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INTERNAL WHISTLE BLOWING – FRIEND OR FOE?

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INTERNAL WHISTLEBLOWING – FRIEND OR FOE?

Ben Henriques, Associate, Corker Binning

If knowledge is power, Whistle blowing is, potentially, a shot in the arm for any corporate body. The extensive new FCA measures concerning Whistle blowers, which came into force on 7 September 2016,provide a good opportunity for reflection on this sensitive topic.

Ben Henriques

Ben Henriques

Arguably, the increasing scrutiny faced by companies in today’s climate (together with the associated risk of prosecution) makes managed reporting of suspected wrongdoing and disclosure of information within an organisation increasingly more desirable. ‘Internal Whistle blowing’ can have great benefits for corporate bodies and may help them to navigate the growing minefield of corporate liability.

A poor or non-existent Whistle blowing policy can have disastrous consequences.For example, when the Whistle is blown externally via the media, such an outcome could have been avoided.

Whilst the perception of Whistle blowers in the corporate world is often negative, such views are usually based on the actions of what are sometimes called ‘External Whistle blowers’ (those disclosing information to prosecutors, regulators or the media). By contrast, ‘internal’ Whistle blowers (individual employees who report wrongdoing to their employer) are less talked about, but may be far more valuable.

What the Law says

Many countries now offer legislative protection for Whistle blowers. In the UK such protection is provided by the Public Interest Disclosure Act 1998 (‘PIDA’). The Act is a purely civil law statute and offers protection from dismissal as the result of a qualifying disclosure of various kinds of wrongdoing, including the commission of a criminal offence. The legislation applies to both internal and external Whistle blowing.

What PIDA does not do is offer any immunity from prosecution to the disclosing employee. This situation may discourage external Whistle blowing, especially if the employee has taken legal advice. Yet, the threat of prosecution may also make internal reporting of fraud and other malpractice more attractive to a potential discloser. From this point of view, PIDA makes the UK an ideal jurisdiction for the implementation of rigorous internal Whistle blowing policies. Indeed, those with the most knowledge about wrongdoing are usually those involved, and thus those most at risk of prosecution.

An EU dimension to the legislative framework surrounding Whistle blowing had just come into view when the June referendum struck. Whilst they may eventually become academic for the UK, for now the EU proposals make interesting reading.

In late 2015, the EU published proposals for a new system of reporting market abuse offences to European regulators.[1]They provide, among other things, that internal procedures for EU regulators make provision for Whistle blowing and make clear that the intention is that reporting should be anonymous (see more on the latter below).

Even Brexit will not prevent greater official interest in a firm’s Whistle blowing procedures. On 7 March 2015 the FCA introduced rules requiring regulated firms to appoint a ‘Whistle blowers’ Champion’ to take responsibility for, among other things:

‘ensuring and overseeing the integrity, independence and effectiveness of the firm’s policies and procedures on Whistle blowing’

In addition, on 7 September 2016, further FCA measures introduced:

‘Requirements on firms in relation to the adoption, and communication to UK-based employees, of appropriate internal procedures for handling reportable concerns made by Whistle blowers as part of an effective risk management system’

These requirements are far reaching (covering areas such as the formulation of the policy, communication with Whistle blowers, record keeping and training) and will have to be implemented with considerable care. Yet, the FCA (sensibly) leaves much of the detail to the individual firm. For example, firms are to establish ‘appropriate and effective arrangements’ and how to manage conflicts of interest is left very much in the corporate’s hands. 

What can the company gain?

Internal Whistle blowing has major advantages in addition to the prevention of further (or any) financial loss to a corporate. First, it gives the senior management greater control over a situation which might well otherwise have had explosive consequences. The corporate body can decide whether or not to self-report the uncovered wrongdoing to the authorities and more effectively control the flow of information to them.  One of the lessons of the recent SFO Standard Bank and XYZ cases is that early self-reporting can pay significant dividends in the context of a Deferred Prosecution Agreement.[2]

Second, Whistle blowing can enable a corporate body to manage, or even avoid,damaging public scrutiny. Assuming there is no legal duty to disclose the suspected fraud, the employees responsible can be dismissed and the activity remedied or prevented. If disclosure to the authorities is inevitable or deemed appropriate, at least the corporate body will not be taken by surprise and can begin preparing for the impending attentions of media organisations and authorities.

Whistle blowing v. Disciplinary Proceedings

Of course, all large corporates invest significant time and resources in creating compliance and disciplinary systems to prevent employees defrauding their employers. Such measures are however,imperfect and expensive. Even the most vigilant compliance department cannot watch every transaction and the more stringent a policy the greater its potential adverse impact on the corporate’s trade.

