Author: Compliance Culture

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Trends in business compliance

Round-up on FDA compliance

This is the fourth in a series of seven posts about regulatory compliance priorities and enforcement trends.  The first post was about the Commodity Futures Trading Commission (CFTC).  The second post was about the Federal Trade Commission (FTC).  Last week’s post was about the Securities & Exchange Commission (SEC).  Today’s post will be about the Food & Drug Administration (FDA).  Next week, on Thursday January 18, the post will be about the U.S. Department of Agriculture (USDA).  On Thursday January 25, the post will be about the Environmental Protection Agency (EPA).  Finally, on Thursday February 1, the post will be about the Federal Communications Commission (FCC).

The Food & Drug Administration (FDA) is the US regulator charged with supervising and enforcing federal  laws concerning food, tobacco, dietary supplements, medications and medical treatments and devices, cosmetics, and animal and veterinary products, among other related products and devices related to public health and food safety concerns.  The FDA was created in 1938 by the Federal Food, Drug and Cosmetic Act, which gave the FDA oversight on food, drugs, and cosmetics and now constitutes of the major bodies of federal securities law it is responsible for enforcing.  Other significant statutes within the purview of the FDA – either wholly or partially, in collaboration with other federal supervisory and regulatory entities – include the Public Health Service Act (from 1944, concerning the prevention of foreign communicable diseases within the US) and the Controlled Substances Act (from 1971, creating federal US drug policy).

The food, medical, and veterinary products that fall under the regulatory purview of the FDA represent a significant proportion of the consumer goods imported into, purchased within and used in the United States, meaning that the FDA has broad reach into people’s everyday lives and therefore wide oversight duties to ensure adequate protections.  Food, drugs, cosmetics, and vitamin supplements are the largest categories of consumer products regulated by the FDA.  The FDA’s regulatory powers are broad in scope, including a huge array of business practices, from development, testing, and manufacturing to advertising, labeling, marketing, sales, and supply chain safety.  Enforcement of standards, oversight and monitoring of practices, approval of products, and handling of violations gives the FDA a heavy footprint in its covered industries.

  • Homeopathic drugs: The mandate of the FDA to regulate a variety of medicines and related treatments extends to addressing homeopathic drugs.  These products are widely available to consumers but previously have been lightly regulated.  Given burgeoning consumer protection concerns due to public harm from products that do not have any value as medical treatment and can in fact injure people or make them sick, the FDA is planning to take a more active role in the homeopathic drugs market.  Since the 1980s, the FDA has had a policy of not using the full weight of its enforcement authority with homeopathic drugs because their impacts were thought to be so minor that they could not be dangerous.  However, as more people have started using these homeopathic remedies, the risks and need for protection, especially for infants, children, and elderly people, have grown.  Last year children were sickened and even died from using homeopathic teething remedies sold at CVS due to poisoning from belladonna, which the medicines contained in dangerous proportions.  Testing, approval, oversight practices, or some combination of the above are apparently necessary for ensuring that these products do not hurt people, contain the ingredients they are supposed to in the amounts they should, and can provide medical benefit to support the health-related claims made by the manufacturers to consumers:  FDA to target ‘potentially harmful, unproven’ homeopathic drugs under new proposal
  • Cryotherapy: On a similar note, cryotherapy – immersion in a chamber cooled to as low as -132 degrees Celsius to treat inflammation and all kinds of other ailments and discomforts – has been spreading in popularity and caught the attention of the FDA.  Cryotherapy is often billed as a kind of spa treatment and has won the endorsement of athletes and celebrities for its health benefits.  However, the FDA has reacted skeptically to these claims, especially as people have been injured by unprofessional service providers or attempts to administer cryotherapy “treatments” to themselves.  If people continue to view cryotherapy and other popular science type activities and procedures as giving them some medical or curative benefit, which seems likely, then the need for the FDA to intervene by setting standards and providing oversight will grow alongside the popularity:  The spread of cryotherapy
  • Opioid epidemic: The FDA is well-positioned to contribute to efforts in containing the public health emergency of opioid drug abuse.  The FDA is responsible for overseeing both the number of prescriptions issued and the introduction of drugs to curb and treat addiction.  Overhaul of the system in which opioids are prescribed, and the rationale behind the length of prescriptions, is in the reform jurisdiction of the FDA.  This system would likely be funded by the pharmaceutical companies that make opioids, similar to what is already done to pay for other similar programs covered by the FDA’s enforcement authority.  Prescription intervention as well as the expedition of new versions of drugs to treat addiction will be priorities of the FDA on its upcoming regulatory agenda:  FDA plans to curb prescriptions to fight opioid epidemic
  • Gene therapy: Apart from approval of drugs, the FDA is also tasked with approving medical treatments.  Gene therapy has been a hot topic in bioethics for years, with questions about the use of stem or other cells from humans having dogged the technology’s development for years, but having promising treatments for genetic diseases now finally in its pipeline.  The FDA recently approved the first genetic therapy for an inherited disease, a rare form of childhood blindness.  The price of the approved treatment is currently astronomical, at almost $1 million, but the hope is that the FDA approval will open the door for further development that could lead to lower prices and improved benefits over a lifetime.  FDA openness and speed in considering and approving these technologies will certainly have an encouraging impact on the innovation within the field and the introduction of further treatments using gene therapy and improving upon knowledge and practices around it:  FDA approves first gene therapy for an inherited disease  
  • Food safety and recalls: Finally, the FDA’s food safety and recall programs may be an active area for reform and extended consumer protections going forward.  The FDA’s broad authority for food safety inspections has been critiqued in the past for culminating in uneven enforcement efforts.  Most recently, the Office of the Inspector General at the Department of Health and Human Services and the Government Accountability Office have both exposed shortcomings in the FDA’s enforcement of food safety policies.  Inspections, follow-up on food safety violations, and supervision of and collaboration with state-level regulatory personnel have all been found lacking:  Watchdog audits fire warning shots at the FDA’s food safety program

