How SFO calls for whistleblower payouts could transform UK fraud enforcement and employee relations

16 December 2024

Dan Hudson, specialist partner and head of white-collar crime at Seladore Legal, examines how proposed whistleblower financial rewards could reshape UK fraud enforcement.

Nick Ephgrave, the Director of the Serious Fraud Office (“SFO”), has recently reiterated his ongoing desire to be able to offer financial rewards to whistleblowers. In doing so, he builds on similar, albeit limited schemes available to HMRC and the Competition and Markets Authority. If such a system were to be introduced, it would mark a seismic shift in tackling corporate fraud in the UK.

In pushing for this, Ephgrave aims to align the UK more with the incentivised US system, where whistleblowers reportedly drive 86% of corporate fraud prosecutions, compared to just 5% in the UK. With the largest single payout to a whistleblower reaching $279 million (in an unidentified case), financial incentives in the US have anecdotally proven effective in encouraging insiders to report criminality and misconduct.

Ephgrave argues that similar rewards in the UK would correct a skewed risk-reward dynamic, empowering individuals (who might be concerned about the potential financial harm involved in being perceived to have “turned” on an employer) to provide crucial information and evidence and enabling the SFO to prosecute cases more effectively. The potential benefits – more investigations, more convictions, increased fines, and reduced fraud – are compelling. Ephgrave has also gone so far as to remark that the attitudes towards paying whistleblowers exhibit signs of “schizophrenia”, adding that he has not encountered a compelling argument against the idea beyond the view that it is somehow “not British”.

There are various tailwinds in favour of a change to whistleblowing rules. In recent weeks, the Director has welcomed the news that the SFO has received increased funding – a sum equivalent to nearly 12% of its annual budget – in order to create a new team which will extend the SFO’s capabilities to seize assets from convicted fraudsters, allowing it to expand and accelerate the use of technology to assist disclosure and support improvements to SFO’s case management system.

Furthermore, following the extension last year of corporate criminal liability for the conduct of senior managers (under the Economic Crime and Corporate Transparency Act – “ECCTA”), the new government, this autumn, has published its Guidance relating to the corporate Failure to Prevent Fraud offence (which will come into force later next year – also by dint of ECCTA).

Having just announced that more prison spaces will be built, criminal enforcement and justice (in particular financial crime) seems to be getting a ‘shot in the arm’ from the government. Given that Sir Keir Starmer was formerly head of the Crown Prosecution Service, this is, perhaps, unsurprising.

It is therefore reasonable to assume that Nick Ephgrave will want to build on the new criminal offence tools that are coming his way, as well as the increased resources (the £9.3m extra for the new SFO team and systems and also the extra general prison space) and unlock the ‘intelligence’ that (more) incentivised whistleblowers could provide.

However, while the intended outcomes in relation to the introduction of whistleblower incentives are commendable from the point of view of increasing (effective) enforcement activity, such a policy would inevitably bring profound implications for employers, employees, the wider legal landscape, and the investigations and prosecution process itself.

Financial incentives are likely to achieve their immediate goal: more whistleblowers coming forward. The introduction of rewards would encourage (and remove some obstacles to) the reporting of misconduct by employees, particularly in the absence of robust internal compliance systems. This, in turn, would lead to an increase in the number of investigations targeting companies and their senior management and employees (personnel whose conduct will, increasingly so under ECCTA, result in their employers encountering criminal liability). Where evidence justifies action, these investigations will translate into more prosecutions.

Furthermore, as whistleblowing reports grow in volume, so too will the likelihood of civil claims against companies. These claims may arise alongside or even ahead of criminal proceedings, as seen in the recently reported London Capital & Finance case. The civil sphere may therefore become an arena of heightened activity as a result of increased investigation and enforcement activity, adding another layer of complexity for corporate defendants.

However, incentivised whistleblowing risks eroding trust between employers and employees. Senior decision-makers may have reason to fear that employees will bypass internal reporting mechanisms and go straight to law enforcement, tempted by the prospect of  financial rewards and motivated by potential gain rather than a commitment to internal resolution. This externalisation of reporting risks fostering a culture of suspicion.

Such decision-makers could improve the standing of corporate self-investigation if they ensured that they were perceived by employees (as well as by law enforcement) as robust, thorough and independent. Endeavour Mining was criticised earlier this year (including by its employees) for hiring regular corporate advisors to conduct a probe into its former CEO. Such criticism bolsters the suggestion that any significant internal investigation should be able to be presented as independent, unless there are exceptional reasons, in order to maximise the credibility and accuracy of an investigation’s findings and process.

The tension between employer and employee will be especially acute if external reports are not grounded in fact. While false or frivolous allegations are less likely to advance to prosecution, employers may still bear significant costs in investigating and addressing these claims, both in terms of time and resources. The mere act of responding to law enforcement inquiries can impose a heavy administrative burden and, potentially, a reputational one too – even if the allegations ultimately lack merit. And, of course, particularly where the assertions lack credibility, the SFO would need to be prepared to counter the stance of consequential defendants and their lawyers who will likely seek to impugn evidence assembled as a result of information provided to the prosecution in hope of receiving a financial payout. The robustness and fairness of the criminal process would need to be preserved.

This development also underscores the critical importance of effective internal compliance systems at organisations. Companies will need to prioritise fostering a culture where employees feel confident that internal mechanisms can resolve misconduct appropriately. Failure to do so risks undermining governance frameworks and escalating tensions, as employees opt to report directly to law enforcement.

At the same time, employers must be prepared for heightened scrutiny of their senior management and employees. The widening scope of corporate criminal liability of the kind found in ECCTA, coupled with financial incentives for whistleblowers, creates a fertile ground for reports targeting middle management and frontline employees, as well as executives.

There is a clear logic in Nick Ephgrave’s goal of transplanting the US whistleblower model into the UK. However, effective management of the expected uptick in whistleblowing will be critical to realising its enforcement benefits while mitigating organisational disruption, and consequential procedural challenges and cultural fallout in the workplace.