Whistleblower Programs
Everything is bigger in the United States of America, and its whistleblower program is no exception. The U.S. Securities and Exchange Commission (SEC) paid out a staggering 600 million dollars in whistleblower awards last year, including the largest-ever payout of $279 million to a single whistleblower. On top of that, since the start of the program, over $2 billion has been paid out by the SEC and Commodity Futures Trading Commission (CFTC), leading to over $9.5 billion in sanctions. The U.S. has, by far, one of the largest and most active whistleblower programs in the world and is only looking to get bigger.
The Department of Justice (DOJ) recently announced an initiative to introduce its whistleblower rewards program. Similarly, the Financial Crimes Enforcement Network (FinCEN) is working through its own AML and Sanctions whistleblower program. Meanwhile, the SEC and CFTC are actively monitoring banks’ trading teams’ activities that might restrict whistleblowers, most recently focusing on swaps, clearing, and commodities. It’s a very dynamic space in the U.S. right now, and there are potential lessons to be learned for other jurisdictions, given most countries outside of the U.S. have no whistleblower reward programs.
Fostering Accountability
Whistleblowers play a crucial role in maintaining a safe marketplace and fostering a culture of accountability. The assurance that potential wrongdoings can be reported without fear of retribution acts as a powerful deterrent for fraudsters. Conversely, many disasters could have been prevented if employees felt empowered and protected enough to speak up. While the need for whistleblower protection is widely acknowledged, monetary rewards for whistleblowers are still relatively uncommon. The U.S. and smaller programs in Australia, Canada and South Korea stand out in this regard.
The U.S. whistleblower reward program traces its roots back to the American Civil War, with the introduction of the False Claims Act designed to reduce fraud in government contracts. The Act includes provisions for “qui tam” suits by private citizens. These protect their identity and allow them to receive a portion of the government’s recoveries from the fraud. They can get 15%-30% of the amount with no upper limit on the total (the SEC and CFTC programs are 10%-30%). Last year, the SEC paid a single whistleblower $279 million, indicating how large the fraud perpetrated amounted to.
The SEC and CFTC reward programs are more recent, starting in 2010 with the passage of the Dodd-Frank Act. All accounts show that the programs have been incredibly successful, with the two agencies taking over $9.5 billion in sanctions since their inception. In 2023, the SEC received 18,354 tips and issued $600 million in whistleblower rewards, stating very clearly that they felt the program provided great value to the commission. Manipulation is the most significant type of fraud reported, at 24%; interestingly, initial coin offerings (ICOs) and crypto accounted for 14% of the tips in 2023.
Global Reach
The U.S. whistleblower rewards program is also not limited to U.S. citizens. Last year, the SEC awarded $30 million to a whistleblower living in a foreign country. Most international tips came from Canada, the U.K., Australia, Germany, and India.
The SEC has also been quite clear that internal compliance officers can participate in the program, stating, “These individuals may be eligible for an SEC whistleblower award if their companies fail to take appropriate, timely action on information they first reported internally,” where timely is considered to be 120 days. Since then, other criteria have been added. In April 2024, a compliance officer was issued a $2.4 million award.
A recent CFTC enforcement action combines everything discussed into a single case. In June 2024, the CFTC ordered Trafigura Trading LLC, a global commodities merchant, to pay a $55 million fine. In summary, they found three violations. First, Trafigura traded gasoline while possessing material nonpublic information (MNPI) that was misappropriated from a Mexican trading entity. This included that entity’s pricing formulas. Second, they manipulated the benchmark price of U.S. Gulf Coast high-sulfur fuel oil. They bought heavily around the benchmark window at strategic times, creating an artificially high benchmark that helped their long derivative positions.
While this was happening, they required current and former employees to sign agreements with broad non-disclosure provisions that prohibited sharing Trafigura’s confidential information with third parties. The CFTC stated, “These non-disclosure provisions did not contain carve-out language expressly permitting communications with law enforcement or regulators such as the CFTC. The provisions caused confusion that resulted in an impediment to voluntary and direct communications with the CFTC about possible violations of the CEA [Commodity Exchange Act] and CFTC regulations in violation of the CEA’s prohibitions against impeding direct communications with the CFTC.” This would be the CFTC’s first-ever action over impeding whistleblowers. The law firm KKC then announced that this was not only a landmark CFTC case about whistleblower impediment but that the case itself was due to the actions of a whistleblower.
Considering the DOJ sprint, the FinCEN AML whistleblower program implementation, the CFTC and the SEC’s recent actions regarding whistleblower impediment, whistleblower programs are currently in a very dynamic phase of their evolution.
Regulatory Updates
20 June: The U.K. Financial Conduct Authority (FCA) built an experimental trading app platform to test the effects of different digital engagement practices (DEPs) on trading behavior. The experiment found evidence that DEPs like push notifications and prize draws on trading apps can heighten trading frequency and risk, particularly impacting subgroups with low financial literacy, women, and younger participants aged 18-34.
17 June: The CFTC awarded over $8 million to an insider whistleblower who provided vital information leading to multiple enforcement actions, uncovering deceptive practices by derivatives market participants.
17 June: The Danish Financial Supervisory Authority (FSA) published a notice warning investors to be critical of finfluencers’ investment tips. The FSA provides five key pieces of advice for investors to consider. Further information in Danish.
