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Whistleblowing: Bounty hunting or a public duty?

25 September 2014

US$30m has been awarded to a whistleblower living in a foreign country, the United States' Securities and Exchange Commission (SEC) confirmed on 22 September 2014.

The SEC commented that "whistleblowers from all over the world should feel similarly incentivised to come forward with credible information about potential violations of US securities laws".

This is yet another reminder to financial services firms worldwide to be aware of the long arm of US securities laws. This latest award is the largest the SEC has made since its programme began in 2012; the previous highest award was US$14 million in US fiscal year 2013.  

Awarding bounty for whistleblowing to the SEC in the US contrasts sharply with the UK financial services regulators' approach, confirmed in July 2014, that they are not proposing to introduce financial incentives for whistleblowing.

The Financial Conduct Authority (FCA) and Prudential Regulation Authority expressed their view that financial incentives could undermine internal whistleblowing mechanisms and create "moral and other hazards", including malicious reporting, entrapment, conflicts of interest in court, inconsistency with regulators' expectations of firms and negative public perception of high-income incentives for fulfilling a public duty in the financial sector.

They set out their standpoint in a joint note on the Financial Incentives for Whistleblowers for the Treasury Select Committee on 30 July 2014. 

Instead, the FCA has more than doubled the size of its specialist whistleblowing unit and introduced new internal tracking mechanisms to increase the support and feedback to whistleblowers, subject to its confidentiality obligations.

The FCA also offers face-to-face meetings with those reporting complex or particularly sensitive concerns. The FCA intends to identify the sectors of the industry from which it receives fewer reports and then raise awareness among potential whistleblowers in those sectors. 

Given that protection for whistleblowers in the UK is limited to the right not to be subjected to a detriment and the right not to be unfairly dismissed, UK financial services firms should be aware that whistleblowers working in the UK, who all too often face the end of their career by raising concerns, could still seek bounty under the US SEC regime if certain criteria are met:

  • the individual works in the UK for a branch or subsidiary (affiliate) of a US publicly traded company 
  • there has been a breach of US federal securities law
  • the individual voluntarily discloses original information to the SEC's Office of the Whistleblower
  • this original information leads to enforcement action in which monetary sanctions over US$1 million are ordered.

The bounty award can be between 10% and 30% of the monetary sanctions actually collected.

Despite the headlines of multi-million dollar bounty awards for whistleblowers, both firms and potential whistleblowers should note that few awards have been made since the SEC started making awards in 2012 relative to the number of reports received.

For example in US fiscal year 2013, 3,238 reports were received, but only 4 awards were paid out.

Financial services firms in the UK should also note the "Speak Up" drive launched on 23 September 2014 by the Chartered Institute for Securities and Investment (CISI) to encourage individuals in the financial services sector to report violations of company policy, the law or any failing which impacts standards.

The initiative seeks to move away from the negative connotations of whistleblowing as a last resort when there's no alternative to firms having an open culture and individuals being able to raise concerns at the earliest point. The CISI is also in favour of a financial hardship fund to provide comfort to potential whistleblowers.

The UK focus on good corporate governance and how best to respond to whistleblowing is likely to continue, as demonstrated by Tesco's announcement of an investigation into its £250m overstatement of half year profits.

This was prompted by a whistleblower alerting the board to accounting practices of bringing forward payments from suppliers and delaying business costs, which led the accounts to give a better picture of the company's financial performance.

Tesco has confirmed that it has notified the FCA. One positive aspect to take from the event was the willingness of the whistleblower to speak out.

In view of the risk of fines and penalties imposed on firms by the FCA and the US authorities, firms should encourage early reporting of concerns and ensure they have effective policies in place to encourage whistleblowing and protect those who come forward.

This enables firms to:

  • have sound systems of internal control as promoted by the regulators and the UK corporate governance code
  • limit the potential damage by early reporting
  • manage how information comes into the public domain
  • bring matters to the regulators' attention for which credit may be granted, and
  • where appropriate, serve as part of an anti-bribery defence to avoid criminal liability. 

This article was written by Clare Davis.

For more information, please contact Clare on +44 (0)20 7427 6552 or claire.davis@crsblaw.com