Do South Korea’s Low Incentives for Whistleblowers Hinder Fair Market Practices?

By Lee Yeon-woo

Experts said Friday that rewards for reporting stock market manipulation and other unfair trading practices in the Korean capital market are insufficient, leading to underutilization of the system by the public. Given that insider reports are crucial in identifying unfair trading, 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. The amount paid in the first half of the year was 58 percent higher than the average annual reward over the past decade, according to the FSC.

“This increase appears to be the result of efforts by financial authorities to improve the system by increasing the base reward level 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.

However, experts say more incentives are needed to encourage whistleblowers. The frequency of tipping has been rare despite a number of cases of unfair dealings identified here.

“Unfair trading often involves multiple perpetrators and is conducted in a secretive and systemic manner, making privileged testimony and evidence crucial. Although a whistleblower reward system has been introduced to address this problem, the number of rewards given and their amount are insufficient, leading to underutilization of the 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 figure rose to 124.4 million per five people, before dropping sharply to 11.8 million per one person in 2021. No cases were reported in 2022, while in 2023, 108.5 million won were paid to two people.

“Even with the cost of rewards, more funds can be recovered through the detection of unfair transactions, including confiscated and forfeited amounts, fines and future penalties,” 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 a sufficient amount of compensation, calls to develop a Korean version of the “Fair Fund” are also increasing. This American policy consists of creating a fund financed by penalties to pay rewards, in order to overcome the limits of government budgets.

The introduction of the new policy was accelerated in 2020 following the sale and operation of fraudulent financial products by the now-defunct Lime Asset Management. However, it has failed to pass the test. The main opposition Democratic Party of Korea plans to discuss the issue at the 22nd National Assembly, after the National Policy Committee opens in July.