David Lawler, Partner, at Forensic Risk Alliance
Whistleblowing: The disclosure by a person, to those in authority, to a regulator, or to the public, of mismanagement, corruption, illegality, or some other wrongdoing.
It is a given that all companies – once they grow beyond a certain size – will have problems. This is as true for banking and financial service companies as it is in any other sector. It is often the case that as soon as a single proprietor is unable to control directly all aspects of a business’s operations, employees will find ways of bending the rules. In most instances these transgressions are fairly minor and amount to purely internal matters – a bit of petty pilfering from the stationery cupboard here; an inflated expense claim there.
Sometimes, however, things get more serious, and laws are broken that come within the remit of regulators and prosecutors: employees in far-flung locations may pay bribes to get things done, break health and safety regulations, or deliberately overcharge governmental customers. These problems are clearly far more consequential to a company than missing stationery or inflated travel expenses; they can lead to the criminal prosecution of the company itself. Although few companies are likely to match J P Morgan’s $13billion fine, the roll-call of companies with $100 million+ fines, a compliance monitor watching their every move for three years, and debarment from government contracts is increasing and the number of prosecutions growing as regulators from different jurisdictions target the same company.
Banks and financial services companies need to get themselves into a position where they are able to deal with problems in-house, handling such issues internally – before they become of interest to a regulator. They can do this by promoting internal whistleblowing, in the hope that external whistleblowing is never needed. What distinguishes a good financial sector company from a poor one (or a great company from a good one) is not the extent to which it has problems, but its willingness to learn about, understand and quickly put right those problems that it does encounter.
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The US experience of rewarding external whistle blowing
For many years the US has had a mechanism whereby whistle blowers could share in the bounty. Citizens with inside knowledge of fraud being committed by contractors against the government can file what has become known as a qui tam lawsuit on the government’s behalf, receiving a share of the recovery as their reward. Such claims have been filed by people with inside knowledge of false claims that have typically involved healthcare, military, or other government spending programs.
More recently, the US Securities and Exchange Commission’s little-used Whistleblower Bounty Program was extended to cover people coming forward with evidence of any type of share fraud. Specifically, the new ‘Dodd–Frank Wall Street Reform and Consumer Protection Act 2010’ now means that individuals coming forward with information about frauds or bribery stand to receive between 10% and 30% of amounts close to $1.5 million recovered by the SEC through subsequent enforcement actions. The SEC decides the final amount based on the originality and value of the information provided and how directly it led to the financial penalty being levied against the defendant.
We are already seeing an increase in enforcement activity in the US, as, for the first time, individuals who come across evidence of suspected fraudulent or corrupt behavior have a real financial incentive to report it to prosecutors. Given the large fines in foreign bribery cases in recent years, there could be some big rewards for those prepared to speak out. On October 1, 2013, the SEC announced that it expects to pay more than $14 million to a whistleblower. (All of the SEC’s previous awards had been below $50,000.) Last September, a former UBS banker who blew the whistle on widespread tax evasion by US citizens using the bank’s accounts received a $104 million reward from the US Internal Revenue Service.
Coupled with legal protection under Dodd-Frank from retaliation, such game-changing whistleblower bounties are creating real interest and fear in Wall Street, as headline grabbing amounts create a cottage-industry in employees actively looking at opportunities to whistle blow.
Is there a UK analogue of Dodd-Frank ‘bounties’?
No – not yet. But deep in the detail of the Home Office’s ‘Serious Organised Crime Strategy’ paper published in October 2013, is the Governments desire to consult on incentivizing UK whistleblowers, including “provision of financial incentives to support whistle blowing in cases of fraud, bribery and corruption.” i
Of course, most employees don’t in any case blow the whistle to the regulator for money, or out of ill will toward the company. Most tried or wanted to report wrongdoing internally, but simply didn’t know how to, got turned away, or worse. UK banks and financial services companies operating in the US will start to experience employees and counterparties whistleblowing into US authorities, and because of the information sharing that goes on between global regulators and prosecutors, UK companies will begin to feel the knock-on effects.
With the increased implementation of Dodd-Frank ‘bounties’, it is even more important that companies get the message across that they take employee concerns seriously, to encourage any would-be whistleblower to report directly to the company, and not to the government.
An effective internal ‘speaking up’ mechanism
Individuals are more likely to take action with respect to unacceptable behavior if there is a formal policy in place which offers near-absolute confidentiality, and explains exactly ow the subsequent investigations will be dealt with.
For companies subject to the Sarbanes-Oxley Act, this anonymous reporting requirement must also be extended to third parties. Accordingly, companies often establish an anonymous telephone hotline or use an internet-based mechanism for anonymous communications and to encourage employees to express concerns. Having a clear, easy-to-use whistleblowing procedure in place, and making sure that employees know about it, will go a long way towards encouraging them to turn to their employer first when something is amiss.
There is, of course, the potential for misuse, and to use whistleblowing to settle or escalate private arguments. It is therefore extremely important both to safeguard the confidentiality of the whistleblower, and to investigate properly all allegations made. This is often best achieved by whistleblowers being able to get in touch with a designated member of the compliance department, or even the board. While many individuals will be reluctant to go directly to their boss (who might be involved), it can sometimes be easier to go to the very top.
Finally, remember that whistleblowing is not easy. For most people, fear is a more common cause of corrupt behavior than greed. People want to avoid conflict, and speaking up can taint a person’s career, even if their suspicions are vindicated, so many individuals just keep quiet. It takes courage to report wrongdoing. Even the terminology used can send an important message: so start with changing the name. ‘Speaking up’ has a far more positive connotation than ‘whistleblowing’.
David Lawler is an expert forensic accountant with over 20 years’ experience in white collar and anti-corruption investigations, insolvency litigation, and in valuing and appraising troubled, declining or formative businesses. He quantified and reported on gain and disgorgement analysis for a number of international companies charged with breaches of the FCPA by US enforcement authorities. David also performs intensive reviews and tests of the FCPA/anti-corruption systems and controls in place at overseas branches of several multinational energy and mining companies, including extensive compliance audits in South America, West Africa and Asia. David frequently serves as an expert witness on profitability, viability, and value, and assists companies to appraise and tighten their financial controls and procedures, including regulatory compliance programs.
David is the author of the textbook, ‘Frequently Asked Questions in Anti-Bribery and Corruption’ published by John Wiley & Sons in March 2012. Prior to joining FRA, David trained as a Chartered Accountant with Deloitte, before moving to set up the London forensic capability at Kroll, and then at Begbies Traynor.
Editor’s note on FRA:
Forensic Risk Alliance (FRA) is a consulting firm with offices in the US, UK, France and Switzerland. It helps businesses to resolve complex and high-risk financial, legal and regulatory challenges. Its people provide independent, conflict-free advice and litigation support services, often in the local language as its team speaks virtually all of the world’s key business languages, including most European languages as well as Arabic, Mandarin and Cantonese Chinese, Malay and Bahasa Indonesia. FRA collects and analyzes data for use in legal disputes and investigations (often cross-border) in a number of areas, including litigation, fraud, bribery and corruption investigations. The company has extensive worldwide project experience in Latin America, Asia, Europe, Africa and the Middle East. FRA is one of only ten companies in the world approved to carry out validation audits for the EITI (Extractive Industries Transparency) Initiative which evaluate how well a country’s government conforms to the EITI’s standards of transparency in reporting revenue received from the extraction of natural resources. Members of the FRA team also provide expert witness testimony in court when required and have recently contributed two chapters to the Serious Fraud Office’s book ‘Serious Economic Crime – a boardroom guide to prevention and compliance’.