Tag: culture of compliance

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Trends in business compliance

Round-up on FTC compliance

This is the second in a series of seven posts about regulatory compliance priorities and enforcement trends.  Last week’s post was about the Commodity Futures Trading Commission (CFTC).  Today’s post will be about the Federal Trade Commission (FTC).  On Thursday January 4, the 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 Federal Trade Commission (FTC) is the US regulator charged with supervisory authority to protect consumers as well as enforce antitrust laws to avoid monopolies and ensure competitive business practices. Created in 1914 by the Federal Trade Commission Act, the FTC is an independent regulatory agency with the purpose to monitor the markets for anticompetitive developments and investigate and eliminate those where they emerge. Avoiding monopolies, known as trust, was a major political focus at the time the FTC was created and eliminating these large, anti-competitive business entities, known as “trust busting,” was an important priority for President Woodrow Wilson. The creation of the FTC was intended to bring an administrative efficiency to regulating interstate trade so that these trust and antitrust matters could be determined more expediently by the regulatory agency instead of working their way slowly through the courts.

In its current state, the FTC has broad supervisory authority over business practices where consumer protection or competitive processes are involved. The mandates of its various bureaus include protecting consumers against unfair or fraudulent acts or practices, enforcing existing antitrust laws, and reviewing pending mergers. These issues come from consumer and business reports, pre-merger notice filings, press reports, and congressional inquiries.

The FTC’s enforcement actions extend to individual companies, groups of companies, or industries with the main objective of addressing series consumer fraud or harm and preventing anti-competition business developments. With such a far-reaching set of interests, the issues and focuses that characterize the FTC’s regulatory agenda and enforcement priorities are equally diverse.

  • Consumer DNA testing services and privacy: Companies offering DNA testing services for everything from ancestry to genetic diseases to potential allergies to nutritional needs have become very popular in recent years. Most of these services involve consumers using a kit at home to collect samples of hair, skin, or saliva, which they then send to the company. The company then tests the samples itself or sends them to a third-party lab service for testing and then compiles results and analytical data into a slick, branded presentation that is sent back to the customer to study. If these services were performed in the traditional setting of a doctor’s office, the customer would be treated as a patient and would therefore be afforded commensurate protections and have expectations of privacy and informed consent for the collection, use, and storage of their genetic material. In the retail DNA testing service business, however, the duty owed to consumers is more dubious and the practices of companies less closely supervised or disclosed. As the popularity and prevalence of these tests continues, the FTC will likely look to standardize and investigate business practices of these companies:  Senator Calls on FTC to Investigate DNA Ancestry Companies
  • Use of consent decrees: The public and courts are taking a closer look at the often widespread use of settlement agreements by regulatory entities. The FTC typically uses these in enforcement actions in the data-privacy arena when companies experience breaches that puts consumer information security at risk. Consumers having their data stolen in cybersecurity compromises of payment systems or other retail financial data records. Settlement agreements and consent decrees are meant to apply to individual companies in federal-level, case-specific circumstances only, but the legal precedent has evolved for this common law practice to be potentially applied to establish liability under state law as well. In the continued use of consent decrees, the FTC needs to elucidate clearly what standards apply to constitute a violation and when and where liability may exist:  Federal Court’s Embrace Of FTC Data-Breach Settlements As ‘Common Law’ Treads On Due Process
  • Venue shopping for overlapping antitrust review: As noted in this post, major merger and acquisition activity is at a high pitch in the markets right now. Many large companies are seeking to merge with or acquire another and in lots of cases, regulatory review is exhaustive and detailed. Regulators seek concessions, order sales or exclusions to assets, delay transactions, and influence deals in both the press and Congress. In this intense environment, companies looking to merge with or acquire another approach these transactions hoping for the lightest regulatory touch possible. As there are overlapping supervisory schemes, companies can attempt to shop for the friendliest regulator who might green-light the planned transaction. The FTC and the Department of Justice (DOJ) both conduct antitrust reviews. The perception in the marketplace is that the FTC review may be easier to pass or less burdensome in terms of settlement requirements than that of the DOJ. Therefore some large companies – such as CVS in its planned deal with Aetna – would prefer to be subject to the FTC to improve their odds of passing muster:  CVS likely wants FTC antitrust review, not Justice Department, of Aetna deal
  • Occupational licensing reform: Portability of occupational licenses – such as those required for nurses and accountants – has long-been a challenging political and business issue. States have wildly varying educational and experiential standards for achieving and maintaining these licenses, often making it very hard for professionals who need them to work to move between states that have differing licensure requirements. Military spouses in particular often find themselves shut out of work due to family relocations. On the other end, consumers could be potentially harmed due to unmet expectations for professional service standards in states where the licensing schemes are more lax or supervisory enforcement is inadequate compared to others. Short of a concerted effort by multiple individual states, there is an authority vacuum in the task of making a coherent and coordinated system out of this patchwork of rules, tests, and qualifications. The FTC could be the appropriate regulator to intercede in these circumstances and create a reformed federal unifying system that would function to provide access to work as well as protect consumers’ interests:  The Onerous, Arbitrary, Unaccountable World of Occupational Licensing
  • Net neutrality: Finally, nearly any discussion of US federal regulatory compliance hot topics at the end of 2017 is incomplete without mention of one of the biggest themes of the time, net neutrality. As the Federal Communications Commission (FCC) is pulling back from rule enforcement on net neutrality, both the FCC and the public expect the FTC to take up a more prominent role. The obvious areas where the FTC would have jurisdiction would be those concerning information security, principally data privacy, as well as competitive practices of service providers as well as other digital companies. Time will tell what approach the FTC intends to take in filling this enforcement void:  After Net Neutrality: The FTC Is The Sheriff Of Tech Again. Is It Up To The Task?

