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More Whistleblowers Help Regulators Detect Misconduct

| May 8, 2014 | News

If you saw misconduct at your workplace, what would you do? Maybe you could “blow the whistle” internally by raising the issue to your manager or by reporting it to your company’s compliance office. But what if such conduct was so prevalent that nobody cared about your alert? Would you think about reporting the issue to a regulator?

WhistleblowerRecent data shows that, in the financial industry in the U.S. and the U.K., an increasing number of people are informing regulators of potential illegal activities. Moreover, whistleblowing tips seem to have emerged as an effective source for regulators to detect misconduct.

In the U.S., the Dodd-Frank Wall Street Reform and Consumer Protection Act created a new whistleblowing program. The Act established a separate office in the U.S. Securities and Exchange Commission (SEC) to administer the program. In addition, the Act introduced monetary awards to whistleblowers whose information leads to successful enforcement by the SEC. Since the implementation of this new program, the number of whistleblowing tips to the SEC has been on a steady rise. The SEC received alerts from 3,001 whistleblowers in fiscal year 2012 and 3,238 in fiscal year 2013.

In the U.K., whistle blowing reportedly increased even more significantly than in the U.S., up 35% in 2013. It is further reported that more than five thousand whistleblowers contacted the Financial Conduct Authority (FCA) between November 2012 and October 2013, up from slightly under four thousand between November 2011 and October 2012.

In addition, the FCA recently reported that actionable information among whistleblowing tips increased by 65% in 2013. Another dataset shows that the number of cases opened by the FCA and other authorities based on whistleblowers’ information surged from 148 in the third quarter of 2012 to 254 in the third quarter of 2013. The FCA regards whistleblowing as an important information source that provides the regulator with “a direct insight into practices that are taking place in firms.”

The upward trend of whistleblowing will likely continue. In the U.S., the SEC awarded $14 million to a whistleblower in October 2013, by far the largest monetary award since the start of the new whistleblowing program under the Dodd-Frank Act. Further, the SEC granted monetary awards to a total of four whistleblowers in fiscal year 2013, compared to just one in 2012. The total of annual monetary awards reached $14.8 million in fiscal year 2013, compared to $45,739 in 2012. The 2012 award was the SEC’s first monetary award given to a whistleblower under the new whistleblowing program.

Furthermore, the former SEC Co-Chief of Enforcement reportedly predicted that pending cases will result in millions of additional dollars of monetary awards to whistleblowers. More frequent and larger payouts will presumably encourage more employees to report issues to the SEC.

In addition, the U.S. Supreme Court recently ruled that whistleblower protections in the U.S. Sarbanes-Oxley Act apply to private contractors and subcontractors of public companies and mutual funds. In the case Lawson v. FMR LLC, two former employees of a privately held investment adviser, which was a contractor of publicly registered mutual funds, sought legal protections for whistleblowers. The decision will likely encourage employees of certain private companies to blow the whistle.

Across the Atlantic in the U.K., the FCA has increased resources to deal with whistleblowing, and it has committed to enhancing the whistleblowing handling process. The FCA also intends to encourage whistleblowing from under-presented sectors, according to its most recent strategic plan.

Further, although monetary awards are currently not available to whistleblowers in the U.K., the FCA is reportedly considering implementation of monetary rewards. If introduced, such monetary awards should encourage still more employees to bring concerns to the regulator.

The trend toward increasing whistleblowing will also likely expand throughout the European Union (EU). The European Commission reportedly adopted an EU-wide whistleblowing hotline in the investment fund industry in February 2014. In the new EU scheme, whistleblowers can raise an issue to the European Securities and Markets Authority (ESMA) if they think their national authority has failed to respond to a concern about a violation of financial rules. ESMA plans to release more details about the scheme by this summer.



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