Insights into North American Whistleblower Programs and Origins of Qui Tam Cases

NEW YORK WASHINGTON SAN FRANCISCO LONDON Overview of North American Whistleblower Programs Mary A. Inman Head of International Whistleblower Practice Constantine Cannon LLP London

Overview U.S. Whistleblower Law 101 Federal, State & Local False Claims Acts (FCA) SEC/CFTC/IRS & DOT Whistleblower programs International WB Programs

What U.S. Whistleblower Programs ARE private sector fraud Private contractors defrauding U.S. Government False Claims Act Defrauding DOD, Medicare, U.S. customs Private companies undermining U.S. Regulatory Interests AGENCY programs -- SEC/CFTC/IRS/DOT Violating U.S. securities laws/harming shareholders of publicly traded companies

What U.S. WB programmes are NOT public sector fraud Not Edward Snowden or Chelsea Manning Not fraud by U.S. Government

Where U.S. WB programs live public prosecution WBs are agents of the Government assignees of Government s claims private prosecutors Stand in shoes of Government helping enforce U.S. laws Not Just Employment Law WBs are not simply seeking redress for personal harm

Origin of Qui Tam Cases -- English Common Law Qui tam pro domino rege quam pro se ipso in hac parte sequitur who sues in this matter for the King as well as for himself WB s private right of action exists solely as Government tool to vindicate public interest deter fraud & return funds to U.S. Treasury

Qui Tam under English Common Law Built on Roman criminal law use of prosecution by private citizens Widely relied on to combat local underenforcement of national laws where national and local interests not aligned and insufficient resources to police Qui tam statutes proliferated along with professional informers Spurious allegations and unlicensed settling of cases, i.e. all settlement monies went to informer and none to Crown, were common Royal patents to certain informers developed but abuses continued Reforms in 16thand early 17thC Resurgence in 18thand early 19thC for economic regulation, public safety, environmental protection, religious matters, performance of public duties For example, used to enforce penalties for attending a Catholic mass or non-Anglican religious service or violating other Sabbath laws Widespread perjury and entrapment used to enforce, inter alia, prohibitions on retail liquor sales Use declined in 19thC with rise of modern police departments The Metropolitan Police Courts Act sought to restrict the activities of common informers a decade after a professional London police force established in 1829 From that time, Parliament looked unfavourably on qui tam and talk of abolishing qui tam statutes increased Largely abolished by the Common Informers Act of 1951 Arose out of concern that common informers would sue government actors under the Sunday Openings Bill for their involvement in planning the Festival of Britain that year since some events would take place on Sundays

Governments primary tool for prosecuting fraud Well-placed insider provides road map to the fraud vs. Government audits from the outside

A Uniquely North American Phenomenon Other Countries Reactive Whistleblower protections against retaliation U.S./Canadian Whistleblower Laws Reactive Whistleblower protections against retaliation Proactive Report Ability to assist Pursue Independently Share

Who Can Be a Whistleblower? Archetypal WB = insider current or former employee of the defendant Does not need to have clean hands It takes a rogue to catch a rogue Ok if whistleblower participated in the fraud. However, planner or initiator may receive reduced reward; but person convicted of crime arising from violation is not entitled to reward 31 U.S.C. 3730(d)(3)

Whistleblowers Without Borders: International Application of U.S. Whistleblower Laws Need Not be U.S. citizen or resident to be a WB under American WB laws Fraud must have U.S. nexus Need not occur in the U.S.

Whistleblowing Works Improved Outcomes in Government Enforcement

$$ recovered by U.S. as a result of WB lawsuits FALSE CLAIMS ACT 1986 Sept. 2018: U.S. Government recovered over $60B 85% (or $51B) from WB cases 2016 alone: U.S. recovered more than $2.9B WB Rewards WBs received $519M in rewards in 2016

DOJ statistics 01/10/1986 30/09/2019 Since 1986, DOJ recovered over $44 billion in taxpayer funds as a result of whistleblower initiated False Claims Act cases Relator share awards, calculated on the portion of the settlement or judgement attributable to the relator s claims, totalled over $7 billion

DOJ statistics 01/10/1986 30/09/2019 In 2019, qui tam relators filed 636 new cases DOJ reported $3 billion in subsequent recoveries (over $2.2 billion thanks to relators) In 2014 alone, DOJ reported recoveries of more than $6 billion (over $4.4 billion thanks to relators)

Fraudsters Fare Worse When Whistles Blow Study from May 2017 Journal of Accounting Research Examined data on 658 federal investigations of financial misrepresentation from 1978 to 2012 When WB involved in Government Enforcement (SEC/DOJ), companies are more likely to be hit with financial penalties (8.5% increased likelihood) Pay far higher penalties (average: $8.7M vs. $30.7M) (total penalties: $22.8M vs. $69.4M) Increased likelihood of criminal sanctions Longer prison sentences (22.5 months v. 41.9 months)

