Compulsory Whistle-Blowing in EU Financial Markets
by
Sally Ramage
The Public Disclosure Act 1998 protects individuals who make certain disclosures of information in the public interest. It protects them from victimisation. It protects workers who are employees and also protects persons who
“(a) work or worked for a person in circumstances in which –
(i) he is or was introduced or supplied to do that work by a third person, and
(ii) the term on which he is or was engaged to do the work are or were in practice substantially determined not by him but by the person for whom he works or worked by the third person or by both of them…”
This would seem to only apply in the employment sphere however.
There is compensation to be claimed if an employee were dismissed because of whistle-blowing. If he or she finds that a criminal offence has been committed or that a person has failed to comply with any legal obligation, and he or she reports it, it will be deemed to be a protected disclosure against which that person has protection from dismissal. The disclosure qualifies for protection so long as “ the worker makes the disclosure in good faith, he reasonably believes that the information disclosed and any allegations contained in it, are substantially true, and he does not make the disclosure for purposes of personal gain”, according to the Public Disclosure Act.
Under the Act , allegations may be raised through a variety of procedures some being, to the employer, to a prescribed person, to a legal advisor or to a Minister of the Crown.
One example of an obligation to whistle-blow is found in the Pensions Act 1995, which states in section 48 that “ (1) If the auditor or actuary of any occupational pension scheme has reasonable cause to believe that –
(a) any duty relevant to the administration of the scheme imposed by any enactment or rule of law on the trustees or managers, the employer, any professional advisor or any prescribed person acting in connection with the scheme has not been or is not being complied with, and
(b) the failure to comply is likely to be of material significance in the exercise by the Authority of any of their functions,
he must immediately give a written report of the matter to the Authority.”
So, in auditing, in a case where a sample check is done for deductions from members pay for pension contributions, if you were to discover that those contributions were not paid over in the statutory time limit, you would have a duty to whistle-blow so that the matter must be reported to OPRA. Audit firms must have procedures for technicians who discover such matters to have it actioned immediately and reported to OPRA.
There has been a recent case in the courts in 2002, RBG Resources PLC v Rastogi and others, in which it was decided that a senior employee owes a duty to “blow the whistle” on a major fraud that was being perpetrated upon his employer by its directors. This duty to “blow the whistle” overrides his obligation of confidence.. The senior employee, the financial controller, was sued by the company RBG Resources PLC for breach of duty. The case came about as a result of 400 million US dollars having been siphoned off by the directors.
Auditors also owe a duty to report evidence of fraud and/or misconduct. The case of SASEA Finance Ltd v KPMG in 1999 made the decision that the nature and scope of the duty of auditors was such that they should blow the whistle on fraud discovered during the course of conducting an audit and that they should not wait until they have signed off the accounts but should blow the whistle immediately. SASEA Finance Ltd was a part of a group of companies which collapsed in 1992 in circumstances of a huge fraud carried out by one of its directors. KPMG was retained to prepare SASEA’a 1989 accounts and carried out this work in 1990, signing off the accounts in November 1990. The obvious reason why KPMG should have disclosed the fraud immediately was that the client might be spared further losses.
The net is closing, it seems, in areas of securities, insurance and banking. The EU Financial Instruments Markets Directive, adopted and in force since April 2004, must be implemented by EU member states by 30th April 2006. Essentially, investment firms must take all reasonable steps to obtain, when executing orders, the best possible results for their clients, taking into account price, costs, speed, likelihood of execution and settlement, size and nature or any other consideration relevant to the execution of the order. This is the way they must conduct business from April 2006. By another name, it is a means of fighting security fraud. It means that companies offering securities for sale must tell the public the truth about their businesses, the securities they are selling and the risks involved in investing.
This Directive interacts with the EU Market Abuse Directive 2003/6/EC. The UK’s Criminal Justice Act 1993 and Financial Services and Markets Act 2000 are not adequate to meet the new obligations of whistle-blowing in respect of authorised persons who arrange or execute a transaction in financial instruments. The UK Treasury and the Financial Services Authority, FSA, propose legislative and rule book changes, including compulsory whistle-blowing, by April 2005 with civil implementation instead of criminal.
Market abuse can be argued to be a risk of detriment to the general public and any directors found guilty of such market abuse should be disqualified under section 8 of the Directors Disqualification Act 1986, blunt instrument this may be. The company could be restrained from engaging in the specified business activity or restrained from carrying out all or part of its business activity which breaches the FSA proposed market abuse rules from 2005. This is arguably more expedient in the public interest., ie. cut the cancer out before it spreads or let it be an example to others. This could be imposed as well as the proposed FSA fine. It can be argued that a fine would just be factored into the company’s administrative costs and relayed back to the public.
Since this is a public interest matter, and with pensions mis-selling fresh in the public’s mind, are the meetings to agree the FSA rule changes going to be open to the public and the news media ? Will the civil actions of the FSA include the return of illegal profits ? What sanctions will there be for persons who repeatedly violate such new rules? What provisions will be made to ensure the professional security of the whistle-blowers in these situations ? Will the whistle-blowers be compelled to give evidence, or will their suspicions be anonymous? What is the written criteria for whistle-blowing ? Will the FSA advertise a list of all companies found deficient and discovered through periodic inspections, complaints and whistle-blowing ? Will the FSA report to the public which companies were found to have breached these new market abuse rules, the nature of the breach, the value of the breach and the sanctions imposed ?
The FSA must make clear the way in which this compulsory whistle-blowing on market abuse will operate with stated criteria for whistle-blowing, safeguards for whistle-blowers as well as clear criteria on what are valid suspicions, what will be treated as malicious, and what sort of whistle-blowing might constitute anti-competitive practices. This would save time, money and unnecessary business disruption by weeding out non-credible allegations as soon as the whistle-blowing occurs.
Finally, defamation issues must be mentioned. Will the Public Interest Disclosure Act 1998 protect market abuse whistle-blowers or can they be sued for defamation? Is the FSA a “prescribed person” under the Public Interest Disclosure Act 1998? Defamation cases are extremely expensive to defend and are not covered by professional indemnity insurance.
click below to