Covering topics of: CDD, Data Protection, Voice Recording, Short Selling and other fund matters Applicable to: each financial industry sector, investment businesses, funds and fund services businesses These unprecedented circumstances …
Whistle-blowing in Jersey: a need for statutory protection?
As experienced professionals working in the financial services industry, the team at Oben have been involved in numerous cases that have been brought to light through a whistle-blower. In Jersey there is no specific statutory protection for whistle-blowers. This means that unlike in the UK, there are no measures in place to compensate a whistle-blower for any losses incurred, for example from loss of employment, after a disclosure is made.
The Jersey Financial Services Commission (“the Commission”) has a dedicated whistleblowing hotline which it has put in place in order to help it identify regulatory misconduct. It also recommends that financial services businesses should have a whistleblowing policy and procedures in place. Jersey has not provided any further assistance to protect the whistle-blower.
In the UK, the Public Interest Disclosure Act 1998 governs matters surrounding the act of whistle-blowing, and under this Act an employment tribunal which finds in favour of an employee can award compensation if certain requirements are met. There is not, however, any provision which rewards a person making disclosures. The Senior Managers and Certification Regime also aims to ensure that whistle-blowers are protected by improving individual accountability within the financial services industry.
In the US, the government offers financial rewards to whistle-blowers who report violations of numerous laws. As at December 2016, the Securities and Exchange Commission (SEC) had paid out in excess of $100 million to whistle-blowers under its whistle-blower programme which was introduced, further to the Dodd-Frank Wall Street Reform and Protection Act, in 2011.
This Act created whistle-blower programmes for the SEC and the Commodity Futures Trading Commission (CFTC). The whistle-blower can be rewarded an amount between 10% and 30% of the funds the SEC or CFTC collect, provided more than $1 million is collected.
On 30 August 2016, the SEC announced the award of more than $22 million to a whistle-blower “whose detailed tip and extensive assistance helped the agency halt a well-hidden fraud at the company where the whistle-blower worked.” 1 This is the second largest reward to date. The largest reward was paid to a whistle-blower in 2014 to the tune of $30 million.
Should Jersey and the UK follow the example of the US (and other countries) and reward whistle-blowers for disclosures made?
In 2014, the UK’s Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority (“PRA”) for the Treasury Select Committee published a note 2 questioning this very point. The research concluded that the introduction of financial rewards/ incentives for whistle-blowers would be “unlikely to increase the number or quality of the disclosures we receive from them“.
In summary, the research concluded:
In the US the reward received is in proportion to the success of the enforcement sanctions. This means the whistle-blower will only be rewarded if there is a successful outcome;
There was no evidence to suggest that a financial incentive results in an increase in volume or quality of disclosures;
In order to administer a reward system there would be costs involved in setting up a governance structure;
There will be legal costs involved for the whistle-blower and defendant firm; and
Finally, and perhaps the most important point, the introduction of an incentive scheme may result in those policies and procedures put in place by businesses being undermined.
Emphasis also needs to be placed on those who may maliciously undermine the reward system; it is self evident that when there is a financial incentive in place some individuals may seek to claim this reward by providing false information or “framing” other individuals. How would one seek to govern and address this? It is true that the US seeks to address this by only rewarding the whistle-blower IF a disclosure results in a successful enforcement outcome, and they will only be rewarded with a percentage of the amount raised in sanction.
This also raises a question over the reliability of evidence in court in a criminal case. If the witness (or whistle-blower) in this case is to be rewarded for a disclosure made, would this put into question the independence of the witness?
Having reviewed the position in the US it is hard to imagine the UK, or indeed Jersey, following the same path in terms of offering financial reward for whistle-blowers. However, it is clear that whistle-blowing is an important mechanism of intelligence for the law enforcement agencies, and thus the UK government is committed to “make it easier for people to report suspected acts of corruption, to protect “whistle-blowers” from discriminatory and retaliatory actions, and to promote action including by law enforcement agencies where credible information is provided”3.
