*** On the 26th of February 2021, it was held the third session of the VIRTEU Roundtable Discussion Series, which focused on “Whistleblowing, reporting, and auditing in the area of taxation.” VIRTEU (Vat fraud: Interdisciplinary Research on Tax crimes in the European Union – Grant Agreement no: 878619) is a high profile legal research project funded by the European Union, which aims at exploring the interconnections between tax crimes and corruption to unravel the relationships between fraud and corrupt practices in the area of taxation.
The series has been organized by VIRTEU Special Adviser Prof. Diane Ring, who is Associate Dean of Faculty, Professor of Law and Dr. Thomas F. Carney Distinguished Scholar at Boston College Law School, the project Principal Investigator, Dr. Costantino Grasso, who is Assistant Professor of Law at Coventry University and Editor-in-Chief of this Blog, and the Co-Investigator, Dr. Lorenzo Pasculli, who is Associate Head for Research at Coventry Law School.
The third session, which was chaired by Prof. Diane Ring, enjoyed the participation of Charles Middleton, International Tax Lawyer and whistleblower, who not only participated in the session but also gave a preliminary speech offering key perspectives from practice. The roundtable also enjoyed the participation of two leading experts in the area of whistleblowing, Prof. Jonas Heese, who is Associate Professor of Business Administration at Harvard Business School, and Mary Inman, who is Lawyer and Partner at Constantine Cannon LLP, as well as of the VIRTEU Research Associate in the area of tax compliance, Dr. Elaine Doyle, who is Senior Lecturer in Taxation at the University of Limerick.
Summary of the Roundtable (by Stephen Holden)
Whistleblowing, while having no universally agreed definition, is broadly accepted as the practice of knowledgeable insiders disclosing illegality, immorality, or otherwise wrongdoing, to those with the ability to affect or prevent transgressional conducts. By virtue of having privileged access to information and the inner workings of organisations, they have been considered the ‘most effective stakeholders for reducing the occurrence of unethical behaviours in organisations’, and as such establish an effective method of providing accountability to powerful actors, and alerting society more broadly to problematic behaviours.
Reflecting upon his personal experiences as a whistleblower, Charles Middleton was able to provide a greater context to the motivations of whistleblowers, and the deliberations and processes that whistleblowers engage with when considering if they should make a disclosure or not (15:20).
Within the field, motivations of whistleblowers remain a contentious issue. The perceived motives have been demonstrated to affect how organisations, managers, and peers, each respond to the person making the disclosure, and the rates of retaliation. Critically, interpretations of motive can affect legal protections afforded to whistleblowers, or even if they receive protections at all.
It has been argued that whistleblowing should be a totally altruistic act, and those motivated by self-interest or financial rewards are not true whistleblowers, ‘as the ethical quality of the act’ is not devoid of self-interest, while others contend that as long as wrongdoing that would otherwise remain hidden is exposed, then the motives of the individual do not detract from the content of the disclosure. In essence, “making the right decision for the wrong reasons is still making the right decision”.
The decision-making process is often fraught with uncertainties, and, as highlighted by Professor Jonas Heese (37:30), retaliation against the whistleblower is a common feature following a disclosure. In addition to bullying and harassment, retaliation may manifest as the loss of the job, demotion, loss of expected bonus, or other detrimental impacts on a household income. Whistleblowers risk their livelihood, potentially losing their home, the health insurance, the ability to provide for their family and loved ones, the potential burden of high legal costs in bringing actions for retaliation, the loss of ability to pay for school or other educational fees, and detrimental impacts on retirement funds or other savings. Further, it has been evidenced that both a loss of income and whistleblowing, in general, can have a serious impact on mental and physical wellbeing, including depression, anxiety, self-harm, increased stress, and sleep problems.
Often, retaliation is indirect and disguised, occurring several weeks after the disclosure, and unrelated to the issues raised (17:00). This allows companies to engage in what is understood as ‘reason shopping’.
The discussion considers the delineation of the role of a ‘gatekeeper’, and the role of the whistleblower. The gatekeeper, as explained by Dr Elaine Doyle (32:20) consists of formal structures and roles that are tasked with uncovering corruption and fraud or other illegal activities, for instance, internal compliance mechanisms, external auditing bodies, and oversight bodies such as tax authorities. However, problems come when organisations acquire the services of individuals with expert knowledge of tax structures in order to advise on how best to circumvent or otherwise avoid these formal oversight functions.
