Key Steps that Financial Employers Can Take to Effectuate Comprehensive Internal Reporting Procedures

This article was originally published by Alabama Bankers Association in Banking Traditions Magazine under the title Key Steps that Employers Can Take to Effectuate Comprehensive Internal Reporting Procedures.

Financial institutions face many challenges in today’s regulatory environment, with the number of applicable federal and state laws and regulations long and ever-changing.  Compliance is further complicated by the number of different regulators that may have oversight over the institution, each sometimes with different compliance priorities, whether it is the OCC, the Federal Reserve, the FDIC, the CFPB, or the Alabama State Banking Department. 

While many industries are heavily regulated, a unique issue faced by financial institutions is that many of the applicable laws and regulations that provide employees with protection from employment retaliation for reporting potential violations or regulatory issues also may incentivize them to come forward with complaints through the possibility of monetary rewards.  An in-depth review of each potentially applicable law/regulation is beyond the scope of this article, but the major relevant federal laws include the Bank Secrecy Act (BSA), the Dodd-Frank Reform and Consumer Protection Act (Dodd-Frank), the Federal Deposit Insurance Act (FDIA), the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), the False Claims Act, and the Anti-Money Laundering Act (AMLA).

Legitimate, good-faith reports of potential violations or regulatory issues are absolutely deserving of employment protection from retaliation.  These reports are a critical tool in assisting financial institutions in ensuring regulatory compliance and transparency.  But it is certainly not uncommon for an unperforming employee to seek to insulate themselves as a “whistleblower” by making a regulatory complaint to their employer on the eve of expected discipline.  This can create issues for financial employers who have a business need to identify and discipline and potentially separate from employment under-performing employees, especially those whose performance may create regulatory issues.    

 To effectively navigate this issue, it is important for financial employers to (a) have in place a comprehensive and effective internal reporting procedure for potential violations/regulatory issues and (b) a policy of regular, documented employee performance evaluations and progressive discipline.  Through this coordinated effort, financial employers can document and build a defensible case that the employee’s performance issues are the basis for the discipline, and the discipline is not retaliation for a belated “whistleblower” complaint.

Key steps that employers can take to effectuate this plan include the following:

• • Establish detailed procedures to comply with all applicable laws and regulations. This includes regular training of all employees, both at hiring, at regular intervals thereafter, and in the event of new laws or a change in regulator priorities.
  • Establish and regularly communicate to employees a clear statement of the institution’s intent to fully comply with the law and encouraging the reporting of potential legal violations, regulatory concerns, unethical conduct, etc. through multiple communication avenues. A mandatory requirement of that policy is the unequivocal statement that all employees who report potential violations in good faith will be protected from employment retaliation.
  • A reporting policy is only effective if the institution dedicates employees to investigate each complaint seriously and thoroughly, documenting all steps of the investigation. That may involve consultation with legal counsel for the purposes of both legal advice but also for the benefits of the attorney-client privilege.  1-800 “hotlines” may be required by law (or if “strongly recommended” by regulators), but institutions should be cautious of them because they may invite frivolous reports or one lacking sufficient information for an effective investigation.  This may hinder an effective investigation, but also may serve to provide evidence in future litigation or regulatory actions that the institution “should have known” of the violation and failed to properly investigate it and/or pattern and practice evidence that can lead to a finding of serious “willful” violations.  Therefore, multiple methods of reporting that encourage detailed complaints is critical to an effective reporting/investigation policy.
  • Train/remind management on a regular basis of the institution’s policy against retaliation. Carefully review with legal counsel any potential adverse employment action (termination, demotion, pay decisions, etc.) that involves an employee who has made a whistleblower complaint before the adverse employment action is implemented.  This includes training on and detailed review of employee complaints to determine if they entitle the employee to non-retaliation protection.  Management may be familiar with identifying complaints of unlawful discrimination or workplace harassment, or safety hazards, all which also entitle the employee to non-retaliation protection, but complaints of regulatory issues may be less obvious and harder to spot.
  • Institute regular, written performance evaluations (at least annually) using objective criteria consistent for all similar-situated employees that specifically identities deficiencies and areas of needed improvement. Use a defined progressive discipline policy, with exceptions for acceleration for certain egregious misconduct.  Document all discipline, including verbal “coaching” or counseling, so that performance issues are identified as early as possible.  Doing so can help a financial employer in evaluating the appropriateness of discipline for future performance issues if the employee later makes a whistleblower complaint and, if necessary, defend a legal claim that the discipline was retaliation for that complaint.

Please contact Michael E. Turner or any member of Phelps’ Labor and Employment team with questions or for advice and guidance.