Whistleblowing: why UK companies should monitor changes in the US
Whistleblowing programmes could be an increasingly important part of the UK corporate liability landscape.
In the UK itself, the number of whistleblowing cases opened decreased by more than 40% from 2014 through to September 2017, according to official FCA statistics. The number of whistleblowing cases opened fell from 1,360 in 2014 to 1,105 in 2015, and down to 866 in 2016. There were 793 cases for the first nine months of 2017. Many experts and organisations are calling for better whistleblowing laws.
This is not the full picture, however. In the US, since the Securities and Exchange Commission’s (SEC) whistleblowing programme came into effect in 2011 (created under the Dodd-Frank Act), the number of whistleblower reports has grown with every fiscal year. There were 4,484 whistleblower reports to the SEC in FY 2017 – nearly 50% more than the number of reports in FY 2012.
Any company that had a dealing in the US or was regulated there could potentially be subject to the US’s whistleblowing provisions.
There’s no reason to suppose this trend will not continue; and recent developments suggest UK companies could be more commonly involved.
Long arm of the law
A Harrogate-based retailer was recently caught by US whistleblowing rules and agreed to pay more than $900,000 in a case that shows how far American justice can reach.
An employee of the cashmere-specialist retailer reported to a US law firm, Constantine Cannon, that the company was evading customs duties by splitting parcels into lower-value consignments.
After first contacting the US embassy and being ignored, the employee contacted Constantine Cannon in 2016, which took the case and was joined by the US government. The retailer and its acting chief executive agreed to pay a combined settlement of $908,100 to the US government, with 18% awarded to the whistleblower. (The joint defendants neither admitted nor denied liability.)
This lawsuit was one of the first to be brought by a UK whistleblower in which the US Government intervened and successfully resolved the whistleblower’s False Claims Act (FCA) allegations.
“I didn’t care initially. The problem started when the company treated me poorly,” the employee told The Telegraph newspaper. “If I had liked the company I wouldn’t have done it.”
This case raises the possibility of any company that had a dealing in the US or was regulated there potentially being subject to the US’s whistleblowing provisions. If a UK bank is listed in the US, for example, and engaging in securities violations, a UK whistleblower could go straight to the SEC.
Ms Inman, a partner in Constantine Cannon’s London office, told The Telegraph newspaper: “As global business expands, European whistleblowers play an increasingly vital role in alerting the US Government to fraud schemes that cross international borders.”
Bounties and protection
Unlike in the UK, in the US successful cases can lead to whistleblowers receiving substantial financial rewards. Since 2012, the SEC has made a total of more than $262 million in awards to 53 whistleblowers.
The size of the whistleblower awards is also rising, and steeply. In March 2018, the SEC announced the two largest whistleblower bounty awards yet: two awards to three whistleblowers – whose reports led to a $415m settlement with Merrill Lynch – totalling roughly $83 million.
The SEC has also been scrupulous in protecting the identities of anonymous whistleblowers, making it clear that it will punish companies that seek to uncover or discourage whistleblowers, or retaliate against them.
The size of whistleblower awards is rising – and steeply.
For example, in September 2016 the agency announced that Anheuuser-Busch InBev had agreed to pay $6m to settle charges that the company had violated the FCPA and attempted to “chill” a whistleblower. (The Dodd-Frank Act’s protection against retaliation extends only to whistleblowers who report to the SEC, and not to internal whistleblowers. This was the ruling in the US Supreme Court’s decision in Digital Realty Trust, Inc. v. Somers, made in February 2018. This could mean that, if in any doubt, whistleblowers will go straight to the SEC.)
Along with the potentially large awards and robust protections provided, prospective whistleblowers might be also be encouraged to speak to the SEC by the increasing number of law firms providing specialist services in this field. In the $415m Merrill Lynch case, for example, the whistleblowers were represented by law firm Labaton Sucharow, which helps to guide whistleblowers and reassure them about the process.
And after 20 years of representing whistleblowers in America, Ms Inman recently opened a London office of Constantine Cannon. The firm’s aim is to build cases in the US with the help of whistleblowers in Britain and Europe. “People don’t realise that you don’t have to be an American to use the American whistleblower programme,” Ms Inman told The Telegraph newspaper.
The SEC notes on its website that individuals in 95 foreign countries have submitted whistle-blower tips between the 2011 and 2015 fiscal years; the largest number comes from the UK.
Corporate wrongdoing in various forms is coming under increasing scrutiny, and employees are often playing a larger role in helping to expose misconduct.
These positive changes seem set to continue. Whistleblowing might be of growing interest to law lords and Government in light of the harassment issues highlighted in Government, the #MeToo campaign, RBS, Lloyds/HBOS, Grenfell Tower, Carillion and so on. For example, there was a surge in calls from people in financial services about sexual misconduct towards the end of 2017, according to the charity Public Concern at Work.
Companies should regularly review their own whistleblowing policies and controls, and be mindful of how this mechanism is changing and may change in future. As with many relatively new mechanisms, unintended consequences are possible and need to be monitored and factored into corporate policies and controls.
Companies should also examine whether their D&O insurance policy has a US exclusion, which might render their directors uninsured against such claims in the US.
For more information, please contact Michael Lea on:
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