Practical insights for compliance and ethics professionals and commentary on the intersection of compliance and culture.

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.

 

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Round-up on compliance issues with blockchain technology

One of the hottest topics of 2017 is blockchain. This advancing technology is seemingly the possible solution to every business problem conceivable. Companies across all industries – as diverse as banking to food production and seemingly everywhere in between – are experimenting with how they might be able to use blockchain to make their reporting and related processes more reliable or efficient. Many are even contemplating how they may take advantage of blockchain to market software applications to other companies, hoping to enter the profitable fintech (financial technology), regtech (regulatory technology), or suptech (supervisory technology) markets.

But what is blockchain? Most famously, it is the core technological component of the well-known cryptocurrencies, such as Bitcoin or Ethereum. Simply put, blockchain is an open list of records (which comprise the “blocks”) which are securely linked together with cryptography. As the blocks are all linked together and independently identified with references to their linked blocks, the data contained therein is extra safe from individual manipulation or alteration. This is a decentralized computing system which is incredibly useful for recordkeeping and records management activities, especially those where security is especially important such as identity management and medical records.

Due to the broad desirability of a secure and adaptable record maintenance technology, blockchain, which was initially developed only less than a decade ago, has been a disruptive influence in many industries already. Across all business areas, companies are looking to blockchain for possible benefits, all relevant to compliance, to their reporting processes.

  • Transparency for pension fund reporting is one major potential use of blockchain. Following the Madoff scandal and other highly-publicized frauds in the investment management industry, there has been more pressure than ever in expectations for investor protection and reporting disclosures. Many pension funds have balked at public and supervisory demands for increased transparency due to the cost concerns for implementing additional reporting mechanisms in balance with very low profit margins. This reaction does not help to enhance trust between investor clients and this fraud-vulnerable industry. Therefore the decentralized, secure nature of blockchain offers appealing opportunities for filling this confidence vacuum. Blockchain-based platforms can get investors access to their own pension information without fears of data manipulation or increased cost burden on firms: How Blockchain is revolutionizing fraud prone industries
  • On a related note, banks and other financial institutions have borne much of the competitive pressure blockchain has created with the advent of cryptocurrencies – but they also stand to benefit from this, if they can make the best of it. Cryptocurrencies such as Bitcoin are a compelling alternative to the centralized, traditional banking system for customers who desire extra security or anonymity. While cryptocurrencies have been traditionally depicted as a safe haven for illegitimate or even illegal payment activities, the mainstream attention on them has created a broader appeal and audience for them. As a response to the interest their customers have shown in cryptocurrencies, banks have started to delve into the potential for the blockchain technology. Some has invested in tech start-up companies concentrating on various blockchain applications while others have delved more deeply into relationships with fintech partners. At this point banks’ proprietary efforts have mostly been restricted to in-house research on potential use of blockchain, but inevitably competitive momentum will start to drive larger institutions toward developing their own projects in this space. These developments are likely to encourage efficiency, inspire leaner and more innovative business models, and serve the regtech and suptech goals of increasing cooperation with regulatory authorities. Ultimately this could help to modernize and improve the persistently staid and legacy-driven banking industry into a bolder and more transparent business model:  How banks and financial institutions are implementing blockchain technology
  • The advertising industry is newly subject to regulatory scrutiny with the upcoming EU privacy directive, the General Data Protection Regulation (GDPR). This law will apply to any organization doing business in, using technology in, or targeting the citizens of, any EU country, so it has a broad global reach. The GDPR will impose new requirements for handling and controlling private data, including protective and disclosure obligations. Therefore blockchain-based solutions, which can be both secure against manipulation or leakage, and distributed with open access so that users making disclosure requests can see the information directly for themselves. This will help to reduce the burden of this reporting as well as improve cost margins rather than coming up with expensive and vulnerable in-house solutions or outsourcing the reporting to third-parties with their own attendant risks: How Blockchains Can Help the Ad Industry Comply With the GDPR
  • Commercial aviation is another industry looking to blockchain systems to help with its risks – this time in cybersecurity management. Airlines and support companies rely a lot on IT systems to do everything from fly and direct aircraft to book and manage passenger travel. These systems are highly imperfect, as system outages and computer crashes that lead to flight cancellations and stranded passengers show in the news each year. They are also vulnerable to cybersecurity risks where intruders could breach personal data, disrupt airline operations, or corrupt and steal client and aircraft information. Storing and protecting this data within vulnerable or old/legacy systems poses many cybersecurity challenges. The concept of tamper-proof blockchain technology is therefore compelling to the aviation industry for these obvious reasons. Blockchain could help to keep operational data safe and protect companies from cyberattacks. More importantly, pressure to adopt it could drive aviation companies to make the difficult yet very important technological updates and improvements to their systems which will serve safety and regulatory concerns alike: How Blockchain, Cloud Can Reinforce Cybersecurity in Commercial Aviation
  • The pharmaceutical industry has long been vexed by inaccurate and unreliable supply chain tracking. It is especially vulnerable to stolen and counterfeit medication entering the supply chain untracked and finding its way to patients, putting their safety at risk. Tracking medicine with blockchain could change all this. A consortium of pharmaceutical companies, including major firms Genentech and Pfizer, are already collaborating together on a tool called the MediLedger Project, which seeks to manage the pharmaceutical supply chain and track medicines within it to ensure that drug deliveries are recorded accurately and transparently. This would take the current complicated and inefficient network of software management in the supply chain to the next level, securing the supply chain with an integrated and decentralized blockchain system. It could also enable sharing of essential information from companies to partners and customers without exposing sensitive business information, a challenge in the industry so far: Big Pharma Turns to Blockchain to Track Meds

There are many potential advantages from a compliance perspective to blockchain, which has the potential to enhance transparency, protect privacy, address various process-driven risks, and strengthen cybersecurity controls, among other benefits. As the technology advances time will tell how broad the applications of blockchain may be across these diverse industries with similar needs for compliance risk management.

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