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31 October 2023

Why is a whistleblowing system useful for companies?

According to global statistics, about half of all cases of corporate abuse are reported, and half of these reports come from employees within the company. The survey also reveals that corporate abuse can harm the company's reputation and cost it up to 5 % of its annual turnover, meaning that companies have a strong financial interest in promptly exposing potential abuses. In this article, Alexandra Bognár and Noémi Suller discuss various forms of misconduct within companies, highlighting the importance of a well-functioning whistleblowing system. This system allows people to report misconduct, even anonymously.

In the past, companies were free to decide whether to set up a whistleblowing system. This is now a legal obligation in nearly all EU countries. In Hungary, companies with 250 or more employees have been obliged to have a whistleblowing system in place since 24 July 2023. Likewise, smaller companies with 50 to 249 employees must do so by 17 December 2023, and may even share a system.

What can or should be reported?

Misconduct can be any unlawful act or omission. Reports can thus stem from anyone in the company who has information about actions that are not just morally questionable but possibly illegal, causing harm to the company or an employee.

Examples of misconduct include an employee using or sharing confidential company information for personal purposes (e.g. leaking a customer database to a competitor) or managers colluding with business partners and embezzling money. Even smaller incidents are worth reporting, like accepting gifts from business partners contrary to the company's code of conduct, using company equipment or confidential information for personal purposes, or making unwelcome advances to a colleague. All these actions can cause significant risks for companies. They can harm its reputation and lead to undesired terminations or legal proceedings.

A survey published by the Association of Certified Fraud Examiners found that corporate abuse is often committed by middle-aged male managers who have been employed by the company for a long time, i.e. essentially making them insiders. These individuals typically hold positions with limited oversight, which gives them the opportunity to commit the abuse.

In practice, abuses like the ones mentioned above typically remain hidden for about a year before being uncovered. This is because, in many cases, it is not the management or the owners of the company who initially detect these issues, but the employees, who are often hesitant to speak up. Therefore, the primary goal of whistleblowing systems is to reduce this one-year latency period. The key is to have an effective whistleblowing system in place that protects whistleblowers.

What makes for a good whistleblowing system?

A good whistleblowing system offers a secure channel for whistleblowers who might hesitate or feel apprehensive about reporting issues to (or even about) their boss, supervisor or HR. A secure channel is one that ensures that the whistleblower's identity remains confidential, where the whistleblower need not fear a potential confrontation, retaliation or dismissal.

This system can be used not just by former and current employees but also by job applicants. Someone who experiences discrimination during an interview may be reluctant to report, since at that point they might have little desire to join the company anyway. Trainees, volunteers, contractors or self-employed people, as well as suppliers and subcontractors, who maintain a business relationship with the company, can also report issues.

Reports can be made verbally and in writing through various channels. Companies are free to choose the specific reporting methods. This could include things like telephone hotlines, complaint boxes, postal letters, dedicated e-mail addresses, online platforms or apps. Reporting by phone, e-mail or via online platforms are currently the most popular methods worldwide.

The company can entrust the operation of the whistleblowing system and the investigation of the reports to an internal, trusted officer or department like HR, or they can outsource it to a whistleblower protection lawyer.

Upon receiving a report, an investigation begins, which usually takes up to 30 days. This involves fact-finding or confrontational interviews, data collection and data analysis. If the report seems valid, it might be necessary to seek legal advice. This stage demands thorough work, as the collected data must stand as valid evidence in legal actions, such as filing a police report or navigating an employment lawsuit. If a crime is suspected, the company must report it to the police.

After the investigation, the company can decide on the consequences. Of course if a criminal offence is suspected the matter will be turned over to the police. In the event of damages, a civil claim for damages may be an option. An employee suspected of having committed an offence may be suspended from work for up to 30 days throughout the investigation, or the company may terminate the employment relationship under labour laws.

In summary, a well-functioning and effective whistleblowing system protects the long-term interests of the company's owners. It is therefore important that the system is set up and operated in a professional and legal manner.


Authors: Alexandra Bognár and Noémi Suller


Attorney at Law