time, as you may have heard, rewriting the nation’s constitution by sourcing the crowd  (Stjórnlagaráð 2011 ) was an attempt Icelanders were willing to make.

Locals, and foreign permanent residents alike, are fond and respectful of the fragile nature and while the weather can be brutal, beating you hard with rain, hail, sleet and strong wind, persistent darkness or daylight – anyone who has been outside the urban borders, in the more remote mountainous areas knows that litter (including human waste) and footprints live on for a long time.

Communicating repeatedly – in English –  that reporting misconduct to the police by noting the number plate and taking photos, is wanted and deemed useful.  Identifying and reporting environmental violations is citizens’ civic duty. Underpinned by media reports of fined drivers, the media coverage highlights, in detail, where drivers have transgressed the rules and how they caused damage to the nature – which could be deemed a way to educate the global public on this specific topic.

In this matter, as often, Iceland shows a pragmatic stance with an absence of passive-aggressive behavior.  Instead, the assertive approach sets clear boundaries and signals healthy collective self-esteem.  Quietly confident, Icelanders know what they want to achieve.  Absent from this picture are also the shaming and blaming, the lamenting and generalizing that can be found in some other countries – and tend to be counter-productive as they trigger predominantly resentment which is ineffective in the pursuit of actual behavioral change.

Culture certainly plays a huge role in handling and discouraging unwanted behavior and any attempts to discourage it or change the collective wrongdoing that groups of tourists may temporarily import.  However, swift and consistently acting upon it, including reporting of fines imposed and meaningful actions taken by the police, such as community service imposed, are underlining the credibility and  the sincerity of the approach.  They leave no doubt that the population is vigilant and protective of its valuable nature, thereby increasing the effective deterrent of penalty to be expected by tourists.

Tourists may come from very diverse socio-economic backgrounds and nations, legislation as to environmental crime may differ widely.  Their communities may place very different, perhaps much lower value on the nature, the natural environment, but also, perhaps on individual human beings as such.  Some tourists may hold lower self-esteem, whether individually or collectively, they may indeed also hold lower self-respect and lack the sense of respect for nature that is so deeply ingrained in the Icelandic culture.  This may not be changed overnight, nor by words alone. But these persistent actions speak louder and they may be one of the few long-lasting souvenirs that tourists take home, even if being fined for destructive driving is  financially painful – and community service  no glamorous fun – it may just stick.

The remarkable aspect is that this is no perfunctory act, not out of compliance with some imposed rule or piece of legislation by some regulatory or supra-national body that has been grudgingly implemented.  Rather, it is out of authentic deep-seated understanding and appreciation of the way Icelandic nature works and human-nature interaction is lived and perceived, how many decades are required in order to grow and restore what has been destroyed in a mindless moment, the blink of an eye.

Objectively considered, it may strike many fastfood-style tourists as an odd thing -realizing that what they have come to see took that long and is that valuable.  If their home is in a city that is scarce of nature and features human-built gardens and parks and very limited communal space, but an over-abundance of traffic and air pollution, too much artificial light and too little respect for genuine human needs, then it might be understandable, yet not excusable, that such behavior occurs.

The way this particular tourist misconduct is being dealt with is:

  • non-passive-aggressively,
  • without blaming and shaming, but
  • swiftly and consistently and
  • appropriately for the purpose of restoration and as collective self-protective measure.

It is an attitude that I hope so see being exported and adapted in other nations.  Reporting misconduct, fraud, corruption and other violations tend to remain negatively connoted, often deemed an act of betrayal rather than of deep loyalty and sense of duty.  Instead of focusing on improvement and whistle-blowing as natural civic duty, reporting misconduct remains in many jurisdictions burdened with layers of bureaucracy, lack of efficient and effective judicial commitment as well as slow and ineffective law enforcement.

Who says that lessons learned from managing tourism risk and blowing the whistle on environmental violations can not be transferred to other areas and industries?

All whistleblowers are the same. True?

