The Senate Economics References Committee yesterday released its final report of the Inquiry into the Performance of the Australian Securities and Investments Commission (ASIC). For corporations, one of the most important aspects of the examination was an investigation into the protections afforded by ASIC to corporate and private whistleblowers.
Leading up to the release of the Committee's final report, many people have called for regulators to consider US-style cash rewards for whistleblowers, while Inquiry witnesses described the current Australian whistleblower regime as 'out-of-date' and 'inadequate'.1
The Committee's final report recommends a number of major reforms to the regulation, protection and reward of whistleblowers in Australia, described as a "fundamental shift in approach to corporate law enforcement". This will have very significant consequences for how Australian organisations manage fraud risk and internal reporting of fraudulent activity.
The Committee's findings
As well as supporting the establishment of an 'Office of the Whistleblower' as a specialist office within ASIC, the Committee recommends that Australia's current corporate whistleblower protections should be extended to cover anonymous disclosures, and that the 'good faith' requirement be removed from the provisions of the Corporations Act 2001.
Perhaps most significant for many organisations is the potentially game-changing recommendation that the government explore options to incentivise whistleblowers in Australia through a rewards-based system, similar to the US.2 With no incentive system in operation in Australia, the current regime is largely focused around protection legislation. The recent passage of the Public Interest Disclosure Act 2013 is an example in the context of public sector whistleblowing. Further, the Corporations Act designates certain protections to whistleblower activities in the private sector, including protection from civil, criminal or contractual liability, prohibition against victimisation and confidentiality provisions.
Adoption of US-style incentivised whistleblower schemes
Incentivised whistleblower schemes are a well-oiled machine in the United States. In 2012-2013 alone, around 6500 tips were received by the Securities and Exchange Commission (SEC), and rewards were paid to six whistleblowers, ranging from US$50,000 to $14 million.3
Late last year, the SEC awarded more than $14 million to a whistleblower as a reward for information that helped it to bring an enforcement action for large-scale investment fraud. This was the largest award made by the SEC under the Dodd-Frank Wall Street Reform and Consumer Protection Act 2010, which rewards voluntary whistleblowers who provide the SEC with original information that leads to a successful action. Under the Act, where the SEC obtains more than $1 million in monetary sanctions, the whistleblower is entitled to 10-30% of the sanction.
A separate incentivised whistleblower system established in the US by the False Claims Act allows private individuals to bring claims on behalf of the government and to claim a percentage of the overall amount recovered, if successful. This scheme is known as the qui tam system and essentially allows individuals to recover 15-25% of a successful claim where the government regulator is involved, or 25-30% where the regulator chooses not to join the claim. From 1987 to 2012, this scheme has resulted in the recovery of over $35 billion in funds by the US government.4
At a general level it would seem that both the US-style cash reward scheme and qui tam arrangements could be introduced in Australia without the need for any major legislative or cultural change. Despite this, the Committee's report stopped short of recommending full or immediate adoption of US-style rewards schemes.
The recovery trends from incentivised whistleblower schemes in the US are indicative of the sharp increase in the investigation of fraud allegations that Australian organisations will likely face if they are introduced here.
How can organisations prepare for incentivised whistleblower schemes?
In its findings, the Committee advocates regulations which will encourage - or even require - companies to operate internal whistleblower systems. Therefore, in terms of both future reform and best practice, having a robust internal compliance process will be a key consideration for all organisations, regardless of whether reporting incentives exist.
For the financial services industry, conversations with risk and compliance officers and with others who have governance oversight need to commence immediately. These areas are increasingly in the spotlight in relation to how organisations manage their affairs, particularly in relation to compliance. Other industries similarly need to start these conversations now, especially those who contract with government.
Preparing for whistleblower tip-offs external to the organisation will include ensuring that fraud control detection and prevention mechanisms in-house are of the highest quality – especially in the areas of financial management, invoicing and information technology.
If a reward-based scheme or qui tam arrangements are introduced in Australia, the prospect of rewards for whistleblowers will undoubtedly result in a sharp rise in the number and type of whistleblower tips received, across a range of industry sectors. In preparing for incentivised whistleblower schemes, ensuring that organisations' fraud detection systems and reporting policies are ahead of the game will be critical to containing fraud risks and cost exposure.
1Senate Economics References Committee, Performance of the Australian Securities and Investment Commission (June 2014) 202
2Senate Economics References Committee, Performance of the Australian Securities and Investment Commission (June 2014) Recommendation 16
3US Securities and Exchange Commission, 2013 Annual Report to Congress on the Dodd-Frank Whistleblower Program (November 2013)
4US Department of Justice, 'Fraud Statistics – Overview, October 1 1987 – September 30 2012' (24 October 2012) at http://www.taf.org/DoJ-FCA-statistics-2012.pdf
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