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Enormous Changes Seem Likely in Incentives to Whistleblowers in US
US Securities and Exchange Commission has unanimously voted to propose a whistleblower program to reward individuals who provide the agency with high-quality tips that lead to successful enforcement actions.
The public is asked to comment on the proposed rules. The SEC’s decision stems from those parts of the recent US financial reform legislation (the Dodd-Frank Wall Street Reform and Consumer Protection Act) that the SEC states in its November 3, 2010 decision does map out a simple, straightforward procedure for would-be whistleblowers to provide critical information to the agency.
The law established a whistleblower program that requires the Commission to pay an award to those who voluntarily provide the Commission with original information about a violation of the federal securities laws that leads to the successful enforcement of a covered judicial or administrative action, or a related action. Dodd-Frank also prohibits retaliation by employers against individuals that provide the Commission with information about potential securities violations.
The SEC stated - Background:
Whistleblowers will receive a percentage of successful SEC actions that lead to fines of at least $1 million. The SEC stated that in this proposal, we have taken several steps to address Congress’s suggestion that the Commission’s whistleblower rules be clearly defined and user-friendly.
First, to the extent possible, we have tried to adopt a plain English approach in writing the rules. Second, the SEC proposed Regulation 21F would provide a complete and self-contained set of rules relating to the whistleblower program. This means that in some places, we have proposed rules within the Regulation that largely restate key provisions of the statute. Although we recognize that this approach leads to some duplication between the statue and the rules, we believe that overall it will assist potential whistleblowers and add clarity, by providing in one place all the relevant provisions applicable to whistleblower claims.
In fashioning these proposed rules, the Commission has considered and weighed a number of potentially competing interests that are presented in implementing the statute. Among them was the potential for the monetary incentives provided to whistleblowers by Section 21F of the Exchange Act to reduce the effectiveness of a company’s existing compliance, legal, audit and similar internal processes for investigating and responding to potential violations of the federal securities laws. With this possible tension in mind, we have included provisions in the proposed rules intended not to discourage whistleblowers who work for companies that have robust compliance programs to first report the violation to appropriate company personnel, while at the same time preserving the whistleblower’s status as an original source of the information and eligibility for an award.
At the same time, the proposed rules would not prohibit a whistleblower in a compliance function from reporting information to the Commission where the company did not provide the information to the Commission within a reasonable time or acted in bad faith. Another important policy issue raised by the statute is the potential for the monetary incentives provided by Section 21F to invite submissions from attorneys, independent auditors, and compliance personnel who may attempt to use information they obtain through their positions to make whistleblower claims. This exclusion focuses on those groups with established professional obligations that play a critical role in achieving compliance with the federal securities laws.
Our proposed rules include certain exclusions for these professionals and others under the definition of “independent knowledge,” and we seek comment on whether the proposed exclusions are appropriate and whether they should be extended to other types of privileged communications or other types of professionals who frequently have access to confidential client information.
Finally, we have attempted to maximize the submission of high-quality tips and to enhance the utility of the information reported to the Commission. More frequent reporting of high-quality information promotes greater deterrence by enhancing the efficiency and effectiveness of the Commission’s enforcement program. To achieve this goal, the proposed rules would impose certain procedural requirements designed to deter false submissions, including a requirement that the information be submitted under penalty of perjury, and requiring an anonymous whistleblower to be represented by counsel who must certify to the Commission that he or she has verified the whistleblower’s identity.
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They are very different cases. What links them is the central role of whistle-blowing. In the one case, involving the U.S. pharmaceutical company, Pfizer, a U.S. federal jury awarded $1.37 million in damages to a former company scientist who was fired when she voiced safety concerns. In the other case, involving Exxon Mobil Corporation, the company will pay $32.2 million to the United States to resolve claims that some of its units knowingly underpaid royalties owed on natural gas, the Justice Department said.
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The International Chambers of Commerce has issued the first global standard on the creation of whistleblowing programs. The guidelines take into account the different cultural and legal environments that have inhibited a universal standard in the past.
