The Six Amendments Needed to Make the EU Whistleblower Directive Work
Pursuant to a Directive enacted by the European Parliament and Council, all 27 nations within the European Union (EU) must “bring into force” whistleblower protection “laws, regulations and administrative provisions” by December 17, 2021. These whistleblower laws must meet the minimum requirements of the Directive. Each nation may also enact laws that are “more favourable to the rights of reporting persons,” i.e., the whistleblowers. Progress within each nation-state has been slow, but there are some troubling signs.
Currently, eight nations have published draft laws, including the Czech Republic, Denmark, Germany, Latvia, Lithuania, Netherlands, Romania and Sweden. All of these drafts fail to provide adequate protection for whistleblowers. They do not properly transpose the Directive’s mandates. If left to stand as they are, Europe will miss a generational opportunity to protect whistleblowers and incentivize these insiders to fight corruption or defend the environment.
What’s Missing in the Draft Legislation
What it takes to adequately protect or incentivize whistleblowers is not a mystery. Whistleblower laws have been on the books for over 50-years, and numerous studies have been published analyzing these laws. Moreover, law enforcement officials have worked closely with whistleblowers in enforcing anti-fraud and anti-corruption laws for over 35-years, and the track record on these initiatives is also part of the public record.
In 2008, the University of Chicago Booth School of Business published the most important study on whistleblowing. Three distinguished economists from the University of Chicago and University of Toronto carefully studied a large subset of major fraud cases and asked a simple question: “Who Reports Fraud?” Their goal was to “identify the most effective mechanisms for detecting corporate fraud.” They concluded that whistleblowers – corporate insiders – were the key to a successful fraud detection program. The economists looked carefully at the False Claims Act, which contains a strong anti-retaliation law and provisions to reward whistleblowers. Their conclusions were simple, honest, and beyond reproach.
First, if you want to effectively fight fraud, you need to recognize that “employees clearly have the best access to information. Few, if any, frauds can be committed without the knowledge and often the support of several of them.” However, because of the threat of retaliation and the actual harms suffered by whistleblowers, few employees with inside knowledge of corruption will ever step forward. Applying a rational cost-benefit analysis, the University of Chicago authors explained the central problem to fraud detection: “Given these costs, however, the surprising part is not that most employees do not talk; it is that some talk at all.” The issue facing policymakers is simple: “Not only is the honest behavior not rewarded by the market, but it is penalized.”
However, the University of Chicago economists did identify a solution to this problem: stronger legal protections and incentives for whistleblowers. They carefully studied the qui tam provisions of the False Claims Act. They concluded that this law succeeded in incentivizing corporate whistleblowers to step forward and offered them compensation in order to overcome the high “costs of whistleblowing.” Their conclusion was clear: “Monetary incentives seem to work well, without the negative side effects often attributed to them,” and they recommended “extending the qui tam statute to corporate frauds” in order to “sharpen the incentives of those who are endowed with information.”
In addition to the scholars at the University of Chicago, law enforcement officials who work with the whistleblowers praised the False Claims Act as the “most powerful tool the American people have to protect the government from fraud.” Similar praise came from other sources, including leading Members of Congress: “One of the smartest things Congress has ever done is to empower whistleblowers to help the government combat fraud. They get results. Without whistleblowers, the government simply does not have the capability to identify and prosecute the ever-expanding and creative schemes to bilk the taxpayers. That is not rhetoric. That is history.” International bodies, such as the Organization for Economic Cooperation and Development (“OECD”), also recognized the importance of the U.S. whistleblower laws in fighting global corruption.
The False Claims Act qui tam law contains all of the basic legislative procedures that need to be incorporated into European whistleblower laws. They are straightforward:
- A clear statement of what constitutes a protected disclosure;
- Procedures that permitted whistleblowers to obtain due process consistent with other laws enforced in court;
- Adequate damages to be paid to whistleblowers who suffered retaliation;
- A right to counsel, and a mechanism to pay private attorneys who represent whistleblowers;
- The identification of an office within the government where whistleblowers would file confidential disclosures related to the frauds outlawed by the False Claims Act;
- A process where whistleblowers can obtain compensation and monetary rewards, paid for by the corporate wrongdoers, if their original information resulted in successful prosecutions.
These six features proved to be the key to driving record numbers of successful fraud prosecutions.
