Partner Bambos Tsiattalou discusses the recent rise in whistleblowing complaints made to the FCA and why companies should be aware of this moving forward, especially in the COVID-19 era.
Bambos’ article was published in Compliance Monitor, 13 July 2020, and can be found here.
The number of whistleblowing complaints made to the Financial Conduct Authority (FCA) has risen markedly over the past year. Reports relating to breaches of standards of professional behaviour rose by a remarkable 35 per cent. It’s also becoming clear that employees in the financial sector are becoming increasingly confident of protection when reporting wrongdoing. In 2019, only 25% of employees reporting to the FCA sought anonymity.
This data suggests that the culture of fear and shame that once surrounded whistleblowing is now subsiding. Whereas most employees might have previously kept their concerns in-house, greater numbers are increasingly willing to report directly to the regulator – especially if they lack confidence in the integrity of their employer’s whistleblowing procedures.
Employees are right to have confidence in being legally protected from reprisals by their employer. The Public Interest Disclosures Act, 1998 protects employees from detrimental treatment by their employer for having made a public interest disclosure. Regulators, courts and tribunals have made it abundantly clear over the years that they will deal severely with employers who victimise employees who raise concerns in good faith. For example, in 2018 the FCA fined Barclay’s boss Jess Staley £642,000 for attempting to uncover the identity of an anonymous whistleblower.
The importance of whistleblowing protections and procedures as a way of combatting issues such as money laundering have also been underscored by other cases, such as that of whistleblower Howard Wilkinson who in 2018 brought to light a €200 billion money laundering scandal at Danske Bank. Reports later emerged of allegations that the bank sought to discredit Mr Wilkinson, which compounded the bank’s difficulties further.
An important factor behind the increasing willingness of employees to report wrongdoing seems to be a cultural shift. After all, in the UK, the legal protections afforded to whistleblowers have not changed substantively in over two decades. It may be that the increased willingness to report wrongdoing is a result of a strong tendency for the media to portray whistleblowers who expose corporate wrongdoing in a positive or even heroic light.
Whistleblowing allegations can, of course, be reputationally damaging to businesses. Even before they are properly investigated or proven, damaging reports of allegations can appear in the media For example, the BBC last year reported that a whistleblower within a compliance team at Revolut raised concerns about its anti-money laundering compliance measures with the FCA. The BBC also reported another employee as saying that “the CEO refused to listen to the compliance team,” an allegation Revolut robustly denies. Whatever the truth of such allegations, it’s clear that – where possible – dealing effectively with concerns in-house is far preferable to having employees bringing their concerns to the FCA or the BBC. To achieve this aim, it is vital to take any concerns raised seriously, to investigate them thoroughly and to communicate openly with whistleblowers.
Companies should engage actively and constructively with concerns raised both informally and formally. People at the appropriate levels should be able to recognise issues raised as whistleblowing concerns, even when they are not specifically described as such by the complainant. The legal protections apply regardless. Above all, care should be taken not to victimise an employee, or to be seen to do so. Developing such a workplace culture is particularly important, given that significantly more robust legal protections for whistleblowers are likely to be introduced in the coming years.
The UK government’s All Party Parliamentary Group for Whistleblowing published a detailed report in June 2019, which calls the whistleblowers the “first line of defence against crime corruption and coverups.” Its most significant recommendations include the introduction of a broader legal definition of whistleblowing, to “include any harmful violation of integrity and ethics, even when not criminal or illegal” with a focus on the risk of harm to the public. The report also recommends that protections be extended to all members of the public.
It recommends that “meaningful penalties” be introduced for failures to comply with mandatory reporting rules and proposes that non-disclosure agreements be banned as regards whistleblowing reports.
The MPs distilled their recommendations into a “ten point plan”, which makes the following recommendations:
- The term ‘whistleblower’ must be defined in law.
- The legal definition of whistleblowing should be revised and include any harmful violation of integrity and ethics, even when not criminal or illegal. The focus should be on the harm (or risk of harm) to public.
- Whistleblower protection should include all members of the public and include protection against retaliation.
