Qui Tam enforcement, and why foreign firms want to tap the Indian whistleblower market

Last month, this article in the Economic Times indicated that American law firms specialising in whistleblower laws are scouting for potential Indian clients. The firms are seeking out individuals who will come forward and report frauds under various American laws, such as the False Claims Act, or under the whistleblowing programmes of the Securities Exchange Commission (SEC)..But while American firms are seeing a significant market in India, Indian firms may not share a similar vision.. Why?.One of the biggest reasons could be the difference in the statutory provisions in the two countries..India:.In 2003, Satyendra Dubey’s death brought whistleblowing, or rather the dangers associated with whistleblowing into the national limelight. A year before his murder, Dubey had written a letter to then Prime Minister, AB Vajpayee, regarding financial irregularities in the construction of the Golden Quadrilateral project in Bihar..Seven years later, in August 2010 the Congress-led central government introduced the Whistleblower Protection (WBP) Bill. Ratified four years later, its passage forces one to question the government’s commitment to its very existence..While the WBP Act aims to protect honest officials or persons from harassment, it falls short of according any penalty for harassing a public servant/ any other person making the disclosure. Also, the WBP Act does not provide for admission of anonymous complaints..Worse, in May 2015, an amendment Bill was introduced which seeks to further dilute the already weak framework contained in WBP Act. This amendment prohibits the disclosure of the same 10 categories of information that cannot be revealed under the Right to Information (RTI) Act, 2005..The avowed purpose of this amendment is to..“incorporate necessary safeguards against disclosures which may prejudicially affect the sovereignty and integrity of the country, security of the State, etc.”.In this regard, it is pertinent to note that the purpose of the RTI Act differs from the WBP Act inasmuch as RTI relates to disclosure of information to citizens regarding the conduct of public authorities whereas the purpose of WBP is to provide corruption related information..Also, while the RTI Act allows information to be withheld under certain circumstances, it provides for a two-stage appeal process which is missing in the WBP Act..Further, the WBP Act of 2014 only provides a mechanism for receiving and inquiring into public interest disclosures against acts of corruption, willful misuse of power or discretion, or criminal offences by ‘public servants’. The private sector is completely ignored..Which is not to say that Indian laws completely ignore private sector whistleblowing; it does find mention in certain legislations. The efficacy of these provisions though, is still questionable..For instance, in 2014 the Securities and Exchange Board of India had made it mandatory for listed companies to establish a whistleblower policy and system. Under this system, stakeholders (including employees) could, within the company,.“report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy.”.The amended Clause 49 of the Listing Agreement also mandates companies to provide enough safeguards from victimization of the employee concerned. The SEBI (Listing Obligations and Disclosure Requirements) of 2015 carries forward this provision..The Companies Act, 2013 under section 177 mandates listed companies to have a ‘vigil mechanism’ for directors and employees to report genuine concerns and provide adequate safeguards from victimization..However, it is the companies themselves who need to ensure that they make these policies effective..USA.The US, as opposed to India, has a robust whistleblower mechanism embedded in several legislations itself. The biggest difference though may be the fact that under US law, whistleblowers take home a piece of the pie (the pie being the penalty imposed on the erring entity)..This encourages people to come forward and report fraud..The False Claims Act (FCA), often referred to as the Lincoln Law, was enacted in 1863 allows private citizens, to bring a lawsuit on the government’s behalf, rewarding them with a signification portion of the government’s recovery (between 15% and 30%)..The famous Ranbaxy-Scandal was exhumed under this law when Dinesh Thakur uncovered a massive internal scheme to falsify critical information about the safety and efficacy of Ranbaxy’s drugs and reported his findings the U.S. Food and Drug Administration (FDA). Based on Thakur’s report, Ranbaxy pled guilty to seven criminal felony charges and paid more than $500 million in fines and settlements, out of which Thakur was rewarded $48.5 million..Darshan Kulkarni, the principal attorney at Philadelphia-based Kulkarni Law Firm, frequently deals with matters under the FCA. He says,.“Violations under the FCA are not just against the pharmaceutical companies. These multi-million dollar violations are being assessed against doctors, hospitals and even pharmacies. Pharma companies, are just the most feasible, with fines in the billions of dollars.”.Further, there are two separate regimes in the US, which deal with violations in this context. Darshan explains,.