You may get fired, but it’s worth blowing the whistle

According to the ACFE Report to Nations (2014), more than 42% of fraud were detected by tips

Last month (October 9th), a U.S. appeals court revived a lawsuit against JPMorgan Chase & Co, known for its infamous client, Bernard Madoff, the operator of the massive Ponzi scheme of 2008. The 2nd U.S. Circuit Court of Appeals reversed the decision of a lower court to throw out Jennifer Sharkey’s concerns (filed in 2009) that an Israeli client was engaging in fraud and money laundering.

Even though these suspicions were voiced just months after the exposure of the Madoff scheme, JPMorgan decided to fire Sharkey (August 2009), and dismissed the allegations made by Sharkey claiming that the bank ignored red flags about potential fraud. Her whistleblower lawsuit stated that the client failed to provide documentation for various businesses and that he did business with Columbia (with which the bank had banned transactions). She also claimed that the client had a trading account in the name of a law firm that funnelled money into JPMorgan commercial checking accounts, which the private wealth management unit had no way of tracking.

Sharkey’s case has been reopened after the implementation of a newer, more lenient standard for Sarbanes-Oxley lawsuits (requiring that the whistleblower reasonably believed the conduct to violate certain provisions). The case was previously ruled out in December, 2009 due to her failure to categorise her complaints specifically under one of the categories of misconduct under the 2002 Sarbanes-Oxley Act.

Madoff, JPMorgan & Whistleblowing

Bernard Madoff, former Chairman of NASDAQ, carried out the largest accounting fraud in history. To be more specific, a $64.8 billion fraud. Madoff started off small- he collected money from local establishments like country clubs and charity events. As Madoff was already a well-known “investor” who made off-the-chart returns, other investors present at these places would ask him for advice, and then entrust their money to him, which he then used to pay those aforementioned returns to other investors (also known as a Ponzi scheme).

Between the years 1996 and 2006, many investigations were done by U.S. Securities and Exchange Commission (SEC) into the alleged fraud committed by Madoff. But due to the lack of evidence, the SEC was not able to take any legal action. That is, until he was turned in by his sons, and his confession in 2008 stating that the asset management portion of his firm is actually a massive, elaborate Ponzi scheme. He was given a prison sentence of 150 years.

So where does JPMorgan fit in?

Madoff was a client of JPMorgan for more than 20 years, sending deposits and transfers from his investors totaling about $150 billion through the bank. In January, JPMorgan agreed to pay $2.6 billion to the U.S. government and Madoff victims to settle allegations stating that it failed to alert authorities to its suspicions of fraud at Madoff’s firm.

Despite the obvious benefits gained by listening to a whistleblower’s allegations, it appears that JPMorgan have yet again failed to do so. Had it looked into the huge amount of money funnelling in from Madoff, the loss might have been reduced. And even after such a multi-billion dollar fraud has been committed, JPMorgan continues to ignore suspicions voiced by whistleblowers like Sharkey.

According to the ACFE Report to Nations (2014), more than 42% of fraud were detected by tips, with only 54% of the victim organisations having hotlines. In contrast, external audit uncovered only 3% of corporate fraud albeit being used as an anti-fraud control in more than 80% of organisations investigated.

Providing individuals a means to report suspicious activity is a critical part of an anti-fraud program. Fraud reporting mechanisms, such as whistleblowing hotlines, should be set up to receive tips from both internal and external sources and should allow anonymity and confidentiality. Management should actively encourage employees to report suspicious activity, as well as enact and emphasize an anti-retaliation policy.

— Association of Certified Fraud Examiners (ACFE)

Unlike in external audit, whistleblowers have an “inside edge” to the workings of an organisation, and they have a better chance at detecting fraudulent practices or red flags from within. Not only employees, but customers and vendors are able to be whistleblowers well. They too, have dealt with fraudsters first-hand at some point, and hence have a better odds at picking out suspicious behaviour or practices than an external investigator- who’s only aware of what he/she has been told or have already found out by other means.

But a major turnoff for whistleblowing might be the lack of rewards as well as protection for one. Considering only 11% of organisations have any rewards for whistleblowers, it doesn’t come as a surprise when people are hesitant to make a move. These findings makes it blatantly obvious that organisations need to focus more on educating and encouraging whistleblowers (instead of firing them)- which would in turn, decrease the loss wrought on by corporate fraud, and quicken the process of uncovering them.

More about the whistleblower case of JPMorgan: http://www.cnbc.com/id/102074838

Bernard Madoff scandal: http://en.wikipedia.org/wiki/Madoff_investment_scandal