In the last two decades, several instances of prolonged and severe corporate wrongdoing by European companies have come to light: from Dieselgate to corruption, money laundering through large European banks, recidivist bid and price rigging, and most recently Wirecard. What allowed European firms to engage in so much wrongdoing? In this brief, we consider some important institutional drivers behind corporate wrongdoing, focusing on the European countries with the largest share of corporate infringers.
The Harm from and Extent of Corporate Wrongdoing in the EU
In June 2020, the German firm Wirecard AG’s stock price fell from €104 to below €2 in the span of nine days after the firm admitted it could not locate $2 billion missing from its accounts. The firm has since then been accused of a wide range of infringements including money laundering, corruption, and fraudulent inflation of profits and sales, with some allegations going back over a decade. The Germany financial supervisor BaFin has been criticized as allegations about fraud had been made several times in prior years. Yet, BaFin failed to identify the problem and even banned short-selling of the stock, as well as accused journalists who were critical of the firm of market manipulation.
This scandal occurred against a backdrop of several other prolonged corporate scandals and has led many to wonder how extensive corporate wrongdoing is and how to combat it more effectively.
Corporate wrongdoing has a range of negative effects in competitive markets that are frequently overlooked in the public debate. Beyond the immediate damages of corporate wrongdoing, such as the draining of public resources in the case of tax evasion, money laundering, corruption, air pollution and associated health harm in the case of environmental law violations, there are also more general negative effects of corporate wrongdoing.
It attracts investors to the worst part of the industry, as firms that engage in profitable wrongdoing often do better than their competitors. Also, it forces out honest competitors and increases market entry thresholds for new competitors. These effects become more pronounced when the wrongdoing is prolonged, so, in an ideal world, regulators need to act fast.
Instead, several recent cases of European corporate wrongdoing lasted for many years before being detected and sanctioned, and there is a worrying degree of recidivism in several regulatory areas, including financial regulation with several banks being recidivists, but also in antitrust (Marvão, 2016).
What are the drivers and enablers behind these many prolonged cases of wrongdoing, and why do firms feel emboldened to engage in recidivism?
One way to gain some insight is to identify European countries whose firms are most frequently fined for wrongdoing and review the legal, cultural, and political contexts of those countries.
We tackle this issue by using data from Violationtracker, a database with over 400 000 actions by US enforcement agencies and prosecutors (such as the Securities and Exchange Commission and the Department of Justice). Many of these sanctions are against firms with headquarters in EU countries. In Nyreröd and Spagnolo (2021a), we added the fines for firms with headquarters in all respective EU countries for the period 2000-2020. After excluding countries like Switzerland, well known as homes of extensive financial crime linked to their status of international tax havens and off-shore centers, we find that the United Kingdom is the gold medalist in corporate wrongdoing, with Germany coming in second place.
Table 1. Fines across the top six EU countries (2000-2020).
Interestingly, the top of the ranking is preserved no matter which metrics we use. In Nyreröd and Spagnolo (2021a) we weigh the fines by population, GDP, and exports to the US, and the UK and Germany remain stable at the top, with the UK’s first position becoming more pronounced. Therefore, we focus on these two countries, although many of the problems we identify apply to a varying degree to most other EU countries.
Because of the recent headlines made by the Wirecard case we start with the runner-up, Germany.
The Wirecard case follows a long tradition of large “household” names such as Siemens, Deutsche bank, Thyssenkrupp, and Volkswagen that have engaged in systemic wrongdoing over extended periods of time and are responsible for most of the fines shown in Table 1.
In one of the largest corruption scandals in history, Siemens was fined $1.6 billion by the Department of Justice in 2008 for systematically paying bribes to government officials around the world, amounting to more than $1.4 billion since the mid-1990s. According to the Securities and Exchange Commission’s investigation, bribery at Siemens was “standard operating procedure” for decades, and the SEC concluded that “the company’s tone at the top […] created a corporate culture in which bribery was tolerated and even rewarded at the highest levels of the company”(SEC, 2008).
In 2015 the Dieselgate scandal unraveled, where it was discovered that several car manufacturers had installed “defeat devices” to cheat emissions tests. Volkswagen had installed the device in 11 million vehicles, some of which emitted up to 40 times more than emissions standards allowed (Gates et al, 2017).
Germany’s largest lender Deutsche Bank has since 2000 paid a whopping $18 billion in fines in the US for alleged infringements ranging from facilitating money laundering and tax evasion, to concealing bribe payments and misleading investors (DoJ, 2021). This is by far the greatest amount paid by any EU bank in the period 2000 – 2020 (Violationtracker.org, 2021)..
Finally, there is the steel conglomerate ThyssenKrupp, which was handed a €479 million fine for bid-rigging by the European Commission in 2007, the highest EU bid-rigging fine ever at the time. The size of the fine was motivated by the fact that, in 2007, Thyssenkrupp was already a repeat offender. In 2019, Thyssenkrupp and three other steel manufacturers were fined $719 million for price-rigging between 2002 to 2016. The firm has also been accused of bribe payments on several occasions (see Nyreröd and Spagnolo 2021a for details).
In reviewing local factors that have enabled these incidents, we find that Germany appears to have a particularly lenient stance toward corporate wrongdoing and a notably hard one against whistleblowers disclosing it. With respect to corruption, for example, bribe payments could be deducted from tax in Germany up until 1999 if paid to foreign officials, and up until 2002 if paid to recipients in the business world (Berghoff, 2017). In October of 2003, the United Nations adopted the Convention Against Corruption. On average, European countries had ratified this treaty halfway through 2007, but Germany was one of the last to ratify the treaty, it did it only in 2014 (UNODC, 2020).
Perhaps more importantly, Germany’s institutional environment seems focused on punishing and deterring whistleblowers, rather than listening to their reports in order to fight corporate wrongdoing. This is likely a crucial enabler of the prolonged wrongdoing we discuss in more depth in Nyreröd and Spagnolo (2021a). It is well known that whistleblowers are essential to detecting corporate wrongdoing (ACFE, 2020). Yet, Germany has some of the worst whistleblower protection laws in the EU (Transparency International 2013, Wolfe et al 2014), and one of the worst records in Europe in terms of mistreating the (obviously few) whistleblowers that dared to denounce corporate wrongdoing (Worth 2020a).