The use of such individuals presents a significant problem from the perspective of identifying and detecting illegality and wrongdoing. In essence, those providing advice to firms have a legal and moral duty to maintain confidentiality, and to act in the best interests of their clients, however, also have a corresponding duty to maintain organisational standards and operate ethically (39:00). For the purposes of the definition, there also exists the question of if advisors may become whistleblowers resultant of the client relationship, and not one characterised by an employer/employee relationship. By example, Mary Inman raises the role of the Big Four accountancy firms and their responsibilities as gatekeepers becoming diluted by virtue of the established transactional and mutually beneficial relationships (35:00), for instance, Disney has used the same auditing firm since inception with no rotation, and therefore, there are concerns regarding the objectivity of audits and relationship between the organisation becoming too familial.
Similarly, an assessment of how gatekeepers’, such as internal compliance bodies and organisational managers approach and treat whistleblowers is necessary. Professor Jonas Heese highlights there exists a stark contrast in approaches to whistleblowers by those with gatekeeping authority (36:50), with some engaging in retaliation, and others believing that each employee holds a risk management function and is acting in the broader interests of the organisation, and as such supports the wider organisational health and displays positive organisational citizenship behaviours.
Of some significant concern, is what Charles Middleton categorises as the ‘revolving door’ between individuals who are gatekeepers, and those with responsibilities to effective and fair tax practises internal within organisations, creating what could be understood as an accomplice to wrongdoing (41:00). Such systems are characterised by those who come from industry before taking up a role as a regulator or otherwise gatekeeper, and then return to industry to advise on methods of ensuring legal compliance with tax codes, while exploiting vulnerabilities to minimise financial liabilities.
Accordingly, given the systemic failures of those undertaking a gatekeeper function in order to detect and prevent organisational wrongdoing, there has become an increased reliance on whistleblowers to uncover unethical and illegal practices, and therefore, whistleblowers are understood to fulfil a regulatory function.
Dr Elaine Doyle takes the opportunity to highlight the inherent issues of whistleblowing within the context of taxation as the differentiation between legal but immoral conduct, and illegal conduct (43:30). When reporting issues around illegal conduct, there may exist in expectation that such behaviours are addressed and prevented from continuing, with appropriate sanctions for wrongdoers, however, in the context of legal but immoral behaviour, the same expectations may not be present. This concern appears to be the result of the significant body of evidence drawn from the experiences of whistleblowers, and those who were aware of wrongdoing and did not blow the whistle, many of whom expressed one of their most prominent concerns would be not being taken seriously, or “nothing would be done, or could be done” to address the conduct. Further, if wrongdoing is tolerated then that conduct risks becoming normalised, and as such will no longer be viewed to be wrong, creating an organisational norm of silence regarding the wrongdoing, making it more difficult to disclose when there is not a strict understanding of illegality. As such, where there exists a lack of evidence of illegality, there may exist a restrictively high barrier to disclosure, categorised by overwhelming risk and limited means of preventing the conduct, and no responsibility for the perpetrators.
This leads to the question, in the face of such dangers and risks of retaliation, with considerable detrimental impact to the individual, how do we best encourage knowledgeable insiders to make disclosures of wrongdoing or otherwise illegal conduct. Punctuated throughout the discussion was the use of rewards, bounties, or otherwise financial incentives in order to encourage whistleblowers in coming forward. While financial incentives or reward programmes may be more commonplace in the US, for instances through the provisions within the Dodd-Frank Act, by expanding these provisions globally there exists the potential to incentivise whistleblowers, and possibly tip the scale in the direction of ‘benefit’ in the cost-benefit decision-making process.
The use of financial incentives has been categorised as ‘a one off compensatory payment for the risk of harm resultant of whistleblowing’, including, as Charles Middleton points out, the difficulty in whistleblowers finding future and alternative employment.
The long-term financial benefits to organisations and investors when providing financial incentive programmes to disclose wrongdoing is self-evident. For instance, had whistleblowers being empowered and encouraged to come forward at earlier stages in circumstances such as the Bernie Madoff scandal, Enron, Wirecard, or WorldCom etc, then significant financial harm may have been averted through the prevention of ongoing wrongdoing, and intervention at a much earlier stage. This supports the argument that incentivising disclosures at an early stage benefits the long-term health off the organisation, and protects shareholders and investors from financial malfeasance conducted by the organisation.