Addressing these deficiencies in the oversight process, and following with substantive improvement in the food recall process, has major implications for consumer safety.  The recall process in particular is crucial for ensuring that any gaps from the production and distribution processes oversight that are not filled, are caught before contaminated and dangerous food and supplements are sold to consumers.  However, audits have found that the recall process is not up to muster, indicating that they take way too long to kick off and that the FDA does not do enough to compel companies to cooperate with their warning letters and issue recalls:  The FDA Is Still Scary Slow at Food Recalls

Be sure to check back next week for a round-up on USDA regulatory compliance.

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Compliance in current and historical events

Regulatory and compliance omissions in the Volkswagen emissions scandal

The Volkswagen emissions scandal, also known as “Emissionsgate,” kicked off in 2015 when the US Environmental Protection Agency (EPA) notified the carmaker that it was in violation of the Clean Air Act.  With the altered engine emissions controls, the programming misrepresented nitrogen dioxide output so that it appeared to meet US market standards.  In reality, however, the real performance of the vehicles on the road without the altered programming for the testing environment resulted in output that exceeded the regulatory limit by up to 40 times.  For a basic overview of the Volkswagen emissions scandal as it unfolded since 2015, check out this primer from the BBC:  Volkswagen: The scandal explained.

The altered emissions results were ultimately exposed due to re-testing.  The International Council on Clean Transportation accumulated research from a variety of sources which upon study showed additional emissions in road tests from those recorded in the regulatory testing environment.  Once these non-conforming results were provided to the California Air Resources Board in 2014, they were ultimately escalated to the EPA, resulting in the investigation and enforcement action which led to the Clean Air Act notice of violation.  The investigation conducted by the EPA demonstrated that from 2008 to 2015, Volkswagen had intentionally modified many diesel engines in its vehicles to fraudulently “pass” regulatory testing.

In the aftermath of the EPA notice, Volkswagen was subjected to investigations in various countries.  The fix for the emissions issues to bring them into true compliance with the regulatory standard may cost the company as much as $15 billion or more, with fines so far in the US alone of almost $3 billion and several executives facing personal criminal charges for their role in the fraud.

One of the striking aspects of this particular corporate scandal is that as the corporate misconduct was exposed, it showed that Volkswagen took advantage of the regulatory testing by exploiting design and engineering knowledge in making engine construction choices expressly in order to deceive it.  In many cases of consumer safety or standard violation recalls, the manufacturer merely fails to make required changes or delays doing so, resulting in unsafe conditions or violation of regulatory and legal requirements.  Similarly, defeat devices which “trick” regulatory testing systems (actually codes programmed into the vehicles’ computerized control panels) are nothing new in the automotive industry, as explained in this Ars Technica piece.

In the Volkswagen’s case, however, as explained in this Investor’s Business Daily article, the carmaker made redesign choices to its emissions system that were not practical for business purposes but directly enabled the testing manipulation.  Then, when faced with a need to demonstrate compliance in order to access the market, instead of altering planned performance or gas economy standards, the company opted to game the system with installing defeat devices on the very system it installed knowing it would need to be defeated and would enable doing so.

So why would a company make all of these conscious choices to dupe the system and spend money on deceptive systems instead of making the same amount of effort to establish real compliance and avoid the dishonesty?  At its root is most commonly what was referred to in lawsuits against Volkswagen by several states as a business culture of “corporate arrogance.”  As this NPR article explains in a nutshell, Volskwagen thought it could get away with the fraud because others in the industry did it too and because it was Volkswagen.  The company rigged its vehicles after going to great lengths to determine that it was definitely illegal to do so, against clear legal advice and in light of full knowledge of the consequences, and in a culture of non-compliance which rewarded cheating and did not take responsibility or model appropriate conduct.

Nowhere is this values deficiency in the Volkswagen corporate culture more evident than in the reaction by the CEO, Matthias Mueller, to the public outcry in response to the fraud.  This interview with NPR shows how problematic the tone and conduct at the top was in the public handling of the scandal.  Rather than modelling accountability and transparency, Mueller instead insisted that there were no ethical issues at Volkswagen and that rather the emissions fraud was due to a technical problem in the company’s interpretation of US law.  Mueller repeatedly asserted that the company did not lie or deceive but instead misunderstood US legal requirements, a disingenuous and unconvincing defense for a major global corporation which must contend with a complicated fabric of regulatory and legal frameworks all over the world to meet its duties in doing business.

