Whistleblowers Usher In New Age Of Accountability
Whistleblowing inside financial services firms is on the rise. Radar looks at the changing regulatory landscape around the world and the risks for companies not on top of internal reporting.
Whistleblowers have become instrumental in flushing out corporate wrongdoing in recent years. Stronger legal protections and, in some jurisdictions, enormous financial rewards are encouraging individuals to speak out in record numbers on corruption that may otherwise go undetected.
Although compliance officers are aware that whistleblowing could end their careers, the tide is slowly shifting in favor of those who do report misconduct to the regulator.
Radar spoke to numerous legal experts who revealed how a handful of banks had witnessed a minor drop in whistleblowing reports while employees were working remotely, as issues had become hidden from view, but they expect a flood of reports once office life resumes.
Others believe reports have increased in Wall Street and the City of London, as a culture of heightened suspicion has set in on the back of the remote working environment.
The pandemic has inflamed issues around health and safety, employment contracts, and pay and furlough fraud. It has also provided cover for rogue trading to flourish.
It is clear from the shifting picture around the world that firms who do not develop and maintain confidential reporting mechanisms risk severe reputational damage or even significant sanctions for breaching regulations, experts said.
Ten Years of Dodd-Frank
The 2020 fiscal year was the tenth anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which introduced the Securities and Exchange Commission’s (SEC) whistleblower program.
In that decade, the SEC awarded more than US$562 million to 106 individuals. Even 10 years after it was launched, the program continues to break its own records; in 2020, several awards handed out by the SEC made the top 10 list of largest whistleblower awards of all time.
“We can already tell that FY2021 will be another record-breaking year,” said Mee Kim, of Proskauer Rose law firm. “In the first eight months of FY2021, the SEC has granted an additional $339 million to 57 individuals,” said Kim.
This represents more than a third of the total $901 million awarded to 163 separate individuals since the SEC issued its first award pursuant to this program in 2012. This includes an award of $114 million in October 2020, the largest single award in the program’s history.
Prior to his confirmation, SEC Chairman Gary Gensler pledged to strengthen and support whistleblowing, building on the work of his predecessors to stamp out corruption, bribery, and malfeasance across Wall Street. Although early in his tenure, Gensler has already made an impact and sent a signal to firms that the Biden Administration will come down on the side of the individual over the corporation.
A Final Order issued by the SEC in June awarded approximately $23 million to two whistleblowers, despite one of them filing the application 18 days after the 90-day deadline, normally a fatal procedural defect. The SEC used its discretion to circumvent the rule and award the sum to the individual, which legal experts said shows the value the current executive is placing on tips.
The SEC also showed a willingness to interpret Dodd-Frank and its own implementing rules liberally to grant awards to whistleblowers in another high-value case on May 19, 2021, said Joshua Martin, Senior Counsel at Arnold & Porter.
The whistleblower reported wrongdoing in one region that resulted in investigations by the SEC and another agency, but the ultimate charges were based on conduct in another region entirely. The individual was awarded $28 million; one of the largest awards ever paid out by the SEC.
“Credible whistleblower tips may serve as an increasing impetus to the opening of investigations by both the SEC and other regulators — and, given the start to FY 2021, the trend is likely to continue, if not strengthen, under the new administration,” said Martin. “In light of this, companies would be well-advised to anticipate the possibility of increased whistleblower activity and take proactive measures to ensure they comply with applicable law.”
A record-breaking number of tips were reported to the SEC during the pandemic, Martin said, which may have been because of a breakdown in internal reporting mechanisms for remote workforces.
“Consider a fresh internal reporting campaign to refocus a returning workforce, whether it be full-time in the office, continuing remote, or some hybrid,” he said. “The statistics show that the current mechanisms for internal reporting may not be effective anymore.”
Silence In The City: Speaking Up
Earlier this year, the Financial Conduct Authority (FCA) launched a new whistleblowing campaign, “In confidence, with confidence”, aimed at individuals working within the financial services sector. It followed a five-fold increase in whistleblower complaints to the FCA since 2017.
A firm’s whistleblowing arrangements are the litmus test for a healthy culture and effective governance, said Sarah Henchoz of Allen & Overy.
“Gone is the forensic, compliance-based approach in favor of one that speaks directly to whistleblowers and their predicament,” she said. “Put yourself into the shoes of an individual debating whether to speak up about potential wrongdoing. What would be the least risky option? Disclose internally or directly to the FCA?”
