Americans like to elevate whistle-blowers to near folk-hero status, from Daniel Ellsberg, who leaked the Pentagon Papers, to Sherron Watkins, who exposed the Enron Corp. financial scandal that in 2002 moved Congress to pass the fraud-busting Sarbanes-Oxley Act.
Indeed, Watkins shared Time magazine’s Person of the Year honors in 2002 with WorldCom Inc. whistle-blower Cynthia Cooper and FBI agent Coleen Rowley, who accused the bureau of mishandling information on suspected hijacking plotter Zacarias Moussaoui before the Sept. 11 terrorist attacks.
Say whistle-blower in Germany, however, and the term most likely conjures up memories of the Gestapo, Adolf Hitler’s secret police. In France, the term evokes images of the Vichy regime’s collaboration with the Nazis and of neighbors ratting out one another.
So it’s probably no wonder that Germany and France have taken the lead in resisting provisions of Sarbanes-Oxley that shield from retaliation corporate whistle-blowers who report fraud and other financial irregularities. “Whistle-blowers are looked at as informants, particularly in France and Germany,” says Boston employment and privacy lawyer Mark E. Schreiber. “That goes back to World War II.”
As a result, multinational corporations face a potential compliance nightmare.
The transatlantic culture clash comes as public companies, U.S. and foreign courts, and regulators attempt to mark out Sarbanes-Oxley’s reach outside the United States. The act applies to all foreign and domestic corporations that sell stock on U.S. exchanges. But some core provisions regarding whistle-blowers conflict with other nations’ laws regulating labor and protecting privacy of computerized data collected on individuals.
Thus, publicly traded companies face the unappealing prospect of breaking U.S. law to comply with foreign laws, or vice versa. Civil and criminal penalties are possible.
EU Trying to Compromise
German and French regulators in 2005 refused to approve whistle-blower mechanisms sought by three U.S. companies—McDonald’s Corp. and CEAC/Exide Technologies in France and Wal-Mart in Germany. The companies wanted to weave the protections into their operations in those countries to comply with Sarbanes.
A European Union committee composed of privacy protection officials from member states expanded the debate’s scope to the rest of the continent with a Feb. 1 nonbinding opinion that offers suggestions for resolving the conflict. U.S.-listed companies would have to deal separately with the governments in each nation where they operate.
In the American view, protection of whistle-blowers is a crucial component of Sarbanes-Oxley’s broader goal of restoring investor confidence in the markets. Without protection, the Americans say, company employees would be reluctant to come forward with evidence of fraud.
Directly fueling the international conflict is a Sarbanes-Oxley provision that requires companies to establish anonymous complaint-reporting systems. In addition, the Securities and Exchange Commission requires public companies to disclose in their proxy statements whether they have adopted codes of conduct for certain executives. The stock exchanges go further and demand that their members maintain enforceable codes that apply to all employees, officers and directors. Such codes generally are broad and can delve into nonfinancial areas, such as sexual harassment. An outside contractor typically receives the complaints.
The Europeans have indicated that whistle-blower systems limited to financial matters probably would pose no problems. They cringe, however, at anonymous transmission to outsiders of more personally focused employment complaints. And while the Americans are most concerned with protecting whistle-blowers to ensure market integrity, Europeans place a higher premium on guarding personal reputations of targets of complaints, which sometimes arise out of spite, revenge or other suspect motives.
“It’s that kind of personal allegation that’s of the most concern because of the possibility of mischief,” says Thomas W. White, a corporate lawyer from Washington, D.C., who counsels clients on Sarbanes-Oxley compliance.
Some critics say the European perspective is short-sighted, considering that today’s global marketplace doesn’t adhere to national borders.
“We’re living in a world where transnational fraud is more common,” says Richard J. Wolf, compliance officer for Cendant Corp., the New York City-based real estate and travel services firm. “I think the European view unfortunately may be too narrow.”
Still, the EU’s Feb.1 opinion takes a first step toward pan-European recognition of whistle-blower systems in the financial arena, though it left for another day the more contentious questions surrounding employee gripes on other matters.
“The adopted opinion makes it clear that EU data protection rules neither prevent companies from setting up such whistle-blowing schemes nor from processing personal data reported by whistle-blowers through these schemes,” committee head Peter Schaar wrote in a Feb. 16 letter to SEC Chairman Christopher Cox. Schaar also serves as Germany’s data protection commissioner.
The opinion dwells on protecting people incriminated by whistle-blowers. Possibilities include: limits on the numbers of people entitled to report misconduct or who may be accused through a whistle-blower system; confidential, rather than anonymous, reports; notice to the accused and access to information gathered so the accused can verify its accuracy and make corrections. In the end, U.S. companies probably won’t enjoy the wide latitude they have at home in prescribing employee conduct.
“The issue for U.S. companies is that they need to tailor their programs so they don’t include everything under the sun,” Schreiber says. “It’s not insurmountable. It’s going to take some adjustment, but it’s all doable.”
Court Questions Sarbanes’ Reach
Back in the states, Congress and the SEC have had no qualms about applying various aspects of Sarbanes-Oxley abroad, including some of the whistle-blower provisions as well as restrictions on foreign-licensed accountants. Among other possible sanctions, companies that don’t comply risk having the exchanges drop their stocks. That’s the cost of doing business in the United States.
But the responsibility for shielding whistle-blowers from retaliation falls to administrative law judges at the Occupational Safety and Health Administration in the Labor Department, with the opportunity for review by the courts. As of March 1, the OSHA judges had consistently refused to protect whistle-blowers working abroad.
The federal courts regularly infer foreign jurisdiction of other U.S. laws, such as the Sherman Act, absent express congressional intent. But the first appellate decision on Sarbanes-Oxley’s foreign whistle-blower protection didn’t extend the provision to an Argentinean citizen working in South America for subsidiaries of Boston Scientific Corp., a medical device maker.
The Boston-based 1st U.S. Circuit Court of Appeals acknowledged that Sarbanes-Oxley would have covered whistle-blower Ruben Carnero had he worked in the United States. But in what critics call a cramped exercise in statutory construction, the court tossed Carnero’s claim because Congress didn’t say in so many words that protection extends beyond the United States, despite the SEC’s conclusion that related provisions do reach foreign conduct. Carnero v. Boston Scientific Corp., 433 F.3d 1 (Jan. 5).
Significantly, the panel worried, extending whistle-blower protection to foreigners working abroad would empower the U.S. courts and OSHA to usurp foreign labor law.
“We believe if Congress had intended that the whistle-blower provision would apply abroad to foreign entities, it would have said so and certainly would have considered, before enacting the law, the problems and limits of extraterritorial enforcement,” wrote Judge Levin H. Campbell.
Carnero’s lawyer, Edward Griffith of New York City, says the decision frustrates Sarbanes-Oxley’s strategy to ensure confidence in the markets by cutting inappropriate breaks for foreigners who peddle their stock here.
He’s weighing an appeal to the U.S. Supreme Court, probably a super long shot for a question of first impression that other circuits have yet to encounter.
“The conflict with the SEC interpretation gives us some fighting chance,” Griffith says.
For the moment, however, the folks in the boardroom appear more interested in finding real-world solutions rather than waiting on lofty but often unworkable judicial pronouncements.
“The issue from our perspective is practical applications for U.S. companies,” says Cendant’s Wolf. “We’re not going to get that much guidance from the courts.”