Economic fraud destroys shareholders’ value, threatens enterprises’ development, endangers employment opportunities and undermines good corporate governance, says the International Chambers of Commerce (ICC). Sound whistleblowing programs are an important preventative measure to help combat corrupt behavior in the workplace.
ICC has issued guidelines on whistleblowing, the first world business organization of its kind to establish a global standard for facilitating the setup of these programs.
The following is a full list of Guidelines set out by the ICC:
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Global Survey of Workplace Hotline Reports Shows Significant Improvements in Some Key Industries – Data Obtained from 650 Companies
Detailed analysis of the use of workplace hotlines provides a key set of benchmark data for corporations in 10 industries. The analysis has been published by the Security Executive Council, a U.S.-based international professional membership organization. This is the Council’s second Corporate Governance and Compliance Hotline Benchmarking Report.
The analysis embraces more than 277,000 hotline incident reports from more than 650 organizations across all major industries over a five-year period. Rate data analyses across years are based on a four-year period from 2003-2006, as data volume for 2002 was too low for this type of analysis. Participants - or those who made reports - may be employees, former employees, vendors and the public. The data was masked to protect confidentiality.
This year’s survey covered the following industries: Agriculture, Forestry, and Fishing; Construction; Finance, Insurance, and Real Estate; Manufacturing; Mining; Public Administration; Retail Trade; Service Industries; Transportation, Communication, and Utilities; and Wholesale and Trade. The new study found that the retail trade had the highest rate of incident reports.
Over the last five years that data was being collected, the numbers show smaller organizations are reporting fewer incidents, whereas mid-sized to large companies are reporting more incidents over time. In 2006, the retail trade industry had the highest incident rate reported (the rate is determined by how many incidents are reported for every 1000 employees), and the construction, mining, and service industries had the lowest rate of incident reports. The authors emphasize these numbers are not meant to point to any specific conclusions. They could mean the retail trade industry has better reporting mechanisms, it has a better awareness program, or it simply has a higher rate of employee misconduct. The organization encourages companies to investigate all possibilities.
It also highly stresses the importance of awareness programs. Over the past five years, the numbers show that most employees found out about their company’s hotline by a poster, followed by the Intranet and another employee.
The survey also notes that 53 percent of the reports were made anonymously. A total of 65 percent of the incidents were serious enough to warrant investigation and 45 percent only required corrective action. The authors were surprised to find that those reporting incidents of corruption and fraud were the least likely to remain anonymous.
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A study was recently conducted, called Whistling While They Work, on whistleblowing in Australian public sector agencies. With funding from the Australian Research Council and support from Griffith University in Australia, results were found to show that whistleblowers can blow the whistle without necessarily a fear of reprisal, but only if they do it inside the organization and carefully, have realistic expectations, and organize their own support.
Starting in 2005 and continuing to the present, over 7,000 public officials from 118 public agencies in Australia were surveyed.
Clear Legislation and Trust Drive Effective Whistleblowing
Some employees are hesitant to blow the whistle. Overall, 71.4 percent of respondents had directly observed at least one of a wide range of nominated examples of wrongdoing in their organization, and 61.1 percent rated at least one form of wrongdoing as at least “somewhat serious.” Surprisingly, 28.5 percent of respondents who observed wrongdoing they considered “very” or “extremely serious” did not report it.
The level of trust in management, the degree to which the whistleblower may be penalized, and whether or not the report would be investigated play an important role in whether or not incidences are reported. The survey did show that there is little evidence to support a view of whisteblowers as disgruntled and embittered employees, driven to report by perverse personal characteristics. The decision to blow the whistle was most likely influenced by perceptions of the seriousness of the wrongdoing and belief that whistleblowing would serve some good purpose.