The answer will depend on the culture of the firm, she said. “Is it one that encourages speaking up and makes individuals feel psychologically safe? Or is it an environment where raising concerns is equated with a ‘troublemaker’ and the most likely outcome is dismissal or some other form of detriment?”
The government has also said it will review existing whistleblowing laws to ensure they are “fit for purpose” given the record number of cases brought before the Employment Tribunal by workers claiming they have been dismissed for whistleblowing.
“In short, whistleblowing is clearly back in focus, both in the financial services sector and in general,” said Nick Ralph, Partner at Kingsley Napley law firm in London. “Last year, we saw that recent cases seemed to indicate that courts and tribunals are recognizing the difficulties faced by whistleblowers in coming forward.”
The EU Whistleblowing Directive 2021
U.K. banks are also being advised to keep tabs on the incoming European Union Whistleblower Directive, which covers financial services. Although the U.K. is no longer an E.U. member, it will be relevant for multinationals with operations in the bloc.
The U.K. is one of the countries that the European Commission grants whistleblowers comprehensive protection. Although much of the content of the Directive is already contained in U.K law, there are some differences to be noted.
“The Directive has a wider scope than the U.K. regime in that it protects self-employed people, shareholders, and board members (including non-executives), as well as ‘facilitators’; individuals connected to the whistleblower in a work-context, such as colleagues and relatives, and legal entities associated with the individual,” said Cathryn Bean, Partner at Simmons & Simmons.
Under the Directive, protection relates to breaches of E.U. laws that fall within specified sectors, including public procurement, financial services, and protection of privacy and data (amongst others), Bean said. U.K. protection, meanwhile, focuses on categories of wrongdoing, including criminal offenses, breach of a legal obligation, and is not limited to sectors.
“A whistleblowing incident can feel like a resource-intensive study in stress, which raises regulatory risk,” said Sarah Thomas, Global Investigations Partner at Addleshaw Goddard. “However, firms can use these experiences to demonstrate strong oversight. In cases where firms handle whistleblowing thoroughly and transparently, this can help foster good relationships with the regulators.”
EU states are required to transpose the Whistleblowing Directive into national law and to apply such national laws as of December 17, 2021.
Given the exodus of financial services staff to various cities across the continent following Brexit, EU-based firms have been advised to ensure they are in compliance, as some interpretation of the laws may vary per jurisdiction.
Areas with limited whistleblowing protections, such as Germany, Spain, and Austria, are required to introduce wholesale change by the end of 2021. Many others, including Ireland, regarded as already having comprehensive rules in place, will also have to act.
No More Hostile Environments
“Until very recently, Asia-Pacific was thought of as a hostile environment for whistleblowers,” said Kristy Grant-Hart of Spark Compliance Consulting. “That’s increasingly untrue.”
Last year, Japan, Australia, and other countries introduced penalties for companies that do not have compliant whistleblower programs.
“Protecting the identity of whistleblowers and maintaining confidential investigations ratcheted up in 2020 in Asia-Pacific,” said Grant-Hart. “Amendments to a key anti-corruption law in Korea increased penalties for improperly revealing a whistleblower’s identity. In Japan, employees that disclose the identity of a whistleblower without a justifiable reason may be fined. And in Australia, new laws enhance the protection of whistleblowers during and following the reporting process.”
A bill in New Zealand is working its way through the parliamentary process, replacing the Protected Disclosures Act of 2000. It strengthens protections for whistleblowers by updating the definition of “serious wrongdoing”, and enables people to report directly to an appropriate authority at any time.
Other countries are also likely to either update or implement new whistleblower protections throughout Asia-Pacific in 2021, Grant-Hart said.
Update Your Surveillance
A new age of accountability is being forced upon the corporate world. The increasing influence of social media as a tool for social change, be it the #MeToo movement or through sharing videos of injustice or unrest, is also giving a voice to corporate whistleblowers.
All of the trends, from tougher penalties for failure to protect those who speak up, to the size of the damages in relation to misconduct, are on the rise. It is imperative firms have a clear line of sight as to the mindset and actions of their workforces, and have proper systems and controls in place to deal with problems before they blow up.
“In 2021, whistleblowers will come into their own in ways previously unseen,” said Grant-Hart. “While the United States has had whistleblower protections for two decades, Europe and the Asia-Pacific region are setting new standards in requirements and protection. In 2021, we expect to see an explosion of whistleblower requirements in organizations, responding to a massive change in regulation, as well as a shift in the perception of whistleblowers.”