The Home Office’s Organised and Serious Crime Strategy document, published on 7 October 2013 to coincide with the launch of the UK’s new National Crime Agency, made reference to the fact that the UK Government would be considering the case for incentivised whistle-blowing in instances of fraud, bribery and corruption, as well as potentially providing UK citizens with qui tam rights allowing private citizens to sue, on the Government’s behalf, companies and individuals that were defrauding the Government.
It is argued that a reward system for whistle-blowers would have the knock-on effect of forcing companies to implement better compliance programmes to prevent wrongdoing and might encourage more corporates to self-report corruption. As these are key goals for the Serious Fraud Office (“SFO”) it might be thought the SFO would be a supporter of change. Incentivised whistle-blowing might also achieve the Banking Commission and Financial Conduct Authority’s (“FCA”) goals of increasing employee awareness of their duty to report wrongdoing, and of course, energise them to do so.
Rather surprisingly, reactions from these potentially major beneficiaries of incentivised whistle-blowing have been tepid. The Director of the SFO urged caution as to the virtues of incentivised whistle-blowing as did the FCA:
- David Green QC was quoted in the Financial Times last week as expressing concern that “defence lawyers could attack the credibility of prosecution witnesses who had been paid”. His preference was to empower individuals who blow the whistle; how, he did not say.
- The Banking Commission’s report of June 2013 on “Changing Banking for Good” was “shocked” that “so many people turned a blind eye to misbehaviour and failed to report it”. The Commission called on the FCA to undertake research into the impact of financial incentives in the US in “encouraging whistleblowing, exposing wrongdoing and promoting integrity and transparency in financial markets”. The FCA in its October 2013 response to the Parliamentary Commission on Banking Standards, appointed following the LIBOR rate rigging scandal, expressed its own concerns over the impact of incentivising whistle-blowers financially and indicated it would conduct further research on this, working with the Prudential Regulation Authority, and publish a statement in 2014. It will be interesting to see the FCA’s position next year.
The idea of rewards for information was deemed to be a good idea in relation to the unearthing of cartel activity, with the Office of Fair Trading (“OFT”) offering financial rewards of up to £100,000 (in exceptional circumstances) for information about cartel activity. The OFT’s rationale was:
“Cartels are generally conducted in secret and they can be hard to detect and prove. For this reason the OFT believes it should offer financial rewards for information which helps in the detection and investigation of cartels and which, in appropriate cases, leads to the fining of the companies and the criminal prosecution of the individuals involved.”
What is interesting about the OFT’s reward system is that under the OFT's leniency policy, any company or individual who has been directly involved in a cartel can gain complete civil and criminal immunity from sanction provided that they are the first to report and confess involvement in the cartel, they cooperate fully with the OFT throughout the investigation, and the OFT did not have any pre-existing investigation into the cartel. The prospect of immunity from prosecution would no doubt incentivise those individuals who have been complicit in wrongdoing, where a financial reward will have less of an attraction. HMRC also offers potential rewards for the reporting of tax evasion to its hotline, and in criminal investigations, generally no criticism is levied when the police make an appeal for information with the prospect of a reward.
What is whistle-blowing?
Public Concern at Work, the whistle-blowing charity, defines whistle-blowing as: “Someone blows the whistle when they tell their employer, a regulator, customers, the police or the media about wrongdoing, risk or malpractice that they are aware of through their work.” Whistle-blowing, also known as ‘protected disclosure’, includes making a report about the following conduct at work: someone’s health and safety is in danger, damage to the environment, a criminal offence is being or has been committed, the company isn’t obeying the law (for example, not having the right insurance) and covering up wrongdoing.
The Public Interest Disclosure Act 1998 (“PIDA”) protects employees who make a protected disclosure internally or to an appropriate authority, such as a regulator, in the event that their employment is subsequently terminated by their employer or the employee is subject to some other detriment because of the decision to blow the whistle. Such a dismissal or detriment will be unfair resulting in compensation being payable, and, unlike in standard unfair dismissal there is no cap on compensation.