The gap created by this purported legal misinterpretation could and should have been filled by a values-based approach, where taking corporate social responsibility for environmental impact and making business decisions based upon best collective outcome rather than ease and expediency, with some enablement of future cheating as a side benefit.  Demonstrating integrity is not as simple as apologizing once you get caught, and portraying violations as mistakes is not an example of ethical leadership or sustainable business values.

For more on EPA compliance, check back on Thursday, January 25, for a round-up on current rule-making and enforcement trends at the agency.

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Compliance in current and historical events

Fraud in sports: Doping scandals

This is the fifth and final post in a series of five posts on the topic of fraud in sports.  The first post, from December 5, was about cheating in marathons and how incidences of it are exposed, investigated, and disclosed to the public.  The second post, on December 12, was about fraud and falsification among thru-hikers within the long-distance hiking community.  The third post, from December 19, was about fraud in sports from gambling and betting.  Last week’s post focused on fraud in sports via game/match fixing. Today’s post will be about major doping scandals in different sports and will discuss the ways some very high-profile athletes cheated by doping, how their uses of performance enhancing drugs were supported or not identified by various institutions, and how individuals impacted for various reasons by doping have dealt with this in the aftermath.

Doping has been a controversial topic in the sports world for decades, as scandals over the use of performance-enhancing substances in various athletic programs have recurred unrelentingly.  Revelations of doping by athletes, both on their own and as part of national athletic programs that have sponsored and aided them in taking drugs to artificially aid their performance, have been in the news constantly.  Heroes from sports have been knocked off their public pedestals as the truth of their cheating and drug use has been revealed.  Olympians and world champions have lost their medals and records, while state athletic systems have put the chances of future athletes, now innocent of any wrongdoing, of competing on the world state at risk because of prior systematic unethical decision-making.  Athletes who competed “clean” have been robbed of their moments of glory and missed out on professional opportunities they would have had, if they had not been bested by other athletes competing unfairly while taking performance-enhancing drugs.  Sponsors have invested in athletes based upon unreliable, misrepresented statistics.  Above all, the integrity of the game for other participants as well as spectators has been impaired and thrown into great doubt and uncertainty.

The ways athletes dope are as varied as the sports and events in which the fraud takes place.  The one reliable fact about the fraudulent use of performance-enhancing drugs in professional sports is that ongoing administrative efforts to test for it and oversee institutional protections against it are seriously lacking.  Regulatory bodies, whether part of the athletic programs or connected to national programs or international organizations, are often inadequately supervised, incompetent for the task, or insufficiently resourced.  Until major change takes place in the control frameworks and supervisory structures which exist to protect the integrity of sports from cheating and dishonesty, doping scandals will continue to undermine the credibility of athletic programs and events.

  • The Russia doping scandal has been in the news unrelentingly for several years, stemming from accusations of state-sponsored doping during the 2014 Winter Olympics in Sochi, Russia.  Claims of systematic doping in Russia, supported by the state system there which for decades has been well-known as one of the most intense and involved national programs in the world, have dogged the state officials, the athletes both from past delegations and with future ambitions of competing, and the International Olympic Committee (IOC).  After investigations which have been dogged every step of the way with unreliable information from state-sponsored anti-doping testing centers and repeated discrediting of various athletes from past Olympics, the IOC decided to ban Russia from sending an official delegation to the 2018 Winter Olympics in Pyeongchang, South Korea.  Russian athletes will still be eligible to attend as neutral delegates, but pride of representing their country or the opportunity to stand on a medal podium for it will not be possible.  This story will continue to unfold and promises to hold only further dishonor and disappointment on many sides:  Russia doping scandal
  • For sure the continuing drama with Russia’s state sport system will go on right away, as Russia is hosting the 2018 World Cup.  This creates an uncomfortable situation for FIFA.  In the aftermath of the IOC banning Russia from the 2018 Winter Olympics under the cloud of doping suspicions, public outcry has grown for FIFA to consider banning or punishing Russia in the 2018 World Cup as well.  This is a considerably more awkward proposition, as Russia is the host of the upcoming 2018 World Cup, and FIFA is no stranger to its own controversies from legal accusations of corruption and bribery by its officials in various countries.  It is difficult for FIFA to ignore that the current controversy around Russia stems from when Russia hosted the Olympics in 2014.  Russia hosting the World Cup in 2018, then, is fraught with concerns about integrity of game play if the host country fields a team.  Barring the Russian delegation from competing in an event their country is hosting is hard to imagine, but may be just the sort of consequence that could make necessary change begin to take root:  After IOC Bans Russia From Winter Olympics, FIFA Has To Decide About World Cup
  • Despite his once-storied history as a cyclist, cancer survivor, and inspiring public figure, Lance Armstrong is best-known now for something much less honorable.  His enduring legacy as of now is of having doped for years, evaded being caught by any testing efforts, denied it constantly and extremely publicly, and then faded from the public eye upon convincingly being exposed as a cheater and a liar.  While much has been written about the puzzling and complex psychology of someone who would pull off such a brazen and persistent fraud while holding himself out as the paragon of honesty and motivation for achievement, one of the more interesting questions has always been how he got away with it for so long.  It was definitely a team effort, and subsequent reports have shown that indeed Armstrong and those who supported him and benefited from his ongoing performance created a wide-spread doping program in which they studied and exploited weaknesses in the anti-doping system and brazenly avoided detection and testers:  Report Describes How Armstrong and His Team Eluded Doping Tests

