The U.S. Securities and Exchange Commission (SEC) Whistleblower Program was created by the Dodd-Frank act of 2010 to combat fraud and protect investors. From 2012-2020, whistleblower reports contributed to the SEC ordering over $2.7 billion in sanctions against guilty parties, with $700 million being rewarded to whistleblowers, themselves. To understand this program’s incredible success at uncovering fraud, we turn to the Association of Certified Fraud Examiner’s (ACFE) analysis, 5 Reasons the SEC Whistleblower Program Is a Success, which is summarized below.
Two of the five reasons for the program’s success go hand in hand: high financial incentives for whistleblowers and the fact that most are eligible to receive these awards. In cases where over $1 million in total monetary sanctions are ordered, whistleblowers who provided necessary information are awarded between 10% and 30% of the money. Whistleblowers are eligible for awards regardless of citizenship, and even compliance personnel can receive awards if certain exceptions apply. It is explained that these exceptions allow for more insiders to be awarded for whistleblowing against members of their own organizations, an action that is often necessary for fraudulent activity to be uncovered.
Although financial incentives are enticing, they are not the only reason for the SEC Whistleblower Program’s success. The ACFE report is careful to note that 84% of award recipients reported their concerns internally before turning to the SEC. This demonstrates that many whistleblowers are willing to stand up for what is right without the promise of a tangible reward. That said, fear of retaliation is a major factor that keeps potential whistleblowers from speaking up. Thankfully, the SEC’s program takes multiple steps to protect those who do. Whistleblowers are able to anonymously submit tips to the SEC as long as they are represented by an attorney. Depending on the circumstances, some whistleblowers are able to remain fully anonymous until they are granted a monetary award. Even after claiming an award, the SEC keeps the identity of the whistleblower private.
In addition to allowing for anonymity, the SEC protects whistleblowers by rejecting “gag clauses” and investigating cases of retaliation. “Gag clauses” refer to agreements between the alleged guilty party and the potential whistleblower that could prevent the disclosure of misconduct to regulators or law enforcement. As an example, the ACFE explains the invalidity of a signed agreement that all funds be immediately returned to an investor on the condition that he/she does not report violations to law enforcement. In addition to the SEC still accepting the whistleblower’s report, the guilty party could face additional penalties for attempting to bribe the individual into such an agreement. In cases of retaliation, the SEC can investigate and enforce actions to protect the whistleblower.
To conclude, the success of the SEC Whistleblower Program can be attributed to the fact that it awards and protects whistleblowers who help uncover serious cases of misconduct. Whistleblowers must feel that their actions are valued whether this is demonstrated by monetary awards or a workplace culture that prioritizes honesty and integrity. They must also have confidence that they will face no retaliation for reporting concerns in good faith. Promoting the use of an anonymous whistleblowing mechanism, such as Red Flag Reporting, demonstrates to all members of an organization that their feedback is welcomed and that everyone plays a critical part in promoting an ethical workplace.