Feature: Is legislation the key to effective international whistleblowing regimes?

Whistleblowing remains a confusing and contentious subject. Whilst news reports of massive payouts to whistleblowers in America have become commonplace, research has now found that offering monetary incentives does not necessarily influence whistleblowing behaviour and might even discourage internal reporting. It also suggested that protection from retaliation made people significantly more likely to report possible wrongdoing.

In this article, ICC FraudNet member Douglas Milne and colleagues offer their perspective on the issues and explain how, when employees are acknowledged as the most effective source of identifying fraud, they may be better supported.

The UK has been described as leading the way in whistleblower protection in Europe. In fact, only six European countries have specific whistleblower legislation, with Norway and the UK being the only two with statutory requirements that cover both public and private sector workers.

Conversely, protection has been afforded to whistleblowers in the US for the past twenty years through a raft of legislative provisions, most notably the Sarbanes-Oxley Act of 2002 (SOX), which established new protections in the US for employees of publicly traded companies and was designed to both protect employees from retaliation and actively encourage whistleblowing as a result of a number of major corporate accounting scandals, including Enron. However, its interesting to note that a 2010 study of fraud cases in large US companies revealed that the number of employee whistleblowers reduced substantially following SOX being passed through Congress.

Problems

Despite the more developed laws in this area in both the UK and US, it is clear that serious problems remain with the whistleblowing regimes in both countries. In the US, there remain major issues with guaranteeing anonymity and properly investigating anonymous calls, a lack of knowledge of how the regimes work, and of allegations being investigated by other employees who are not seen as independent of the company. In the UK, a 2013 survey of employers carried out by global law firm Eversheds revealed that 40% of respondents believed the current law was not working and 58% did not anticipate having to change their current whistleblowing policy to accommodate these changes. However, the same survey suggested that just under a third of respondents have encountered bullying or some other form of detrimental treatment in their workplace as a result of whistleblowing. The results in both countries suggest that employers may not be interpreting or implementing the law correctly.

Legislative update

In the UK, changes to the whistleblowing laws were introduced in June 2013 under the Enterprise and Regulatory Reform Act 2013, which mean that employers now have a legal responsibility to actively protect against the detrimental treatment or bullying of whistleblowers. The June 2013 changes include the addition of a “public interest” test for qualifying disclosures, removal of the “good faith” requirement for protected disclosures and introduction of liability for employers in situations where whistleblowers are subjected to detrimental treatment by their colleagues. Following this, as a result of the UK Government Response to a call for evidence by the Department of Business, Innovation and Skills in July 2014, further changes to UK law were announced, which are expected to be brought into legislation this month (April 2015) through the Small Business, Enterprise and Employment Bill. The new measures include a new best practice guide to whistleblowing policies for employers with a model policy employers can adopt, a new duty on regulators to report annually on cases referred to them, extending the legislative protections to groups currently excluded, such as student nurses, and exploring options to reward employers who adopt effective and proactive approaches to whistleblowing in their organisations.

Despite the legislative changes in the UK, Sir Robert Francis QC, chairman of the inquiry into poor care and high mortality rates amongst patients at Stafford Hospital, England, has warned that poor treatment of whistleblowers is acting as a deterrent to employees from speaking up. His report found that there were five overarching issues with the UK whistleblowing regime - cultural change, improved handling of cases, measures to support good practice, particular measures for vulnerable groups and extending the legal protection. The report went on to make 20 recommendations for change, all of which have been accepted by the UK Government. Accordingly, UK legislation in this area looks set to evolve even further in the next few years.

Beyond legislation

However, the current statistics show that something more than just legislative change is required to create an effective international whistleblowing regime, especially at a time when estimates of fraud and malpractice clearly represent a significant threat to businesses across the globe.

The Association of Certified Fraud Examiners (ACFE), in their 2014 Global Fraud Study (reported in CCI), estimated that a typical organisation loses 5% of its revenues each year to fraud. If these figures were applied to the 2013 estimated Gross World Product, this would translate to a projected global loss of nearly $3.7 trillion. The same study demonstrated that the most effective method of identifying fraud in an organisation is through disclosures by employees. Over 40% of all cases were detected by an employee disclosure, which is more than twice the rate of any other detection method. Employers with whistleblowing hotlines are much more likely to catch fraud by an employee disclosure. These employers also experienced frauds that were 41% less costly, and they detected frauds 50% more quickly.

Encouraging reporting

A healthy and open culture is one where people are encouraged to see, hear and speak up, confident that they can do so without adverse repercussions, convinced that they will be heard and that appropriate action will be taken. One of the main UK Government objectives when introducing the whistleblowing framework was to encourage employees to report wrongdoing to their employer internally without the need to go out with their organisation. As a result of the call for evidence, the UK Government accepted that employees feel that it is more difficult to blow the whistle internally, usually due to lack of knowledge and fear of reprisals.

These common problems, coupled with evidence that the most effective source of identifying fraud is employees themselves, has already seen many employers increasingly seeking the services of specialised global external whistleblowing service providers. One such provider, SeeHearSpeakUp, regularly deals with a variety of employee disclosures across the globe. These can range from simple reports of bullying in the workplace to the identification of international multi-million pound procurement frauds reported through their whistleblowing hotlines. Global whistleblowing service providers such as SeeHearSpeakUp are also able to provide a tailored approach to whistleblowing in order to effectively manage and deal with the sharp contrasts in cultures and legislation between jurisdictions.

Taking this, and the recent statistics, into account, it is clear that a cultural change in the attitude of employers - to view the regime as requiring a proactive approach to communicating and supporting employees by investing in training and other support mechanisms such as the effective use of external whistleblowing providers - will pay dividends within their organisation. The most recent changes proposed to UK law clearly have this approach in mind. However their success will ultimately come down to the extent to which employers are willing to foster cultural change within their organisations in order to comply with their underlying intent.

Douglas Milne and Fiona Grant are members of Morton Fraser LLP’s fraud and asset recovery team. Douglas Milne is the Scottish member of ICC Fraudnet. Fiona Grant is a certified fraud examiner.

Sean MacAuley is senior manager within Anderson Anderson & Brown LLP, Chartered Accountants, Aberdeen, Fraud Prevention & Investigation service line, SeeHearSpeakUp,