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Thursday
Oct172013

UK forgets ethics, mulls whistleblower rewards

The recent announcement that the U.K.’s legislature and enforcement agencies are considering the case for financially incentivizing whistleblowers in economic crime cases, thus aping the U.S.-approach, presents a serious and insidious threat for U.K. companies.

A government paper issued this month said,

[T]he Ministry of Justice and the Home Office will consider the case for incentivizing whistle blowing, including the provision of financial incentives to support whistle blowing in cases of fraud, bribery and corruption. As part of this work we will examine what lessons can be drawn from the successful ‘Qui Tam’ provisions in the U.S. where individuals who whistle-blow and work with prosecutors and law enforcement can receive a share of financial penalties levied against a company guilty of fraud against the government.

Why insidious? Because good ethics and statutory bribes are inimical.

Clearly, individuals should be encouraged to disclose potential crimes but why should such individuals need encouragement or expect large and benchmarked financial reward for exposing financial wrongdoing any more so than a person who is able to perform a rescue or expose a personal crime?

The announcement may prove valuable if companies now acknowledge and fully embrace the need to meet the threat by putting in place independent and effective internal reporting lines and lobby to restrict financial incentivization only to those cases where a whistleblower can demonstrate that internal reporting would have been a pointless exercise.

Otherwise, and apart from subverting ethics, financial incentivization in a commercial context will only encourage individuals to perpetuate problems and irregularities that could well have been nipped in the bud, in order to receive a larger financial payment, which will potentially jeopardize the employment of fellow employees; subvert good corporate compliance systems that require internal integrity; force companies to make a Dodd-Frank benchmarked payment to departing and often complicit individuals; and will ultimately subvert the credibility of potential prosecution witnesses. 

It would be heartening if the purpose of the “incentivization” announcement was to force companies to put in place effective and transparent compliance systems. But more likely is an announcement based on as little appreciation of context as that of encouraging corporate ethics. 

___________

Alistair Craig is a commercial barrister practicing in London. He can be contacted here.

Reader Comments (2)

As Evans (2004) wrote, “nowadays, to cleanse the Augean stables means more than clearing away an accumulated mass of corruption, whether financial or political. It amounts to reforming wrongs almost beyond the power of man to tackle”.

Whistleblowers undoubtedly play a very important role in corporate and government accountability, exposing fraud, corruption and illegal activities in companies that have yet to be discovered. You asked, “Why should such individuals need encouragement or expect large and benchmarked financial reward for exposing financial wrongdoing any more so than a person who is able to perform a rescue or expose a personal crime?”

The principle behind rewarding whistleblowers I think is no way different from crime stoppers programs that have long been operated in many countries around the world. The offering of cash rewards for information on criminal activities has the same goal of helping investigations in order to solve crimes. Probably the main difference is that whistle-blowing usually involves not just corporations but very large corporations and influential individuals.

As we all know, disclosing very sensitive information certainly requires a lot of courage and motivation. Blowing the whistle is tantamount to jeopardizing one’s life, career and family which made many people turned a blind eye to wrongdoing and chose to not say anything. Rewarding whistleblowers but also providing them with security and protection will definitely encourage those people holding highly confidential information to come forward and expose such the fraudulent acts.

Incentivising whistleblowers can be insidious you say, yes I agree but would it be far more damaging to the victims of fraud, bribery and corruption if fraudulent individuals and corporations continuously do more crimes which have become incessantly rampant in various institutions but distressingly unreported?

“The greatest tax evasion scheme in Irish history, Ansbacher deposits, went back decades before it was unearthed by the McCracken Tribunal. It ultimately netted the state Euro 113 million in tax, interest and penalties. However, despite the 289 cases of illegality identified, not one person was prosecuted because, according to Revenue, these include “some who were very elderly and deceased” (PSAI Editors, 2013, para 23).

Blowing the whistle against any serious wrongdoing is indeed one way of decontaminating the rot that accumulates in the Augean Stables. Whistle-blowing has the potential of discovering corrupt practices, mismanagement and government fraud that remain unexposed for long periods of time. Most likely, out of fear or to avoid scandal nobody wants to come forward and speak out. It is high time to recognise the potential of whistle-blowing as the key to start wiping out massive accumulation of corruption in public as well as in the private sector.
January 15, 2014 | Unregistered CommenterJoy Aquino
Hence, I believe crimes tend to proliferate for long periods of time if nobody would want to blow the whistle.

You also state that on mulling whistleblower rewards UK forgets ethics. Blowing the whistle may be disregarding company loyalty and betraying the hand that feeds the employee but what about social responsibility that the fraudulent corporations chose to neglect? I think exposing unethical business practices for the interest of the public instead of personal gain is the right thing to do.

If we are to analyse the morality of rewarding whistle-blowers, under utilitarianism ethical theory, if the action produces the most good and maximises happiness to most people then such action is considered ethically correct. Obviously, the consequence of reporting illegal activities will protect the public good and will help the authorities in tracking down such illegal acts. Would it make the majority of the people happy? Yes, definitely. The scams in financial institutions for example, the consequence of not saying anything is far more damaging than revealing the truth.

Under Kantian theory, one should have good intentions before the action counts as morally good. Rewarding whistleblowers come with the best intention to encourage them to talk and fulfil a sense of moral duty to protect the public and solve potential crimes therefore is the most ethical thing to do.

Most would agree with the value of good governance, social and moral considerations not only in governments but also in private institutions. I strongly believe that the public has the right to know the truth especially of unethical business practices concerning them and those people who have access to such sensitive information have the moral obligation to tell the truth for the welfare of the public. Deterring and decreasing corruption and fraud by exposing the truth will greatly benefit the majority.

Alongside the potential advantages of the coming out of whistleblowers I agree that there are also inherent pitfalls as you have enumerated such as jeopardizing the employment of fellow employees or subverting good corporate compliance systems that require internal integrity. Adams & Suarez-Martinez (2013) however pointed out that a reward system for whistle-blowers would have the knock-on effect of forcing companies to implement better compliance programmes to prevent wrongdoing and might encourage more corporates to self-report corruption.

But what would happen if no one will expose potential crimes? Probably depending on the context and gravity of the crime it would be a matter of choosing the lesser of two evils. But wouldn’t it make the world a little less evil if exposing the crime would result in more good than harm?

As mentioned in the PSAI (2013) blog, there are only two choices and I agree that it’s either maintaining the culture of silence which would mean allowing the culprits to do more crime or paying whistleblowers to break it. The great irony however lies in the paradox of brainwashing whistleblowers and paying them to be silent.

“In short, in banking as in healthcare, the silence was deafening. While lives were endangered and billions of pounds siphoned away, the whistles did not sound. Whether too many looked the other way, or worse, whistleblowers were silenced, the lesson was the same. The message is now loud and clear. Legislative protections are important, but not enough. For the good of us all, this culture of silence must be ended” (Mangwana, 2013, para 13).
January 15, 2014 | Unregistered CommenterJoy Aquino

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