Whistleblower rewards, compliance risk

The Ontario Securities Commission plans to start paying whistleblowers for tips about securities violations. Even companies with strong internal systems need to recognize the change
By Ken Mark

The deadline for comments has passed. After the Ontario Securities Commission reviews the responses to its recent Staff Consultation Paper 15-401, Proposed Framework for an OSC Whistleblower Program, the next step is that program’s formal unveiling—and with it, challenges for public companies in how to adapt.

The goal of the program, the first of its kind for Canadian securities regulators, is to encourage reporting of securities law violations. It will replace the current de facto practice of benign neglect with a plan offering informants the comfort of money—up to $1.5 million—together with the solace of confidentiality and support. In return, whistleblowers must provide “timely, credible and robust information that leads to an enforcement outcome.”

Specifically, the OSC expects the program to yield insider information on corporate processes, relationships and culture, enabling it to expedite malfeasance investigations, impose suitable penalties and the like. These actions will enable the regulator to further protect Canadian capital markets and investors. They also keep Canadian rules in step with recent G20 commitments to develop and maintain robust whistleblower and whistleblower protection regimes, and heed recommendations by third-party anti-corruption groups such as Transparency International.

As proposed, the program contains three critical, defining features. The first is offering monetary incentives, capped at $1.5-million. While some argue that whistleblowers should not be rewarded for making public-interest disclosures, others contend it is not enough.

Says Daniel Bach, Toronto-based partner at Siskinds LLP: “It’s only about the annual salary of a corporate vice-president. We need more flexibility to encourage people to come forward.”

By comparison, the U.S. Securities and Exchange Commission (SEC) pays a sliding scale of 10% to 30% of its final settlement proceeds. Last year, the largest award was US$30 million paid to an anonymous whistleblower.

Until now, there was no possibility for such rewards for Canadian whistleblowers. “In most cases, whistleblowers stepped up after seeing management improprieties because they wanted to do the right thing and have it corrected,” says Bach. “But in the past, that rarely happened because of employer retaliation—legal actions, etc.—which hurt them personally because of the cost of defending themselves and the damage to their personal and professional lives. If their names ever became public, they were unemployable.”

Under the proposed plan, the OSC “would use all reasonable efforts to protect the identity of the whistleblower and we would not generally expect the whistleblower to testify.” As well, it would also “deter employers from retaliating against employees who provide information internally or to the OSC.”

Another factor for listed company boards, in particular, to consider: by establishing a new external reporting outlet for potential whistleblowers besides companies’ in-house reporting mechanisms, the OSC may be creating new challenges for both executives and whistleblowers on how to do the right thing.

Lawrence Ritchie, a former OSC vice-chair who now leads Osler Hoskin & Harcourt’s Risk Management and Crisis Response practice, believes that public companies can leverage the OSC initiative to bolster their own compliance reporting processes.

“Companies need to recognize the new OSC policy and practices,” he says. “Each side has its own way of handling information and complaints. The internal mechanism acknowledges the firm’s duties to handle them in a manner compliant with OSC rules without undermining business opportunities. They must also show that they take such complaints seriously and investigate them while ensuring whistleblower anonymity.

“The OSC plan does not require informants to file first with their firm’s internal processes. Most whistleblowers want to do the right thing, so it’s important that they feel comfortable that their complaints will be handled responsibly in-house. I believe it is riskier for firms if whistleblowers use an alternative outlet rather than the internal corporate program. Going to an external system should be a last resort.

“Regulators need help to identify and deal with wrongdoing. When firms collaborate and cooperate with them, they are building up trust by acting as good corporate citizens.”

However, such “gold star” treatment is off the table if firms fail to report to OSC staff misconduct gained from internal channels. According to Staff Consultation Paper 15-401, they will “receive no credit for cooperation when the issuer or registrant firm is ultimately brought to account for the misconduct.”

SO, WHAT DOES a well-functioning internal reporting mechanism look like? According to Toronto-based Grant Thornton LLP forensic accounting partner, David Malamed, it features the three As—awareness, accessibility and anonymity: “Employees need to know that the reporting mechanism exists and how it works. It has to be easy to use and employees must know that that if they come forward, their names remain secret.”

Employee tips are valuable for uncovering fraud and financial wrongdoing. At Malamed’s presentations, executives have told him that about 50% of reports of corporate misbehaviour they see come from employee tips. However, when he asks those same executives if they know how to access their internal reporting systems, about half of them say they do not.

Internal reporting systems are not only a nice-to-have; they are also a regulatory requirement for public companies contends Shannon Walker, Vancouver-based president of Whistleblower Security Inc. Walker estimates that only a minority of Canadian public firms has established such programs. The requirements (under Multilateral Instrument 52-110, created in 2004) can be compared to government building codes, which regulate the number of functioning fire alarms that must be in place. When inspectors discover a building that is not up to code, they can issue fines and other penalties to landlords. But this is apparently less common regarding failures to introduce internal whistleblowing instruments.

Says Walker: “Having them in place is a basic requirement for public firms, so executives and board members must ensure that they can check off this box during the firm’s annual audit. It’s part of their fiduciary duty to be compliant with these rules.”

Another, more pragmatic yet pivotal question is will the new, OSC whistleblower pro- gram have sufficient funds and other resources to handle the expected flood of tips? In 2013, the U.S. Securities and Exchange Commission’s Office of the Whistleblower fielded 3,200 tips, up 7% from the previous year.

The whistleblowing section of the 2011 Transparency International Canada’s Annual Conference Report concluded, “Canada has not kept up with best practices related to whistleblowing and has a poor track record of protecting truth tellers and acting on disclosures to expose wrongdoing. Stronger laws are needed and existing laws need to be fully enforced.”

The proposed OSC whistleblower program is the first step in achieving that goal.

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