Thursday 6 January 2011
Revealing the truth - Nicola Laver
Whistleblowing has increased as a result of the financial crisis, but laws to protect those who speak out are often lacking, which makes Wikileaks a welcome development, for some.
Wikileaks has put whistleblowing on the agenda in dramatic style. The revolutionary website has established itself as the means for disclosing information that governments and major corporations would rather keep under wraps. In doing so – most notably revealing record-breaking bundles of classified information relating to the Iraq and Afghanistan – it has attracted a barrage of criticism.
Nevertheless, the site – which bills itself as ‘a multijurisdictional public service’ and has published more than 75,000 US military intelligence reports about the war in Afghanistan and, more recently, 400,000 classified US documents about the Iraq War and 250,000 State Department cables – has its fervent supporters. The executive director of the First Amendment Coalition, for instance, has described the site as a ‘journalistic necessity’.
But the Pentagon doesn’t see it that way. It says Wikileaks broke US law by releasing many thousands of government documents. Whether Wikileaks will face legal action remains to be seen. In response to an initial e-mail, Timothy Matusheski, the US lawyer who says he is acting for Wikileaks, said: ‘I will answer some questions.’ The questions put to him include: what laws are the site supposed to have broken? Is Wikileaks on safe ground under US laws or should it be concerned? Are lawyers and attorneys in the US adequately protected by whistleblowing laws? Since the initial exchanges, of course, the heat on Wikileaks has risen somewhat, so perhaps unsurprisingly, Matusheski has not yet answered.
|Whisleblowing in a crisis
Whistleblowing claims by workers rose drastically during the global recession, long before Wikileaks hit the headlines with its Afghanistan and Iraq disclosures. As thousands of businesses accepted the unavoidable necessity of shedding jobs, some employees recognised that they had little to lose in speaking out about perceived wrongdoing within their organisations.
The SEC, for example, received information that sales of ‘structured notes’ were so important to the Bank of America's brokerage business during the financial crisis that they were allegedly pushed out to clients on the basis that they represented an ‘extremely conservative’ risk. A BoA employee alleged that he was told his job could be under threat unless his staff sold more structured notes.
And whistleblowing claims are continuing: in early November 2010, HSBC and JP Morgan were the subject of a lawsuit filed in New York by trader Eric Nalven, who claims the banks ‘artificially depressed the price of silver dramatically downward’ in a scheme that netted the banks ‘substantial illegal profits’.
Some incidents of earlier whistleblowing hit the headlines afresh during the financial crisis, and with good reason. Paul Moore, former head of regulatory risk at HBOS between 2002 and 2005, tried to warn his superiors of the bank’s reckless and excessive consumer lending – 'I felt like a man in a rowing boat trying to stop the Titanic heading for the iceberg.' – and he ended up being sacked. He sued for unfair dismissal under the UK’s whistleblowing legislation – the Public Interest Disclosure Act 1998 (PIDA). The bank eventually settled his claim, paying substantial damages, but Moore had to agree to a gagging order. This was only breached when Moore was able to reveal the full story under cover of Parliamentary Privilege as part of an investigation by the Treasury Select Committee.
The penalties levied on companies for abusing a whistleblower are severe: compensation in the UK for a successful whistleblowing claim is unlimited with the potential to pay out huge levels of damages. But the odds are stacked against the humble worker. Moore, who has said he felt ‘like David taking on Goliath’, was represented by Peter Hamilton, a barrister practising in financial services who does not believe the PIDA is sufficient to protect people in Moore’s position.
He says: ‘I don’t suppose any legislation could prevent an employer firing someone, subject to the right to compensation, but once you’ve lost your job because you’ve been a whistleblower it’s very difficult to be reemployed and I’m not sure there’s a realistic answer to that problem.’ But can he envisage some workable changes to the law? He says: ‘From a practical point of view you could say in relation to financial services, for example, the Financial Services Authority [FSA] should take a much tougher line – that the whistleblower should have the right to go to the FSA before the matter is raised internally. The FSA really didn’t cover themselves in glory on this issue.’
