Sweden: Whistleblowing Scheme – A Conflict Between The US SOX And The Swedish Personal Data Act

Last Updated: 18 December 2008
Article by Henrik Bengtsson and Johan Kahn

The Swedish Data Inspection Board has, on March 26, 2008, rendered decisions in five cases regarding exceptions from Section 21 in the Swedish Personal Data Act (Sw. Personuppgiftslagen (1998:204)) concerning whistleblowing schemes. The Swedish Data Inspection Board takes a restrictive view on how a whistleblower scheme may be designed. This means that many US and Swedish companies may come into conflict with either the U.S. Sarbanes Oxley Act (SOX) or the Swedish Personal Data Act.

SOX and whistleblower schemes

SOX was enacted as a result of the Enron and Worldcom scandals. The act regulates how companies listed on the US stock exchanges shall be governed. SOX implies, among other things, that companies should operate a so called whistleblower scheme. By means of a whistleblower scheme, employees are able to anonymously report irregularities, e.g. white collar crime, inflated figures or ethical violations to an audit committee. Thus, the company may, at an early stage, investigate and prevent criminal activity, damages and bad publicity. The obligation to introduce a whistleblower scheme is governed by SOX Article 301(4):

[Each audit committee shall] "establish procedures for the receipt, retention and treatment of complaints received by the issuer regarding accounting, internal accounting controls or auditing matters; and the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters"

The New York Stock Exchange (NYSE) and Nasdaq rules contain corresponding obligations. SOX do not contain any rule limiting the territorial scope of the act. US case law regarding the extra-territorial scope of SOX is divergent. However, many companies operate on the assumption that the act is applicable on European subsidiaries. Since the NYSE and Nasdaq rules concern all foreign companies listed on these stock exchanges, the rules have a wide scope of application.

Article 301(4) does not contain any formal legal requirements regarding the design of whistleblower schemes. A whistleblower scheme may, for example, consist of telephone or web based interfaces. Many companies have however chosen to establish whistleblower schemes where the employees, through a web interface, can report suspected crimes and irregularities within the company to the audit committee in the United States.

The Swedish Data Inspection Board's decisions

Since processing of personal data relating to suspect violations of law (judicial data) is prohibited under Section 21 of the Swedish Personal Data Act, a number of Swedish subsidiaries of US companies, governed by SOX and the stock exchange rules, have applied for exemption from the prohibition of processing judicial data, to the Swedish Data Inspection Board. The Data Inspection Board has rendered coincident decisions in the cases. In short, the decisions imply that the conditions for processing data within a whistleblower scheme are that:

  1. The scheme shall constitute a complement to normal management, and be voluntary to use. The scheme should only be used when it is objectively justified not to use the company's internal information and reporting channels.
  2. The whistleblower scheme shall be limited to serious irregularities regarding accounting, internal accounting control, auditing, and combating bribery and crime within the banking and finance system. It may also cover other serious irregularities concerning the vital interests of the company or the life and health of individuals.
  3. Only employees in key or leading positions may be reported and their personal data processed in the scheme.
  4. The controller of personal data must ensure that the processing is performed in accordance with the Swedish Personal Data Act, e.g. concerning sensitive personal data, information to the employees and transfer of personal data to a third country.

The Data Inspection Board's reasons for limiting the decisions to people in a leading position are that a whistleblower scheme should only be used when it is objectively justified not to use the normal internal channels of the company.

In addition to the decisions above, it is worth mentioning that the basic rules for processing of personal data (Section 9 of the Swedish Personal Data Act) must be in compliance with good practice on the Swedish labour market. In a consultation report from the Swedish Data Inspection Board (Reg. no 177-2006) it is concluded that there is not enough information from the applicant to fully investigate the issue. The Data Inspection Board does, however, refer to a statement made by the Article 29 Data Protection Working Party and underlines the importance of the designation of a whistleblower scheme in conformity with the fundamental principles for processing of personal data. Furthermore, it can be assumed that, under the Act on Co-Determination (Sw. Lag (1976:580) om medbestämmande i arbetslivet), there is an obligation to negotiate with concerned trade unions and other employee organisations before the implementation of a whistleblower scheme.

