The Final Whistle on Fraud

Corporate fraud is big news once again with Parmalat and the claim against the Bank of England arising out of the collapse of BCCI. The "whistle-blowing" legislation (the Public Interest Disclosure Act 1998) provides protection to an employee if he chooses to report an internal fraud and as a result suffers victimisation or loses his job. In the case of dismissal, it is automatically unfair as the legislation confers protection on employees who choose to blow the whistle. However does the law ever oblige an employee to report a fraud?

If the answer is Yes, then it raises all sorts of issues. Firstly what happens if, as an employee, you don't report it? And if you are obliged to file a report, to whom should it be made - the police, the company's lawyers, the auditors or to the company itself? Secondly, do you have a duty of confidentiality? Is reporting a suspected fraud a breach of confidence? If so, could that be a defence to a claim that you should have reported but didn't?

You could be forgiven for fearing that if you make a report of suspicious behaviour, which then proves capable of innocent explanation, your job prospects and working relationships will be damaged. On the other hand, if there is a duty to report and you don't, could you be sued for the loss to the company caused by someone else's dishonest behaviour?

The case of RGB Resources (in liquidation) v. Rastogi & Ors [2002] EWHC 2782 (Ch) has helped shed some light on these difficult questions. This case concerned a certified accountant who was employed as a financial controller of an unlisted public limited company. He was not on the board. The chief executive officer, deputy chief executive officer and a third executive director were all implicated in the misappropriation of several hundreds of millions of dollars of loan capital. The company (through liquidators) took action against the directors and against the financial controller for the recovery of the misappropriated funds.

The financial controller's case was that he had not been involved in any of the unlawful activities of the others and had been unaware of what was going on. The company's position was that as a senior executive, the financial controller was subject to a duty to make enquiries about the suspicious conduct of the other directors and should have taken steps to prevent dishonest activities affecting the company. The company also claimed that the financial controller was liable to disclose these...