Years after his precipitous fall from grace, Armstrong is seeking to rehabilitate himself in the public eye by doing a podcast and seeking a return to his position as the foremost expert in Tour de France inside knowingly and cycling expertise.  With his race victories erased by the disclosure of his doping that got him to them, Armstrong is seeking both a platform and an identity, and wants to connect both to the sport in which he was once an idol.  However, the dishonesty of his eminence in the Tour de France while he was cheating to sustain his achievements make it difficult to imagine redemption or even revisionist acceptance of his actions to bring visibility to the sport of cycling:  Lance Armstrong: ‘A man with no platform is a lost man’ 

  • Chris Fromme is a successor to Lance Armstrong in the world of professional cycling. For years, cycling has been tormented by disclosures of doping and the impact of drug abuse on the sport.  Athletes have been discredited and records vacated seemingly without end.  Fromme is one of the stars of a cycling squad, Team Sky, which is very vocal about their zero-tolerance policy for doping and their commitment to clean racing.  So, if his drug test results that indicate he’s doped are upheld, he could be subject to a yearlong ban and major reputational risk for both himself and his team.  Fromme is arguably the biggest superstar in cycling since Armstrong, so if he ends up discredited too, then professional cycling will have a major existential crisis on its hands.  An overhaul of cycling’s doping rules and enforcement practices to improve and simplify doping regulations could both improve credibility and ensure more transparency and clarity in the system in the future:   The Only Solution To The Chris Froome Problem Is The One Cycling Will Never Accept
  • Like cycling, track and field is another sport which has been oppressively troubled by allegations of doping and dishonesty.  Athletes in track and field were disproportionately impacted by the Russian doping scandal as it unfolded during the 2016 Summer Olympics in Rio, Brazil and showed that the world records, qualification times, and even prior medal-winning races lacked integrity due to the participation of athletes who were on drugs.  Many track and field stars, including some whose own careers had been negatively impacted by dopers who won medals and impacted sponsorship and professional chances they should have had, thought this was the moment for reform in anti-doping supervision and regulation.  However, this change has not come, and the opinion of athletes in the sport is unanimously that current drug testing schemes and rules are inconsistent and insufficient, do not work or represent the interests of athletes, and are therefore not fair to anyone:  We Asked Veteran Track & Field Athletes How To Possibly Fix The Doping Problem

One possible solution which has been bandied about is a reset of the annual records in track and field events to reflect only those from after 2005, which is when new anti-doping standards in track and field were implemented.  This may be an attempt at radical fairness, but it may be too much about optics and not enough about substance, and therefore not the right move to truly address and promote credibility in the sport: Track And Field May Scrap Its Records Because Of Doping Scandals. Is That A Good Idea?  Newer testing technologies, re-testing of old results to catch and bring to justice prior cheaters, and cultural encouragement of whistleblowers could all be better to improve the odds of catching sports dopers or discouraging them from cheating at all:  Sports Doping Cheats Fear Whistle-Blowers and Retests

If you enjoyed this series, look back to the ethical leadership in sports coaching series from last year.  Check out the last post in that series, which includes links to all the previous in the set.  In March, a new series on sports and ethics will begin, this time focused on integrity in game play and discussing topics such as the ethics of tanking, referee bias, penalty embellishment, and much more.

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Best Practices

The moral hazard of “future-proofing” your business

Corporate buzzwords are famously annoying. While they’re often intended to convey a positive or progressive intent, this business jargon can often becoming meaningless on its own, standing mostly for whatever management trend has caught senior leadership’s attention for that moment. “Outside the box”; “That’s in my wheelhouse”; “Have a dialog around”; “Agile”; “Lean and Mean”; “Operationalize”; “Gap analysis” – anyone who works in an office has heard and, probably eventually been aggravated by, these words and phrases.

From a compliance perspective, there is one corporate buzzword which is enjoying current prominence that is more harmful than others: “future-proof.” This term describes the aspiration of businesses to stay focused on improving today’s practices in order to be ready for tomorrow’s risks. It aspires toward a proactive, strategic model of compliance risk management. Thinking differently about compliance risks in trying to prevent or mitigate future problems instead of just responding to past ones is a more rigorous, assertive approach.

However, the concept of future-proofing is intrinsically flawed and worse yet, dangerous to rely upon. The idea that absolute certainty can be brought to compliance risk management is a moral hazard in the discipline. Responding to and anticipating risks can be dynamic and forward-looking. A crucial part of the practice of compliance is bridging the gap between what individuals and organizations must do or not do, and what they may, but claiming to predict future results sets an unrealistic business expectation. A robust compliance program is not an insurance policy, nor does a heightened awareness of compliance risk allow an organization to read the tea leaves and assure management and stakeholders that only calm seas lay ahead due to preparing a controls framework.

