Developments in UK & US Whistleblowing Protection
By Arpita Dutt
Posted: 22nd April 2015 10:07In the wake of various corporate scandals, there has been increasing recognition of the public interest in robust whistleblowing protection and procedures in the UK and US.
Every month’s media headlines feature a new scandal such as LIBOR fixing, bribery or tax fraud. Behind each lie individuals who knew, or at least suspected, that wrongdoing was afoot. Sometimes individual whistleblowers do disclose information to companies, organisations and regulators, but many times they do not for fear of victimisation and the adverse consequences to their careers.
In the UK, since 2012, a number of consultations have taken place across the banking and health sectors.
‘Changing Banking for Good’
The Parliamentary Commission on Banking Standards (“PCBS”) was established in July 2012, following the LIBOR scandal, to conduct an enquiry into professional standards and culture in the UK Banking sector and to make recommendations for legislative and other action.
On 19 June 2013 it published its report, “Changing Banking for Good”, which expressed its shock that so many people turned a blind eye to misbehaviour and failed to report it. The PCBS stressed whistleblowers should be encouraged to come forward and, for that to happen, a significant shift to the culture in the financial sector is necessary.
The report made a number of recommendations to ensure more effective support for whistleblowers in the Banking sector. In particular, it proposed that:
- A non-executive Board member – preferably the Chairman – should be given specific responsibility and be held personally accountable for the effective operation of each firm’s whistleblowing regime.
- The Board member should be held personally accountable for protecting whistleblowers against detrimental treatment and proving that the firm acted appropriately where such treatment is alleged.
- In addition to whistleblowing policies, firms should have informal procedures that encourage individuals to discuss concerns (even when there is no specific allegation of wrongdoing).
- The appropriate regulator (The UK Financial Conduct Authority (“FCA”) or the Prudential Regulatory Authority (“PRA”)) should regularly examine a firm’s whistleblowing records.
- Firms should be required to inform the FCA of any successful whistleblowing claims brought by employees before Employment Tribunals. The FCA should consider taking enforcement action against firms found to have acted in a manner inconsistent with the regulatory requirements set out in the FCA Handbook.
- The FCA/PRA should be empowered in cases where, as a result of an enforcement action it is satisfied that a whistleblower has not been properly treated by a firm, to require firms to provide a compensatory payment for that treatment without the person concerned having to go to an employment tribunal.
The Department of Business Information Skills (“BIS”) published its response to its consultation on 25 June 2014. BIS found that whistleblowing legislation does not necessarily prevent malpractice or encourage people to raise concerns. It focuses on addressing any workplace dispute that follows a concern being raised (a disclosure), offering a legal remedy when a whistleblower suffers detriment as a result of making the report.
Research and practitioners of legal cases have found that employees who report misconduct to employers and to regulators often raise their concerns internally first but are ignored, rebuffed, victimised or dismissed. BIS noted that there are negative attitudes ingrained in organisational culture which form barriers to whistleblowing and that often an organisation’s response to a disclosure reinforces such negative attitudes. An example is the Tesco accountant who warned senior executives the Company was over-stating profits months before it became a public scandal.
BIS suggested a combination of legislative and non-legislative measures including:
- Improved guidance for individuals from the Government;
- Publication of best practice guidance or a non-statutory Code of Conduct (including a model whistleblowing policy);
- Clarification of the position in relation to costs awards where a whistleblower brings a claim against their employer for detriment suffered after reporting misconduct; and
- Introduction of a duty on prescribed persons (i.e. regulators) to report annually on disclosures received.
BIS remained unconvinced that the introduction of financial incentives would change the culture surrounding whistleblowing in the UK positively. The majority of respondents to the BIS consultation considered that it was inappropriate to introduce financial incentives into the whistleblowing framework for a number of reasons, including the likelihood of personal gain and the risk of corruption. The FCA and PRA have since agreed, concluding that such incentives would be unlikely to increase the number or quality of the disclosures received.
The FCA and PRA
From Autumn 2014, the FCA and PRA have published annual reports on the whistleblowing disclosures they receive and how they handle them, with the aim of creating a culture in financial services where speaking up becomes normal business practice and people are more prepared to report concerns.
On 11 February 2015, Sir Robert Francis published his report of his review into whistleblowing in the National Health Service (the “Freedom to Speak Up” report). Although it was an independent review into creating an open and honest reporting culture in the NHS, its executive summary and principles can be applied across most sectors. Indeed the recommendations identified in that report were similar to those identified by BIS.
Is the disclosure in the public interest?
Whilst there has been a resounding call for whistleblower protection to become more effective for the individual whistleblower, the UK Parliament was troubled that individuals could obtain protection by raising concerns which are solely in their personal interest. Therefore, in July 2013, Parliament introduced a test to ensure an individual can only gain legislative protection if they make disclosures which are reasonably believed to be in the “public interest”. Few cases have yet been brought to determine the scope of the test. The whistleblowing charity Public Concern At Work criticised the wording of the public interest test, suggesting that it went too far and felt the “honest and reasonable whistleblower, faced with an increasingly complex piece of legislation to navigate should they be poorly treated, may choose not to speak up”.
