Are low incentives for whistleblowers hindering fair market practices?
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Experts stated on Friday that the rewards for reporting stock manipulation and other unfair trading practices in Korea's capital market are insufficient, leading to the public's underutilization of the system. Given that insider testimony is crucial for identifying unfair trading, they believe the amount of the reward should be increased.
According to the Financial Services Commission (FSC), rewards of 113.3 million ($81,982) won were paid to four whistleblowers from February to June. The payout in the first half of the year has increased by 58 percent, compared to the average annual reward over the past decade, according to the FSC.
"This increase appears to be the result of financial authorities' efforts to improve the system by raising the reward baseline and expanding the eligibility criteria for payouts," the FSC said.
A law amendment last February increased the maximum reward limit from 2 billion won to 3 billion won. Furthermore, whistleblowers have become eligible for rewards even if they report after financial authorities have begun investigating unfair trading, provided their information helps uncover the violations.
However, experts believe that more incentives are required to encourage whistleblowing. The frequency of tips has been scarce despite a number of spotted unfair trading cases here.
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"Unfair trading often involves multiple perpetrators and is conducted covertly and systemically, making insider testimony and evidence crucial. Although a reward system for whistleblowers has been introduced to address this, the number of rewards given and their amounts are insufficient, resulting in underutilization of the system," Hwang Hyun-young, a research fellow at Korea Capital Market Institute, said.
In 2019, a total of 38 million won was paid to two people. In 2020, it surged to 124.4 million to five people, then sharply dropped 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 costs of the rewards, more funds can be recovered through the detection of unfair trading, including confiscated and forfeited amounts, fines and future penalties," Hwang said.
The country that most actively utilizes this system is the U.S. In the 2022 fiscal year, over 12,300 whistleblower reports were received, and approximately $229 million in rewards were paid out. In 2023 alone, $600 million in rewards were distributed.
"The market will learn, and the number of whistleblower reports is expected to increase in the future," Hwang added.
To guarantee a sufficient amount of compensation, calls to develop a Korean version of the "Fair Fund" are also rising. This U.S. policy involves establishing a fund sourced from penalties to pay out rewards, to overcome the limitations of government budgets.
The introduction of this new policy gained momentum in 2020 following the now-defunct Lime Asset Management's sale and operation of fraudulent financial products. However, it failed to pass the bar. The Democratic Party of Korea, the main opposition, aims to discuss the issue in the 22nd National Assembly, following the opening of the National Policy Committee in July.