‘The FSA just has to keep improving its act and in that regard I think it’s very important that when the FSA becomes the Consumer Protection and Markets Authority it should be subject to the parliamentary ombudsman to whom all whistleblowers can appeal after all their other remedies have failed.’
Another high profile whistleblower is Robert Dougall, a former senior healthcare executive, who successfully appealed against his 12-month jail sentence for bribery. He blew the whistle on his employers, DePuy International (a subsidiary Johnson & Johnson) over £4.5m bribes paid to surgeons in Greece to encourage them to use the company’s products – and then cooperated with the SFA in its investigations into the company’s activities.
‘Legal professional privilege should always trump any other issue, even public interest - maybe especially public interest’
Richard Sallybanks of BCL Burton Copeland, who acted for Dougall, has his doubts as to the effectiveness of the PIDA. He says: ‘The PIDA provides a framework which protects workers who have raised genuine concerns about misconduct from facing reprisals. However, whether or not such workers are protected sufficiently in practice is likely to depend on the extent to which the relevant organisation is, save for the potential for rare or isolated incidents of malpractice, otherwise law abiding and ethically sound.’
He adds: ‘In cases where the malpractice is endemic and driven from the top of the organisation, it is questionable whether the protections in the PIDA can ever be effective in encouraging the internal disclosure of corporate wrongdoing.’ But what about lawyers who blow the whistle?
There have been rumblings in some quarters of the UK legal profession that the PIDA’s exclusion of disclosures that are covered by legal professional privilege (LPP) is a major flaw as far as lawyers are concerned. Under PIDA, individuals making certain disclosures in the public interest are protected from victimisation. But to claim protection, the disclosure must satisfy the test of ‘qualifying disclosure’ – such as the belief that a criminal offence has been or is likely to be committed; an organisation is putting the health and safety of employees at risk, or is endangering the environment.
But disclosures are not protected if the information is covered by LPP. And the lawyer who feels morally responsible to make a public interest disclosure as a result of communications received from a client is not therefore protected by the PIDA. In addition, there is a statutory duty on lawyers to report some matters, primarily under the Proceeds of Crime Act and terrorism legislation. So in such cases, a lawyer choosing to blow the whistle on an organisation it suspects of wrongdoing will have legal protection.
The UK courts have recently affirmed the inherency of LPP. In its legal judgment the court held: ‘The privilege was that of [the solicitor’s] client and could not be broken or waived without the client’s consent. The solicitor’s duty of disclosure could not override the entitlement of the client.’ While the case involved issues of LPP and confidentiality in relation to whether a solicitors’ firm should disclose its documents to professional indemnity insurers, the client’s privileged position was judicially held sacrosanct.
This crucial issue of LPP faces lawyers on both sides of the Atlantic in relation to whistleblowing. Hamilton says: ‘Legal professional privilege is one of the great cornerstones of the legal profession (and the legal system), enabling lawyers to provide unambiguous, objective, not necessarily welcome advice and so I think that legal professional privilege should always trump any other issue, even public interest – maybe especially public interest.
‘The only exception is where the lawyer is party to the iniquity and then, of course, there’s no privilege.’ The iniquity exception describes the principle that communications between a lawyer and his or her client that are in furtherance of crime or fraud are not protected by LPP – a necessity in the interests of justice.
And because privilege exists in order to promote justice, it is lost where the information conceals wrongdoing – whether or not the professional lawyer is aware of such wrongdoing. So once the lawyer becomes aware of the wrongdoing after giving legal advice, the information is no longer covered by privilege. SOCA is the UK’s financial intelligence unit that analyses reports made involving money laundering and other suspected cases of proceeds of crime. Employees of businesses in the ‘regulated sector’ (which includes lawyers involved in a financial or real property transaction) for the purposes of the Proceeds of Crime Act 2002 have a legal duty to report knowledge or suspicion of such matters either to the employer’s money laundering reporting officer, or direct to SOCA.
