Category: Compliance and ethics business case studies

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Compliance and ethics business case studies

Integrity of game play: Player misconduct

This is the first in a series of five posts on the topic of integrity of game play.  Today’s post will be about player misconduct, such as penalty embellishment, individual cheating and misconduct, and time offenses.  Next week’s post, on February 28, will be about the ethics of tanking.  The third post, on March 7, will be about referee bias.  The fourth post, on March 14, will be about institutional cheating.  The fifth and final post, on March 21, will be about the unethical leadership of coaches.

Player misconduct is any instance of an act committed by a player which is unfair, contrary to the laws of the game, or interferes with other players or the active play of the game.  These acts can occur in a variety of circumstances, including during active game play, when the play is paused, during intermissions, or before and after the game.  Some types of misconduct – such as those that are eligible for disciplinary sanction, including cautioning or dismissal from the game – are subject to significant referee discretion or technical construction.  Other types of misconduct – such as those fraudulent acts by players that are the result of sustained conspiracies or pre-meditated efforts to cheat – can be more subtle, harder to detect, and challenging to prevent or punish effectively.

Players may be motivated into misconduct out of emotion, competitive ambition, game dynamics toward some outcome or interaction with another player, or, like many other fraudulent acts that threaten game integrity, desire for financial gain and future success.  No matter the varied reasons for why players engage in malfeasance, it remains true that these misconduct events happen across all sports, all national cultures, and all types of events.  Furthermore, manipulation of plays and games by player misconduct negatively impacts the integrity of sporting events and interferes in the unadulterated experience of sporting with real stakes that other participants and fans expect and deserve.

  • Penalty embellishment – Penalty embellishment generally describes anytime that a player seeks to gain unfair competitive advantage by exaggerating contact with another player in order to imply that a foul has been committed against him or her.  Assessments of whether players are embellishing penalties are highly subjective and can become notorious personality evaluations of various players who are accused of chronic or shameless embellishment.  These pretended injuries or simulated contacts with other players are a fundamental exercise in dishonesty and player misconduct which impugns the quality and veracity of game play.  In various sports penalty embellishment takes different typical forms, as described below.
    • Diving (football) – In football (referred to as soccer within the United States), penalty embellishment is also referred to as diving.  Players do it in pursuit of chances to score via free or penalty kicks or in order to cause the opposing player to be sanctioned by the referee and therefore unduly disadvantaging the other team.  Diving is actively studied as a powerful example of “non-verbal deception.”  Leagues have begun to give out punishments and fines more frequently for diving, as the practice of exaggerating contact and injury has the potential to endanger or slow response to other players who are in actual danger.  Footballers who become known for chronically diving further face the reputational damage of being labelled as perpetrators of this deceptive behavior.  Check out these examples of diving from 2017:

Diving is also practiced by players in hockey, where perpetrators are subject to 2-minute penalties for embellishment and can receive fines as supplemental discipline for repeat offenses.  Check out this compilation of diving in the NHL:

    • Flop – Similarly, in basketball, flopping is when players fall on purpose after minimal or no contact from another player in order to provoke referees into calling a personal foul.  This way the player who flops wishes to be awarded free throws and possession of the ball or possibly to cause the opposing player to be fouled out and dismissed from the game.  Flopping has been regulated against in the NBA since 2012 with the potential of fines and, like diving, subjects inveterate practitioners of it to public scorn.  Nevertheless, many players in the NBA do it and even see it as a form of strategy which they practice and perfect over the course of their careers, much to the derision of some of their peers but possibly to their own competitive benefit.  This archived Grantland post gives an interesting perspective on the long history of flopping:  Flopping in the NBA: A History of (Non)violence.  Check out this collection of floppers from the NBA:

  • Time offenses – Time offenses generally refer to the actions of a player or players on one team which use up the remaining time on the clock but don’t serve any other tactical or strategic purpose.  This is possible in any sport which is timed and therefore is a prevalent practice employed to prevent the other team from getting adequate opportunity to score before the period of the game or the game itself ends.  Players will often do this when their team is winning by a small margin, or tied, in sports where overtime play is possible and/or regulation ties or non-regulation losses are still awarded points.
    • Time-wasting – The term time-wasting typically applies to football.  Late in the game, such as during the extra minutes from injuries or other stoppage, substitute players are brought on and time can be wasted both by exiting and entering players who do so deliberately slowly.  These and other less obvious forms of time-wasting, such as putting the ball out of play from the corner or returning to the ball to play slowly, can subject players to punishment.  Check out these ridiculous and overt examples of time wasting by footballers:

    • Running out the clock – Running out the clock is a form of clock (mis)-management which is employed by American football players in the NFL.  Teams on the offense which are also leading on the scoreboard will plan their play strategy with minimal risk in order to run the time from the clock and avoid the potential of losing possession or having the ball go out of bounds.  Basic rushing plays down the middle of the field or multiple quarterback knees are often used as teams trade the chance of additional scoring for relative security as the remaining time in the game drains away.  Here’s an example from 2016 of players deliberately holding the other team’s defenders in bear-hugs in order to run out the clock (notice all the flags on the play):

  • Equipment cheating – Equipment cheating is a ubiquitous risk across many different sports, in any situation where the condition of accessories used by the players can be doctored or falsified.  In baseball or cricket, bats can be “corked” – filled with an artificial material to make them lighter and easier to hit a ball farther with them.  In tennis, rackets can be strung illegally.  In golf, players can use clubs which violate weight and size regulation.  In cycling, bikes can be altered so that they perform and operate unnaturally in comparison with normal equipment.  This can be referred to as “technological doping” – a threat to the integrity of the sport which comes not from illegal performance enhancing-drugs, but in fact from performance enhancing-equipment that has been fraudulently adjusted.  Check out this article on “technology doping” in cycling from 2016:  What’s Next for Sport After Cycling’s Technology Doping Shame?

Check back next week, Wednesday February 28, for the second post in this series of five, which will discuss the ethics of tanking, such as the Philadelphia 76ers and “trust the process” and the Astros tanking strategy for World Series contention.

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Compliance and ethics business case studies

Happy Valentine’s Day!

Happy Valentine’s Day from Compliance Culture!

In honor of the holiday, check out this selection of links on compliance and ethics risks and issues in online dating.

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Compliance and ethics business case studies

Ben & Jerry’s CSR origins

Corporate culture is most effective when it is part of the organization’s origins. Compliance by force can never be fully effective at risk control or influencing corporate values. While organizations can and should always be looking to improve their standards and frameworks for compliance risk management, the most successful compliance programs will be rooted in the native culture of the company. For this reason thinking of compliance fundamentals from the beginning (such as described in this post or this post about start-ups, this post about founder-led business, or this post about small businesses) wherever possible gives the greatest chance of imbedding an authentic and engaging culture of compliance.

The above is especially true from a corporate social responsibility (CSR) perspective. CSR values adopted purely and un-authentically, just for competitive advantage or public relations attention, will not be convincing to all consumers or stakeholders, and therefore will not be sustainable. Companies that have some relation to or interest in political issues or social justice should recognize this early and often and incorporate activism and engagement into their company mission statements and values.

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Compliance and ethics business case studies

Tony’s Chocolonely and a Roadmap for CSR principles

The chocolate business has long been plagued with associations with slavery and child labor. In the countries where manufacturers buy their cocoa beans, trading companies and farmers traditionally have engaged in exploitative and unfair business practices both between each other and in employing the work of slaves, many of them children. Chocolatiers have even claimed that producing chocolate without the use of slave labor at some point in the supply chain, however remote, is impossible to prove or accomplish. Instead, the industry has focused on shifting risk or responsibility for the use of slave labor or abusive trade partnerships by moving these decisions and relationships to third parties and offering ignorance or lack of control as a defense.

Tony’s Chocolonely, a Dutch confectionary company, offers an intriguing alternative to and challenge within this market. The eponymous Tony is actually Teun van de Keuken, a Dutch investigative reporter. In 2002, van de Keuken was working on a project about chocolate manufacturers. He determined that none of the manufacturers he studied that had signed the 2001 Harkin-Engel (aka Cocoa) Protocol, an international agreement intended to end child and forced labor in chocolate production, were in full compliance with the protocol’s requirements. Therefore, all the chocolate for sale by those candy companies (including Hershey’s, M&M Mars, Nestle, and Guittard) was, in van de Keuken’s view, an illegally-manufactured product.

