Quarter of high-paid bank staff face gags – survey

A survey of financial sector employees found that many have been forced to sign illegal confidentiality agreements blocking them from reporting wrongdoing to regulators

A quarter of highly paid staff at financial companies have been asked to sign an illegal gag order blocking them from reporting illicit activity, according to a survey by the University of Notre Dame and Labaton Sucharow, a US law firm.

The survey of financial industry employees in the US and UK found that 10% had signed or been asked to sign a confidentiality agreement forbidding them from reporting illegal activity to industry regulators – including 25% of employees paid $500,000 or above. Also, 16% of respondents said that company internal policies banned the reporting of illegal or unethical activity to regulators or law enforcement – 28% of high-paid employees.

The individual agreements "are not enforceable... the illegality of such employment agreements is black and white," commented Jordan Thomas, a partner at Labaton Sucharow in New York. "As for the internal policies, it is debatable and would depend on the specific language of the policies."

The legal position is similar in the UK. In a December 2014 article on Risk.net, Ben Wright, a lawyer with Norton Rose Fulbright, noted: "Businesses should be aware that provisions (including in otherwise valid statutory settlement agreements) that seek to prevent a worker making a protected disclosure will be void and unenforceable. As such, the entry into a settlement agreement that includes confidentiality provisions will not prevent the worker making further protected disclosures, whether in relation to the same or a different issue."

Regulators in the US have already begun to prosecute companies for imposing these gag orders on their employees. Last month, the Securities and Exchange Commission (SEC) imposed its first penalty for restrictive language. Military contractor KBR was fined $130,000 for threatening employees involved in internal investigations with disciplinary action or sacking if they talked to outside parties, including the SEC, without going through the company's legal team.

While the SEC did not link the penalty to any specific incident where an employee had been punished for reporting wrongdoing, the contractor, which landed an estimated $40 billion in contracts associated with the Iraq and Afghanistan wars, is under investigation for wartime fraud. The investigation is based on the allegations of a KBR whistleblower, Harry Barko, and the gag agreement came to light last year as part of the case, according to Barko's lawyers.

Thomas commented: "The SEC in the KBR case actually charged a company with using agreements that "could impede" whistleblowers from reporting possible violations. The financial professionals in our survey are reporting that they are being "prohibited" from reporting possible wrongdoing by their firms' agreements. Much worse."

Whistleblowers who keep their concerns within the company rather than going to the SEC may not benefit from Dodd-Frank whistleblower protection, according to a 2013 court decision which found that the SEC had exceeded its powers in promising to protect internal whistleblowers from retaliation.