And if a lawyer working outside the regulated sector receives information and is at risk of committing a ‘prohibited act’ such as being party to money laundering, he or she is obliged to report the matter to SOCA requesting consent to undertake the ‘prohibited act’. More than half of such reports made each year are made by lawyers: in the period October 2008 – September 2009, 3,094 consent ‘Suspicious Activity Reports’ were made by lawyers.
But do the general principles of LPP that exclude lawyers from PIDA protection where they make disclosures place lawyers in a vulnerable position? Cathy James, acting director of Public Concern at Work (PCAW) says: ‘I don’t think lawyers are particularly vulnerable because they have a professional duty [of LPP] and this should dictate the way they behave. They do work under strict confidentiality rules but I think this is absolutely paramount.’
She says if a situation arose ‘in which a client’s position and professional position were in jeopardy I would have a personal decision to make and quite often the way in which that works in practice is that you decline to act, you don’t breach the privilege. And unfortunately they’re the sorts of difficult decisions lawyers have to make every day. You have to preserve your professional duty.’
Lawyers are agreed that in-house lawyers are in a particularly difficult position. The Corporate Governance Committee of the Commerce & Industry Group (the Law Society's recognised body for in-house lawyers) says in-house lawyers can be under a greater obligation than other staff to act as a whistleblower within firms – despite a shortfall in their protection, with much depending on how seriously an organisation takes corporate governance.
‘the fact that SOX requires organisations to have whistleblowing policies can only be a good thing’
Public Concern at Work
Nina Barakzai, the committee’s acting chair, explains: ‘There is certainly less statutory protection and more risk for them in terms of their employer’s response. Many organisations already have formal procedures which may be used to raise queries and the preference is always to work within organisational controls. Often, the legal team is part of the formal route for raising concerns, so in such instances, in-house lawyers are specifically identified as being corporate governance guardians and will have organisational controls in place to support them as they carry out such a role.’
Cathy James explains: ‘We have heard it said anecdotally that it is common practice for organisations to ensure sensitive issues are considered by in-house counsel because then it’s covered by legal professional privilege and if there is a dispute, this would not have to be disclosed – but this is about the way in which privilege is used by corporations and not about PIDA.’
Would she welcome changes in the law? She says non-executive directors including legal advisers should be better protected by employment law generally and specifically under PIDA. She explains: ‘This is really important in connection with strengthening the ability of non-executive directors to effectively challenge the executive board. There should be a robust legal safety net to ensure non-executive directors know they are covered by PIDA.’
|Exposing illegality in the US
The issue of LPP is a somewhat greyer area in the US – where the inherency of LPP is not entirely sacrosanct. Richard R Renner, legal director of the National Whistleblowers Center in the US explains that in the UK, ‘while the attorney-client privilege is an important component of our legal system, it is a limited privilege’. He explains: ‘The purpose of the attorney-client privilege is to encourage clients to be open and honest with their lawyers so that they can get the correct legal advice about what to do.
‘The privilege does not apply to communications in which the purpose is to figure out how to perpetrate a crime or fraud without getting caught. This is called the ‘crime-fraud’ exception to the attorney–client privilege. If a company is trying to evade the law and hide that evasion by claiming the attorney– client privilege, the attorney should be free to disclose the client's fraud, and indeed, should have an obligation to do so. Naturally then, the attorney should be protected from adverse actions against his or her employment on account of the attorney's decision to uphold the public interest by disclosing a crime or fraud. This has been a controversial issue among legal ethicists, and it may take some time for all states to conform their professional standards.’
As a multijurisdictional nation, US law frequently differs from state to state – with the issue of LPP a prime example: some states such as Minnesota and Illinois take the line that in-house lawyers are simply performing their professional duty in exposing illegality, while others (California for instance) take the view that lawyers who lose their job after blowing the whistle can sue for wrongful discharge – and, importantly, can rely on privileged materials in support of their claims.