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Compliance and ethics business case studies

Business compliance wish list for cryptocurrencies

One of the hottest topics of 2017 was cryptocurrencies.  The blockchain-derived digital currencies such as Bitcoin, Ethereum, and Ripple were the subject of seemingly endless interest and speculation, in both the media and the markets.  In an excitement reminiscent to many of the dot-com boom, cryptocurrency companies rushed to become issuers via initial coin offerings (ICOs).  Companies that were previously unrelated to blockchain or any product of the technology changed their names or indeed their entire operational purposes to attract market interest.  Investors searched for information and guidance, experimented with the digital currency as both a payment service and a securities holding, and filled social media and dinner table conversation with curiosity and enthusiasm for the disruptive potential cryptocurrencies hold for banking, technology, and the markets.

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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.

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Compliance and ethics business case studies

Compliance challenges for start-ups in disruptive industries

In today’s fast-paced business world of innovation and advanced technologies, every company seems to offer the next in-demand disruption. Ever since the days of the dot-com boom and bust in the late 1990s and early 2000s, in the infancy of e-commerce and internet-based or networked products and services, companies have been striving to identify revolutionary items and ideas to market to consumers eagerly awaiting the next life-changing thing to buy. Start-ups in Silicon Valley and entrepreneurial communities all over the world want to develop the next iPhone that will transform every aspect of modern human life. Companies that provide services instead of making products all want to be the next Airbnb, the Uber of their industries, and so on.

But are those companies, and those goals of disruption for the sake of itself, anything to which companies should aspire? Companies in all business sectors are trying to emulate technology companies, and they may not be the best role models in terms of regulatory compliance, risk control frameworks, and business integrity fundamentals. Disruption and sustainability aren’t necessarily mutually exclusive, but many of the companies that were visible pioneers in the current wave of technological innovation and development cut ethical or foundational corners to focus on growth, sales, and branding. Companies in the new generation which seek to copy their success and single-minded commercial focus will run into legal and supervisory obstacles sooner rather than later, now that their predecessors have overstayed the honeymoon period of lax regulatory attention and are running afoul of legal, tax, and compliance concerns all over the world.

The start-up community’s response to public exposure of fraudulent or insufficient business practices – such as companies buying their own products to falsify sales success for partners and investors, or violating straightforward business operations rules like participating in mandatory state insurance programs to maintain company licensure – is to go on the defensive and blame the media. Worse yet, they want to claim stand-out corporate misconduct from their start-up peers are the exception, not the rule, and distance themselves from it, without doing any self-examination or risk assessment to feed-forward into their own continuous improvement.

However, the venture capital firms that are keeping these start-up companies striving toward their disruptive ambitions have a fiduciary duty to their funders to contain reputational risk that could stem from these companies’ public relations and legal problems. The “bad apples” theory cannot win the day in identifying why so much goes so wrong at so many start-ups that were once ambitious and backed by prestigious funders and now have failed, and are being sued by fraud, investigated for investor abuse, accused of forgery or inappropriate accounting practices, and have otherwise missed out on reaching disruption and instead fallen into disrepute.

In any business dominated by private companies getting rich quick, delving into areas which are within loopholes or blind-spots to current legal and regulatory enforcement agendas, transparency is the victim to innovation and doing things the right way, with respect to ethical concerns or compliance requirements that could pop up further down the road from the beginning, is subverted in favor of making money, attracting more investors, and bringing a product or service to market first and with the most attention. “Fake it till you make it” is a toxic approach to management and is no kind of leadership whatsoever. Ignoring legal and regulatory requirements cannot go on forever, as the many bans and service stoppages Uber has experienced in the last year well show. Companies may be able to grow quickly this way, but they cannot keep their business running or have much hope of holding onto their ill-gotten gains unless they tread carefully with regulators and supervisors from the start.

The cultural forces at work here are strong, and disconcerting. Founders with no experience as CEOs and even less experience as functional managers or ethical leaders are given millions of dollars by investors and pressured to be geniuses, redefine business and whatever it is they have to offer to the market in everything they ever do, and succeed at all costs. Liberties are taken, misrepresentations are made, and not every brilliant troublemaker with a crazy idea and a team of engineers turns out to be any good at actually running a legal, functioning, mature business.