The UK has opted to follow a compensation scheme rather than the reward scheme put in place in the US. For genuine whistle-blowers this should not deter from “doing the right thing”. Jersey does not have similar statutory protection in place.
It is not only the fear of financial loss that deters employees from reporting wrongdoing. A study produced by the Institute of Advanced Legal Studies at London University has found that the media are finding it increasingly difficult to maintain the anonymity of their whistle-blowing sources because of developments in the digital world.
Further, in a recent case, the so called “Trojan Horse” (the case whereby there was allegedly a plot to inject an Islamic extremist agenda into several schools in Birmingham), the whistle-blowers were assured in writing that their identities would be kept secret. It was reported in the media in January 2017 that lawyers acting for the Department of Education had notified the whistle-blowers that their names could be revealed as part of disciplinary procedures4.
If, as appears to be the case, keeping the identity of the whistle-blower confidential is becoming increasingly difficult, then surely this supports an argument for Jersey to introduce some form of statutory protection.
As noted above, research conducted by the FCA and PRA showed that offering financial incentives would not increase the volume or quantity of reports being made. If whistle-blowers are not to be rewarded and now face the prospect of being publicly named, what, therefore, is the incentive to report wrongdoing?
Recently, two whistle-blowers have said their lives have now been ruined as a consequence of blowing the whistle. Jonathan Sugarman, a former risk manager at the Dublin branch of Unicredit appeared before the Oireachtas Finance Committee on 13 April 2017. In his opening remarks he said he has been “totally unemployable” for ten years for attempting to bring the truth to light. He also said that “Official Ireland has absolutely and completely destroyed the lives of every single whistle-blower who has come forward, from whatever walk of life they’ve come”.
Nicholas Wilson (the whistle-blower in the HSBC case), commenting on a recent whistle-blowing case stated “it’s hell, especially if you are whistle-blowing against banks and I’ve been insulted, patronised, mainly by the media, I have to say, shut down, censored” he went on to state: “it has destroyed my life, I haven’t worked properly since I blew the whistle”5.
Given the publicity surrounding the negativity faced by whistle-blowers, and indeed these two prominent whistle-blowers stating categorically that blowing the whistle has destroyed their lives, what would motivate an individual to blow the whistle when faced with loss of income and loss of reputation?
In my opinion offering a financial incentive to report wrongdoing would not promote a better culture within organisations. The emphasis should be firmly upon maintaining satisfactory policies and procedures within an organisation to enable whistle-blowers to feel “protected” should they step forward with information relating to wrongdoing. Having a strong whistle-blowing mechanism in place is an essential part of a good corporate governance framework and an effective board will ensure that there is protection in place.
The recent reported Barclays case, where the Chief Executive is under investigation for attempting to discover the identity of an employee who blew the whistle, only serves to support the argument that Jersey and businesses in Jersey need to do more to protect the whistle-blower.
It is human nature to fear the consequences of doing the “right thing” by reporting, and organisations (including governments) should ensure that there are adequate strategies in place to ensure that the whistle-blower is protected from financial and reputational risk.
Therefore, after discounting the possibility of offering a financial reward to the whistle-blower it seems apparent that Jersey should offer the same kind of statutory protection as offered by the UK. It should ensure that each and every business maintains adequate whistle-blowing policies and procedures in order to safeguard the individual and thus promote a culture whereby an employee can report wrongdoing without fear of reprisal.
1. US Securities and Exchange Commission website press release 2016-172 ↵
2. Financial Incentives for Whistle-blowers (Note by the Financial Conduct Authority and the Prudential Regulation Authority for the Treasury Select Committee July 2014 ↵
3. UK Government’s commitment provided at the 2016 Anti Corruption Summit- AC Summit Communique May 2016 (www.gov.uk) ↵
4. Article in the Telegraph 6 January 2017 ↵
5. Interview on Sky News 10 April 2017