A new era of whistleblowing - But why is it important?
The proper management of corporate whistleblowing is an increasingly important issue globally, so much so that the European Union has adopted a directive to make such systems mandatory. On the face of it, this is another burden for companies, but it is in everyone's interest to have a properly functioning mechanism for reporting such abuse that is effective and can reduce the damage caused by fraud.
Whistleblowing — what does it mean?
“Whistleblowing” refers to the reporting of activities related to misconduct within organisations through a designated channel.
At first glance, the mandatory setting up of systems may seem like an extra cost for companies, but problems such as fraud, bribery, corruption, abuse, harassment, intimidation or other unethical behaviour are all risks that, if left undetected, can lead to financial and reputational losses for companies, so it is important that they receive proper attention.
The first and most important factor is the perception of whistleblowers and the behaviour demonstrated towards them. It is now widely accepted in society that misconduct within organisations should be combated, but many organisations continue to view whistleblowers as traitors and respond to their actions with retaliation. Consequently, only by operating effective, confidential and secure whistleblowing systems that employees/partners can have confidence in, knowing that both their disclosures and their person will be dealt with appropriately, can provide organisations with financial and moral benefits.
At present, the legal regulation of whistleblowing is still in its infancy in Hungary, but the European Union adopted a directive in 2019, which was due to be transposed by December last year. Many Member States, including Hungary, are expected to comply with this obligation in 2022.
For now, companies with more than 250 employees must apply the rules in the first round, while companies with 50-250 employees have until December 2023 to extend the legislation. The Directive requires common minimum standards to be set for whistleblowers, specifies the precise scope of application, the persons to whom, the matters to be covered and the circumstances in which whistleblowing, even anonymous whistleblowing, should be provided, and requires that whistleblowers are protected by ensuring that appropriate whistleblowing channels are in place and operated.
What is effective whistleblowing?
There are several important requirements for what an effective whistleblowing system should look like. From a psychological point of view, reliability and anonymity are key to encourage participants to report wrongdoing or unethical behaviour that comes to their attention. At present, in the absence of legislation, some companies operate an internal system for this purpose, others maintain an independent third-party whistleblowing system. In addition, whistleblowers can also turn to various public bodies or, ultimately, the media. The latter is, of course, the worst case scenario for the organisation as it has no control over what happens.
Whistleblowers can be channelled towards the first two channels if their effectiveness is established and players can be confident that they do not need to fear possible retaliation. The easiest way to dispel potential doubts is for the organisation to provide a supportive and trustworthy platform for whistleblowing, where the whistleblower can feel safe both in making a whistleblowing report and in themselves. That is, if the organization has a platform that both ensures a full and timely investigation and can provide complete anonymity as to the identity of the whistleblower.
For businesses, being the first to be informed of anomalies within a company through a well-functioning whistleblowing system can also be a significant advantage from a competition law perspective.
It is well known that competition law infringements, such as illegal price fixing, market sharing, collusion in public procurement and other competitive tendering procedures, can have significant negative consequences for companies. Firms that commit such infringements not only risk heavy fines – up to several hundred million forints – but may also be excluded from public procurement procedures for years, and injured contractors may bring damages actions against them on simplified terms. In many cases, competition law infringements also lead to the loss of supplier status. It is therefore in companies' best interest to be the first to know if a suspected competition infringement is suspected, as this will give them a much better chance of correcting the behaviour and alleviating the consequences of the infringement as soon as possible.
A proper whistleblowing system allows businesses to investigate suspected infringements themselves and take appropriate steps to reduce the consequences, rather than through investigation performed by the authorities.
Of course, an effective whistleblowing system has implications not only for competition law but also for employment law, as it can also detect unethical behaviour within a company, such as harassment at work or abuse of a subordination relationship. This can also relieve the company from significant liability for damages.
Data protection plays a critical role in the setting up and operation of whistleblowing systems, as whistleblowing will inevitably include personal data, but may also include sensitive personal data in the case of criminal or sexual abuse whistleblowing. Systems can only achieve their intended purpose if there is a high level of trust within the organisation, i.e. employees who intend to report are confident that their identity and the proper handling of their report is guaranteed, which is impossible without full respect of data protection requirements.
A secure and confidential whistleblowing system increases the sense of security within the organisation for both employees and management, reinforces a culture of trust, provides a complete and effective solution for the rapid detection of suspicious incidents and their appropriate internal management before they lead to legal or reputational problems.
Even the best managers can only make the right decisions if they have access to the right information at the right time – problems, situations, successes and failures alike. An effectively functioning whistleblowing hotline can be able to show a business’s leaders a real set of problems. It's like putting on a pair of good quality polarised sunglasses in bright sunlight – suddenly you can see a lot of detail that you couldn't see before because of all the light. Having the option of protected whistleblowing builds trust between employees and employers, and business partners and the enterprise, and gives managers a clearer picture of areas that would otherwise remain hidden,
- said Lajos Antal, head of Deloitte Central Europe’s Cybersecurity Services business line.
Based on the principle of separation of responsibilities, a third-party whistleblowing system, independent of the organisation's operations, is the best way to build trust. These systems (by including a third party in the process) are more likely to be able to handle whistleblowing in a timely, reliable and discrete manner, while guaranteeing anonymity. The inclusion of an independent third party also avoids the possibility of a complaint/whistleblowing to the operator of the reporting line resulting in a conflict of interest.