B(LO)w and behold!

By On Jul 2, 2013

In 2001, Sherron Watkins, the then Vice-President of the corporate development department at Enron wrote an anonymous letter detailing aberrations in the company’s financial statement to the CEO, Kenneth Lay, turning whistleblower in the process. Not only did Enron go bankrupt because of fraudulent earnings reports and embezzlement, many employees lost entire retirement portfolios filled with company’s stocks as their value turned to zilch. The scandal is remembered as one of the biggest in the US till date. It was then that Senator Paul Sarbanes and Representative Michael Oxley drafted the Sarbanes-Oxley Act or ‘SOX’ to rein in corporate fraud. That is in the financial domain. However, such cases can have serious implications when pharmaceutical companies are involved, since the lives of innumerable patients are at stake and the damage is irrevocable.

The revelation by Dinesh Thakur, then Director and Global Head of Research Information and Portfolio Management at Ranbaxy Laboratories (2003-2005) has not only made Ranbaxy the first Indian company to come under the scanner for misrepresenting data in one of the biggest settlement by a generic pharma company ($500 million) but it also serves as a warning for others to be careful and diligent about data reporting and others such frauds. The case which dragged on for the past eight years could not have made a roaring impact had Thakur’s identity not been protected under the Whistleblower Protection Act. It was in 2005, when he first reported falsified data from Ranbaxy’s Paonta Sahib and Dewas plants to the management. Their failure to take any action, led him to knock the doors of the US FDA over falsified records and violations of US Drug manufacturing rules.

The Indian scenario

Figures indicate that in the US alone, of all the whistleblower suits filed, 10 per cent involve drugmakers, which is significant given that 2011 saw 900 such suits in total. The stream of allegations continues even as the lawyers from US Justice Department dish out hefty penalties, one after the other. So much so that pharma biggies including GSK, Johnson & Johnson and Abbott to name a few, paid $6.6 billion as fraud penalties in 2012, double that of previous year, suggest estimates. However, the Indian scenario is completely different. Unlike the US, where the Whistleblower Protection Act is two decades old, India does not have any law to protect whistleblowers, though a bill for the purpose is in the pipeline. The Union Cabinet passed The Public Interest Disclosure and Protection of Persons Making Disclosure Bill, 2010 in order to implement an effective whistle blowing policy. This bill was passed by the Lok Sabha on December 27, 2011 but the Rajya Sabha is still to pass the Bill. At present, the Chief Vigilance Commissioner and the Central Vigilance Commission have the same powers as that of a criminal court in matters related to whistleblowing.

“The major loophole in our administration lies in the fact that Indian Companies Act, 1956 as well as SEBI Act, 2002/ Guidelines do not contain any statutory provision regarding whistle blowing policy and there exists only a non-mandatory provision under Clause 49 of the Listing Agreement under SEBI guidelines(which deals with the various measures of corporate governance that companies should follow),” elaborates Nandita Gera, Partner, Titus & Co. Under this policy, if a company is involved in any kind of malpractices, persons aware of it do carry an option to report higher official or rather appropriate Governmental authorities so that the investigation procedure can begin at the very onset, and the responsible persons/ company could be penalised.

“Since, there are no specific statutory provisions regarding whistleblower policy, people in our country do not report such instances out of the fear of retaliation, rejection, lack of personal security and risk of loosing their jobs in absence of any provisions of reward/ compensation for reporting any unethical acts in their organisations,” she says further. Corporate India has been slow to respond to the non-mandatory requirements of Clause 49 in general, and the clause relating to the whistleblower policy in particular, she opines.

“US also recently introduced the Dodd Frank Act which provides for a whistle blower bounty programme, beyond just protection of identity with the provision for the whistle blower to report directly to the regulators. The US laws are quite stringent in terms of quantum of penalties and settlement of criminal matters.”
Dinesh Anand
Partner & Head, Forensic Services,KPMG India

Chips in Dinesh Anand, Partner and Head, Forensic Services, KPMG India, “US also recently introduced the Dodd Frank Act which provides for a whistleblower bounty programme, beyond just protection of identity with the provision for the whistleblower to report directly to the regulators. The US laws are quite stringent in terms of quantum of penalties and settlement of criminal matters. Further, they also have provisions for voluntary self disclosures of problems by companies.”

