Types of Whistleblowing: Internal vs. External [and Their Impacts]
Whistleblowing has the potential to bring about positive change and promote accountability in business—but it also carries substantial risks and challenges for both the individual whistleblower and the organization involved. Those brave enough to blow the whistle on professional misconduct need to decide whether to keep the matter internal or take it to an external party. Since different types of whistleblowing carry varying levels of risk, it helps to know the potential impacts (positive and negative) of both internal and external whistleblowing.
What is Internal Whistleblowing?
Internal whistleblowing involves an employee reporting misconduct, illegal activities, or unethical behavior within their organization to someone within the same organization who is in a position to address and correct the issue. This approach is intended to resolve issues internally before they escalate or require external intervention, such as by regulatory bodies or law enforcement.
Employees may report concerns to various individuals or channels within their organization, such as a manager, a designated ethics officer, an internal hotline, or another relevant department like human resources or internal audit. To encourage reporting without fear of retaliation, organizations typically establish formal internal whistleblowing channels, including hotlines and secure email addresses. These mechanisms are designed to protect the identity of the whistleblower, ensuring their confidentiality and safety.
Upon receiving an internal report, the organization is responsible for thoroughly investigating the claims and taking appropriate actions to rectify any issues. Effective internal whistleblowing policies should include provisions that protect whistleblowers from retaliation or adverse consequences as a result of their reporting; this creates an environment where employees feel safe to speak up.
Here is a hypothetical scenario that illustrates an effective internal whistleblowing process:
Jane, a software engineer at TechCorp, discovers that her colleague Mike has been falsifying Quality Assurance reports to hide significant software bugs. She reports this misconduct through the company’s confidential internal whistleblowing hotline, leading to an investigation that confirms her claims. As a result, TechCorp takes corrective action, including suspending Mike, tightening QA controls, and protecting Jane from retaliation.
Ideally, if organizations have formal processes in place for protecting whistleblowers’ identities and enacting positive change, internal whistleblowing should not cause much disruption to normal business operations. Whistleblowers’ identities should never be made public. However, when organizations lack secure channels or standard reporting procedures, the outcome can turn negative for multiple people involved.
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What is External Whistleblowing?
External whistleblowing involves reporting misconduct, illegal activities, or unethical behavior within an organization to outside entities or authorities rather than using internal channels. Whistleblowers typically take this approach when internal mechanisms fail to address the issue, or if they believe that reporting internally would not lead to corrective action and could result in retaliation.
External whistleblowing can involve reaching out to government agencies, regulatory bodies, law enforcement, or the media—all of which puts the whistleblower at risk of retaliation by their company. Fortunately, whistleblowers are afforded legal protection around the world by laws that shield them from contentious retaliation and provide some level of legal safeguard.
Well-publicized instances of external whistleblowing include:
- Edward Snowden leaking classified information on extensive global surveillance programs run by the National Security Administration (2013)
- Christopher Wylie of Cambridge Analytica revealing how the political consulting firm harvested data from millions of Facebook users without consent to influence the 2016 U.S. Presidential election (2018)
- Tyler Shultz and Erika Cheung exposing fraudulent practices at Theranos, which falsely claimed its devices could perform a wide array of medical tests with just a few drops of blood (2014)
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Legal Protections for Whistleblowers
All whistleblowers in the U.S. are protected from retaliation under federal laws, including:
- Whistleblower Protection Act (WPA): The WPA protects federal employees who disclose information about government misconduct, illegal activities, or gross mismanagement. It prohibits retaliation against whistleblowers—such as demotion or termination—and allows them to pursue legal action if they perceive their company has breached the WPA.
- Sarbanes-Oxley Act (SOX): SOX offers protection to employees of publicly traded companies who report fraud or violations of securities laws. It prohibits retaliation against whistleblowers and gives them the right to sue for damages if they experience professional repercussions.
- Dodd-Frank Wall Street Reform and Consumer Protection Act: The Dodd-Frank Act expands whistleblower protections, particularly for those who report violations of federal securities laws. It offers financial rewards for whistleblowers who provide information leading to successful enforcement actions and prohibits retaliation. It also allows whistleblowers to file claims directly in federal court.
- False Claims Act (FCA): The FCA allows individuals to sue on behalf of the government if they have knowledge of a company or individual defrauding government programs. Whistleblowers are protected from retaliation and may receive a portion of the recovered funds if the lawsuit is successful. The law also provides remedies for whistleblowers who face professional repercussions, including reinstatement and compensation.
- Foreign Corrupt Practices Act (FCPA): Although primarily a U.S. law, the FCPA has significant implications in the EU and globally. It prohibits companies from bribing foreign officials to gain business advantages. Whistleblowers who report violations of the FCPA, including those working for companies with operations in the EU, are protected under U.S. laws like the Dodd-Frank Act, which provides protection from retaliation and offers financial incentives for reporting.
Many other U.S. laws include provisions regarding whistleblower protection, such as in the Occupational Safety and Health Act (OSHA), the Consumer Financial Protection Act (CFPA), and the Affordable Care Act (ACA).
