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Frédéric St-Martin: Legal incentives for whistleblowing in the private sector

As mentioned in a prior post, ex post protective measures for whistleblowers are insufficient on their own. Considering the economic benefits brought by effective reporting mechanisms, private firms need to adopt proactive measures that will avoid whistleblower victimization and lead to meaningful organizational change.

The Association of Certified Fraud Examiners (ACFE) estimated that on average, organizations lose 5 percent of their revenues to all types of fraud, and that tips are consistently and by far the most common fraud detection method.

The implementation of whistleblowing mechanisms is sometimes expressly required by law to enhance investor protection, transparency and corporate accountability. For instance, the U.S. (pdf) and Canada require publicly traded companies to implement whistleblowing mechanisms with respect to accounting and auditing related matters. They also require issuers to allow for the confidential, anonymous submission of employees’ concerns regarding questionable accounting or auditing matters.

In addition, the U.K. recently passed mandatory whistleblower requirements for larger banks and insurance companies.

The law may also encourage the implementation of whistleblowing mechanisms without expressly making it mandatory.

The UK’s Public Interest Disclosure Act (PIDA) provides greater protection for whistleblowers who disclose wrongdoing to enforcement authorities or the media when their employers have not implemented adequate reporting procedures or applied them properly. Incidentally, most UK employers chose to implement whistleblowing mechanisms.

Another powerful legal incentive enacted by the U.S. and the UK is to allow corporations to limit their liability from bribery-related offences committed by their employees or representatives. The implementation of whistleblowing mechanisms is part of the UK Bribery Act so-called adequate procedures that companies should have if they wish to avoid criminal prosecution for failing to prevent bribery.

Similarly, the U.S. Sentencing Guidelines (USSG) and the possibility to conclude deferred or non-prosecutorial agreements allow corporations to mitigate their liability by implementing effective compliance and ethics programs, which include anonymous, confidential systems where employees and agents may report and seek guidance regarding potential or actual criminal conduct.

U.S. publicly-traded companies may be further incentivized to adopt credible reporting mechanisms by the fact that whistleblowers do not necessarily need to report wrongdoing to enforcement authorities in the first place to be eligible for a reward under the Dodd-Frank Act. These firms may wish to take advantage of the fact that according to the National Business Ethics Survey (NBES), 92 percent of US workers prefer to disclose wrongdoing internally, and that doing so might even entitle them to a larger reward.

Therefore, in contrast with the commonly-heard argument that reward-based schemes undermine internal reporting mechanisms, the availability of financial rewards for whistleblowers could also incentivize corporations to adopt credible whistleblowing mechanisms to seek to ensure they are the first to find out about internal wrongdoing, and that they take appropriate action immediately.

Public procurement law may also provide meaningful incentives for private firms to adopt whistleblowing mechanisms. In Canada, to avoid or reduce the length of disqualification from bidding on public contracts at both federal and provincial levels, firms found guilty of certain criminal offences may be encouraged to implement compliance systems, which will often include credible mechanisms for reporting wrongdoing.

That being said, Canadian law does not currently provide sufficient incentives for private firms to implement appropriate whistleblowing mechanisms, particularly for those that are not publicly traded or that do not seek to contract with public bodies.

My study on Measuring the Effectiveness of Canadian Whistleblowing Law recommends that the Canadian federal and provincial governments consider incentives to implement whistleblowing mechanisms that would be applicable throughout the private sector, at least such as those provided by the USSG and the UK Bribery Act discussed above.

The final post of this series on whistleblowing will discuss the circumstances when disclosures of wrongdoing to the media may be considered legitimate, and the potential for abuse of applicable legal protections.  

*     *     *

The first post in this series is here, the second post is here, the third post is here, the fourth post is here, and the fifth post is here.


Frédéric St-Martin advises a Canadian financial regulator on corporate governance, anti-corruption controls, investigations and the implementation of whistleblower programs. He graduated from the inaugural IACA MACS 2012-2014 program summa cum laude and received the Best Master Thesis Award in December 2014. He also holds a Master in Law from the University of Montreal, as well as a Bachelor of Common Law and Civil Law from the University of Ottawa. He can be reached by email here and through linked here.

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