The awkward thing about paying whistle-blowers is that the best informants typically aren't squeaky clean.
They hear about stuff because they are not innocent bystanders. They are often insiders who become aware of wrongdoing because they are partly involved in it. They may even have profited from their conduct.
The Ontario Securities Commission, which is poised to introduce its first-ever reward program on July 14, has acknowledged the inherent ethical dilemma by making "culpable whistle-blowers" eligible for payments.
The OSC draws the line at would-be whistle-blowers convicted of criminal offences related to the information they bring to the commission. And the OSC reserves the right to reduce awards if whistle-blowers with unclean hands are fined for their actions or "directed, planned or initiated" securities-law violations.
The OSC program is modelled on a successful U.S. Securities and Exchange Commission program that was created in 2011 – in part out of frustration that early warnings about the Bernie Madoff Ponzi scheme went unheeded.
Quebec's securities regulator is taking a different tack. The Autorité des marchés financiers (AMF) launched its own whistle-blower program in June that offers potential immunity from lawsuits, but no cash. AMF officials insisted there is no "certainty" that money produces better information.
So why reward whistle-blowers at all, particularly the guilty? Because it's better than no information at all.
"Even silence is complicity, which may suggest that an individual who observes wrongdoing in silence, taking no action, may have the same level of fault as a participator in the wrongdoing who then reveals it," Jennifer Pacella, a City University of New York assistant law professor, argued in a recent University of Pennsylvania Journal of Business Law article titled Bounties For Bad Behaviour.
"Culpable whistle-blowers should be acknowledged and rewarded for inside information that only they can provide, but with caution," according to Prof. Pacella.
The money may also be seen as compensation for what whistle-blowers endure. Informants often suffer other repercussions beyond legal penalties. Some lose their jobs or have their careers cut short. Others are often denied promotions, reassigned and ostracized by co-workers.
The SEC experience suggests that rewards do work. The number of whistle-blower tips has increased every year since it started paying for information five years ago – from 3,000 in 2012 to nearly 4,000 last year. And the commission is on a pace to exceed that this year. That's roughly 15,000 leads the SEC might never have received.
Rewards are also going up. The SEC, which has called the program a "game-changer," has so far paid out $85-million (U.S.) to 32 whistle-blowers, including $17-million in May to an unidentified former employee of a company caught up in an SEC investigation. The largest-ever reward was $30-million, paid in 2014.
Tips from whistle-blowers account for an estimated 40 per cent all reported incidents of workplace fraud, according to academic research cited in Prof. Pacella's study.
Whistle-blower legal advice has also become big business in the U.S., both for plaintiffs and target organizations. Most major law firms have practices dedicated to the relevant laws, and the rewards.
The most infamous of paid whistle-blowers is Bradley Birkenfeld, who received $104-million from the Internal Revenue Service in 2012 for tipping off U.S. tax officials to illegal tax shelters run by UBS in Geneva, Switzerland. Mr. Birkenfeld, a UBS private banker, was involved in recruiting customers in the U.S. He eventually went to prison for his involvement, but his tip helped the IRS to crack Swiss bank security laws and pursue hundreds of UBS clients in a massive tax-evasion probe.
There aren't likely to be similar bloated rewards in Canada. The OSC's maximum payout will be capped at $1.5-million (Canadian), and payouts only kick in if a case involves fines of more than $1-million. The SEC offers unlimited rewards, based on a payout of 10 to 30 per cent of penalties imposed in a case.
The risk is that OSC's reward program proves to be too small of an incentive to get reluctant informants to come forward, particularly in high-profile cases.
The good news is that regulators will be able to track and compare how the different Ontario and Quebec approaches are working.
Based on the U.S. experience, money does talk.