Whistleblower Update MAPI LAW COUNCIL MEETING FALL Miriam Fisher Eric Swibel November 9, 2017

Transcription

1 MAPI LAW COUNCIL MEETING FALL 2017 Whistleblower Update Miriam Fisher Eric Swibel November 9, 2017 Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. Latham & Watkins operates in Seoul as a Foreign Legal Consultant Office. The Law Office of Salman M. Al- Sudairi is Latham & Watkins associated office in the Kingdom of Saudi Arabia. Copyright 2017 Latham & Watkins. All Rights Reserved.

2 Agenda The Current Landscape The IRS Whistleblower Program The SEC Whistleblower Program How to React: Practicalities and Best Practices Resources and Speaker Bios 2

3 Whistleblowers: The Current Landscape Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. Latham & Watkins operates in Seoul as a Foreign Legal Consultant Office. The Law Office of Salman M. Al- Sudairi is Latham & Watkins associated office in the Kingdom of Saudi Arabia. Copyright 2017 Latham & Watkins. All Rights Reserved.

4 Overview Various statutory schemes strongly incentivize, protect and reward individuals who will come forward to report perceived company malfeasance, including, for example, commercial, employment-related, environmental, accounting and tax Whistleblowers may receive lucrative awards paid out from collected restitution, fines and penalties A well-oiled plaintiff s bar has emerged around these programs Regardless of the merits, whistleblower claims, when discovered, can be highly disruptive for the company Increased activity in general Corporate and International Tax planning 4

5 The Rise of the Tax Whistleblower In 2006, echoing programs at other Federal agencies, new legislation formalized the IRS program of paying substantial rewards (15% to 30% of amounts collected) for information that substantially contributes to the detection and recovery of amounts in dispute in excess of $2 million In its first ten years, the program has generated $3.4 billion in completed collections and paid out $465 million to date in whistleblower awards; thousands of active claims remain open at this time Claims involve highly sophisticated issues and often go hand in hand with SEC whistleblower claims 5

6 Who Are They and How Will You Know? Tax whistleblowers are generally current or former employees and/or accountants or lawyers, but can also be family members or close personal contacts It is typical for a single whistleblower submission to give rise to multiple claims affecting more than one taxpayer A company may discover the existence of a whistleblower in a variety of ways; e.g., demands directly from the whistleblower and/or his counsel, anonymous letter to the Board, press inquiry, circumstantial evidence, mere suspicion or not at all 6

7 Impact on the Company Once a claim is discovered, governance processes will require multidivisional internal review, involving not just Tax but Legal, HR, IT, PR, Compliance, SEC Reporting, Board, as well as a team of outside advisors, to address both substantive analysis of the merits and a variety of practical issues Process takes over Increased sensitivities surround the company s dealing with the whistleblower, his counsel and/or expert, the IRS and the SEC 7

8 IRS Whistleblower Program Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. Latham & Watkins operates in Seoul as a Foreign Legal Consultant Office. The Law Office of Salman M. Al- Sudairi is Latham & Watkins associated office in the Kingdom of Saudi Arabia. Copyright 2017 Latham & Watkins. All Rights Reserved.

9 IRS Whistleblower Award Types IRC 7623(b) awards ( B Claims ) Enacted in 2006 with creation of the IRS Whistleblower Office Amount in dispute is potentially in excess of $2,000,000 (and, if against an individual, the person s gross income in one year must exceed $200,000) Awards are mandatory and range from 15% to 30% of amount of tax, penalties and interest ultimately collected (10% where based on public information) IRC 7623(a) awards ( A Claims ) Awards of 1% to 15% of amount ultimately collected where amount in dispute is expected to be less than $2,000,000 (or <$200,000 for individual taxpayers) Codification of long-standing IRS policy; entirely discretionary 9

10 IRS Whistleblower Program Rules The information submitted by the whistleblower must be specific and credible regarding underpayments or violations of tax law and must substantially contribute to and administrative or judicial action that results in the IRS s detection and recovery of collected proceeds Reduced awards possible if whistleblower was involved in actions that led to underpayment of tax if info is from public sources No award if whistleblower is convicted of criminal conduct arising from role in such actions Collected proceeds from which an award can result include tax, interest and penalties and can result from administrative or judicial action or settlement Contingent legal fees are permitted 10