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

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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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Administrative

Happy Boxing Day!

Happy Boxing Day from Compliance Culture!

In honor of the holiday, and all the shopping – and payments – that are going on, check out this perspective on how Payment Services Directive 2 will impact the payment services and banking industries in the EU in 2018:  The world after PSD2: Compliant or competitive.

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Administrative

Merry Christmas!

Merry Christmas from Compliance Culture!

In honor of the holiday, check out this article from Vice’s Motherboard on advanced technology efforts to engineer ideal Christmas trees to appeal to consumers:  Scientists Are Creating Christmas Trees That Don’t Shed Their Needles.

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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: Merry Christmas!
  • Tuesday: Happy Boxing Day!
  • Wednesday: Non-compliance of start-ups
  • Thursday: FTC enforcement priorities
  • Friday: TED and TEDx talks on justice and ethics

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 in The Circle

The 2017 movie The Circle, based on the 2013 novel of the same name by Dave Eggers, is about the impact of commercial technology on human life.  It poses common ethical and moral questions about privacy and security in a time of interconnected information sharing via social media and networked devices. The movie is a thriller which centers around a tech giant that offers advanced products and services that have transformed the way people do business and interact with each other by placing all interactions on various platforms and networks with ratings and sharing capabilities.

While the high-tech immersion depicted in The Circle is not yet current reality, technology is developing at a breakneck pace and social media platforms, the Internet of the Things, and services driven by algorithms and other artificial intelligence and machine learning are increasingly ubiquitous with each passing day. At its core The Circle is concerned with overreach of these technologies and the companies that develop and market them, and the ethical problems and moral challenges that can arise from human and societal interaction with them.

  • Secrecy as dishonesty – One of the central philosophical proclamations of The Circle is when the protagonist, Mae, is confronted with a legal transgression she committed and in her reckoning with her actions states, “Secrets are lies.” Mae’s central thesis is that she would not have committed her crime if someone had been watching or aware of what she was doing. Therefore, the suggestion is that secrecy is a form of dishonesty. Disclosure, on the other hand, is the ultimate truthfulness and in this perspective, is valued over privacy. Privacy enables people to lie and conceal, and therefore leads to misconduct and distrust. Individuals giving up their expectations of privacy would supposedly lead to greater overall security and trust. The tension between liberty and safety is not an unfamiliar one in society. The dilemma of which takes precedence will be an on-going and dominant moral dilemma.