So, how has this worked in practice? In 2005, general counsel Brian Kidwell was fired a few weeks after e-mailing management about his company’s (Sybaritic Inc) 'pervasive culture of dishonesty'. The high court in Minnesota held that under the ‘job duties exception’ where an employee’s job is to report illegality the mere fact of making a report is insufficient to show he intended in good faith to blow the whistle. Yet Kidwell did his homework before taking action: he researched the relevant law and felt he had a good chance of winning his case. But he discovered that Minnesota state does not adequately protect in-house counsel whistleblowers – and it is not the only state that fails to do so.
‘The United States has a most uneven patchwork of whistleblower protections’
Richard R Renner
National Whistleblowers Center
Steven Richman, a partner at Princeton firm Duane Morris, and communications officer for the IBA’s Professional Ethics Committee says: ‘Traditionally, regulation of attorneys in the United States is a matter of state regulation. While the ABA promulgates ‘model rules’, the applicable rules governing attorneys are those of the states in which they are licensed to practice. In some cases, there is an argument to be made for pre-emption of inconsistent state rules where there is federal regulatory authority, which would arguably alleviate the disparity in the particular context.’
A recent ECJ ruling has revisited the issue of LPP as far as in-house counsel in the EU are concerned – with implications for private practitioners. In the case of Akzo Nobel’s recent tussle with the European Commission, the court held that privilege does not extend to the advice of in-house lawyers; that they are not sufficiently ‘independent’ of their employers for their advice to qualify for LPP in the same way as lawyers in external law firms. While the case applied only to antitrust and defence cases, there’s little to suspect the judgment may have been different in other circumstances.
The implication is that the judgment leads the way for potential whistleblowing claims by in-house counsel who suspect that an organisation is committing wrongdoing, knowing that advice and documentation are not covered by LLP.
And the upshot is that companies could resort to consulting private law firms if they decide this is the safest approach where they are concerned about the watchful eyes of the regulators, bypassing their own in-house counsel when they see fit. And law firms are welcoming the opportunities this presents, encouraging businesses trading in the EU to use external lawyers for advice where LPP affords greater protection.
The US judiciary recognised the need some years ago for tighter protection for employees in the financial services industry, reflected in the Sarbanes Oxley Act of 2002 (SOX) that tightened up many aspects of regulation of the industry in the aftermath of various financial scandals – and the level of fines and compensation available in the US shows how seriously these issues are taken.
But it has its limits: while Cathy James makes the point that ‘SOX is limited to financial malpractice, and only applies to those organisations listed on the US stock exchange’ she says it’s slightly confusing because it requires ‘anonymous confidential’ reporting lines to be established and these two words are not synonymous. She adds: ‘These provisions are also in direct conflict with the EU data protection authorities who are not prepared to endorse anonymous reporting.
‘That said any legal requirement will make organisations look at their reporting systems and think about how they can protect staff who speak up, so the fact that SOX requires organisations to have whistleblowing policies can only be a good thing.’ But can the UK take lessons from SOX? Nina Barakzai says: ‘The SOX process has a number of limitations and its focus on rules rather than principles has resulted in a significant increase in administrative obligations, without necessarily improving corporate governance. In addition, it has raised a number of serious privacy concerns that have not really been resolved, although there are workarounds to address these privacy concerns.’
There are already other forms of protection to whistleblowers in the US in varying degrees. As well as SOX, the Securities Exchange Act also provides for a financial reward to an individual who provides information to the SEC regarding insider trading but the provision not been particularly effective.
The US has recently made further moves to protect some in-house lawyers: since July this year, in-house lawyers in the financial services industry have a greater incentive to blow the whistle now the Dodd-Frank Act has been passed, which protects all employees engaged in providing consumer financial services.