Comprehensive Internal Policies Are Significant, But Most Need Work
The majority, 97.1 percent, of respondents reported wrongdoing internally in their agency in the first instance, the report said. A similar number of public interest whistleblowing, 90.3 percent, ended internally as well. Only 9.7 percent of whistleblowing involved an external agency or the media at any stage. The researchers suggest internal whistleblowing reflects strong trust in management, and it also increases the obligation on agencies to manage whistleblowing well, and to protect whistleblowers.
It is interesting to note that in case study agencies, 48 percent of caseholders and managers surveyed believed that employees who report wrongdoing often or always experience problems as a result; however, survey results show that in reality, only 22 percent of whistleblowers said they were treated badly by management and/or co-workers as a result of reporting wrongdoing. By contrast, 56 percent of those whose reports were investigated indicated the investigation resulted in improved outcomes. Most bad treatment, if any, tended to come from management in the form of intimidation, harassment, heavy scrutiny of work, ostracism, or unsafe or humiliating work.
Agencies Should Boost Whistleblower Protection Procedures
In general, most managers had a high level of support for whistleblowing, the report said. However, 40 percent of managers still did not know if they and their staff were covered by whistleblowing legislation, and were more likely than non-managers to agree they needed more information and training about the legislation. The level of sophistication among agency whistleblowing legislation greatly varied. Agency internal disclosure procedures were typically weakest on procedures to do with support and protection of whistleblowers. A rather high percentage of agencies had no procedures to protect whistleblowers, 46 percent.
These survey results were taken from a draft report. In-depth analysis of the survey findings are available in .pdf form. The editor, AJ Brown, of Griffith University, encourages readers to send their comments on the draft. See the full draft report for more information.
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Fraud and unethical behaviour are facts of corporate life. But with a new European survey finding employees still fearful of the consequences if they blow the whistle, it is clear that many large firms could be doing far more than they claim to be doing to combat the problem.
The article about the survey was released by Management-Issues.com on June 4, 2007.
Ernst & Young interviewed 1,300 employees of multinational companies in eight Western European and five Central and Eastern European countries to explore their views on how anti-fraud measures were implemented in their organisations. The survey found there was almost total unanimity that whistleblower rights should be protected, but many employees fear reprisals, even loss of employment, if they do blow the whistle.
Nine out of 10 staff believe companies should have a code of conduct to address fraud, bribery and corruption. Yet only half of Central and Eastern European respondents and two-thirds of Western European respondents have such a code or are aware of one.
One in five said that fear of repercussions would prevent them from blowing the whistle if they did suspect a collegue was involved in unethical behavior.
Employees are "crying out for their employers to provide clarity and encouragement for them to act positively in the interests of the company," said Ernst & Young's David Stulb. " Employees want strong codes of conduct and make high ethical demands on companies in return. Regrettably some employers are failing to persuade staff they feel the same."
The article notes there are huge variations across countries concerning willingness to report unethical behavior. Overall, French employees are the least likely to report suspicions of fraud, whereas British employees are the most willing.
Ultimately, the responsibility lies with the company. "Good education and awareness programs will help but in the final analysis it is how the company and its leadership behave that sets the standard for the whole organisation," Stulb said.
For the full report and methodolgy click here.
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What external control mechanisms are most effective in detecting corporate fraud? To address this question, authors Alexander Dyck of the University of Toronto’s School of Management, Luigi Zingales of the National Bureau of Economic Research, and Adair Morse of the University of Michigan’s School of Business studied all reported cases of corporate fraud in the U.S. (over 230) in companies with more than 750 million dollars in assets between 1996 and 2004. In their paper Who Blows the Whistle on Corporate Fraud? for the National Bureau of Economic Research, a New York-based economic research organization, the authors find that fraud detection does not rely on one single mechanism, but on a wide range of often improbable actors. Their findings include:
On who detects fraud at companies
On employee disincentives to blow the whistle
On the use of monetary incentives for whistleblowing
For the full paper and methodology visit NBER's website.