11 IRS Whistleblower Claim Process Submission of IRS Form 211 Application for Award for Original Information under penalties of perjury Requests detailed description of alleged violation, inclusion of supporting documents, location of additional supporting info WBO Initial Review: decline or translate into claims and transfer to Operating Division (OD) for Field Exam OD Field Investigation or Suspense No Contribution/Decline or Preliminary Award Recommendation Taxpayer Payment/Award Suspense Final Award Determination TIMELINE: 5 TO 8 YEARS!! 11

12 IRS Whistleblower Protections Strong IRS commitment to protecting the identity and even the existence of whistleblowers Whistleblower identity is protected from disclosure in almost all cases; disclosure requires high-level approval Although IRS Program has no anti-retaliation provision, a recent legislative proposal sought to create one A whistleblower may be protected under other antiretaliation provisions (e.g., those of False Claims Act or Sarbanes Oxley) if also providing information under those programs B Claim whistleblowers can appeal denials and determinations 12

13 Whistleblower Rights for Denied Claims WBO can deny a claim for a variety of reasons at time of Initial Review or upon completion of taxpayer audit and litigation Further, a whistleblower may disagree with an award determination At each of these junctures, a B Claim whistleblower is entitled to an administrative appeal and may petition the US Tax Court in confidential proceedings to challenge the denial or amount of the award Under a protective order, the whistleblower may get access to the taxpayer s files from the IRS The taxpayer is not a party to these proceedings! 13

14 IRS Whistleblower Office Communications WBO to Whistleblower ( one-way street ) May receive information from whistleblower Advise whether claim is open or closed Convey award determination Whistleblower cannot receive information from the IRS about the alleged tax violator or OD process WBO and Affected Taxpayer ZERO But -- Whistleblower TC litigation presents an opportunity for additional disclosure to whistleblower under confidentiality No current restraint on whistleblower disclosure of info 14

15 FY2016 Statistics Of approximately 4,600 new Forms 211 that survived Initial Review in FY2016, 179 represent potential B Claims; of those, 60 were referred to LB&I (totaling 184 separate claims) 21 were referred IRS Criminal Investigation (1,249 claims) Of approximately 1,700 open B Claim submissions (dating back to 2007), 1,085 are in OD Field Investigation or Suspense; another 388 are in Award Assessment or Suspense These represent nearly 15,000 separate open claims Denied claims and contested awards represent the fastest-growing class of Tax Court litigation 15

16 Not Just the IRS: SEC Whistleblower Law Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. Latham & Watkins operates in Seoul as a Foreign Legal Consultant Office. The Law Office of Salman M. Al- Sudairi is Latham & Watkins associated office in the Kingdom of Saudi Arabia. Copyright 2017 Latham & Watkins. All Rights Reserved.

17 The SEC Whistleblower Program Congress created the SEC whistleblower program in 2011 The SEC has devoted significant resources Stats as of January 2017: SEC has received more than 10,540 tips from all 50 states and 95 countries $975 million in financial remedies arising from program $162 million in awards paid to whistleblowers 17

18 How the SEC Describes the Process Source: 18

19 Dodd-Frank: Award & Anti-Retaliation Provisions Whistleblower Awards In cases involving at least $1 million in sanctions, the SEC must pay whistleblowers between 10% and 30% of sanctions collected Includes amounts collected in related actions -- DOJ actions, certain state attorney general actions, and others Anti-Retaliation Claim Whistleblower must have had reasonable belief of a possible violation of the securities laws The whistleblower need not be correct Open question: must whistleblower report to the SEC to be protected the Supreme Court will hear case 11/28/17 19

20 Who Can Get an Award? One or more individuals a company cannot be a whistleblower The individual does not need to be an employee of the subject entity Consultants Competitors Reporters Academics 20

21 Culpable Whistleblowers Can Collect Only disqualifying factor: conviction of a criminal violation related to the successful enforcement action In calculating the $1,000,000 threshold, the SEC will exclude the value of any monetary sanctions that: The whistleblower is personally ordered to pay The company is ordered to pay if liability is based substantially on conduct directed, planned, or initiated by the whistleblower 21

22 The Race Is On 120-day lookback period once whistleblower reports internally, they must report to the SEC within 120 days to keep their place in line for award Internally-reporting whistleblowers get credit for information subsequently reported by their companies 22

23 How to React: Practicalities and Best Practices Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. Latham & Watkins operates in Seoul as a Foreign Legal Consultant Office. The Law Office of Salman M. Al- Sudairi is Latham & Watkins associated office in the Kingdom of Saudi Arabia. Copyright 2017 Latham & Watkins. All Rights Reserved.

