Paying For Ethics

The SEC’s inspector general has suggested to Congress that the government should pay a bounty to individuals who turn in financial felons, a new wrinkle among the attempts to keep fraud out of the system. According to the FT, the agency’s comments included the observation that “Although the bounty system has been in place at the SEC for more than 20 years, there have been relatively few awards made.” The agency also recommended that the Roman Catholic Church pay altar boys for turning in priests who they suspect of bad behavior.

The trouble with paying to encourage ethical behavior is that it perverts the core of the ethical system itself. Either right behavior is its own reward or it is not. Paying those who dig up dirt encourages people to spend their time looking for wrongdoing instead of doing the right thing on their own. Informant systems may be good for totalitarian governments, but they are hardly a part of a well-maintained democracy where the government is responsible for maintaining the rule of law without vigilantes.

The concept of building a monitoring system throughout the banking and securities industries based on financial incentives given to those who can find fault leads very quickly to a system where everyone is monitored, even those who would normally be above reproach. It came to light recently that attorneys within the SEC itself may have been involved in an insider trading scheme. The SEC will obviously have to set up a system to spy on itself if the bounty system is to work properly.

Handing out fees to make a system morally accountable never works. The perpetrators who think that they can outsmart the system almost always believe that they get away with their scheme du jour.  The best ones usually can, at least for a time, often a long time. Those hoping to make money by spotting bad behavior are almost always looking in the wrong places. If dishonest labor was easy to find, fraud would hardly be fraud. No one has to dig for what is in plain sight.

The SEC’s inspector general knows that turning financiers and bankers into sleuths who spend their time checking on their fellow workers will engender a great deal of mistrust in a system which is already overflowing with it. The process of encouraging people to find fault will only make cheaters take that new part of the system into account. Fraud will need to become more elaborate to avoid detection by the government’s amateur watchdogs. Experts could not find Madoff and others of his kind. The untrained will not do any better trying to beat morality into a system that is neither ethical nor unethical. It is just a system to make money.

Douglas A. McIntyre