The Ontario Securities Commission of Canada has introduced financial rewards for whistleblowers, as much as C$5million(The Economist 2016). This system is modelled on the American Securities and Exchange Commission scheme. But does it work? Does it uncover wrongdoing that otherwise would have continued?
Not everyone pays whistleblowers, for example the British Financial Conduct Authority, the Australia Securities and Investments Commission do not offer money as part of their whistleblowing support policies. And in Ireland there are various protections and encouragements for whistleblowers, but pay-outs are not part of these schemes.
The modern day origin of paying for whistleblowing dates back to the U.S. False Claims Act 1863, introduced during the US Civil War under the administration of Abraham Lincoln. It was introduced to prevent fraud against the government and gives the whistleblower the power to initiate the action, a qui tam suit, and then claim a percentage of the recovered monies. Later amendments protect employees when reporting public fraud, including providing for anonymous reporting, reinstatement, special damages and back pay.
Paying for whistleblowing has been criticised as being in breach of natural justice as it rewards criminal behaviour, as usually the whistleblower is a party to the fraud. In addition, an external reward may interfere with the moral dimension of reporting (Feldman & Lobel 2010). As a result, the reluctance to introduce “rewards” for whistleblowing may be politically unacceptable despite any saving to the public purse. These schemes are also criticised as their scope is limited to financial fraud or financial mis-deeds, and thus does not address procedural, environmental, or ethical wrongdoing.
But back to the original question, does it work?
The decision to whistleblow is impacted by numerous factors, individual, situational and organisational and thus the financial rewards have to overcome all of these issues to be effective. For example, there are indicators a fear of retaliation may prevent reporting, even with financial incentives(Guthrie & Taylor 2017). Research to understand whistleblowing is generally self-reporting or scenario based, that is, assessing whether an observer is likely to blow the whistle. Both these methods have significant limitations, for example, what an individual says they would do may not be what they do if faced with the real-world situation (Podsakoff & Organ 1986). In 2002, the US Department of Justice claimed that over US$10 billion have been recovered since 1986 under the False Claims Act(Bowden 2005). But would that amount or even some of it been recovered anyway? How much fraud is not uncovered, even with the financial incentives and why? And is there a way to prevent the fraud in the first place? These questions also need to be addressed when assessing the effectiveness of whistleblowing financial incentives.
Ontario has opened an office to encourage whistleblowing, and whistleblower pay-outs are just a part of that new initiative. It will thus be difficult to separate the effectiveness of the pay-out scheme from the other measures that the new office will introduce. Time will tell if the new measures improve the regulatory environment in Canada encouraging greater investment. Thus, from the viewpoint of the Canadian taxpayers and public, the specifics of the measures may not matter as much as the overall results.
Bowden, P., 2005. A comparative analysis of whistleblower protection. In Australian Association for Professional and Applied Ethics 12th Annual Conference. Adelaide, pp. 1–15.
Feldman, Y. & Lobel, O., 2010. The Incentives Matrix: A Study of the Comparative Effectiveness of Monetary Rewards as Compliance Systems. Texas Law Review >, 88, p.1151–1212.
Guthrie, C.P. & Taylor, E.Z., 2017. Whistleblowing on Fraud for Pay: Can I trust you? Journal of Forensic Accounting Research.
Podsakoff, P. & Organ, D., 1986. Self-reports in organizational research: Problems and prospects. Journal of Management.
The Economist (2016, July 16). Whistle while you work. The Economist, p.60