Whistle while you work: Wall Street's culture of fingering fraud

A new federal program of rewarding whistle-blowers in the financial industry is booming. And a survey shows industry insiders favor acting as tipsters against wrongdoing – especially in firms with a culture of integrity.

The Monitor's View

If you saw financial headlines only like this one on Wednesday – “Five banks plead guilty and pay $5.6 billion in penalties” – you might think Wall Street is a den of thieves. But a new federal program that rewards people who expose financial wrongdoing has revealed a different picture – a hidden culture of extreme honesty in the industry.

Since 2011, the Securities and Exchange Commission has paid out hundreds of millions of dollars to whistle-blowers whose tips to investigators led to fraud convictions. And for the first time this past April, the SEC even gave more than $600,000 to a tipster whose employer, a New York hedge fund, had retaliated against him. That type of compensation may help discourage corporations from trying to gag workers from reporting an internal crime. 

As a result of this escalation in rewards, the number of complaints coming into the agency has risen sharply – to more than 10 a day – much to the surprise of regulators. 

“The program, while clearly still developing, has proven to be a game changer,” says SEC Chair Mary Jo White. “Gone are the days when corporate wrongdoing can be pushed into the dark corners of an organization.”

The whistle-blower program is just one reform mandated by the 2010 Dodd-Frank Act, which was passed by Congress after the 2008-09 financial crisis. It was created in part because federal regulators failed to respond to a whistle-blower’s complaints about Bernard Madoff’s massive Ponzi scheme. While rewarding company whistler-blowers is nothing new – the idea goes back to a 17th-century Dutch ban on short selling – the SEC’s success is spawning interest among other financial regulators.

A new survey by the law firm Labaton Sucharow may explain the program’s success and the industry’s strong culture of integrity, one now more accepting of workers who speak up. In a poll of more than 1,200 financial services professionals in the United States and the United Kingdom, nearly 9 out of 10 said they were willing to report wrongdoing under the kind of protections and incentives offered by the SEC whistle-blower program.

A 2014 global survey of more than 2,500 corporate managers by the international law firm Freshfields Bruckhaus Deringer found similar results. Nearly two-thirds of those surveyed said they would report a colleague if they suspected them of committing a criminal offense. More than a quarter said they would go straight to a regulator if the wrongdoing wasn’t handled properly by their company.

Whistleblower-reward programs “have effectively deputized all of us to report possible violations of law,” says Jordan Thomas of Labaton Sucharow, which commissioned the US-UK survey along with the University of Notre Dame.

“As a result, the probability of detection has dramatically increased. Responsible organizations would be wise to redouble their efforts to establish and maintain a culture of integrity – where doing the right thing and speaking up are the norm,” Mr. Thomas said. 

Surprisingly, the poll also showed 16 percent of financial workers say their company policies prohibit reporting potential illegal or unethical activities to law enforcement. While far from the norm, that number reveals why the SEC must also protect whistle-blowers from retaliation.

“The bottom line is that responsible companies with strong compliance cultures and programs should not fear bona fide whistle-blowers, but embrace them as a constructive part of the process to expose the wrongdoing that can harm a company and its reputation,” says Ms. White.

Often a whistler-blower does not act to get a reward but acts simply because a company has developed a culture of honesty. “Our behavior is influenced by the norms that we believe exist in the industry, the norms that we believe exist in the organization,” says Ann Tenbrunsel, an associate professor at the University of Notre Dame and an author for the US-UK survey.

In a climate of integrity, in other words, justice can be its own reward.