Finance

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

The whistle-blower's dilemma is usually easy to understand, if hard to solve. Choose the ethically honest path and you face ostracism and the sack; head down the less honest route and you may have more job security and better promotion prospects.

Regulators have used a stick and carrot to try to solve this. Whack banks with a fine if they don't have internal processes that encourage staff to come forward, and offer financial rewards to whistle-blowers. The SEC promises a share of any fine above $1 million and some of the proceeds from any related action. In theory, that should be a good way to solve the most immediate worry for staff who want to do the right thing: financial security and employment prospects.

But a Financial Times opinion piece on Friday, written by a former Deutsche Bank executive, hands regulators a fresh problem: the successful whistle-blower who's lost faith in the system. Eric Ben-Artzi refuses to take his share of a $55 million settlement, not because he doesn't want it, but because he thinks it should come from the pocket of the individuals and managers responsible. Not the shareholders.

Like others before him, he bemoans the fact that senior execs aren't held accountable for wrongdoing on their watch. So while some would consider that $55 million fine a reason for back-slapping over a job well done, Ben-Artzi sees failure.

It's tempting to dismiss this type of public gesture as excessive, accompanied as it is by accusations that SEC bigwigs are too cozy with the banks they're trying to prosecute -- something that will be batted away as the stuff of conspiracy theory.

But Ben-Artzi probably fits the profile of other whistle-blowers out there, who insist they're motivated by bigger concerns than financial reward. If one of their own is saying effectively "don't bother", that's hardly inspiring for employees who may want to speak out in future. That should worry executives, shareholders and regulators trying to deliver on tough talk of cleaning up the post-crisis system. 

Legal Headache
Deutsche Bank's litigation costs have been rising in recent years
Source: Company reports

After all, there are clear signs that whistle-blowers have an impact. A recent U.S. study found evidence from whistle-blowers helped secure on average $21.7 million more in company penalties, $46.5 million more in employee penalties and about 19 months more in jail sentences. Not every regulator likes to reward them -- the practice is stigmatized in some countries -- but it does seem to pay off.

The problem is that bankers are more skeptical than most about doing it. A 2014 PwC study found such tip-offs were a factor in about 16 percent of the significant economic crime in the finance industry, compared with an average of 26 percent in other industries.

So while regulators have forced banks to protect and pay heed to whistle-blowers, they must make sure cynicism doesn't set in. If even Ben-Artzi is saying the system is rigged, that might suggest to the rank-and-file that it's not worth the hassle.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net