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Should the FCA pay millions of pounds to whistleblowers?

Sam Dale MM blog

In September 2012, UBS banker Bradley Birkenfield was paid more than £65m by the US Internal Revenue Service for whistleblowing on tax evasion at the bank.

Birkenfield was given the huge prize after revealing details of tax evaders within UBS, which was fined £520m in 2009 and later turned over the names of individuals involved.

He served time in prison for fraud conspiracy but was then gifted the enormous reward within months of his release.

At the time, the IRS said it sent “104 million messages” to whistleblowers that there is now a “safe and secure” way to report crime.

The IRS clearly calculated it could save more money in the long-term by encouraging whistleblowers, even if it means hugely enriching a convicted fraudster.

Under the sweeping US financial regulatory reforms, Dodd-Frank, a similar system of cash rewards for whistleblowers is being introduced. The potential rewards for whistleblowing on huge corruption such as the Libor rigging scandal are even bigger.

Last week, Financial Conduct Authority chief executive Martin Wheatley said he is watching the fledgling US system carefully and if it works he may copy it.

With public outrage over bankers’ bonuses at its zenith, it doesn’t seem a popular move to reward fraudsters with tens, or even hundreds, of millions of pounds just for telling the truth.

Wheatley says the FSA receives up to 4,000 pieces of information from whistleblowers every year with 12 per cent worthy of further investigation.

Clearly cash would only be paid for quality information that results in money being recovered, wrongdoers found and fines being levied.

FSA chairman Lord Adair Turner argues the manipulation of Libor could never have been uncovered without the help of whistleblowers no matter how intensive the supervisory process imposed.

It is simply impossible to supervise every trade and transaction and therefore whistleblowers have to play a role in uncovering bad behaviour.

Informed Choice managing director Martin Bamford says: “Such a system is fraught with moral and ethical challenges. The FSA could get better results by having a clear and more supportive process for whistleblowers, providing better feedback on the outcome of reports made.

“If the FSA believes it is failing to discover criminal behaviour, or catching it too late, then it needs to review its own supervision practices and become a more approachable regulator, rather than offering cash incentives for ‘doing the right thing’.”

It is a moral maze and the world’s financial regulators will be watching the American system with interest.

Would it be too much to handle if a fraudster had enjoyed a life of corruption only to come clean at the last moment and walk off into the sunset with £100m in his back pocket?

Or would it be a price worth paying if scandals such as Libor rigging had been uncovered much sooner, stopping corruption from permeating the financial system? Would it have saved millions in regulatory costs and allowed the FSA to focus its supervision in other areas?

These are the questions currently being considered at the financial watchdog but will it really have the nerve to introduce a policy of cash for fraudsters?

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. I can see merit in this if AND ONLY IF the whistleblower has no “skeletons in the closet”. Even the FSA are not stupid enough to pay a whistleblower who had him/herself been involved or benefited in any way from previous fraud………. Are they?

  2. creates the incentive to see things go wrong and then whistle blow

  3. Actually, the theory is that, among others, those with the best information are those most likely to be close to the crime, so incentivizing participants in order to expose fraud and to bust the king pin and the other significant players is a key tool.

    The check against profiting from self made fraud, just to get a whistleblower award, is that besides being prosecuted, the kingpins and major players are excluded from such awards. (Only the stupidest of criminals is going to think that WBing is a necessary and sufficient Plan-B to the actual Plan-A crime.

    Incentivizing whistleblowers works. It is a shame that companies don’t have similar internal programs. This and stronger personal liability for planners and initiators would nip fraud in the bud.

  4. Actually, the theory is that, among others, those with the best information are those most likely to be close to the crime, so incentivizing participants in order to expose fraud and to bust the king pin and the other significant players is a key tool.

    The check against profiting from self made fraud, just to get a whistleblower award, is that besides being prosecuted, the kingpins and major players are excluded from such awards. (Only the stupidest of criminals is going to think that WBing is a necessary and sufficient Plan-B to the actual Plan-A crime.

    Incentivizing whistleblowers works. It is a shame that companies don’t have similar internal programs. This and stronger personal liability for planners and initiators would nip fraud in the bud.

  5. Why did you not post my earlier comment?

  6. @ivor_park_fin 5th March 2013 at 1:46 pm

    FCA – get this programme up and running

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