JOINT COMMITTEE ON FINANCE, PUBLIC EXPENDITURE AND REFORM debate -
Tuesday, 5 Jun 2012

Protected Disclosures in the Public Interest Bill: Discussion (Resumed)

Chairman

We will resume in public session. I welcome Mr. Paul Egan, partner at Mason Hayes and Curran and author on company law and corporate governance. I remind members that briefing documents have been circulated via e-mail in advance of today's presentation. The format for this meeting will be for Mr. Egan to make some opening remarks and for these to be followed with a question and answer session. I remind members, the witness and those in the Gallery that all mobile telephones should be switched off completely.

I advise the witness that by virtue of section 17(2)(c) of the Defamation Act 2009, he is protected by absolute privilege in respect of his evidence to the committee. If he is directed by the committee to cease giving evidence on a particular matter and he continues to do so, he is entitled thereafter only to a qualified privilege in respect of his evidence. He is directed that only evidence that is connected with the subject matter of these proceedings is to be given and is asked to respect the parliamentary practice to the effect that, where possible, he should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. Similarly, members are reminded of the long-standing ruling of the Chair to the effect they should not comment on, criticise or make charges against a person outside the House or an official in such a way as to make him or her identifiable.

Mr. Paul Egan

I propose to speak for approximately five minutes and to highlight some of the points I made in my presentation. I intend to focus on slides Nos. 6, 9, 10 and 11 or pages 3, 5 and 6 of the PDF version. I come to the issue of whistleblowing in the context of being a company lawyer advising clients on corporate governance. More recently, I have had to advise clients with respect to compliance with anti-corruption law, notably the UK Bribery Act 2010, which came into force last year and which has an effect on Irish businesses doing business overseas. I have also advised on the effect of the American Foreign Corrupt Practices Act. I have found myself led by my clients in that many of them have initiated and have pretty effective whistleblowing procedures and structures in place, particularly larger companies where these procedures can operate internally.

As a solicitor in practice, I believe this is a good Bill which, with suitable tweaking, will be a good addition to corporate governance. I have included a cartoon from The New Yorker in the material I presented. The cartoon depicts a number of gentlemen sitting around a table and one of them calling for someone who can distinguish right from wrong to come in. As a solicitor, my primary duty is to advise clients with respect to the law of what is or is not a crime and in respect of civil law of what may give rise to civil action. However, more and more I find that clients seek to know the law so as to be a little ahead of it because, rather than be known as a compliant company, they like to be known as an ethical company.

In slide No. 6 I explore the technical points in respect of how liability for corporate acts on the criminal and civil side can attach to a company. The rules are fairly technical and I do not intend to go into them unless I am asked for details in the question and answer session. Whatever way liability will attach to a company, whether by imputation or attribution, having effective whistleblowing procedures in a company is an essential part of good governance. Slide No. 9, on page 5 of the PDF document, lists a number of general observations from my legal practice and I will highlight two points. First, whereas external, good faith reporting exists to defend workers, internal reporting structures serve to protect the company and its officers. I note one of the sections in the proposed heads suggests that with regard to State organisations there should be stated policies with regard to internal treatment of information. This may have a place in the private sector also. Whatever is done in the law should not discourage internal reporting.

A couple of years ago, the ICTU paper on good faith reporting urged there should not be a requirement to use internal systems before reporting externally and the heads of the Bill provide for this. This makes sense, because in small companies it will not be possible to report if there is a gang mentality. I am attracted to the idea that the emphasis should be on good faith reporting. When I speak to business people, most likely those on the management side, the idea of using the expression "whistleblower" is unattractive. To make an extreme argument, if the Bill was called the informers' Bill, it would be unattractive. Therefore, "good faith"reporting is a better expression as is the focus on disclosure in good faith.

I have made a few technical observations on the general scheme, but do not propose to go into detail on them now. With regard to slide No. 11, this law has come into further focus recently in the context of the recommendations from the Mahon report. That report made a triad of suggestions, one on political funding, one on conflicts of interest of politicians and the third on the updating of bribery and corruption law. The recommendations that are pertinent to whistleblowing advocated a pan-sectoral Bill; this is it. They also advocated extending the protection to independent contractors and removing a time limit on compensation.

