http://www.acfe.com/article.aspx?

id=4294973865&terms=(whistleblowing)+

July/August 2012
Bert F. Lacativo, CFE, CPA

My Take: Views on the News

The views expressed here aren't necessarily those of the ACFE, its executives or employees. ed.
Do the whistleblower provisions of the Dodd-Frank Act send a
clear message to the public and corporate America that the U.S.
government is fed up? One can easily argue that by making it
easier to become a whistleblower, the government no longer
trusts corporations to police themselves. Let's look at some
history about the government's philosophy on compliance and
whistleblowing activity.

DEFENSE INDUSTRY'S BIG ANTI-FRAUD GUNS

In the 1980s, companies serving defense industry contractors found themselves inundated with
government investigations, so they collectively decided to put the brakes on improper activities that were
hamstringing the industry. They instituted the Defense Industry Initiatives in which all participants agreed
to develop ethics and compliance programs to put in place anti-fraud policies, procedures and processes.
They decided to police themselves not only because it was the right thing to do but because they knew the
government wasn't going to go away anytime soon. We began to see a new era of cooperation between
corporate America and the government, which applauded the defense industry's efforts. Since then, the
Department of Justice Civil Division has reported a decline in the number of new defense industry matters,
which include newly received referrals, investigations and qui tam actions.
FSGO USES CARROTS AND STICKS
In 1991, we saw the implementation of the Federal Sentencing Guidelines for Organizations (FSGO) that
laid out expectations for corporate ethics and compliance programs. This carrot-and-stick approach
rewarded companies for implementing effective compliance programs while allowing for more severe
punishment for those who chose not to. This is another example of the government's position of wanting
companies to police themselves.
In spite of the FSGO, in the 1990s we witnessed an onslaught of health care fraud. Again the government
cracked down, and again we saw the industry react by working with the government to develop accepted
compliance practices for the various players payers, providers, home health agencies, long-term care,
etc. to police themselves.

POWERFUL FALSE CLAIMS ACT

It's open to debate whether these compliance activities have worked because we still regularly see health
care fraud headlines, and the government continues to fund resources to deal with a multibillion-dollar
problem. The government recently announced that of the $3 billion it recovered under the False Claims
Act,$2.4 billion was related to health care fraud, which further supports the view that corporate America
may not be able to police itself.
For the last decade or so, the whistleblower provision of the False Claims Act has been a powerful tool to
ferret out wrongdoing. However, the Dodd-Frank Act's whistleblower provisions, on their face, don't
necessarily encourage employees to first report to their employers. In most cases, otherwise loyal
employees who raised whistleblower cases engendered by the False Claims Act have first tried to resolve
their issues within their companies to no avail.
SOX EMPHASIZES RESPONSIBILITY
We all recall Enron and the government's response in its aftermath: the Sarbanes-Oxley Act (SOX). Passed
in 2002, SOX requires all companies to take a hard look at their internal controls and for top company
executives to sign off on the adequacy of those controls. It was yet another message from the government
that it expects companies to police themselves.
Even with the SOX requirements in place, the number of financial restatements in 2010 remained higher
than in 2002, according to Audit Analytics' "2010 Financial Restatements A Ten-Year Comparison,"
released in May 2011. While the number of restatements increased, the severity decreased, according to
the report. One could argue that the decrease in severity is a direct result of SOX. The act also provided
further protection for whistleblowers, but it didn't go as far as encouraging employees to approach the
government.
AND NOW DODD-FRANK
In 2008, the financial crisis came to a head and continues to cause pain. The result has been more
government intervention and legislation. Sen. Chris Dodd (D-Conn.) and U.S. Rep. Barney Frank (D-Mass.)
sponsored the Dodd-Frank Act with far-reaching reforms. Its whistleblower provisions encourage
individuals to bypass normal reporting channels and go directly to the Securities and Exchange
Commission (SEC) with the possibility of collecting a huge bounty.
Since Dodd-Frank's passage, the SEC guidelines now state that it's okay to first go to one's employer, but
the SEC clearly doesn't encourage that. The SEC has made it easy to file a complaint via its whistleblower
complaint website. The government now seems to be sending the message that it no longer trusts
corporate America to police itself. On the surface, this may seem like a shift in the government's
philosophy. However, the threat of employees bypassing internal reporting mechanisms may just
encourage companies to up their game by redoubling their self-policing efforts.
While the whistleblower provisions will create more bureaucracy (the SEC's Office of the Whistleblower has
ramped up its personnel complement) and more headaches for cash-strapped companies, the result may
be that companies will more diligently endeavor to ferret out fraud and improper activity within their
organizations.
The SEC, in its November 2011 annual report on the Dodd-Frank Whistleblower Program, indicated that it
had received 334 tips since the rules were finalized on Aug. 12, 2011. The SEC may not have the capacity

