The European Parliament Committee on Budgetary
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THE EUROPEAN PARLIAMENT COMMITTEE ON BUDGETARY CONTROL MAY 25, 2011 HEARING ON WHISTLEBLOWING EVIDENCE OF KAREN HUDES1 "Speak truth to power"2 "No one should be silenced. Everyone deserves to know the truth."3 Mr. Chairman, Honorable Members of the European Parliament, A 2008 study on whistleblowing in action in the European Union recommended a seminar with whistleblowers and academics on the panel.4 The Committee on Budgetary Control ("CONT") has benefltted from many valuable studies on best practice whistleblower protection policies.5 The EU furthers its goals by enabling loyal public servants to report illegality, misconduct, and corruption without fear of losing their jobs.6 CONT can use "the power of the purse"7 in motivating EU institutions to tolerate reports of misconduct and corruption. Prior to receiving a Juris Doctor from Yale Law School, the author received a doctoraal in development economics from the University of Amsterdam, having studied macroeconomics with Wim Duisenberg (first President of the European Central Bank), development economics with Jan Pronk (UN Special Representative for Sudan and Minister for Development Cooperation in the Netherlands), and international institutional law with Hein Schermers (author of International Institutional Law and Judicial Remedies in the European Union). 2 Phrase first coined by an American Quaker in 1955 during the Cold war with the Soviet Union as the title of a pamphlet. http://www2.gol.com/users/quakers/living_the_truth.htm 3 President Barack Obama at the April 30, 2011 White House Correspondents' Dinner http://www.huffingtonpost.com/2011/04/30/white-house-correspondents-dinner- 2011_n_855926.html?icid=maing-grid7%7Cmaing6%7Cdll%7Csecl_lnk3%7C59688 President Obama also stated in accepting the Nobel Peace Prize in Oslo: "Furthermore, America - in fact, no nation - can insist that others follow the rules of the road if we refuse to follow them ourselves.... We lose ourselves when we compromise the very ideals that we fight to defend...[W]e honor those ideals by upholding them not when it's easy, but when it is hard." http://www.whitehouse.gov/the-press-office/remarks-president- acceptance-nobel-peace-prize 4 Annual Practical Philosophy and Methodology report of the Polish Academy of Science and the Business Ethics Center, Whistleblowing in Action in the EU Institutions ADIE by RBEUC, Tallinn / Brussels http://www.whistleblower-net.de/pdf/ADIE_Whistleblowing_EU.pdf 5 Paul van Buitenen, Rapporter, Whistleblowing Rules: Best Practice; Assessment and Revision of Rules Existing in EU Institutions May 12, 2006, http://www.europarl.europa.eu/activities/committees/studies/download.do?language=en&file=27551#search=% 20whistleblowing%20 6 Wim Vandekerckhove, Rethinking 'Loyalty', 'Integrity' And Whistle Blowing Within The Organizational Discourse http://desinuam.org/apros/abstracts/051.pdf 7 In 1215 a group of English noblemen forced King John to sign sixty-three articles known as the "Magna Carta" which recognized the supremacy of ancient liberties, limited the King's ability to raise funds, and reasserted the principle of due process. Parliament was established in 1265 based upon the articles of the Magna Carta, requiring majority consent for new laws levying taxes. The consent of elected representatives to expenditures is 1. Why are whistleblower protections necessary? Robust whistleblower protections can strengthen institutions by providing early warning of significant risks, preventing damage to staff morale, and protecting institutions from irreparable damage caused by a tarnished reputation. All worthy endeavors demand persistence; putting effective systems for whistleblower protection in place is no exception. The writer served over twenty years in the World Bank's Legal Department, gaining practical experience with what works in judicial and legal reform in the World Bank's member countries. Reforms are implemented only when they are owned by coalitions of stakeholders and consistent with the legal institutions on the ground.8 In 1998 under the Strategic Compact the World Bank's members predicated additional funding upon reforms for increased effectiveness. The writer served on the taskforce for human resources reform, referred to as the Drysdale Committee. The Drysdale Committee best practice reforms to put systems into place with incentives for effective management were later dismantled. Following the East Asia financial crisis, the writer reported up the corporate ladder a violation of the securities and banking laws in a banking sector project in the Philippines, to the World Bank's Audit Committee, and ultimately to the US Congress and other oversight agencies of the World Bank.9 Like the proverbial