New DOJ whistleblower pilot program and its potential impact on D&O and E&O policies

On 1 August 2024, the U.S. Department of Justice (DOJ) launched a three-year pilot whistleblower program designed to fill gaps from other successful U.S. agency whistleblower programs, including  those run by the Securities Exchange Commission (“SEC”) and the U.S. Commodity Futures Trading Commission. 

The successful SEC whistleblower program which focuses on investigations of public companies and issuers of U.S. securities, received more than 18,000 tips in 2023. This is almost more than 50% of  tips received the previous year.  Further, the SEC program awarded almost $600 million to 68 individual whistleblowers, including a record $279 million award to one individual whistleblower.

The DOJ program focuses on four key categories of potential crimes that are designed to fill the gaps from the other whistleblower programs.  Those “gaps” have generally been described as:

1. Crimes involving financial institutions and their employees.
2. Foreign corruption and bribery involving privately held companies that are not issuers of U.S. securities.
3. Domestic corruption involving companies.
4. Health care fraud schemes involving private insurance plans.

Although the DOJ program is just getting underway, the chief counsel of the DOJ’s criminal division has publicly stated that it has already received reports from more than 100 tipsters. 

Under the program, whistleblowers can receive up to 30% of the first $100 million in net proceeds, forfeited as a result of the tip, as well as up to 5% of any net proceeds forfeited between $100 million and $500 million.  However, an individual is not eligible for such payments under the program if they meaningfully participated in the subject criminal activity.  This is somewhat different to the SEC program, which considers a whistleblower’s culpability when deciding what to award them in terms of the net proceeds.  The SEC program also makes tipsters ineligible for financial rewards if they are ultimately convicted of a criminal violation relating to the conduct. 

Another interesting aspect of the DOJ’s new program is that it amends the department’s corporate enforcement policy in such a way that allows a company to self-report within 120 days of receiving an internal report of misconduct. Upon self-reporting within that time frame, the program allows the company to receive a “presumption of a declination” if it adheres to the other corporate enforcement policy requirements, which include cooperation with the DOJ and remediation.  Such amendments are designed to encourage companies to strengthen their own internal compliance programs.  However, if a company does not already have policies and procedures in place to respond to internal whistleblower complaints, they may have difficulties adhering to this time-limitation, which could significantly impact the DOJ’s investigative process.  It is therefore important for companies to have policies and procedures in place in advance of receiving disclosures about suspected misconduct so that the company is able to take the reported disclosure seriously and react quickly in handling the situation going forward, including determining whether to voluntarily disclose it to the DOJ.  It is also important that such policies and procedures consider how the company treats whistleblowers after such misconduct is reported.  For example, the DOJ’s new program also includes guidance regarding any potential retaliation against the whistleblower, as any retaliation could result in the DOJ bringing criminal charges, such as obstruction of justice, against the company.    

While criminal investigations and prosecutions are traditionally excluded under insurance policies, it is sometimes less clear if coverage extends under director and officer policies or other forms of professional liability policies for whistleblower allegations, regulatory investigations and related civil litigation that can follow criminal investigations.  As such, insurers will have to carefully evaluate whether they intend for whistleblower claims to trigger coverage under their policies.  In addition, whistleblower claims can often present issues as to whether notice of the claim was made on a timely basis and when an insured first became aware of the potential that a claim could result from misconduct arising out of a whistleblower tip. Moreover, whistleblower litigation that leads to significant fines, penalties or remuneration awards can eventually lead to other civil, derivative or securities class actions that could ultimately impact director and officer and/or errors and omissions policies.  As such, it is important for insured companies and insurance underwriters to fully understand the types of policies and procedures in place at companies to deal with these situations and the scope of coverage being offered.  Given the DOJ’s 120-day self-reporting requirement, such policies and procedures could go a long way in reducing the risk and potential exposure presented by someone reporting misconduct under the DOJ’s new program.

A view across the pond

The UK, in stark contrast to the  US, takes a less robust approach to incentivising whistleblowers who provide law enforcement agencies with information that could lead to the conviction of a defendant. There are programmes such as that in place by the Competition and Markets Authority, where whistleblowers can be offered £250,000 for their role in reporting illegal cartel activity, or HM Revenue & Customs handing out discretionary amounts to individuals who report tax fraud. However, the UK is somewhat queasy at incentivising witnesses who have a personal financial vested interest in the conviction of a defendant. The risks of such incentives increasing the uptick in malicious reporting and/or cases of entrapment are too high. The term “it’s just not cricket” springs to mind.

That said, there has been more vocal support for a US-style programme by the Director of the Serious Fraud Office (SFO) who, in February 2024, publicly stated a similar vision as that espoused by his predecessor. In acknowledging the mountain the SFO has to surmount when investigating complex financial crime, Nick Ephgrave has sought to reinvigorate how criminal allegations are reported and subsequently investigated. However, reforming the disclosure process is one thing, financially incentivising witnesses may be a step too far. For now at least.

Comment

While the DOJ’s new pilot whistleblower program may not have a significant direct impact on the types of insurance commonly procured by large companies, an investigation under the program could eventually lead to related derivative or securities class action claims in the US that ultimately could impact insurance.  Moreover, the initiation of this program in general could ultimately lead to more whistleblowers coming forward in general under the DOJ’s program or other U.S. agency programs in general. Although the UK does not have similar programs, UK domiciled companies should still be mindful of this program to the extent they have been dealing with the US as they could still be investigated for the types of conduct noted above, including violations of the Foreign Corrupt Practices Act 1977.

Read other items in Professions and Financial Lines Brief - October 2024