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Why CMA needs to ‘juice up’ its whistleblowing incentives

Whistle-blowers have become powerful agents for detecting fraud and corruption.
Whistle-blowers have become powerful agents for detecting fraud and corruption. FILE PHOTO | NMG 

Sometime last year, the recipient of what is the largest whistle-blower award to date under the US Securities and Exchange Commission (SEC) Whistle-blower Programme banked Sh5 billion for exposing conflicts of interest at JP Morgan.

The initiative, enacted in 2010 by the US Congress as the Dodd-Frank Wall Street Reform and Consumer Protection Act in response to the 2008 financial crisis, has so far awarded 66 whistle-blowers Sh38 billion for their contributions.

More importantly, the SEC has recovered more than Sh200 billion from wrongdoers. From its success, the programme is now seen as an effective enforcement tool particularly where fraud is well hidden or difficult to detect.

To date, approximately 15 percent of whistle-blower tips received by the SEC lead to some form of investigation.

For starters, here’s how the SEC whistle-blower programme works.

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A whistle-blower voluntarily submits information about any possible violation of the federal securities laws that has occurred, is ongoing, or is about to occur.

If the information provided by the whistle-blower leads to a successful SEC action with monetary sanctions exceeding the equivalent of Sh100 million, the whistle-blower may then apply for a reward.

Compensation can range from 10 to 30 percent of the money recovered.

What is even more interesting, whistle-blowers are not required to be US citizens or residents. Further, the illegal conduct doesn’t have to have taken place in the United States, as long as it affects the US market.

Crucially, whistle-blowers are generally entitled to protection from retaliation by their employers based on their reporting of securities violations.

From the brief above, it is clear that the programme’s strong monetary incentive is its cornerstone, and its main success factor.

Simply put, people are motivated by money.

In contrast, Kenya’s whistle-blower programme as stated in the Capital Markets (Amendment) Act (2018), which took effect early last year, does not seem to understand or follow this spirit. Rewards are capped at three percent of the amount recovered subject to a maximum of five million shillings.

In fact, its initial format had no financial rewards whatsoever when it was launched in 2016. But after a year without any results, wisdom prevailed, and the new structure was adopted.

A whistle-blower is essentially taking a risk whenever they expose the fraud within a licensed firm, and as such should be able to count on the authorities for protection and suitable reward.

Therefore, for the local programme to start yielding meaningful results, going by the US example, it may need to remove the caps on compensation.

At a bare minimum, it may make sense for the regulator to increase the percentage awards to double digits and set a base minimum for amounts.

This way, whistle-blowers can start playing an integral role in keeping licensed institutions honest, ethical, and safe, providing information to the regulator for accountability to the public.

Whistle-blowers have become powerful agents for detecting fraud and corruption. Our local capital market is halfway there—they only need to “juice-up” the awards to make the programme complete.

Mr Mwanyasi is the managing director of Canaan Capital

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