In summary, my view is that this Bill is part of a general renewal of laws, along with a proposed criminal law corruption Bill, which was announced in April. I expect it will be viewed positively by businesses and, subject to inevitable tweaking, will be good law.

Deputy Sean Fleming

I thank Mr. Egan for sending his documentation to us. I have just a few general questions for him as he has specific legal knowledge those of us who are not members of the legal profession do not have. He mentioned the issue of "good faith" reporting a number of times. My view is that it is the issue being reported and the substance of the report that matter, not whether the person disclosing the information does so in good or bad faith. For example, we could have an employee who was passed over for a promotion who is aware of something being wrong and is sore about being passed over and blows the whistle. He or she probably blows the whistle in bad faith, but what he or she does is quite right. He or she might not have blown the whistle if he or she got promotion, but it would be wrong not to take the whistleblowing seriously because the person blew it in bad faith. It is similar to the situation where someone reports a crime or a neighbour. Normally when people have problems with neighbours they do not report them for the good of the local authority but because they are personally annoyed about something. However, that does not detract from the substance of what is being reported. We have not sufficiently teased out the question of whether there is an over-reliance on good faith. A report submitted in bad faith might be as valuable as one given in good faith. We hear about cases involving spouses who report each other to the Revenue Commissioners after a falling out. That would be a bad faith report but it does not lessen the fact that the individuals concerned were probably not paying sufficient tax.

The main difficulty I have is that people may believe their organisation is not working properly or is doing something unethical but in a hierarchical structure it may simply be the case that they do not have the full picture. Their perspective is based on a segment of the organisation. How does one prevent unnecessary reporting by people who may not have the full picture?

Issues also arise in respect of the role of the legal profession in advising clients. Tobacco companies knew for many years that their products caused cancer but they carried out surveys under the auspices of their legal teams rather than their marketing departments so that any results indicating that tobacco was harmful were protected by legal privilege. Is it possible for companies to use their legal departments to shield themselves against accusations on the basis that they acted on privileged legal advice?

Mr. Egan suggested that whistleblowing is valuable in terms of overall risk management by companies. Does he have a view on the role of internal audit committees in receiving such information when assessing risks?

The Mahon report suggests that the existing limit on the amount of compensation awarded to those penalised for whistleblowing should be removed. An individual's future earnings could be reduced by much more than the existing limit of two years' salary. Who should pay for that and should it be an issue for the courts to decide? Should a mechanism be provided to deal with the issue outside of the courts?

Mr. Paul Egan

I agree with Deputy Fleming that a large proportion of disclosures are motivated by the desire for vengeance. However, the key point is that there must be a bona fide belief in the correctness of the information. This is where the question of good faith arises. In many cases people will disclose information in circumstances where they have been wronged but they should have a good faith belief in the truth of their accusations. We are trying to get away from the concept of being in compliance. When I tried to explain to a client the fine distinctions between the UK's Bribery Act 2010 and the Irish melange of the Prevention of Corruption Acts 1889 to 2010, he told me he was not interested in the distinctions but wanted something clear. The UK law and, I believe, our proposed law support the cultivation of a better attitude at work rather than one based on distinctions between what is legal or illegal. It goes back to what may be the slightly cheesy concept of what is right. I grant the Deputy the point in regard to good faith.

Chairman

Deputy Fleming brought this up on our last occasion. It is an important point.

Deputy Sean Fleming

Mr. Egan clarified the point for me.

Chairman

At issue is the belief in the truthfulness of what is being disclosed rather than whether the individual has an ulterior motive.

Deputy Sean Fleming

When the Minister spoke to us about good and bad faith, he interpreted the issue in terms of motivation. Mr. Egan suggested that good faith is based on a belief in the accuracy of what one is saying.

Mr. Paul Egan

That is the key point.

Deputy Sean Fleming

The individual believes a claim to be true.

Mr. Paul Egan

Good faith is based on a belief in the accuracy of the complaint.

