Modern Whistleblowing System: Early Warning System and Shield for Your Business
A whistleblower system acts as a protective shield! As an entrepreneur, managing director, or executive, you will have followed the scandals of recent years at Tönnies, Wirecard, or also at Wilke, VW, and Facebook. You therefore know that such incidents can bring about significant reputational damage. However, it is often only large corporations that have the financial reserves to escape with a slap on the wrist.
So, for every upright, medium-sized business owner, the question arises: how can the risk be reduced that an employee, through conscious or unconscious breaches of the law, puts the company's fate at risk or jeopardises its future?
For known, quantifiable risks, there are often very complex risk management systems depending on the size and business model of the company. At least, however, there is a „Plan B“ in the drawer, which one hopes not to need. But what about the broad spectrum of unknown risks due to misconduct, which are rather unlikely but, if they occur, can have the consequences of a tsunami for the company?
In the following post, you will learn how a compliant whistleblowing system can serve as an early warning system and a shield against scandals and legal violations within your company.
What risks can be avoided by companies through a whistleblowing system?
Potential environmental or health hazards, product liability cases due to quality defects, corruption, bribery, fraud, accounting and balance sheet irregularities or even serious economic crime: they all fall under the risks for which there is usually no plan B in your company. They come as a surprise and no one would have thought it possible beforehand. Small and medium-sized enterprises or family businesses with proven cooperation based on trust and short decision-making processes are often particularly at risk here. The line between great trust and blind trust is narrow. If appropriate control mechanisms are missing, the gateway for abuse is wide open.
The sooner risks can be identified, the more efficient and cheaper the measures will be to counteract them and prevent a scandal from defining your company's future. Severe reputational damage from negative press or massive financial losses not only leads to significant revenue shortfalls for small and medium-sized enterprises but often also to insolvency and personal liability for you, the management.
An example of Financial losses:
The unlimited trust of the owner family of the world-renowned security firm ABUS in their former authorised signatory enabled him to embezzle over 16 million euros into his private accounts. After spending the defrauded money, he turned himself in. However, the company suffered massive financial damage, which could only be rectified with the private assets of the entrepreneurial family.
An example of Damage to reputation:
In the Tönnies case a whistleblower, an employee of the canteen operator, was concerned that the violation of the minimum distance of 1.5 m in the canteen would lead to the spread of was promoted by COVID-19. Her video went viral and she was sacked. She sued, but there was no final judicial resolution. The spread of the virus in the region and the devastating press coverage regarding working conditions at Tönnies contributed to lasting reputational damage and significant financial losses.
An example of Trade secrets:
The case of Brigitte Heinisch, who pointed out inhumane conditions in care to her employer Vivantes – Netzwerk für Gesundheit GmbH, went through all legal instances. Due to staff shortages, residents were left lying in their own faeces and urine until the afternoon. Services were billed that were never provided in that form. After Vivantes did not respond, Brigitte Heinisch could not reconcile this fraud with her conscience and involved the public prosecutor's office.
The Federal Constitutional Court had already ruled in 2001 that employees may also report their employer if there are criminal concerns (Ref: 1 BvR 2049/00). Ms. Heinisch was dismissed. Her persistent struggle through the courts ended six years later before the European Court of Human Rights in Strasbourg. It delivered a judgment on 21 July 2011 (Az: 28274/08which restricts the protection of trade secrets:
- The „Disclosure of wrongdoing“is covered by freedom of speech.
- The „public interest in information about shortcomings“ a company's interest in protecting its reputation and business interests prevails.
Since 2019, the legal situation in Germany has been extended by the Trade Secrets Act to the effect that unethical behaviour by a company or its management is sufficient for an employee to disclose trade or business secrets. The prerequisite for this is that the disclosure is suitable for protecting the general public interest. For example, the Higher Regional Court of Oldenburg acquitted a whistleblower who leaked trade secrets of a company to the media. The company lawfully exported a chemical for lethal injection to the USA for the execution of the death penalty, with the approval of the authorities.
Legal requirements for early warning systems
Early warning systems come in varying levels of complexity. From the minimum compliance with legal requirements to comprehensive risk management systems and extensive compliance programmes. The aim of all systems is to prevent breaches, thereby preventing damage to reputation and reducing liability risks. Furthermore, they serve to detect any misconduct as quickly as possible, in order to be able to react efficiently and consistently.
With small and medium-sized enterprises, there is often an approach of simply meeting the minimum requirements, which avoids criminal proceedings or claims for damages, and which, for example, allows them to participate in public procurement tenders.
But what is the minimum? In Germany alone, there are around 2,000 laws and around 3,500 regulations with over 75,000 legal norms. Added to this are EU directives and further legal requirements as soon as the company operates outside of Germany.
However, to this day, there are only recommendations and no explicit „compliance“ law that regulates which measures you must implement as a business owner. With the EU Whistleblower Directive From 16/12/2019, a mandatory, cross-industry core element of compliance programmes was established for the first time.
The whistleblower system according to the new EU directive
The EU Whistleblower Directive (now translated into the German Whistleblower Protection Act) states that all companies with 50 or more employees must establish secure channels for reporting infringements by the end of 2023. The reports must then be handled professionally and confidentially.