Not surprisingly, given the success of the False Claims Act, the United States enacted numerous similar whistleblower laws, all based on the six points identified above. Today, False Claims Act-styled laws cover the public sector economy within the United States, including the entire publicly traded economy. The United States is also using qui tam laws to combat global corruption. Since Congress modernized the False Claims Act in 1986, the following additional laws now have qui tam whistleblower provisions based on the FCA: the Dodd-Frank Act, Securities and Exchange Act, Commodity Exchange Act, Foreign Corrupt Practices Act, and Internal Revenue Act.
Not surprisingly, each of these laws has worked exceptionally well, and the government officials responsible for prosecutions under these laws uniformly and effusively praise their effectiveness. Moreover, because of the coverage of international whistleblowers under the Foreign Corrupt Practices Act (and the other whistleblower laws), over 4500 international whistleblowers from 126 countries have filed claims under the U.S. FCPA since 2011. The OECD’s independent review of the United States’ FCPA enforcement included lavish praise recognizing the U.S. international bribery program’s “remarkable efforts” as a “driving force” for “FCPA enforcement.”
Perhaps most telling is the OECD’s explicit praise for the U.S. Dodd-Frank Act. This law that protects international whistleblowers who report foreign bribery: “The Dodd-Frank Act’s multi-faceted protections,” which include effective “anti-retaliation provisions” “constitute a good practice given that they provide powerful incentives for qualified whistleblowers to report foreign bribery.” The Dodd-Frank Act “multi-faceted” whistleblower law incorporates all of the six features identified above.
Thus, the basic provisions that European nations must include in their domestic whistleblower laws are well established. The requirement to implement the EU Whistleblower Directive creates an opportunity for every nation within the Union to enact effective whistleblower laws that will play an instrumental role in policing environmental crimes, tax evasion, corruption and fraud.
The Six Provisions that Must be Adopted when EU Member States Transpose the Whistleblower Directive
All domestic whistleblower laws need to incorporate the six major features set forth below.
I. A Clear Statement of What Constitutes a Protected Disclosure
The United States does not have one uniform whistleblower law. Instead, whistleblower protections were enacted over many years, and there are over 50 different laws in the books. Europe has learned from this haphazard approach and passed an EU-wide Whistleblower Directive that seeks to cover all major areas where employees may blow the whistle. Although the current definition is very broad, because European law follows a civil code tradition, it is extremely important that every major area of potential whistleblowing be addressed explicitly in domestic legislation. This clarification will help prevent future loopholes and narrow judicial interpretations that will prejudice whistleblowers and the public interest. Simply stated, if a disclosure is not explicitly referenced within the scope of protected activities, whistleblowers who report these types of violations could be (and will be) excluded from protections.
Based on a review of the protected activates referenced in the EU Directive and the scope of protected disclosures referenced in the eight nations that have published draft laws, the following areas need to be added to the definition of what is a protected disclosure: Foreign bribery prohibited by the OECD convention and similar anti-bribery laws; all laws impacting climate change (including risk corporate disclosures); laws enforced by international environmental and anti-corruption treaties; laws prohibiting the trafficking in wildlife and human trafficking; laws prohibiting the importation of illegal products, such as illegal timber or fish caught in violation of IUU standards; tax evasion; maintaining undeclared and illegal foreign bank accounts; fraud in public procurement and contracting; and full protection for persons who disclose violations of the whistleblower laws (i.e., who report illegal retaliation).
II. Procedures that Permit Whistleblowers to Obtain Due Process
Whistleblowers need access to courts of law that contain clear due process guarantees. Although many whistleblower laws have crafted special administrative procedures designed to help whistleblowers, all effective whistleblower laws permit whistleblowers to file their cases in court, similar to other legal actions, such as those for personal injury. Retaliation against a whistleblower is a personal injury, and the damages suffered by whistleblowers are similar to damages caused by other torts. The harms suffered by whistleblowers need to be placed on the same footing as those suffered by other persons who are victims of wrongful conduct. Unless a whistleblower law creates a legal framework enabling whistleblowers to defend their rights and economic interests, whistleblowers are left without any real protections. Passing a deficient whistleblower law is worse than no law at all, as it creates the impression of protection but results in personal catastrophe for the whistleblower.
