Whistleblower Protection Under the Sarbanes-Oxley Act: The Need for All Businesses to Have an Effective “Whistleblower” Policy
Whistleblower Protection Under the Sarbanes-Oxley Act:
The Need for All Businesses to Have an Effective "Whistleblower" Policy
Oregon Lodging Association’s "Lodging News"
June 2004
So, you think that all the big corporate accounting and securities scandals don’t apply to you, a small family-owned business with only two owners? Think again. While it is true that the recently passed Sarbanes-Oxley Act of 2002 (the "Act") was primarily aimed at corporate giants like Tyco, Enron, Worldcom, and even certain hardened criminals like Martha Stewart, it also contains two specific provisions that apply to companies big and small, for-profit and nonprofit, and virtually anybody who decides to go into any business of any kind, anywhere. These two provisions are Sections 806 and 1107, dealing with document destruction and "whistleblower" retaliation, respectively. This article is the first of a two-part series that will discuss these two provisions and the critical importance of having appropriate record retention and whistleblower protection policies in place to minimize the risk of state and federal criminal penalties.
In Section 1107 (18 U.S.C. ¤1513(e)) of the Act, Congress for the first time enacted new federally-imposed broad-based "whistleblower" protection. Specifically, this provision states that any person who:
knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing a law enforcement officer any truthful information relating to the commission or possible commission of any federal offense, shall be fined under this title or imprisoned not more than 10 years, or both.
The statutory definition of "law enforcement officer" is "an officer or employee of the Federal Government … authorized under law to engage in or supervise the prevention, detection, investigation or prosecution of an offense…." Such a definition therefore includes investigators from almost any federal agency including the Internal Revenue Service, the Federal Trade Commission, the Federal Bureau of Investigation, the Department of Homeland Security, and many others. In light of this new statute, as well as Oregon state law providing similar protections for "whistleblower" employees (ORS 659A.230), it is critical that all organizations, large and small alike, take steps to review their internal policies and procedures to prevent retaliation against employees, or anyone else, who might raise questions or report problems regarding your business’s financial or other affairs.
In the lodging context, this issue can be particularly troublesome. For example, as you should already know, hotel rooms, lobbies, restaurants, etc., often make inconspicuous and convenient meeting places for plotting criminal activity of various sorts. Of course, the last thing you want is to have your hotel become known as a meeting place for drug activity, a terrorist rendevous, or a popular place for some other unseemly activity. So when the FBI comes poking around asking questions about suspected drug activity in room 303, your general manager might be inclined to deny that he or she is aware of any questionable activity or guests with the intent of trying to resolve the problem quickly and quietly. Upon learning that the FBI agent came to ask questions because of a tip received from one of the maids on staff, the general manager decides to find out who it is and to fire that person.
Firing an employee under this type of circumstance is plainly a violation of Section 1107 of the Act. While it should be that the only person facing criminal charges under the example above is the general manager, his or her actions could make life very difficult for you as the owner, particularly if you have not taken any steps to inform employees, including your managers, of the law in this area. It is not too far a stretch to imagine a situation where a general manager facing the threat of prosecution claims that he or she was acting under orders, express or implied, from the owner to avoid problems and to avoid allowing anything to happen at the hotel that could damage the hotel’s reputation.
To minimize the risks of being caught up in this type of situation, we recommend that all businesses implement a clear policy against retaliation of so-called "whistleblowers." While this term has ordinarily and historically been associated with those persons in large companies who "rat out" the fraudulent or criminal actions of corporate tycoons, the statutory language set forth above greatly broadens this historical definition. Therefore it is critical that your management staff fully understand the consequences of this statute and avoid taking actions that could result in substantial fines and possibly even land them, and maybe even you, in jail.
Your "whistleblower policy" should include provisions detailing why the policy exists, who is covered by the policy, a prohibition against retaliation of any sort under any circumstances, a confidential reporting process to allow employees and others to report suspected wrongdoing without fear of retaliation, a process for investigation, and a warning about the consequences of intentionally making false claims and reports. Such a policy will not only serve as a tool to educate employees and managers, but may also prove highly useful as a possible defense to both civil and criminal investigations of wrongdoing. Remember that an employee need only have a "reasonable belief" that the employer has engaged in some form of wrongdoing to make a good faith report of the alleged wrongdoing. Whether you are defending yourself and your business in the civil or criminal context, you want to be careful of the "employee for life" who attempts to use the whistleblower protection to cloak their below-standard work performance. If such an employee has access to a confidential reporting system under the terms of a comprehensive whistleblower policy, you will have a much better opportunity to defend yourself and your business in both the civil and criminal context.
We would encourage anyone who has any additional questions to contact us and we will be happy to further explain this important new statute and to help you develop an appropriate whistleblower policy for your business. Then, next month, we will discuss the Act’s new criminal statute regarding document destruction and the need for your business to have a well-drafted document retention policy.