The Whistleblower Industrial Complex

The US SEC runs a successful whistleblower incentive programme. If you’re aware of someone who’s breaking financial regulations, you can tip off the SEC. If they’re eventually prosecuted and fined, you can earn a share of the fine – anything from 10 to 30 per cent. Several people have earned individual awards of over $100m for their tips.

The result, though, is a fascinating case study in unintended consequences and perverse incentives. Alexander I. Platt at the University of Kansas School of Law discovered that the scheme (along with a similar one run by the CFTC) has effectively been captured by a small pool of professional lawyers. Awards are dominated by whistleblowers who are represented by lawyers, but in particular by lawyers from a small set of firms and by lawyers who used to work at the SEC.

The result is that the capability of sifting through the avalanche of tips that arrive each day at the SEC has accidentally been outsourced to private law firms, who (naturally enough) prioritise their own interests.