The hope, supposedly, is that people will merely bend or flaunt the rules, and not break them, but who’s making the distinction? The moral hazard is great of creating an incentive for behavior that would even lead incrementally to a company that is not in simple compliance with the legal requirements for operating a business in the city, state, or country where it is located. Cautious onlookers assume that maybe if a few corners are cut at the beginning when things are small, it will all work out okay because by the time the company gets big, someone who likes paperwork or understands laws will stumble along and lend a hand. This is immature and short-sighted thinking.

Even if some philanthropic compliance officer did intervene, it would be too late to fix the cultural decay that grows at companies that do not have adequate business values and controls from the beginning. When people ask how it’s possible that business fraud and misconduct went on for years at some companies, or permeated every level of the organization seemingly without detection or interruption – this values void is the answer. To avoid a culture where cheating, misrepresenting, and making unethical decisions are all common, the foundations of the company must include cultural values where that conduct is expressly defined as unacceptable, and business governance structures to prevent, identify, and punish it when it happens.

For more on the challenges to ethical decision-making, and pitfalls for fraud and non-compliance, faced by start-ups, especially in the highly competitive advanced technology world of Silicon Valley, check out this article in Fortune from December 2016:  The Ugly Unethical Underside of Silicon Valley.

For further thoughts on the challenges that start-ups and emerging enterprises face with prioritizing compliance risk management, see this post on Tinder’s corporate culture and the role compliance can play in fostering professionalism in start-ups.  For practical tips, check out this post on compliance foundation must-haves for small businesses. And, check back next Wednesday, January 3, for a post on inexperienced (even if visionary) CEOs and the immature compliance cultures they cultivate by omission.

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Compliance and ethics business case studies

Institutional responsibility and the US Olympic Committee

The end of 2017 has been an explosive and revelatory time for public disclosures about culturally-pervasive sexual harassment and abuse. In most cases the reporting has focused on exposing various individuals, who committed their offenses with the full force of their power and prominence within their communities, organizations, and industries. All too often, the courageous narratives presented by the individuals who come forward to tell their stories include the fact that their harasser or abuser systematically prevented them from work advancement or access to work at all, in many cases withholding employment opportunities and in some cases, even coordinating with other men in positions of authority to prevent the women from working in the future.

The many (and continuing) disclosures about the inappropriate and dangerous behavior of these high-profile men has been a cultural watershed moment. Hopefully this heightened awareness will lead to a transformation in the public discourse about societal expectations around these dynamics, as well as justice for the women who have had their lives negatively impacted and their careers curbed or ended. However, many questions remain in what structural progress, if any, will come from the individual cases, no matter how numerous they become.

Thus far, far-reaching institutional responses to the misconduct of these individuals has been lacking or entirely absent. The best most organizations have been able to muster is routine HR statements that the accused men are being suspended or will resign, sometimes accompanied by saccharine denials of knowledge and expressions of regret, and seldom followed up with any significant sort of commitment to organizational change or an authentic intention toward setting a standard for corporate social justice.

Corporate boards and senior management at organizations under fire for the unacceptable behaviors of their principals and often most visible representatives have proven lacking in the unfolding of this cultural moment, which is driven by individuals and targeted at individuals. While certainly these are cases where bad people did bad things, it is important to acknowledge that they were empowered to do so, implicitly or in some cases expressly but with a blind eye toward their malfeasance, by the organizational structures which promoted and supported them and oppressed and marginalized their victims.

For more on the complicity of corporate leadership and the dubiousness of their malleability to change even amid the major societal focus on these issues, check out these great pieces from Wired:  Corporate boards are complicit in sexual harassment and Making the silence breakers Time’s Person of the Year won’t change anything.

One particularly beleaguered institution that is confronting the limitations of its definition of its own institutional responsibility is the US Olympic Committee. Ethical and integrity questions about the actions of individuals associated with the US Olympic Committee are nothing new. Incidences of cheating, doping, and abusive behaviors by coaching and medical staff are, unfortunately, nothing new. Because the US Olympic Committee relies on a vast network of local personnel who train, recruit, develop, and support athletes often from a very young age. Under these conditions, athletes, their schools, and their families place tremendous trust in the representatives and related parties to the US Olympic Committee that they rely upon to bring their Olympic ambitions to fruition.