to deal with such a high level of complaints in a timely fashion. Because the SEC doesn't want to be accused
of sitting on information that could be detrimental to the investing public, it will likely send messages to
the accused companies outlining the whistleblower allegations with "requests" for independent
investigations that will undoubtedly include close government oversight and scrutiny.
INTEGRITY AND TRUST
The U.S. federal government traditionally has attempted to encourage companies to police themselves.
Our country has been built on the pillars of integrity and trust. However, the Dodd-Frank Act possibly
signals a departure, which apparently encourages citizens to circumvent that trust, bypass their employers
and head straight to the government with their allegations.
Hopefully, the act's whistleblower provision will force corporations to do what they should have done
years ago: develop and implement ethics and compliance programs that include a strong and consistent
"tone at the top," which clearly doesn't tolerate wrongdoing.
As CFEs, we'll keep repeating the multi-pronged mantra till our dying days: communicate expectations to
employees; encourage them to report wrongdoing; monitor, test and update ethics and compliance
programs; and be sure to conduct credible, timely and thorough investigations when you suspect
potential wrongdoings.
The world isn't ending, but the Dodd-Frank whistleblower provisions will certainly test the acumen
(discernamantul) of corporate America.
ACFE Regent Emeritus Bert F. Lacativo, CFE, CPA, a former FBI special agent, is a senior managing director
at Mesirow Financial Consulting in Dallas, Texas. His views in this column aren't necessarily those of
Mesirow Financial or its related entities.
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Summary of Dodd-Frank Wall Street Reform Act:

The Dodd-Frank Wall Street Reform Act was the most comprehensive financial reform since the GlassSteagall Act. Like Glass-Steagall, it sought to regulate the financial markets and make another economic
crisis less likely. Banks were deregulated in 1999 by the Gramm-Leach-Bliley Act, which repealed GlassSteagall. Dodd-Frank proposed eight areas of regulation. Here are the major parts of the Act.
Regulate Credit Cards, Loans and Mortgages:
The Consumer Financial Protection Agencyconsolidated protection from many different agencies. It
oversees credit reporting agencies, credit and debit cards, payday and consumer loans (but not auto loans
from dealers). The CFPA regulated credit fees, including credit, debit, mortgage underwriting and bank fees.
It protects homeowners in real estate transactions by requiring they understand risky mortgage loans. It
also requires banks to verify borrower's income, credit history and job status. The CFPA is under the U.S.
Treasury Department.
Oversee Wall Street:

The Financial Stability Oversight Council looks out for risks that affect the entire financial industry. It also
oversees non-bank financial firms like hedge funds. If any of these companies get too big, it can
recommend they be regulated by the Federal Reserve, which can ask it to increase its reserve requirement.
This prevents another AIG from becoming too big to fail. The Council is chaired by the Treasury Secretary,
and has nine members: the Fed, SEC, CFTC, OCC, FDIC, FHFA and the new CFPA.
Stop Banks from Gambling with Depositors' Money:
The Volcker Rule bans banks from using or owning hedge funds for the banks' own profit. That's because
they'd often use their depositors' funds to do so. Banks can use hedge funds for their customers only.
Determining which funds are for the banks' profits and which funds are for customers has been difficult.
Therefore, Dodd-Frank gave banks seven years to divest the funds. They can keep any funds if that are less
than 3% of revenue.
Regulate Risky Derivatives:
Dodd-Frank required that the riskiest derivatives, like credit default swaps, be regulated by the (SEC) or the
Commodity Futures Trading Commission (CFTC). In this way, excessive risk-taking can be identified and
brought to policy-makers' attention before a major crisis occurs. A clearinghouse, similar to the stock
exchange, must be set up so these derivative trades can be transacted in public. However, Dodd-Frank left
it up to the regulators to determine exactly the best way to put this into place, which has led to a series of
studies.
Bring Hedge Funds Trades Into the Light:
One of the causes of the 2008 financial crisis was that, since hedge funds and other financial advisers
weren't regulated, no one knew what they were investing in or how much was at stake. That's why the Fed
and other agencies thought the mortgage crisis would be confined to the housing industry. To correct for
that, Dodd-Frank says that hedge funds must register with the SEC and provide date about their trades and
portfolios so the SEC can assess overall market risk. States are given more power to regulate investment
advisers, since Dodd-Frank raises the asset threshold limit from $30 million to $100 million.
Oversee Credit Rating Agencies:
Dodd-Frank created an Office of Credit Rating at the Securities and Exchange Commission(SEC) to regulate
credit ratings agencies like Moody's and Standard & Poor's. Many blame the agencies for over-rating some
bundles of derivatives and mortgage-backed securities. This mislead investors who didn't realize the debt
was in danger of not being repaid. The SEC can require agencies to submit their methodologies for review,
and can deregister an agency that gives faulty ratings.
Increase Supervision of Insurance Companies:
It created a new Federal Insurance Office under the Treasury Department, which identifies insurance
companies like AIG that create risk to the entire system. It will also gather information about the insurance
industry and make sure affordable insurance is available to minorities and other underserved communities.
It will represent the U.S. on insurance policies in international affairs. The new office will also work with the
states to streamline regulation of surplus lines insurance and reinsurance.
Reform the Federal Reserve:
The Government Accountability Office(GAO) was allowed to audit the Fed's emergency loans during the
financial crisis. It can review future emergency loans, when needed. The Fed cannot make an emergency
loan to a single entity, like Bear Stearns or AIG, without Treasury Department approval. (Although the Fed
did work closely with Treasury during the crisis.) The Fed must make public the names of banks that
received these loans or TARP funds.
The Dodd-Frank Act was named after the two legislators who created it. It was introduced by Senator Chris Dodd on March 15, 2010
and passed by the Senate on May 20. The bill was revised by Congressman Barney Frank and approved by the House on June 30.
On July 21 2010, President Obama signed the Dodd-Frank Wall Street Reform Act into law. (Source: U.S. Senate, Dodd-Frank
Wall Street Reform Act, Morrison & Forster, Summary of Dodd-Frank Reform Act) (Article updated January 14, 2012)

7 Dodd-Frank reforms to watch out for in 2012

By Thomas P. Vartanian, a partner in the global law firm of Dechert LLP and head of the firms financial institutions
practice. He is former General Counsel of the Federal Home Loan Bank Board and former special assistant to the
Chief Counsel at the Comptrollers Office. The Dechert firm helped ABA put together its massive summary of the
Dodd-Frank Act the summer of its passage.