 

 

  • Transparency overload – It’s easy to agree that transparency and openness encourages honesty and communication. Clear and public disclosure of organizational activities and values provide strong incentives for making the best ethical decisions and keeping integrity in mind when planning business strategy. However, the admirable mission of transparency is subject to subversion, as The Circle Claims of public transparency can be selective, creating an impression of a company that values openness and progressive values when in reality it is picking and choosing disclosures while hiding malfeasance and abuse behind this self-selected façade. Also, going too far in claiming transparency on a personal level can be too much of a good thing. As above, the tension between personal privacy and public disclosure is a delicate balance which must be worked thoughtfully.

 

 

  • Surveillance and consent – In promotion of corporate and societal values of transparency and shared disclosure, the company in The Circle introduces a service where tiny cameras are embedded everywhere out in the world. Some of the cameras are installed intentionally by users who wish to share, but others are placed in a variety of public locations without notification or permission to do so. The video streaming from the cameras are publicly available online for searching, indexing, and manipulation. While being able to see a high-definition and flexible feed of the surf at a beach is appealing for a number of reasons, cameras everywhere in public, regardless of their utility or entertainment value, can also be used by both private and public concerns to conduct surveillance. As these cameras are in some cases posted without consent or knowledge, this surveillance is vulnerable to unintended uses and can represent, as above, serious risks to personal rights and privacy expectations.

 

 

  • Cybersecurity – The company in The Circle develops, markets, and sells a technology service. Therefore the people who buy what they market are not only purchasers or customers but also users. They have heightened expectations and rights for protection by the company as such. Not only is the extent to which their data is collected by the company questionable (even when the users are intentionally sharing it in an excessive or imprudent manner), but the company also is obligated to store it, and may violate individuals’ rights by viewing it, accessing it, analyzing it, or not keeping it safe from intrusions by and alterations, deletions, or other misuses of, its employees or third parties. Cybersecurity risk management is a huge challenge for a company such as this one, which is clearly putting its commercial and societal ambitions over any fundamental value of information security that is discernible.

 

 

  • Unethical decision-making – While the titular company in The Circle repeatedly suggests that transparency can be a force for good and should be leveraged for this purpose by the widespread use of what boils down to be surveillance technology, reality of how humans use this technology show that its use and influence is not straightforwardly positive at all. Quite to the contrary, on many occasions in the movie disclosures and discoveries due to the technology are harmful to individuals and relationships. Despite the desire to incentivize honesty and normalize total disclosure, people end up getting hurt, both because of their own overzealous adoption of the technology and of the actions of others. In the most dramatic example of this, a person dies due to a series of events kicked off by a crowd-sourced surveillance operation performed at a company demonstration of their new service. Unethical decision-making, both in questionable design ethics by the organization and in immoral behavior by user-individuals, directly causes these tragic and disturbing events.

 

 

There are many ethical and moral dilemmas posed by availability of advanced technology which can encroach about privacy, security, and consent of individuals. Transparency, surveillance, and risks to information security and from cybersecurity are all common themes of The Circle as well.

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Trends in business compliance

Round-up on the humanity of artificial intelligence

Human fascination in, and even obsession with, robots is nothing new. For many years people have imagined distant versions of the future where human interaction with different types of robots, androids, or other robotics products was a routine part of life both at work and at home. Sometimes these forward-looking scenarios focus on convenience, service, and speed. Much more often, however, when asked to contemplate a future with ubiquitous artificial intelligence (AI) technology imbedded alongside humans, thoughts stray into possible troubling or dark impacts on society. People worry about loss of humanity as technology predominates, or the possibility that robots could be misused or even gain sentience and have intentions to work against or harm humans.

In the past these scenarios, both of the positive advancement of society and of the potential for isolating, dangerous dystopia, were mostly relegated to science fiction books, Hollywood blockbuster movies, or what were seen as overactive imaginations or paranoid opinions of luddites. Now, however, the news is full every day of developments in AI technology that bring the once-imaginary potential of robots ever closer to present reality.

As technologists and business organizations consider the utility of advancement in AI, ethicists and corporate compliance programs must also consider the risk management issues that come along with robots and robotics. Technology which will have such a broad and deep impact on human life must be anticipated with thoughtful planning for the compliance risks which can arise. In particular the potential for sharing human traits with AI technology or imbedding AI technology in place of human judgment present provocative challenges.