All too often, predatory coaches are reported by a victim only to have multiple other athletes come forward to say that they too were mistreated and abused. Organizations within the US Olympic Committee’s umbrella ban individuals proactively upon revelations of sexual abuse, and make efforts to distribute guidelines and ensure education, but underreporting of instances of sexual assault mean that predator coaches prey on athletes for entirely too long undetected.

The reality is, the US Olympic Committee has 48 national governing bodies underneath it which thousands of club teams and gyms underneath that. The sheer volume of organizational and administrative entities through which these abuses pass and would need to be addressed or investigated, all without a national entity or a mandatory supervisor to set a compulsory standard for this, is one of the greatest forces working against effective identification and removal of predatory coaches. In this context, major organizations such as the US Olympic Commission too often focus on removing individuals without identifying root causes or building defense structures against the underlying problems.

Changes are too often driven by media exposure and fear of reputational damage, and too infrequently motivated by compassion or justice. Until these institutions adapt their approaches to address sexual abuse as directly as they can their commercial concerns, and until adequate oversight and control measures are taken with meaningful enforcement actions to back them up, individuals will continue to be harmed.

Organizations must change from operating independently on these issues, which provides them with the plausible deniability of jurisdictional ignorance and a patchwork of ineffective rules and procedures for processing sexual assault claims and investigations. Instead, senior leadership must stand up and make these processes uniform and coherent so that they can be not just a pretense, but also effective in protecting individuals and taking responsibility. Only then can the brave testimonies of individuals lead to organizational change toward practices that will respect and protect them.

For more about the US Olympic Committee’s challenges in defining and enforcing a meaningful code against sexual abuse and misconduct in its ranks, check out this article from Harper’s Magazine:  Pushing the Limit.

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Compliance and ethics business case studies

Fraud in sports: Betting and gambling

This is the third in a series of five posts on the topic of fraud in sports. The first post, from December 5, discussed the motivations of marathon cheaters and the methods through which their frauds are discovered and publicized. Last week’s post, from December 12, was about thru-hiking fakers, discussing a collection of imposters and scammers in the long-distance hiking world. Today’s post will be about fraud in sports gambling and betting. The fourth post, on January 2, will focus on sports fraud via game fixing. The fifth and last post in the series, on January 9, will be about major doping scandals in different sports, including novel ways athletes cheated through the use of performance enhancing drugs and systematic efforts to either identify or support these fraudulent actions.

Sports gambling, both legal and illegal varieties, is a widespread social and cultural activity. Sports fandom goes to the core of many communities, in which cities and cohorts are bonded together by the activity of following and watching games or teams or entire leagues. For every spectator who attends or watches games, on a casual or a devoted basis, there are others who take their interest to a more commercial or financial level by engaging in various types of wagering, hoping to make money off predicting game or match developments and outcomes. Legal bets are placed through a bookmaker or sports book, which can be found online as well as in states or jurisdictions where sports gambling has been legalized and a marketplace with service providers within it has emerged. On the other hand, illegal bets are placed through individuals or privately run operations known colloquially as “bookies,” usually operating on a person-to-person, word of mouth basis.

Betting on sports results has led to a number of integrity-sensitive scandals and crises in the sports world. Apart from match fixing, which will be covered in next week’s post on its own, gambling fraud is facilitated through illegal betting and investment scams or other unregulated wagering activities. Fraud in this area can lead to other tangential illegal activity, such as money laundering that is facilitated by the fraudulent wagering transactions, and market abuse or violations of investor protections due to investment scams.

