Reacting to whistleblower claims
May 2014 | PROFESSIONAL INSIGHT | FRAUD & CORRUPTION
Financier Worldwide Magazine
In 2013, the UK Treasury Select Committee asked the Financial Conduct Authority (FCA) to consider the benefits of introducing a whistleblower program in the UK. The move, in part influenced by the recent LIBOR rate scandal, may also be due to the success of the United States Securities and Exchange Commission’s (SEC) program, which has thwarted several cases of fraud and produced financial rewards, including a $14m payout to an individual who provided information that led to the recovery of millions of dollars in investor funds.
The latest development reflects continued interest by certain groups calling for the adoption of a law in the UK and echoes the Committee’s concerns that employees who might be willing to report potential problems are not receiving the necessary legislative backing that would encourage them to do so.
In the US, persons who report wrongdoing to the SEC may receive an award of 10-30 percent of sanctions greater than $1m imposed and collected by the SEC. The information must be original and provided voluntarily. Company directors and officers, as well as employees in compliance or audit roles, are generally not eligible. There are some incentives for whistleblowers to report internally first. Credit may be given in setting the award level for internal reporting. In addition, there is a 120-day ‘look back’ period to keep a whistleblower’s place in line if a matter is reported internally. This may be jeopardised if the company does not report to the SEC within 120 days, putting pressure on it to deal with a report in this timeframe.
One challenge in drawing up such legislation in the UK is finding the necessary funding to do so. The SEC’s Office of the Whistleblower was established in 2011 with substantial funding ($453m). In contrast, the SFO’s annual budget in 2013 was roughly £32m. Martin Wheatley, who heads the FCA, has indicated he is open to the use of financial incentives to curtail cases of alleged fraud and wrongdoing. To date, however, the FCA has made no indication that it will recommend the adoption of a program. The charity Public Concern at Work has set up the Whistleblowing Commission, consisting of former members of the judiciary, whistleblowers and corporate governance proponents that launched a public consultation including the role of incentives. In November 2013, the group issued a report setting out two dozen recommendations that would encourage individuals to report possible wrongdoing, and protect them from retaliation for doing so.
To be sure, whistleblowing reports to the FCA are already up nearly 350 percent since 2007, and the first year of the FCA’s operations saw an increase of 38 percent over the prior year, according to figures from the FCA. Given the increased activity, some have questioned whether there is a need for financial incentives. However, as recent cases – LIBOR, failings related to anti-money-laundering policies and procedures, and more recently allegations regarding foreign exchange rate market rigging – have shown, misconduct and fraud remain viable threats to UK business. A strong compliance program, including whistleblowing measures and protections, can mean such issues may be identified earlier, before they have the potential to inflict reputational harm on the company, as well as damage to financial markets and investors.
Measuring the potential impact
If the Commission’s recommendations are adopted, they could mark a significant step forward in making whistleblowing a more established and effective mechanism for supplementing the UK government’s efforts to combat fraud and misconduct. As the SEC’s program has demonstrated, affixing substantial awards to such reporting can facilitate the reporting of information about possible misconduct that may have otherwise gone undetected. In its 2013 annual report, the Office of the Whistleblower noted that it received 3238 tips (compared with 3001 in 2012) related to potential securities law violations, and paid whistleblowers a total of more than $14m in connection with “their contributions to the success of enforcement actions pursuant to which ongoing frauds were stopped in their tracks”.
UK companies that have a US parent that is publicly-owned may have increased exposure to employees potentially blowing the whistle to US authorities due to the potential rewards. In such instances, it may be safe to presume that whistleblowing that involves serious allegations may be reported to US authorities and that, as a result, an investigation into these allegations will be subject to regulatory oversight.
Insights for companies and their compliance officers
So what can companies do? To begin with, it will be particularly important to create a culture in which whistleblowers are encouraged to come forward without fear of retaliation. Companies may establish strong internal reporting frameworks and detailed processes and procedures around reporting issues. To be effective, it is important for companies to ensure that processes and procedures are clearly communicated and understood by employees. Companies may also provide training to address anti-retaliation and the appropriate handling of complaints or tips when they are received. It is particularly important that companies take appropriate disciplinary action in the event that an employee who reports a problem internally is discriminated against.
In any event, if a company identifies a potential problem, it will be particularly important for it to investigate it quickly, given the 120-day ‘reasonable timeframe’ for handling internal whistleblower reports. An investigation should be appropriate to the nature and seriousness of the alleged wrongdoing and reasonable steps should be taken to protect the whistleblower.
In order to address a potential issue appropriately, an investigation may include interviews with relevant staff and reviews of documentation in accordance with the firm’s policies and procedures and applicable local laws. Companies may wish to establish an investigation response plan that sets forth the initial steps and framework for investigations pursuant to whistleblowing claims. This is especially important given that there is good reason to presume that regulators may be interested in evaluating how an investigation was conducted and measuring those results it produced.
Ben Johnson is a director at AlixPartners, LLP. He can be contacted on +44 (0)20 7098 7634 or by email: firstname.lastname@example.org.
© Financier Worldwide