Fraud in sports: Thru-hiking fakers

This is the second in a series of five posts on the topic of fraud in sports. The first post, from December 5, was about marathon cheaters and how they are publicly investigated and exposed. Today’s post will be about imposters and scammers in the world of thru-hiking, a hard-core and tight-knit community of athletes who long-distance hike with the objective of completing a major trail end-to-end at once. Next Tuesday’s post, on December 19, will discuss fraud in sports gambling schemes, including those committed by players and to induce people into fraudulent investment vehicles. On December 26, the next to last post will be about game fixing, describing conspiracies by players to throw games or systemic spying and cheating operations by teams and coaches. The final post in the series, on January 2, will discuss fraud in sports via doping scandals, such as in the Olympics and the Tour de France.

Thru-hiking is the endeavor of hiking a long-distance trail in full within one hiking season. In the United States, there are three main trails where these attempts are made: the Appalachian Trail, the Pacific Crest Trail, and the Continental Divide Trail. Thru-hiking these trails can take months, passing through all kinds of remote trail and difficult weather conditions, and requiring immense planning and preparation to do so safely and with proper equipment, provisions, and support. Adjacent to thru-hiking is section-hiking, in which hikers complete parts of the same trails methodically over a longer period of time. Because of the intense nature of this activity, and the survivalist needs of the participants who camp rough along the trail and crowd-source information about conditions and news from both the outside world and further down the trail, tightly bonded communities of hikers form.

In this insular community comes a lot of trust and reliance on people’s credibility and honesty. People share materials, hike sections relying on each other’s planning and information about conditions, help each other when they are out of money or food, and generally work together to stay safe and make progress in their individual and collective efforts in the thru-hiking process. In such an intimate social group, reliance on honesty creates unfortunate opportunities for people to commit fraud and carry out scams. Sometimes these acts of dishonesty take advantage of other hikers, whereas others falsify accomplishments or misrepresent setting records.

  • In summer 2017, the story of an inspiring thru-hiker began making the rounds on social media, even receiving publicity in the press and coverage on television news. Stacey Kozel was portrayed as a hero for completing both the Appalachian Trail and the Pacific Crest Trail as a paraplegic with lupus. Unable to use her legs unassisted, Kozel relied on specially-designed braces that allowed her to not only walk, but miraculously walk long distances. However, much like the case of marathon cheaters, the online community of thru-hikers and those who support and follow them soon became skeptical to her claims about her achievements. Thru-hikers operate on a quasi-honor system, without a self-regulatory organization to administer verification and investigation efforts when individuals proclaim that they have completed hikes or set records. However, a robust independent community exists on forums online and that community relies upon much of the same data used by marathon runner authenticators – GPS data, photographs, witnesses, and other real-time physical evidence. No one could remember seeing Kozel on most of the trail, and encounters she should have had with other hikers in rest and communal areas were totally lacking. The photographs of Kozel were mostly only taken at trailheads or other area relatlvely easy to access by driving and then walking a short distance. Kozel reiterated her claims that she did the thru-hikes, but did not stand up to continued scrutiny, and she subsequently removed most of the coverage of her purported hike from the internet. One of Kozel’s possible motivations for pretending to do the hike could have been to get publicity for her leg braces, as she stated that she wanted to be an inspirational user of them and to encourage insurance companies to cover them: How Did No One Notice This Inspirational Hiker On The Pacific Crest Trail?
  • Taking the endurance sport of thru-hiking to an all-new level, there are some individuals who take an ultra-marathon approach to completing the trial. These people aim not only to complete the trial in one go, already an audacious task, but to do so as quickly as possible, in pursuit of a record known as Fastest Known Time (FKT). In 2016, Kaiha Bertollini claimed to have set a huge FKT on the Appalachian Trail. Her announcement of her achievement was shortly followed by major doubts and dissension. Bertollini did not have a support crew, was seen drinking and smoking on the trail or even taking “zero days” where she did not hike at all despite her claim of a lightening-fast finish time, and did not produce the proof and documentation demanded by the community, claiming that her phone that held the evidence was broken. Claiming an achievement like a FKT without the requisite evidence in the 21st century, with the community’s obsessive demand for proof and data easily satisfied by all the recording capabilities technology affords, is sure to arouse criticism and mistrust: The Problem with Claiming a Fastest Known Time in the 21st Century
  • Further in the challenges of the concept of validating FKTs, the popular doubts about claims of setting records suggests that there may be some need for a more robust and reliable authentication system. As the sport grows in popularity and recognition, the unofficial arbiters of the records may need to become at least somewhat more official. In their early days, ultramarathons were plagued by the same questions about reliability of their results, as informality and athlete-driven timekeeping reigned. However, most ultramarathons now are governed by some administrative entity or a race organization, and they typically have reliable, consistent rules about the type of data that is accepted to substantiate authenticate and prevent concerns about alteration or falsification. The time could be near for thru-hiking and FKT attempters to follow suit: We Need to Re-Evaluate the Fixation with Fastest Known Times
  • On a different note, one of the reasons why most people know anything all about thru-hiking or about the trails on which it happens is because there have been several very popular books and film adaptations about the attempts of amateurs to join the sport. Two of the most famous of these books (with movies based on both) are Bill Bryson’s “A Walk in the Woods” and Cheryl Strayed’s “Wild.” These books, depicting thru-hiking attempts on the Appalachian Trail and the Pacific Crest Trail respectively, are both bestsellers and have fascinated readers with their depictions of the authors’ amusing and emotional attempts to immerse into the lifestyle of the thru-hiker. However, a careful contemplation by a real thru-hiker would lead anyone to likely conclude that neither of these authors truly thru-hiked or accurately depicted the experience of having done so. In all cases, the authors wrote interesting, engaging books, mostly appealing emotionally to the readers by retelling the tales of their lack of preparation and overwhelmed reactions to the hike. In the end, they often had to reduce their efforts and could not meet their ambitions. Their books are more about this than they are about actually thru-hiking, and therefore they may reproduce conversations or thoughtful revelations truthfully, but the descriptions of the trails themselves, which induce many other amateur hikers to embark on journeys of their own, are perhaps not so faithful: Why the Most Popular Hiking Memoirs Don’t Go the Distance
  • Finally, a tale of an imposter scammer who chose the trusting and supportive community of thru-hiking to execute his cons: Jeff Caldwell is a serial scammer who operated for many years in the outdoor community, posing as a thru-hiker and taking advantage of fellow thru-hikers and people to whom he appealed because of this identification. He used his false accomplishments as a thru-hiker to pull off romance scams. He claimed he had completed what is known in the thru-hiking world as the Triple Crown – thru-hiking the Pacific Crest Trail, the Continental Divide Trail, and the Appalachian Trail. These assumed bona fides gave him credibility in the community and made his victims easier to befriend and defraud: Inside the Mind of Thru-Hiking’s Most Devious Con Man