  • Advanced technology and the ever-increasing influence of the internet is impacting every area of human life more each day, and sports betting, as well as the fraud committed through it, is no exception. In this era of “fake news” and controversy about and confusion between fact and fiction on social media and in advertising, credibility of data comes into question. Activities that rely heavily on an empirical basis, such as predictive betting on outcomes of sporting events, are particularly vulnerable to the scourge of data manipulation and falsification. Fraudulent identities, records, and news about players and team developments can spread quickly and destructively with the aid of social media, putting the information bettors rely upon on shaky factual ground:  Fake news, manipulated data and the future of betting fraud
  • The state of New Jersey, bolstered by its desire to give a much-needed tourism and gaming business infusion to Atlantic City and its other gambling venues, is leading the charge to legally defeat the nationwide ban on commercial sports betting at the federal level.   The law being challenged is from 1992 and excludes states where sport betting or lotteries were already legal at that time, such as Nevada and Delaware. One of the principal arguments of proponents of rolling back the ban is that illegal sports betting is facilitated in huge volumes all over the country, and legalizing it would serve to bring that activity under regulatory and supervisory authority, and therefore strengthen risk controls and protections for market participants. In the current regime, the vast majority of sports gambling happens in illicit markets which are vulnerable to fraud and scams and devoid of investor protections that a regulated market could ensure and enforce:  Justices Skeptical of Sports Gambling Ban
  • Another motivation to further regulate and supervise sports gambling comes from the potential that criminals could use betting transactions and proceeds, whether legal or illegal, to conceal and process funds from illicit activities. Sports wagering is a cash activity with high volumes and therefore an attractive fit for criminal operations. Money laundering by organized crime enterprises, for example, is often thought of as taking place through match fixing but in reality happens much more frequently through sports betting. Markets and exchanges in which this betting takes place are often not transparent and therefore are susceptible to and useful in manipulation by criminals. In on-going efforts to ensure that the world of sport is cleaner and transparency wins out over anti-corruption forces, focusing on regulating and improving the efficacy of honest sports gambling markets is a key focus of organizations such as the International Centre for Sports Security:  Betting fraud, not match fixing, is main enemy: expert
  • Conmen and scammers also find their marks under the guise of sports betting operations. In the case of Peter Foster, his fraud involved a betting club that he held out to funders as an investment opportunity. This was an international scheme which purported to be an online gambling service but rather functioned as an offshore syndicate operation where investors’ money was moved out of the country and gambling returns and activities were falsified along with the identities and records of the principals allegedly involved in the operation. Claiming hugely successful investments in different major bets and alleging impressive records, all that definitively happened through the Sports Trading Club was that a lot of investors lost their money in a fraud of the type that is repeated over and over again in any business in which trusting individuals can be attracted to give up some of their funds in hopes of winning big through someone else’s management efforts:  Peter Foster implicated in international betting scam
  • Finally, the world of fantasy sports presents a daunting challenge on all of the above themes – unregulated markets, varying user expectations, and diminished participant protections. Fantasy sports, where users assemble hypothetical teams and play against each other in simulated games and seasons, began years ago in grassroots origins, where participants mostly self-assembled into leagues that they administrated themselves. This system pre-dates the internet and was revolutionized by the advent of online, forum-based league play. In the ensuing years corporate interests came into the community and set up corporations that offered daily or weekly play and uncannily resembled gambling platforms, yet were purportedly for entertainment purposes only and therefore escaped the regulatory scrutiny to which gaming or sports book companies would be subjected:  Scandal Erupts in Unregulated World of Fantasy Sports

Check back in two weeks, Tuesday January 2, for the next to last post in this series of five, which will be about game fixing, describing game-throwing conspiracies by players or institutional operations to spy and cheat by teams and coaches.

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Compliance and ethics business case studies

Compliance and social media influencers

Influencer marketing has become a major trend in the advertising industry with the increasing dominance of social media and blog networks in the media landscape. With influencer marketing, brands and their advertising agencies identify the individuals to whom certain demographic groups look to for suggestions on trends or products and services to purchase. These individuals, referred to as “influencers,” then share or produce editorial content for their followers (the people who like or connect to them on social media networks) or engage in the brand’s marketing activities.

Through these sorts of campaigns, both the brands and the influencers hope to gain a non-traditional advantage in appealing to a wider audience. From the brand perspective, they get creative and incredibly targeted content that is produced on a bespoke basis for very specific consumers who are already engaged and interested in the channel through which the content is shared. Through the detailed metrics that are abundantly available via social media and blogs, advertisers can determine which campaigns were successful in spurring either interest or actual sales. From the influencer perspective, they get opportunities to generate paid content and engage with their followers and fans in a novel way. Relationships with brands can be very lucrative for influencers, especially if they become long-term, and can drive significant, much-desired traffic for blogs and social media posts that brings attention to other content the influencer has to offer.