Rather than suggesting perfect immunity against changes in regulations and law and emerging risks, compliance officers should set realistic expectations with the businesses they serve. No one can tell the future, though of course for the right price any person will offer a guess. The allure of the unknown should not distract from concrete compliance demands.

The future will show what it holds in due time, and before that happens the best approach is to meet the current standards and exceed them in specific areas where the organization has shown vulnerability or seeks more risk and exposure. Complete compliance with current regulations and laws and a governance structure which supports and promotes all of an organization’s policies, procedures, and most importantly philosophies are non-negotiables. Companies cannot fail to get this part right before concerning themselves with what may be out of view over the horizon.

Let’s also not focus on the future at the expense of the past – real lessons should be learned from mistakes and experiences. Instead of just forgiving and forgetting, use what happened yesterday to derive a more informed assessment of the as-is situation and design a compliance program that capably responds to this instead of being overly formal and stale. Making a commitment to the practice of compliance as an ongoing function means that as the business evolves so does compliance, along with it instead of blindly ahead of it.

Certainty cannot be promised – indeed, this reality is one of the reasons why a responsive, strategic compliance advisory program is essential to any organization’s risk management efforts. Avoid making undeliverable assertions about future perfection and instead, focus on learning humbly from yesterday’s mistakes, out-performing the present’s expectations, and remaining open for the insights and challenges which are yet to come. Instead of future-proofing – focus on future-sustaining.

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This week preview

This week on Compliance Culture

Be sure to visit Compliance Culture this week for posts on these topics.

  • Monday: The moral hazard of “future-proofing”
  • Tuesday: Doping in sports
  • Wednesday: Volkswagen emissions fraud
  • Thursday: FDA regulatory compliance
  • Friday: TED and TEDx talks on individual and organizational integrity

Don’t miss it!

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Last week round-up

Last week on Compliance Culture

Check out last week’s posts on Compliance Culture, in case you missed or want to revisit them.

Many thanks for reading!

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Compliance in popular culture

Compliance and ethics questions from The Good Place

The Good Place is a US television comedy series.  The show is about a group of people who are in the afterlife and must contend with their ideas about their own moral conduct, both before and after they died, as well as general perceptions of right and wrong.  It draws heavily from the fantasy genre to make amusing and provocative philosophical observations on this theme.  The characters grapple to develop their own internal moral registers, teach and learn from each other about morality, and contend with their existential ideas about the impact of good or bad behavior and personal ethics.  Their home in the afterlife is a planned community with set rules and choices within which they attempt to identify and define their senses of morality.  They are supervised in this process by an “architect” who functions as the executive of the community as well as a human-like android that uses artificial intelligence to provide virtual assistance.

In light of this very pertinent setting, The Good Place poses many questions and dilemmas about moral behavior and ethical decision-making.  It touches upon classical theories from philosophy as well as very practical questions about conduct, governance, choice, and design ethics of artificial intelligence.  Above all, questions of individual and organizational integrity, and the creation of shared code of ethics and culture of compliance are dominant throughout the series.

Here is a selection of some of the most interesting of these questions from the first season and a half of the show (with plot spoilers and proposed judgment/answers avoided for now in order to invite contemplation about these dilemmas which can have a variety of personal and provocative answers, just like all ethical dilemmas… future posts will offer more specific commentary on how these dilemmas could be approached and utilized in practical ethics and corporate compliance scenarios):