The German opposition to the protection of(truth-telling) whistleblowers from employers’ retaliation was on full display when a public consultation was held on the new EU Directive on whistleblower protection (2019/1937). German industry representatives were particularly active in arguing against it, suggesting that whistleblower protection is not necessary and that the new regulations are a clear signal of mistrust towards companies (BDI, 2019). The German parliament discussed improving the poor whistleblower protections in 2013 but did not enact any improvement of whistleblower protection laws. There are several instances of retaliation against truth-telling whistleblowers where they had very little legal recourse (Worth 2020a; Nyreröd and Spagnolo, 2021a).
The hostile regulatory and political environment to whistleblowers is likely a main factor that has enabled so many German corporations to engage in such prolonged wrongdoing with no records of employees reporting it.
The United Kingdom
We now turn to the winner of our contest, the UK. Over $26 billion of the total fines paid by UK firms in Table 1 is accounted for by the British Petroleum’s (BP) Deep Horizon oil spill in 2010 in the Mexican Gulf. It is estimated that 5 million barrels of oil were released into the ocean, a spill regarded as one of the largest environmental disasters in history.
Internal investigations at BP during the decade preceding this spill had warned senior BP managers that the company repeatedly disregarded safety and environmental rules and risked a serious accident if it did not change its ways. A 2004 inquiry found a pattern of intimidating workers who raised safety or environmental concerns (Lustgarten and Knutson, 2010). The company allegedly flouted safety standards by neglecting aging equipment, delayed inspections to cut production costs, and falsified inspection records. Even before the 2010 spill, officials at the US Environmental Protection Agency had considered debarring BP from receiving government contracts (Lustgarten, 2012). Since 2000, BP has been fined 158 times for environment-related offenses in the US, and again over 60 times since the oil spill in 2010.
Then there is the UK banking sector, with many large banks continuously engaging in wrongdoing, and seemingly more so than elsewhere. CASS (2020: 6) shows how, since 2011, the conduct costs of UK banks have far exceeded that of banks based in the US and Euro area when compared to GDP. In 2017, conduct costs for UK banks represented 0.88% of the UK’s annual GDP, while conduct costs for US and Euro area banks represented around 0.10% or less. In 2018, the conduct costs for UK banks shrank and constituted around 0.55% of the UK’s annual GDP.
In 2010, it was discovered that HSBC had systematically laundered money for some of the bloodiest drug cartels in history through its Mexican subsidiary. Despite numerous internal warnings, complaints from regulators, and internal flags, HSBC Mexico continued laundering money for organizations like the Sinaloa cartel, who not only flood the US with illegal drugs but is considered responsible for the gruesome killings of tens of thousands of people, often innocent civilian casualties at home. The UK’s then-chief financial minister, George Osborne, pleaded with the US Treasury Secretary and others that they do not impose criminal sanctions on HSBC (US Congress 2016).
Another major scandal involving UK banks that have cost regular people billions of pounds was the misselling of “payment protection insurance”. This aggressively marketed insurance had profitability of approximately 90% (Laris, 2020). Several barriers were created to inhibit people from claiming the insurance, such as contract exclusions or administrative barriers, and many people who bought these insurances either did not need them or were unsuitable. As of January 2011, UK banks and financial institutions had paid out £37.5 billion in compensation to customers who were wrongly sold the insurance (Coppola, 2019).
One of the main drivers of corporate wrongdoing in the UK appears to have been the lack of effective corporate sanctions. The “identification principle” requires the identification of a directing mind and will of the company (typically a director), and then proving criminal liability through this person’s conduct and state of mind. This principle has been singled out by several experts as making it “impossibly difficulty” for prosecutors to find companies guilty of serious crimes, especially crimes in large companies with devolved business structures (The Law Commission, 2015: 15). Several UK institutions, such as the UK’s Serious Fraud Office and the Crown Prosecution Service, have also pointed to the identification principle as a central hurdle to their ability to bring corporate prosecutions (Corruption Watch, 2019).
Moreover, effective business lobbying and close connection between politicians, regulators and the financial sector have been prevalent in the UK for a long time and may have exacerbated the already accommodating regulatory environment. Several well-known high-level politicians that affected financial regulation and its implementation for years ended up being hired with handsome pay by financial institutions afterwards (see Nyreröd and Spagnolo 2021a for details).
Regarding regulators, Miller & Dinan (2009: 29) notes that of the 36 people that served on the board of the Financial Services Authority (FSA) between 2000 and 2009, 26 of the members had connections at board or senior level with the banking and finance industry either before or after their term of office, whilst nine continued to hold appointments in financial corporations while they were at the FSA”.
The UK also has an outdated and ineffective whistleblower protection law, the “public interest disclosure act” of 1988 (see e.g., Lewis 2008, Thomas Reuter Foundation and Blueprint for Free Speech 2016, All Parliamentary Committee 2020). At the same time, important UK regulatory agencies have been proactive in neglecting the mounting independent academic research highlighting the effectiveness of the US whistleblowers rewards programs (see Nyreröd and Spagnolo 2021b).
Corporate wrongdoing appears widespread in Europe, and recent cases have been prolonged, severe, and sometimes industry-wide.
The UK and Germany stand out, but other EU countries are no angels. In the case of Germany, an acute aversion to whistleblowers by government institutions appears as a central driver that has enabled corporate wrongdoing. With respect to the UK, ineffective corporate sanctions laws, regulatory/political capture, and a lack of whistleblowers, appear to have driven or enabled firms to engage in prolonged corporate wrongdoing. Similar enablers and drivers are likely present in other EU countries to varying degrees.
There is now an EU Directive on whistleblowing, requiring all member states to put in place retaliation protections for those reporting on corporate wrongdoing. But protections have proven insufficient in a variety of ways and are unlikely to be a game-changer in terms of combating corporate wrongdoing (see e.g., GAP and IBA, 2021).
In the light of the strong independent evidence on the effectiveness of whistleblower reward programs at increasing detection and deterring wrongdoing (see, e.g., Nyreröd and Spagnolo 2021b for a survey), EU Member States seriously concerned about corporate wrongdoing should consider introducing them in a wide variety of regulatory areas.
