IT DOESN’T PAY TO BLOW THE WHISTLE
Whistleblowers in Canada get no rewards and often lose their jobs
It doesn’t pay to be a whistleblower in corporate Canada. Not only are there no financial incentives in place to reward people for coming forward with incriminating information, but there is also a very real possibility those who shed light on wrongdoing will have to find another job.
Ottawa lawyer Harold Geller advised his client, a mutual fund salesman named Don Andrews, to go to authorities with his belief that a superior had involved them in a pair of schemes that contravened the rules at the large financial services firm at which they worked.
The information led to an investigation that ultimately took Andrews’ former mentor out of the business. But, with a three-year prohibition imposed on Andrews, combined with a loss of clients and a reputation hit, he’s out, too, according to his lawyer.
“Mr. Andrews is being harshly penalized for doing the right thing,” said Geller. “There’s no incentive for people who get caught in schemes to come forward and self-report.”
By contrast, U.S. authorities are willing to pay hundreds of thousands of dollars for information, and to go easier on those who expose wrongdoing. Last week, the U.S. Commodity Futures Trading Commission cut its first cheque, for $240,000 US, to a whistleblower.
Even “culpable whistleblowers” — those who are involved in the improper activities they bring to light — are eligible for leniency and bounties, albeit reduced ones, paid by the U.S. Securities and Exchange Commission.
Despite years of study, Canadian securities authorities have so far balked at putting any reward money into the system. The one exception in this country is the Canada Revenue Agency, which established an incentive-backed program in January to crack down on international tax evasion. No awards have been paid so far, but even if someone has come forward, there hasn’t been enough time for it to have worked its way through the system.
Canadian securities authorities have set up whistleblower hotlines in recent years, and are more than happy to take information. But with no obvious incentives and no guarantee of identity protection, the phones aren’t exactly ringing off the hook. The Investment Industry Regulatory Organization of Canada, for example, logged just eight calls in 2013. In the United States, more than 3,200 tips were delivered to the U.S. Securities and Exchange Commission last year, up seven per cent from the year before.
There’s an argument to be made that if those who see malfeasance aren’t encouraged to step forward and expose it, investors will continue to be hurt, said Geller, whose Ottawa law practice frequently handles disputes between aggrieved investors and their advisers.
He said there was no indication the Mutual Fund Dealers Association of Canada knew about the wrongdoing that Andrews became entangled in through his mentor before the younger man put what he knew in a letter and sent it to regulators.
The system adopted by regulators in the U.S. fully embraces the idea that “it sometimes takes a rogue to catch a rogue,” said Kathleen Clark, a law professor at Washington University, who specializes in whistleblower law and ethics.
“You don’t have to have completely clean hands to take advantage” of the system’s financial bounties and other protections, she said.
In fact, U.S. lawyers say, the whistleblower system in the U.S. on insiders to expose wrongdoing and recognizes the power of financial and prosecutorial incentives.
“What the SEC does is if there’s a co-operator or a culpable whistle- blower who’s really helped out the SEC, they’ll give credit to that person, so maybe a reduced penalty,” said Jennifer Pacella, an assistant professor at City University of New York, whose focus is federal whistleblower programs and securities regulation.
“They may also decide to follow a non-prosecution or deferred prosecution agreement and not even go after that person. I think that’s really important, too, as kind of an added incentive to get such persons to come forward,” Pacella said.
The financial crisis of 2008 prompted securities regulators around the world to mull and develop whistleblower programs.
Both the SEC and the U.S. Commodity Futures Trading Commission began offering cash for tips leading to successful enforcement action as part of whistleblower programs established under the DoddFrank Wall Street Reform and Consumer Protection Act of 2010.
They pay whistleblowers up to 30 per cent of money collected through sanctions of $1 million US or more.
The CFTC’S initial award this week was for “specific, timely and credible information” about securities violations. Last fall, the SEC handed out a record $14 million US award to a whistleblower.
Canada’s first whistleblower hotline in the securities industry was set up in 2009 by the Investment Industry Regulatory Organization of Canada. A total of 37 calls have been logged since February of 2011, though a spokesperson for IIROC points out that “some of these may not have been true whistleblower matters.”
IIROC’s policy says the agency will do its best to keep the identity of a whistleblower private, but may be compelled by law to disclose it.
The same goes for the Canadian investment industry’s other self-
There’s no incentive for people who get caught in schemes to come forward and self-report.
regulatory agency, the MFDA, which established a whistleblower program just in February.
On its website, the MFDA says it hopes tips and information will help the enforcement team “identify fraud and other misconduct and take the necessary regulatory action against responsible parties earlier than otherwise possible.”
Canada’s largest capital markets regulator, the Ontario Securities Commission, has been considering creating a formal whistleblower program that would pay monetary awards like the SEC since 2010. So far, though, such a program has not advanced beyond the study stage.
The OSC plans to publish a “concept” paper this fall and invite input that will “inform the direction the commission ultimately takes.”
The regulator already has a program that offers credit for co-operation with the regulator in some circumstances, and a new program for explicit no-enforcement action agreements was put in place in March. The OSC also clarified a process for self-reporting.
But Geller, who is a member of an advisory panel convened by the OSC to advise the regulator on investor issues, said he believes the Canadian regulatory system would work better if the important role of whistleblowers was clearly recognized and acknowledged across the board.
“Insiders should be encouraged to self-report, which is key to a reasonable consumer protection regime,” he said.