“They are in for the money.” “Another disgruntled one.” “They stretch the truth for the dough.” And so it goes on. Grumpy commentary, overheard. Whistleblowers have been given a bad rep – ask by whom -, but is it true and are they really all the same?

One whistleblower withdraws his claim, and leaves everyone guessing, another one turns down a sizable award, and issues his statement of motivation for doing so. Thousands remain unmentioned, though, their cases never hit the headlines.

The US Securities and Exchange Commission boasted in a recent press release to have “awarded more than $111 million to 34 whistleblowers since [the award program’s] inception in 2011.”.  However, on the US Department of Labor’s site the Whistleblower Protection Programs’ data set spanning a ten year period between 2005 and 2015 reveals that more than 15,000 cases were dismissed, another 4,500 plus cases were withdrawn.  In total, more than 26,000 cases were considered and determined. Continue reading “All whistleblowers are the same. True?”

Risk: rogue culture killed das Fahrvergnuegen

The whistle-blower lawsuit Donovan v. Volkswagen Group of America Inc., 2016-151877-CD, Circuit Court, Oakland County, Michigan (Pontiac), filed on 8th March by a former  Volkswagen-employee, brought to light what the tone at the top can cause in terms of management of reputational and litigation risk.  Volkswagen, founded in 1937, is currently professional home to more than 600,000 employees around the globe, and a portfolio of 12 automobile brands that span the entire spectrum and include Audi, Porsche, Lamborghini and a wide range of trucks and buses.  Further, activities in engineering related to power plants, turbines, and chemical reactors and beyond make the corporation a systemically important player in Germany’s labor market and therefore a key contributor to Germany’s GDP and wider national economy.  It self-identifies as embracing an open corporate culture but has come increasingly under scrutiny for a leadership style and ownership structure (c.f. Governance issue discussion) marked by hierarchy and family dynamics.

So far, Volkswagen’s online representation only marginally touches upon the notion of whistleblowing (c.f. European Ombudsman (Draft decision on internal rules concerning whistleblowingas confined to corruption and human rights violations only, implying these are perceived as external phenomena. Following then-CEO Winterkorn’s statement in September 2015:

“We do not and will not tolerate violations of any kind of our internal rules or of the law. The trust of our customers and the public is and continues to be our most important asset.”

Volkswagen’s stance – in terms of actions – hasn’t been exactly in line with what investors and the public were hoping to see, and what should have become a governance overhaul, ideally rooted in impact assessment and supported by related relevant risk-metrics. The opposite seems to be the case, with further threatening clouds now looming large on the horizon thanks to the above-mentioned whistleblowing case which, independent of its merit, has already been making headlines and thereby increasing uncertainty for investors and stakeholders, and reputational risk.

Losses and reputational damages beyond quantifiable scars:
Increasingly it has become clear that the crisis strategy senior management at Volkswagen has been resorting to is proving inadequate and not suited to reestablish its fragile but most vital asset. Customers’ and the public’s trust have taken a severe and sustained blow as Volkswagen’s share value.  More than 6 months after the peak of emission fraud -related news, it still keeps hovering well below the 50% worth of its 52-weeks’ high Volkswagen currently faces a solid two-digit amount worth billions of Euros in fines, criminal charges, lawsuits and class actions, anticipated and resulting from filed claims in the US, Canada, the UK and beyond.  This is going to add to the losses already incurred and priced in by the market:

  1. the cost of recalling affected cars and
  2. installing the required software update.

In addition Future Losses encompassing:

  • long-term profit decline resulting from reputational damage to the corporate brand, the wider industry and the nation’s quality standard “Made in Germany”,
  • a weighing down of Germany’s share performance index DAX,
  • staff retention issues, hiring and related costs, and
  • further expansion of internal controls and compliance efforts,
  • less apparent knock-on effects such as not yet known potential further revelations which may need to be added in and will most likely be revised upward.

Risk resulting from ineffective crisis management:
The lack of clear, firm, concise and concerted, as well as forthcoming and truthful communication, by top management, has been particularly painful and adding scorn to the scandal.