Inevitably, a single director or senior manager will know less about the minutiae of their corporate’s dealings than the workforce collectively. Of course they will know more about the overall strategy and be privy to much confidential information other workers are not, but the devil is very often in the detail. And the devil is fraud.

Whilst fraud is inherently difficult to estimate, it is undoubtedly extremely costly. Private sector fraud losses in the UK are estimated at over £144bn annually. Procurement fraud (often associated with malfeasance by employees) is believed to cost £127bn per annum. [3] Worse, there is some suggestion that fraud is on the rise[4]. Much of this activity could, in theory, have been reported by Whistle blowers and stopped at an early stage.

Honest employees working (literally) alongside fraudsters are very often best placed to notice and report the kind of wrongdoing. The question for the corporate is how to ensure both that employees make disclosures and that those disclosures are managed effectively.

Which policy?

The International Chamber of Commerce guidance on Whistle blowing includes examination of two questions that any corporate will need to consider when determining its Whistle blowing policy.

First is the question of anonymity. Should the Whistle blower be able to make their accusations without their name being revealed?Technically, it would be possible to have a completely anonymous system of reporting, such that even the receivers of the information were unaware of the identity of the Whistle blower. This is, perhaps, an extreme example but by no means an implausible one.

Firms will obviously want to avoid the use of a policy as a vehicle for untraceable bullying or undermining of employees. Equally, anonymity may make information harder to use, clarify or convert into evidence in court. Anonymity is, however, a key incentive for those who wish to come forward and may encourage frank and accurate disclosure.

For those firms operating in both the US and the EU, the anonymity of a Whistle blowing scheme can create serious issues. The restrictions of EU Directive 95/46/EC (which restricts the gathering and retention of data) can conflict with the requirement that entities listed on the US stock markets and their affiliates store data relating to Whistle blowing (as per the Sarbanes-Oxley Act 2002). A subsidiary of McDonalds has already become a casualty of this conflict and corporates will need to address the issue with care.

The second question is that of compulsion. Should employees be forced to use the Whistle blowing policy in preference to other (perhaps more informal) channels? The advantages of compulsion is clarity and a reinforcement of the importance of the policy.  On the other hand, compulsion can lead to abuse and even discourage some potential informants from coming forward.

Each corporate will of course want to create a Whistle blowing policy which meets its own needs. Any policy will obviously need to be work able in all the jurisdictions in which the entity operates.

Where now?

What is certain is that official intervention in the area of internal reporting of regulatory misconduct or crime (as exemplified by the new FCA measures) is here to stay, whatever impact the Brexit vote will have on the force of EU law in the UK. Internal reporting can have real benefits for corporates if implemented and used effectively,and those who swim with the tide are likely to gain significantly in the long term.

[1]See: Official Journal of the European Union, 15.12.15, available online at: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32015L2392

[2]See the Approved Judgment of Lord Leveson at para 22, available online

at, https://www.judiciary.gov.uk/wp-content/uploads/2015/11/sfo-v-standard-bank_Final_1.pdf

[3]See: Annual Fraud Indicator 2016 – available online at
http://www.pkf- littlejohn.com/sites/default/files/media/documents/protected/annual_fraud_indicator_report_may_2016.pdf

[4]See The Financial Cost of Fraud 2015, p.12, para 5.2

Business

Battling Covid collateral damage, Renault says 2021 will be volatile

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Battling Covid collateral damage, Renault says 2021 will be volatile 1

By Gilles Guillaume

PARIS (Reuters) – Renault said on Friday it is still fighting the lingering effects of the COVID-19 pandemic, including a shortage of semiconductor chips, that could make for another rough year for the French carmaker.

Renault reported an 8 billion euro ($9.7 billion) loss for 2020 which, combined with gloomy take on the market, sent its shares down more than 5% in late morning trading.

“We are in the midst of a battle to try to manage a difficult year in terms of supply chains, of components,” Chief Executive Luca de Meo told reporters. “This is all the collateral damage of the Covid pandemic… we will have a fairly volatile year.”

De Meo, who took over last July, is looking at ways to boost profitability and sales at Renault while pushing ahead with cost cuts. There were early signs of improving momentum as margins inched up in the second half of 2020.

The group gave no financial guidance for this year, although it said it might reach a target of achieving 2 billion euros in costs cuts by 2023 ahead of time, possibly by December.

Executives said they were confident the carmaker could be profitable in the second half of 2021, but that they lacked sufficient market visibility to provide a forecast.

Renault struck a cautious note, saying it was focused on its recovery but warned orders had faltered in early 2021 as pandemic restrictions continued in some countries.

The group is facing new challenges as the European Union tightens emissions regulations and after rivals PSA and Fiat Chrysler joined forces to create Stellantis, the world’s fourth-biggest automaker.

The auto industry endured a tough 2020 but a swift rebound in premium car sales in China helped companies such as Volkswagen and Daimler to weather the storm.