While there exists some concern that rewards will be used as a means for opportunistic individuals to profit from organisational wrongdoing, any rewards are offset by significant risk, and as Mary Inman points out, the process of being granted rewards can take up to 10 years (53:13). Similarly, Charles Middleton highlights that the vast majority of the rewards provided do not make a person rich when contrasted to the benefits of remaining within an organisation and progressing up the corporate ladder (54:20).
As highlighted by Dr Elaine Doyle, there also exists a significant deterrence effect when considering the use of significant punitive rewards, which would offset the benefits gained of any wrongdoing. saliently, it is predicted but following the implementation of bounty or reward programmes, once several large awards had been provided, they would exist search a significant deterrent as to reduce the overall level of wrongdoing. (100:31)
A further consideration on how to best encourage and empower whistleblowers is the use of effective anti-retaliation laws, as explained by Mary Inman (50:05). The United States system is Categorised by a lack of overarching umbrella protections, relying on a more piecemeal and state by state-based system for anti-retaliatory measures. By contrast, with the implementation of the European Whistleblowing Directive, EU countries will be required to provide overarching protections to whistleblowers who highlight breaches of European law, providing a more consistent level of protection.
Finally, it is required there is an authority with the appetite to pursue cases, implement protections in practise, and enforce provisions that bring such rewards, for instance, the IRS in the United States. Within the context of what whistleblowing tips to act upon, and which firms the US Department of Justice choose to pursue for prosecution, as Professor Jonas Heese highlights, this can be somewhat problematic (101:46). There exists performance metrics for success within law enforcement and regulatory agencies, namely, win cases and collect fines/financial penalties. Accordingly, such tips and cases may not be based on a belief in the existence of the wrongdoing, but rather, the likelihood of success and the existence of deep pockets. It could therefore be argued there exists an enhanced incentive for organisations engaged in wrongdoing to create ever increasingly complex structures and difficult investigatory environments as a means of dissuading prosecution, regardless of the existence of the belief of wrongdoing.
In some way to combat this, is the use of qui tam prosecutions, brought by individuals on behalf of the state, and enabling for what is in effect, a private prosecution. Qui tam suits however are characterised by an imbalance of power and resources, with opportunities for drawn-out appeal processes, and no certainty in victory. As such, while they present an opportunity, they also represent a significant risk to the individual. The application of the False Claims Act in the areas of taxation is sporadic, with only certain jurisdictions, for instance New York, allowing for qui tam suits, however, this is being gradually expanded.
 Near, J. P. and Miceli, M. P. (1985) ‘Organizational Dissidence: The Case of Whistle-Blowing’. Journal of Business Ethics 4 (1), 1-16 pg 4
 Miceli, M. P. and Near, J. P. (2005) ‘Whistle-Blowing and Positive Psychology’. Positive Psychology in Business Ethics and Corporate Responsibility 1, 85-102
 For discussions, see De George, R. T. (2010). Business ethics (7th ed., pp. 298–318). New York: Prentice Hall.
 Grant, C. (2002). Whistle blowers: Saints of secular culture. Journal of Business Ethics, 39(4), 391-399.
 Bouville, M. (2008). Whistle-blowing and morality. Journal of business ethics, 81(3), 579-585. pg 583
 Park, H., & Lewis, D. (2018). The negative health effects of external whistleblowing: A study of some key factors. The Social Science Journal, 55(4), 387-395.
 Worth, M. (2020) Unsafe and Unsound: How Citizens Suffer Under the UK’s Whistleblower Protection System
 Organisational citizenship behaviours may be understood to mean, “‘performance that supports the social and psychological environment in which task performance takes place”. Cassematis, P. G., & Wortley, R. (2013). Prediction of whistleblowing or non-reporting observation: The role of personal and situational factors. Journal of business ethics, 117(3), 615-634.
 Savage, A., & Hyde, R. (2015). The response to whistleblowing by regulators: a practical perspective. Legal Studies, 35(3), 408-429. Pg 415
 Miceli, M. P., Near, J. P., & Dworkin, T. M. (2008). Whistle-blowing in organizations. Psychology Press. Pg 71
 Jacquinot, P., & Pellissier-Tanon, A. (2019). Conspiracy of Silence versus Moral Freedom: Applying the Concept of Structure of Sin to the Phenomenon of Whistleblowing. Journal of Markets & Morality, 22(1).