“The first being the FDA, wherein the primary focus is to avoid four different things- two things must happen and two things must not happen i.e. product should be safe & efficacious and it must not be adulterated or misbranded..Then there is a separate law, the FCA. Payments in the US are predicated on the idea that government must not overpay for products and services, under programs such as medicare and medicaid..Further, the idea is that the government shouldn’t overpay or, pay for products or services which weren’t delivered or were otherwise sub-standard. Therefore, if you created an adulterated or misbranded product, the government or a whistleblower could assert that it has resulted in the government for a product that should not have been delivered in the first place or was otherwise sub-standard.”.Another legislation which was passed in wake of the financial and economic crises witnessed from 2007-2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). This law rewards whistleblowers who bring violations of securities law, commodities law, or the Foreign Corrupt Practices Act (FCPA) to the attention of regulators such as the SEC, the Department of Justice (DoJ), or the Commodities Futures Trading Commission..What is particularly interesting is the intersection of the FCPA with the SEC’s Dodd-Frank whistleblower program which offers awards of as much as 30% of the penalty imposed..Given that the SEC and DoJ routinely impose multi-million dollar penalties on companies who have violated the FCPA, this 30% can be a handsome figure. Not only that, but SEC rules allow a whistleblower to get credit for other “related cases” that may owe their generation to the whistleblower’s original tip..The Dodd-Frank Act and the SEC Whistleblower Program have significantly expanded whistleblower protections for employees who face retaliation for raising concerns about fraud, securities violations and related wrongdoing by their employers. Whistleblowers are allowed to sue in federal court if their employers retaliate against them for assisting the government authorities in any investigations in relation to relevant corruption laws..While the FCA encompasses within itself cases relating to any field, so long as there has been a false claim made to the government, the Dodd-Frank Act exclusively deals with securities and commodities violations..The Future.Under the FCA and SEC whistleblower programme, the US recovered a total of nearly $4.5 billion in 2015 alone and received 69 tips from India between October 2013 to September 2014. This surge has been an obvious result of the high profile Ranbaxy Scandal..No wonder American law firms are rushing to tap into this expanding market..But what about India?.Indian authorities have either turned a blind eye to such incidents or are nor particularly enthusiastic about punishing the erring entities, unlike the USA, where the interest stems from loss of revenue/ false claims made to the Government..For such a market to open up in India, substantial legislative reforms are required..The Income Tax Department and the Food Safety and Standards Authority of India (FSSAI) have attempted to offer ‘bounty’ to whistleblowers, albeit with very little/ no success. The FSSAI offers rewards ranging from INR 500 to INR 50 lakhs..However, as Neerav Merchant, partner at Majmudar & Partners notes,.“They have still not implemented appropriate guidelines for the same. The FSSAI is waiting for the Whistleblower’s Protection Bill to be enacted before they issue guidelines. Without proper guidelines and structure, the reward alone isn’t enough. India needs a better policy structure, if it actually wants to use the reward system for whistleblowers.”.This “policy structure” includes recognising the importance of anonymous complaints. Such anonymity is known to improve the quality of complaints received for fear of persecution is diminished to a great extent..As Neerav says, anonymous complaints are important as they don’t affect the employee’s credibility at work and make an employee feel safer to report any mishaps..“However, there might be cases wherein the employees seek their vendetta. This problem exists with all laws that are in place. There will always be frivolous complaints, but the need to have an anonymous complaint mechanism outweighs the few frivolous complaints that may come through. To counter such frivolous measures, it may also be a good idea to have a penalty on people who lodge frivolous complaints.”.Secondly, statutory protection for whistleblowers is paramount. Without adequate protective measures, it is unlikely that the whistleblower of a scandal of a scale as large as Ranbaxy will lead a life free from threat of being hurt, or even killed. Neerav notes,.“Under the current mechanism, no specific guidelines/rules are given to protect against victimization. It is simply stated that adequate safeguards should be provided against victimization..Hence, there is a need to fully frame these rules and make sure that there are some basics given under law, which companies can then mold their policies around. This would ensure that, companies at least have bare minimum safeguards for protecting whistleblowers.”.While according protective measures is needed immediately, so is the concept of qui tam enforcement. The idea behind qui tam enforcement is simple, if somewhat counter-intuitive—allow those who know about corruption to profit from exposing and prosecuting it..As Nicholas Robinson writes, such a doctrine would require a new legislation and a reinterpretation of the same by the Supreme Court..The final change that could be considered is the concept of contingency fees, that is actively practiced in the US and the UK. If the high costs of litigation discourage whistleblowers, the contingency model could well provide a welcome boost..(Image: Source)