Encouraging whistleblowers in a complex environment: the way forward

September 2017 | LEGAL & REGULATORY | FRAUD & CORRUPTION

Financier Worldwide Magazine

September 2017 Issue

It has been widely reported that whistleblowing tips concerning fraud, bribery and corruption made to the UK’s Serious Fraud Office (SFO) are continuing to fall. This must change. Nobody truly believes that the number of cases of this type are actually decreasing, or that the seriousness of the cases being brought are anything other than increasing.

The introduction of the UK Bribery Act and the first major non-prosecution agreement with Rolls Royce Plc are all part of the long-term plan for the UK to up its game to the level of the US in matters of anti-corruption. The SFO fully intends to take its place alongside the Department of Justice (DOJ) and other international law-enforcers (including the US Securities and Exchange Commission (SEC)), exactly as it should do. But how can it do so in the face of falling tips?

The obvious answer is for there to be a bounty paid to UK whistleblowers in the same way it is currently offered in the US under the Dodd-Frank Act. However, the correct thing is not always as obvious, or as easy, as many would like to believe.

Employees and management must speak up about instances of potential corruption and wrongdoing that they suspect may be occurring within their organisation (and, perhaps controversially, also at competitor companies). But it does not stand to reason that they should be financially rewarded for simply doing so.

At this point many practitioners in the area of bribery and corruption stand tall and shout that any person that runs the risk of ruining their career, reputation, personal health and financial situation must be rewarded for taking such a stand.

This makes perfect sense. The real question is how this should be done.

At this point in time the UK legal system has no specific mechanism for protecting whistleblowers but it is highly likely that one will need to be implemented, and before too long, if reporting is to get back on to the positive trend that everyone involved in anti-corruption activity believes it should be. The simple percentage based system offered in the US under Dodd-Frank offers an easy way of doing so – pay the whistleblower a percentage of fines and penalties received by the regulator.

But this approach does not consider two fundamental points that affect the whistleblower directly.

The first is that, under this system, a whistleblower is only eligible for a reward if the tip results in a penalty. There would undoubtedly be cases where a report is made in all good faith by the whistleblower that, for whatever reason, does not result in a fine or penalty and thus in no reward to the whistleblower. The whistleblower could still suffer in such circumstances.

The second is that the whistleblower could make a report that results in fines and penalties so huge that any standard percentage payout to the whistleblower would result in a windfall bonus completely disproportionate to the standard remuneration for their position, or, most importantly, with any damage they may have suffered.

It is this area of damage that should be looked at further. Employees that raise a potential issue internally and find themselves either ignored, stonewalled or suspect that an internal cover up is going on and are then either held back for promotion, pressured out of the company or fired outright from their employment, will have suffered real damage and should be recompensed for it.

However, to assume that all companies that have a whistleblower situation will behave badly and retaliate does not give many companies due respect. Not every company that suffers from a fraud, bribery or corruption issue is rotten to the core and therefore not every whistleblower will be retaliated against.

Many companies now have a compliance policy that sets out that employees involved in whistleblowing will be protected. There are still companies that receive an internal whistleblowing report and do not take the opportunity to act appropriately. If they are informed of potential illegal activity and fail to properly investigate, then they are the ones that must face the consequences. It may also follow that where a company fails to act appropriately with regard to a report of potential wrongdoing, it may well be the case that the company would also fail to adequately protect the individual speaking up from either explicit or less obvious retaliation.

What is undeniable is that companies that self-report to regulators about situations of potential fraud, bribery or corruption offer themselves the best chance of obtaining the most favourable outcome.

When a company is faced with a situation that could lead to regulatory disclosure, it needs to take control of both the situation and, as best it can, the outcome. This will usually involve launching an independent investigation utilising outside counsel to maintain privilege and to set the scope and then direct the work of forensic accountants, technology experts and other professionals engaged to assist in the internal investigation. In most cases it would also be appropriate to have a special committee of the company formed to receive updates as the investigation progresses, and to report to the board and audit committee as the facts are established.

Swift and decisive action, followed by a timely disclosure if wrongdoing is found, are all factors that weigh in a company’s favour with regulators in most jurisdictions. However, if a regulator first hears about potential issues from any other source, then the company loses control. It is forced to keep the regulator updated even when the situation has not yet been fully understood, and may then have to contend with reduced privilege, and almost certainly lose any reporting credit that may otherwise have been available.

Where there is a financial incentive or bounty on offer that is only available if the regulator is contacted by an individual prior to being contacted by the company, the individual is being induced not to act in the best interests of the company. Therefore, it blurs the ethical scope under which the whole system operates: if there is more incentive to report externally before reporting internally, then questions around personal integrity arise.

Of course, others consider that the damage argument is merely a convenient way of diverting the focus away from the main purpose of the bounty, which is to drive up the number of reports that regulators receive directly. The advantage to the regulator of direct report is severalfold. First, it can demonstrate that a company cannot live safe in the knowledge that if it keeps quiet its issues will not be detected. Second, it puts the regulator in the driving seat and much more able to dictate the terms of the investigation in terms of scope, access and timing. Finally, and probably also of least importance to the regulator, is that without self-reporting by the company, there can be no self-reporting credit awarded to the company.

Continuing to ask for people to come forward internally in good faith is, at present, the correct approach if we seek to promote ethical standards in business from employers and employees alike – and all companies should continue to strive to build ethical cultures which are based on doing the right thing, rather than being based on motivation for a cash reward. Ethics should be embedded in everything an organisation does, and anything which could potentially divert from this approach risks undermining the good work which is currently being carried out by companies themselves, and as currently supported and promoted by the SFO and other regulatory bodies.

The UK has the opportunity to support, through legislation, those that choose to the right thing, whether this be via an internal or an external route, and speak up about potential wrongdoing within their (or a competitor) organisation. However, the paying of people purely to do the right thing should be avoided as it would only otherwise serve to encourage a deterioration in ethical behaviour and therefore a compensation based scheme should be the way forward.

Daniel Barton is a managing director at Alvarez & Marsal. He can be contacted on +44 (0)20 7715 5200 or by email: dbarton@alvarezandmarsal.com.

Daniel Barton

Alvarez & Marsal