Clifford Chance

For the first time, ASIC has commenced civil penalty proceedings in the Federal Court of Australia against TerraCom and its senior executives for allegedly engaging in conduct that caused harm to a whistleblower who raised concerns regarding the company’s operations.

TerraCom is a publicly listed company, who was primarily a producer of thermal coal as the owner of a coal mine in Queensland.

A whistleblower essentially alleged that TerraCom was falsifying certain coal quality certificates for higher profits. Shortly after receiving the whistleblower allegations, TerraCom engaged PricewaterhouseCoopers (PwC) to investigate, among other things, the whistleblower allegations. PwC identified certain matters regarding inconsistencies with coal quality certifications that were similar to matters identified by the whistleblower.

Public Announcements

In response to publication of the whistleblower allegations in a national newspaper, which also reported various legal proceedings by the whistleblower following the termination of his employment, TerraCom provided the Australian Securities Exchange (ASX) an announcement on 24 February 2020 (which the ASX released to the market) that denied the whistleblower allegations and referred to the independent investigation by PwC (February Announcement). On 10 March 2020, TerraCom gave another announcement to the ASX further denying the whistleblower allegations and referring to (amongst other things) that an independent investigation had found that there was no evidence of wrongdoing involving its CEO and CFO in a scheme purporting to the fake analysis of the coal samples. The ASX refused to publicly release this announcement.

On 12 March 2020, TerraCom published the substance of the February Announcement in various national newspapers as an "Open Letter" to its shareholders (Open Letter). On 3 April 2020, and following an ASX announcement by the third-party laboratory appointed by TerraCom to test its coal and issue independent certificates of quality, which identified numerous instances of manual amendment of certificates of analysis without justification, TerraCom provided the ASX an announcement (which the ASX released) which stated that the whistleblower's allegations were made only after his dismissal and that an independent forensic investigation found that neither the CEO nor the CFO had not done anything wrong regarding the fake analysis of coal samples referred in the February Announcement. Additionally, TerraCom stated that there were no customer concerns regarding the quality of the relevant coal (April Announcement).

ASIC alleges that by publishing the February Announcement, the Open Letter and the April Announcement (including by omitting information from those public announcements) TerraCom engaged in conduct that caused detriment to the whistleblower's reputation, earning capacity and psychological and emotional state in contravention of the relevant provisions in the Corporations Act 2001 (Cth) and that certain directors and officers of TerraCom were involved in that contravention.

Why must whistleblowers be protected?

Whistleblowers play an essential role in promoting transparency and accountability in organisations and have legal protections from any harm, particularly when their actions expose wrongdoing, illegal, and unsafe practices in an organistation. Legal protections are in place to encourage and enable whistleblowers to speak up without them fearing for their "reputation, earning capacity and psychological state".

TerraCom is a significant case because it is the first time ASIC has commenced proceedings against a company and its directors for alleged breaches of the whistleblower provisions in the Corporations Act. ASIC Deputy Chair Sarah Court stated in a press release that "[w]histleblowers perform a vital role in identifying and calling out corporate misconduct. We take any indication that companies are engaging in conduct that harms or deters whistleblowers very seriously". The penalties could have a severe impact on the directors and officers involved, with disqualification orders being sought along with pecuniary penalties, declarations of contravention and costs.

In line with helping companies set up sound whistleblowing disclosure arrangements, ASIC released a helpful report "Report 758 Good practices for handling whistleblower disclosures" which provides insights for companies when designing frameworks to manage whistleblowing in accordance with the obligations contained in the Corporations Act.

Public companies, large proprietary companies and trustees of prudential-regulated superannuation funds are required to have a whistleblower policy. The whistleblower policy must include information relating to how an individual can report their concerns both internally and externally and the available protections. Although only the above types of companies are required to have a formal whistleblower policy, all companies in Australia are required to comply with the whistleblower protections in the Corporations Act. ASIC "strongly encourages" companies to adopt the good practices found in Report 758 in a scaled and tailored way to suit their operation.

Strong whistleblowing programs facilitate a "transparent, accountable and safe work culture". From a company's perspective, they also help "improve the overall corporate performance and governance".

Is your policy up to scratch?

The TerraCom case is a timely reminder for businesses to ensure that they have the necessary systems in place to protect whistleblowers from any detriment. Boards and executives should ensure adequate training is provide and be up to date with the latest whistleblower obligations and processes.

Given that ASIC has indicated that it will not hesitate in using any regulatory means including, where appropriate, civil, or criminal enforcement action where serious harm is identified, this is an area where extra attention is warranted.