Until now, in Germany, as in most EU countries, whistleblowers were not protected. Reporting an incident entailed a high personal risk. The directive therefore requires that someone who notices potential compliance violations in the course of their professional activities should be able to report them without having to fear civil and labour law consequences. Specifically, these include, for example, suspension or dismissal, relocation or transfer of duties, salary reduction or issuance of a poor employment reference, bullying or discrimination, disadvantage or unequal treatment.
This also includes applicants, interns, and former employees. The policy goes further: if the whistleblower suffers retaliation, they are additionally entitled to compensation.
What's the situation like in practice today?
The variety of reporting channels and systems used in practice to date is large, as there are currently no legal requirements for the design of such whistleblower solutions. Today, whistleblowing systems are primarily found in internationally operating companies with comprehensive compliance programmes. In these, whistleblowing is considered an important contribution to effective compliance.
Some companies consciously reject whistleblower systems. They are convinced that their open communication culture does not require special reporting channels, or they fear that doing so will create a culture of mistrust.
„Is the catfight now continuing anonymously and digitally?”
The fact is that, in the future, as a business owner, you will be obliged to respond to notifications within one week and to follow up on them accordingly.
What is to be reported according to the EU Directive? The scope appears manageable at first glance, but can become complex and challenging in the detailed areas:
- Breaches of consumer protection
- Environmental protection violations
- Infringements of the financial interests of the Union
- Competition infringements
- Breaches of tax and money laundering law
However, each EU country can extend the scope. So it is quite possible that German or Austrian legislation will include further legal areas.
As an entrepreneur, you can best prevent abuse by clearly informing your employees what guidance you expect. Clarity and orientation are also provided by a so-called code of conduct, which sets out how everyone should behave within the company.
Here, „simple, short, concise, and lived“ is better than „complex, long, and put away in a drawer.“ A good guideline is the principle: Always act as you would want to read about it in the newspaper (or in the media).
The best prevention against abuse is clear, transparent, and open communication, as well as a constructive approach to mistakes.
So who are whistleblowers? Are they particularly loyal or do they want to harm the company?
In principle, every employee has a duty to draw their employer's attention to grievances. However, delivering bad news is rarely appreciated. If taboos, silence, and looking the other way prevail in a company, those who deliver the bad news are often insulted as denouncers or traitors. Supervisors who do not wish to be confronted with mistakes or are reluctant to admit them turn the tables and interpret the raising of the issue as a loss of trust.
Is it about However, violations of standards that pose a danger to the organisation, employees or the environment must be weighed against the duty of loyalty to the company, making loyalty to the company more important than supposed loyalty to a supervisor. Employees who dare to draw attention to grievances are therefore acting in the interests of their company. They take responsibility and facilitate improvements.
Which whistleblowing systems exist on the market today?
A wide variety of options are available on the market today: internal or external ombudsmen, trusted individuals, suggestion boxes, telephone and email solutions, digital whistleblowing solutions, and other internal or external points of contact. All of these contribute to increasing transparency within the company and utilising tips as an early warning system.
But with which of the different Whistleblower systems Do you also meet the requirements of the EU Whistleblower Directive?
The risks you take without a whistleblower system
The temptation is great to ignore the directive and hope that nothing happens and you don't get caught. With around 100,000 companies in Germany alone, you won't really stand out, will you?
In addition to the risk of non-compliance, the EU directive gives rise to another, far more serious risk: if a company offers its employees an internal anonymous channel for reporting, employees must first use this internal channel. If they go public immediately, they face employment and criminal law consequences.
If the company does not adhere to the prescribed deadlines for received reports, or does not offer any confidential communication channel at all, employees are permitted to go directly to the public. The resulting financial damages or reputational damage due to bad press are, based on experience, significantly higher than the anticipated penalty for the violation.
at the affordable Prices Therefore, you are saving money in the wrong place if you do not set up such a reporting channel for whistleblower systems. The potential damage that could arise from this is disproportionate to the Costs of a whistleblower system.
Wer kann bei der Auswahl des passenden Hinweisgebersystems helfen?
Lawyers, compliance consultants, auditors and tax advisors are suitable. They can advise you on selecting a suitable whistleblowing system that meets your requirements. The size and business activities of your company, labour and data protection law requirements, as well as possible integration into an existing compliance management system, should be taken into account.
Do you want to quickly and easily choose a suitable whistleblowing system as a shield for your company? Get an overview of the most important decision criteria for Selection of a whistleblowing system.
Conclusion: Why should you implement a whistleblowing system?
The answer is simple: to protect your company, your good reputation, your employees, and your stakeholders from risks with this early warning system.
Do you wait until the last day stipulated by the EU directive on the introduction, or do you already seize the opportunities that arise from it for your company? The sooner you integrate a whistleblowing system into your company processes, the more you contribute to increasing integrity and transparency in the company culture.
Download our latest Guide to implementing the Whistleblower Protection Act in your company” down. Or Contact Arrange a personal consultation with one of our experts.
(The masculine form used refers to all people, regardless of gender.)