24 Someone Reports Concern: What to Do? Ensure that business folks know to report to counsel promptly any whistleblower concerns Understand the whistleblower s concerns does company agree? Understand what information the whistleblower has and what the whistleblower does not have Identify potential privilege issues and preserve privilege over internal investigation Evaluate credibility of whistleblower, whistleblower s lawyer, and whistleblower s expert 24

25 Other First Steps Initiate governance policies Consider who to notify: board/audit committee, key officers, auditor, insurers Assemble internal and external teams Lawyers Accountants Outside experts Identify scope of concerns, internal folks with relevant knowledge, third-party consultants with relevant knowledge Documents! 25

26 Documents, Documents, Documents Documents are often at the center of a whistleblower s analysis When whistleblower raises concerns, preserve potentially relevant documents Evaluate potential security breaches, confidentiality breaches, privilege breaches Collect potentially relevant documents 26

27 Witness Interviews: Internal Investigation & Gov t Interviews/Testimony Co-workers Supervisors Officers Board, audit committee, compliance personnel, FIN 48 Committee members Outside consultants tax-planners, accountants, lawyers Auditor Outside counsel 27

28 Strategic Considerations Involve PR team? IR team? Self-report fact of whistleblower to IRS/SEC/DOJ? Self-report findings of investigation to IRS/SEC/DOJ? Waive privilege? How to handle whistleblowers already subject to discipline, performance improvement plan, etc.? Posture with whistleblower s counsel? How to handle threats, demands, etc.? 28

29 Impact on Interactions with IRS Consider FOIA request regarding whistleblower Explore the whistleblower s motivations Assess credibility and impact of whistleblower s claims Consider affirmative disclosure to control narrative Do not interfere with the whistleblower s interactions with the IRS Limit the whistleblower s access to taxpayer information Live life as if under a microscope; as if every action will be scrutinized 29

30 What Can I Do Now? Consider requesting final opinions from tax planning consultants and law firms, rather than draft opinions, summaries, etc. Encourage tax planners to document business purpose early and often Document key decisions, including rationale for HR decisions, response to whistleblower concerns, FIN 48/litigation reserves, etc. Encourage open dialogue; follow-up on concerns raised Document legitimate performance concerns in realtime 30

31 What Can I Do Now: Privilege Considerations Where feasible, include in-house counsel in internal discussions related to tax planning, accounting, and related decisions that have legal components Note that the tax practitioner privilege may not apply Label documents clearly as privileged, confidential, etc. Keep records of who attended meetings, especially when counsel attends Understand proper use of work product protection Make conscious decisions about what privileged materials to share with consultants, auditor, etc. 31

32 Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. Latham & Watkins operates in Seoul as a Foreign Legal Consultant Office. The Law Office of Salman M. Al- Sudairi is Latham & Watkins associated office in the Kingdom of Saudi Arabia. Copyright 2017 Latham & Watkins. All Rights Reserved. Resources

33 Resources IRS Whistleblower Program Fiscal Year 2016 Report to Congress Form 211 Application for Award for Original Information IRS Publication 5251 The Whistleblower Claim Process IRS Chief Counsel Notice on Approval Procedures for Identifying Whistleblowers (CC ) SEC 2016 Annual Report to Congress on the Dodd- Frank Whistleblower Program SEC Form WB-APP (Form for Claiming Award) 33

34 Speaker Bios Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. Latham & Watkins operates in Seoul as a Foreign Legal Consultant Office. The Law Office of Salman M. Al- Sudairi is Latham & Watkins associated office in the Kingdom of Saudi Arabia. Copyright 2017 Latham & Watkins. All Rights Reserved.

35 Miriam Fisher 35

36 Eric Swibel 36