Whistleblowing: (Financial) incentives and external reporting in focus

Whistleblowing remains high on the agenda of authorities, and therefore companies, need to watch – and continuously adapt to – new developments. In some regions, authorities are looking at additional incentives to encourage whistleblowing, and speed up the consideration and resolution of concerns that are raised. Other regions with relatively new whistleblowing frameworks are focusing on the implementation of new processes for managing reports, and the creation of new structures such as external reporting channels.

Recent data from the Freshfields whistleblowing survey (which collected views from over 2,500 individuals across 13 industries and five regions) found that respondents increasingly believe that if financial incentives are available to reward whistleblowing, this would have an impact on their organisation.

The Freshfields whistleblowing survey found that in the United States, financial incentives are generally viewed as positive forces. For example, 43 per cent of United States respondents felt that financial incentives would encourage employees to abide by their employers’ rules (up from 19 per cent in 2020).

In the US, federal agencies have made clear that they will increasingly use whistleblower programs to incentivize self-disclosure and cooperation.

In March, the Department of Justice (DOJ) announced a significant new nationwide DOJ policy—a whistleblower rewards program designed to create financial incentives for individuals who report misconduct to the DOJ (for more information see here).

Earlier this year, the US Attorney’s Office for the Southern District of New York (SDNY) (a division of the DOJ located in Manhattan, the US financial capital) launched its own SDNY Whistleblower Pilot Program, which offers non-prosecution agreements (NPAs) to individuals who self-disclose their own misconduct under certain circumstances — a significant departure from past DOJ policy (for more information see here). The Northern District of California (which includes the tech-heavy Silicon Valley) is similarly piloting a program that offers NPAs to wrongdoers who self-disclose to authorities and cooperate against more culpable targets.

Other federal agencies including the Securities Exchange Commission, the Financial Crimes Enforcement Network, and the Commodities Futures Trading Commission have, in parallel, launched or updated their own whistleblower programs, encouraging cooperation with sizeable financial awards and other forms of protection from prosecution.

Going forward, companies will need to keep in mind that globally, regulators are increasingly providing additional incentives for whistleblowers to come forward and offering them greater protection for doing so.  As has always been true, a robust and effective corporate compliance program is the best defence to aggressive DOJ enforcement.

In other jurisdictions, the Freshfields whistleblowing survey found that whilst respondents believed that financial incentives for whistleblowing would have an impact on their organisation, respondents fell into two camps – those who view the use of financial incentives with caution and those who are more receptive to the positive role financial incentives can play in a whistleblowing framework. 

At present in the UK, regulators do not offer financial incentives to whistleblowers. Instead, they encourage employees to blow the whistle to them and promote the ways that employees can do this – for example, some regulators have a fairly simple online reporting form that can be used for raising concerns. This does have some success: for example, the Financial Conduct Authority received over 1,100 new reports in 2023. However, some UK regulators are also cognisant that financial incentives may encourage individuals to speak up more. For example, in recent months, the new Director of the Serious Fraud Office in the UK has said that he thinks that whistleblowers should be paid and that he considers it has “many benefits”. 

Also in the UK, in 2023, the UK Government published a policy paper launching a review of the whistleblowing framework, aimed at examining the effectiveness of the framework in meeting its original objectives. The review will inform Government policies on the development and improvement of the existing whistleblowing regime. The scope of the review does not expressly include financial incentive payments, but is sufficiently broad that such payments could be considered as part of the review. The review was expected to conclude by the end of 2023, but it appears to be ongoing and there is no firm timing commitment for it to conclude.

In Continental Europe financial incentives are currently not in the focus of legislators and regulators, and it seems unlikely that this will change in the near future. Although the number of whistleblower reports would probably rise with the introduction of financial incentives, there are concerns that this might be misused and do harm to corporate culture. 

The focus in the EU is therefore not on the question of introducing financial incentives, but rather on the implementation of the new requirements of the EU Whistleblower Protection Directive and the respective implementing legislation at national level. Companies have had to review and revise their existing processes based on the new requirements. One point that is particularly worth emphasising here is that the Whistleblower Protection Directive provides for the establishment of external reporting channels: Whistleblowers can choose whether to report internally or directly externally to the competent external body. 

In Germany, where the law implementing the EU Whistleblower Protection Directive into national legislation entered into force only in July 2023, the central external reporting channel has been established at the Federal Office of Justice (Bundesamt für Justiz, BfJ). The newly established body is intended to serve as a one-stop shop for whistleblowers who wish to report externally. Until now, direct external reporting was generally not possible in Germany; instead, the internal reporting channel had to be contacted first. This changed with the introduction of the EU Whistleblower Protection Directive.

First experience shows that the number of external reports to the newly established body is constantly rising. In July 2023, i.e. the month in which the German implementing law came into force, the external reporting channel at the BfJ had already received over 40 reports. Since then, the number of reports has risen continuously and the BfJ is expecting to receive about 3000 external reports per year. 

The incoming reports are currently processed by 11 employees, some of whom, as former judges and public prosecutors, have special expertise in analysing and assessing whistleblowing. However, the BfJ only has a pre-filtering and distribution function. The incoming reports are checked for plausibility and then passed on for further investigation and prosecution either to the responsible supervisory or law enforcement authorities or, in appropriate cases, to the company concerned. The full investigation and sanctioning of any reported misconduct are therefore not the responsibility of the BfJ, but remain the duty of the competent authorities. However, in order to check the plausibility of the incoming report, the BfJ can, among other things, request information from the companies involved.

With the establishment of the new external reporting channel and the rising number of external reports companies should, therefore, be prepared to increasingly receive requests for information from the BfJ. At the same time, it can be assumed that in future more investigations will be initiated by supervisory and law enforcement authorities following an external report forwarded to the authorities by the BfJ.

How can companies respond?

Overall, companies should closely watch these developments as these might lead to increasing numbers of whistleblowing cases and to changes in the behaviour of whistleblowers. In order to encourage employees to make use of internal reporting channels rather than external ones, companies should consider creating their own incentives – which may not necessarily be financial incentives – for example:

• Implementing simple and easily accessible internal reporting channels; 
• Proactively promoting these internal reporting channels;
• Promoting a speak-up culture; 
• Emphasizing the steps that can be taken to protect the confidentiality of the whistleblower’s identity, potentially including allowing anonymous reporting; 
• Emphasizing the status of the internal reporting channels allowing these units to investigate potential misconduct separately and successfully, even if management is (potentially) involved in the relevant misconduct; 
• Creating transparency regarding the internal procedure; 
• Offering the option to report directly to the parent company in larger corporate groups;
• Creating amnesty regulations for whistleblowers (within the scope of legal possibilities);
• Strengthening trust through carrying out fair investigations and offering effective whistleblower protection in practice.

At the same time, companies should also keep an eye on developments at EU level. The Network of European Integrity and Whistleblowing Authorities (NEWA) was established bringing together public authorities responsible for the protection of whistleblowers. The various external reporting bodies in the EU Member States use this forum to meet, exchange experiences and develop best practices in handling external whistleblower reports. In this respect, it remains to be seen to what extent this exchange will lead to a harmonisation of procedures of the external reporting bodies in all EU Member States – which would be desirable from a corporate perspective – and to what extent best practices with regard to cooperation between external reporting bodies and companies will emerge.