Fraud

Responding to Whistle-blower Allegations

Kroll Global Fraud & Risk Report 2016/17

Companies rely on information from whistle-blowers as one of the key methods of fraud detection. The latest Kroll Global Fraud and Risk Report survey showed that 44% of identified fraud was reported by an internal whistle-blower. Given that 79% of fraud involved current, former, or temporary employees, internal staff are a key line of defense in the fight against fraud. It is therefore surprising that a relatively large number of respondents with whistle-blower programs already in place (36%) do not intend to revise, modify, or expand them in the next 12 months.

Kroll-Responding-Whistle-blower-Allegations.jpgThe Princeton Dictionary defines “whistle-blower” as “[a]n informant who exposes wrongdoing within an organization in the hope of stopping it.” However, there is no consistent definition of the term in the corporate world. Depending on the definition of “whistle-blower” within a company’s policies, an internal whistle-blower at one organization may not be considered a whistle-blower at another organization. It is therefore important for companies to have the term clearly defined in their policies.

Companies are inundated with advice on how to set up whistle-blower hotlines, and their reactions to allegations of wrongdoing vary widely. Many companies grapple internally about which function should handle whistle-blowing reports. Unfortunately, there are no uniform standards for handling these allegations, which means the crucial initial triaging phase isn’t always managed in the most effective way.

The initial response to whistle-blower allegations is critical, and many things can (and do) go wrong at this stage. For example, in a recent Kroll investigation in the UAE, a CEO wanted to immediately, and personally, interview the alleged wrong-doer after being informed of an allegation. Fortunately, after discussions with the Kroll team, the client heeded our advice and decided against this approach. Interviewing a suspect before all facts are known risks giving the game away and possibly alienating a potentially loyal and innocent employee.

The first 24 hours after a whistle-blower comes forward are critical. A senior response team should be formed, comprised of individuals who are not directly associated with the employee whose conduct has been questioned. Companies need to have policies and procedures in place to respond to allegations through set mechanisms, which should be flexible enough to allow for rapid escalations of truly material matters. A swift response can also help limit financial and reputational damage and, where appropriate, recover or avoid losses.

The initial evaluation should assess the credibility and gravity of the alleged issues. It is key to establish these factors before launching a full investigation.

Allegations are frequently difficult to verify due to insufficient information being provided by the whistleblower. For example, a whistle-blower may allege that a procurement manager has taken cash from suppliers, but it may be difficult to prove that a “brown envelope” has been given to the manager. In one such case, email analysis successfully showed wrong-doing, but was unable to corroborate the specific accusation of kickbacks. This case was further complicated by another common feature: the whistle-blower was seriously underperforming and was not a credible or well-intentioned witness.

Sometimes, whistle-blowing allegations simply cannot be substantiated, making it very difficult to ascertain whether the whistle-blower is acting in good faith. Kroll recently investigated a whistle-blower who was considered to be a credible and well-respected source by senior management. The individual was convinced that a sales manager was colluding with a key distributor. However, a thorough analysis of the alleged wrong-doer’s lifestyle revealed nothing out of the ordinary and a forensic review of emails did not disclose any evidence of impropriety.

It is important to think about the following questions when triaging or assessing allegations:

How specific are the facts in the allegations?

How serious are the consequences, if the allegations are true?

How full and frank is the disclosure of the whistle-blower?

Is it helpful to have a third party assess credibility for the record?

How do these allegations fit with other whistle-blower allegations?

If an investigation is deemed necessary, it is vital to execute it in phases and, where possible, conduct a covert credibility assessment first. After the data has been analyzed, appropriately qualified personnel can start to conduct fact-finding interviews with individuals who may know about the alleged wrongdoing. Typically, interviews with a suspected wrong-doer are the final step.

Investigating whistle-blower allegations is often complex; it is crucial that the credibility of the whistle-blower is examined as part of the process, as their allegations may be without merit.

To further complicate the investigation process, even where a company has invested in resources to encourage staff to speak up and use whistle-blower hotlines, some cultures have a negative view of whistleblowing. For example, employees in Russia and other countries may be hesitant to come forward.

Whistle-blowers often choose to remain anonymous when making a report due to cultural reasons, fear of retaliation by their peers or the company, or for other reasons altogether. Despite legal protections, in some jurisdictions the consequences for genuine whistle-blowers are often severe and long-lasting. Although companies need to maintain whistleblowers’ right to remain anonymous, this anonymity generally makes investigations more difficult.

Corporate culture is an important part of creating an environment in which employees feel free to raise an issue without fear of retaliation. Companies are encouraged to include anti-retaliation language in their policies and to inform their employees that no form of retaliation will be tolerated for any report made in good faith. Our investigations have repeatedly revealed that a key issue for employees deciding whether to come forward is whether they have confidence in their company’s internal whistle-blower process.


Learn more about fraud and risk statistics and trends -- as well as innovative risk management strategies and best practices -- in Kroll’s annual Global Fraud & Risk Report 2016/17.

Global Fraud & Risk Report

Businesses saw a significant rise in fraud and risk incidents during 2016. Although companies have taken significant strides toward building resiliency, more is needed. We have expanded the scope of this year’s Report—it’s now the annual Kroll Fraud & Risk Report, breaking out specific cyber and security threats to better reflect the growing challenges that our clients are facing around the world.

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