David Green QC’s desire to greater empower whistle-blowers was reflected to a certain extent earlier this year with the introduction of changes to UK whistle-blowing laws on 25 June 2013. Hoping that people simply do what is right is a clearly desirable, but perhaps it is too idealistic. The fact is that reporting wrongdoing both internally and externally comes with risks, such as the loss of a job, involvement in a long-running investigation and huge stress – it is perhaps just an aspect of human nature that individuals need to have some financial reward for pursuing the correct path, rather than just better protection.
The Enterprise and Regulatory Reform Act 2013 (“the Act”) has amended the law on protected disclosures to introduce a ‘public interest’ test for a whistle-blower, whilst the necessity for the person to be motivated by ‘good faith’ has been removed. The new ‘public interest’ test was introduced to close a legal loophole which allowed employees to rely on PIDA to raise allegations about breaches of their own contract of employment. This was not the underlying intention of PIDA. This loophole has been closed to ensure employees utilise the PIDA regime to raise concerns which are in the public interest rather than personal contractual issues. At the same time, the ‘good faith’ requirement when reporting has been removed, albeit that if an employment tribunal found that a disclosure was made in bad faith then it has the discretion to reduce any award for unfair dismissal by 25%.
A further significant change that has been introduced is that an employer will be vicariously liable for the conduct of its employees if they subject a whistle-blowing employee to detrimental treatment as a result of a protected disclosure. This new measure has been established in direct response to the treatment of Helen Donnelly, the whistle-blowing nurse in the Mid Staffordshire Trust scandal about high mortality rates, who told the Francis Inquiry of how she was physically threatened by colleagues after raising concerns about standards in the accident and emergency department. Robert Francis, in his report, drew upon her case and said that Mrs Donnelly was offered no adequate support. As a result of the harassment from her co-workers she eventually left for other employment.
An employer has a defence to harassment by its employees in such circumstances if it can show it took all reasonable steps to prevent the other worker from “doing that thing” or “anything of that description” that was detrimental. It appears that an employee could also be personally liable for such detrimental conduct unless he/she reasonably relies on a statement from the employer that such conduct is not a breach of the Act.
Is incentivised whistle-blowing a good thing?
Public Concern at Work published a report in May 2013 which determined that the vast majority of whistle-blowers did not raise concerns externally. In reality, that is the one big change incentivised whistle-blowing is most likely to achieve. Studies suggest that most employees raise initial concerns internally; indeed, Public Concern at Work’s report found that 83% of employees have raised a concern internally, 74% say nothing was done, and only 15% have raised a concern externally. It is suggested that the US system shows that it is the provision of a guaranteed reward for whistle-blowing that can persuade an individual to take the associated risks of reporting misconduct externally.
In the US, the incentivised whistle-blowing regime is broadly seen as a success:
- The Dodd-Frank Act enacted in July 2010 affirms that whistle-blowers who bring violations of securities law, commodities law, or the Foreign Corrupt Practices Act to the attention of the proper government authorities in the US — the Securities and Exchange Commission ("SEC"), Department of Justice, or Commodities Futures Trading Commission — are entitled to between 10% to 30% of any government recovery in excess of $1 million.
- The US False Claims Act was originally introduced during the American Civil War to combat dishonest contractors who sold Union Army horses and mules in ill health, faulty rifles and ammunition and rotten rations. The Act provides the right for private persons to take legal action to sue for corruption and be rewarded for doing so where the State fails to initiate any proceedings of its own despite being put on notice. The financial incentive offered by the False Claims Act has motivated hundreds of private individuals to blow the whistle. For example, as recently as May 2013, US Renal Care agreed to pay a US$7.3 million settlement out of court in respect of false claims submitted in which the amount of medication admitted to patients was allegedly overstated. The private citizen that filed the lawsuit, Laura Davis, received US$1,314,000, 18% of the settlement figure.