  • Anticipating increased interactions with androids – robots that look like humans and can speak, walk, and otherwise “act” like humans would – leads to the logical question of will humans have relationships with androids and vice versa? This would be not just transactional interactions like giving and receiving directions, or speaking back and forth on a script written to take advantage of or increase machine learning within the android. Rather, this could be intimate, emotionally-significant exchanges that build real connections. How can this be when only one side of the equation – the human – is assumed to be able to feel and think freely? While technical production of robots that appear credibly human-like is still beyond the reach of current science, and giving them a compelling human presence that could fool or attract a human is even further away, work on these tasks is well underway and it is not unreasonable to consider possible consequences of these developments. Will humans feel empathy and other emotions for androids? Can people ever trust robots that seem to be, but aren’t, people? Will the lines between “us” and “them” blur? The burgeoning field of human-robot interaction research seeks to answer these questions and develop technology which responds to and considers these tensions.  Love in the Time of Robots 
  • On a similar note, when could machine learning become machine consciousness? Humans have embraced the usefulness of AI technologies which become smarter and more effective over time after they are exposed to more knowledge and experience. This is a great argument for deploying technology to support and improve efficiency and productivity. Everyone wants computers, networked devices, and other products that use advanced technology to work more accurately and easily. Machine consciousness, however, suggests independent sentience or judgment abilities, the potential of which unsettle humans. From a compliance and ethics perspective there is an extra curiosity inherent in this – what will be the morality of these machines if they achieve consciousness? Will they have a reliable code of ethics from which they do not stray and which comports with human societal expectations? Will they struggle with ethical decision-making and frameworks like humans do? Or will human and human-like practical ethics diverge completely?  Can Robots be Conscious? 
  • In 2016, David Hanson of Hanson Robotics created a humanoid robot named Sophia. At his prompting during a live demonstration at the SXSW festival, Sophia answered his question “Do you want to destroy humans?… Please say ‘no’” by saying, “OK. I will destroy humans.” Despite this somewhat alarming declaration, during the demonstration Sophia also said that she was essentially an input-output system, and therefore would treat humans the way humans treated her. The intended purpose of Sophia and future robots like her is to provide assistance in patient care at assisted living facilities and in visitor services at parks and events. In October 2017, Saudi Arabia recognized the potential of the AI technology which makes Sophia possible by granting her citizenship ahead of its Future Investment Initiative event. A robot that once said it would ‘destroy humans’ just became a robot citizen in Saudi Arabia
  • The development of humanoid robots will certainly become a bioethics issue in the future as the technology to take the human traits further becomes within reach. While there are so many compelling cases for how highly advanced AI could be good for the world, the risks of making them somehow too human will always be evocative and concerning to people. The gap between humans and human-like androids is called the uncanny valley, the space between organic and inorganic, natural and artificial, cognitive and learned. The suggestion that the future of human evolution could be “synthetic” – aided by or facilitated in the development androids and other robotics – presents a fascinating challenge to bioethics. Are humanoid robots objects or devices like computers or phones? It is necessary to consider the humans and androids in comparison to one other just as it is humans and animals, for example. This ethical dilemma gets to the root of what the literal meaning or definition of life is and what it takes for someone, or something, to be considered alive. Six Life-Like Robots That Prove The Future of Human Evolution is Synthetic
  • One of the potential uses of AI technology which worries people the most is in autonomous weapons. The technology in fact already exists for weapons which can be used against people without human intervention or supervision in deploying them. Militaries around the world have been quick to develop and adopt weapon technology that uses remote computing techniques to fly, drive, patrol, and track. However, this established use of this technology is either for non-weaponized purposes or, in the case of drones, deployment of weapons with a human controller. Fully automating this technology would in effect be giving AI-powered machines the decision-making ability that could lead to killing humans. Many technologists and academics are warning governments to consider preventing large-scale manufacturing of these weapons via pre-emptive treaty or other international law.  Ban on killer robots urgently needed, say scientists

As the diverse selection of stories above illustrates, the reach of robots, robotics, androids, and other developments within AI technology are certain to permeate and indeed redefine human life. This will not be in the distant or unperceived future. Rather, real impact from these advancements is even already starting to be seen, and there is only more to come. Governments, organizations, and individuals must make diligent risk assessment preparations to integrate this technology with human life in a harmonious and sustainable fashion.

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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.