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Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
The Covid-19 pandemic has revealed substantial shortcomings in central governments’ and municipalities’ ability to procure items needed in the fight against Covid-19, and corruption has been rampant partially due to the increased discretion of procurement staff to award contracts. We argue that suspension of ex ante rules safeguarding accountability is essential for disaster relief, but must be compensated for by better ex post monitoring. Such monitoring can be greatly strengthened by increasing transparency of all awarded contracts and providing incentives to whistleblowers to come forward to report fraud and corruption.
Corruption in Covid-19 Procurement
The disastrous Covid-19 pandemic has revealed weaknesses in global supply chains and in national public procurement systems’ ability to secure essential Personal Protective Equipment (PPE), ICU material, and Covid tests. Several countries have been and are experiencing issues like poor quality of procured goods, extremely high prices, scams, and a general inability to source.
Examples of quality under-provision abound. The Spanish government discovered that out of 340,000 tests purchased from a Chinese manufacturer, 60,000 of them did not test accurately for Covid-19 , and the Dutch ministry of health issued a recall of 600,000 face masks from a Chinese supplier due to poor quality . Analogous problems were common in the UK [3, 4]. Several countries have also had difficulties to procure at all, for example in terms of their desired number of tests [5, 6], or the reagents used to analyze the tests , as well as swabs .
Reports on price gouging – selling at extremely high prices – are also widespread. Examples of price gouging and investigations by competition authorities can be found throughout Europe and the US, but also in developing countries like Indonesia, Brazil, Thailand, Kenya, and South Africa (OECD 2020a), and in Ecuador and Paraguay, with corruption as the alleged cause .
While many reasons lie behind these procurement failures, several of them are directly traceable to the abuse of the increased discretion granted by emergency procurement rules to urgently source material and bypass time-consuming public procurement processes and legal frameworks. This important and necessary increase in discretion can easily be abused to hand out contracts to friends and/or political allies or to cash bribes.
Again, examples in the press abound. In the UK, a clearly non-urgent contract was awarded without competition to a firm owned by two long term associates of Michael Gove and Dominic Cummings . In Slovenia, a gambling mogul with no public record of healthcare experience appears to have received millions in an emergency contract related to Covid-19 . In Bosnia, a raspberry farm was apparently granted a contract to import 100 ventilators,paying $55,000 for each ventilator, while their price was around $7,000 to $30,000 on the international market in the relevant period . In India, a Mumbai Realtor with no previous healthcare experience got a contract to supply things such as oxygen cylinder and medical beds . The health minister in Bolivia was arrested in May after the country bought 179 ventilators at $27,683 each while it later was revealed that the manufacturers were offering ventilators at approximately half that price . In Bangladesh, Transparency International issued a study suggesting widespread corruption in the country during Covid-19, including the purchase of substandard medical supplies at five to ten times the market price .
The Covid-19 crisis has exacerbated an already significant problem: according to Transparency International (2020), up to 25% of all global healthcare procurement spending is lost to corruption.
Historically, Fraud Increases During Emergencies
Disaster related fraud is frequently a problem in the western world as well. In September of 2005, in the aftermath of Hurricane Katrina in the US, the Hurricane Katrina Fraud Task Force was set up to go after frauds related to recovery funds. By August 30th, 2007, the task force had prosecuted 768 individuals for Katrina-related fraud, and additional state and local prosecutions for disaster-related fraud had been brought (DoJ 2007). The National Center for Disaster Fraud was also created within the justice department in the aftermath of several devastating hurricanes in the US, and currently houses over 80 employees.
Organizations and academics warned the public early about the risk of increased corruption in public procurement during the Covid-19 pandemic (Khasiani et al 2020, OECD 2020b). Indeed, emergency procurement and disaster relief has historically been linked to increases in corruption (Leeson and Sobel, 2008), especially where institutions are weaker (Barone and Mocetti 2014). The problems often highlighted in this context, such as using emergency authority when it is not required/warranted or using it beyond the time it is required, abuse of discretionary authority, drawing up specifications to suit the firm desired to win the contract, restricting the number of bids, and caving in to political influences (Schultz and Søreide 2008: 523), have also been on display during the Covid-19 crisis.
There are of course compelling reasons to relax stringent procurement rules in emergencies to allow for a fast response proportional to the population´s needs. But such a lessening of oversight and ex ante checks must be compensated for by much more extensive ex post checks, that should be advertised widely to deter public officials from abusing discretion. Broadly, there are two main ways of strengthening ex post checks/monitoring.
Two Ways of Ex-post Monitoring
The first is to have complete and transparent documentation of all the contracts awarded and the related documents, a “keep the receipt” mentality and practice, and making these records publicly available as soon as possible. Several countries have been moving in this direction as a response to the crisis, often with the help of NGOs like the Open Contracting Partnership (The Economist 2020). Examples include Ukraine, that require the submission of a report for each contract within a day of its conclusion, which is then made publicly available on an internet platform; and as of 2016 a third of government contracts in Colombia were published on an e-procurement platform where they can then be scrutinized by the public. In the US, the user-friendly website USAspending.govprovide data on federal contracts, with advanced search functions including tags specific to Covid-19 contracting.
The organization Open Contracting Partnerships provide a list of suggestions for any government that is looking to increase transparency in procurement; it includes the timely publication of contracts, licenses, concessions, permits, grants, as well as related pre-studies and bid documents. A full list of best practices, which can be implemented at a low cost, can be found on their website (Open Contracting Partnerships 2020).
The second is to protect and incentivize whistleblowers. Adequate protection of whistleblowers is a first step, but protection is always partial and imperfect, and may therefore be insufficient to induce those close to frauds to come forward, given the terrible consequences they typically face (see e.g. Rothschild and Miethe 1999, Nyreröd and Spagnolo 2020c).
In the U.S., the False Claims Act (FCA), first enacted by President Lincoln to curb fraud on military supplies during the civil war, and strengthened in 1986, has gone one step further by providing whistleblowers with substantial monetary rewards when they report on procurement fraud. Building on the success of the FCA, the US has introduced similar programs in several areas, most prominently with respect to tax evasion (in 2006) and securities fraud (in 2011).