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A recent report by RCC Risk Communications Concepts for the European Parliament entitled, "Whistleblowing Rules: Best Practice; Assessment and Revision of Rules Existing in EU Institutions" examines the history, context, and the strengths and weaknesses of current whistleblowing approaches of EU Institutions. Then, drawing upon its study of whistleblowing policies in both EU and non-EU states, the report presents a benchmark list of 18 "Best Practices,", which it measures against existing EU policies. While the benchmark was published for the purpose of EU reform, the 18 practices are an excellent tool for measuring and improving the effectiveness of whistleblowing policies in other institutions and companies.
Explanation of Benchmark
raises serious doubt about the effectiveness of the system, even where parts were outstanding. Currently the EU Staff Regulations reach an overall average of 43 % – on the first glance not so far from an acceptable 50 % - however with three elements at only 1/5 points. The situation has to be rated as clearly below minimum standards, if one considers that the rules fail (2/5 points or less) on two thirds of the criteria. That means, on two thirds of the criteria current rules and practice are clearly below what has to be expected as against the benchmark. Only 6 out of 18 criteria are clearly in the acceptable region, none is outstanding.
In order to improve,
- next all marks of 2/5 should be addressed. These need to be improved to an overall “pass” (equal or better than 3/5);
With this strategy and understanding the complexities of changing the Staff Regulations, an overall “pass” should be achievable within one year (by 2007). The necessary cultural improvements can be expected to a certain extent even throughout that first year, because the process will have to be taken very seriously. Beyond that it will take much longer to build up a host of positive experiences for all, which in turn will influence the underlying culture. An overall mark of at least 66 % (~50% improvement) should be aimed for and seems achievable within 3 years. Better marks than 75% will only be possible once there is trust in safe internal risk communication. Trust needs repeated positive experiences and time to build up. Along this ambitious schedule this can be possible within 5 years.
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UPDATE, June 7, 2006: The New York Times reported that newly released company records show that Guidant Corporation drafted a detailed letter in January 2005 to physicians disclosing the electrical flaws in its defibrillators and its intention to pull back devices not yet implanted into patients. The letters, however, were not sent and the defibrillators continued to be implanted. These records challenge Guidant executives defense last year of their decision not to tell doctors about significant device defects, citing concerns that doing so could have exposed patients to risks from unnecessary device replacement.
UPDATE, April 27, 2006: The New York Times reported that the Heart Rythm Society, which represents implant device specialists, called for sweeping changes in how the medical device industry and government oversee implanted heart devices. It stongly urged companies to use outside experts to help them decide when to issue alerts about potential product safety problems, recommended ways of collecting product performance data, and proposed methods for standardizing how doctors and patients are made aware of problems.
Newly released court documents are shedding light on a case that raises questions about the ethical obligations that medical supply companies have to their customers – doctors, and, by extension, their patients. The company has now responded publicly, but behind today’s headlines is a story that raises critical ethical business issues.
Guidant Corporation, a leading manufacturer of heart defibrillators, has cautioned doctors to check the voltage on certain implantable defibrillators after the company received reports of defective devices. This is the latest development in a case that was featured in a March 10, 2006, U.S. Senate Judiciary Committee hearing on potential new legislation that would prohibit corporate executives from intentionally distributing defective products.
On March 8, 2006, the New York Times reported that a Guidant consultant, Dr. Richard N. Fogoros, had told the company that he believed it had an ethical responsibility to inform doctors of the defects found in one of the life-saving heart defibrillators the company manufactures. His concerns related to a different problem with the defibrillators than the the one addressed on March 13 by Guidant, but his warnings, just like today’s announcement, go to the heart of the question of how early a medical supply company should warn doctors when there is evidence of a product defect.
Memos from Dr. Fogoros challenge Guidant’s decision not to publicize flaws on the basis that it believed patients would face a greater risk from replacement surgery than they did from the units themselves. It appeared that Guidant did not go public because it did not believe it had a sufficient number of cases of defects.