The Deputy asked how one can prevent people from making disclosures without knowing the full facts. I agree this is part of human behaviour and employees may see only a small aspect of their organisation. The cases with which I deal are obviously only a small sample but when I come across malpractice it is a pretty straightforward matter of inappropriate payments being received by individuals with respect to transactions by the commercial organisation. In the case of anti-corruption law it is relatively straightforward. I grant that it might be more tricky to make disclosures under competition or environmental protection law.

In regard to legal professional privilege, the first point to make is that it belongs to the client rather than the lawyer. On the question of whether in-house legal departments can be used as a cloak, it was found in a European case - the name does not come straight to mind - that in-house legal advisers do not have legal professional privilege under European competition law. The question then arises of external lawyers. As officers of the court, solicitors are precluded from advising clients to conceal information. Leaving aside the quality of information disclosed under the proposed Bill, section 19 of the Criminal Justice Act 2011 provides a mandatory requirement to disclose information relating to the commission of a particular class of serious arrestable offences. Legal professional privilege will be there forever. It is guarded jealously by members of the legal profession. I have to declare my interest as a lawyer.

The Deputy asked about internal audit committees for large companies. Audit committees exist under various rules of law. We have the audit committee under the code of practice for the governance of State bodies, the audit committee under the Companies (Auditing and Accounting) Act 2003, and audit committees specified for listed companies under the governance code. It should be included in the audit committee's remit because as a matter of law under the transposition of European directives on auditing and accounting, key risks must be identified in the financial statements each year. The trend in law is that managers and directors of companies put their heads in the sand, using an audit committee as a means of centralising information. In this respect, the proposal is a good idea.

Reference was made to compensation. Under the Unfair Dismissals Act there is a cap on the amount that can be paid in respect of compensation for loss of employment. However, there is no cap on that under equality legislation. The social policy being communicated is that whatever about dismissals being offensive, breaching the equality legislation is viewed as more reprehensible. Perhaps that is the motive for that recommendation from the Mahon tribunal report.

Chairman

I thank Mr. Egan for his attendance and his paper, which is very helpful. We are preparing a report for the Minister in the context of the preparation of the Bill. We will summarise the evidence from various witnesses and produce our conclusions. The transcript of today's debate will also be available to the Minister. It is very useful that Mr. Egan is assisting us.

The good faith disclosure point raised by Deputy Fleming is one we will discuss when preparing a report. Mr. Egan is suggesting the title should change and that it should not be the protected disclosure in the public interest Bill but the good faith disclosure in the public interest Bill.

Mr. Paul Egan

Given the choice between the two, it encourages a particular quality of behaviour rather than focusing on a narrow, legalistic approach.

Chairman

Is Mr. Egan proposing to replace the word "protected" with "good faith" in every instance? I understand him to mean this applies only to the title of the Bill. The principle in the Bill is to protect certain disclosures. We must maintain the word "protect" because it is protecting individuals making the disclosure.

The point is well dealt with in subsection (4): "A disclosure is not a protected disclosure where the person making the disclosures does so knowing that the disclosure is false or misleading or where he/she made the disclosure recklessly without regard to whether it was false or misleading, frivolous or vexatious." The concentration is on the belief and truth of the disclosure rather than an ulterior motive. That is less clear in other sections of the Bill.

In section 5, dealing with disclosure to an employer, one of the phrases refers to "A disclosure made in good faith by a worker in relation to any of the matters set out in head 4" is less clear and touches on the point raised by Deputy Fleming. It seems to open up the motivation of the individual and perhaps we should examine that. Does Mr. Egan agree?

Mr. Paul Egan

Yes.

Chairman

We had not spotted the matter raised by Mr. Egan about head 4. Paragraphs (f) and (g) appear to be confined to public sector events:

(f) that an unlawful, corrupt, or irregular use of funds or resources of a public sector body has occurred, is occurring or is likely to occur;

(g) that an unlawful, corrupt or irregular use of public monies has occurred, is occurring or is likely to occur;

Mr. Egan suggests that should also comprehend the private sector.

