When fraud occurs within an organization, we know that: the sooner it is detected, the smaller the damage will be. And we also know that denunciation is one of the most effective fraud detection tools. The annual report by the Association of Certified Fraud Examiners (ACFE) 2020[1] shows that 50% of the fraud cases detected in the organizations worldwide has resulted from denunciations received through internal channels.

Therefore, effective compliance programs need a denunciation channel which should be known and open not only to all the members of the organization but also to third parties. In addition, they ensure confidentiality and protection against retaliation to denouncers.

Regulators specifically analyze the effective functioning of internal denunciation channels as one of the elements required to assess the effectiveness of a compliance program.

The high importance that is given to denunciation channels makes us think of denouncers or whistleblowers because the system works only if the individuals who are aware of a fraud case denounce it. Ideally, any individual who is aware of or in good faith suspects that fraud is being committed should immediately and, in all cases, denounce it.

And here some organizations face obstacles: some cases of fraud are not denounced.

In some cultures, denouncing an illegal act may be seen as something negative: the denouncer is considered as a “snitch”, someone who breaks solidarity rules, someone who betrays a partner.

It is true that, as social beings, “belonging” matters to us. The sense of belonging to a group has been a main aspect for our survival: it has helped us better defend ourselves from the threats of our surroundings, as well as construct and produce more and move further.

But… what happens when we see that a member of our group is doing something wrong? Our desire to belong to a group and to protect it may clash with our moral values or even, sometimes, with what is legally required (as may be the case of public officers who become aware of a crime while they are in office).

The person who denounces takes many risks. They endanger the link to their group and assumes the social risk of being considered a “snitch”. Depending on the organization, they may risk the possibility of achieving professional growth or their employment continuity may be directly affected. In some cases, denouncers may be subject to physical violence or even lose a relative or lose their life.

The confidentiality and anti-retaliation protection which compliance programs offer to denouncers are important. But, are they sufficient? Can they ensure more effectiveness to our most valuable tool to detect fraud: internal whistleblowing? Or should we think about generating more incentives so individuals denounce the frauds in place? 

International experience shows that it is possible to go beyond confidentiality and protection against retaliation by offering a reward to denouncers, provided that the information furnished contributes to the actual clarification of the fraud denounced.

In its latest annual report[2] the SEC Division of Enforcement unveils that in 2020 they set a record under their Whistleblower Program by rewarding 39 individuals, for a total amount of around US$175 million.

As informed, denouncers from inside and outside the organization have helped by:

  • contributing critical information and evidence which allowed the SEC to save time and resources,
  • giving comprehensive and permanent assistance throughout the investigation,
  • furnishing detailed information and helping investigators understand key documentation and identify witnesses, and
  • making denunciations which worked as investigation triggers.

The SEC has been rewarding denouncers since 2012. As from that date to the present, it has paid some US$ 562 million as rewards to 106 individuals. And, in addition, one of its objectives for 2020 has been to accelerate denunciation assessments, by increasing the assessment ratios for the denunciations received from whistleblowers and their rewards.

The reward to whistleblowers may be an interesting and useful tool to be taken into account when thinking about how to make a corporate compliance program effective. Its feasibility will, of course, depend on a number of factors, including the legal framework of the jurisdiction where operations occur.

If you are interested in rendering the denunciation channel effective, please contact us at: [email protected]

G5 Integritas can help you design, implement and improve your internal denunciation channel. www.g5integritaslatam.com

[1] https://www.acfe.com/report-to-the-nations/2020/   

[2] https://www.sec.gov/files/enforcement-annual-report-2020.pdf

Equipo G5 Integritas Latam

Equipo G5 Integritas Latam

Equipo G5 Integritas Latam

G5 Integritas is a consulting and strategic advisory firm for corporate clients, financial institutions, law firms, entrepreneurs and investors, specialized in: RISK AND COMPLIANCE DUE DILIGENCE AND BACKGROUND CHECK INVESTIGATIONS AND BUSINESS INTELLIGENCE SECURITY CONSULTING FORENSIC INFORMATION AND DATA RECOVERY


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