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Whistleblowers: risks and response

June 2013

Increasing employment protection and strong financial incentives for whistleblowers mean that firms can expect a steady rise in whistleblower complaints and a higher risk of regulatory investigations based on complaints to regulators. Having clear and robust whistleblower and investigation procedures is essential to manage risk.

The U.S. Dodd-Frank Act of 2010 introduced a whistleblower reward scheme that offers significant incentives for individuals to report suspected breaches of federal securities laws. The U.S. Securities and Exchange Commission (SEC) will reward a whistleblower who voluntarily provides it with original information that leads to a successful enforcement action (ie one in which it recovers monetary sanctions totalling at least USD 1 million) an amount ranging from 10% to 30% of the money collected. Whistleblowers are also protected against retaliation if they make their report in good faith. The UK’s Financial Conduct Authority has a whistleblower programme but this does not reward those who use it.

The cross-border whistleblower

The Dodd-Frank provisions are not confined to U.S.-based firms and whistleblowers. Non-U.S. firms with SEC reporting obligations (for example, those with shares traded in the U.S.) are exposed to complaints of alleged securities laws breaches. And individuals based outside the U.S. are eligible to make complaints provided these relate to securities laws breaches. The statistics in the SEC’s 2012 “Annual Report on the Dodd-Frank Whistleblower Program” show that there is an increasing awareness of these provisions outside the U.S. Of the 3,001 whistleblower tips received by the SEC in its 2012 fiscal year, approximately 11% of these originated from outside the U.S. spanning 49 countries. The largest number came from the UK with 74 tips reported, followed by Canada with 46 and India with 33. The SEC issued a total of 143 enforcement judgements and orders that potentially qualified for whistleblower rewards.

Developing protection

In contrast to the UK and a few other countries such as Norway and Switzerland which have developed whistleblower protection, many European countries either afford whistleblowers no special protection or limited protection only. This stems to some extent from a different cultural attitude to whistleblowing in parts of mainland Europe where it has been perceived historically as a breach of employees’ duty of loyalty.

The financial incentives on offer under Dodd-Frank may mean that employees are more inclined to put aside any cultural concerns. New whistleblower protection reforms, for example, draft legislation pending in Germany and Ireland, will also create a more secure environment for those who might want to make complaints.

Risk and response

Firms should be prepared for a steady rise in whistleblower complaints. Those with U.S. reporting obligations should be alive to the risk of opportunistic complaints under Dodd-Frank. The SEC is likely to scrutinise complaints and investigate them exhaustively. As well as the costs of responding to investigations, this could mean costly enforcement actions and inevitable publicity causing reputational harm.

To manage risk, firms that have not already done so should implement whistleblower procedures encouraging employees to report complaints internally before going to the regulators. Whilst Dodd-Frank does not require whistleblowers to use internal procedures, the SEC will take this into account in assessing any award that they ultimately receive. Employees and managers should receive regular training on these procedures. Firms also need robust policies and procedures to review, evaluate and investigate whistleblower complaints. These may assist to forestall any external reporting to the regulators and strengthen their position in any subsequent regulatory investigation.

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