Under the Act, where a whistleblower’s ‘original information’ leads to an SEC enforcement action that produces sanctions of more than US$1m, the SEC must pay the whistleblower a bounty of between ten and 30 percent of that amount. Some cushion indeed for whistleblowers who fear losing their jobs. And yet while this will undoubtedly be a major incentive to potential whistleblowers, there are ethical issues. For instance, large companies invariably have in place robust ethics and corporate compliance procedures that would include facilitating a culture of trust whereby employers will have the confidence to report wrongdoing internally.
But where there is the prospect of ‘earning’ a tidy sum from the SEC, could the trust element between employer and employee seriously be undermined? Lawyers are invariably in a prime position to possess ‘original information’, potentially placing them in an ethical dilemma.
David E Kovel, a partner at New York firm Kirby McInerney, says: ‘Under US law, the attorney– client privilege and other ethical canons designed to encourage honest communication between lawyer and client would normally prevent lawyers from reporting the conduct of their clients to law enforcement authorities. There are some exceptions which might apply in the whistleblower context, but, as a rule, a lawyer reporting a client's conduct would be a very problematic whistleblower. In the context of the False Claims Act (an analogous statute designed to allow whistleblowers to report government procurement fraud), the Department of Justice refuses to review evidence that is ‘tainted’ with privilege.
The Department of Justice's position is that this evidence cannot be used in court anyway and viewing it risks disqualifying the lawyer from the case.’
The moral is, lawyers tempted to try to take advantage of the SEC bounty should exercise extreme caution, preferably taking legal advice before taking any action.
On the plus side, the new law indirectly offers potential work to private practitioners: under s922 any whistleblower making a claim anonymously must be represented by counsel. This offers a niche area of legal work for some law firms.
So while lawyers will be looking to see just how effective this new legislation will be, the prevailing inconsistency of laws in the US means even those whistleblowers, like Kidwell who did as much research as possible into his legal position, may still come unstuck in the end. This leads to a great deal of uncertainty.
Renner sums it up: ‘The United States has a most uneven patchwork of whistleblower protections. We now have good protections for employees in public accounting and consumer financial services, transportation safety, nuclear and environmental industries. We have weak protections for federal employees and employees complaining about hazards to worker health and safety. Our new health care reform protects whistleblowers who raise concerns about improper denial of health insurance, but not for employees who raise concerns about bad medical practices that are killing patients. It is a most uneven patchwork.’
Nevertheless, the US is clearly moving in the right direction while, in the UK, not much has changed since the PIDA became law.
The major disclosures of classified documents by Wikileaks has undoubtedly prompted a wider international debate on the issue of whistleblowing – which is no bad thing given the poor state of existing whistleblowing legislation in other jurisdictions. Transparency International, one of the the world's leading non-governmental anti-corruption organisations, reports that various European countries including Bulgaria, the Czech Republic, Estonia, Hungary, Ireland, Italy, Latvia, Lithuania and Slovakia lack adequate laws to protect whistleblowers. But the Council of Europe makes clear that it recognises the importance of whistleblowing legislation and has issued ‘guiding principles’ for member states to follow when reviewing their legislation. So, in the absence of better protection for lawyers and senior personnel who instinctively consider it their moral and legal duty to blow the whistle, but fear they will not be protected under existing law, what is the alternative?
Could they go down the Wikileaks route? And have they started going down that road already? It’s difficult to know: while Wikileaks states that none of its sources has been exposed – could the force of the law change this in the future? A US federal shield law, to protect journalists from revealing confidential sources, has been under consideration for years. There is debate as to whether Wikileaks should be distinguished from mainstream news organisations and be protected under a shield law, particularly given the national security implications of some of its revelations. If Wikileaks is excluded from a future shield law, it may be forced to reveal its sources – lawyers and others choosing such a route will think again.
Nicola Laver is a freelance journalist. She can be contacted by e-mail at email@example.com.
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