Providing meaningful monetary incentives to whistleblowers who report on particularly egregious frauds and corruption can have a substantial deterrent effect on potential fraudsters as several studies show (see e.g. Wilde 2017, Johannesen and Stolper 2017, Wiedman and Zhu 2018, Amir et al. 2018, Leder-Lewis 2020; see Nyreröd and Spagnolo 2020a for a review of the earlier literature). Simple cost-benefit analysis shows that a well-designed and implemented whistleblower incentives scheme can be a highly cost-effective continuous monitoring tool for enforcement agencies and public prosecutors (see e.g. Nyreröd and Spagnolo 2020b).
As for the EU, it is conspicuously lagging behind. Even prior to the Covid-19 crisis there was a need for increased monitoring evidenced by a 2019 European Court of Auditors (ECA) report entitled “Fighting fraud in EU spending: action needed.” A central emphasis of this report is that the Commission lacks insight into the scale, nature, causes, and level of fraud, as well as the level of undetected fraud. In 2018 the EU adopted a Directive that would harmonize and strengthen whistleblower protection in the EU. While the new EU Directive on whistleblowing is a step in the right direction, it failed to provide a framework for whistleblower rewards.
This may have been a mistake, as standard detection methods, including whistleblower protections, have often proven inadequate. The recent Wirecard scandal is a testament to the failure of standard fraud detection methods. In June of 2020, the stock price of Wirecard dropped from €100 to sub €2 in less than nine days after it was revealed to be an Enron-level accounting fraud. The firm has also allegedly laundered money for mobsters and was involved in a range of shady practices. Since 2008, fraud accusations have been leveled several times against the firm and Wirecard´s response was to label their critics “market manipulators”. The German financial supervisors, instead of investigating Wirecard, went after those who correctly claimed that the firm was a fraud, including reporters at the Financial Times. This fraud went undetected for at least 12 years, costing investors millions and undermining trust in financial markets. Moreover, those correctly accusing Wirecard of fraud allege they were subject to harassment campaigns, including phishing attacks by hackers and intimidating surveillance outside their homes and offices . This is perhaps not surprising given that Germany is a country with some of the worst protections for whistleblower .
The shortcomings of traditional methods of fraud detection may turn out to be especially costly and ineffective during the Covid-19 pandemic.
With increased public spending being a cornerstone of the response to this crisis, adequate monitoring of abuse of public funds will become more urgent. Some EU institution, such as the European Public Prosecutor’s Office, or the European Anti-Fraud Office, could be suitable for a whistleblower reward program, as investigators are likely stuck looking for needles in haystacks, or lack the necessary information to bring/recommend actions to recover funds. Irrespective of the lost opportunity of the Directive, evidence shows it is time to introduce serious (high stakes) whistleblower rewards programs in Europe, unless of course Europeans are not able to manage them, or are more interested in hiding rather than airing their dirty laundry.
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- Open Contracting Partnerships, 2020. “Global Principles” Available at: https://www.open-contracting.org/what-is-open-contracting/global-principles/
- Sanchez-Graells, A, 2020. “Commentary – Procurement in the time of COVID-19”. Forthcoming in Northern Ireland Legal Quarterly, available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3570154
- Rothschild M; and T Miethe, 1999. “Whistleblower Disclosures and Management Retaliation.”, Work and Occupations 26(1),120-21.
- Schultz, J; and T Søreide, 2008. “Corruption in emergency procurement”, Disasters, 32(4): 516−536.
- Spagnolo, G; and T Nyreröd, 2020b. ”Financial incentives for whistleblowers: a short survey”, Cambridge Handbook of Compliance, David Sokol and Benjamin van Rooij (eds).
- The Economist, 2020. “The future of public spending: responses to Covid-19”, The Economist, Intelligence Unit, available at: https://unops.economist.com/wp-content/uploads/2020/06/Thefutureofpublicspending_responsestocovid19.pdf
- Transparency International, 2020. “FIRST, DO NO HARM: SPENDING THE GLOBAL CORONAVIRUS RESPONSE PLEDGES PROPERLY”, available at: https://ti-health.org/content/covid-19-vaccine-countries-pledges-money-well-spent/
- Wiedman, C; and C Zhu, 2018. “Do the SEC Whistleblower Provisions of Dodd-Frank Deter Aggressive Financial Reporting?”, 2018 Canadian Academic Accounting Association (CAAA) Annual Conference.
- Wilde, J, 2017., “The Deterrent Effect of Employee Whistleblowing on Firms’ Financial Misreporting and Tax Aggressiveness”, The Accounting Review 92(5), 247-280.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Numerous stories have emerged about whistleblowers being silenced and retaliated against during the Covid-19 pandemic. In this policy brief we consider some cases of retaliation against whistleblowers and cases illustrating the significance of the information they bring forward. Two facts about Covid-19 and whistleblowers become salient. First, it is hard to externally monitor behavior within care homes due to the risk of contagion (auditor-patient/patient-auditor). Second, it is hard to infer from outcomes (e.g. number of deaths) that management misbehaved, due to the high uncertainty and the many possible factors involved in the spread of Covid-19. Adequate whistleblower protections and confidential reporting channels are therefore essential to ensure transparency, compliance with safety rules, and more generally public accountability in the management of this crisis.
Whistleblowers are Silenced and Suffer Retaliation
The Covid-19 crisis has created pressure on governments, hospitals and secondary health institutions – in particular elderly care homes – to control the narrative on the spread of the virus and their response to it. As a result, we have already seen several whistleblowers being silenced and retaliated against.
The most (in)famous case is probably that of Li Wenliang, the Chinese doctor at Wuhan Central Hospital who warned his colleagues about a new SARS-like virus to on the 30th of December 2019. Four days later he was summoned to the Public Security Bureau where he was ordered to sign a letter in which he was accused of “making false comments” and “severely disturbed the social order”. Another seven persons were also arrested on suspicion of “spreading rumors”.
China is perhaps not the first country that comes to mind when considering adequate whistleblower protections, but the problem is a broad one.