DETAILS OF U.S. WHISTLEBLOWER LAWS

A. False Claims Act (FCA) Federal, State and Local FCAs B. IRS Whistleblower Program* Tax Relief and Healthcare Act of 2006 Title III 406 (26 U.S.C. 7623) C. SEC/CFTC Whistleblower Programs* Dodd-Frank Wall Street Reform and Consumer Protection Act Title IX Subtitle B (2010) (15 U.S.C. 78u-6 & 7 U.S.C. 26) D. DOT/NHTSA Auto Safety WB Program* E. Other Whistleblower Laws * Only individuals (not corporations) qualify as whistleblowers under these programs

FCA Filing Process/Procedure (31 U.S.C. 3730(b)(2)-(5)) 1. Complaint and written disclosure is filed with the government Under Seal 2. Upon expiration of seal, the government either proceeds with or declines the case If the government proceeds, the action is conducted by the government If the government declines, the whistleblower has the right to continue the action on his/her own

FCA - granddaddy of WB laws Federal False Claims Act (FCA) Medicare fraud Defense fraud Customs fraud International aid fraud State False Claims Acts Medicaid fraud, infrastructure fraud & tax fraud City & Country FCAs

State Whistleblower Laws Generally 29 states, DC and Puerto Rico have FCAs that are generally modeled on the federal FCA. New Hampshire (formerly Montana) Some states limit claims to those brought by state citizens or against companies with a strong presence in state. Cities & Counties Some cities & counties (Chicago, New York) have separate False Claims Acts

States with False Claims Act & Qui Tam Provisions California Colorado Connecticut Delaware District of Columbia Florida Georgia Hawaii Illinois Indiana Iowa Louisiana Maryland Massachusetts Michigan Minnesota Montana Nevada New Hampshire New Jersey New Mexico New York North Carolina Oklahoma Puerto Rico Rhode Island Tennessee Texas Vermont Virginia Washington

6 Cities and 2 Counties with False Claims Acts Bay Harbor Islands, FL Broward County, FL City of Hallandale Beach, FL Miami-Dade County, FL Chicago, IL New York City, NY Allegheny, PA Philadelphia, PA

IRS WB Program Tax fraud must exceed $2 million, with limits (for individuals) based on annual income, including interest and penalties Fraud not required, merely evasion IRS Whistleblower Office handles the claim (administrative proceeding) Statute of limitations, generally 3 years

IRS WB Program Requirements Information must be specific and credible that a taxpayer is avoiding or underpaying a tax obligation IRS must collect in excess of $2M, including interest and criminal penalties WB can receive between 15 to 30% of collected proceeds Confidentiality protections/impossibility to file anonymously (unlike SEC or CFTC programs) Protections against retaliation

IRS Whistleblower Bradley Birkenfeld Exposed UBS for assisting tax evasion by U.S. account holders using offshore accounts U.S. imposed $780M fine on UBS Birkenfeld received over $104M award

IRS Rewards FY 2019 181 rewards totaling ~$120.3 M Collected $616.8M Highest number of claims: 510 WBs by region: - Eastern Region: 1,320 - Central Region: 1,032 - Western Region: 1,006 - Foreign Regions: 282

IRS WB Program Process (Source: IRS Publication 5251: The Whistleblower Claim Process

SEC WB Program Program Overall (2011 to 2020) WB info helped SEC secure over $2.5B in sanctions to wrongdoers 107 WBs have received ~$562M in awards (as of 10/2020, over $136M awarded to WBs) FY2019: Highest number of tips in program history (~5,200) from 70 different countries (25% increase as of 10/2020) WB received $50M in June 2020: largest individual award to date

SEC WB Program Requirements Information must be original, voluntary and lead to a successful enforcement action SEC must collect monetary sanctions exceeding $1M WB receives between 10 to 30% of monetary sanctions Confidentiality Can file anonymously but need a lawyer Protections against retaliation

SEC WB Program Filing/Process/Procedure: Whistleblowers provide information to the SEC through its Whistleblower Office If the SEC recovers sanctions over $1 million, it posts a Notice of Covered Action (NoCA) on its website Whistleblower then has 90 days to apply for an award. Application is reviewed by the SEC and Final Order is issued granting or denying an award Whistleblower cannot continue the claim privately if the SEC declines to initiate an enforcement action Statute of limitations 5 years

SEC WB Program

Examples of SEC WB AWARDS 2019-2020 JUNE 2020: $50M award Largest amount ever paid to an individual, highlights importance of WBs in reporting misconduct MARCH 2019: JP Morgan securities fraud $50M award, 2 WBs)

Increase in International Whistleblowers Filing Tips under SEC WB Program London/UK: presence of financial services industry securities fraud LIBOR manipulation Foreign Exchange rate (FX) manipulation Foreign Corrupt Practices Act (FCPA) SEC & DOJ have jurisdiction over FCPA enforcement CFTC also has FCPA jurisdiction to the extent there are commodity/derivatives violations

Foreign Corrupt Practices Act (FCPA) Prohibits offers, promises and actual payments of bribes to foreign officials to obtain or retain business. Applies to: 1) issuers and their officers, directors, employees, agents and shareholders; o U.S. and foreign companies listed on a U.S. national securities exchange (e.g. NYSE, NASDAQ) either stock or American Depository Receipts (ADRs); or o Companies required to file periodic SEC reports. 2) domestic concerns (U.S. companies, nationals and residents); and 3) foreign nationals and companies that, while in the U.S., engage in any act in furtherance of a corrupt payment. Requires issuers to maintain books and records that accurately and fairly reflect transactions of the company and to maintain a system of internal accounting controls. Violations are investigated by the SEC and the DOJ. Also CFTC if CEA violation