14 June: The European Securities and Markets Authority (ESMA) published its Annual Report for 2023. It sets out the key achievements of the authority in the first year of implementing its new five-year strategy, delivering on the mission of enhancing investor protection and promoting stable and orderly financial markets in the European Union.
13 June: The Bank for International Settlements (BIS) published a working paper analyzing how generative AI, emerging AI agents, and artificial general intelligence will impact finance. It focuses on four functions of the financial system: financial intermediation, insurance, asset management and payments.
6 June: The Securities and Exchange Board of India (SEBI) released a framework of “Financial Disincentives for Surveillance Related Lapses” at market infrastructure institutions (MIIs). Under the new framework, effective July 1, SEBI will impose penalties in case of surveillance-related lapses on stock exchanges, clearing corporations, and depositories. MIIs are required to report suspicious activities, take preemptive measures, and issue alerts.
6 June: The China Securities Regulatory Commission (CSRC) and the Comissão de Valores Mobiliários (CVM) of Brazil signed an amended MoU in Beijing to enhance regulatory cooperation in their capital markets. This agreement reflects ongoing efforts by both authorities to strengthen the regulatory environment for bilateral capital market cooperation and signifies a milestone in cross-border supervision.
3 June: The Dubai Financial Services Authority (DFSA) announced significant amendments to its Crypto Token regime. Changes include updates to funds offerings, custody rules, financial crime compliance, recognition criteria and fees, aligning with market developments, international recommendations and the DFSA’s regulatory experience.
Enforcement Actions & Fines
The Court of First Instance, in collaboration with the Department of Justice and Hong Kong Securities and Futures Commission (SFC), convicted three individuals for conspiracy to carry out false trading in the shares of Ching Lee Holdings Limited. The case marks a significant milestone as the first trial of an offense under the Securities and Futures Ordinance at the Court of First Instance, involving complex market manipulation activities leading to illicit profits over $124 million.
The High Court of New Zealand fined a former chief executive of NZX-listed New Talisman Gold Mines Limited $100,000 for breaching the Financial Markets Conduct Act 2013. The court highlighted undisclosed online posts on an investor forum and emphasized the executive’s expected familiarity with securities laws and disclosure obligations.
The CFTC charged Trafigura Trading LLC for violating the Commodity Exchange Act through trading with material nonpublic information and manipulating fuel oil benchmarks. The CFTC imposed a $55 million civil penalty, mandated compliance measures, and underscored Trafigura’s obstruction of whistleblower communications, marking the first such CFTC action against a company.
The Kingdom of Saudi Arabia’s Appeal Committee for Resolution of Securities Disputes (ACRSD) imposed fines totaling SAR 101.7 million on multiple individuals for violations, such as insider trading, resulting in bans from working in Saudi Stock Exchange-listed companies for durations ranging from one to six years. One investor has been sentenced to six months of imprisonment for breaching the Capital Market Law. Offenses encompassed misleading information provision, false statements, and other illicit activities aimed at evading losses, impacting security prices, or prompting purchases by others.
The SEBI fined 11 entities with a fine of Rs7.75 crore and market bans for up to five years for executing a ‘pump & dump’ scheme in Svarnim Trade Udyog Ltd shares, where false recommendations led to a surge in trading volume from 2,008 shares to 1,20,905 shares following the circulated advice.
The Vietnamese State Securities Commission (SSC) penalized four individuals for market manipulation and 13 others for account lending enabling the manipulation of PSH securities, each fined VNĐ1.5 billion ($58.9 million).
The FCA, working with the Metropolitan Police Service, conducted an investigation to arrest two suspects in London for allegedly trading over £1 billion in unregistered crypto assets. The FCA conducted searches, seized digital devices and is investigating the case.
The SEC charged an individual and a private company with a fraudulent scheme to manipulate Getty Images Holdings Inc.’s stock price by announcing a fake buyout offer, causing a spike in the stock price. The individual, a former CEO and CFO of publicly traded companies, and the company agreed to a settlement with the SEC that includes penalties and injunctions, with the individual barred from serving as an officer or director of a public company.
The Eastern Magistrates’ Court approved the transfer of three ramp-and-dump cases to the District Court for trial, stemming from joint investigations by the SFC and Police. The 18 defendants charged face allegations under various ordinances for organizing schemes manipulating trading in Hong Kong-listed companies’ shares through nominee accounts and social media platforms, with bail conditions set by the court.
Featured Content
MiCA Regulation: The Path to Compliance
Authorities worldwide have been developing a regulatory framework for crypto-assets. Learn more about MiCA’s phased approach and what your firm needs to have in place to be compliant by the December 2024 deadline.
Tech Tuesday: Integrating Gen AI in Surveillance
Tony Sio, Head of Regulatory Strategy and Innovation, Nasdaq Financial Technology, delves into Nasdaq’s recent announcement of Gen AI features within the Market Surveillance technology solution to enhance the quality, speed, and efficiency of investigations into suspected market abuse and market manipulation.
Establishing an Effective Market Abuse Surveillance Function
In the recent Market Watch 79, the FCA discusses market abuse surveillance failures, which are primarily around data and automated alert logic, and its recent peer review of front-running surveillance models. Read more about the latest regulatory guidance from the FCA.