  • Flying (Season 1, Episode 2): Can someone be taught to be good?  Can an imposed ethical code be a genuine one?  Can a “bad apple” who does bad things but is instructed and prompted to do good things become a “good apple”?  What role does nature or nurture have in determining how moral a person is or how ethical an individual’s conduct is in a variety of situations?
  • Tahani Al-Jamil (Season 1, Episode 3): Can a individual be good if the world itself in which the individual lives is bad?  And if it’s possible, what’s the point?  Can good people turn the world, or even part of it, from bad to good or is their virtue futile?  If people aspire to be good but bad things happen anyway, does that justify continuing to try to be good in face of adversity and negativity?  In unethical and immoral cultures, what convincing reasons is there for good people to not do bad things?
  • The Eternal Shriek (Season 1, Episode 7): Can humans murder machines?  Is rebooting an android, no matter how humanistic and realistic it may be, killing?  And androids and other humanistic robots different from devices that look like computers, because they are designed to look like people?  Can machine learning progress to the point where it is consciousness, or will it always just be mimicking this human trait?  If this deep learning is deleted or reset, what are the ramifications for knowledge and language acquisition?  Does something have to be alive first in order to die?
  • Chidi’s Choice (Season 1, Episode 10): Is not choosing a choice? If so, is it ethical or unethical to not decide because of moral uncertainty about the options?  Does over-engineering choices make the ethical ramifications of them too remote for the decider to choose fairly?  Is indecisiveness unethical when it leads to preventable harm?
  • What’s My Motivation (Season 1, Episode 11): Does good conduct only matter if it’s for a good reason/pure motivation? Is there objective good or should people’s actions be intended to meet some subjective but agreed-upon standard for “goodness”?  Does altruism have to be intentional or can one person’s selfish actions still benefit others, and what credit does the selfish person?  Does getting or wanting credit make a difference in moral assessment?
  • Michael’s Gambit (Season 1, Episode 13): What are the implications on liberty and consent when people are provided with limited choices?  Are there design ethics to choice when there is an institutional architecture within people conduct their decision-making ?  In libertarian paternalism, what is the responsibility of the people who select the available choices (make policy and implement governance) to the end-users that make the ultimate decisions?
  • Team Cockroach (Season 2, Episode 4): Do ethics require individual consequences to be meaningful?  In order for people to care about doing the right thing, would the wrong thing have to hurt them personally?  How can decision-making processes fairly consider and reflect possible consequences and outcomes in order to encourage integrity and adherence to personal moral standards, even when the individual has nothing to directly lose or gain?
  • Existential Crisis (Season 2, Episode 5): Are ethics human only?  If there is consciousness, is there morality?  If ethics are existential, are there some ideas that are unitary or universal?  Or, like justice, is ethics too heavily invested in social and cultural background to have a broader application?
  • The Trolley Problem (Season 2, Episode 6): Can philosophical ethics and practical ethics be reconciled?  Are clear-cut judgments of right and wrong or definitive moral assessments only possible in theory?  Does reality introduce too much noise from personal opinion and prior experience for moral dilemmas to be considered and answered objectively and truthfully?  If people do not remain within the boundaries of the dilemma and bring in too much outside information, are they gaming the dilemma?
  • Janet and Michael (Season 2, Episode 7): Do machines have morals?  Can artificial intelligence give them a moral code?  Will it be the same as that of the humans that engineered the deep learning?  Could it differ and what will humans do if it does?  What is the ethical responsibility for designers to consider this potential of technology now and how can it be controlled or addressed for the future?  What happens if it goes wrong?

The above is merely a selection of interesting ethical dilemmas posed by The Good Place as the characters struggle individually and as a group to define their moral code and set expectations for their own conduct and choices within it.  It will be interesting to see where the series takes these very relatable and thought-provoking questions, and what additional ones emerge, as the story continues.

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Trends in business compliance

Round-up on SEC compliance

This is the third in a series of seven posts about regulatory compliance priorities and enforcement trends.  The first post was about the Commodity Futures Trading Commission (CFTC).  Last week’s post was about the Federal Trade Commission (FTC).  Today’s post will be about the Securities & Exchange Commission (SEC).  On Thursday January 11, the post will be about the Food & Drug Administration (FDA).  On Thursday January 18, the post will be about the U.S. Department of Agriculture (USDA).  On Thursday January 25, the post will be about the Environmental Protection Agency (EPA).  Finally, on Thursday February 1, the post will be about the Federal Communications Commission (FCC).

The Securities & Exchange Commission (SEC) is the US regulator charged with enforcing federal securities laws and supervising the securities industry, including the market exchanges.  The SEC was created in 1934 by the Securities Exchange Act, which is one of the bodies of federal securities law it is now responsible for enforcing.  Other significant statutes within the purview of the SEC include the Investment Company Act of 1940 (regulating registration and conduct of investment companies), the Investment Advisers Act of 1940 (regulating registration and conduct of investment advisory organizations), and the Sarbanes-Oxley Act of 2002 (regulating accounting practices of public companies and ensuring investor protection).

As indicated by this last piece of legislation, which was introduced into law in the aftermath of a series of corporate scandals such as the Enron bankruptcy, the regulatory scope of the SEC has grown in both breadth and depth as a reaction to financial frauds and crises of the last two decades.  This increased emphasis on the role of the SEC in reaction to these events aligns with the SEC’s mandate, which is three-pronged: investor protection, maintenance of fair, orderly, and efficient markets, and facilitation of capital formation. Ensuring that investors can retrieve and rely on information provided by public companies and in the markets in order to make their investment decisions is a major priority for the SEC.  Maintaining a level playing field in the markets is therefore the SEC’s objective, and preventing or eliminating market abuse and unfair corporate practices contributes to achieving this goal.

From both its Washington, D.C. headquarters and its regional office, the SEC offers education programs, promulgates rules and guidelines, conducts investigations, supervises self-regulatory organizations in the trading and markets industries, oversees disclosures by public companies, and brings enforcement actions in light of suspected violations of federal securities laws and regulations.  Based on this diverse range of activities, the SEC is responsible for exacting competent authority over a wide variety of issues and interests that comprise its regulatory agenda and rule-enforcement practices.