Dr. Fogoros argued in memos back on May 18, 2005, that while Guidant’s decision was statistically defensible, the company had violated a “sacred obligation” that it had to doctors by interjecting its medical judgment for theirs. “Neither the doctor nor the patient consider themselves to have signed up to have Guidant dictate any treatment plans,” he reasoned. Furthermore, he wrote, the situation presented Guidant with a clear conflict of interest, which would predispose it to divulge product malfunctions only when “absolutely necessary.”
Dr. Fogoros, according to the report in The New York Times, added that “[The conflict] is obvious for all to see….This means that when a tragedy occurs our decisions will be viewed in the harshest light possible, without any objective consideration of the statistical niceties supporting our actions.”
Dr. Fogoros stressed in his memo that while he believes Guidant’s products to be extremely dependable, he worried that the company’s use of numbers to defend its choices under circumstances which involve people’s lives would generate “bitter derision towards our protests that we were only acting with the patients best interests at heart.”
The memos were written just after Guidant informed a Minneapolis physician, Dr. Barry J. Maron, of a defect in its defibrillators, which could cause it to short circuit and malfunction (defibrillators use electricity to interrupt potentially lethal heart rhythms, and are usually replaced every five years). The company informed Dr. Maron of the problem after one of his patients died as a result of a dysfunctional Guidant defibrillator, one of seven patient deaths tied to the devices. Dr. Maron urged the company to warn doctors of the product’s potential risks, which it had known about for three years. When the company failed to do so, Dr. Maron and a colleague, Dr. Robert G. Hauser, notified other physicians and contacted the New York Times, which ran an article in late May 2005 about the defibrillators.
Since the article, Guidant has recalled over 10,000 implantable heart devices and is under inspection by the Justice Department and the Food and Drug Administration. Guidant has responded to criticism by insisting that its decisions are motivated solely by the concern for patients well-being (October 20, 2005 Guidant Press Release) and by creating an independent panel of experts to propose guidelines for physician communications (August 29, 2005 Guidant Press Release).
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Many cases of alleged malfeasance in the health sector come to light as a result of the courage of whistleblowers. The Global Corruption Report 2006, to be published by Transparency International on February 1, 2006, highlights numerous instances of massive corruption and unethical activities in the health area across the globe – time and again these cases would not have been discovered had it not been for whistleblowers. The latest example was reported on January 24, 2006:
Suit Accuses Medtronic of Bribing Doctors
UPI reported from Memphis in the United States that a whistleblower lawsuit accuses Medtronic (a leading U.S. manufacturer of healthcare products) of paying doctors thousands of dollars in consulting fees to get them to use its spinal implants. In court papers, lawyers say that one Wisconsin surgeon received $400,000 for a consulting contract that required eight days of work, while another, in Virginia, was paid almost $700,000 in the first nine months of 2005. UPI noted a story in the New York Times that reported that Jacqueline Kay Poteet, a former manager of travel services for Medtronic, filed the lawsuit in Memphis. Her job included making travel arrangements for doctors who traveled to conferences on Medtronic's dime.
UPI reported that if the Minneapolis-based company settles with the Justice Department, Poteet, who left her job because of disability in 2003, will get a percentage of the settlement. The Justice Department has not yet formally intervened in the lawsuit, although the Times said it has offered Medtronic a $40 million settlement. A company spokesman said that consulting arrangements with doctors are critical to improving its product.
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A section of the 2005 National Business Ethics Survey highlights the serious problems that now exist with regard to whistleblowing.
The NBES asked employees who reported misconduct what personal consequences they faced after they reported what they had seen.
The analysis by the NBES found that most striking is the fact that misconduct is widespread. More than half of all employees witness an act of misconduct each year (52% of respondents), and more than 36% of those who see it also witnesses at least two or more incidents.
One possibility that this finding suggests is that an act of misconduct does not always take place in isolation. If misconduct happens within employees' circle of associations, at least one-third of the time some form of misconduct is likely to happen again in the course of their work. Fifteen percent of employees who feel pressure to compromise the standards of their organization say this pressure is inflicted by their coworkers, and 94% of employees who feel pressure say that they have observed at least one type of misconduct.
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