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Whistleblowing. New legal obligations imposed on companies to ensure a healthy business environment

Amalia-Teodora Gogoci
Amalia-Teodora Gogoci
Adrian Șandru
Adrian Șandru

Context. What is a whistleblower.

Transparency International recently stated that in 2020, there is no justification on leaving the whistleblowers unprotected[1]. The message was addressed to both the authorities and the business environment.

A whistleblower is a person who provides information about certain illegal, incorrect or unethical conduct within a private or public company.

The same press release stated that recent global events have shown that the biggest challenges of today’s society can only be solved if mistakes or violations of the law are reported and the truth is exposed. The world is facing the combined threats of a global pandemic, global warming, exacerbated by systemic corruption.

For example, in Wuhan, China, in December last year, Dr. Li Wenliang made a report on what became to be known as COVID-19. He tried to warn people about this new virus, but he was threatened and intimidated by the authorities. Dr. Li got infected with the virus and died on 6 February, at a time when the world was facing the dangers of the virus and the prospect of a pandemic.[2] Thus, perhaps some of the effects of the COVID-19 pandemic could have been limited if certain facts had been reported on time and the required measures had been taken by the authorities.

Recently, on 28 April 2020, the U.S. Securities and Exchange Commission (SEC) announced the award of a USD 18 million reward to a whistleblower whose significant information generated a referral to the authorities that led to a major criminal investigation. The whistleblower repeatedly reported the matter to the company’s internal bodies before contacting SEC[3].

The whole international community emphasizes the importance of whistleblowers considering that the response of employers and authorities against crime must be very quick in order to have the expected effects.

In October 2019, the European Council approved the European Union Directive[4] on the protection of individuals reporting certain criminal acts.

The directive was created in response to a number of scandals discovered and made public in recent years by whistleblowers, including the Cambridge Analytica scandal and the Panama Papers, which highlighted the lack of protection for those trying to expose corporate crimes in the public interest.

Obligations of the Public Companies

The directive introduces a three-channels reporting system.

Private companies will be required to comply with this Directive, with the mandatory task of providing secure and anonymous communication channels to protect whistleblowers.

This whole process aims at organizations providing clear, easily accessible and transparent information about reporting channels in order to promote – and not discourage – reporting.

The deadline by which Romania will have to transpose the directive into national law will be met in 2021. We believe and hope that this deadline will not be exceeded as Romania has recently been fined EUR 3 million for failing to transpose another EU directive regarding money laundering.

According to the directive, companies will be required, among other things, to:

a) provide dedicated channels for receiving reports that are securely designed, set up and managed in such a way so as to protect the confidentiality of the identity of the reporting person and of any third party mentioned in the report, as well as to prevent access to communications by unauthorized personnel;

b) confirm receipt of the report, to the person making the report, within seven days of receipt;

c) designate an impartial person or department to take action subsequent to the reporting, who will maintain communication with the reporting person and, where appropriate, request additional information from the reporter and provide feedback;

d) provide feedback and respond to alerts’ reports and take subsequent actions in these reports within a maximum period of 3 months.

Regarding the provision of reporting channels, companies will be required to introduce a three-tier reporting system:

(i) first, employees should use internal channels to report non-compliant behaviour so that the employer can take the necessary action,

(ii) the second level will allow employees to report the facts directly to the “competent authorities” at EU or Member State level, and

(iii) the third level allows whistleblowers to make their notifications public through media or other means.

Who are the companies that will have to implement these reporting channels for whistleblowers?

All companies with more than 50 employees or more than EUR 10 million of annual turnover will be required to establish appropriate internal reporting channels. Companies with 250 or more employees will be required to comply within two years of the adoption of the Directive, once the national legislation transposing these obligations enters into force, while companies with between 50 and 250 employees have to comply within another two years after transposition.

Which persons will be protected by the new legislation?

The directive protects a wide range of people – essentially anyone working in the public or private sector who may have information about a breach of the law in a work-related context.