The Dodd-Frank Act created a constellation of federal regulators and regulations that will substantially
reconstruct the supervision, compliance, and business models of U.S. banks and non-bank financial companies.
While many of the new regulatory standards are focused at large banks, there is legitimate worry that they will
trickle down to regional and community banks. Federal regulators are clearly aware of the enormous impacts
that Dodd-Frank can have. For example, to explain a mere extension of the Volcker Rule comment period by 30
days, SEC Commissioners Gallagher and Paredes recently described that rule alone as having the potential to
dramatically and irrevocably impact the U.S. financial markets.
This year will be an especially formative one under Dodd-Frank. Seven separate parts of the act will become
effective or potentially be put into use in the year, including:
1. Systemic regulation. The rollout of systemic regulation on large bank holding companies and the
designation of significantly important financial institutions.
2. Volcker Rule. Adoption of this controversial and voluminous regulation.
3. Enhanced and early. Finalization of Section 165 and 166, enhanced supervision and early resolution
regulations.
4. Changing FDIC role. Appointment of FDIC as receiver for non-banks and bank holding companies.
5. Living wills. The filing of living wills by the largest financial companies.
6. Mortgage industry regulation redux. The rebuilding of the regulatory and business models for mortgage
origination, servicing, and securitization.
7. Booting up more CFPB regulation. Initiation of new consumer protection rules by the Consumer Financial
Protection Bureau (on top of those that the bureau already gained control over).

Not since the reforms of the early 1930s, when many of the countrys current basic banking, securities, and
deposit insurance laws were largely put in place, has the financial services industry experienced such a massive
overhaul of its business and regulation, in such a short period. These are historic changes, and there is no
doubt that financial institutions will adapt, they always have. But that adaption will affect the:
Cost and availability of financial services to consumers and businesses.
Extent to which large financial institutions are standardized to reduce the risk of failure.
Number of banks that markets can support.
Status of banks relative to their foreign and non-bank competitors.
1. Systemic Regulation
Dodd-Frank seeks to reduce threats to U.S. financial stability by limiting balance sheet risks; increasing capital
and liquidity requirements; and reducing the likelihood of economic contagion. Large bank holding companies
are beginning to see the future as new regulations take shape. And the law now firmly prohibits the kinds of
financial intervention that were used in the most recent crisis, and on its face, ends too-big-to-fail.
Business models of large financial companies are already changing as those that are not already regulated by
the Federal Reserve Board attempt to avoid such regulation. At the same time, regulators have the difficult job
of balancing the cost-benefit ratio of regulatory reform as they draft hundreds of new regulations. Whatever
balance is finally achieved will eventually touch the regulation of every single financial services company in the
country, whether in the form of new rules, or new industry best practices.
Things to Watch in 2012
How will the additional designation of non-bank financial companies as significantly important financial

institutions (SIFIs) impact the economy and their business relationships with banks?
What competitive and acquisition opportunities will Dodd-Frank create as large non-bank financial companies
restructure or shed businesses, activities, and investments to avoid designation?
How will the capital markets price large financial institutions, and will they assume that they can now actually
fail?
If regulators use Dodd-Frank to limit acquisitions by large financial companies and banks, how will it impact
the value and pricing of the bank capital model and the M&A market generally?

2. The Volcker Rule

The impact of the Volcker rule is only now coming into sharp focus. While the goal is simple and direct, the task
of restricting proprietary trading and private equity and hedge fund investments is proving to be incredibly
difficult given the complex nature and structure of todays financial services companies.
Things to Watch in 2012
Will the rules exemptions be broadened to limit the potential impact on foreign investment managers and
funds, and reduce the rules extraterritorial impact?
Will the definitions of proprietary trading and covered funds be narrowed to avoid impacting a wide variety
of investment and securitization activities?
Will the application of Super 23A/B limitations be narrowed to limit the issues it imposes on financial
companies which integrate banking, funds, and investment management services?
Will insurance and other companies that control insured depositories continue to dispose of them in order to
reduce the impact of the Volcker Rule?
(Editors Note: ABA lobbyists have also been exploring unintentional consequences of the rule, such as its
potential impact on community banks.)

3. Enhanced Prudential Regulation

In December 2010, the industry has its first look at the enhanced prudential standards and early resolution
rules that will impact large bank holding companies and SIFIs. They include higher capital requirements,
increased liquidity and liquidity management requirements, periodic stress testing, limits on counterparty credit
exposures, the creation of risk committees, and the establishment of specific obligations and potential liabilities
for their boards of directors.
Things to Watch in 2012
How will enhanced capital, liquidity and other limitations be applied to non-bank financial companies, such as
investment managers and funds?
With the Feds announced reliance on future Basel III requirements, will there be global competition equally
with regard to regulatory reform requirements?