Mr. Paul Egan

It should be examined. I do not know if the section has already been negotiated. My experience dealing with companies headquartered outside Ireland is that they want to know about this.

Chairman

In the context of what we are trying to achieve – to protect disclosures of wrongdoing – the Bill is not confined to disclosures in the public sector and Mr. Egan's comment makes sense unless the Minister has an objection for some reason we cannot think of at the moment. Logic suggests it should extend to the private sector.

Perhaps Mr. Egan can explain his technical observations on the general scheme. Regarding head 9, which deals with the disclosures of exceptionally serious impropriety, Mr. Egan suggests considering requiring the disclosing person to have a good reason to disclose the information other than to any person. I am not clear on what Mr. Egan means.

Mr. Paul Egan

I am referring to a specified person. My reading is that the section relates to an ability to tell the world.

Chairman

I understand now.

Head 11 relates to anonymous disclosures. My initial view is that, as the explanatory note states, it is not considered appropriate or practical that workers could seek to avail of the protection provided under the legislation on the basis of having made an anonymous disclosure. On the face of it, that seems an intelligent observation but Mr. Egan is contemplating the situation where someone's identity is inadvertently uncovered later. Should the person have protection?

Mr. Paul Egan

Possibly. At the moment it is worth looking at.

Chairman

Head 13 considers extending the civil liability immunity to the employer to prevent other employees suing an employer on account of a disclosure made by another employee. I think I know what Mr. Egan is driving at but perhaps he can elaborate on it.

Mr. Paul Egan

As a general rule, where there is an actionable wrong by reason of the activity of an individual who is an employee, the employer has vicarious liability. If an employee discloses misbehaviour by another employee, the disclosing employee is exempt from legal action that results but potentially the employer must pick up the Bill.

Chairman

As the Bill is drafted, the employer does not have the protection enjoyed by the disclosing employee or the immunity from being sued. Therefore, the employer should have that immunity.

The Mahon tribunal report observations are very helpful. I am not clear on whether the Bill needs to be proofed for the recommendations of the Mahon report. Have issues come to the fore in the Mahon report that must be incorporated in the Bill? If so, what are they?

Mr. Paul Egan

One concerns compensation and has been dealt with. The other relates to extending whistleblowing protection to independent contractors. An independent contractor could be a contract worker but can also apply to any entity discovering wrongdoing. Under the Mahon tribunal report recommendations, this applies to a breach of anti-corruption legislation. The position of the report is that the protection given to whistleblowers should be extended to everyone. As things stand, at its core, this is essentially a piece of employment law which is there to protect employees. To that extent, I believe the scope may require to be expanded slightly, notwithstanding that the definition of "worker" is slightly broader than the strict one of "employee".

Chairman

I understand that.

Deputy Peter Mathews

I welcome the gentleman and I thank him for his presentation and the illumination of these matters. I have a few thoughts on which I would like to hear the views of Mr. Egan, to get their resonance, so to speak. I refer to the culture obtaining in companies and in particular, in professional firms, such as auditing firms or those providing professional advisory services. There can be a culture of pressure on middle and senior juniors - if this is not a contradiction in terms - on longer term junior employees, to conform to a culture whereby they should not raise matters that might be uncomfortable for clients to hear, and all in the interests of not unsettling the fee profile that may have been achieved over a number of years with a client. One thinks of auditing firms and Bloxhams, for example, which recently went bust. There may well have been a culture in the relationship between auditors and the firm that would have made it embarrassing or uncomfortable to open discussions that could have led to disclosures and so on.

Mr. Egan has experience in this area and I ask how he suggests these practices could be dealt with. It is not in the direct public interest but rather it is indirectly in the public interest that these cultures might be mannered or controlled. I refer, for instance, to the case of British-American Tobacco which was the subject of a documentary on BBC 2 about two years ago. This relates to Deputy Fleming's point. In this case, there was circumvention of the specific and express legal frameworks for advertising and marketing but there were subtle ways of getting around the frameworks and the honesty was obviously missing and is still not there to this day. For instance, promotional practices of the company did not create an X in a box against the express rules of what was permitted or not permitted in advertising. The use of young children in merchandising throughout Africa and in certain countries is patently wrong. I refer to those practices which are borderline or which sail close to the wind on tax planning and legal planning. I ask if Mr. Egan can offer any guidance at this stage while the draft heads of the Bill are being considered.

