Can whistleblowers help prevent fraud?

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

In 2011 the US Securities Exchange Commission (SEC) introduced new rules to permit the rewarding of people who blew the whistle on fraud and other illegal conduct in the securities world. This permits the SEC to reward whistleblowers between 10% and 30% of the sums awarded in penalties in favour of the SEC, where the sum recovered exceeds $1m. The rules are fairly complex as you might imagine. Specialist law firms have sprung up in the US to assist whistleblowers with making their reports to the authorities, taking a percentage of the sum paid to the whistleblower by way of reward.

Implications of rewarding whistleblowers

Since the reward scheme was introduced, a number of whistleblowers have come forward and have subsequently received rewards. The effect has been increased enforcement and increased fines for the government.

The SEC’s justification for the reward scheme is to encourage people working within an organisation to come forward to prevent fraud being perpetrated against investors. They claim that it brings forward information which, if it had not been revealed, would have meant that the fraud would not have been discovered, thereby leading to investors and others suffering greater losses.

The SEC has created an Office of the Whistleblower, a link to the relevant pages of the SEC website can be found here. The website contains plenty of information for whistleblowers who are contemplating taking this path. The SEC also reports on the rewards it has made. Recently it posted this article which concerns a likely $5m to $6m reward to a former company insider whose detailed tip led the agency to uncover securities violations that would have been nearly impossible for it to detect but for the whistleblower’s information. This is the third largest reward so far. In September 2014, the agency announced a more than $30m whistleblower award, exceeding the prior highest award of more than $14m announced in October 2013. Since the inception of the whistleblower program in 2011, the SEC has awarded more than $67m to 29 whistleblowers, including one for more than $3.5m announced in May 2016.

Whitsleblowing in the UK

In the UK, no such whistleblower reward scheme exists. The position of the prosecutors and the Government seems to be, according to speeches made publicly by top law officers, that it is every citizen’s moral duty to come forward with this type of information, and that it is not right to have to induce a person with a monetary reward to come forward and tell the truth about a fraudulent situation.

UK law does provide protection to employees who become whistleblowers against unfair dismissal. The Public Interest Disclosure Act 1998 (PIDA) came into force on 2 July 1999. It provides protection for workers reporting malpractices by their employers or third parties against victimisation or dismissal. There is no financial cap on compensation in whistleblowing claims, and no requirement for a minimum period of service. Whether a whistleblower qualifies for protection depends on certain qualifying tests, broadly depending upon whether the information to be disclosed is "protected" (as defined in PIDA). Before 25 June 2013, a qualifying disclosure made to anyone other than a legal advisor had to be made "in good faith" for it to be protected. This requirement was removed by section 18 of the Entreprise and Regulatory Reform Act 2013 (ERRA). Effectively, it was replaced by a new requirement that a disclosure will not be a qualifying disclosure unless, in the reasonable belief of the whistleblower, it was made in the public interest.

The Government encourages people to approach their employers and use internal grievance procedures first before embarking on the whistleblower path. For our part, we would tend to think that the suggestion that people can easily go beyond internal procedures if they prove to be ineffectual is better in theory than in practice. However, we think that unless a genuine whistleblower had good grounds for believing that an internal report inside the company would either be ineffective or, even worse, would result in that person’s dismissal from the company, that person would be reluctant to go beyond internal grievance procedures. Doing so would necessitate them relying on the rather technical whistleblower protection legislation and most people will know that their employers will react badly to a disclosure to regulators.

In our view, the legislation as it stands does not do enough to protect someone against the broad repercussions of exposing the wrongdoing of powerful, wealthy or influential parties. Therefore, more often than not, a person who blows the whistle does so at a significant personal cost. An excellent article was published in the Financial Times some time ago by the journalist Carola Hoyas, which was written after she had interviewed a number of whistleblowers in different industries. The various personal whistleblower stories reported in that article demonstrate the practical considerations, human side and significant personal risks of becoming a whistleblower. These are often risks to one’s health, both mental and physical, and one’s career and finances. Often all of these elements of a person’s life are ruined by the process and outcome of the whistleblowing. As Carola Hoyas puts it in her article: "Even in the UK, where whistleblower protection laws are held up as some of the best, a standard for other countries to emulate, whistleblowers often find themselves shunned by their employer, ignored by regulators and let down by a court system that concentrates on their employment experience, rather than on the problems they reveal. And regardless of how legitimate their case, whistleblowers who go public rarely get to work again in the industry they expose. Many lose their wealth, their homes, their families, their reputations and their mental health. Some contemplate suicide."

A number of whistleblowers in the UK set up a not-for-profit organisation called Whistle Blowers UK (WBUK) as a support group for other whistleblowers or those contemplating whistleblowing. Their website states that what they offer includes:

1. a telephone helpline with a referral service to voluntary responders who are whistleblowers themselves;
2. a legal referral service for initial pro bono legal advice;
3. a therapeutic counselling service for individual consultations and group meetings; and
4. ongoing discussions with Public Concern At Work (PCAW) and the Government's Department of Business, Innovation and Skills (Labour Relations) to contribute to their Whistleblowing Commissions and contribute ideas and initiatives to improve protection for future whistleblowers and induce more people to disclose discoveries of wrongdoing.

Conclusion

A reading of the Financial Times article and the WBUK website suggests, to us at least, that the UK whistleblower protection legislation is not a sufficient protection to those who are brave enough to exercise their moral duty to blow the whistle on fraudulent or inappropriate conduct. There is a strong argument for the proposition that the Government should consider a scheme along the lines of the one run by the SEC, so that the brave souls who elect to become whistleblowers are properly compensated for what may be a career-ending decision. The scheme is self-funding, as it comes out of fines paid by miscreant companies. The scheme should also increase the level of criminal enforcement and reduce the costs of investigations, because prime witnesses will come forward to assist the authorities.

On 12 May 2016 the UK Government announced a new corporate offence targeting businesses that fail to prevent fraud or money laundering in a package of measures against international corruption.

The Ministry of Justice starts a consultation this summer on proposals to extend the scope of the "failing to prevent" criminal offence beyond bribery and tax evasion to other economic crimes. It remains to be seen how this will tie in with the current whistleblowing legislation, where, at the moment there is no positive duty to bring criminality to the attention of the authorities, but just protections in certain circumstances for those who elect to do so.