optimist who fell from a ten story building and reported referred to as "the power of the purse." R. Nosotro, "The Magna Carta and the creation of England's Parliament" http://www.hyperhistory.net/apwh/essays/cot/t2w07magnacarta.htm Effective laws must be meaningful in their local contexts so that citizens can demand institutions that work. D. Berkowitz, K. Pistor & J. Richard, "The Transplant Effect", The Am. J. of Comp. L, V. 51, (2003) See also a political model that has analyzed scores of policy issues in over thirty countries, and was determined to have in excess of 90% accuracy in Randolph M. Siverson, A Glass Half-Full? No, but Perhaps a Glass Filling: The Contributions of International Politics Research to Policy, 33 POL. SCI & POL'Y 59 (2000). This model predicted in 2004 the demise of the Gentlemen's Agreement for US to appoint the President of the World Bank if the US abrogated the rights under the World Bank's Articles of Agreement of other shareholders on the Board of Executive Directors and Board of Governors. 9 Lucio Tan, a crony of Joseph Estrada, then President of the Philippines, acquired stock owned by government employees in Philippines National Bank valued more than 10% of PNB's outstanding capital without disclosure, as required by Philippines securities laws. Tan owned Philippines Airlines, in default on its loans from PNB. The government of the Philippines loaned $493 million to Philippines National Bank after PNB's depositors made heavy withdrawals. $200 million of the World Bank loan was cancelled, and similar amounts of Japanese cofinancing were cancelled. Estrada was ultimately impeached, and in 2007 an anti-corruption court in the Philippines required Estrada to refund graft he had plundered. The World Bank's Country Director in the Philippines reassigned the writer when she asked him to sign a letter warning the Philippines' government that the World Bank could not disburse its loan without a waiver from the Board of Executive Directors since the loan conditionality was not met. The Internal Audit Department refused to correct the satisfactory evaluation of the World Bank's supervision performance or the flawed report of the Institutional Integrity Department to the Audit Committee of the Board of Executive Directors. When the Audit Committee requested an audit of internal controls over financial reporting, the external auditors circumscribed the scope of their audit in violation of Generally Accepted Accounting Principles and Generally Accepted Auditing Standards. See attached Chronology of Internal Control Lapses at the World Bank. at the lowest floor: "all right so far," the writer updates the Ministers of finance and development of the World Bank's 187 member countries on progress in bringing the World Bank into compliance. The writer informed the World Bank/IMF Board of Governors prior to the Spring Meetings that the US Congress required reform of the World Bank and increased oversight before approving the proposed capital increase.10 Recent international professional research shows that whistleblowing, together with people management and internal and external controls, provides the major source for detection of fraudulent behavior in enterprises.11 FACTOR RANK Internal controls 1 Whistle-blowing 2 Internal audit 3 Management review 4 Accident 5 External audit 6 Therefore, it is not surprising that PricewaterhouseCoopers' first (and most important) "best practice" advice for whistleblower systems was a strict prohibition against employee- whistleblower retaliation: "Whistle-blowing Programmes: Best Practice Tips": "Safeguard employees who report misconduct against any form of retaliation (i.e., threats, harassment and demotion)" "Reporting misconduct by public servants is either required by law and/or facilitated by organizational rules in two-thirds of OECD countries. A growing need to protect whistleblowers in the public service is also visible across OECD countries. ... the most commonly provided safeguards are legal protection and anonymity."12 10 See Chronology, supra note 9; http://foreiRn.senate.gov/hearings/hearing/?id=33c66777-5056-a032-525a- aOa5806634e9; http://kavgranger.house.gov/index.cf rn?sectionid=12§iontree=4,:l.2&itemid=983. 11 PricewaterhouseCoopers' 2007 survey of the chief executive officers, chief financial officers and other responsible executives from over 5,400 companies in 40 countries of "root causes of economic crime and the ways in which it affects businesses worldwide." http://www.pwc.com/gx/en/economic-crime-survey/download- economic-crime-people-culture-controls. 12" Public Sector Transparency and Accountability Making It Happen" Organisation For Economic Co-Operation and Development, Paris 2002 p. 182. https://bvc.cgu.gov.br/bitstream/123456789/3490/l/public_sector_transparency_and_accountability.pdf