President Lee Jae-myung has promised to introduce a Korean-style fair fund (justice compensation fund) to aid capital market victims who have been subjected to incomplete sales or price manipulation, amidst calls for enhanced compensation for those reporting unfair practices. As attempts to violate capital market laws become increasingly sophisticated, the role of whistleblowers is inevitably growing.
President Lee proposed the establishment of a justice compensation fund as one of his pledges in the capital market sector during the presidential election. The plan is to set up a justice compensation fund under the Financial Services Commission to use part of the penalty surcharges or fines imposed for unfair or illegal activities in the capital market for victim compensation. A bill for the justice compensation fund, already introduced by Democratic Party of Korea lawmaker Park Sang-hyuk, is currently under consideration by the National Policy Committee and the Strategy and Finance Committee.
The justice compensation fund is modeled after the fair fund in the U.S. The fair fund is a fund that uses penalty surcharges levied against violators to compensate investment victims. The U.S. established its fair fund using civil penalties and recoveries of unjust enrichment collected from those who violated securities laws in 2002. Under current law, Korea allocates the penalty surcharges and fines imposed in the capital market to the national treasury.
However, experts say the new government should not focus solely on compensating investment victims. Since reporting is one aspect of detecting unfair practices, there must also be measures to strengthen compensation for whistleblowers who risk their own safety to report illegal activities, according to common advice from experts to establish a fair order in the capital market.
One typical example is the compensation for reporting accounting fraud. According to financial authorities, the total rewards given to whistleblowers on accounting fraud from January to May this year amount to 450 million won (four cases). The problem is that the authorities need to pay an additional 1.7 billion won (10 cases) in rewards, but the budget is only 450 million won, which means that this year’s payouts have already ended after those four cases.
Most unfair reporters are whistleblowers. Many of them often resign alongside their whistleblowing. This means that despite risking their livelihoods by reporting to the financial authorities, they are not receiving adequate compensation due to severely insufficient budgets. The number of accounting fraud reports, which was 81 in 2019, more than doubled to 179 last year. The Financial Services Commission had aimed to increase the budget for rewards to 1.15 billion won this year but could not get past the threshold of the National Assembly.
Experts say that reward systems for reporters could also be addressed in the same context as the idea behind the justice compensation fund, as similar systems already exist in advanced capital market countries. In the U.S., amounts corresponding to 10-30% of imposed penalty payments are given as rewards from the Investor Protection Fund. Additionally, the Ontario Securities Commission in Canada provides rewards of 5-15% of penalty fees imposed when sanctions are applied to a company based on information provided about violations of securities laws.
Kim Bong-hwan, a professor at Seoul National University's Graduate School of Public Administration, stated, "The most reliable way to detect many illegal acts in the capital market, including accounting fraud, is through insider reports," and added, "In addition to financial rewards for whistleblowers, the government must also consider measures for their physical protection."