Does Lack of Incentives for Whistleblowers Hinder Fair Market Practices?

By Lee Yeon-woo

Experts said Friday that the rewards for exposing stock manipulation and other unfair trading practices in Korea’s capital market are insufficient, leading to underutilization of the system by the public. Since insider testimony is crucial to identifying unfair transactions, they believe the reward amount should be increased.

According to the Financial Services Commission (FSC), rewards of 113.3 million won ($81,982) were paid to four whistleblowers between February and June. According to the FSC, payments in the first half of the year increased by 58 percent compared to the average annual award over the past decade.

“This increase appears to be the result of efforts by financial authorities to improve the system by increasing the base level of rewards and broadening the eligibility criteria for payments,” the FSC said.

An amendment to the law last February increased the maximum limit for rewards from 2 billion won to 3 billion won. In addition, whistleblowers can now claim rewards even if they report a case after financial authorities begin investigating unfair transactions, provided their information helps uncover the violations.

Experts, however, believe that more incentives are needed to encourage whistleblowing. The frequency of whistleblowing remains low despite a number of cases of unfair business practices detected in the country.

“Unfair trading often involves multiple perpetrators and is conducted in a covert and systemic manner, making privileged testimony and evidence crucial. Although a whistleblower reward system has been introduced to address this problem, the number and amount of rewards given are insufficient, leading to underutilization of the system. system,” said Hwang Hyun-young, a researcher at the Korea Capital Market Institute.

In 2019, a total of 38 million won was paid to two people. In 2020, this amount jumped to 124.4 million for five people, then dropped sharply to 11.8 million paid to one person in 2021. There were no cases in 2022, while in 2023, 108 .5 million won was paid to two people.

“Even with the cost of rewards, more funds can be recovered through the detection of unfair transactions, including confiscated and confiscated amounts, fines and future sanctions,” Hwang said.

The country that most actively uses this system is the United States. In fiscal year 2022, more than 12,300 whistleblower reports were received and approximately $229 million in rewards were paid. In 2023 alone, $600 million in rewards were distributed.

“The market will learn and the number of whistleblowers is expected to increase in the future,” Hwang added.

To ensure sufficient compensation, there are also growing calls to develop a Korean version of the “Fair Fund.” This American policy involves creating a fund fed by penalties to pay out rewards, in order to overcome the limits of government budgets.

The introduction of the new policy gained momentum in 2020 after the now-defunct Lime Asset Management sold and operated fraudulent financial products. However, it failed to pass the test. The main opposition Democratic Party of Korea wants to debate the issue in the 22nd National Assembly, after the National Policy Commission opens in July.