Incentive capped at $1.5 million would be inadequate to attract whistleblowers

By Susan Yellin | August 24 2015 09:00AM

A financial incentive capped at $1.5 million is “highly inadequate” to attract would-be whistleblowers who could be putting their entire financial futures in jeopardy, a roundtable sponsored by the Ontario Securities Commission (OSC) has been told.

The public roundtable held in June was called by the OSC after it released a discussion paper aimed at introducing a whistleblower program, the first of its kind for securities regulators in Canada. The program, designed to entice people to come forward with compliance issues or knowledge of other wrongdoings, would pay a financial award of up to 15% of total monetary sanctions collected to a maximum $1.5 million.

OSC commissioner Mary Condon said the landscape in Canada changed when the U.S. Securities and Exchange Commission (SEC) put in similar legislation a few years ago. “This has been described as a game changer,” said Condon. She noted, however, that the United Kingdom and Australia also have whistleblower programs – but they do not offer financial incentives.

American and Canadian representatives from the legal, investor and corporate worlds agreed at the roundtable that financial incentives were key for the program to succeed, especially given the kinds of retaliatory risks many whistleblowers face.

Misalignment of risk

Dimitri Lascaris, a partner at Toronto-based law firm Siskinds LLP, said as it now stands, the risks and rewards are skewed with most of the risks borne by the whistleblower.

“Any time there is a misalignment of risk and reward, perverse incentives already exist,” said Lascaris. “Namely, those who witness frauds have an incentive to remain silent because they bear all the risk of reporting the problem but stand to gain nothing from this exposure. So if we actually care about perverse incentives we should be supporting a whistleblower program and not opposing it.”

lascaris_dimitri_articleIn order to take that first step to reporting to regulators, the tipster first has to believe that the financial reward will be worth the trouble, Lascaris said.

But a cap of $1.5 million is “highly inadequate” since whistleblowers can be blackballed later from their industry and risk their future livelihoods. “And $1.5 million is simply not enough money nowadays for long-term financial security,” he said.

On top of that, many potential whistleblowers would want to get in touch with a lawyer long before they go to a regulator, a cost that can add up quickly, he said.

Financial incentives have done well at the SEC and in fact, have been a “game changer” for the U.S. regulator since the program began in 2011, said Jane Norberg, deputy chief of the Office of the Whistleblower at the SEC.

There were 3,600 whistleblower tips to the SEC in 2014, with about 58 coming from Canada. It paid out more than US$50 million to 17 whistleblowers, with the highest amount, more than US$30 million, paid to a tipster outside the United States.

“If the question is: can a whistleblower program be effective, I’m here to tell you today, because I have a front row seat, yes, it can be very effective.”

Anti-retaliation protection

Norberg also credited its successful plan to its confidentiality and anti-retaliation protection provisions, saying each of the features is just as important as the monetary rewards.

The OSC has said it will consider amendments to the Ontario Securities Act to include anti-retaliation provisions. It also said that to ensure the success of the program, OSC staff would “use all reasonable efforts” to keep a whistleblower’s identity confidential.

Marian Passmore, director of policy at the Canadian Foundation for Advancement of Investor Rights (FAIR Canada), said the OSC’s proposed threshold should be lowered because there aren’t nearly as many sanctions over $1 million in Canada as there are in the United States.

As well, Passmore said the public needs to be aware of the program, and expertise and money are required to run it.

Connie Craddock, chair of the OSC Investor Advisory Panel, said people who come to a regulator have to believe that the risks they are taking are worthwhile and the key to that is robust confidentiality and anti-retaliation protection.

Craddock said the investor panel also agreed that the OSC should not share whistleblower information with organizations that do not have the same confidentiality or anti-retaliation protections in place, but noted that in reality, this will be difficult to achieve.

She also said whistleblowers should not have to put themselves at risk by going to their own firm before going to the OSC.

The OSC should not share whistleblower information with organizations that do not have the same confidentiality.

– Connie Craddock

But Linda Fuerst, a partner at Lenczner Slaght Royce Smith Griffin LLP, said there are financial and reputational advantages to a company if the whistleblower reports internally before going to a regulator.

“The bottom line is internal reporting allows the organization to get ahead of the curve by planning and conducting its only internal investigation with the view to figuring out if there is any truth to the internal whistleblower report before any regulatory action and/or any adverse publicity results.”

If the internal investigation substantiates that wrongdoing has occurred, then the company can consider ways to “self-remediate” and to prevent the issue from continuing, saving the company significant amounts of money and benefiting investors, she said.

Should there be an obligation to make the wrongdoing public, a company then has the benefit of deciding how to get its message across internally and externally rather than respond to reports in the financial press or a notice from regulators, said Fuerst.

The federal Competition Bureau has an immunity-from-prosecution program, mostly with criminal provisions, such as bid-rigging and price fixing, said John Pecman, head of the bureau.

“It’s a very significant carrot for individuals and companies, particularly given the fact that there is always a risk of being detected,” Pecman said. “[It’s] a huge reward given the size of the penalties that are involved.”

Leniency plan

Since 2011, the immunity program and a leniency plan have enabled the federal government to collect $88 million in fines. Of that, $86 million have come from leniency programs where the person has pleaded guilty.

Pecman said the bureau is also trying to promote its standalone whistleblowing program to encourage more people to participate.

“[But] we have not had a lot of success, maybe because there aren’t financial rewards. We have a couple of cartel investigations emerge from that program, but the success is not there.”

The roundtable also raised a number of questions, including how the OSC plan would work in conjunction with other securities regulators across Canada and whether the financial incentive would be taxed by Canada Revenue Agency.