DOL’s ARB Limits SOX & Dodd-Frank Whistleblower Protections To U.S. Employees

||DOL’s ARB Limits SOX & Dodd-Frank Whistleblower Protections To U.S. Employees

DOL’s ARB Limits SOX & Dodd-Frank Whistleblower Protections To U.S. Employees

February 2012

By a 3-2 vote, the Department of Labor’s Administrative Review Board (ARB) limited the jurisdiction of the Sarbanes-Oxley Act (SOX) whistleblower protection outside the United States. The case is Villanueva v. Core Laboratories, NV, ARB No. 09-108, ALJ No. 2009-SOX-6 (ARB Dec. 22, 2011) (en banc).

The ARB received multiple amicus briefs setting out the impacts of their decision, applicable case law, and the legislative history. Unlike prior decisions that summarily dismissed extraterritorial application of SOX’s whistleblower protection, this ruling was supported by a full briefing.

Most U.S.-based companies provide whistleblower reporting systems for their operations in numerous foreign countries.  This is an excellent approach to fraud reduction having nothing to do with legal compliance (For example, see these two articles that summarize this Fraud Survey and this Fraud Survey.)  However, if a company is interested solely in minimal legal compliance, an aggressive interpretation of this ARB decision could support reducing the scope of one’s whistleblower reporting system to only U.S.-based employees.  While we would not recommend this approach, there is no doubt that providing a U.S.-only solution is much easier and less expensive.

Core Laboratories NV is a publicly traded company based in Houston, Texas that provides services to the petroleum industry. For 16 years, William Villanueva worked as CEO of Core’s subsidiary (Saybolt Columbia).  The ARB ruling indicates that the underlying facts in this case are essentially undisputed.  They include:

“Complainant Villanueva lived and worked in Bogota for Saybolt Colombia for more than 24 years, the last 16 years as the company’s General Manager (CEO).  Villanueva is a non-United States citizen who never worked in the United States during his employment at Saybolt Colombia.  Villanueva alleged that Core Labs orchestrated a transfer pricing scheme in 2008, by requiring Saybolt Colombia to use Core Laboratories Sales, N.V. (Core Lab Sales) as the contracting party for inspection services that Saybolt Colombia performed for non-Colombian clients. Core Lab Sales is domiciled in the Dutch Antilles. As part of the scheme, 10% of the contract revenues were paid to Core Lab Sales even though it did not procure the contracts or conduct the services.  The Complainant believed that Core Labs’ corporate accounting department in Colombia wrongfully claimed Value-Added-Tax (VAT) exemptions on work transferred to Core Lab Sales and that, as a result, Saybolt Colombia, his employer, was able to under-report its taxable revenue to Colombian authorities.”

[Citations omitted.]

The ARB noted the U.S. limitations of the applicable laws, as follows:

“Turning to the words of the [SOX] statute first, there is certainly no indication that Section 806(a)(1) includes extraterritorial securities and financial laws. In fact, the words suggest that the six categories are limited to violations of U.S. laws given its reference to the ‘[U.S.] Securities and Exchange Commission” and “[U.S.] Federal law.’ 18 U.S.C.A. § 1514A(a)(1). Otherwise, that section simply lists six categories of protected disclosures. Absent a clear context in SOX or clear legislative history, we must interpret Section 806(a)(1) to refer only to the violation or implication of domestic securities laws, criminal laws, and financial regulation only….

After Villanueva filed his complaint, Congress enacted Section 929A of the Dodd-Frank Act, Pub. L. No. 111-203, 124 Stat. 1852 (2010), clarifying that Section 806(a) applied to ‘any subsidiary or affiliate whose financial information is included in the consolidated financial statements’ of an otherwise covered company. Like Section 806, the statutory text of Section 929A, however, is silent as to its extraterritorial application. Unlike in Section 929A, the statutory terms of which make no reference to its extraterritorial application, Section 929P of Dodd-Frank does make that reference and expands the scope of jurisdiction of federal courts over actions or proceedings ‘brought or instituted by the [Securities Exchange] Commission or the United States alleging a violation’ involving ‘securities transactions occur[ing] outside the United States and involves only foreign investors or ‘conduct occurring outside the United States that has a foreseeable substantial effect within the United States.’” [Citations & references omitted]

Villanueva refused to sign the company’s Colombian tax returns when they became due.  He claimed that after his report to Houston executives, he was denied a pay raise and was eventually terminated. He further alleged that his termination was perpetrated by the U.S. executives of Core Labs in the U.S.  The underlying Administrative Law Judge (ALJ) ruling acknowledged these facts, including:

“Villanueva argues that the adjudication of his claim will not require an extraterritorial application of SOX because all of the accounting practices that led to the alleged tax fraud in Colombia emanated from executives located at Core Labs’ headquarters in Houston, Texas.  He also argues that the retaliation was orchestrated and controlled by executives at Core Labs in Houston.” [Citations omitted.]

The ARB addressed Villanueva’s contentions that this case’s facts did not require extraterritorial findings, as follows:

“The alleged fraud that Villanueva complained of involved allegedly improper transactions between two foreign companies, Saybolt Colombia and Core Laboratories Sales NV, which is located in the Dutch Antilles, and is grounded in what Villanueva perceived as Saybolt Colombia’s under-reporting of income to the Colombian tax authorities. The onus of the alleged fraud involved actions affecting foreign companies doing business in a foreign country, and a failure to comply with foreign tax law. … The fact that Villanueva reported the alleged misconduct to Core Labs officials in Houston, or that they responded to his inquiries does not change the foreign nature of the alleged fraud.”

Although the ARB did not explicitly mention the following rational, the ALJ actually went one step further in stating:

“Even if the policy for the transfer pricing scheme came from Core Labs in Houston, the overt acts and the alleged harm all happened outside U.S. borders.”

By “overt acts”, the ALJ refers to the actions of the Columbian-based entity that was directly responsible for the employee’s employment and termination.

While providing substantial protection to multi-national employers, there are important limitations to this case.  Specifically:

  1. Because the case was brought before Dodd-Frank existed, it is not clear whether the case addresses Dodd-Frank’s whistleblower provisions.  As noted above, the ARB mentions Dodd-Frank’s provisions, but this may not be sufficient to provide authority for Dodd-Frank application.  Additionally, unlike SOX, the ARB may not have jurisdiction over Dodd-Frank disputes.
  2. The ARB was split 3 to 2.  The dissenters desired broader U.S. SOX reach for a U.S. registrant.
  3. Since the facts of each case are important in determining a U.S. nexus, other circumstances involving foreign employees could provide different results.

Fulcrum Inquiry provides turn-key whistleblower reporting systems.

2018-12-20T11:58:25+00:00Whistleblower Systems|

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