Internal Reporting Protections
Internal whistleblowers are protected from retaliation through a combination of company policies, internal codes of conduct, and specific laws designed to safeguard those who report misconduct within their organization. These protections are often embedded in an organization’s internal whistleblowing mechanisms, which emphasize confidentiality to shield the whistleblower’s identity and reduce the risk of retaliation. If they do experience blowback, employees who come forward can typically seek recourse through internal grievance procedures or the human resources department.
While internal whistleblowers generally receive fewer financial incentives compared to those who report externally, they are still afforded protection under certain laws. For instance, the Sarbanes-Oxley Act specifically protects employees of publicly traded companies who report issues internally, ensuring that they cannot experience retaliation for their disclosures.
External Reporting Protections
In contrast to internal whistleblowers, external whistleblowers are protected from retaliation by a range of federal and state laws. This is because external whistleblowing can involve public disclosure, which increases visibility but also exposes the whistleblower to more significant personal and professional risks.
Several laws provide financial incentives for external whistleblowers, making the decision to report externally more appealing despite the risks. For example, the Dodd-Frank Act offers monetary rewards for individuals who report securities violations to the Securities and Exchange Commission (SEC). Similarly, the FCPA and Dodd-Frank provide protections and financial rewards for those who report to the SEC or the Commodity Futures Trading Commission (CFTC).
Federal laws like the FCA and the Dodd-Frank Act include specific anti-retaliation provisions to protect external whistleblowers from adverse actions by their employers, such as termination, demotion, or harassment. The FCA also allows individuals to file qui tam lawsuits on behalf of the government, enabling them to share in the financial recovery if their claims are successful, while being shielded from negative blowback.
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Win Some, Lose Some: The Impact of Whistleblowing
Even if done for the right reasons, the act of whistleblowing is fraught with risk. Once the whistle is blown, there is no going back. Both internal and external whistleblowing can have profound impacts on individuals and organizations, with outcomes that are both positive and negative.
Impacts on Individuals
Positive impacts for individuals include:
- Moral and ethical fulfillment: Whistleblowers can experience a strong sense of moral and ethical satisfaction from doing the right thing by exposing wrongdoing.
- Creating positive change: Whistleblowers can play a crucial role in initiating positive changes within their organization by bringing attention to unethical or illegal practices.
- Financial rewards: In some cases, especially with external whistleblowing, individuals may receive financial rewards or bounties, such as those offered under the Dodd-Frank Act.
- Public recognition: Whistleblowers who expose significant issues may gain public recognition and be celebrated as heroes or protectors of the public interest.
On the other hand, internal and external whistleblowers risk:
- Professional retaliation: Whistleblowers often face retaliation from their employers, including termination, demotion, harassment, or other adverse actions that can have long-lasting effects on their careers.
- Financial burden: The loss of employment, coupled with potential legal battles, can result in substantial financial strain for whistleblowers.
- Legal challenges: Whistleblowers may be subject to lawsuits or legal challenges, such as claims for defamation or breach of confidentiality, adding to financial burdens.
- Blacklisting: The act of whistleblowing can lead to blacklisting within an entire industry, making it difficult for the individual to find future employment.
- Mental health issues: The stress, anxiety, and emotional strain associated with whistleblowing can lead to significant mental health challenges.
- Strained relationships: The contentious nature of whistleblowing can strain or damage personal relationships, particularly if the issues reported lead to significant public attention.
Impacts on Organizations
Whistleblowing can have repercussions that radiate out from the individual, affecting their organization and even whole industries.
Some of the more positive results include:
- Identification and correction of issues: Whistleblowing can lead to the company identifying and correcting unethical or illegal practices, thereby promoting a culture of integrity.
- Improved compliance programs: Organizations may be prompted to improve their compliance programs and internal controls as a result of whistleblowing incidents.
- Enhanced public trust: Addressing and rectifying issues can enhance public trust and improve the organization’s reputation, especially if handled internally before becoming public.
- Operational improvements: The organization may implement operational changes that improve efficiency and reduce the risk of future misconduct.
- Avoiding public reputational damage: Handling issues internally can prevent the reputational damage that might occur if the issues were exposed externally to regulatory bodies or the public.
However, there can be a number of negative impacts for the organization, whether intentional or unintentional on the whistleblower’s part:
- Reputational damage: Public disclosure of misconduct can severely damage an organization’s perception, leading to a loss of customer trust and potential business.
- Financial costs: Organizations may incur significant costs related to legal fees, settlements, fines, and the implementation of corrective actions.
- Disruption of operations: Whistleblowing incidents can disrupt normal operations, creating internal conflict, frustration, or distrust among employees.
- Impact on employee morale: The fallout from whistleblowing can negatively impact employee morale and may create a hostile or divisive work environment.
- Increased regulatory scrutiny: Organizations may face increased scrutiny from regulatory bodies, leading to more frequent inspections or audits and additional compliance requirements.
To mitigate these risks, safeguard employees, and ensure ethical business practices, it’s crucial that organizations implement robust whistleblowing reporting and compliance systems. By providing secure reporting channels and protecting whistleblowers from retaliation, organizations can foster a culture of transparency and accountability, ultimately leading to a healthier and more resilient workplace.
StarCompliance’s Incident Management solution provides a safe, anonymous mechanism for employees to report wrongdoing, enhancing compliance efforts and facilitating fast issue resolution. Book a demo with a Star expert today and learn how the STAR Platform can help both your business and your employees stay on the right side of compliance.
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