From the above, it is evident that along with all the opportunity comes a complex set of interests which may end up in conflict or give rise to concerns about business practices and accuracy of representations and disclosures. For influencers in particular, blurring the line between the position a follower or a fan, which is even on some networks referred to colloquially as a “friend,” and the position of a customer or a referral, complicates an informal relationship where few duties are owed. Instead, these interactions can occasionally be viewed as a commercial relationship where much more responsibility exists and can be potentially breached.

  • In the United States, the Federal Trade Commission (FTC) is one of those regulators who is contemplating stronger restraints in the practices of influencer marketing. The main area of the FTC’s concern centers on disclosure of the relationships between brands and blogger influencers. Without full, clear disclosures, consumers cannot make reliable, informed choices about purchases they may be influenced to make due to influencer marketing content. The FTC hopes to protect customers from being misled or ripped off entirely by influencer marketing that is targeted to them without providing them with the necessary disclosures for them to make ethical and financially-wise decisions. The FTC has already informed influencers and advertisers that disclosure of relationships between them must be “clear and conspicuous,” with posts that paid promotions clearly indicated as such so that they are not lost within the influencer’s unpaid content that engaging with would not lead to a directly-linked commercial interaction. These regulations have been around for some time, but the extra enthusiasm for enforcing them protectively will have a much bigger impact on the market going forward: Regulating influencers: What retailers need to know about the regulatory crackdown
  • The SEC also has influencer marketing on its regulatory enforcement docket. This is an interesting clash of social media advertising etiquette and investor protection priorities. Companies offering trading of cryptocurrencies have begun to rely on celebrities for endorsements. Much of influencer marketing is done in “testimonial” style, so this medium lends well to a celebrity sharing his or her preferences with thousands or millions of followers. When that preference is for a cryptocurrency investment, however, the endorsement may run afoul of proper disclosure expectations. These regulatory expectations for cryptocurrencies are still evolving, as the market for initial coin offerings (ICOs) is in its infancy still and nearly everything that happens with cryptocurrencies is new, with its impact on banking, the markets, and investors unproven as of yet. Central banks and regulators have taken wildly different approaches in different countries to handling demand for and developments in cryptocurrencies. In the US, this approach has been cautious and restrained, but one area in which the supervisors have not been quiet has been to protect potential investors from advertisements without appropriate disclosures: SEC warns celebrities over endorsing ICOs without proper disclosure
  • Brands and influencers aren’t the only ones who may need to meet a higher disclosure standard when it comes to advertisements that aren’t immediately identifiable as such. Hidden marketing on social media sites as just as insidious as the political advertising that has received so much attention in the press recently. As Congress pushes social media platforms like Facebook to make clearer disclosures about and take more monitoring and control responsibility for the advertisements that appear on their sites, the need to build in protections against deceptive actions by marketers and their partners is urgent as well: It’s not just Facebook’s Russian ads: Hidden advertising is pervasive and growing
  • Social media compliance enforcement will be a major priority for the FTC in this regulatory environment. It should be expected that even within regulatory rollbacks in other areas, the FTC will continue to pay attention to possible non-compliant social media posts and advertisers and their related influencers could be subject to formal enforcement actions. Compared to some other industries like banking or pharmaceuticals, advertising agencies are subject to a relatively sparse supervisory agenda. This light regulatory touch may change dramatically if the FTC chooses to extend and entrench investigation and enforcement efforts on influencer marketing. This is worrying for the influencers as well, who are even less likely than advertising agencies or marketing divisions of brands to have fully-formed compliance programs and to be ready to have the record-keeping and other regulatory controls they may need in place and up to speed: How to Comply with FTC Social Media ‘Influencer’ Rules
  • For more on influencer marketing and the way that brands, advertisers, and influencers may use it to spread content in the future, check out this 2018 forecast for possible trends in the practice, which will in turn dictate the ensuing regulatory priorities, from Forbes: The Influencer Marketing Trends That Will Dominate 2018

Given these potential developments and risks, it is definitely not premature to direct appropriate and pro-active compliance attention to the cultivation and use of influencer marketing networks. Regulatory and supervisory entities are already starting to consider cracking down on various marketing activities in this sphere, and enforcement of disclosure and reporting standards will become robust and should be aided by proper control frameworks.