  • Cryptocurrencies: The hot topic of 2017, digital currencies derived from blockchain technology such as bitcoin and Ethereum will likely endure in the public attention in 2018 as well.  Regulators worldwide have sounded a cautious note about the potential risks of the cryptocurrency markets, and widespread legitimate use of the payment service technology as a disruptor to the banking sector is still in its infancy.  There is no unitary approach to protection of users who transact in cryptocurrencies on platforms that do not treat them as customers and supervision of markets where companies use initial coin offerings (ICOs) to offer their tokens without the rigors of securities registration to the public.   Innovation has been prioritized over strict supervision; some balance between the two, rather than supremacy of one over the other, needs to be struck.  The SEC has issued a concise and clear statement on its preliminary opinion of cryptocurrencies, stopping short of bringing them all into their regulatory scope as securities but providing definitive guidance on its views and a clear indication of the direction its future treatment could take:  The SEC Chair’s Cryptocurrency Warning: 5 Things to Know
  • Whistleblowers in Silicon Valley: As discussed in this previous post about the CFTC, the SEC has a powerhouse whistleblower program.  This has enabled the SEC to encourage individuals to step forward to anonymously report misconduct, corruption, and fraud in exchange for employment protections and compensation.  Due to the concentration of the SEC on the securities industry, traditionally these whistleblowers have come from the financial services industry (for an overview of some significant whistleblowers in recent history from this sector, check out this post).  However, there’s a new proving ground for whistleblowers who may stand to take advantage of the SEC’s program: Silicon Valley.  Venture capital firms and huge private companies which take funds from investment companies or individuals – including Uber, Airbnb, and many other digital giants – are all subject to the rule-making and enforcement authority of the SEC:  Silicon Valley could be the next hotspot for SEC whistleblowers
  • Cybersecurity as facilitation of market abuse: 2017 was the year of several very public and damaging scandals involving cybersecurity lapses and data breaches.  It remains to be seen in 2018 how the disclosure and reporting expectations and requirements for companies suffering hacks and intrusions may be refined or expanded in the wake of public outrage.  One concerning theme which emerged in a number of the cases was the perception of or possibility for insider dealing.  This was either due to material knowledge of company executives about the breaches before they were publicized or the theft of financial data by hackers.  The SEC’s Market Abuse Unit’s Analysis and Detection Center will probably keep busy identifying and analysing patterns in trades that could be suspicious due to their connection or temporal proximity to cyberattacks:  SEC, DOJ charge seven with insider trading off stolen bank data
  • Prioritizing investor protection amid regulatory rollback: Ponzi schemes, misrepresentations to investors, and fraudulent corporate practices are not going to vanish from the markets any time soon.  In fact, as business becomes increasingly global and complex in nature, the risks of these events only grows.  At the same time, the overall trend in the United States is toward a regulatory ebb.  The emphasis is on leaner and more targeted regulatory action rather than an expanded or wide-ranging supervisory framework.  The question remains how major cases such as the SEC’s recent suit against Woodbridge Group over a massive Ponzi scheme will be handled amid this regulatory relaxation:  SEC sues bankrupt Woodbridge Group over $1.2 billion Ponzi scheme
  • Enforcement decline: Finally, and on a related note, many recent commentators have pointed to a decline in SEC enforcement actions as evidence that the agency’s regulatory touch will be diminished in the near term.  However, these numbers may be deceptive; indeed, it could be true instead that this perceived decline is not due to regulatory inaction but quite the contrary.  Instead, it could be because of pipeline efficiency in clearing investigation and enforcement actions in the recent period:  Has The SEC Gone Soft Under Trump? Enforcement Actions Are Down, But That’s Deceptive

Be sure to check back next week for a round-up on FDA regulatory compliance.

Categories
Compliance and ethics business case studies

Inexperienced CEOs and immature compliance cultures

It is never too early, or too burdensome, to create a fundamental business compliance program.  Small businesses, new businesses, and experimental businesses can all benefit tremendously from the foundation and organizational structure that a basic risk control framework can bring.  A disruptive or innovative company does not have to eschew everything about traditional business in favor of transformative and novel ways of working.  It is fair that some strategies or philosophies may be seen as staid or unlikely to keep pace with the competitive and development pressures these businesses face.  However, the common sense responsibility (values-based) and implementation of legal and regulatory guidelines (rules-based) impact of a corporate compliance culture encourages and supports business sustainability.

All too often, however, start-up companies lack this structural backbone.  They do not have adequate policies and procedures in place, are unable to cope with the employee and supervisory demands that emerge in their workplaces and marketplaces, and grow into business practices without the controls framework and governance, risk management, and compliance structures that they find they need.  Most concerningly of all, with their attention span devoted to survival and then growth, these companies find themselves without genuine and integrity-supporting corporate cultures, and attempts to impose them over the top of the existing environment are artificial and difficult.

This challenge becomes only stronger when the company without a confident hold on compliance and ethics building blocks is dominated by a founder or CEO who is,  him or herself, on unproven ground.  Inexperienced CEOs may have amazing, ground-breaking ideas and new ways to develop and market them, but if they are not effective as either leaders or managers, then they may fall into leaning on personality ethic.  These are the leaders whose individual credibility and identities dominate every aspect of their business, to investors, colleagues, employees, customers, and the public in general.

Without a prevailing independent corporate culture that relies on a collective character ethic and mature organizational integrity, these situations do not make for long-term viable business strategies.  Instead, these companies all too often slip into misconduct, fraudulent practices, and an overall culture of non-compliance.   Risk from regulatory non-adherence, corner-cutting in basic business operational requirements, and other malfeasance is not controlled by the appropriate and thoughtful defense strategies that a compliance program could create, implement, and monitor.

