Is $200-million payment to whistleblower really worth?

Good incentives for blowing the whistle on bad behaviour are great. But $200 million is a hell of a big prize. That's the amount awarded to a single source of critical information that led to nearly $2.5 billion in fines for Deutsche Bank AG in 2015 for manipulating the discredited and soon-to-be-defunct Libor interest rate, according to reports. The Commodity Futures Trading Commission announced the award last week. It is a record payment to a whistleblower.

Is it too much? A joke on Twitter last week was: Right, I'm going to find the dirtiest firm possible to work for, then snitch to the Feds! It's the kind of sum that could go into the Urban Dictionary as the definition of "F*** You Money."

The $200 million is just a mind-bending amount of money. Good incentives are important and you need some way of calculating them, so the question is where, or if, we draw a line.

There have been several large payouts since 2010, when the reward program was created in the Dodd-Frank Act. In September, the US Securities and Exchange Commission paid someone $110 million. Last year, it made its highest award of $114 million. There have been eight other awards worth more the $30 million, including three of $50 million each. The remuneration is decided on a simple rule: The amount should be between 10 per cent and 30 per cent of the total penalties paid to federal regulators and foreign agencies, if overseas authorities also relied on the same evidence.

Dawn Stump, one of the CFTC's own commissioners, published a long argument saying she disagreed with the Deutsche Bank award in part because it wasn't certain that the foreign regulator involved had actually relied on this whistleblower's evidence. If the CFTC had agreed with her, the award in this case would still have been enormous. Just 10 per cent of the fines imposed only by the CFTC and New York Department of Financial Services would still have meant $140 million for the whistleblower.

This year, the SEC celebrated having paid more than $1 billion in total awards - that's a lot of bad behaviour! But it's also a lot of justice served. Other countries, like the UK or Germany, have their fair share of financial scandal but are often criticized for failing to nail those responsible. They also have weaker whistleblower protection, impose smaller penalties on firms and don't pay rewards.

But could such golden tickets make snitching seem like an opportunity rather than a last resort? Eugene Soltes, professor of business administration at Harvard Business School, says companies and people often make mistakes. Misconduct can take place anywhere and companies with strong integrity and compliance programs will respond appropriately. It is only when these are too weak or fail to respond that the financial cops should be called. Plus if regulators end up drowning in hopeful claims, that might make it harder to identify and pursue true crime.

Advocates of the reward program say such debates are a red herring. It is only very large fines that allow fractional payments to be so big. Also, whistleblowers rarely if ever have an easy time of it - whether they are driven by righteous indignation or resentment and vengeance. Confidentiality at the official level may not hold within their industry and they may struggle to find work anywhere in their chosen field again. It may take years of stress and doubt before cases are adjudicated and any rewards decided.

Super-sized awards are undoubtedly life-changing for many back-office and compliance workers, who often bring to light the evidence that stops terrible corporate behaviour. But there's also a limited amount of money in the rewards pot. It's replenished with the fines collected from corporate malpractice, but only to a certain level, the rest going to the Treasury. The SEC has considered making the awards more discretionary or limiting the largest to $30 million to preserve funds. But the 10 per cent-30 per cent rule has remained in place.

Still, would a maximum award of $30 million be incentive enough for someone who is on track to become a senior executive in finance, an individual who would expect to earn millions each year over a decade or more? It is a lot of money - but maybe not enough for that kind of person to risk everything when it might be simpler just to change firms and find one with a more ethical culture. But then, people who are senior and already big earners ought to be invested in how their firm reacts to wrongdoing in the right way.

Some would argue that the Deutsche Bank award is still the exception and not the rule. It's true that many more informers get much smaller amounts, just as many diligent hedge fund managers don't become billionaires and most lottery tickets don't mint plutocrats. But $200 million is a crazy amount of money for essentially just doing the right thing. Heck, $50 million would be a lot. It's complicated, but a cap of some kind seems like a good idea. (Bloomberg)