Reports may cover breaches of EU law, including money laundering and corporate taxation, protection of personal data, protection of the Union’s financial interests, food safety, environmental protection or nuclear safety.

Therefore, those protected are (among others): employees, public clerks, self-employed, volunteers, trainees, non-executive members and shareholders.

Protection also applies to those whose employment relationship has not yet begun, such as people who are in the stage of pre-contractual negotiations or even in situations where the employment agreement has ended.

People who help those who choose to talk about irregularities, such as colleagues or relatives who may be affected by a disclosure, are also protected.

Are there sanctions for non-compliance of companies?

The EU directive also includes details on sanctions. Companies that obstruct reporting or try to obstruct it will face sanctions.

The same applies if companies do not keep the whistleblowers’ identity confidential.

Retaliatory measures against whistleblowers will also be punished.

It is for the national law to establish in concrete terms what these sanctions will be and how they will be applied on a case-by-case basis to each company that does not comply with these provisions.

Recommendations

The adoption and implementation of a whistleblowing system is not only a recommendation for the private environment but will soon become a legal obligation to avoid major property sanctions.

Already, several EU countries have complied with the provisions of the directive. A draft law on the protection of whistleblowers has recently been announced by Sweden. The proposed law requires organizations to provide a reporting channel for people to sound the alarm about suspected misconduct related to the organization[5].

A recent survey[6] showed that many companies in countries such as France, Germany or Switzerland are already taking various measures to prevent or identify illegal or unethical actions at an early stage.

Compared to other European countries, the survey showed that almost 60% of the companies surveyed have implemented a system of whistleblowing, reporting channels, through which whistleblowers can report incorrect or suspicious behavior.

Major companies, including banks and insurance companies, have been most concerned with implementing these reporting channels.

There are various reasons for companies to introduce a whistleblowing system. These include the desire to avoid financial losses or to improve the company’s ethical and moral image.

The same survey showed that in 2018, about a third of the surveyed companies managed to recover more than 60% of total financial losses due to the whistleblowing system. The proportion of financial losses revealed by this system is not only influenced by communication, but also increases with the expansion of the target audience of the whistleblowing system.

In our experience, beyond any legal obligation, we have found that the implementation of effective communication channels for all members of a company, who are aware of certain facts that could constitute crimes, has, in addition to the obvious advantage of recovering or avoiding the prejudice brought to the company through non-compliant behavior (for example by retaining mitigating circumstances for the company related to the implementation and effective encouragement of the use of a whistleblowing system) and a multitude of non-equity benefits. These include a better understanding of compliance by employees, strengthening the ethical and moral image of a company, and promoting proper conduct.

Therefore, given that the directive establishes a minimum set of obligations, it is already advisable and soon mandatory to adopt policies that implement effective whistleblowing systems, addressing all members of the company and targeting a wide range of non-compliant conduct, as the beneficial effects of such a package extend beyond the avoidance of a significant property sanction imposed by the authorities.


[1] Press release Transparency International, available at: https://www.transparency.org/en/news/world-whistleblowing-day-in-2020-there-can-be-no-excuses-for-leaving-whistleblowers-unprotected#.
[2] Please see https://www.bbc.com/news/world-asia-china-51403795.
[3] Please see https://www.sec.gov/news/press-release/2020-98.
[4] Directive (UE) 2019/1937 dated 23 October 2019 on the protection of persons reporting infringements of Union law, available at: www.eur-lex.europa.eu.
[5] Please see https://www.regeringen.se/rattsliga-dokument/statens-offentliga-utredningar/2020/06/sou-202038/.
[6] Please see the study Whistleblowing Report 2019 made by EQS Group AG together with Chur University of Applied Sciences, available at: https://www.eqs.com/


Amalia-Teodora Gogoci, Senior Associate act | Botezatu Estrade Partners
Adrian Șandru, Associate act | Botezatu Estrade Partners

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