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The return of a whistleblower

2 Comments

After approximately 10 years of price agreements and other anticompetitive practices in the Dutch construction industry, Ad Bos, ex-director of one of the 344 companies involved blew the whistle in 2001. Although existing signs of these practices both the Dutch prosecution court and competition authority failed in investigating and terminating it. A whistleblower was needed to make the case relevant. This example shows the importance of whistleblowers, and how effective they can be. This article is a call for a financial incentive for whistleblowers in Europe and argues why we should not want to be without it.

The European Commission underestimates whistleblowers. This is underlined by the way she explains how Article 101 (probation of anticompetitive agreements) cases start: “1) a complaint, 2) opening of an own–initiative investigation, or 3) a leniency application from one of the participants to a cartel.” [1] But what about whistleblowers like Ad Bos? An incentive program for whistleblowers would be a great additional fourth point here. While the British, Hungarian and Slovak antitrust laws have already included a financial incentive, the EU is still trusting in the moral incentive of individuals to do the right thing.

This incentive program would basically include a cash payment given to first person that notifies the regulator of a horizontal or vertical cartel agreement and provides electronic or paper form proof. The whistleblower can than receive a payment of some small percentage of the penalties levied in the case, up to a certain maximum. Also, protection of identity by the regulator would be of great importance for the functioning of the program.

A big advantage of this additional program would be the reduction in time of cartels operating. On top of the leniency program’s incentive of being the first company there is also an internal race for being first employee. Companies that consider applying for the leniency program have to take into account these anonymous employees that might want to make some extra returns as whistleblower.

Recently, Lord Turner, chairman of the Financial Conduct Authority of the UK, made an interesting statement with respect to the importance of whistleblowing. According to him the regulator might never have known about the recent -affair if there would not have been a potential supervisor in every trading room. Whistleblowing is one of the few mechanisms to avoid an enormous police force that could spot every crime. The link with competition policy in this sense is easily made. [2]

Although this sounds like a great idea, there are two issues that have to be given some thought. First, even as an employee it is not easy to get your hands on actual proof nowadays. It is a great risk that the employee faces when considering the high unemployment rates in the EU and the chance of bearing damage to the employer while the cartel accusation might turn out to be untrue or not enough supported. Besides this, the question is whether the EC is able to protect identities and more importantly will EU citizens believe the EC is capable of doing that. [3]

On the other hand, the existing burden in form of proof and risk that has to be taken is a good mechanism to avoid potential fake whistleblowers. One has to be fairly certain about his case before contacting the regulator. In the end, whether someone is telling the truth has to be discussed and decided on in court. A way to fight fake whistleblowers is to raise punishments for those who commit fraud by creating evidence for example.

To conclude, given the concerns that policy makers have to cover before imposing this new program, the whistleblower incentive program can be an effective tool in fighting anti-competitive practices. It speeds up potential leniency applications, fills in a cap that is hard to fill in competition policy and on the other hand it gives employees a financial push in the moral right direction.

Stefanus Leeffers, 642

[1] http://ec.europa.eu/competition/antitrust/procedures_101_en.html

[2] http://www.compliancy-services.co.uk/news/article/2736/fca-interested-in-whistleblower-cash-incentives

[3] http://kluwercompetitionlawblog.com/2013/03/22/slovakia-cash-incentives-to-whistleblowers/comment-page-1/

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Author: studentnovasbe

Master student in Nova Sbe

2 thoughts on “The return of a whistleblower

  1. I remain sceptical about the introduction of a special program or incentives for individual whistle-blowers. What Stefan does not fully consider is how it changes companies from the inside. As employees’ access to information can be potentially harmful to the enterprise it might seek to restructure its internal organisation and restrict access to information. This structural change within the company toward a more centralised design can –depending on the company- not be the best design for the business and hence decrease efficiency and welfare. Even companies that might not actually collude but instead have some (possibly vertical) agreement that could be close to being not in line with EU regulation might change their structures simply because of (slight) uncertainty. Overall this internal mistrust is nothing desirable as resources are not optimally used and wasted.

