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OSC Decision Heightens Importance of Whistleblower Programs

27/05/2016


A Security Commission’s role is to protect investors and ensure compliance with the rules governing the securities industry. The Ontario Securities Commission (OSC) is going to offer rewards for successful prosecutions under its whistleblower program. OSC Chair Maureen Jensen indicated they will pay whistleblowers 5-15% of the total penalties imposed in a case, as long as there is a successful prosecution which leads to penalties of at least $1 Million. This program is based on the success of the U.S. Security Exchange Commission whistleblower program.

The U.S. SEC paid out $14M to one whistleblower in 2013 that alleged a scheme to defraud about 250 mostly Chinese investors by two Chicago-based companies.1 In 2014, the SEC paid out its largest reward of $30M to a whistleblower whose identity was not disclosed under the provisions of their program.

Some of the largest fraud cases have been discovered as a result of whistleblowers; Enron, the Bernie Madoff security fraud, HSBC money laundering in 2011 and the Edward Snowden case. These examples make it clear that whistleblowing has a place in your organization and that it is critical to protect the identities of those that step forward.

The 2016 Association of Certified Fraud Examiners Report to Nation2 conducts surveys of over 40,000 CFEs annually about cases they had investigated and identified the following key points:

  • Asset misappropriation was the most common form of occupational fraud;
  • The longer a fraud lasted, the greater the financial damage;
  • The median losses for all cases was $150,000, with 23% of cases causing losses of $1M or more; and,
  • The most common detection method was tips; organizations that had reporting hotlines were more likely to detect fraud through tips than organizations without hotlines.

What does this mean for companies and organizations governed by Securities Acts across Canada?

The financial incentive offered by the OSC will likely be duplicated across Canada if it replicates the success of the program in the U.S. This means that companies and organizations should continue to offer their own whistleblower programs in order to satisfy any Securities Commission they are demonstrating self-governance, transparency and ethical workplaces. Providing independent hotlines which are monitored by third parties will likely assist with identifying issues and problems before the intervention of a Securities Commission.

What should my program look like?

Strong whistleblower programs should consist of the following elements:

  • Education of employees on misconduct, policies and whistleblower legislation;
  • Implement policies such as conflict of interest, insider trading, misconduct and investigation of these contraventions;
  • Create whistleblower policies;
  • Implement an independent whistleblower hotline.

Implementing, regulating and enforcing policies and procedures will create an ethical workplace. Providing the venue to make anonymous complaints will not weaken your organization but strengthen it through transparency and ethics. Whistleblower hotlines should support your organization’s responsibilities, not replace them. Detecting fraud quickly will allow your business to operate uninterrupted from inspection by regulators and will ensure you do not suffer from reputational damage as a result.

To learn more, contact Michael McCormack, CFI, at 403.536.5527 or [email protected] or your local MNP Valuation, Forensics & Litigation Support Services team member.

  1. http://www.wsj.com/articles/SB10001424052702304071004579407211911169186
  2. http://www.acfe.com/rttn2016.aspx