Mr. Paul Egan

I thank Deputy Mathews for his questions. When it comes to the issue of auditors, there is one point on which I am evangelical and that is the corruption of the principle of true and fair view by the IFRS. Coincidentally, John McManus wrote a business editorial about this in Monday's The Irish Times. When I started in practice as a solicitor in 1981, I remember visiting a friend of mine and looking at what were then called the SSAPs. These were contained in a slightly oversized single loose leaf book. The IFRS now is contained in 3,000 pages of tight print of European regulation. Damon Runyon had a great saying: “I understand subtraction and all the rest is conversation.” What has happened is that the accounting rules have become ever more technical. At one stage before there was convergence towards IFRS, the Daimler-Benz-Chrysler organisation reported hundreds of millions in profits in Europe and hundreds of millions of losses in the United States, or vice versa. To revert to the Deputy’s question, it may be beyond the scope either of my competence or of this Bill to deal with issues to do with auditors. The problem is that the rules governing audits have become so technical that-----

Deputy Peter Mathews

If I may be of assistance by suggesting an example such as an audit being conducted on a large organisation in multi-locations and perhaps in multi-currencies and with a team of staff from partners down through managers and juniors. For example, a person at senior level, just above the junior level, who has a good brain and an ability to be honest about things, makes a judgment call on some testing results or on some provisioning or whatever. The people above him or her disagree with him or her and there is pressure on the person in the same way as Professor Patrick Honohan in his report on the banking crisis said it would have taken people of courage to have persisted in presenting or in following up on their lines of inquiry and in pressing home points or lines of investigation. This is the sort of pressure coming from those who control the proprietary results of the firm - providing the advice, issuing the invoice or the bill for fees - on the people doing the work. There are judgment calls involved and as Mr. Egan said there is a reliance on whether there is a true and fair view and what is the template for arriving at a true and fair view and what sort of addition, subtractions and algebra formulae - as referred to by Damon Runyon - the conversations and the audit trail of those conversations are required to arrive at the clean bill of health. I think this is a minefield and this is why we have banking crises at the moment.

Chairman

We need to focus on the heads of the Bill and whether any such issue arising could be incorporated in this legislation. This is the focus of this committee.

Mr. Paul Egan

It is clear that whistleblowing has a role and if the law is enacted it will provide an opportunity for employees to report wrongdoing and to be complicit in the auditing of accounts which are not being audited in accordance with law. This would seem to me to be something that is open to disclosure.

I refer to my previous point regarding the highly technical rules and the more technical the rule, the more technical the approach. This is approached rather like a tax statute rather than compelling the behaviour that is being sought. The Deputy's third point is the same which is with regard to legal ways around it. This all results from a highly technical law which is producing highly technical work-arounds, so to speak.

Deputy Peter Mathews

Should we call this the neurotic guide to the such and such Bill?

Deputy Sean Fleming

I wish to take up a point. I refer to the issue of independent contractors. Mr. Egan suggested adapting the Bill but designating a specific body to deal with non-employee complaints. When Mr. Egan referred to "body", did he mean within a company? I will give an example. A major construction contract will be subcontracted and the subcontractor will in turn subcontract to others. Workers may be informed that their PRSI will not be paid on this job but these people could be about eight links down the chain and they may not even know who is the main contractor because they are employed by a subcontractor. How far down the chain will this legislation stretch, in the view of the delegation? I can think of examples of people going to their public representative to complain about not being paid for work on a job and they are quite sure that the official construction industry rate for the job is not being paid. The National Employment Rights Authority, NERA, was established to follow up on these issues. People have other avenues and can report the matter to the Revenue Commissioners and the Department of Social Protection under existing law, but that is so cumbersome. What does Mr. Egan suggest in regard to protecting people who are several links down the chain as they are working for a sub contractor to the sub contractor of the main contractor?

