The Securities and Exchange Commission (SEC) received more than 18,000 whistleblower tips in the fiscal year ending Sept 30, a 50 per cent jump from the previous year, according to the SEC whistleblower programme's annual report to Congress. But only 68 tipsters got any money.
Last year it awarded nearly US$600 million, although more than half came in just two awards. One was a US$279 million payment to a tipster.
At its core, the SEC says its whistle-blower programme is about money, both the amount recovered on behalf of defrauded investors and the amount awarded to those who helped to expose fraud. Since its 2010 inception, the programme has recovered more than US$6 billion and paid out nearly US$2 billion to informants.
Whistleblowers, individuals who expose misconduct or illegal activities within organisations, play a pivotal role in maintaining integrity and transparency. Regulators often seek to incentivise whistleblowers by offering monetary rewards. While this practice has notable advantages, it also brings about certain challenges and drawbacks.
Advantages:
Greater Chance of Detecting Violations: Regulator-led whistleblower reward programs significantly increase the chances of detecting and addressing violations. Offering financial incentives motivates individuals with insider information to come forward, ensuring a more comprehensive and effective regulatory oversight. Incentivised whistleblowing then becomes a regulatory tool at the regulator's disposal.
Cost-Effective Enforcement: Whistleblower rewards offer a cost-effective means of enforcement for regulators. By tapping into the knowledge of whistleblowers, regulators can optimise their resources and focus on high-impact cases, leading to a more efficient allocation of funds. The investigative process is so much focused and shorter when there is a whistleblower providing the right leads and information to ensure an efficient, effective, and economic closure of cases.
Increased Deterrence: The existence of whistleblower reward programs serves as a deterrent to potential wrongdoers within organisations. Knowing that individuals may be motivated by financial incentives to report misconduct creates a powerful disincentive for engaging in illegal activities. The presence of incentivised whistleblowing is a preventive control - its mere presence is a deterrent.
Quick Response to Emerging Threats: Whistleblower programs enable regulators to respond swiftly to emerging threats and evolving forms of misconduct. Timely information from whistleblowers allows regulators to stay ahead of the curve, addressing issues before they escalate and potentially cause widespread harm. Regulators can only, at the best, be a half-step behind perpetrators. Incentivised whistleblowing reduces the half-step further where time is of essence in averting a disaster.
Broader Access to Information: Regulators gain access to a broader range of information through whistleblower programmes. Individuals with firsthand knowledge of violations may be reluctant to report without the assurance of a reward. This expanded information pool enhances the effectiveness of regulatory investigations. Sources of information out-trumps routine regulatory investigations when it comes to uncovering wrongdoings.
Public Confidence in Oversight: Rewarding whistleblowers fosters public confidence in regulatory bodies. The visible commitment to uncovering and addressing wrongdoing demonstrates that regulators take their responsibility seriously and are proactive in protecting the public interest. The number of cases identified will increase and closure will be swift due to the whistle-blower's information.
Facilitation of Complex Investigations: Whistleblower information is invaluable in complex investigations that may involve intricate financial transactions or sophisticated schemes. The expertise and insights provided by whistleblowers can significantly facilitate the resolution of intricate regulatory cases. The web of deceit is often transparent to the naked eye – until it is too late.
Disadvantages:
Potential for False Claims: One of the primary concerns associated with whistleblower rewards is the potential for false or malicious claims. Individuals may be tempted to provide misleading information to secure financial compensation, leading to wasted resources and damage to the reputation of innocent parties. Sure, there may be several false claims which can and should be dismissed after a precursory investigation, but this is a price worth paying if you after the major wrongdoings.
Ethical Dilemmas: The lure of financial rewards may introduce ethical dilemmas for whistleblowers. Some individuals may prioritize personal gain over ethical considerations, raising questions about the motives behind their disclosures and potentially undermining the moral foundation of the reporting process. But it is not for the regulators to second-guess the motives of a whistleblower.
Legal Complexity: Whistleblower reward programmes can introduce legal complexities. Determining the legitimacy of claims, evaluating the value of provided information, and ensuring fair and consistent reward distribution can pose significant challenges for regulators.
Dependence on External Information: Overreliance on whistleblower information may create a perception that regulatory bodies lack internal mechanisms for detecting and addressing violations. This can impact the confidence of the public and stakeholders in the overall effectiveness of regulatory oversight.
A well-designed and carefully implemented framework, coupled with a commitment to protecting whistleblowers, can contribute to a more transparent and accountable business environment.
Just because it has never been done is not reason enough not to do it. It is about whether the end justifies the means.
*The writer has over two decades of experience in the Malaysian capital market. He is a keen follower of capital market development and is passionate about corporate governance and fundamental investing.