Whistleblowing (WB): A powerful tool to deter and detect fraud and corruption

By: Kyriacos Savva*

Despite the significant increase in WB schemes in the international level (corporate and government level), the attributes and best practices of WB have not been, to my knowledge, an area of consistent interest, debate or research in Cyprus. In addition to this, Cyprus has not established an independent authority that receives and investigates complaints about WB and there is not any exclusive jurisdiction for such a task. (2013 National Report for Cyprus- Providing an Alternative to Silence: Towards Greater Protection and Support for Whistleblowers in the EU)

This article briefly presents the main attributes and areas of debate that might emerge upon the formulation and implementation of a comprehensive WB scheme in Cyprus. This is the first part of my article presenting the definition of WB and 1 out of 4 main attributes of WB, the identity protection of the whistleblower. In the next 2 publications of Accountancy Cyprus I will present the whistleblower protection (2), the reward element debate for WB (3) and the debate for the internal and external WB reporting mechanism (4) together with my proposal for formulation of a WB scheme in Cyprus.

Defining whistleblowing

WB is a powerful anti corruption tool aiming to promote accountability by allowing for the disclosure of information about misconduct by any person related to fraud and corruption while at the same time protecting the person against sanctions and retaliation of all forms (Banisar 2010). Taylor and Curtis (2010) support that after all, successful WB requires not only the initial report, which is the major step forward, but strong persistence in reporting. The whole point of the proposed whistleblower protections and financial incentives is to encourage whistleblowers (WBs) to step forward in the reporting procedure, which can be a lengthy, tiresome and truly harrowing experience.

One of the first modern uses was by US consumer activist Ralph Nader in 1971 who described WB as ΄΄An act of a person who, believing that the public interest overrides the interest of the organization he serves, blows the whistle that the organization is involved in corrupt, illegal, fraudulent or harmful΄΄. According to Jubb (1999), WB is a deliberate non-obligatory act of disclosure which gets onto public record and is made by a person who has or had privileged access to data or information of an organization, about a major illegality or other significant wrongdoing whether actual, suspected or anticipated to an external entity having potential and legitimacy to rectify the wrongdoing.

As insiders, WBs are sources of valuable information that neither the government nor the public can pinpoint and detect from oversight and regulatory systems. Thus, WB is an important means of improving government transparency and accountability (Philip, 1991). Wunderlich (2010) also suggest that insiders are in a unique position because they can alert employers or the authorities to problems before those problems escalate. No reporting by WBs, future incidents of massive corporate wrongdoings might never be revealed, or might have been revealed too late, as in Enron and Ponzi cases.

1. Identity protection of the whistleblower

Deloitte and Touch (2004) in a research end up with several reasons why whistle-blowing systems failed. Two of the main reasons deal with the anonymity of the whistleblower and the inability to have in place a truly independent (in form and in substance) reporting entity

Herzig (2011) observed that although, disclosing one’s identity may lead to negative outcomes for the individual in the short term, this effect would be tolerated by individuals who are morally confident with their reporting. Whereas, more individualistic individuals would be careful not to disturb their own career prospects and therefore be more inclined to use anonymous reporting channels to protect themselves, more idealistic employees would be less concerned about possible negative consequences and thus be less interested in anonymous WB.

Mahany (2009) in analysing the IRS WB Program, claimed that with so much potentially at stake, some lawyers have specialized in representing WBs. The audit practice was that when a CPA is approached by someone with information might automatically refer that person to an attorney. Mahany believes that a CPA may be better suited than most lawyers to perform much of the groundwork that such a claim entails, starting with helping potential WBs determine whether they have a valid claim to submit. WBs and their lawyer have to be very careful themselves not to expose their identity. Submitting a claim through their lawyer has substance only if it is done after they have been vigilant themselves about protecting the WBs’ identity. The hazard of WBs report to going public is very common despite using the proper channel to blow the whistle. The IRS policy protects the informant’s identity to the fullest extent permitted by law. However, practitioners are reminded to advice clients interested in the program, that upon a judicial proceeding the whistleblower may be identified and called to testify as a witness.

Erika Kelton, works in one of the few law firms devoted exclusively on representing WBs. In one of her recent articles in Forbes she pointed out the quality of work of the SEC ( US Securities and Exchange Commission)  officers in regards to WB. Αs part of its mission, the SEC Whistleblower Office has substantially educated SEC staff how to handle WB cases and sensitised them to the importance of protecting WB’s identities. In this respect, the US Dodd-Frank Act and SEC policies provided additional push towards protection of WB’s identity. The US law permits anonymous claims by allowing WBs to hire an attorney to file a claim. This would enable the lawyers to be aware of all the aspects of the case and the supporting documents available in relation to the additional evidence that might be required to file a complete claim.

A 2009 report of Transparency International ΄΄Alternative to silence: whistleblower protection in 10 European countries revealed that most countries in the study rely on a patchwork of legislation that falls under different sectors and existing laws. There is no single piece of legislation except in Romania, which passed a Whistleblower Protection Act in 2004. In UK, WBs are protected by the 1998 Public Interest Disclosure Act whereas public interest immunity can be used to protect the identity of WBs. Cconsequently, it is possible a case to be abandoned rather than be required to disclose WB’s identity.

In the other point of view, according to the Deloitte Forensic Center Report on WB, laws in certain European countries limit the use and discourage the emphasis on anonymity for WB reports unless independent counsel determined that the complaint has reasonable grounds. The confidentiality issue has posed significant problems for multinational US based corporations attempting to create WB hotlines in compliance with SOX.  The German law and the French Data Protection Authority did not approve McDonalds and Wal-Mart to establish hotlines in their local operations. Particularly, for France, the concept of anonymous reporting brings historical implications related to Nazi informants during World War II, and fears remain that an anonymous WB system would give a way of a system placing charges in this respect (Lipman 2012).

The Council of Europe Resolution 1729 entitled ΄΄The protection of WBs΄΄ passed in 2010 acknowledges that confidential disclosures fuel less mistrust than anonymous ones and suggests that the identity of a whistleblower should only be revealed with his consent or in order to avert serious and imminent threats to the public interest. It is important for Cyprus case, to thoroughly study the 2010 summit of the G20 and the special report issued: ΄΄Whistleblower protection frameworks, compendium of best practices and guiding principles for WB legislation΄΄ which is a crucial guide for countries not yet put forward such programs.

In Cyprus, the political and public perceptions of WBs are primarily politically influenced and there is frequent disclosure of information on the basis of anonymity. The issue raised is that the whistleblower is seen favourably or negatively, depending on the political motivation associated with his actions. The recent amendment of the Cyprus Public Service Law (Law 1/90) follows a wrong direction as it introduces the clause for submission of written reports relating to corruption and bribery. The written report means that WBs have to reveal their identity and this is a disincentive for reporting. This specific clause was also criticized by GRECO Evaluation Report for Cyprus.

Failure to keep the WB’s identity confidential may provide grounds and ΄΄incentives΄΄ for retaliating actions. If the identity is disclosed in any way prior to submitting the claim the success of the claim is jeopardised significantly and the whistleblower may consider stepping back due to potential retaliating actions. Upon failure of identity protection, then strong anti-retaliating legal protection and measures should apply although these cannot always be enough or provide absolute protection to the whistleblower.

 

*FCCA, CIA

Member of the Economic Crime and Forensic Accounting Committee of the ICPAC

Member of Transparency Cyprus

Associate member of the Association of Certified Fraud Examiners

Member of the Institute of Internal Auditors (IIA) of America and IIA Cyprus