Incoterms_® and Commercial Contracts

One of your most important tasks as an ethics and compliance officer will be to organize a group-wide system allowing employees to share concerns, seek advice, and report suspected violations of your company’s ethical and compliance rules. This Chapter discusses the essential ingredients of an effective internal whistleblowing system. A prime objective is to ensure that the system is compatible with the various national legislations of the company’s countries of operation, including data privacy laws. Other key matters to consider include whether to permit anonymous reporting, whether to make reporting voluntary or compulsory, and how to deal with false or malicious claims.

WHY ESTABLISH AN INTERNAL WHISTLEBLOWING SYSTEM

How can a responsible company become aware, in a timely fashion, of actual or potential wrongdoing – such as corruption, fraud, and accounting improprieties – by one of its employees or agents?

As a matter of fact, it is other employees within the enterprise who are most likely to become suspicious or aware of any proposed or actual unlawful activity, and who are therefore in the best position to bring it to the company’s attention. Internal whistleblowing has been proven to be a major source for the detection of fraudulent behaviour in businesses.

A study conducted by an international accounting firm revealed that more than 25% of the occurrences of fraud discovered in the enterprises surveyed came to light thanks to a whistleblowing system put into place by these companies.

Source: KPMG Forensic, “Profile of a Fraudster”, Survey, 2007, p. 26.

However, potential whistleblowers will not report internally if they fear reprisals from within the company or suspect that management may condone or may even have participated in (or approved) the illegal activity. In that event, the company’s ability to take appropriate remedial measures will be severely impaired. If it is not perceived as ‘safe’ to blow the whistle internally, a conscientious employee will either remain silent and allow the illegal activity to occur or, alternatively, will report the wrongdoing to government authorities or the press.

[Page110:]

It is, therefore, very much in the interest of an enterprise to establish, as an integral part of its integrity programme, a whistleblowing system, under which employees (and, to the extent possible, any of the enterprise’s agents, suppliers and customers) will feel comfortable reporting concerns without fear of retribution. Early reporting, identification, and resolution of potential issues are critical to the success of the process.

Key ICC resources on whistleblowing

The ICC Rules on Combating Corruption (2011) recommend that each enterprise should consider including in its corporate compliance programme, measures “offering channels to raise, in full confidentiality, concerns, seek advice or report in good faith established or soundly suspected violations without fear of retaliation or of discriminatory or disciplinary action”.

Such reporting, notes the Rules, may either be compulsory or voluntary and it can be done on an anonymous or a disclosed basis. All reports in good faith should be investigated and an enterprise should, as per the Rules, establish and maintain proper systems of reporting procedures.

Similarly, in 2008, ICC issued Guidelines on Whistleblowing (2008) aimed at helping companies establish and implement internal whistleblowing programmes and encouraging them to put in place, within their organization and as an integral part of their integrity programme, a whistleblowing system, commensurate with their size and resources.

ESSENTIAL INGREDIENTS OF AN EFFECT IVE WHISTLEBLOWING SYSTEM

Once a company has clearly established a policy providing for employees to report concerns about potential violations of corporate policies, including the company’s anti-corruption policy, and once it has appointed high-level qualified personnel of undisputable repute to be in charge of the management and administration of the whistleblowing system, its next step will be to define a clear road map indicating what employees should do when they have a concern. The objective is to encourage employees to report promptly and in a way with which they feel comfortable.

The road map should take into account the following provisions:

1. Variety of reporting channels: Employees need a number of available reporting channels within the business unit where they can take a concern (for example, to a supervisor, a company legal counsel or to the next higher level of management). This is important because the concern may involve a fellow worker within the same business unit or possibly the employee’s own manager. In this regard, a company would be well advised to appoint at least one corporate ombudsperson, outside and possibly also within each major business unit, who is committed to dealing fairly and objectively with all concerns reported to him or her.
   [Page111:]
2. External reporting: In addition to, or as an alternative to, an internal reporting process, a company might also consider designating a firm, external to the group, specialized in receiving and handling whistleblower reports, to which an employee could also report directly. Such firm should be independent, of undisputable repute, and should offer appropriate guarantees of professionalism and secrecy.
3. The employee should feel comfortable with the reporting channel used: Employees should be encouraged to use the reporting procedure with which they are most comfortable. Often reporting to someone within their own business unit can be most effective in arriving at a prompt resolution of an issue. Also, reporting channels should reflect the languages spoken in the different countries of operation.
4. Voluntary or compulsory? Prompt reporting of a concern about a possible violation of the company’s ‘no-bribery policy’ and other anti-corruption policies is crucial. Delays are likely to allow a problem to grow. Often the potential problem can be averted or the damage minimized if the issue is raised early enough. Companies are therefore increasingly adopting, if the legislation of the country of operation allows it, an affirmative duty to report or, at the very least, are strongly encouraging employees to report any serious concerns and are rewarding them for doing so.
5. Anonymous reporting permitted? Although ‘open’ reports are preferable and should be encouraged, consideration should also be given to allowing an employee to report anonymously (since otherwise some very serious matters could remain unreported). Evaluating the good faith of whistleblower charges, however, is made more difficult when dealing with anonymous allegations. While anonymous complaints should not be rejected out of hand (because whistleblowers may well have legitimate concerns about reprisals), it is also true that the validity of allegations can be determined much more readily when the identity of the whistleblower is known. In addition, company employees against whom allegations are made are also entitled to fair play. Their rights to defend themselves may be impaired when they have to respond to allegations by unidentified accusers.
6. Confidentiality protected: Every reasonable effort should be made to respect a reporting employee’s desire for confidentiality consistent with the requirements of carrying on an effective investigation. Also, there are circumstances in which the company must disclose the concern and the findings of its subsequent investigation to appropriate management personnel or government authorities. It is not possible, therefore, for an enterprise to guarantee confidentiality in all circumstances.
7. Prohibition against retaliation: Company policy must clearly prohibit any form of retribution or retaliation against an employee who reports information about a policy concern in good faith. Appropriate disciplinary action should be taken against any employee who fails to abide by this prohibition. This is a critical element of a successful whistleblower policy, as employees will not report concerns (particularly those relating to those in more senior positions) when they fear their position in the company may be compromised. This does not, however, exclude a company from taking appropriate
   [Page112:]
   disciplinary action (and in such circumstances, they should certainly do so) if an employee abuses the policy by making false accusations against another employee.
8. If no corrective action taken: If the reported problem recurs or if the employee feels that no corrective action has been taken within a reasonable time, he or she should be encouraged to raise the matter with one of the other contacts listed in the company guidelines. Clearly, if the situation seems to be recurring or has not been resolved, the employee should raise it again.
9. Process for dealing with concerns that are raised: A company needs to differentiate between various problems raised by whistleblowers and establish a process for each. This involves classifying the concern to determine what needs to be done next, assigning appropriate personnel (from ethics and compliance, finance, legal or human resources) to investigate, determining appropriate corrective actions (for instance clarifying the issues, providing education and training or improving procedures) and, where warranted, taking disciplinary action appropriate to the breach. The latter may range from a warning to suspension or an outright dismissal. Each matter should be diligently tracked to ensure prompt close-out. If allegations relate to people at the top of the company, outside investigators should likely be retained.
10. Acknowledgement of reports and feedback: In order for the process to be fair and objective, and be seen to be so by all those involved, all whistleblower reports should be diligently acknowledged, recorded, and screened, and the company should also provide feedback about the outcome of the investigation to the employee who reported the concern as well as to the person whose behaviour was reported.
11. Periodic reports to the Board: Significant cases identified by the whistleblowing system and statistical summaries relating to the operation of the system should be regularly reported to the Chief Executive Officer (or other top executive) and the Board of Directors.
12. Compliance with laws: Finally, the company should at all times comply with all legal requirements relating to the establishment and implementation of whistleblowing procedures, as well as those related to providing notice to relevant governmental authorities. Companies need to be aware that, in certain jurisdictions and cultural environments and, as a result of data protection and labor law concerns, legal restrictions have been imposed on whistleblowing procedures which will have to be complied with.

PROBLEMS IMPLEMENTING AN INTERN AL WHISTLEBLOWING SYSTEM

The experience of companies in establishing internal whistleblowing systems has shown that concerns reported by employees generally fall into one of four categories:

1. Real problems: First, there is the reporting by an employee of a concern that turns out to be a real problem, which the company is then able to deal with in a responsive and responsible manner. The reporting of genuine problems is likely to happen often enough to make the existence of an internal whistleblowing system worthwhile.
   [Page113:]
2. Perceived problems: Often an employee, on the basis of limited information, will in good faith report a concern which, upon further investigation by the company, turns out not to be a problem. In these circumstances, it is most important to communicate the conclusions back to the reporting employee in order to preserve the credibility of the programme and to ensure there is no perception of a cover-up by the company.
3. Employee grievances: Employees may try to utilize an internal whistleblowing system as a means of securing redress for personal employee grievances that have nothing to do with a breach of laws or of the company’s Code of Conduct. These grievances may include issues relating to promotion or compensation or other job-related disputes with managers or fellow employees. These should be appropriately dealt with by some other process, usually within the human resources department. Initially, a large number of calls may fall into this category, but the problem should decrease rapidly as employees come to understand the real purpose of the whistleblowing process.
4. Abuse of process: Finally, although this doesn’t happen very frequently, complaints made under an internal whistleblowing system sometimes constitute a clear abuse of the process. First, where the local legal system provides protection for whistleblowers, employees may invent or exaggerate a claim to try and protect themselves from an anticipated lay-off or discharge. Due care needs to be taken to diligently investigate these complaints in order to identify their true purpose. Second, false or malicious reporting of a problem can be used by an unscrupulous employee who has a personal grudge (or some other form of personal animosity) against a manager or another employee or for other improper personal purposes. Appropriate disciplinary action needs to be taken against such an employee to effectively deter this type of abuse.

For a whistleblowing system to work effectively, it is important that the ombudsperson (if there is any such function in the company) and others responsible for administering the internal reporting system be of indisputable integrity and have the requisite knowledge, experience, and training to be able to distinguish between these various categories of employee complaints and to deal with them appropriately. Selecting highly respected local employees to perform and explain the whistleblowing system, the reporting process, and the ombudsperson role, will contribute significantly to the success of the programme, particularly in countries where there is a cultural sensitivity with regard to reporting concerns about fellow employees.

PROBLEMS WITH WHISTLEBLOWING

It is important to recognize that a whistleblowing system will inevitably raise tensions in a company. For the whistleblower, there may be conflicting feelings of loyalty towards fellow employees and a sense of obligation to broader corporate interests, as well as to the overall public interest. Potential whistleblowers are likely to be in a very sensitive and potentially precarious position vis-à-vis those whose conduct they criticize. They can be harassed or ostracized by their fellow employees
[Page114:]
and are susceptible to being demoted or fired by hostile managers. Quite often there will be disagreements about the propriety or the legality of the actions challenged by the whistleblower, and his or her views may prove to be incorrect. There are also some countries (such those in Central and Eastern Europe) where the memory of state-organized eavesdropping and the historical stigma attributed to whistleblowing still prevail.

Notwithstanding all of these concerns, it is very much in the corporate interest to establish an internal whistleblowing system and to deal pro-actively with concerns raised by whistleblowers.

Summary of the essential ingredients of an effective whistleblowing system

1. Establish an internal disclosure programme (‘whistleblowing’) which encourages or, if legally permitted, requires employees to identify concerns within the company about what is or could be a possible violation of the company’s anti-corruption policy.
2. Not limit the reporting to information relating to actual breaches of the policy, but extend the programme to concerns or suspicions relating to actions which may lead to illegal acts in order that they can be prevented.
3. Require that concerns be reported promptly, again so that the company may stop the illegal activity before it occurs.
4. Establish effective mechanisms, such as hot-lines and ombudspersons, that can deal confidentially with employee reports and with which an employee will feel comfortable.
5. Guarantee that there will be no retaliation or repercussions regarding issues raised or information provided in good faith.
6. Encourage reports to be made openly but allow them to be made anonymously (since a company would be unwise not to pay attention to anonymous reports) and make best efforts to honor an employee’s desire for confidentiality.
7. Establish a process within the enterprise for effectively dealing with concerns that are raised.
8. Take appropriate steps to respond to problems that are identified – including education, modifying processes and disciplinary action, when required – and maintain statistical records that identify trouble spots.
9. Provide periodic reports and summaries to the top of the company or to the Board of Directors and comply with laws (including those relating to external reporting to relevant authorities).
10. Ensure that, whenever possible, the reporting employee and the person accused receives appropriate feedback.

-

About the author

Michael Davies joined General Electric Canada as Associate General Counsel and, in 1987, was appointed Vice President, General Counsel, and Secretary of the company. He retired in 2002. For almost ten years, he was Chair of the Bribery and Corruption Committee of the Canadian Council for International Business and in that capacity has been an active member of the ICC Commission on Anti-corruption. He was one of the founders of Transparency International and was, for many years, a Director and Vice Chair of the Canadian Chapter of Transparency International.

---