New US whistleblowing ruling prompts heated debate
By Rebecca Lowe
A new whistleblowing ruling in the US that rewards people who take complaints directly to regulators has provoked a fierce debate among business groups, politicians and transparency advocacy agencies.
The proposal, announced last month by the Securities and Exchange Commission (SEC), is designed to encourage employees with potential complaints to step forward without fearing retaliation in the workplace.
To qualify under the regulations, individuals who take grievances directly to the SEC could collect up to 30 per cent of any financial penalties incurred over US$1m.
The proposal has provoked a backlash from corporations and business groups, including the Association of Corporate Counsel (ACC), who believe whistleblowers should be obligated to approach their companies before seeking redress externally.
They claim the new rules will undermine corporate compliance, reward wrongdoers and encourage potential whistleblowers to delay claims to maximise their bounty. However, the rules do contain financial incentives for people to bring up grievances via their employer first.
Defending the decision, SEC Commissioner Elisse Walter said: ‘If we want our whistleblower programme to work, we must encourage potential sources of information to come forward. And I believe we cannot do so without assuring those who fear for their jobs, their livelihoods and their families’ welfare that they have an avenue to come directly to the government. After-the-fact relief for retaliation alone is simply not sufficient.’
Susan Hackett, Vice President and General Counsel of the ACC, disagreed, describing the ruling as a ‘Pandora’s box that, when opened, is likely to create new and even unanticipated harms rather than promoting better reporting of potential problems’.
She added: ‘Listening to the SEC staff’s overview of the rule today, we are unclear if they understand what the impact of this rule will be. They are assuming that offering whistleblowers money to come forward will yield better results without imposing disproportionate costs for companies, shareholders and the very compliance programs that ACC members have spent decades building.’
The ACC believes the ruling could encourage corporate misconduct to ‘fester’, with people disinclined to risk losing out on an award by approaching the company first or alerting the SEC too early. The Association also fears premature leaks, when an SEC complaint is made public before its veracity is confirmed.
To address these issues, the ACC has asked the SEC to consider a formal review of the awards programme 18 months after the rules are implemented.
Concerns have also been raised from a more unexpected quarter. Speaking to the International Bar Association (IBA), Nancy Boswell, President and CEO of Transparency International USA, warned that the new rules may be open to abuse:
‘Given the importance of whistleblowers to combating fraud and corruption, it is appropriate to provide incentives to report wrongdoing and protection from retaliation,’ she said. ‘However, there is legitimate concern that the new rules may lead some whistleblowers to circumvent robust and effective internal reporting procedures for personal gain.
‘While it appears that the SEC has attempted to craft the rules carefully to avoid such circumvention, it should periodically reassess how the rules operate in practice to make sure compliance programs aren’t undermined.’
‘There is legitimate concern that the new rules may lead some whistleblowers to circumvent robust and effective internal reporting procedures for personal gain'
President & CEO, Transparency International USA
Other organisations dedicated to open communication have proved more supportive. Public Concern at Work (PCaW), an independent UK whistleblowing charity, believed the ruling would improve, rather than undermine, corporate compliance structures.
Speaking to the IBA, PCaW Legal Director Shonali Routray said: ‘This is a good decision for companies and shareholders as it means companies will have a greater incentive to ensure robust internal compliance systems that encourage individuals to speak up – especially as there is greater regulatory oversight.'
However, Routray stressed that discretionary financial awards would be preferable to mandatory ones to avoid whistleblowers taking advantage of the system to make themselves rich. In the UK there is no comparable bounty law, but whistleblowers can win compensation for any losses they suffer via the Public Interest Disclosure Act (PIDA).
‘It should be noted that there is little or no employment law protection for workers in the US, so a rewards system maybe appropriate in that context. Our view is that it is imperative that society thanks whistleblowers for speaking up in the public interest, but financial rewards should be discretionary.
‘Mandatory rewards may cause problems as they may lead to situations where some individuals turn a blind eye to the wrongdoing, in order to allow the spoils to grow. In that respect it can be dangerous rewarding greed with greed.’