It’s a legendary scene from the classic film “Goodfellas”, when the Robert DeNiro character reminds the just acquitted Ray Liotta character about “the two greatest things in life: never rat on your friends, and always keep your mouth shut.” Not exactly fodder for the corporate code of ethics, but with a certain rough logic to it, nevertheless.
And one wonders if the Department of Justice had this scene in mind when developing its new “pilot program” for voluntary disclosure by individuals. Because it’s a program that can generally be described as incentivizing employees and certain executives to “rat” on their company and their co-workers. When it is the right thing to do, of course.
The new pilot program, released on April 15, represents the latest initiative in DOJ’s ongoing focus on corporate fraud. Essentially, executives and employees are encouraged to voluntarily disclose what they know about corporate fraud in exchange for a promise not to be prosecuted. That’s a powerful incentive, which makes it different from government whistleblower programs grounded in the promise of monetary award.
The requirements for qualifying for the pilot program are strict. The disclosure must involve original information, not something already known to the DOJ. It must relate to one of six specific legal violations, ranging from money laundering and various types of financial and health care fraud, to public corruption. The individual making the disclosure cannot be the CEO, the CFO or “the organizer/leader of the scheme.”
The disclosure must be completely voluntary, as well as truthful and complete. The individual also must agree to cooperate fully with the government, and to make financial restitution for the harm caused by the fraud. To top it off, the individual must also fully disclose his/her role in the disclosed misconduct. All in all, a tall order.
Such a unique individual disclosure program is likely to prompt a major leadership headache for companies across industry sectors, prompted by the following causes (among others):
Its Uniqueness: Unlike most government whistleblower programs, the new DOJ initiative doesn’t offer a monetary reward, but rather the promise of a non-prosecution agreement. That might look pretty good to risk-conscious employees who are not motivated by money, but rather by a guarantee of personal freedom.
Squeezing the CEO and CFO: The program seems to be unusually harsh on these senior officers. What if neither has been involved in, or aware of the misconduct? What if they’re undertaken at the express direction of the board? How will that impact the CEO-CFO relationship, and that of the CEO and CFO, and the board? It’s likely to be a significant source of C-Suite tension.
More Compliance Investment: Most sophisticated companies have been investing in corporate compliance programs since the Sarbanes-Oxley era. Yet the new voluntary disclosure program is a clear message from DOJ for companies to increase the level of compliance investment.
Hotline Conundrum: Most compliance programs have confidential systems through which employees can report concerns with wrongdoing – presumably, so the company can take corrective action. The effectiveness of these systems could be undermined if employees concerned with their own exposure figure they are better off going straight to DOJ with their disclosures.
Risk Avoidance: The government’s increased concentration on corporate fraud enforcement could have a chilling effect on leadership’s willingness to pursue informed risks in strategy development, for fear that it could be misconstrued by a potential “discloser” as corporate misconduct.
Cultural Strains: Incentivizing employees to voluntarily disclosure incidents of corporate misconduct could create an awkward tension between loyalty to the organization and individual self-preservation. This tension is exacerbated by the exclusion of the CEO and the CFO from the program. When does spirited project team debate transform into the potential source of a misconduct disclosure?
Tone at the Top: Both the board and executive leaders will be challenged to strike a much stronger and more engaged “tone at the top” with respect to the corporate commitment to compliance. While this would not immediately seem to be a bad thing, the extra effort may prove to be a major distraction to the performance of their duties.
This may only be a pilot program, and by their nature pilot programs are subject to change. But the basic concept of incentivizing individual disclosure by the promise of non-prosecution is unlikely to change. So it’s in corporate leadership’s interest to get in front of this issue and provide some compliance assurances to both the executive team and the broader workforce. Individuals are more likely to work within the compliance program to correct perceived fraud if they view the program as credible and responsive.
Effective and respected corporate leaders recognize their duty to maintain robust compliance programs. At the same time, they’re expected to pursue informed risks in order to create long term value for the company’s stakeholders. The DOJ’s new voluntary disclosure program will challenge the ability of leadership to achieve both of these goals.
Michael wishes to thank his colleague, Ashley Hoff, for her valuable contributions to this post.