Last month, the UK Home Office in a policy document announcing the launch of National Crime Agency announced that it was considering financially incentivizing whistleblowers in cases of fraud, bribery and corruption. If this proposal is implemented it could represent a significant development in the discovery and enforcement of fraud, bribery and corruption offences in the UK.
Although whistleblowing originates from Ancient Greece, the motivation of the whistleblower and the manner in which the act itself is treated differs widely between states. Speculation as to the motivation of the act and the ramifications of whistleblowing have a key impact on the manner in which regulators have sought to support and protect whistleblowers.
Strong corporate codes of ethics, internal self-regulation and robust corporate governance mechanisms are undoubtedly fundamental to creating an environment in which whistleblowers are encouraged to come forward without fear of recrimination. However, the potential advantages offered by a strong whistleblowing law which incentivises the process of transparency and legal compliance are undeniable.
Primary among these is that legislation sets the minimum standard to which internal systems and controls must adhere. In reality most companies implementing the requirements of legislation will look to go beyond the bare minimum necessary for a system to operate in order to demonstrate that they have adequately implemented, monitored and enforced internal systems and controls in compliance with the legislation. For example, although the UK Bribery Act 2010 does not stipulate that companies must have in place a code of ethics or an anti-bribery and corruption policy, in reality and in order to demonstrate that they adequate procedures in place, most companies will take steps to put such measures in place by way of preparation for potential future regulatory action.
What makes whistleblowing law “work”?
When assessing whether a law supporting whistleblowers is working or not, there are three fundamental questions which need to be answered.
- Does the law aid the disclosure of misconduct;
- Did the whistleblowing have an acting impact on reducing misconduct; and
- Was the whisteblower protected from retaliation.
Whistleblowing in the UK
The primary law protecting whistleblowers in the UK is the Public Interest Disclosure Act 1998 (PIDA), which amended the Employment Rights Act 1996.
The primary UK law protecting whistleblowers is the Public Interest Disclosure Act, 1998 (PIDA) which amended the Employment Rights Act, 1996. PIDA itself was recently amended by the Enterprise and Regulatory Reform Act 2013 (ERR). These amendments have a potentially serious impact on whistleblower protection. ERR introduced a public interest test into PIDA which means that employees must now show that they reasonably believed that their disclosure is in the public interest. However employees do not need to make the disclosure in good faith. If it turns out that a disclosure was made in bad faith then this may be taken into account at the remedy stage of an employment hearing (for instance if there has been retaliation against the employee whisteblower).
While this law provided a watershed moment in UK employment law at the time of its introduction, fifteen years on, it is worthwhile assessing it contents against the three questions above through an analysis of comparative legislation.
Simply put, the bounty model gives whistleblowers a percentage of the penalties paid and/or the settlement agreed upon with the wrongdoer as a result of the misconduct reported by the whistleblower. As a concept, the bounty regime has been around for over a century and has had several iterations in the United States including, most notably, the Sarbanes- Oxley Act (SOX), the False Claims Act (FCA) and the more recent Dodd-Frank Act (Dodd).
At its best, PIDA protects whistleblowing employees against retaliation from their employers, allows for compensation in cases of retaliation and prevents the use of confidentiality clauses as barriers for making “protected disclosures” under PIDA. However, in the last decade, high profile cases concerning the LIBOR scandal, the NHS care standards for vulnerable persons, defense contractors’ malpractice and money laundering have raised questions about the efficacy of the PIDA. If the fundamental factor in assessing the success of a whistleblowing law is that it creates an atmosphere conducive to whistleblowers coming forward, it is arguable that something in the present system should change.
Introducing a bounty regime gives whistleblowers a far more tangible reason to come forward. It is worthwhile noting that the whistleblower bounty programme incorporated by Dodd has three important elements: the information must have been supplied “voluntarily”; the information must be “original” and it must have “led to” a successful enforcement action; and, the whistleblower must not be “ineligible” for the bounty. Ineligibility covers a wide spectrum of factors which could work to mitigate the “perverse incentive” that some argue that a bounty system provides but the most powerful counter to arguments of moral hazards is simply that bounty systems are found to work. It is striking to note that British citizens prefer to make complaints in the US system because of the incentives present in that regime. In 2012, about one in four of the non-US submissions to the SEC were made by UK whistleblowers- in many cases, these were complaints about wrongdoers very much within UK jurisdiction. However, given the backlash that whistleblowers often face, there was simply no incentive for the whistleblowers to come forward within the UK framework.
Anti-retaliation provisions in whistleblowing legislation can provide comfort for the whistleblower in protecting their position but the bounty systems in the FCA and Dodd go further in addressing the misconduct itself by making the bounty award directly correlative to the underlying malpractice. Effectively, rather than frame the compensation in terms of retaliation (much of which can be hard to prove, especially when the issue is less dismissal and more side-lining or other indirect methods of retaliation), the compensation is framed in terms of the misconduct disclosed by the whistleblower. Further, the fact that whistleblowers might be more willing to come forward has a benefit of creating a virtuous cycle of more misconduct coming to light and, presumably, rectified.
Protecting whistleblowers from retaliation
Bounty regimes insulate whistleblowers against the fall-out of social ostracism and blacklisting which tend to be regrettably common in such cases. By creating a public-private partnership in the truest sense of the word, they ensure that entities are held responsible for breaking laws and that persons who brought the information to light are rewarded for doing so. There is a great deal of anecdotal evidence to suggest that the financial and social repercussions of whistleblowing can be massive. Whistleblowers have reported being discriminated against at their workplace, losing friends, being blacklisted by potential employers and harassed on multiple levels. While antiretaliation provisions are important, it is also true that the introduction of a bounty regime might provide a cushion against financial stresses.
There are many ways in which the bounty system in the UK could build upon the lessons learned from similar programmes elsewhere. The scope of a bounty system should be expanded from being considered simply on any settlement agreed or fine imposed to a system where those who bring to light misconduct which does not have a financial aspect are equally compensated for speaking out.
Comments by groups such as Whistleblowers UK are interesting and provide some guidance on potential steps for the future. As proponents of incentivised whisteblowing they propose that regulatory fines be imposed as a result of whistleblowers should be divided up in a manner which apportions a share to the government and to the whistleblower and, in addition, to a central fund for compensating those who have uncovered misconduct which does not have a monetary weight but is significant nonetheless (such as the issue of poor NHS care standards). However, the Parliamentary Commission on Banking Standards while accepting that whistleblowing is an essential element of an effective compliance regime did not propose to incentivise whistleblowers. It did instead call on regulators to undertake research into the effects of financially incentivising whistleblowers in the US.
The UK Financial Conduct Authority and the Prudential Regulation Authority appear to have undertaken to do this and will report back to the Commission in 2014.
Furthermore, given the experience of the US system, the bounty must be mandatory with a possible discretionary range of variance should the information meet the threshold criteria to qualify for the bounty. Any policy on encouraging whistleblowing is one which must consider a variety of factors and draw a delicate balance between competing interests, but ultimately, it is hard to say that a well-designed bounty regime would not prove immensely beneficial to the situation of whistleblowers and corporate governance in the UK. As an act, whistleblowing is capable of having far-reaching impact into the conduct of business and the perception and reputation of an industry. Encouraging whistleblowers and strengthening internal controls allows for companies to avoid criminal and regulatory sanctions as well as bolster employee morale and the work atmosphere. Most importantly though, the practice of better controls, checks and balances in an organisation improves the manner in which businesses are conducted globally and it is this ultimate aim that should be the most remembered when designing a whistleblowing regime that is both effective and fair.