The applicability of the Swedish Personal Data Act on web based whistleblower schemes

The main principle in Section 4 of the Swedish Personal Data Act is that the act applies to controllers of personal data established in Sweden. In the above mentioned decisions, the Data Inspection Board has made an extensive interpretation of the concept of controller of personal data, when considering that a Swedish subsidiary is responsible for collection and disclosure of personal data in cases when the subsidiary company enables Swedish employees to use a whistleblower scheme provided by their foreign parent company. The Data Inspection Board does not reason any further as to how the Swedish subsidiary, in practice, would have any actual or legal discretionary power over the processing of personal data. Since, in the above mentioned decisions, the US parent company is liable for the whistleblower scheme, and takes action on notifications under the Whitleblower sche, our opinion is that the US company is the controller of personal data. Whistleblower schemes are often implemented globally, and Swedish subsidiaries are normally instructed by the parent company to introduce the scheme, and hence have no control in regard to the designation of the scheme. The question is whether the relationship between the US company and the Swedish subsidiary, according to the structure of the Personal Data Act, should not rather be regarded as the relationship between a controller of personal data and a personal data assistant, and that the applicability of the Personal Data Act could be questioned on that ground. The interpretation of control over personal data, made by the Swedish Data Inspection Board, entails far reaching consequences and one could ask one self if it should be interpreted in such a way that as soon as an employer gives an employee access to a data base, in which the user can do other than access information, in Sweden or elsewhere, the employer becomes responsible for the processing of personal data.

The view on whistleblower schemes within the EU

The question whether whistleblower schemes comply with the EC Data Protection Directive has been widely debated in Europe. The French Data Protection Authority, CNIL, in 2005 prohibited McDonald's Corporation and Exide Technologies to provide whistleblower schemes designed in a specific way. After the French decisions, discussions were initiated between the Article 29 Data Protection Working Party and the U.S. Securities Exchange Commission, resulting in the Article 29 Data Protection Working Party Opinion of the application of EU data protection rules to internal systems for supplying information within accounting, internal accounting control, auditing, and combating bribery and crime within the banking and finance system. The National Data Protection Authorities in Belgium, Denmark, France, Netherlands and Germany have, as well, each rendered decisions or elaborated published guidelines regarding whistleblower schemes. The Article 29 Data Protection Working Party Guidelines implies that the question whether a whistleblower scheme is in conformity with the Data Protection Directive should be examined in view of the following points:

  1. Limitation to the number of individuals entitled to report misconduct through a whistleblower scheme. This applies, in particular, since only serious accusations should be subject to reporting.
  2. Limitation to the number of persons who may be reported through a whistleblower scheme. The Article 29 Data Protection Working Party is of the opinion that the company implementing a scheme for supplying information should make a careful assessment as to whether it is suitable to limit the number of persons able to report in the scheme, especially considering the seriousness of such alleged offences reported. These specified categories of employees can, sometimes, include all personnel.
  3. Encouragement of non-anonymous, however confidential, reporting, as opposed to anonymous reporting. The reasoning behind this statement is, among other things, the speculations due to anonymous reports as well as difficulties in regard to the investigation of an accusation when no possibility to ask additional questions is provided.
  4. Proportionality and accuracy in the data processed within the frame of a whistleblower scheme.
  5. Observance of the regulations concerning storage of personal data.
  6. The controller of personal data must inform the registered of the existence, purpose and function of the scheme, who may receive the reports as well as the reported employees' right to access, correct, and remove data.
  7. The controller of personal data must ensure that all reasonable technical and organizational precautions are taken to preserve the security of the data when collected, spread and stored.
  8. If the responsible company is established in the USA, the company shall:
    1. be connected to the (safe harbour) system or
    2. have a signed agreement with the subsidiary, according to clauses in standard agreements issued by the European Commission or
    3. apply rules (binding corporate rules) approved by a National Data Protection Authority.

The above mentioned national guidelines and decisions are closely connected to the Article 29 Data Protection Working Party Guidelines. As for the question of which employees to be included in a whistleblower scheme, the national data protection authorities have adhered to the opinion in section (ii) above, which means that the controller of personal data shall make a proportionality assessment as to whether all employees are to be included in the scheme.