In the US, several doctors and nurses have been fired and disciplined for expressing worries about their work conditions, also in relation to a lack of personal protective equipment (PPE). Nor is the issue of retaliation against whistleblowers localized to healthcare. The Vice President of Amazon’s cloud computing arm, Tim Brady, quit his job “in dismay at Amazon firing whistleblowers who were making noise about warehouse employees frightened of Covid-19”. Nine US senators also sent Amazon a request to explain its policy for firing workers after several employees who had expressed concerns over working conditions were laid off.
In Russia three doctors, two of which had protested their working conditions during the crisis suspiciously fell out of hospital windows, allegedly due to excessive work pressure. Two of the doctors died, and one doctor was threatened with criminal charges for spreading “fake news” about Covid-19. We do not know whether these cases were accidents, suicides, or retaliation for speaking up, but an investigation is currently ongoing.
The problem has been particularly severe in residential elderly care homes, where in many countries there have been extreme rates of contagion and deaths.
In Italy, complaints from caring personnel about lack of PPE and safety procedures in terms of restrictions in visits of relatives from ‘red zones’ and transfer of personnel and patients across departments, emerged already in the end of February. At the private elderly care home Trivulzio in Milan, caretakers claim that their early complaints were ignored by management, who allegedly also harassed those wearing face masks on the ground that they would scare guests. An investigation is currently ongoing, but if the allegations turn out to be true, numerous deaths in Lombardy could potentially be attributed to this negligence and could have been avoided.
In the UK, a country that had much more time than others to prepare for the arrival of the virus, a recent report by the whistleblower hotline Compassion in Care registers a dramatic increase in calls to their hotline: over 170 since the Covid-19 outbreak, while they normally receive no more than 30 cases per month. These whistleblowers at residential care homes, care agencies, and nursing homes continue to detail a widespread lack of protective equipment, and retaliation for raising these concerns. Five lost their jobs and are considering taking legal action.
In some countries there is instead a noticeable absence of whistleblowers at nursing homes and the like. Germany is one example. While this can be due to the country’s fast and apparently adequate response to Covid-19, the country also has an infamous history of mistreating whistleblowers, and the country´s protections are some of the weakest in the EU, which may have deterred potential whistleblower from reporting. A well-known example related exactly to nursing homes is the case of Heinisch vs. Germany, where a nurse was fired for reporting improper working conditions in 2005, and then lost her case for reinstatement at all levels of German labor courts, even though it was recognized that her claims were correct. She had to turn to the European Court of Human Rights to be vindicated, only after six years of legal hassle, though.
These are just some examples of the systemic issue of silencing and retaliation that is now emerging. Watchdog organizations are warning about a widespread and extensive mistreatment of whistleblowers worldwide during this pandemic. The Government Accountability Project details several cases of maltreatment of whistleblowers, describing the situation created by the Covid-19 crisis as “the largest attack on whistleblowers in the world”.
Other cases of whistleblowing, absent retaliation, further illustrate the crucial value of the information they bring forward. In Sweden for example, a country that should have been particularly careful given its softer approach to contain the virus, whistleblowers still reported a lack of PPE and poor safety routines in elderly care institutions. At one home, employees detailed how they went from caring for Covid-19 patients to caring for non-Covid patients while wearing inadequate safety protections. At that same home, it is estimated that more than 35 persons died from Covid-19: over a third of all residents.
Fighting Misinformation and Uncovering Wrongdoing
Protecting whistleblowers is also crucial to fight misinformation and fraud related to Covid-19. For example, a whistleblower recently alleged that the founder of JetBlue, who previously had argued against lockdowns, helped fund an influential yet controversial study which found that the infection rate in Santa Clara County, California, was 85 times higher than believed – which would have driven down the local fatality rate to flu levels at 0.12% – 0.2%. The whistleblower complaint also contained emails suggesting the authors of the study disregarded warnings raised by two other Stanford professors who attempted to verify the accuracy of the antibody tests used in the study.
Worries about abuse and fraud related to stimulus packages linked to Covid-19 have also been mounting. And indeed, the US Securities and Exchange Commission has seen a 35% increase in whistleblower claims received between mid-March and mid-May compared to the previous year.
There is already strong public support for whistleblower protections with respect to important matters like healthcare and elderly care (Butler et al., 2019), and as we have argued elsewhere (Nyreröd and Spagnolo, 2020a, 2020b), whistleblowers are currently not adequately protected or incentivized in the EU: they do not speak up to the degree desirable from a law enforcement/public interest point of view. The negative consequences of speaking up are often significant: blacklisting from the industry, harassment, and social and economic uncertainty are frequently associated with whistleblowing. This is not different with Covid-19 whistleblowers.
What Can Be Done
The state of whistleblower protection in Europe has been rather poor and uneven (Wolfe et al., 2014). In 2013, Transparency International rated a disappointing four countries in Europe as having “advanced” legal protection for whistleblowers. In recent years, several countries have enacted legislation to remedy the issue. France enacted Sapin II in 2017, which prohibits retaliation against whistleblowers; Sweden improved its protection in 2016 (Proposition 2015/16:128); and since November 2017, whistleblower protection in Italy, which was previously limited to the public sector, has been extended to the private sector.
It is only now, however, with the new EU Directive on Whistleblowing that we will see even protection levels for whistleblowers throughout the EU. Among other things the Directive would require firms with more than 50 employees to establish confidential internal whistleblower channels. The deadline for transposing the directive (implementing it into national law) is December 17, 2021.
EU member states should try to transpose the directive as soon as possible, as whistleblower protections are not only needed at nursing homes, but also at firms who may choose to put employees at excessive risk of infection when faced with high cost of compliance with safety measures. This is important, because monitoring compliance with safety measures externally will likely be difficult and costly, while the new directive contains several articles that would improve the informational flow within organizations but also externally to supervisory agencies.
To conclude, the Covid-19 crisis has created pressure to silence whistleblowers to control reputational risks for governments and private firms. If whistleblowers are successfully silenced, we risk ending up with an incomplete picture of the spread of the virus, a lack of public accountability, unnecessary deaths, and several good faith whistleblowers being retaliated against without adequate protection. Hastening the implementation of the new Whistleblower Directive is one way to ensure some level of protection for whistleblowers throughout the EU.
