Why is a whistleblower policy important?

Whistleblowing remains a sensitive topic and has divided opinions all around the world. Some are seen as heroes, such as Sherron Watkins, who at the time was Vice President of Enron Corporation and shared her concerns over accounting issues and other fraudulent behaviour with the Chairman. Her statement and the breakdown of Enron led to the Sarbanes-Oxley Act of 2002 (SOX), which contains 11 sections of legislation all geared toward avoiding similar corporate and accounting scandals.

In Europe, Wirecard’s fraudulent activity was first reported on by the Financial Times in 2019. Pavandeep (Pav) Gill, a senior legal counsel for Wirecard based in Singapore, later revealed himself to be the whistleblower who provided the documents exposing the fraud to the Financial Times. Without Gill coming forward, more investors would have lost their money. The European Union (EU) introduced the Whistleblowing Directive, which should have been implemented into national legislation by 17 December 2021. Most countries have followed this direction, however, Czechia, Germany, Estonia, Spain, Italy, Luxembourg, Hungary, and Poland were recently referred to the Court of Justice of the European Union (CJEU) for failing to transpose the directive fully and satisfactorily.

While the Directive was enacted after the UK’s departure from the EU, it will still affect companies in the UK. Any organisation with a wider EU operation will need to apply the Directive and the relevant national law. Firms are likely to implement a policy that follows that of the EU as it is globally recognised and therefore, it is expected that the UK will align its legislation closer to that of the Directive.

Key whistleblower rules

The EU Directive requires companies to:

• Provide internal mechanisms for whistleblowing
• Educate employees and others about their whistleblowing options
• Protect whistleblowers who report breaches of EU law, and
• Prevent them from being retaliated against

Most have already incorporated the Directive into their national law, however, Germany has failed to do so in time and was referred to the CJEU. In February 2023, the Bundesrat did not approve the legislation as it goes beyond the requirements of the EU Directive and would be an undue financial burden on small and medium-sized businesses. This confirms that the German Whistleblower Protection Act (Hinweisgeberschutzgesetz – HinSchG) will not be implemented by mid-2023 either. However, we are seeing Belgium putting out further clarifications and guidelines to go alongside their implemented whistleblower legislation.

Whistleblower case

The latest case in front of the European Court of Human Rights (ECHR), LuxLeaks, considered the changing role of whistleblowers in a democratic society. Whistleblowing can encourage corporate social responsibility, increase shareholder confidence, and reduce an organisation’s exposure to damaging risks.

In the judgement, the court considered six relevant criteria:

1. the channels used to make the disclosure;
2. the authenticity of the disclosed information;
3. good faith;
4. the public interest in the disclosed information;
5. the detriment caused; and
6. the severity of the sanction.

A whistleblower may only be protected under Article 10 of the ECHR if the information disclosed is genuine and the whistleblower has acted in good faith, with no intention of gaining a financial advantage or harming the employer. Therefore, an employee who is dismissed on the grounds of whistleblowing and who is fined under criminal law is entitled to compensation for damages suffered and expenses suffered.

The case shows once again that a strong whistleblower policy is key and shows the employer’s commitment to transparency. It encourages employees to come forward with any concerns and allows for earlier disclosure which may result in the matter being dealt with before it gets too serious or causes reputational damage.

UK whistleblowing incentives

In the UK, the discussions about whistleblower protection have picked up again this month. The current law protecting whistleblowers is the Public Interest Disclosure Act 1998 (PIDA), which safeguards whistleblowers from adverse treatment or unfair dismissal if the report was made in the public interest. The Protection of Whistleblowing Bill, a private member’s bill introduced by Baroness Kramer, recognises the value of whistleblowers in uncovering wrongdoings. It seeks to repeal the current legislation and follow suit with other countries that have already introduced penalties for employers who fail to comply with the whistleblower obligations.

A further enhancement could be a reward scheme. A concept that was mentioned during the debate on the bill. It would be a move towards the enforcement-focused US reward scheme and turn away from the European GDPR and banking secrecy-conscious approach. This would certainly go much further than the EU Directive currently in place. The FCA has not addressed any plans for a reward scheme since 2014.

The latest whistleblower data shows that one-quarter of 734 allegations were received by the FCA. The majority of complaints are in relation to:

• fitness and propriety
• treating customers fairly
• Financial Services and Markets Act 2000
• culture
• compliance

Implementing a strong whistleblower policy on a company level could see these numbers reduce and improve customers’ faith and trust in financial services.

US whistleblowing laws

A key difference to that of the EU or UK approach is the reward scheme. The scheme aims to address the consequences of speaking up against an employer and their wrongdoing. It also encourages enforcement as more wrongdoings are likely to be reported. The personal consequences for whistleblowers are far-reaching and often result in a lack of future employment opportunities. The US scheme is currently better positioned in recognising the personal sacrifices that come with exposing wrongdoings.

The US Securities and Exchange Commission (SEC) awarded more than $50mn (£41.5m) to whistleblowers in January alone.

In December 2022, the Anti-Money Laundering Whistleblower Improvement Act was enacted to encourage and reward those who report violations of US sanctions.

The US’s reputation for being strong on enforcement actions indicates that the rewards system is fruitful and the number of whistleblower lawyers in the US confirms its effectiveness.

CUBE comment

To protect themselves, firms should maintain strong compliance systems to avoid breaches and respond appropriately to reports requiring further investigation. This is highly recommended as it can result in liability advantages for the company. The sanctions could be mitigated as the implemented system shows that the company takes its supervisory duties seriously. It is likely to avoid reputational damage if the information is first obtained through an internal whistleblowing channel.

CUBE can keep companies up to date on whistleblowing policies. Using AI to automatically map relevant regulations to company procedures – CUBE is a Compliance Officer’s best friend.

Contact CUBE to keep up to date with whistleblower policies.