The Indian Ministry of Health and Family Affairs devised a reward scheme for whistleblowers who provide specific information to the designated authorities leading to the seizures of spurious, adulterated, misbranded and not of standard quality drugs, cosmetics and medical devices by the designated officers of the Central Drugs Standard Control Organisation [CDSCO]. The informer is entitled upto 20 per cent of the total cost of consignments seized which should not in any case exceed Rs 25 lakh in each case.

While it keeps the identity of the whistle blower a secret, the fact that he/ she is required to file an FIR for CDSCO to take any action, is responsible for the little or no impact of the scheme.

Origin of the term

The term `whistle blowing’ was first discussed by Doggett, J, in the case of Winters v. Houston Publishing Company (781 S.W.2d 408 (1989). The word is derived from the practice of the English Police, who would blow their whistles when they noticed the commission of a crime. Whistle blowing is when a worker reports suspected wrongdoing at work. Officially this is called ‘making a disclosure in the public interest’. The whistle would alert both law enforcement officers and the general public of danger. It can be invoked in case of danger to health and safety of an individual, damage to the environment, occurrence of a criminal offence etc.

Various international conventions recognise whistle blowing as an effective tool for detecting and fighting corruption, fraud and mismanagement, and commit signatory countries to implement appropriate legislation.

United States: First to pioneer the formulation of a policy, the American Senate and House passed Whistle Blowers Protection Bill in 1988, but it was vetoed by President Reagan. Later, the Sarbanes – Oxley Act was enacted in 2002 in response to a number of corporate accounting scandals

Australia: the Public Interest Disclosure Act, 1994, enacted for Employees in the public sector and those who disclose information of public concern, to provide protection to such persons from any retaliation or reprisal.

China: Article 41 of the Chinese Constitution enshrines the whistle blower protection as a constitutional right for all citizens. It empowers all citizens to report any kind of misconduct and forbids retaliation against such citizens.

United Kingdom: Public Interest Disclosure Act, 1998 protects employees in all sectors from dismissal and other forms of retaliation. The Sarbanes Oxley Act lays emphasis on the fact that the public sector must follow the highest norms of corporate governance including having a whistle blowers mechanism in place. The statute ensures that the whistle blowers are not subjected to victimisation or retaliation in any manner.

Discretion is essential

Both Anand and Gera agree that the policy can go either way. “While whistleblowing reinforces the idea of social justice by exposing fraud, deceit, corporate inequity etc. to protect the public, colleagues or others from risk, its misuse can’t be ruled out. A person might blow a whistle in order to pursue a personal grudge or for other malicious reasons even when the concerned person is not directly responsible,” says Gera. Moreover, many of the employees look for opportunities to come in to the limelight so that their seniors can recognise them as a responsible person. This may engage the company into unnecessary investigations which would result in substantial loss of the company, she adds.

However, whenever there is a debate with regard to the pros and cons of whistle blowing, academia has always tilted the balance in favour of whistle blowing despite the awareness that a law which is completely in favour of the whistle blowers may lead to frivolous complaints without merits, she reinforces.

Anand stresses, “If companies want to know whether unethical practices exist in a work place, one of the best ways to unearth these are through appropriate whistleblower mechanisms. These provide a safe and secure means to stakeholders to report ethical violations and concerns in a non-threatening environment. It is necessary that any such measures are supplemented by strong training and triage processes that result in the correct identification and remediation of ethical complaints as regards general grievances.”

Enactment of new laws in India will go a long way in terms of vastly improving governance cultures in companies and prompt companies to identify, address and report shortfalls to regulators in the future, he adds. This along with an increasing number of companies realising the need to pay heed to non-mandatory requirements might help the situation. Till then, the probability of any malpractices in an Indian pharma company being reported are very low. However, the subsidiaries of the Indian pharma company outside India will always stand a better chance of being exposed on account of the specific legislations on whistle blowing in such countries, which may ultimately expose the parent Indian company like in Ranbaxy’s case, concludes Gera.

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