The UK regulators are actively promoting self-reporting and whistleblowing; a process whereby employees are encouraged to speak up where they suspect fraud or unlawful conduct by their employers, confident that their concerns will be investigated without any personal repercussions.
The Serious Fraud Office (SFO), Action Fraud (the national fraud and cyber-crime reporting centre operated by the City of London Police), and the Financial Conduct Authority have all reported increases in the volume of whistleblowing reports received.
Critics have raised concerns about funding problems for these regulators. During the 12 months ending 31 March 2014, the SFO only opened 12 new investigations into suspected fraud and corruption despite receiving 2,508 reports through its whistleblower service over a similar period. Action Fraud received more than 210,000 reports in 2013/14 and only 544 investigations into financial crime followed. Of course, not all whistleblowing reports will contain the high quality information needed to justify a full investigation but critics are suggesting that this data shows that the SFO lacks the resources to pursue all available leads and that it is having to prioritise cases.
Nonetheless, we understand that the SFO has been able to secure additional funding from the Treasury for large cases, and with the regulators' focus on senior decision-makers, we expect more regulatory claims in the future.
These developments are troublesome for directors and officers and their insurers for a number of reasons.
In the US, where the legislation is more advanced, studies have shown that whistleblowers have enabled the regulators to obtain judgments which would not otherwise have been obtained and to impose higher penalties than would otherwise have been the case.
Whilst fines and penalties are not typically covered under most D&O policies, an insured will want to think seriously before jeopardising any cover in respect of the defence costs of expensive investigations and litigation. Insurers may also want to consider the scope of available cover in light of the likely increase in internal investigations (as opposed to formal investigations).
Also, whether a particular admission made in a whistleblower report or settlement with the authorities in exchange for leniency could trigger a policy exclusion will depend on the specific wording of the policy. If the exclusion is only triggered if there is "deliberate" misconduct, then it may be possible for an insured to phrase an admission carefully so as avoid any suggestion that the misconduct was "deliberate". Where for example a "final adjudication" provision in the policy is determinative of whether or not the exclusion is triggered, then the process surrounding the admission (e.g. whether a court order will be obtained) will be relevant.
More worryingly in the US, the culture of whistleblowing has led to an increase in frivolous complaints against companies, resulting in distraction, burden and expense for businesses. This could also lead to shareholder litigation and civil claims being pursued by companies against their own board members.