III. Adequate Damages
Fully compensating whistleblowers for all of the damages they suffer is absolutely required. Why should a whistleblower suffer personally, professionally, or economically for doing the right thing and reporting fraud, violations of health and safety rules, or corruption? If whistleblowers are not fully compensated, the law is, in fact, is an anti-whistleblower law. It tells all employees that if they blow the whistle, and are harmed, they will suffer, and the law will not protect them.
As in other areas of whistleblower law, the types of compensation that must be paid whenever there is retaliation are well-established. Damages are divided into two categories: equitable remedies and economical remedies. Equitable remedies include reinstatement, restoration of all of the “privileges of employment” as if the retaliation never occurred. Equitable relief also targets the chilling effect caused by retaliation. Courts are generally given wide discretion to craft specific remedies to cure the chilling effect, including posting apologies to the employee, instructing managers not to engage in retaliation, mandatory training, and other remedies that address the reality of retaliation within the workplace.
The second type of remedy is economical. This remedy includes payment of all back pay and other economic losses (such as retirement payments, medical payments, etc.) with interest. It also includes non-monetary relief for compensatory damages, including loss of reputation and emotional distress. In cases of intentional retaliation, it also includes punitive damages, which permit the courts to increase the monetary amount of damages up to 10-times the actual damages in cases where the abuse shocks the conscience.
IV. Right to Counsel
Without the ability to obtain high-quality legal counsel, whistleblowers cannot prevail in their cases. Corporations can afford the best attorneys to defend them in whistleblower cases. Without statutory protection, most whistleblowers cannot obtain private counsel, and those who do have private attorneys face an uneven battle in court against opponents who have overwhelming resources. Thus, including a provision to compensate attorneys for whistleblowers within the EU Directive is absolutely essential for achieving the purposes behind the Directive.
Moreover, a retaliation case is recognized as “complex civil litigation,” requiring proofs consistent with some of the most difficult causes of action. Unlike some personal injury cases, the standard is not simple negligence. Also, cases are not based on interpreting documents such as contracts. The cases usually require an inquiry into specific intent and complex human actions, often spanning a significant time period. Within the United States, these types of employment cases are classified as complex litigation, and attorneys are required to be compensated by companies found guilty of retaliation at extremely high market rates. Payment, at objective market rates, was determined to be essential so that there are not two levels of representation: top-level and highly paid lawyers representing the corporations; low paid lawyers representing employees. Instead, the law mandates an even playing field, so high-quality lawyers are attracted to represent whistleblowers. The only way to ensure the right to counsel is to follow the statutory attorney fees laws developed in the United States over the past 45-years. Attorneys who successfully represent a whistleblower should be compensated at high market rates or at the same rate paid to the corporate attorneys representing the corporation.
V. Establishment of a Whistleblower Office where Whistleblowers can File Confidential Disclosures and Obtain Protection
One of the earliest whistleblower protection laws, the Civil Service Protection Act of 1978, established an “Office of Special Counsel” with the authority to accept confidential whistleblower disclosures, investigate whistleblower claims and provide protection to whistleblowers who suffered retaliation. This concept has been duplicated under other laws, including offices covering whistleblowers who disclose violations of tax laws, money laundering, foreign bribery and securities violations. See SEC Office of the Whistleblower and CFTC Office of the Whistleblower.
A special Whistleblower Office is essential to enforce rules protecting the confidentiality or anonymity of a whistleblower. It is also necessary to ensure that a whistleblower’s disclosure is forwarded to the proper law enforcement agency for a formal investigation. The persons working for that agency must understand the necessity of honoring confidentiality. Finally, a Whistleblower Office can act effectively and in a timely manner to address retaliation and provide an immediate remedy to an employee.
VI. Incentives for Reporting Fraud and Corruption
When enacting whistleblower protection legislation, Members of Parliament must always keep in mind the role whistleblowers need to play in any anti-corruption program. Whistleblowers are needed to assist in the detection and prosecution of serious frauds. Incentivizing whistleblowers to report specific types of crimes, such as corruption in public procurement, trafficking, tax evasion, climate-related crimes, bribery, and fraud, is the single best tactic for developing the ability to detect corruption.
