Whistleblowers Should Avoid Internal Reporting Channels

Whistleblowers should remember that internal reporting channels exist to benefit the company, rather than the individual reporting misconduct. 

Many employees who suspect fraud or misconduct first think to report to a supervisor or a corporate compliance department. Many companies also advertise “hotlines” for employees to report fraud, misconduct, or safety issues. However, whistleblowers should be wary of these internal reporting channels.  

While hotlines often promise confidentiality or anonymity, companies may still be able to identify the employee based on the complaint, and employees who report their concerns internally are often not protected from retaliation. Some laws, such as the nuclear whistleblower law, specifically protect those reporting misconduct using internal channels. However, imany cases, employers have successfully argued in court that they can fire at-will employees for reporting to their internal company channels.  

Many whistleblower channels also report to a company’s general counsel or a compliance department that reports to the general counsel. Company lawyers who receive whistleblower complaints are not obligated to report those complaints to the government. They are required to act in the best interest of the company, not the whistleblower. In the past, company lawyers have used attorney-client privilege to hide evidence of whistleblower reports.  

Whistleblowers should remember that internal reporting channels exist to benefit the company, rather than the individual reporting misconduct. Whistleblowers should not make any disclosures internally until after they consult a whistleblower attorney. With the help of a whistleblower attorney, whistleblowers can report to law enforcement.  

If you need help or want to contact an attorney, please fill out a confidential intake form. To learn more about how NWC assists whistleblowers, please visit our Find an Attorney page. 

Virtually all whistleblower laws, including Dodd-Frank Act, and the IRS whistleblower law, prohibit employers from retaliating against employees for reporting to law enforcement in good faith, and a number of laws, including the Dodd-Frank Act, allow whistleblowers to report confidentially or even anonymously. Laws such as the False Claims ActDodd Frank Act, and the IRS whistleblower law also allow whistleblowers to obtain rewards for providing original information that leads to a successful prosecution. Whistleblowers should consult with an attorney on how to qualify for protections and rewards. 

The History of Internal Whistleblower Protections  

Prior to the 2000s, few protections existed for employees who raised concerns about fraud, misconduct, or safety concerns internally. In the New Whistleblower’s Handbook, whistleblower attorney and National Whistleblower Center board chairman Stephen Kohn explains that the earliest whistleblower cases illustrate the dangers that employees faced trying to report their concerns to supervisors or internal compliance programs. Publicly traded companies and their agents aggressively attempted to convince courts that internal complaints were not a protected activity and that only those whistleblowers who made disclosures to government agencies were protected from retaliation. While some companies maintained hotlines to which employees could report concerns, companies successfully argued that they could to fire at-will employees who used these systems.    

The collapse of Enron and WorldCom and the presence of two highly qualified whistleblowers in both scandals highlighted the importance and potential of whistleblowers in identifying corporate fraud. It also highlighted the need for stronger protections for whistleblower reports. In the case of the Enron whistleblower, Sherron Watkinsit was revealed that Enron had made plans to fire her for reporting concerns about the company’s accounting – a decision that was legal due to the lack of protections for internal reporting.  

To address these limitations, in 2002, Congress passed the first securities fraud law, the Sarbanes-Oxley ActThe law required companies to establish channels for employees to confidentially or anonymously submit complaints “regarding questionable accounting or auditing matters” and required companies to establish safeguards to prevent the identification of internal whistleblowers. The law also explicitly sought to protect employees who reported internally by defining protected activity to include reports not just to federal regulatory and law enforcement agencies and Congress but also to an employee’s supervisor, and internal corporate investigators.   

However, Stephen Kohn explains in an article for Ethical Boardroom how companies quickly identified a series of strategies to undermine the Sarbanes-Oxley Act. To limit its application, companies attempted to exempt subsidiaries and mutual fund companies, and they succeeded in narrowing the scope of protected disclosures. Companies were also able to hide employee complaints by designing compliance programs to report directly to the General Counsel and arguing that whistleblower disclosures to compliance programs were protected by attorney-client privilege. Employees were often forced to arbitrate claims in pro-employer forums. Ultimately, thousands of whistleblowers who reported internally lost their jobs.   