Auto companies globally have since been hit by a shortage of semiconductors that has forced production cuts worldwide.

“The beginning of the year has shown some signs of weakness,” De Meo told analysts, but added the chip shortage should be resolved by the second half of 2021. “We have taken the necessary measures to anticipate and overcome challenges.”

Renault estimated the chip shortage could reduce its production by about 100,000 vehicles this year.

SHARP HIT

The group was already loss-making in 2019, but took a sharp hit in 2020 during lockdowns to fight the pandemic, which also hurt its Japanese partner Nissan.

Analysts polled by Refinitiv had expected a 7.4 billion euro loss for 2020. The group posted negative free cash flow for 2020.

The 2018 arrest of Carlos Ghosn, who formerly lead the alliance between Renault and Nissan, plunged the automakers into turmoil.

In a further sign that the companies have been working to repair the alliance, De Meo told journalists that Renault and Nissan will announce new joint products together in the coming weeks or months.

Renault has begun to raise prices on some car models, and group operating profit, which was negative for 2020 as a whole, improved in the last six months of the year, reaching 866 million euros or 3.5% of revenue.

Analysts at Jefferies said the operating performance was better than expected. Sales were still falling in the second half, but less sharply.

Renault is slashing jobs and trimming its range of cars, allowing it to slice spending in areas like research and development as it focuses on redressing its finances. It is also pivoting more towards electric cars as part of its revamp.

It was already struggling more than some rivals with sliding sales before the pandemic, after years of a vast expansion drive it is now trying to rein in, focusing on profitable markets.

De Meo told journalists on Friday that the French carmaker will make three new higher-margin models at its Palencia plant in Spain, where manufacturing costs are lower, between 2022 and 2024.

($1 = 0.8269 euros)

(Reporting by Gilles Guillaume and Sarah White in Paris, Nick Carey in London; Editing by Christopher Cushing, David Evans and Jan Harvey)

 

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Business

UK delays review of business rates tax until autumn

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UK delays review of business rates tax until autumn 2

LONDON (Reuters) – Britain’s finance ministry said it would delay publication of its review of business rates – a tax paid by companies based on the value of the property they occupy – until the autumn when the economic outlook should be clearer.

Many companies are demanding reductions in their business rates to help them compete with online retailers.

“Due to the ongoing and wide-ranging impacts of the pandemic and economic uncertainty, the government said the review’s final report would be released later in the year when there is more clarity on the long-term state of the economy and the public finances,” the ministry said.

Finance minister Rishi Sunak has granted a temporary business rates exemption to companies in the retail, hospitality, and leisure sectors, costing over 10 billion pounds ($14 billion). Sunak is due to announce his next round of support measures for the economy on March 3.

($1 = 0.7152 pounds)

(Writing by William Schomberg, editing by David Milliken)

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Business

Discounter Pepco has all of Europe in its sights

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Discounter Pepco has all of Europe in its sights 3

By James Davey

LONDON (Reuters) – Pepco Group, which owns British discount retailer Poundland, has targeted 400 store openings across Europe in its 2020-21 financial year as it expands its PEPCO brand beyond central and eastern Europe, its boss said on Friday.

The group opened a net 327 new stores in its 2019-20 year, taking the total to 3,021 in 15 countries. The PEPCO brand entered western Europe for the first time with openings in Italy and it plans its first foray into Spain in April or May.

Chief Executive Andy Bond said its five stores in Italy have traded “super well” so far.

“That’s given us a lot of confidence that we can now start building PEPCO into western Europe and that expands our market opportunity from roughly 100 million people (in central and eastern Europe) to roughly 500 million people,” he told Reuters.

To further illustrate the brand’s potential he noted that the group has more than 1,000 PEPCO shops in Poland, which has a significantly smaller population and gross domestic product than Italy or Spain.

The company, which also owns the Dealz brand in Europe but does not trade online, has already opened more than 100 of the targeted 400 new stores this financial year.

Pepco Group is part of South African conglomerate Steinhoff, which is still battling the fallout of a 2017 accounting scandal.

Since 2019 Steinhoff and its creditors have been evaluating a range of strategic options for Pepco Group, including a potential public listing, private equity sale or trade sale.

That process was delayed by the pandemic, but Steinhoff said last month that it had resumed.

“The business will be up for sale at the right time. It’s a case of when, rather than if,” said Bond, a former boss of British supermarket chain Asda.

Pepco Group on Friday reported a 31% drop in full-year core earnings, citing temporary coronavirus-related store closures.

Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) were 229 million euros ($277 million) for the year to Sept. 30, against 331 million euros the previous year.

Sales rose 3% to 3.5 billion euros, reflecting new store openings.

($1 = 0.8279 euros)

(Reporting by James Davey; Editing by David Goodman)

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