Programs that reward employees for providing actionable evidence that authorities can use to hold fraudsters accountable have been the most successful whistleblower laws in history, including tremendous success policing tax evasion and illegal offshore accounts, fraud in government contracting, financial frauds, and transnational corruption. A successful incentivization program contains the following criteria:
(1) Employees are encouraged to provide evidence of specific crimes;
(2) emphasis is placed on the quality of the information provided, not on whether an employee suffered retaliation;
(3) compensation is paid only for “original information” that the government was not aware of, and is used as a predicate for a successful enforcement action;
(4) rewards are only paid if the whistleblower’s information triggers an actual sanction from a wrongdoer;
(5) rewards are paid from the money obtained directly from the fraudsters. Taxpayer money is never used to pay the whistleblower.
Working whistleblower incentives programs are the most effective mechanism to obtain evidence of fraud.
Whistleblower laws have been in effect for over fifty years. What is needed to make a whistleblower program work is now well established. The importance of effective whistleblower laws as an essential component of any anti-corruption program is also well established by the empirical evidence. It is incumbent that Members of Parliament fully understand the basic principles that underly proper whistleblower laws and insist that the final version of the whistleblower laws being enacted pursuant to the requirements of the Whistleblower Directive follow these dictates.
The Appendix below contains suggested language for implementing each of the six basic principles needed for any effective whistleblower law.
§ 1 PROTECTED ACTIVITY
[The following types of protected disclosures should be added to the list currently identified in the EU Whistleblower Directive]
(a) violation of the Foreign Corrupt Practices Act or similar laws prohibiting bribery of foreign government officials;
(b) violation of laws, rules, regulations or international treaty obligations designed to address climate change;
(c) violation of laws, rules, regulations or international treaties designed to address illegal wildlife trafficking in plants, fish and animals (including illegal logging), or human trafficking;
(d) tax evasion or maintaining an illegal undeclared offshore bank account;
(e) fraud in public procurement and contracting;
(f) reporting retaliation prohibited under this law.
§ 2 DUE PROCESS
In addition to any administrative process available to the whistleblower, the right to be protected against retaliation may be enforced in a court of law in the same manner as cases concerning personal injury or breach of contract. The standard rules of civil procedure shall be applicable. The statute of limitations for filing a retaliation claim is one year from the last retaliatory action. This provision shall not be subject to mandatory arbitration and a whistleblower is not required to exhaust any administrative process prior to filing for relief. The court shall have the authority to issue preliminary relief on behalf of the whistleblower.
§ 3 RIGHT TO COMPENSATION
A whistleblower who prevails in a retaliation case shall be entitled to all relief necessary to be made “whole,” including compensation for all actual damages, compensatory damages, equitable relief, and punitive damages. This includes, but is not limited to, all equitable relief necessary to cure any chilling effect caused by the retaliation, reinstatement or front pay (if the whistleblower declines to be reinstated), back pay, compensation for all lost benefits, compensation of for emotional distress and loss of reputation, interest on all damage awards, and punitive damages if the retaliation was intentional.
§ 4 RIGHT TO COUNSEL
A whistleblower shall have the right to an attorney during all proceedings covered under this law, and all proceedings related to the adjudication of a retaliation claim or any counterclaims filed against the whistleblower. Should the whistleblower prevail in any such proceeding the entity that engaged in the retaliation shall pay all of the whistleblower’s reasonable attorney fees at market rates, or at the same rate the entity paid for its attorneys. This election of rates shall be at the discretion of the whistleblower.
§ 5 WHISTLEBLOWER OFFICE
There shall be a Whistleblower Office with the authority to accept complaints, guarantee confidentiality and enforce the provisions of the Whistleblower Act. The Office shall have the authority to investigate allegations of retaliation and order all relief permitted under this Act to protect an employee from retaliation. An order of the office shall be enforceable in proceedings for civil or criminal contempt. Should the Whistleblower Office deny relief to the whistleblower, or fail to make a final decision within 90-days, the whistleblower may seek relief in court pursuant to the provisions guaranteeing due process.
§ 6 INCENTIVES
The Ministry of Justice shall be authorized to establish whistleblower reward programs consistent with the current whistleblower programs covering public companies that trade on the United States’ stock or commodities markets. Any reward paid under such program shall come from the fines, penalties and sanctions obtained by the government based on the original information provided by the whistleblower. The Ministry shall issue rules implementing this provision within 180 days. The denial of a reward shall be reviewable in court.