The financial crisis of 2007-2008, and the later discovery of widespread fraud that fueled it, revealed the limitations of the Sarbanes-Oxley Act. While several employees identified patterns of fraud and key warning signs prior to the financial crisis, their inability to sufficiently raise the alarm, often due to retaliation following internal complaints, showed that the act provided insufficient protection.

In response to the financial crisis, Congress passed the Dodd-Frank Act, known formally as the Dodd-Frank Wall Street Reform and Consumer Protection Act, on July 21, 2010. The Dodd-Frank Act rectified several of the weaknesses of the Sarbanes-Oxley Act, such as extending the scope of whistleblower protections to cover subsidiaries. Mandatory arbitration in pro-employer forums was banned and jury trials were guaranteed.   

The law also went beyond the Sarbanes-Oxley Act that by ensuring that whistleblowers with knowledge of securities or commodities fraud could report confidentially to the government and even anonymously through an attorney. It also expanded the definition of whistleblower from employees to “any individual with original information.” Individuals with original information that led to a successful prosecution were made eligible for a reward of between 10% and 30% of money sanctions over $1 million.  

The protection of internal whistleblowers through the Dodd-Frank Act was a critical component. An NWC report on the impact of qui tam laws on corporate compliance found that “the overwhelming majority of employees voluntarily utilized internal reporting processes.” Yet the internal whistleblower protections created by the Dodd-Frank Act have been consistently under attack. 

To read more about the history of internal whistleblower protections in depth, read The New Whistleblower’s Handbook, the first-ever guide to whistleblowing, by the nation’s leading whistleblower attorney. The Handbook is a step-by-step guide to the essential tools for successfully blowing the whistle, qualifying for financial rewards, and protecting yourself.  

Digital Realty Trust v. Somers  

One case, Digital Realty Trust v. Somers (No. 16-1276), has proven to be particularly devastating to internal whistleblowers. The Chamber of Congress, claiming to represent three million companies and professional organizations, sought to convince the court that employees who report violations of securities law to their supervisors or corporate compliance programs but not to the SEC are not protected from retaliation under the Dodd-Frank Act.  

The National Whistleblower Center submitted an amicus curiae , also known as friend-of-the-court, brief to the U.S. Supreme Court, urging the Justices to reject this argument and protect internal whistleblowers. The amicus brief was widely read and influential. An analysis of the Supreme Court arguments by the well-respected SCOTUS Blog, which highlights Justice Stephen Breyer’s point about the National Whistleblower Center’s amicus brief, can be found here. Senator Charles Grassley, the then-Chairman of the Senate Judiciary Committee and the top-ranking official on the Senate Whistleblower Caucus, also filed a brief in support of the whistleblower. Sen. Grassley argued that “it would make no sense to read” the Dodd-Frank Act as only protecting employees’ internal disclosures if they “also reported to the SEC” stating the “obvious effect of petitioner’s interpretation will be to discourage internal reporting.”  

Unfortunately, on February 21, 2018, the U.S. Supreme Court ruled in support of Digital Realty, and against whistleblowers. The Supreme Court unanimously ruled to leave whistleblowers who report internally without critical protections under the Dodd-Frank Act.To be protected from retaliation under the Dodd Frank Act, whistleblowers reporting securities fraud must report first to the Securities and Exchange Commission.   

Although this ruling only applied to the Dodd-Frank Act, the precedent could be applied to other laws that do not specifically protect internal reporting. These laws include numerous banking whistleblower laws, the whistleblower provisions in the Commodity Exchange Act, the Clean Air Act, Safe Drinking Act, Occupational Safety and Health Act, Credit Union Employee Protection Act, FDIC Act, International Monetary Transactions Act, Superfund, Water Pollution Control Act, Toxic Substances Control Act, and Surface Mining laws.  

However, the National Whistleblower Center and other whistleblower advocates are working to rectify this ruling and protect whistleblowers who make internal disclosures first. Learn more about our work to reverse Digital Realty here. 

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