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One of the Most Clever Features of Dodd-Frank is Really Working

David Callahan

There are few better ways to uncover fraud in an industry than to incentivize insiders to blow the whistle on wrongdoing. And a little known part of Dodd-Frank did just that for the securities industry, creating a new whistleblower program run by the SEC that can bestow huge rewards on anyone who brings to light evidence of fraud that results in a settlement. 

The law is now in it third year of operation, and evidence is mounting that it's really working. And why wouldn't it work: If there is one thing that Wall Street types care about it's money, and so dangling fat carrots before this crowd was brilliant as a way to expose illegality. 

According to a new report by the SEC, that agency has received over 6,500 tips and complaints by would-be whistleblowers, with the number of complaints steadily climbing since the law went into effect. Nearly $15 million was paid out last year in whistleblower bounty. 

Of course, the ultimate impact of the law will never be measurable -- which is its deterrent effect. Because of the law, any bank executive or trader or mortgage broker or anyone engaged in fraud will have to take the risk of a colleague turning on them to collect a reward. 

That's significant, since most financial frauds are complex and involve multiple people. 

The best evidence of how well whistleblower laws work comes from the defense industry, which used to be drenched in fraud. Today, while that industry is still very wasteful, we haven't seen the kind of procurement scandals that used to be commonplace. 

Frankly, it's hard to imagine a scandal-free finance sector given what we've seen over the past 15 years. But if this sector does significantly clean up its act, the new SEC whistleblower program will be one reason why.