The Department of Justice’s new Individual Voluntary Disclosure Program

It’s a legendary scene from the classic film “Goodfellas,” in which the character Robert DeNiro reminds the just-acquitted character Ray Liotta of “the two greatest things in life: never betray your friends and always keep your mouth shut.” Not exactly fodder for the corporate code of ethics, but still with some rough logic.

And one wonders if the Justice Department had this scene in mind when developing its new “pilot program” for voluntary disclosure by individuals. Because it is a program that can generally be described as encouraging employees and certain executives to “betray” their company and their colleagues. When it’s the right thing to do, of course.

The new pilot program, released on April 15, represents the latest initiative in DOJ’s continued 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, making it different from government whistleblower programs that rely on the promise of monetary reward.

The requirements to qualify for the pilot program are strict. The disclosure must be for original information, and 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 healthcare fraud to government corruption. The person making the disclosure cannot be the CEO, CFO or “plan organizer/leader.”

The disclosure must be completely voluntary, truthful and complete. The individual must also agree to fully cooperate with the government and make financial restitution for any damages caused by the fraud. To top it all off, the individual must also fully disclose his/her role in the disclosed misconduct. All in all quite a task.

Such a unique individual disclosure program is likely to lead to major leadership challenges for companies across all industry sectors, caused by (among others) the following causes:

Its uniqueness: Unlike most government whistleblower programs, the new DOJ initiative does not offer a monetary reward, but rather the promise of a non-prosecution agreement. This can seem quite good to risk-conscious employees who are not motivated by money, but rather by the guarantee of personal freedom.

Putting pressure on the CEO and CFO: The program appears to be unusually harsh on these senior officers. What if neither of you was involved in or aware of the misconduct? What if they are carried out at the express direction of the board? How will that impact the CEO-CFO relationship, and the CEO-CFO relationship, and the board? It’s likely a major source of tension in the C-Suite.

More compliance investments: Most advanced companies have been investing in compliance programs since the Sarbanes-Oxley era. Still, the new voluntary disclosure program is a clear message from DOJ to companies to increase the level of compliance investments.

Hotline conundrum: Most compliance programs have confidential systems in place that allow employees to report concerns about misconduct – presumably so the company can take corrective action. The effectiveness of these systems could be undermined if employees concerned about their own exposure rates were better off going directly to the Department of Justice with their disclosures.

Risk avoidanceThe government’s increased concentration on corporate fraud enforcement could have a chilling effect on leadership’s willingness to take informed risks in developing strategy, for fear of being mistaken by a potential ‘revealer’ could be interpreted as corporate misconduct.

Cultural tensions: Encouraging employees to voluntarily disclose incidents of corporate misconduct could create an uncomfortable tension between organizational loyalty and individual self-preservation. This tension is exacerbated by the exclusion of the CEO and CFO from the program. When does a spirited project team debate turn into a potential source of misconduct disclosure?

Tone at the TopBoth the board and executive leaders will be challenged to adopt a much stronger and more committed ‘tone at the top’ regarding the company’s commitment to compliance. While this may not immediately seem like a bad thing, the extra effort can prove to be a major distraction from completing their duties.

This can only be a pilot program, and by their nature, pilot programs are subject to change. But the basic concept of encouraging individual disclosure through the promise of non-prosecution is unlikely to change. So it is in the interests of company leadership to raise awareness of this issue and provide some assurances of compliance, both to the management team and to the wider 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 business leaders recognize their obligation to maintain robust compliance programs. At the same time, they are expected to pursue informed risk to create long-term value for the company’s stakeholders. The DOJ’s new voluntary disclosure program will test leadership’s ability to achieve both goals.

Michael would like to thank his colleague Ashley Hoff for her valuable contributions to this post.