A ripening conflict for US Defense and Government Contractors with the newly imposed EU Whistleblower Directive
Regulators in the United States and the European Union have placed a significant emphasis on removing barriers for whistleblowers as part of addressing fraud and corruption, with the EU taking bold steps by imposing its new Whistleblower Protection Directive ("EU Directive" or "Directive"). This development in the EU however could have direct and perhaps unintended consequences for defense and government contractors at a time when largescale government spending is creating fertile ground for whistleblowers.
The EU Whistleblower Protection Directive
The EU Directive, which went into effect on December 17, 2021, marks a shift in the EU's traditionally resistant attitude towards whistleblowing culture and a show of support for whistleblowers across the Union. The Directive mandates that Member States implement certain laws aimed at protecting whistleblowers and making the whistleblowing process more accessible. All private companies with more than 50 employees are subject to the Directive's requirements, as well as any additional requirements that the Member States in which they operate impose. As of February 16, 2022, only seven Member States have adopted the mandated whistleblowing laws, however, nearly all remaining Member States have draft laws or proposals in place.
For companies that operate across multiple jurisdictions, the changes mandated by the EU Directive will likely create obstacles to investigating and disclosing claims made by whistleblowers. The Directive requires companies with more than 249 employees to establish local internal reporting channels to facilitate whistleblowing. Companies must designate an individual or department responsible for receiving and investigating reports. Further, the Directive requires that companies keep whistleblower identities confidential and within the designated, local channel. Absent explicit consent from the reporting person, the Directive forbids disclosure of any information that could lead to the discovery of the whistleblower's identity, even to internal stakeholders, such as management and the Board. These confidentiality requirements seriously limit the Head Office's oversight and ability to manage serious allegations of misconduct.
"See Something, Say Something," US requirements for Defense and Government Contractors
The US has approximately sixty whistleblower laws which impose various requirements on government contractors. The most pertinent to the federal defense contracting sector is the National Defense Authorization Act ("NDAA"), which covers all Department of Defense ("DoD") contractors, subcontractors, and grant recipients. The NDAA protects whistleblowers from retaliation for providing evidence of waste, fraud, and abuse in federal contracts, grants, and payments. In many cases, a whistleblower may be entitled to up to 30 percent of any government recovery stemming from their report.
Also relevant is the Federal Acquisition Regulation ("FAR") which mandates that government contractors disclose in writing all situations in which they have "credible evidence" of procurement-related Federal criminal violations – including fraud, conflict of interest, bribery, overpayment, and gratuity – and violations of the civil False Claims Act. This means government contractors cannot turn a blind eye when they become aware of any such violation. Failure to timely disclose a violation could result in serious consequences such as debarment, suspension, and even criminal liability.
Criminal liability aside, the potential impact of a suspension or debarment action should not be overlooked. Not only may these actions result in the loss of business opportunities, but also exclusion from federal financial assistance. The US government has taken an increasingly aggressive approach in debarring and suspending government contractors. In 2019 alone, the DoD issued 442 debarment actions and 267 suspensions. It is crucial for companies facing potential suspension or debarment to understand the significant impact such actions could have on their businesses. This is especially true for those that primarily engage in federal contracting.
The conflict between the US Law and the EU Directive
In contrast with current US regulations which require government contractors to report any indicia of procurement-related violations, the EU Directive requires companies to take every possible step to limit the disclosure of information that could lead to the identification of the whistleblower or persons referenced in the whistleblower report. For companies that operate in multiple jurisdictions, the Directive's confidentiality mandates could lead to an unintended breach of US reporting requirements. For example, imagine the German subsidiary of a US contractor receives a whistleblower report alleging overpayment of a contract with the DoD. The whistleblower, an employee of the German subsidiary, reported the complaint through the subsidiary's internal reporting channel. Pursuant to the Directive, assuming the whistleblower doesn't consent, the German subsidiary cannot disclose any information that could lead to identification of the whistleblower or persons involved in the misconduct to the US contractor. Even if the US contractor becomes aware of the overpayment allegation, the Directive forbids sharing this information with US authorities absent the whistleblower's explicit consent. The US contractor, in turn, is unable to comply with its obligations under US law and may face serious consequences. It is regulatory conflicts like these that government contractors must be prepared for as the EU Directive is transposed across the Union.
Why this matters now and how we can help
Companies that bid for and win government contracts are especially vulnerable to whistleblowing because of the size of the industry and the procurement process government contracts usually entail. With historic spending by the US and EU on government contracts in recent years, regulators in both regions will vigorously monitor activities in the industry. Government contractors need to be prepared for the possibility of a surge in whistleblowing activity.
Clifford Chance can discuss with you the impact of the EU Directive on your business, including what changes need to be made to ensure compliance with the new regime as well as the US regulations while still allowing the company to properly and effectively investigate issues raised by whistleblowers. While companies in all sectors will be subject to and therefore affected by the EU Directive, given all the circumstances described, companies in the defense and government contracting sectors will likely see an increasing number of whistleblower complaints, which is why it is especially critical that these companies be prepared for the changes to come.