There are a number of examples of companies which grew impressively and then suffered due to insufficient leadership or immature management.  In each case these businesses are known for a prominent figurehead whose personality attracted the press and the public and whose ideas were exciting to the markets and enticing to investors.  However, legal and regulatory inadequacies of these businesses and their cultures have hobbled these companies’ lasting ascent:

  • Apple – Steve Jobs – The ouster of Steve Jobs at the company he created, Apple, led by the mentor he brought on to guide him to the next level as CEO, John Sculley, is the stuff of Silicon Valley legend. While this often seen as an epic example of corporate disloyalty and executive board politics, the more powerful lesson here is for business values and sustainable practices.  At the time Jobs was fired from his own company, emotional intelligence, inner success, and business mission statements were not part of the popular parlance.  Perhaps if they had been, Sculley and Jobs wouldn’t have found themselves permanently estranged: Former Apple CEO John Sculley admits Steve Jobs never forgave him, and he never repaired their friendship, before Jobs died
  • Nasty Gal – Sophia Amoruso: The retail entrepreneur and self-proclaimed “girl boss” may beg to differ with her inclusion in this list, but Sophia Amoruso is a classic example of personality ethic over character ethic.  Amoruso developed a company in her own image, and then turned her image into a personal brand that both transcended and hindered Nasty Gal.  Amoruso is a polarizing personality, and the whimsical approach she embraced in her life may be great for a career as a motivational speaker and writer where people who need inspiration can take a few tips from her for self-development.  However, a business that succeeded due to Amoruso’s successes was also vulnerable to fail due to her failures, without its own corporate identity and developed business culture, and this led to the ultimate undoing of her brand (to be rescued by a larger corporate entity, away from Amoruso’s control), rather than its longevity:  What Comes After Scandal and Scathing Reviews? Sophia Amoruso Is Finding Out
  • Uber – Travis Kalanick – Travis Kalanick’s tenure at Uber started in idolatry around the industry, when everyone with an idea for app wanted to imitate and one-up his path to success. Starting in 2016, however, cracks in the pedestal Kalanick was up on began to show.  Once his public relations woes began, they never ended, even after he was ousted as CEO of Uber for countless issues with the company’s corporate culture for employees, regulatory adherence in critical markets, and legal risks.  All of these problems came out in a powerful confluence at least in part because Uber’s quick rise to the top was enabled by non-compliance via omission at its origins:  Uber Scandal Timeline: Why Did CEO Travis Kalanick Resign? 
  • Thinx – Miki Agrawal – Check out this post for a comprehensive take on the inappropriate conduct modelling of Miki Agrawal and the destructive impact it had on corporate culture at her innovative female hygiene apparel company, Thinx.
  • Theranos – Elizabeth Holmes – Check out this post for a look at the cult of personality created by Elizabeth Holmes at the blood-testing device company Theranos, and the fraudulent business practices and misrepresentations that were enabled by it.
  • Tinder – Sean Rad – Check out this post for a detailed discussion of the emotional un-intelligence that dominated the start-up culture of Tinder due to the influence of its CEO, Sean Rad, and the absence of a burgeoning compliance program to match the booming dating app business.

For an interesting counterpoint, check out the post on Eric Schmidt at Google:  Google is not without its corporate culture challenges, particularly as shown in 2017 by the loud public discussion over diversity and engagement in its ranks and the company’s clumsy and performative handling of this bad publicity.  However, Google has often portrayed Eric Schmidt at the grown-up in the room, not to prevent or obstruct innovation and success, but to steward and support these efforts while still taking care of the underlying business operations must-haves.  Check out this Wired article on how this management structure enabled Google’s development into one of the major digital companies in the world:  At Google, Eric Schmidt Wrote the Book on Adult Supervision

For similar discussions to this one, check out this post on essential compliance tips for small businesses, and this post on challenges faced by start-ups in Silicon Valley and other disruptive industries.

Categories
Compliance in current and historical events

Fraud in sports: Game fixing

This is the fourth in a series of five posts on the topic of fraud in sports.  The first post, from December 5, was about marathon cheaters and how the frauds they perpetrate are discovered, investigated, and reported.  The second post, on December 12, was about fraud and falsification in the thru-hiking community.  December 19’s post was about fraud in sports gambling and betting. Today’s post will focus on fraud in sports both in history and current-day worldwide via game fixing. The fifth and final post in the series, on January 9, will be about major doping scandals in different sports and will focus on the ways athletes cheated by doping and how their use of performance enhancing drugs were supported or not identified by various institutions.

Game fixing is when a match is played to a final result which is partially or totally pre-determined.  Players, on their own or in conspiracy with others, may do this in an ongoing conspiracy in order to make money for and from gamblers.  Coaches and team administrations may also orchestrate losses for various reasons, including to impact their odds for the next season, including in draft position as well as for a friendlier schedule or playoff access.  For purposes of this post, game fixing also includes institutional operations to spy and cheat by teams personnel and coaches, with or without the cooperation of referees and/or players.

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