13 August 2015 - Post by:Kurt Wolfe
Last fall, we reported a noteworthy trend developing at the US Securities and Exchange Commission’s Office of the Whistleblower: the SEC is receiving an increasing number of tips, complaints, and referrals from whistleblowers who live outside the United States. The trend is particularly significant for financial services institutions with headquarters or operations outside the US, because it suggests that the SEC is successfully leveraging attractive financial incentives—incentives that simply do not exist in other jurisdictions—to lure whistleblower tips from abroad.
The SEC’s whistleblower program appeals to potential whistleblowers who reside overseas
In the UK, the FCA and the PRA have firmly declined to offer financial incentives to would-be whistleblowers, opting instead to bolster whistleblower protection as a means to promote better (internal) reporting cultures in financial services firms. While the FCA and PRA believe ‘introducing financial incentives for whistleblowers would be unlikely to increase the number or quality of the disclosures we receive from them’, the incentives offered through the SEC’s whistleblower program have enticed a considerable number of whistleblowers outside the US to come forward to the SEC’s Whistleblower Office with tips relating to potential US securities laws violations.
The SEC is receiving an increasing number of tips from whistleblowers who live outside the US
Indeed, in 2014 more than 12% of the tips received by the SEC’s Whistleblower Office came from abroad. Of those, the SEC received more tips from whistleblowers resident in the UK than any other nation.
The SEC’s whistleblower program incentivizes individuals with knowledge of possible US securities laws violations to come forward to the SEC with information about the potential misconduct. Whistleblowers who voluntarily provide original, high-quality information that leads to a successful SEC enforcement action in which sanctions exceed $1 million may be eligible to receive 10-30% of the money collected in that case.
The SEC offers lucrative financial incentives to attract ‘foreign’ whistleblowers
There are no restrictions on awards to whistleblowers who live in a foreign country and, in fact, the SEC actively encourages individuals who live outside the US to participate in its whistleblower program. The Chief of the SEC’s Whistleblower Office has unequivocally stated his desire to ‘incentivize company and industry insiders, or others who may have knowledge of possible federal securities law violations, both in the US and abroad, to come forward and report their information promptly to the Commission’. Similarly, the Commission itself has plainly stated its willingness to consider tips from sources abroad, whether ‘the claimant [is] a foreign national, the claimant resides overseas, the information [is] submitted from overseas, or the misconduct comprising the US securities law violation occurred entirely overseas’.
And the SEC is building a strong track record of rewarding ‘foreign’ whistleblowers who volunteer information relating to potential US securities laws violations. To date, nearly 25% of the SEC’s whistleblower awards have gone to whistleblowers abroad: the Whistleblower Office has authorized awards to 18 whistleblowers, four of whom reside overseas.
Notably, the SEC’s highest-ever whistleblower award—$30 million—went to a foreign resident. At the time, the SEC touted the award as a virtual call to arms for would-be whistleblowers abroad, stating that ‘[w]histleblowers from all over the world should feel similarly incentivized to come forward with credible information about potential violations of the US securities laws’. In the SEC’s view, rewarding a whistleblower who resides overseas may be appropriate whenever the whistleblower’s tip leads to a successful enforcement action in the US.
In addition to wooing would-be whistleblowers who live outside the US, in 2015 the Whistleblower Office has taken an expansive view of its authority to reward whistleblowers, authorizing awards on an exception basis to a compliance officer who reported misconduct to the SEC after company management failed to take steps to prevent resulting investor harm; and to a corporate executive who tipped the SEC about a fraudulent scheme that had been reported internally by another employee.
The SEC’s commitment to reward whistleblowers who live in foreign countries, and its expanding view on the circumstances in which an award is appropriate, will likely induce more whistleblowers to submit tips to the Whistleblower Office. As the total number of tips increases, we expect a commensurate rise in reports from whistleblowers who reside overseas. Financial services institutions with headquarters or operations outside the US should meet this challenge head on by re-evaluating their reporting culture, policies and procedures, and reporting systems.
How good is your firm at encouraging internal reports, triaging credible tips, and promptly addressing legitimate issues?
For more on appropriate steps your firm might consider, please read our article ‘Recent SEC award will entice foreign whistleblowers to come forward’.