In 2002, Time Magazine made three whistleblowers the persons of the year. If a global recession hits in the next few years, it is looking more likely that the people who blow the whistle on misconduct this time will actually be living overseas.
Global growth has been the talk of the morning with the Dow Jones Industrial Average plummeting more than a thousand points on the open before reversing course to a much more modest decline by mid-day. It reminds me of the volatility that hit the stock market in late 2007 as the financial crisis took hold. Unlike the past two recessions here in the United States where much of the talk of domestic excesses was oriented within the country at the tech bubble and the real estate bubble, this time it’s the world economy that is squarely on the radar of the financial professionals.
International Whistleblowers have made up slightly more than 10% of tips to the Securities & Exchange Commission for the past few years. But if this recession starts overseas, then that’s the most likely area to see whistleblowing.
This could also be the first time that multinational corporations are forced to shrink their workforces overseas and people who believe they are wronged by companies start talking to employment lawyers about their options. As the Wall Street Journal pointed out a few months ago, more misconduct is discovered during recessionary periods and emerging markets have been growing the entire existence of the SEC Whistleblower program.
Among these areas that we’re expecting to see misconduct with international ties include:
Accounting Fraud: China and Japan
There’s concern that both Chinese and Japanese companies are engaged in problematic accounting. The Toshiba scandal has put international companies squarely on the radar of investors in what has been described as the equivalent of Enron for Japan. And Chinese companies have been living in a quick growing economy that has sparked concern that investors will be left holding the bag when the music stops.
Some of the big banks have already settled investigations into market manipulation in the foreign exchange market but it is possible that this is only the tip of the iceberg. Emerging market currencies have been in for a wild ride so far this year and it’s possible that a global market selloff could create further problems as countries try to orient their monetary policies to the new reality and prop up the economy.
Commodities & Oil
Oil is under $40 a barrel and the Bloomberg Commodity Index hasn’t been this low since 1999. As demand for raw materials from developing economies has shrunk, the possibility for the discovery of issues at miners, oil companies or others selling to foreign countries to meet this demand. As the recession ends, it’s possible that there could be more violations of the Foreign Corrupt Practices as well as businesses try to get a jumpstart on the market.
Emerging Market Bonds
Investors have removed more than $2.5 billion from mutual funds in this area over the past week. If there is a “run on the bank” and these funds are not able to sell these illiquid investments at reasonable prices in order to keep up with outflows, the SEC may be forced to take a look at the disclosures made to investors or the practices of the banks selling these bonds for the foreign countries.
There’s areas in the United States, of course, where there is enough frothiness to potentially get a regulator to dive in with enforcement actions. These areas include High Frequency Trading in the market, the Bond Market, Venture Capital funds investing in tech startups and health care fraud. But right now, it looks like the biggest jump could be from foreign countries.