Whistleblowing in the corporate world

Stories of whistleblowing can be like espionage thrillers, shining light into dark corners of the corporate world where the stakes are high, writes Edwin Smith


For a practice that has historically been associated with confidentiality clauses and shadowy backroom deals, whistleblowing has enjoyed an unusual amount of publicity of late. Much of this, of course, is because of the sensational case of the American government security contractor turned whistleblower Edward Snowden. But the corporate world has seen the issue thrust under the spotlight too.

In the UK, the Financial Conduct Authority (FCA) has made an effort to set out its stall since superseding the Financial Services Authority in April 2013. Data released earlier this year showed that the average number of whistleblowing reports received by the FCA was 38 per cent higher than its predecessor. It had also opened 50 per cent more investigations.

Meanwhile, in the United States, where whistleblowers are eligible for financial incentives, the Securities Exchange Commission recently made its highest-ever award to a whistleblower, of $14 million. Even in China, a country, fairly or not, seldom associated with transparency and exemplary corporate governance, the powers that be have been eager to show they are paying attention to insider reports of fraud and other malfeasance.

This has been most clearly illustrated by the recent case of an anonymous whistleblower at the Chinese arm of the British pharmaceutical giant GlaxoSmithKline (GSK). What’s more, the story has a plot that would be at home in the pages of an airport thriller.

The chain of events began in January 2013 with an e-mail to GSK’s London-based chief executive Andrew Witty from an anonymous source, who had knowledge of the company’s Chinese operation. The e-mail alleged that the firm’s standard marketing practices in the region “constitute bribery in the vast majority of cases”, and detailed the way in which illegal payments were allegedly made to doctors and other officials in a bid to push the company’s products. It named specific doctors and hospitals, and quoted senior executives at the company and their private e-mail accounts.

GSK later revealed it had investigated the claims using external legal and audit expertise, and that some fraudulent behaviour had been identified. This, the company said, “resulted in employee dismissals and further changes to our monitoring procedures in China”. But GSK also said the investigation “did not find evidence to substantiate the specific allegations made in the e-mails”.

SEX AND BRIBERY CLAIMS

However, perhaps the most extraordinary thing about the incident was that, along with the allegations of bribery and other wrongdoing, the whistleblower’s e-mail included a sex tape – a video of GSK China chief Mark Reilly and his long­term Chinese girlfriend that was filmed in his apartment, which Mr Reilly says, was recorded without his knowledge.

In response, the company tasked investigator Peter Humphry with uncovering the identity of the whistleblower. But Mr Humphry and his American wife were later charged by a Chinese court for illegally buying information relating to their work. In August this year, the pair were sentenced to a combined total of four-and-a-half years in prison and fines of £35,000.

In another twist, Mr Humphry went on to reveal, in a statement released from prison before his trial, that when he offered to investigate the bribery allegations in addition to establishing the source of tape, GSK instructed him that the claims in question had been shown to be false.
However, when he finally saw the whistleblower’s original e-mail, just weeks before his own arrest, he described the allegations it contained as “totally credible”.

In an e-mail to colleagues he wrote: “I can only assume that they didn’t give them to us because they were afraid we would find the allegations credible and start verifying them… Actually I do believe every word of these allegations. They are totally credible.”

GSK, for its part, said that while wrongdoing by its employees in China had been uncovered, the perpetrators had not been acting on instructions from the company.

Four high­ranking GSK executives were detained by Chinese police in connection with the case and, according to reports, Mr Reilly was also “effectively detained” as the ruling Communist Party continued an anti­corruption campaign under the leadership of Xi Jinping. It was announced in May that GSK would also be investigated by the Serious Fraud Office in the UK.

INCREASED AWARENESS

Michael Ruck, a financial services litigation specialist at law firm Pinsent Masons and former FCA lawyer, says the case is symptomatic of a wider trend. “There are clearly issues that GSK will now be addressing,” he says. “But, more widely, there has been an increased awareness of bribery, corruption, money laundering and policies to counter these practices. I’ve noticed it particularly in the last six months or so.”

Mr Ruck adds that changing international attitudes to bribery and fraud may force certain companies to rethink the way that they do business. “Historically the risk of being caught out and having sanctions implemented would have been fairly small. So, on a commercial basis, firms may have taken one decision in the past. But now we’re at a point where the risks are much greater. I’m not sure the same commercial decision would still stand. Particularly overseas, [sanctions] will be used as a political tool as well,” he says.

Lots of employers take this very seriously, but certain organisations and certain industries rely on conducting business in a certain way

Professor David Lewis, convener of the International Whistleblowing Research Network, points out that, while the majority of corporates have a whistleblowing procedure in place, this doesn’t guarantee that best practice will be followed or that disclosures from concerned employees are always treated with the gravity they merit. Professor Lewis says: “Lots of employers take this very seriously, but certain organisations and certain industries rely on conducting business in a certain way. If they get caught out on occasion, and have to pay off a whistleblower or pay a fine, it’s viewed as a cost to the business.”

BIG FINES, BIGGER PROFITS

He adds that even apparently big fines, in the tens of millions, need to be seen in the context of the profits of the multinationals that pay them, which often run into the tens of billions of dollars.

Public scepticism regarding company procedures should be tempered by the realisation that only a certain type of case tends to hit the headlines. “Of course, the media highlights cases where whistleblowers get crucified or go to tribunals. What the media doesn’t bring out is successful whistleblowing [that remains internal and confidential within a company] because that’s not a story. It’s not in anyone’s interest to demonstrate when it has worked,” says Professor Lewis.

If they are not commonplace, high­profile cases involving multinationals do raise important issues. In 2011, Michael Woodford, the new British chief executive of Japanese camera manufacturer Olympus, resigned just two months into his role amid worries over $1 billion of improper payments made by the business to conceal its losses. Eventually the entire board resigned and Mr Woodford received a £10-million settlement, but not before his concerns had fallen on deaf ears within the company and he had fled to London for fear that his life was at risk.

When internal investigations arise from whistleblowing, they must almost always be carried out by the companies themselves or agencies in their employ. So it’s not difficult to imagine how the dynamic could result in conflicts of interest. However, Professor Lewis warns that any truly independent ombudsman would have to be funded somehow and the question of when an ombudsman would be brought into action would be difficult to resolve. “It’s a thorny problem,” he says.

But the publicity surrounding prominent corporate cases such as these may prove to have positive consequences for businesses – if only as cautionary tales.

When it comes to dealing with whistleblowing within a business, Professor Lewis says: “The short answer is to take it seriously. Whistleblowers tend not to be crackpots these days,” he says. So if an individual is serious and not acting out of malice, it may well be advisable for the employer to deal with the problem before it escalates.

“Because of the price to be paid,” Professor Lewis adds, “commercial organisations know that it’s in their own interest to get their act together.”