Nyreröd, T; and G Spagnolo, 2020a. “Myths and Numbers on Whistleblower Reward”, Regulation and Governance, forthcoming.
Nyreröd, T; and G Spagnolo, 2020b. “Financial Incentives for Whistleblowers: A Short Survey”, forthcoming in Cambridge Handbook of Compliance. Sokol, D., van Rooij, B. (Eds). Cambridge University Press.
Butler, J; D Serra; G Spagnolo, 2019. ”Motivating Whistleblowers”, Management Science, 66(2), 605-621.
Wolfe, S; M Worth; S Dreyfu; A Brown, 2014. “Whistleblower Protection Laws in G20 Countries, Priorities for Action.” Blueprint for Free Speech, The University of Melbourne, Griffith University, Transparency International Australia.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
On the 17th of April 2018 the European Commission adopted a package of measures to increase protections for whistleblowers (European Commission Newsroom, 2018). This is good news, as whistleblower protection in Europe has been uneven and in some member states non-existent. Transparency International (2013) rated a disappointing four European countries as having adequate or extensive protection. In a report by Wolfe et al (2014), several European countries, including Germany, France and Italy, were judged to have inadequate laws with respect to several aspects of whistleblower protection, although France and Italy recently improved them considerably. Corruption, fraud of various types, and related forms of economic crime are widespread almost everywhere in the world (See e.g. Dyck et al 2014, and Global Crime Survey 2016). Criminal organizations such as drug cartels, have become increasingly sophisticated and their ability to use the international financial markets has made it ever more difficult for law enforcement agencies to discover them with more traditional law enforcement tools (see e.g. Radu 2016 for an overview). Incentivizing whistleblowers through protection and rewards can prove effective at getting information on these hard-to-detect crimes. Whistleblower protection is central for ensuring democratic values such as freedom of speech and fair elections, and recent cases also suggest that it may be central for protecting investigative journalists and their sources.
The Need for Protection and Possibly Rewards
On February 26th 2018 Ján Kuciak, a Slovakian journalist, was murdered in his home for investigating political connections to organized crime in the heart of Europe (Washington Post, 2018); Daphne Caruana Galizia was killed on 16th of October 2017 by a car bomb while she had been writing about corruption in Malta in connection with the Panama papers (Financial Times, 2018a); Maria Efimova, an employee at a private bank that claimed that her employer had illegally moved funds for Maltese politicians, is under an arrest warrant from Malta and Cyprus on seemingly unrelated charges (The Guardian, 2018); and Hervé Falciani, who blew the whistle on the bank he was working for in Switzerland that helped clients evade billions of dollars in taxes, was arrested in April in Spain after an arrest warrant issued by Switzerland on March 19th, though he has now been released on bail (Financial Times, 2018b).
While some EU countries recently improved whistleblower protection, some seem to be heading in the opposite direction. An extreme example is Germany. A provision packed into the German Data Retention Framework of 2015 allows for prison sentences of up to 3 years for the handling of “stolen data”, and journalists are no longer protected against search and seizure (European Digital Rights, 2017). This provision was included despite Germany’s problems with underreporting of corporate crime. On the need of whistleblowing in the country, consider Volkswagen’s emissions scandal in 2015 when the public learned that the company had installed defeat devices in millions of diesel cars to ‘cheat’ on environmental emissions standards and increase pollution all over the world. The response of management was to blame a set of “rouge engineers” (Congressional Hearing, 2015), while we now know that power points on how to circumvent U.S. emissions tests by a top technology executive circulated within the company as early as 2006 (New York Times, 2016). Excess diesel emissions were associated 38 000 premature deaths in 2015 (Anenberg et al, 2017), implying that whistleblowing could have saved thousands of lives, yet the wrongdoing went on for close to a decade without anyone blowing the whistle. Cheating on emissions tests also turned out to be an industry wide phenomenon.
Germany also has a history of treating whistleblowers poorly. Consider for example the case where a German nurse brought a complaint to her employer in December of 2004 over poor treatment of patients, and she was fired in January 2005. Her employer cited repeated illness as the reason for being fired, the nurse claimed that it was retaliation for speaking out about poor conditions. The nurse then filed a complaint in German Labor Court which was dismissed in August 2005. She then brought the claim to the European Convention of Human Rights, alleging that her right to expression under article 10 of the European Convention of Human Rights had been violated by her employer. She won that case in 2011, and Germany was ordered to pay the nurse 10 000 Euro in non-pecuniary damages, and 5000 for costs and expenses (Heinish V Germany 2011).
Large firms do not appear to be doing better. Even after the Siemens scandal in 2008, when the company was discovered pursuing a long-term, extensive and systematic strategy of bribing foreign governments and purchasing agencies, and promises about a drastic change in corporate governance. Recent cases suggest that the corporate culture at Siemens has not improved. Meng-Lin Liu, a compliance officer at Siemens China, brought attention to alleged kickbacks paid in connection with equipment sales to army hospitals in China to the chief financial officer for healthcare in China. He was fired after reporting internally and filed a claim alleging violations of the Foreign Corrupt Practices Act. Siemens lawyers argued that since he was no longer an employee, he was not entitled to protection under Dodd-Franks definition of “whistleblower” (Forbes, 2014).
The situation in such an important European country like Germany suggests that protection applying across all member states is needed, and the experience of other countries further suggest that protection may not be enough. In the UK, the country recognized to have some of the best protections in the EU (Wolfe 2014, Transparency International 2013), whistleblowers are still experiencing pushback. The recent case of Jes Staley, Barclays Bank’s CEO is enlightening. He ordered his security team to unveil the identity of an uncomfortable whistleblower, going so far as to request video footage of the person who bought the postage for the letter. Yet, the Financial Conduct Authority and the Prudential Regulation Authority (FiCA & PRA) decided to just fine him £642 000 – a small fraction of his pay package that year (Reuters, 2018). Cases like this suggest that the US Congress was right in pushing for rewards. The mild sanctions established by the UK regulators sent a loud and clear message to prospective whistleblowers: even in the UK, where protection was judged as high in the above-mentioned reports, a CEO that violates the law trying to uncover someone reporting his potential mismanagement (probably not to give him a premium), will just have to pay a mild fine, if he is caught of course!
