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A Million for Your Thoughts

Bruce Carton | June 19, 2012

Statutes and programs that encourage and incentivize whistleblowers to report fraud are gaining traction in the United States and Britain.  

As the SEC's whistleblower program created in August 2011 under the Dodd–Frank Act wraps up its first year of operation, officials at the agency say they are quite pleased with the flow and quality of tips coming in from whistleblowers. They add that the first cash reward—which may be imminent— will be a milestone event that they hope will drive people to blow the whistle on fraud in even greater numbers.

Similarly, a program in the United Kingdom known as “SFO Confidential” launched by the Serious Fraud Office in November 2011 reportedly has phones at the agency “ringing off the hook.” What's so surprising about the flood of tips is that the U.K. program doesn't include any monetary incentive for informants to take their concerns to the SFO.

The current and likely future surge in whistleblower activity in the United States and Britain is an important development for companies on both sides of the Atlantic, which must ensure that their compliance and internal reporting functions are sufficient to meet this challenge. Many companies are currently reviewing internal policies for handing whistleblower and hotline reports to ensure that employees feel comfortable raising concerns and that those concerns that are valid are addressed in a sufficient manner.

Those are important steps since regulator-induced whistleblowing is likely to increase.  SEC officials say the program is already a success  with approximately seven solid tips coming in per day. This is true despite the fact that many employees are still not familiar with the program, and, after nearly a year, the SEC's whistleblower program has yet to pay out a penny. Sean McKessy, chief of the SEC's Whistleblower Office, said in late May that he is hopeful that the first payouts will be substantial and help motivate people who may be considering bringing a tip to the government. “People want to see the deliverable. And the deliverable, in our view, is paying people for good information,” he said.  

The SEC will not say when it expects to make its first whistleblower bounty payment. Word among the SEC whistleblower bar (yes, one has already taken shape!) is that the first award may be imminent and a “big deal.” Jane Norberg, deputy chief of the SEC's Office of the Whistleblower, declined to comment on that rumor during remarks at the Compliance Week 2012 conference, although she did say that the first award could not come soon enough.

U.K. Confidential

In Britain, while the incentives for whistleblowers are quite different— there is no Dodd-Frank equivalent to authorize the government to pay cash awards to whistleblowers—the results have been no less substantial.

Companies on both sides of the pond must be sure that their internal reporting systems and compliance procedures are ready for this snowballing level of activity.

Under SFO Confidential, the department pledges to protect a whistleblower's identity unless ordered by a judge to reveal it.  “If we do have to reveal your identity, we will always consult you and consider your needs before we disclose your identity,” the SFO said in a statement.  Whistleblowers can also remain anonymous and communicate with the SFO using a unique PIN or pseudonym. When he announced the new program, former SFO Director Richard Alderman said that the department even created a special SFO Confidential team staffed with trained personnel “sympathetic in dealing with any anxieties people might have about coming forward.” On a more ominous note, however, he later reminded corporations wrestling with the question of whether to self-report problems they encounter that a key consideration in the SFO Confidential era should now be whether the SFO will be approached first by the corporation or by a whistleblower.

Some U.K. whistleblowers are finding a way to cash in despite the SFO policy of not paying a bounty for good information. The recent news that perhaps the highest-profile whistleblower in U.K. history— ousted Olympus CEO Michael Woodford—will receive a £10 million ($15.6 million) settlement from the company on his claim that the company retaliated against him by firing him for blowing the whistle on corporate fraud may further embolden whistleblowers in the United Kingdom.

In June, the SFO disclosed that the SFO Confidential whistleblower hotline was producing more than 100 calls a month and a total of 350 calls in the first quarter of 2012. The SFO received an additional 288 tips via e-mail or regular mail during that period. The combined total of 638 tips coming in to SFO Confidential in the first quarter of 2012 tracks closely with the 7 tips per day reported by the SEC, despite the lack of any monetary incentive for whistleblowers in Britain.

The flood of new tips into the SFO comes at a difficult time for the department, as British austerity measures have resulted in steep budget cuts. The SFO's 2012-13 fiscal year budget has been cut by 40 percent to £32 million ($50 million). That may help explain why despite the hundreds of new tips, the SFO recently acknowledged that, to date, not one investigation has actually started as a result of the SFO Confidential hotline.

U.K. lawyers, such as Tom Stocker of Pinsent Masons, say that the delay in bringing investigations is simply due to the SFO needing time to sift through the many new complaints, and that investigations will inevitably follow. In any event, he says, the SFO Confidential hotline is already making an impact. "There is clearly an increased propensity for people and companies to report matters directly to the Serious Fraud Office, as well as the National Fraud Reporting Center and the Serious Organized Crime Agency,” Stocker says. “There is no doubt that businesses and people involved in bribery and fraud are at an increased risk of being caught as a result of the hotline."

Whistleblowers in Britian are not only bringing tips to the SFO, though. In fact, early reports from the SEC show that the United Kingdom and China were by far the largest sources of non-U.S. whistleblowers seeking bounties from the SEC's whistleblower program. In the seven-week period between early August 2011 (when the SEC's Office of the Whistleblower began operations) and the end of the SEC's fiscal year on September 30, 2011, nine whistleblowers from Britain reported information to the SEC. On their blog, thebriberyact.com, U.K. attorneys Barry Vitou and Richard Kovalevsky observe that the large number of U.K. whistleblowers bringing information to the SEC likely will cause a ripple effect back in the U.K. Whistleblower reports to the SEC “will almost certainly be fed back to U.K. prosecuting authorities and regulators and be a catalyst for parallel U.K. investigations,” they write.

In both the United States and the United Kingdom, then, whistleblowing activity in the area of corporate fraud is reaching new heights. This activity can reasonably be expected to surge even further once the SEC starts paying whistleblowers millions of dollars under Dodd-Frank, and the U.K. authorities begin pursuing the many expected cases resulting from SFO Confidential and under the new U.K. Bribery Act. Companies on both sides of the pond must be sure that their internal reporting systems and compliance procedures are ready for this snowballing level of activity, as it is likely that many whistleblowers will report information to the company before going to the government, or perhaps simultaneously.