  1. Senior leaders chose to provide piecemeal allocations of blame and engaged in accountability rhetoric of very limited substantiation.
  2. They focused initially on blaming a single-digit figure of “rogue engineers”.
  3. In addition, they had very little to say about the lack of decisive action upon notification in the past,
  4. and failed to provide clarity on missing or dysfunctional internal controls, thereby only further damaging the demolished brand.

Volkswagen’s social media engagement continued to be highly selective: VW Group’s Twitter channel follows less than a mere 10% of its followers and engages predominantly in glossy self-promotion. An advanced search demonstrates Volkswagen’s complete absence of engagement with critical consumers, clients, and the wider public.

This silence on the particular matter has proven counterproductive to the restoration of trust and confidence.  Even if the default tone at the top in such moments of public and widespread embarrassment may have been silencing critical voices, waiting it out and hoping that time will encourage regulators and the public to forget, might not be a reasonable strategy, in particular as Volkswagen had committed similar fraud in the past (discussed and referenced further below in more detail).

Volkswagen Financial Services AG (VW FS, and Volkswagen Bank GmbH) 2015 report strikes a tone that appears overly confident, given the ongoing debacle, the audience is assured of the Group’s strength to “master the impact of the emissions issue and to emerge stronger in the future”.  The report was compiled at a time when the full scale of what Volkswagen calls euphemistically the “emission issue” was neither clear nor the internal investigation, commenced in October 2015, concluded.

With no consideration or reference to factual data and underpinning evidence, the bold promise made to the audience represents an assessment that is potentially misleading shareholders and the public alike:  VW FS’ credit rating downgrade in November 2015, to long-term investment grade BBB+ (S&P via Reuters; downgraded also by Moody’s with negative outlook by either rating agency, also applied to Volkswagen Group which maintains a higher credit rating though) reflects this  view.

Volkswagen, however, argues that the rating agencies focused mainly on the emissions fraud and resorts to a defensive tone in respect to their communication with the agencies. Overall, the report remains very tight-lipped on the tone at the top, in fact leadership issues are mentioned only a handful of times within the 184-pages strong report, with a brief and vague note on one training opportunity which was held to “promote the corporate and management culture”, leaving the reader guessing as to whether the problematic existing culture was indeed further promoted or if any rethinking and remodeling was considered.

Communication as to the consideration of adoption of best practice from outside the firm, industry or nation has not been provided at all so far.

Internal controls – wherefore art thou?
At the time of writing, neither Volkswagen’s online staff magazine nor its corporate website offers much transparency as to recently implemented hotlines (via external Ombudsmen). Questions which arise are for instance:

  • what protection and/or incentives are offered other than (discouraged) anonymity,
  • whether whistle-blowing is valued or perceived as the operation of last resort.
  • in the case of the latter, what alternative routes exist in order to tackle misconduct, fraud, corruption, or other ethical concern.
  • How many, if any, instances have been handled so far and
  • how long it took to investigate them and/or
  • what losses and damage have subsequently or potentially been prevented.

Clarity and insight into soundness, effectiveness and acceptance rate of the mechanism would benefit investor relations but also impact positively on retention rates. It could prevent whistleblowers from going public.  It could in the wider sense positively shape the restoration of trust and support behavioral change if Volkswagen’s leadership committed to more transparency of their whistleblowing policies and related procedures.

A progress report of 2010 (dated 2008) can be found that summarizes progress on whistle-blowing protection but only in the narrowly defined context of conflicts of interest and corruption:

“Der Volkswagen-Konzern zeichnet sich durch eine offene und transparente Unternehmenskultur aus.

Das Ombudsmann-System garantiert allen Mitarbeitern bei Verdacht auf Verstöße das Whistle-Blowing, ohne dass sich jemand vor Repressalien fürchten müsste. “

Volkswagen prides itself on an “open and transparent corporate culture” and guarantees employees [the right] to whistle-blow with subsequent protection from retaliation. Further details cannot be found, this hasn’t changed post-scandal.

