Regulators Stop Fraud with Whistleblowers Payments

Organizations are vulnerable to fraud, especially smaller organizations and nonprofits that have lower staffing levels and technology investments. Fraud losses are estimated total about 5% every year. That’s a lot of lost revenue or donations!

Federal regulators, like the Securities and Exchange Commission (SEC), focus on large-dollar fraud committed at public companies that usually involve mid- or high-level management. Some frauds go on for years, perpetrated by insiders who know the organization and its controls well enough to circumvent them.

In 2011, the SEC established a Whistleblower Program to provide incentives to whistleblowers to report federal securities law violations. Individuals who provide information that leads to a successful SEC enforcement action resulting in sanctions greater than $1 million are eligible for a monetary award. Whistleblowers may be an employee, an insider such as a consultant, or an outsider of the company. 

Since its inception, the Whistleblower Program has fined wrongdoers more than $1.7 billion, and the SEC has awarded more than $60 million to whistleblowers. Since the whistleblower rules took effect in 2011, the SEC has received more than 22,000 whistleblower tips. The annual number of tips submitted internationally has grown 75 percent since 2012.

Two fraud categories that tend to come up on the “Whistleblower Hit List” most often are Corruption and Financial Statement Reporting. Those tend to be large-dollar schemes perpetrated by senior-level members of an organization. Here’s a little information about each category to help you to recognize it, just in case:

Corruption

Corruption often involves senior management with authority over essential elements of an organization, like sales and operations. About 70 percent of corruption cases are perpetrated by someone who misused her or his authority to gain direct or indirect benefit. Examples include bribery, kick-backs and conflicts of interest.

Financial Statement Reporting

Financial statement fraud is less common, but is usually the most costly. The median reported cost is a whopping $800,000. This type of fraud is commonly perpetrated by middle or senior managers whose income is based on meeting projected financial targets.
The SEC Whistleblower Program is one way to tamp down on corporate fraud. With the monetary rewards increasing, reports to the SEC’s Whistleblower Program are likely to grow. Let’s hope that this upward trend dissuades fraudsters from corrupt practices altogether.