Thu, Jan 9, 2014

Whistleblowing on the Rise

Whistleblowing cases reported to the Financial Conduct Authority (FCA) have increased by 35 per cent in the past 12 months, according to new information1 obtained under the Freedom of Information Act by Kroll, the global investigations firm.

  • Contacts to FCA whistleblowing helpline up 35 per cent in past year
  • UK whistleblowers responsible for one in six US tip-offs from abroad, more than any other country
  • Whistleblowers involved in one in three incidents of all cases where fraud was uncovered

Kroll found that between November 2012 and October 2013 the FCA received 5,150 contacts to its whistleblowing helpline compared to 3,813 in the same period the previous year.

The increased number of contacts is also resulting in a much higher number of new cases being created, in which actionable intelligence derived from whistleblowing is disseminated to departments within the FCA and other regulators and law enforcement agencies. The number of new cases has increased by 72 per cent in the third quarter of 2013 compared to the same period the previous year (254 in Q3 2013 compared to 148 in Q3 2012).

Separate analysis2 from Kroll reveals that whistleblowers from the UK were responsible for one in six (16 per cent) overseas tip-offs to the US Securities and Exchange Commission (SEC) in the last US fiscal year, more than any other country.

Kroll’s analysis of the SEC’s annual report on its whistleblower program reveals that of 3,238 tip-offs received in total in the past year, 404 (12 per cent) came from outside the US, a 25 per cent increase on the 324 overseas tip-offs last year3. Whistleblowers based in the UK were responsible for 66 of these.

The Securities and Exchange Commission (SEC) made payouts to four whistleblowers during this fiscal year including one award of over $14 million, the largest whistleblower payment to date under the Dodd Frank Act2. Kroll says that payouts such as these will encourage more whistleblowers to come forward to the US regulator in search of bounties, as the rewards on offer have no jurisdictional limits as long as the case has a negative impact on US financial markets.

Canada is home to the second largest number of overseas whistleblowers with 62 tip-offs, 15 per cent of all those from outside the US. Whistleblowers from China were responsible for 52 tip-offs (13 per cent), almost double the 27 they were responsible for last year. Russia was the origin of 20 tip-offs (5 per cent) and India 18 (4 per cent).

Kroll’s latest Global Fraud Report4 recently revealed that a whistleblower was involved in one in three incidents (32 per cent) of all cases where fraud was uncovered and in 41 per cent of cases that involved senior or middle management. Despite this, just 52 per cent of companies reported that they have invested in staff training around fraud and the creation of whistleblower hotlines.

The Department of Business, Innovation and Skills is currently examining whether the UK’s whistleblowing framework is operating effectively in today’s labor market5, including the issue of whether financial incentives would be appropriate in the UK whistleblowing framework. It has said it would welcome further research from the Financial Conduct Authority into the effectiveness of financial incentives in encouraging the exposure of wrongdoing as it believes the current evidence base is insufficient to consider introducing them.

Benedict Hamilton, a Managing Director at Kroll, said: “As companies increasingly invest in often risky emerging markets and more stringent regulation and guidance governing whistleblowing procedures is introduced, we believe cases of whistleblowing will continue to rise.

“The UK authorities are considering offering rewards to whistleblowers, as they are a very effective way of discovering fraud. The increase in overseas whistleblower tip-offs to the SEC shows the policy’s impact on international companies in particular. Those thinking about reporting corporate malpractice might be tempted to go to the US regulator rather than their own company, wherever they are based in the world, in the hope of receiving a substantial reward.

“This reinforces just how important it is for companies to implement robust whistleblower procedures so they can find out about any wrongdoing being carried out by their employees as early as possible. The earlier they find out, the quicker they can react in order to limit financial and reputational damage, and where appropriate, recover or avoid losses.”

Top 5 non-US sources of whistleblower tip-offs to the SEC, fiscal year 2013
Country Number of Tip-offs received  %age of all non US tip-offs from this country
 UK 66 16
Canada 62 15
China 52 13
Russia  20 5
India 18 4

1 Information obtained by Kroll from the Financial Conduct Authority under the Freedom of Information Act. The whistleblowing helpline was managed by the Financial Services Authority (FSA) prior to the establishment of the FCA.
2 Kroll analysis of data from the US Securities and Exchange Commission Annual Report on the Dodd-Frank Whistleblower Program, Fiscal year 2013, published November 2013.
3 Kroll analysis of data from the US Securities and Exchange Commission Annual Report on the Dodd-Frank Whistleblower Program, Fiscal year 2012, published November 2012.
4 Kroll commissioned the Economist Intelligence Unit to conduct a worldwide survey on fraud and its effects on business during 2012/13. A total of 901 senior executives took part in the survey from a wide range of industries, including Financial Services; Professional Services; Retail and Wholesale; Technology, Media and Telecommunications; Healthcare and Pharmaceuticals; Travel, Leisure and Transportation; Consumer Goods; Construction, Engineering and Infrastructure; Natural Resources; and Manufacturing. Respondents were senior, with 53% at C-suite level. Almost half (49%) of participants represent companies with annual revenues of over $500m. Respondents this year included 25% from Europe, 24% from North America, 23% from the Asia-Pacific region, 14% from Latin America and 14% from the Middle East/Africa. Please click for key findings and graphics, including a detailed look at the industries, regions and types of fraud covered in the report.