August 31, 2015

A Grimm Lesson on Internal Compliance


internal compliance programs, whistleblower protection, whistleblowing

by Reuben Guttman, partner, Guttman, Buschner & Brooks, PLLC; member, ACS Board of Directors

This month, former United States Congressman Michael Grimm will begin an extended vacation courtesy of the United States Federal Bureau of Prisons. Mr. Grimm was awarded an eight month getaway as the prize for a scheme to defraud the Internal Revenue Service while running a New York health food restaurant. He pled guilty last December but was formally sentenced in July, 2015.

A December 23, 2014 press release issued by the United States Attorney’s Office for the Eastern District of New York stated that “Michael Grimm has now publicly admitted that he hired unauthorized workers whom he paid ‘off the books’ in cash, took deliberate steps to obstruct the federal and state governments from collecting taxes he properly owed, cheated New York State out of workers’ compensation insurance premiums, caused numerous false business and personal tax returns to be filed for several years, and lied under oath to cover up his crimes.”

As Mr. Grimm counts down his final days of freedom, there is no question that the summer of 2015 is for him a far cry from his summer of 2011 when he was a member of the House Finance Committee and hawked legislation requiring whistleblowers to report wrongdoing to corporate internal compliance groups before disclosing information to the Securities and Exchange Commission. Back then Grimm explained that “most companies want to know if an employee is doing something wrong or hurting customers.” Mr. Grimm’s choice of words was telling. Employees doing something wrong? What about their bosses?

These days Mr. Grimm is a poster child for why employees should not be required to blow the whistle internally before reporting to government regulators. What is the likelihood that one of Mr. Grimm’s employees would have had their grievances fully and completely addressed if they complained about being paid off the books? The truth is that when the boss is the culprit, internal compliance programs are not a viable means of redress for employees. Enron, Tyco and WorldCom all had internal compliance programs, none of which worked.

There are, of course, other problems with internal compliance programs. In some cases their mere existence may assuage would be whistleblowers from rigorous analysis and reporting of corporate misconduct. “If this conduct was really illegal, internal compliance would have caught it.” Really? If this were true there would be no corporate wrongdoing at all. There is also the real risk that internal compliance programs exist to placate and/or silence would be whistleblowers while the corporation persists in conduct that places shareholders, workers and consumers at peril.

The point is that employees should always have the right to report their concerns directly to government regulators who can act to protect the public interest through ― presumably ― independent investigation that recognizes and protects the legitimate interests of the corporation. If nothing else, the former congressman has taught us a Grimm lesson on internal compliance.