Views of the Swedish Data Inspection Board's decisions and the necessity of an amendment of Section 21 of the Swedish Personal Data Act

When comparing the Swedish Data Inspection Board's opinion in the question with the principles applied by other European National Data Protection Authorities, the conclusion that the Data Inspection Board has made a more strict proportionality assessment than its European equivalents can be drawn. The Data Inspection Board has decided that a whistleblower scheme must be limited to violations committed by individuals in a leading position. Furthermore, the Swedish Data Inspection Board is stricter in its assessment than the Article 29 Data Protection Working Party, which, in its guidelines, states the following regarding the limit of the number of individuals to be included in a whistleblower scheme:

"In application of the proportionality principle, the Working Party recommends that the company responsible for the whistleblowing scheme should carefully assess whether it might be appropriate to limit the number of persons eligible for reporting alleged misconduct through the whistleblowing scheme, in particular in the light of the seriousness of the alleged offences to be reported. The Working Party acknowledges, however, that the categories of personnel listed may sometimes include all employees in some of the fields covered by this opinion."

In view of the last sentence in the quoted statement of the Article 29 Data Protection Working Party, it is surprising that the Data Inspection Board, unreservedly, with the same wording, and despite the different circumstances in all five cases, limits the decisions in such a way that data can be furnished only regarding individuals in leading positions. The fact that the Data Inspection Board makes the same assessment, despite the different circumstances, gives the impression that the Data Inspection Board has adopted a general principle, rather than making an examination of each individual case.

Processing of violations of law is prohibited according to Section 21 of the Swedish Personal Data Act. The Swedish Data Inspection Board and Swedish Courts apply a strict interpretation of the term judicial data the result of which ids that even data that is not specified to a specific crime are considered as judicial data. Under Section 21 of the Swedish Personal Data Act, the right to decide upon exceptions from this Section has been delegated to the Swedish Data Inspection Board, which has recently assessed a number of cases concerning processing of judicial data, regarding, among others: a security company's photographing of scribblers caught (Reg. no 366-2006), surveillance of garbage recycling stations with so called garbage spies (Reg. no 750-2006), investigation of copyright infringement (Reg. no 1631 and 1632-2006), private investigations regarding stolen insured objects (Reg. no 886-2007) and investigation of game cheats on the Internet (Reg. no 424-2007).

The Swedish Data Inspection Board has, through Section 1 in its regulations (DIFS 1998:3), excluded certain processing of data from Section 21 of the Swedish Personal Data Act, e.g. it is permissible to process personal data concerning judicial data, if the processing refers to single data, necessary to fulfil the reporting duty according to law. Any general recommendations as in regard to the conditions for exception have not been published. Therefore, and until further notice, the exception principles have to be interpreted on the basis of the non-distinctive decisions of the Swedish Data Inspection Board. As for processing of personal data for the purpose of solving violations of the intellectual property laws, the Swedish government has suggested that an exception from Section 21 of the Swedish Personal Data Act is enacted in these acts.

There is an at least theoretical possibility that a penalty could be adjudged according to Section 49 of the Swedish Personal Data Act. It is not satisfactory that the conditions of exception from Section 21 in the Swedish Personal Data Act are not explicitly stated in the act, or at least in a decree. An authority, which could very well be a party in an appeal against a decision to refute exception, should not, through ad hoc practice, be assigned to work out the guidelines for exception.

Practical consequences of the Data Inspection Board's decisions

It should be pointed out that the question of admissibility of a whistleblower scheme has not been subject to court assessment, since the decisions of the Data Inspection Board have not been appealed. For the companies which are affected by this issue, it is of great importance that the question of processing data concerning violations of law under Section 21 of the Swedish Personal Data Act, as well as the questions of the extent of the responsibility concerning personal data processing, is further elaborated on. It is unfortunate that a representative for a Swedish subsidiary, under SOX and applicable stock exchange rules, risks ending up in an impossible situation if the representative, even with a theoretical risk of punishment, must choose between abiding either the Swedish Personal Data Act or SOX.

A possibility for Swedish subsidiaries is to introduce a whistleblower hotline, where informants can call to the USA, and report to someone who, in its turn, registers the actual data in a case management system. The practical consequences of the Data Inspection Board's application of the Swedish Personal Data Act could therefore be that Swedish subsidiaries introduce hotlines which are excluded from the application of the Swedish Personal Data Act, the result of which would be that there are no guarantees as in regard to the privacy of the registered individuals. In our view it is questionable whether the Data Inspections Board's current application constitutes a reasonable and adequate interpretation of the directive.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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