4. FDIC As Receiver for Non-Banks

FDICs new regulations implementing Title II of Dodd-Frank are in place. FDIC may now be appointed receiver
for large financial companies and large bank holding companies, potentially impacting the rules that investors
and bondholders are accustomed to. In that regard, Title II largely removes the independent oversight of the
bankruptcy court from the equation; pressures FDIC to liquidate the company; and forces the capital and
securitization markets to adjust to FDIC rules of repudiation, priorities and preferences.
Things to Watch in 2012
Will the Treasury appoint FDIC as receiver for a large financial company? Under what circumstances will that
occur?
How will the capital markets react to bank holding companies and SIFIs that are subject to the new FDICs
receivership authority, particularly with regard to the price of capital and the structure of securitizations?
Will bankruptcy rules be the principal model that the FDIC follows, or will it graft its own receivership
standards onto the process?

5. Living Wills
Dodd-Frank requires each BHC with assets of $50 billion or more and each SIFI to report periodically on its
plans for its rapid and orderly resolution in the event of its material financial distress or failure. That
information, to be revised periodically, will be available to assist regulators to evaluate balance sheet risk,
understand foreign operations, and develop a comprehensive and coordinated cross-border resolution strategy.
Living will requirements may be customized to institutions under $100 billion, and will be required to a lesser
degree from foreign corporations.
A living will provides a roadmap for the FDIC to the extent that it needs to prepare for the orderly liquidation of
a covered company under Title II. But banks of all sizes should expect that the concepts embedded in the living
will process will become part of the everyday regulatory lexicon.
The living will rules also provide another lever that can be used to reduce risk, and restructure large financial
companies: If a company does not submit a resolution plan that is acceptable to FDIC and the Fed, the
agencies may jointly impose more stringent capital, leverage, or liquidity requirements or restrict the

companys growth or activities. After two years, and following consultation with the FSOC, they may order the
company to divest certain assets or operations.
Things to Watch in 2012
How will the practical components of living wills be determined through the iterative process that each filing
entity will be engaged in with regulators?
How will companies disclose the elements of their living wills to satisfy securities disclosure laws?
What parts of living wills will regulators determine to be in the public domain?
Will confidential portions be protected by the courts in the face of challenges, which are sure to come?

6. Rebuilding of the Mortgage Finance Business

The mortgage finance business in this country is in the process of being rebuilt, as is its regulatory system. A
combination of new regulations regarding qualified mortgages and risk retention, and pending and executed
enforcement orders with state and federal regulators, will change the underwriting, servicing and securitization
of mortgages.
Things to Watch in 2012
Where will the standards for qualified mortgages end up?
Will a 20% down payment--a key home-lending facet of Dodd-Frank--survive the rulemaking process?
Will mortgages sold to Fannie and Freddie be exempt from risk retention, reducing the impact of the 5% risk
retention requirement?
How will the future of Fannie Mae and Freddie Mac be impacted in this election year?
7. The Consumer Finance Protection Bureau
CFPB is in business with a single focus--protection of the financial consumer. It is not charged with any safety
and soundness responsibility, and therefore comes to the supervision of banks and other financial companies
from a different point of view. While it only supervises banks in excess of $10 billion in assets, its rules and the
manner in which they are interpreted and enforced will impact all banks, large and small.
Things to Watch in 2012
Will the CFPB regulate through rules or enforcement?
How will it define abusive actions?
Conclusion
The challenges ahead are substantial, and the new regulatory mindset with regard to large banks and financial
companies will have an impact on regional and community financial services companies as well.
There is no doubt that the next few years will be a time when public sector companies need to work closely with
government regulators to make sure that the cost/benefit ratio of regulatory reform is properly calibrated to
allow financial services companies to continue to be the vibrant drivers of the economy that they have always
been.