Mr. Paul Egan

The class of persons to be protected by a law that expands to protect them would be any individual company that potentially had contractual arrangements or failed to have contractual arrangements with a third party or a public body. Essentially, the law is broadening the ability to report wrongdoing with whistleblower protection in the case of corrupt practices and bribery, rather than general wrongdoing. If it is thought to be a good idea for public policy, it could be expanded.

Deputy Sean Fleming

The current legislation does not capture that sufficiently and would need to be amended.

Mr. Paul Egan

To accommodate the Mahon requirements, it must be looked at through the prism of the Mahon report.

Deputy Sean Fleming

I am not referring to corrupt payments or other matters viewed in the context of Mahon, but general failures.

Mr. Paul Egan

Is Deputy Fleming referring to the failure to pay tax and PRSI on behalf of workers?

Deputy Sean Fleming

Okay.

Mr. Paul Egan

As things stand that would not form part of the protected disclosure by the sub contractor.

Deputy Sean Fleming

The sub contractor would not be covered by the proposed legislation?

Mr. Paul Egan

An employee of the sub contractor who was aware of it could make a disclosure about the wrongdoing.

Deputy Sean Fleming

The wrongdoing of whom? There would be no contractual arrangement between an employee of a sub contractor and the main contractor. There is other legislation going through the Dáil on payments to sub contractors. In many businesses there are designated sub contractors who can make a claim to be paid, but they break down the job into component parts and engage other sub contractors who can then engage other workers. These workers have no contractual arrangement with the main contractor, who may not be aware of these individuals.

Public representatives regularly go to look at the work of those involved in building schools. We would go to visit the main contractor, but it would have no knowledge that the people who put in the windows were not paid. The main contractor would tell us it engaged a person as a sub contractor, who subsequently broke it down further. My point is that there is no financial link between the main company conducting the work and people who work on the job for other sub contractors. The employee of the sub contractor has no link to the main contractor for payment. I feel it is necessary to have such a link provided for in legislation.

Deputy Peter Mathews

Does the Deputy mean that such an employee could have a conversation on site about an issue?

Deputy Sean Fleming

Yes.

Chairman

Could such a person be protected under head 8, where he or she is making a disclosure to the media or to a relevant body, for example the Revenue Commissioners? The proposed legislation talks about "a worker", but if I understand Deputy Fleming's point correctly, it does not have to be a disclosure in relation to the individual's employer. It could be a disclosure on another matter that comes to the worker's attention, but not necessarily wrongdoing on the part of the employer. It is my understanding that the worker of a sub contractor could make a disclosure about the non-payment of tax by the main contractor and still be protected, as the worker is defined in the proposed legislation.

Deputy Sean Fleming

Is the whole purpose of the legislation to protect employees or workers?

Chairman

The legislation does not just refer to the worker and his or her employer, but the person would be protected in making disclosures about-----

Deputy Sean Fleming

In other words, it is open to anybody to make a disclosure.

Deputy Peter Mathews

A citizen.

Deputy Sean Fleming

A citizen.

Chairman

The proposed legislation refers to the citizen. It refers to a worker, but there are slight differences which apply in relation to a worker and a public body.

Deputy Sean Fleming

This is what we are teasing out and we need to tease it out further.

Chairman

We need to tease this out among ourselves in the preparation of our report.

Mr. Paul Egan

There is no requirement for a nexus between the disclosing employee and the wrongdoing entity.

Chairman

That is the point that needs to be flagged.

Deputy Sean Fleming

Is it catered for under the proposed legislation?

Chairman

It is catered for in a different way. There are separate protections for disclosure to one's own employer and a disclosure to a relevant body. There are three different levels of protection depending on who one is making the disclosure to. We will come back to this point. Does Mr. Egan wish to add to that?

Mr. Paul Egan

No, Chairman.

Chairman

I thank Mr. Egan for his assistance, his paper and his observations on the heads of the Bill. This was extremely useful to us and we will incorporate it in our deliberations for the purpose of preparing a report for the Minister. I again thank Mr. Egan for attending.

The joint committee went into private session at 4.35 p.m. and adjourned at 4.40 p.m. sine die.