In the following we review the new proposal for whistleblower protections and argue that evidence from the US suggests that financial incentives for whistleblowers may still be needed to ensure an adequate level of reporting. We then consider objections to monetary rewards which are praised by regulators in the US, while EU agencies remains hesitant. Finally, we conclude with suggestions on how to improve the European legislation.
The EU Proposed Directive Versus US Developments
The new Directive includes mandatory establishment of internal reporting channels for firms with more than 50 employees that should allow for anonymous claims (Article 5). It includes prohibition against a wide range of retaliation (Article 14); and the burden of proof is reversed in case of alleged retaliation (Article 15). Who counts as a whistleblower under the Directive is defined widely to encompass subcontractors, trainees, and people associated with a wrongdoing firm in a “work-related context” (Article 2).
The Directive is bound to improve the situation for whistleblowers given the current uneven protection. It bears similarities with the US Sarbanes-Oxley act of 2002 (SOX), but it goes beyond SOX in that it applies more broadly. Since SOX, the legal debate in the US has increasingly focused on rewards to whistleblowers as protections alone are often insufficient to ensure an adequate level of reporting.
After the financial crisis, the US concluded in the Dodd-Frank Act of 2008 that protections were insufficient, and that above and beyond protections, Dodd-Frank allows for rewards to whistleblowers who report wrongdoings in securities trading where the sanction against the wrongdoing party exceeds 1$ million.
The use of rewards was not unfamiliar to the US before Dodd-Frank. They had formerly concluded that in the tax area, whistleblowers who report tax evasion should be eligible for rewards through the Tax Relief and Health Care Act of 2006 which established the Internal Revenue Service “Office of the Whistleblower”. Although previously to 2006 whistleblowers could receive rewards at the IRS, this was entirely up to the agency’s discretion.
In the procurement area, whistleblowers are also eligible for rewards in the US under the False Claims Act (FCA) enacted in 1863. The commitment to rewards was reaffirmed in 1986 when revisions to the act reinvigorated the whistleblower or “qui tam” provisions of act (for an overview of reward programs, see Nyreröd & Spagnolo 2017).
Despite being regarded as having some of the best whistleblower protections in the world (see e.g. Wolfe et al 2014), the US did not settle for protections alone in key regulatory areas. The new EU directive does not address rewards at all which is unfortunate given their law enforcement potential if they are coupled with independent and competent judicial institutions.
Although the US experiment with whistleblower rewards is working, the only EU institution to evaluate reward policies to our knowledge is the UK’s PRA & FiCA on the request of the UK parliament. Their assessment concludes strongly against rewards, yet they do not provide any evidence to back up their negative assessment and make claims that later evidence has refuted. In the following, we review the concerns raised by critics of reward programs, primarily the PRA & FiCA.
Evidence on the Effectiveness of Rewards
Under reward programs in the U.S whistleblowers can receive a percentage of the fine imposed on the wrongdoing firm or person. The range is usually between 15-30% of the sanctions against the firm, and of the money recovered. The exact reward percentage within the range is determined by how central the whistleblowers information was to unearth and sanction the wrongdoing.
One fundamental concern with rewards is their cost effectiveness. Some argue that they can come with a costly government structure and that they attract a lot of meritless claims by opportunist employees, which increase the administrative costs (PRA & FiCA 2014, Ebersole 2011).
On the other hand, many argue that they can be a cost-effective tool in an age when governments are looking for austere economic policies (Engstrom 2014). Some argue that they are at least as efficient as classical “command and control” methods of enforcement, such as selecting random persons or firms for audit. We evaluate cost-effectiveness with respect to three important effects: deterrence, increased quality of claims, and increase quantity of claims.
A significant part of determining cost-effectiveness is the extent to which whistleblowing has any significant deterrence effects on future misbehavior. Johannesen & Stolper (2017) found that whistleblowing had deterrence effects in the off-shore banking sector. They studied the stock market reaction before and after the whistleblower Heinrich Kieber leaked important tax document from the Liechtenstein based LGT Bank. They found abnormal stock returns in the period after the leak, and the market value of banks known to derive some of their revenues from offshore activities decreased.
Wilde (2017) also provide evidence that whistleblowing deters financial misreporting and tax aggressiveness. Using a dataset of retaliation complaints filed with OSHA between 2003 through 2010 on violations of paragraph 806 which outlaw’s retaliation against employees who provide evidence of fraud, he found that firms subject to whistleblower allegations exhibited decreases in financial misreporting and tax aggressiveness.
As for experimental evidence, Abbink and Wu (2017) conducted laboratory experiments studying collusive bribery, corruption, and the effects of whistleblower rewards on deterrence. They find that amnesty for whistleblowers and rewards strongly deter illegal transactions in a one-shot setting, but in repeated interaction the deterrence effect is limited. Their results support a reward mechanism, especially for petty forms of bribery (which are more like one-shot games).
Bigoni et al (2012) conducted laboratory experiments on leniency policies and rewards as tools to fight cartel formation. They find that rewards financed by the fines imposed on the other cartel participants had a strong effect on average price (returning it to a competitive level). In the model setting, this implies that rewards have a deterring and desisting effect on cartel formation.
Another central question is whether rewards increase the quality and quantity of claims. PRA & FiCA (2014) writes that “There is as yet no empirical evidence of incentives leading to an increase in the number or quality of disclosures received by regulators” (PRA & FiCA 2014, p.2).
As for increased quality, there is evidence suggesting that this claim is untrue. Dyck et al (2010) compared whistleblowing in the health care sector where rewards are available through the FCA with non-healthcare sectors where they are not. They found that 41% of fraud cases are detected by employees in the healthcare sector. That number was only 14% for other sectors, a difference highly statistically significant (at the 1% level) despite a small sample size (Dyck et al 2010, p. 2247).