Top SEC/DOJ Settlements in 2019 for FCPA Violations Offender Amount Description $1.06B Paying bribes in Djibouti and China, maintaining slush funds and sham contracts in Vietnam, Indonesia and Kuwait Ericsson $850M Russian telecom giant paid hundreds of millions in bribes to an Uzbek official related to Uzbekistan s president, channelled through front companies Mobile TeleSystems PJSC $296M International gas and oil provider paid bribes in Brazil and Iraq to secure improper business advantages TechnipFMC $283M Subsidiaries in Brazil, China, India and Mexico hired third-party intermediaries to make improper payments to secure permits and licenses Walmart $231M German-based medical device and services company paid bribes to obtain or maintain business in Angola and Saudi Arabia Fresenius Medical Care AG & Co $75M Paying millions to a Brazil-based intermediary knowing that funds would be used to bribe officials to obtain a shipbuilding contract Samsung

Top SEC/DOJ Settlements in 2019 for FCPA Violations (cont.) Offender Amount Description $43M Paying unlawful bribes to government officials to secure lucrative contracts for Goldman Sachs Tim Leissner (Goldman Sachs) $25M Paying bribes to Indian government officials to obtain construction permits and operating licenses Cognizant Technology Solutions Corporation >$23M Improper incentives to third parties to fund improper payments to government officials in Hungary, Saudi Arabia, Thailand and Turkey Microsoft >$16M Providing employment to relatives of government officials in China and Russia Deutsche Bank

Countries with Most SEC Tips 2019 Country 2012 2013 2014 2015 2016 2017 2018 Total 44 U.K. 74 66 70 72 63 84 85 558 71 Canada 46 62 58 49 68 73 89 516 32 China 27 52 32 43 35 39 40 300 28 Australia 21 15 29 29 53 48 45 268 27 India 33 18 69 33 20 14 26 240 44 Germany 8 11 13 8 16 19 29 104 (Source: SEC 2019 Annual Report to Congress on the Whistleblower Program

Sources of SEC tips in FY 2019 Source: SEC 2019 Annual Report to Congress on the Whistleblower Program

CFTC WB Program Largely mirrors the SEC WB Program (same requirements), and WBs are involved in 40% of ongoing investigations. Largest single award to date is $30M in July 2018 First award to a WB living in a foreign country also in July 2018 (over $70k) Recent award to a WB living in a foreign country in June 2019 ($2.5M) Latest award: $6M in June 2020 WB info helped CFTC secure over $900M in sanctions to wrongdoers Over 14 WBs have received $110M in awards

DOT/NHTSA WB Program WB = Employees of car manufacturers, car part suppliers or car dealerships Largely mirrors the SEC Whistleblower Program Violations of safety regulation -- defects

DOT/NHTSA Whistleblowers Takata whistleblowers Mark Lillie & Dan Ramon Insiders at Takata who exposed defective airbags that have caused over 22 fatalities NHTSA fined Takata $1B for airbag scandal So far, Takata WBs have received over $1M

Other WB Programs Ocean Dumping/Pollution Act to Prevent Pollution from Ships Whistleblowers have received ~$33M in awards for exposing ocean dumping Cruise Ships, Shipping vessels Wildlife protection The Endangered Species Act The Lacey Act The Rhinoceros and Tiger Conservation Act The Wild Bird Conservation Act The Antarctic Conservation Act The Fish and Wildlife Improvement Act

INTERNATIONAL WHISTLEBLOWER LAWS

Countries with some form of whistleblower reward

Canada Offshore Tax Informant Program (OTIP) WB rewards for exposing Offshore Tax Evasion Tip must lead to at least CAD$100K recovery Award of 5-15% of tax recovered (excluding interest and penalties) No award payment until full amount recovered and case finalized As of 31 March 2018, the Canada Revenue Agency (CRA) has entered into 30 contracts with WBs and identified CAD $29M in additional taxes and penalties, apparently $1M has been paid in rewards

Canada Ontario Securities Commission Largely identical to US SEC WB program Awards range from 5% to 15% Awards are capped at $5M April 2020, OSC paid $525K to a whistleblower March 2019, OSC paid $7.5M to 3 WBs (first award by Canadian securities regulator) Paid >$8M since implementing rewards program in 2016 Expose violations of Ontario securities law Companies traded on Toronto Stock Exchange

Asia South Korea Tax Evasion Informant Reward Program Awards for significant information on tax violations Between 5% to 20% of collected proceeds (exceeding over $44k) Foreign Financial Account Reward Program Same as before, but lower threshold (collected sanctions exceeding over $18k)

Asia South Korea Anti-Corruption & Civil Rights Commission up to ~$3M for information on corrupt officials up to ~$1M for information on health and safety, environment, competition, consumer interests Korean Fair Trade Commission cartels, unfair assistance and violations of sales activities