- Mandatory internal and external reporting mechanisms and protections should be adopted to include meaningful penalties for those who fail to meet the requirements across all sectors and to include those currently outside of the regulations, e.g. journalists and clergy.
- A further review of compensation and how it is calculated.
- An urgent review of the barriers to justice including access to legal aid and an introduction of measures to tackle inequality of arms including protection against costs.
- Non-disclosure agreements in whistleblowing cases must be banned.
- Better regulatory framework and coordination to include the introduction of international best practice and a public awareness campaign.
- There should be an urgent review of the prescribed persons list, a more comprehensive guide to their role and measures put in place to ensure that they fulfil their responsibilities.
The parliamentary report makes it abundantly clear that whistleblowing is going to be increasingly protected and indeed encouraged in future. It therefore seems clear that the already evident cultural shift towards a greater acceptance of whistleblowing will grow, in tandem with a regulatory shift in the same direction.
The trend towards greater acceptance and encouragement of whistleblowing in the financial sector is global. In the US, whistleblower reports to the Securities and Exchange Commission rose sharply after financial incentives for whistleblowers were introduced. Such “bounty programmes” have seen some US$6.5 billion paid out worldwide for information revealing wrongdoing in recent years.
The EU is also significantly enhancing its protections for whistleblowers. The Directive on the protection of persons who report breaches of Union law came into force on 17 December 2019. The directive intends to ensure a strong level of protection for whistleblowers across the EU in key areas, including financial services, transport safety, nuclear safety, public health, data protection and money laundering. UK companies with operations in the EU will have to consider its potential impact carefully. Multinational companies which operate a single whistleblowing policy may have to amend such policies to meet the directive’s enhanced requirements.
UK financial services companies are, of course, already subject to the FCA’s extensive rules on whistleblowing, which are set out in detail in Chapter 18 of the FCA Handbook. Chapter 18 also sets out clearly the whistleblowing obligation under article 73(2) of MiFID, which requires certain firms to have procedures for employees to report infringements of MiFID, MiFIR and other EU-derived whistleblowing obligations. Such obligations are set to survive Brexit.
Compliance professionals should bear in mind that third party advisors to companies and financial institutions such as lawyers and accountants may also be obliged by their codes of professional ethics to report suspicious activities. One such recent case was detailed by a BBC Panorama exposé which suggested that EY aided money laundering through its Dubai office. Amjad Rihan, a former EY auditor turned whistleblower, said his bosses would not inform the authorities of extraordinarily suspicious activity. This was despite suspect activity involving a Dubai gold refinery paying out some £4bn in cash in 2012 alone. The company had even literally used wheelbarrows to withdraw cash.
The fallout from this case makes clear that the courts are prepared to order substantial compensation to whistleblowers who suffer loss or victimisation after having revealed wrongdoing. In April 2020, the High Court awarded Mr Rihan €10.8 million in damages, in a judgment which found that his employer had breached the Code of Ethics for Professional Accountants and had failed in its duty to protect Mr Rihan “against economic loss, in the form of loss of future employment opportunity, by providing an ethically safe work environment, free from professional misconduct”. This judgment chimes well with the All Party Parliamentary Group’s report on whistleblowing, which suggests expanding whistleblowing protections to cover activity which is not just illegal, but unethical. Employees such as in-house lawyers may be subject to similar ethical obligations.
The financial sector is currently reeling as the recession caused by the coronavirus pandemic envelops the sector. The reality is, we are probably not in a recession but instead in the greatest depression ever recorded in history. Under such strained conditions, regulatory breaches and wrongdoing are likely to increase – as is whistleblowing. With the financial sector suffering from more and more margin calls forcing huge investments to lose profits, allegations of fraud and skulduggery will increase, as will whistleblowing. It is now abundantly clear that the UK’s Parliament, courts and – perhaps most importantly – its broader workplace culture – are all becoming increasingly supportive of whistleblowing. Whistleblowing is increasingly encouraged, and the legal protections for whistleblowers are being enhanced. In this environment, financial services companies would be wise to ensure that their whistleblowing procedures and training are up to the task. Above all, they should work to ensure high levels of confidence in those procedures amongst staff. Companies can increase compliance and reduce risk by actively working to create a culture that is internally supportive of whistleblowing.