More recently, Call et al (2017) examined empirically the link between whistleblowing and (i) penalties, (ii) prison sentences, and (iii) duration of regulatory enforcement actions for financial misrepresentation. They found that whistleblowers’ involvement in financial misrepresentation enforcement actions was correlated with higher monetary sanctions for the wrongdoing firm and increased jail time for culpable executives. They also found that enforcement proceedings began quicker, and further that whistleblower involvement increased the likelihood that criminal sanctions were imposed by 8.58%, and that criminal sanctions were imposed against the targeted wrongdoer increased by 6.64%.
Another highly contested point is the relation between the quantity and quality of claims and regulatory effectiveness. Some argue that rewards may attract a lot of meritless claims by employees who are either malicious or hope to reap some reward (PRA & FiCA 2014, Ebersole 2011). This does seem to have been the case with some reward programs, but not to the extent many opponents of rewards argue, and this effect does not render rewards a futile or ineffective policy approach, see Nyreröd & Spagnolo (2017) for a thorough discussion.
There are, however, valuable lessons to be learned from the quantity of claims received and the percentage of claims determined to have merit from, for example, the IRS Whistleblower Office. At the IRS there has been a significant backlog of claims, and an exceedingly small number of claimants receive rewards. The IRS program, under 7623(a), does not have a threshold for claims to be considered, and the vast majority of claims fall under 7623(a). These are lessons for optimal design, but not an insurmountable obstacle for effective reward programs. One way around this problem is to have a threshold for claims to be considered. Another is the FCA model, where persons pursue litigation on their own if the Department of Justice declines to join, thereby taking on the risks and costs of losing in court.
Concerns over administrative burden and costly government structures are not salient enough to warrant a rejection of reward policies, as benefit in deterrence and quality outweigh the administrative costs of reviewing even large quantities of incorrect claims.
Entrapment and Malicious Claims
Another central concern has been that “Some market participants might seek to ‘entrap’ others into, for example, an insider dealing conspiracy, to blow the whistle and benefit financially”, FiCA & PRA (2014).
There are presently good ways of preventing this issue, which does not seem to have been salient in the U.S. experience with these policies. Regarding the FCA, for example, when the relator (whistleblower) initiated or planned the wrongdoing, courts can reduce the reward below 15% as they see fit (False Claims Act, 31 U.S.C. §3730 (d) (3)). The IRS has similar restrictions that in cases where the whistleblower planned and initiated the tax evasion, they may considerably reduce or deny any reward. If the whistleblower is convicted of criminal conduct related to the suit, then they should deny her any reward (Internal Revenue Code, 26 U.S.C §7623 (b) (3)).
These restrictions on reward payouts is probably the reason why, judging from the reports by the U.S agencies, entrapment has not emerged as a salient issue in the US experience with the various programs. As for evidence, the National Whistleblower Center (2014) claims they did not find a single case of entrapment in over 10 000 cases in which the planner and initiator of the wrongdoing received an award. Of course this does not exclude the possibility that a poorly run European agency/regulator might mismanage the whistleblower program to the point where this indeed becomes an issue; a sufficiently incompetent administration can generate problems even with the most robust and effective tools.
A related concern is that financial incentives could encourage employees to submit fraudulent claims, e.g. to “fabricate claims of wrongdoing for personal profit” (Howse & Daniels 1995, p.540, see also Rose 2014, p.1283). A similar concern is that: “Financial incentives might lead to more approaches from opportunists and uninformed parties passing on speculative rumors or public information. The reputation of innocent parties could be unfairly damaged as a result” (PRA & FiCA 2014, see also Vega 2012, p.510). There is also the fear that opportunistic whistleblowers will force “corporations into financial settlements in order to avoid the adverse reputational and related effects caused by highly public, albeit ill-founded, accusations” (Howse & Daniels 1995, p.526/27).
Although evidence on this is hard to find, judging from the reports of agencies, fraudulent and malicious has not been a significant issue. This is probably because fraudulent reporting is a crime, and a whistleblower who report fraudulent information exposes him or herself to a legal fight with the falsely accused employer and to sanctions against perjury and defamation. Indeed, in the case of the IRS, the information is submitted under penalty of perjury (Internal Revenue Code, 26 U.S.C §7623 (b)(6)(C)), which is also the case of the SEC if the whistleblower is represented by an attorney (Exchange Act, U.S.C 78u-6(h)). In the case of the FCA, should the whistleblower lie to the court, he risks felony charges punishable by up to five years in jail for perjury, and the possibly of being convicted of other crimes related to lying under oath. Further, the FCA has a reverse fee-shift for obviously frivolous claims (Engstrom 2016, p.10).
Whether fraudulent claims are a concern for the efficacy of a whistleblower reward program depends to a large extent on the precision of the court system. Buccirossi et al. (2017) analyze this concern within a formal economic model. They show that fraudulent reports are entirely irrelevant for countries with sufficiently precise/competent court systems, provided strong sanctions against perjury, defamation and lying under oath are there to balance the incentives generated by large bounties. Where the judicial system makes a lot of mistakes, instead, this may not be sufficient for the scheme to have crime deterrence effects, which may make it preferable not to introduce large rewards for whistleblowers.
Some suggest that the European hesitation over improving whistleblower protection and considering rewards may have partially historical roots, as both Nazi Germany and Soviet Russia relied heavily on citizens reporting on one another (Givati 2016, p.26.). But the lack of voices speaking out against what the Nazi’s were doing should suggest the opposite, and it is not clear how these parallels should be drawn when we are talking about rewarding whistleblowers in the financial offices of private corporations.
It is also the case that most valuable information to law enforcement is often in the hands of higher-ups in the organization, those who have more to lose in the case of whistleblowing (Engstrom 2016), and for whom protections would be an insufficient compensation relative to their current position and salary. The blunt tool that is horizontal protection for whistleblowers who report violations of EU law could be coupled with precise tools such as rewards for violations of specific EU laws whose undermining can be particularly detrimental to financial stability or the environment.
If European countries and their regulatory and law enforcement institutions are not capable of having an open and honest debate, competently based on the available evidence from rigorous research and from previous experiences in other countries, then they would hardly be able to competently design and properly administer a system of rewards for whistleblowers. As argued in Buccirossi et al. (2017), in countries with weak institutions high powered tools like whistleblower rewards should better be avoided, as in the hand of incompetent law makers and corrupt regulators they would likely produce more damage than good.
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