Conduct & Ethics

The Whistleblowing Dilemma

Are whistleblowers now appreciated for contributing to good corporate governance or are they still viewed as disloyal informers? Let's weigh the pros and cons of reporting on wrongdoings.

Friday, May 3, 2019

By John Thackeray

To be or not to be a whistleblower?

Forget money laundering, tax evasion and ransomware. Do something legal and rewarding, become a whistleblower, and you could receive millions, all tax free. The must-haves for this role include a good attorney, a record of the wrongdoing and a high‐profile company.

John Thackeray

If these criteria are in place, regulators will seemingly do the work and bring the perpetrators to justice. With right on your side and the moral high ground, the rewards - both monetary and non-monetary - can potentially be fantastic. But you might have to spend the money in anonymity, as you will be regarded as a pariah in some circles.

How many people would, say, use a company hotline to expose nefarious conduct, knowing that they could face the wrath of senior management? Why, moreover, do there seem to be relatively few internal incentive schemes to screen out egregious conduct?

Whistleblowing exposes and shines light on wrongdoing and bad culture. So, it should be an essential component of good corporate governance that needs to be embraced, from the top of an organization down.

The reality, however, is that many firms are aware of illegal and/or unethical conduct but are willing to overlook it in the name of profit. At such firms, turning a blind eye to certain wrongdoings is seen as part of the cost of doing business; at others, whistleblowing is seen as a kind of necessary evil.

All Regulators are Not Equal

The European Parliament recently passed landmark legislation aimed at encouraging reports of wrongdoing. The new law shields whistleblowers from retaliation and creates “safe channels” that will allow them to report breaches (both within an organization and to public authorities), without fear of dismissal or demotion.

Regulators, fortunately, have programs designed to capture wrongdoings and can share the proceeds - a win‐win for both parties. But not all programs are equal and not all regulators have teeth.

The UK's FCA, for example, has recently been criticized in the media for spending more on its CEO's salary than on all of its staff (seven employees) dedicated to whistleblowing investigations in 2018.

Obviously, it's important to choose a regulator that has both the necessary resources and a track record for vigorously pursuing whistleblowing investigations.

High‐Profile Leaks

  • LuxLeaks: Whistleblowers working for PricewaterhouseCoopers leaked documents exposing favorable tax arrangements offered by Luxembourg to some of the world's biggest companies.
  • Paradise Papers: Millions of financial documents were leaked, detailing offshore tax‐avoidance schemes. The papers revealed details about how the ultra‐wealthy secretly invest cash in offshore tax havens.
  • Cambridge Analytica: The British data analytics company was accused of harvesting the personal data of millions of Facebook userswithout their consent.
  • Panama Papers: About 11 million confidential documents were leaked from a Panamanian law firm, showing how it helped clients to launder money, dodge sanctions and evade tax.

Target‐Rich Environment

In 2018, the SEC's whistleblower program received a record 5,282 tips - an 18% increase from a year earlier. What's more, the agency's own internal data shows that tips have nearly doubled since 2012.

Indeed, in the US, many firms have been taken to task for their risk culture (or lack thereof), and whistleblowing can therefore be quite lucrative.

The SEC, for example, recently paid two whistleblowers a total of $50 million for their participation in a corporate wrongdoing case the agency brought against JPMorgan Chase. The bank agreed to pay $307 million (tax‐free money) to settle the case, so the SEC and the whistleblowers were both well-compensated for the investigation.

The increase in tips has put the onus on whistleblowers and their attorneys to present better evidence of their claims at the outset. Given their limited resources, regulators typically investigate only the most robust and potentially profitable cases.

Parting Thoughts

Today, it does not seem like there is much cooperation between global regulators on whistleblowing. But if regulators communicated with each other more frequently and were willing to share the rewards from investigations, the fines they would collect alone would probably pay for their organizational budgets for corporate malfeasance cases.

Undoubtedly, there is still a stigma attached to whistleblowing. But more and more financial institutions now see it as a key component of good corporate governance - and employees who report wrongdoings are not only taking an ethical stand but also, in some cases, reaping significant financial rewards.

John Thackeray is the founder and CEO of Risk Smart Inc. Over his long career, he has held many risk positions, including CRO posts where he interacted and engaged with US and European regulators. He frequently contributes articles on his risk insights to the Financial Executives Networking Group (FENG).

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