In the UK, qui tam actions, where a private citizen can bring a claim (on behalf of the Government and himself/herself) and receive a share of the damages awarded by the Court, were phased out. They historically were treated with a great deal of scepticism. Attempts to introduce a UK version of the US False Claims Act in 2007 appear to have been abandoned.
So what are the advantages of financially rewarding whistle-blowers?
- Its mere existence may scare companies into eradicating poor corporate practices and governance;
- It might persuade some people, or those that are not incentivised by public interest factors alone, to accept the associated risks of whistle-blowing, like dismissal from employment, workplace stigmatisation, and involvement in a protracted investigation and potentially testifying at trial; and
- It works for HMRC and the OFT, as well as encouraging appeals for information in relation to non-economic crimes - so why is reporting of serious economic crime really so different?
Some of the perceived downsides are:
- It might actually discourage companies from alerting their employees to whistle-blowing procedures and laws;
- Information provided by the whistle-blower may be perceived as tainted for the purpose of any criminal prosecution or investigation; and
- An undesirable ambulance-chasing culture is created.
Public Interest at Work launched a consultation earlier this year concerning the effectiveness of workplace whistle-blowing in which the question of incentivised whistle-blowing was raised. Its follow-up report will be studied carefully by the UK’s Home Office as part of its consideration of the case for rewarding whistle-blowers.
Predicting the future?
Evidence given before the Banking Standards Committee in June 2013 about the success of incentivised whistle-blowing in the US presented some stark facts:
- from 1943 to 1986 only around six cases were brought each year and in 1985 the US Justice Department recovered only US$27 million. Since 1986 (when the False Claims Act was amended to provide guaranteed rather discretionary awards for whistle-blowing) the amended False Claims Act has incentivised more than 8,500 individuals to report fraud committed against the US Government with more than 400 cases brought each year. In 2012 the Justice Department recovered more than US$9 billion in civil and related criminal fines. Total Government recoveries under the False Claims Act amount to about $50 billion to date.
- The adoption of non-discretionary rewards by the Internal Revenue Service (tax) and SEC (securities law) led to a surge of whistle-blowers to the IRS from 2007 with recoveries of billions of dollars in lost tax revenues. The SEC’s programme in 2012 has led to 3,000 submissions, whereas in the 22 years of its predecessor programme, where there were no guaranteed rewards, there were only six small cases.
- It is reported that in 2012, one in ten SEC whistle-blower submissions came from non-US sources with 25% of those from the UK, more than any other country outside of the US.
- Major examples of serious wrongdoing have been uncovered because of information provided by whistle-blowers in the US over the last few years.
The fact that tens of billions of dollars have been recovered in the US through incentivised whistle-blower programmes will be a hugely attractive proposition for the UK Government, money which after all is ultimately being recovered for the tax payer. Some of those recoveries could be used to improve and build investigatory resources and capacity. Whistle-blowing in the UK is presently associated with huge risks rather than rewards for ‘doing the right thing’. It is also worth noting that a Freedom of Information Request by this firm in July of this year to the SFO concerning its ‘Confidential Hotline’ launched in November 2011 revealed that:
- In November 2011, there were a total of 498 referrals, and in December 2011, 354.
- From January 2012 until 30 June 2013, there were a total of 4,451 SFO Confidential referrals.
- None has led to a formal investigation and/or prosecution.
It is unclear why none of the SFO Confidential referrals has led to a formal investigation or prosecution. The SFO decided to close the telephone element of SFO Confidential on 12 June 2012 due to a disproportionate amount of resource being spent on calls that did not contribute to the aim of revealing serious fraud or corruption. This suggests the referrals were of a quality that did not identify complex economic crime. These figures are to be contrasted to the US where information provided by whistle-blowers has demonstrably been shown to have led to successful prosecutorial outcomes. Unless UK enforcement agencies like the SFO can point to examples of high-quality tip-offs leading to successful prosecutions or civil settlements, then the Home Office will look for other ways to incentivise people to report wrongdoing. The success of the US system, which to put it bluntly is a highly lucrative source of revenue for the US Government, will be hard to ignore.