Although financial incentives have not been implemented in respect of financial services or NHS cases, the UK’s tax authority, HMRC, paid out £400,000 in 2013 to people who had whistleblown on tax avoidance activities. Informants on tax avoidance can gain a financial reward of between £50 and £1,000 if they use the HMRC hotline specifically established for this purpose.
Whilst improvements to UK whistleblowing legislation are likely to be incremental, there has been an increasing focus on internal compliance by effective cultural change. In particular, organisations are encouraged to have in place both formal and informal whistleblowing policies that encourage individuals to discuss concerns. Whilst whistleblowing hotlines have become relevant, sometimes they only provide a tick-box approach and not the substance of information, which is often useful to investigate the veracity of the underlying concern and make further enquiries where relevant.
For many companies there is still some way to go in ensuring their whistleblowing policies are effective. Reporting systems in many global companies are not fit for purpose and there is no unified view on how to treat whistleblowers, or what to do when a claim is filed. From a risk and compliance perspective, getting internal whistleblowing mechanisms right has huge advantages for an organisation’s internal controls. A problem identified in its early stages may prevent greater damage being done and may not require the involvement of external authorities with all the expense and reputational damage that entails. Initiating notification of concerns to a regulator is more likely to be seen favourably than being on the back-foot when an investigation is commenced.
US Whistleblowing Protection
The United States has four Federal programs, each providing for non-discretionary financial awards to whistleblowers to incentivise disclosure to the relevant Federal authorities:
(1) The Federal Claims Act (“FCA”), which addresses frauds against Federal Government Programs, such as Federal Healthcare and defence spending;
(2) The Internal Revenue Service (“IRS”) Whistleblower Program, which addresses tax underpayments and frauds;
(3) The Securities and Exchange Commission (“SEC”) Whistleblower Program, which addresses securities law violations; and
(4) The Commodities Futures Trading Commission (“CFTC”) Whistleblower Program, which concerns violations of the commodities laws.
In the case of the FCA and IRS Whistleblower Programs, the awards range from 15% to 30% of the amounts recovered by the Justice Department and IRS respectively. Under the SEC and CFTC Whistleblower Programs, introduced by the Dodd-Frank Act in 2010, the awards range from 10% to 30% of the judgment or settlement amount. In all of these programs, the precise percentage share awarded to an individual is determined by how substantially the whistleblower and his or her Counsel contributed to the success of the Government’s enforcement action.
To qualify as a whistleblower under the Dodd-Frank Act, individuals must provide “original information” which may be derived from whistleblowers’ “independent knowledge” or “independent analysis”. Independent knowledge is simply knowledge that is not available to the public and not already known to the SEC from any other source. In contrast, independent analysis is the examination and evaluation of information (public or not) that reveals information generally unknown or unavailable to the public.
A new and central question of the Dodd-Frank Act whistleblower provisions has been whether a whistleblower has to first report information about questionable practices to the SEC in order to be protected from firing, demotion or harassment. The Federal Courts have been split on this question. To encourage disclosure of corporate wrongdoing, the SEC has taken an expansive view that would protect from retaliation any employee who reports information either internally or to a Government agency. The legal problem is that Congress appears to require reporting to the SEC as a prerequisite to applying the anti-retaliation provision.
Whistleblowing has certainly been embraced by Congress as a means to combat fraud in Government programs and in 2014 in the case of Lawson v SMR LLC, the Supreme Court considered that the Sarbanes-Oxley Act whistleblower protection also included employees of private companies that do work for publicly traded corporations, not just those who work for public companies.
In February 2015, the Senate Commerce Committee approved legislation that would give whistleblowers in the automotive industry who report wrongdoing to the Government a percentage of any fines or monetary judgments imposed by Federal agencies. The Bill allows whistleblowers to receive up to 30% of penalties that exceed $1m in relation to any motor vehicle defect, non-compliance or violation of reporting requirements likely to cause risk of death or serious injury.
US Financial Incentives
Given the awards paid to US whistleblowers it is unsurprising that more and more UK citizens are looking to the US in order to report wrongdoing. Since 2011, the SEC has received more than 200 submissions from UK whistleblowers.
In 2014, whistleblowers were paid $435m overall with a further $170m to be shared among three whistleblowers in a case involving Bank of America. The awards arise from nearly $6bn recovered under the False Claims Act, with more than $3.1bn from Banks engaged in fraudulent mortgage practices and $2.3bn coming from Medicaid and Medicare fraud cases. The Dodd-Frank Act and the Securities Exchange Commission Program received 3,620 complaints and made nine awards. The largest was a $30m award to an anonymous foreign national who blew the whistle on a significant securities fraud.
In the US, therefore, legal practitioners suggest that whistleblower incentive laws crack the “conspiracy of silence” that accompanies significant fraudulent practices. As frauds become increasingly complex and multinational, the need for assistance from whistleblowers has become more profound.
Brahams Dutt Badrick French LLP