    Further independent of the company (if it actually colludes or not) the information search for proof of collusion by employees -who might be uncertain about if their company actually colludes or not- lowers productivity as time and resources are spent to find proof. This efficiency loss and decrease in total welfare has to be considered when introducing such incentives.

    Lastly, quoting Stefan: “Companies that consider applying for the leniency program have to take into account these anonymous employees that might want to make some extra returns as whistle-blower.” This constitutes a problem. As the company or namely the ones in charge of the company usually tend to have more or better information about the details of collusive behaviour, a single whistle-blower with a subset of information could “blow” the chance to have solid proof and a strong collaborator. While this might induce companies to apply for the leniency program as soon as possible there are potential harms to consider as the application for leniency programs usually takes careful preparation and time.

    Instead of introducing a program for whistle-blowers existing penalties could be increased. As in a lot of cases the people that initiated collusive actions are only partially affected by the financial penalties imposed on the company they manage, introducing more severe personal punishment on the management –who is responsible for managing collusion and also applications to the leniency program- might increase the number of applications for the leniency program or simply the end of cartels without the notice of authorities. These punishment measures might include financial or in severe cases prison sentences. Latter could be justified with the harm that was done but has to be used very carefully as collusive actions often go on over years and agreements can exist long before the current management took over; prison sentences would require to change the legislation in the member countries as these malpractices are generally not considered a crime in the EU- with the exception of Ireland. As the adjudgement of responsibility is not clear the possibilities to apply such individual penalties is questionable.

    SLH #685

  2. In response to the former comment on the blog entry, I agree with certain perspectives taken by the author, however, think that whistle blowing rather increases welfare and effectively prevents the formation of cartels. Therefore, I would like to address the three arguments made.

    Regarding the first argument, I do agree that the existence of whistle-blowing might change the internal structures of a company. In some cases, this will be done to prevent employees from spying on the company. However, in my opinion, companies understand that the existence of whistle blowing increases the cost of collusive behaviour and therefore, induce executive managers to discontinue or prevent cartel activities. Specifically, if firms wanted to continue collusive behaviour and prevent employees from reporting their misbehaviour, they would have to “bribe” the informed employees. This effect is multiplied because the colluding firm has to provide this to each informed employee, even if only the first employee might benefit from the reward by the antitrust authorities. Resulting from this, firms might want to enforce a rather more transparent internal structure in order to prevent misbehaviour, similar to the increasing importance of transparency in financial control since the failure of WorldCom and Enron. I agree that these changes can be costly, however, don’t necessarily decrease welfare in the long run as collusion is more likely to be avoided.

    Second, the former comment mentioned that the search for proof of collusion decreases the productivity of employees, given the time and resources wasted for proof. This might be true. However, it should be in the best interest of all companies to prevent misbehaviour and using this argument would also imply that all measures of internal audit against fraudulent behaviour decrease welfare. This is certainly not the case, as we have seen in the past (e.g. WorldCom). Here, the lack of protection against retaliation and incentives to report were the main reasons that some executive managers’ misconduct went undiscovered until it was already too late. If this were reported earlier from employees informed and involved, the company might still be existing today. Moreover, the reward gives employees the incentive to keep hard information on any agreements on potential misconduct, therefore allowing authorities to find tangible evidence.

    Lastly, I again agree that an application for leniency “takes careful preparation and time” as has been mentioned in the comment. In most cases, employees are neither experts in competition policy nor have full information on their employer’s conduct. It is therefore preferable if a company opts for leniency. Here, the existence of a special whistle blowing programme can incentivise firms to come clean, instead of paying a “bribe” to individuals to keep their mouth shut. And even if an investigation has started already, companies still have the opportunity to cooperate with the authorities and partly receive a reduction of the fine. After all, it is strong misbehaviour and companies still have the chance to apply for leniency before a whistle blowing programme is introduced.

    Concluding, rewards for whistle blowing strongly decreases the benefits of collusion and therefore incentivises colluding firms to terminate their agreements. In the first place, however, companies might think twice whether to join in cartel activities or not.

    Trieu Pham #578