Whistle while you work

CANADA has long had a reputation as a security fraudster’s playground, where misdeeds go undetected and unpunished and investors must take extra care. David Dodge, then governor of the central bank, provoked outrage in 2004 when he said foreigners perceive Canada as a “Wild West” in terms of the degree to which financial rules and regulations are enforced. At the time Mr Dodge was advocating a single national securities regulator, which despite the efforts of successive federal governments has yet to be created. But stung by the criticism, Canada’s 13 separate securities commissions—one for each province and territory—have at least been trying much harder to get to grips with securities fraud.

The regulators, often working in concert with the police, the government or the courts, have experimented with all kinds of fraud-fighting schemes. They have set up multi-agency enforcement teams, brought in no-contest settlements akin to those used by America’s regulators and allowed institutional investors to finance lawsuits on behalf of aggrieved investors in exchange for a cut of the proceeds. The results to date have been underwhelming. Between 2012 and 2015, 1,205 individuals and companies were prosecuted for securities offences in Canada, but fewer than 40 went to jail, according to FAIR, a lobby group for investor rights. “From a swindler’s point of view, these are great odds,” says Neil Gross, FAIR’s boss.

This week the Ontario Securities Commission, Canada’s biggest, decided to up the ante, by setting up an office to encourage whistleblowing, with the power to offer financial rewards of as much as C$5m ($3.8m). “It will be a game-changer,” says Kelly Gorman, who heads the new office. She expects insiders will help uncover difficult-to-detect frauds and offer the kind of meaty evidence that investigators would normally spend years accumulating. It should also prompt financial firms to improve compliance systems to catch misconduct before it becomes fodder for a tip. The payouts for whistleblowers, modelled on those offered by America’s Securities and Exchange Commission, will be an especially powerful tool, she says.

The creation of a new office to encourage whistleblowing has broad support, but the decision to offer financial rewards has been much more controversial. Some see the hand-outs as too timid: the commission, confusingly, has decided not to make payments in cases in which it plans to pursue a criminal conviction. There is an administrative logic to that: the commission does not handle criminal cases itself, but hands them to Ontario’s prosecutors. Nonetheless, says Mr Gross, the distinction “could have a chilling effect on whistleblowers, who will be reluctant to come forward in the most serious cases.”

Others think the promise of payouts will create an “avaricious mentality among employees and agents”. Similar programmes run by Britain’s Financial Conduct Authority and Australia’s Securities and Investments Commission do not offer money. Nor does the new whistleblower office in neighbouring Quebec, which opened its doors in June.

Quebec looked at the American, British and Australian systems and concluded there was not enough evidence to show that money generated more or better tips. Ms Gorman defended Ontario’s choice, saying that while the prime motivation of most whistleblowers is to stop wrongdoing, the offer of a reward might tip the balance for those who fear blowing the whistle will be a career-ending move.

It will take time to see whether Ontario has struck the right balance with its financial inducements. Yet just by opening its doors the new office helps send a message to investors that regulators are on the case. Mr Dodge, the former central-bank governor, says the situation has changed since he made his comments in 2004, with many new rules and regulations now in place. “The West is not so wild as it was,” he says.