VW Group Sustainability Report 2014 further demonstrates very limited progress on group-wide compliance efforts: less than 1/3 of all staff had received class-based or online Compliance training. Whistle-blowing is not mentioned anywhere in the report. Further questions arise:

  • No explanation is provided as to the newly introduced – quite airy and generic – Code of Conduct (PDF, 24p), mandatory per online training for all new employees has been introduced.  However, with respect to those who have been with the firm for years or decades, no clarity is offered as to training records.

While the variable bonus pay (performance-based element of compensation) has now been linked to compliance with the Code of Conduct:

  • Yet, it remains entirely unclear how/to what degree compliance with the Code is measured and taken into account;
  • how the Code is enforced,
  • what measures are taken when breaches occur and
  • what consequences, in particular with respect to those employees who haven’t been recently recruited, can be expected, and
  • what metrics and qualitative data underpin the wider implementation and monitoring of compliance with the Code and when communication to shareholders and stakeholders about progress or lack of such can be expected.

The Group’s online subsite on Compliance and Governance is boldly talking of “successful Governance”, not clarifying, though, how it measures the success, what parameters feed the model and not permitting the audience to reverse-engineer that statement.

Trust assumed, when trust has just been severely damaged does not underpin the notion of an introspective, reflective, open and learning corporate culture.

The notion of a flat, open and dynamic corporate culture, capable of incorporating critique for the wider good and at an early stage as means of effective (preventive) risk management appears like a nostalgic advertisement of the glorious past.

The glorious past – and the history of breaches:
Volkswagen had come under intense scrutiny by US EPA (Environmental Protection Agency) back in 1973 for a not dissimilar issue: emission-defeat devices had been installed in more than 20,000 cars and also buses.  This consequently resulted in fines and a costly recall for removal imposed by the US authority, c.f. VW DefeatDevice EPA Prosecution 7-23-73 (PDF, 6p).

The failure to disclose the inbuilt switches and seek prior permission and certification was paralleled by a lack of swift and forthcoming correspondence with the US Agency.  The settlement meant that Volkswagen did not admit any wrongdoing, but committed shortly after, in 1974, yet another breach WSJ, 1974 [PDF].

Switching heads:
Various individuals have stepped down or have been suspended, most prominently CEO Winterkorn who was offered a much criticized golden handshake. Furthermore, heads of development and research respectively at Audi and Porsche as well as Volkswagen U.S. CEO Horn were dismissed.

While the internal probe, launched on 1st October 2015, continues, the reshuffle brought various new heads in.  Previously ordinary board member Poetsch (since 2003) is now heading a newly set up 20-member controlling panel and is chairman of the Supervisory Board.

As mentioned at the onset, Volkswagen is systemically important to the Germany national economy and a look at the newly placed Board members and their affiliations raises further questions as to independent decision-making and conflicts of interest at the helm of the giant:

  • While the federal state Lower Saxony holds 12.4% of subscribed capital and 20% of voting rights, 2 of the Supervisory Board members are ministers of Lower Saxony,
  • 3 hold professorships at German universities,
  • 5 of the Supervisory Board Members received basic compensation of nearly EUR 6.5 mn p.a. in the past fiscal year, with the lowest of the 32 receiving only around 6% Supervisory Board’s Chairman’s compensation, amounting to EUR 398,500.

Switching gears – or not:
In total 5 key Committees of the Supervisory Board are headed by 2 individuals who act as chairmen, i.e.:

  • Chairman of the Supervisory Board Poetsch – heads 3 committees, including ExCo and Nomination, and
  • 2 family members of the Porsche family (uncle and nephew) are heading the Audit Committee and a Special Committee of Diesel Engines.

The lack of independent decision-making at the top level and related impressions of conflict of interest are unfortunately not being dispersed by the newly set-up Ombudsmen system. Neither is specialized in whistleblowing protection, but both have extensive expertise in employer interest representation and their legal defense.

The segregation of functions, independent examination of internal controls and compliance with regulatory requirements remain a major challenge for Volkswagen Group.  Also, perhaps most importantly, mechanisms that offer effective means in the prevention and early detection of compliance breaches continue to present a pressing issue to the organisation.