Check back next week, Tuesday December 19, for the third post in this series of five, which will be about fraud in sports as illustrated in sports gambling.

Compliance and MLMs

Although multi-level marketing companies (MLMs) have been selling products and services via “distributor” networks for years, they have shot to prominence in the aftermath of the 2008 global financial crisis. In reaction to long-term unemployment or under-employment and systemic, structural changes to the labor market in many communities, non-traditional workforces such as the non-employee, commission-only participants in MLMs have become more common than ever before in the United States.

MLMs all determine their own compensation scheme and marketing and recruitment strategies, but they do share some similarities with the way they brand themselves and communicate. They operate in diverse industries, from nutrition and fitness/wellness to fashion apparel to jewelry to housewares, but they all are organized around a pyramid-shape commission system, where participants at the top recruit and make residual income from the participants below them on a sliding scale. These business also all rely heavily on worth of mouth marketing, both to sell the products or services on offer as well as to recruit new participants to fill out the levels of the pyramid.

Because of this operation style, MLM participants are expected to promote the products and the company itself very eagerly, often expressing the financial freedom and flexibility that the non-traditional working arrangement has granted them in unstable times and portraying the MLM company as a self-employment or entrepreneurship opportunity. These portrayals are particularly effective with the aid of social media and are prevalent in communities where social connection and employment consistency may be hard to achieve and sustain, such as stay-at-home parents, military spouses, or people who need to work from home for medical or personal reasons.

While some MLMs certainly do offer popular products and present an opportunity for participants to earn at least some income, studies have shown that most participants make no money from their involvement or even lose money due to sunken costs of inventory and personal products they buy and do not or cannot sell. Questions are rampant as to whether many MLMs are pyramid schemes, scams that purport to sell products or services but really just recruit members in order for them to recruit other members.   These schemes are often illegal and seen by many as immoral due to the misleading or even fraudulent representations made to participants to get them to spend money, join, and continue making investments.

  • As noted above, one root cause of the popularity of MLMs in the current economy is the struggle of many communities for economic opportunity post-financial crisis. Rural communities, for example, were especially hard-hit by the crisis and have not experienced a fully-realized economic recovery in the following years. To these individuals, joining an MLM appeals because it promises freedom for family time, quick income, and an “American dream” lifestyle that is otherwise far out of reach. This version of the MLM business model is laser-targeted to women in these rural areas who did not work before the financial crisis or don’t work now and seek economic freedom and community, as well as the allure of fun products such as nail decals or whimsically patterned leggings. These companies hawk a message of women’s empowerment and female entrepreneurialism matched with a do-it-yourself dream of financial success. Unfortunately, many of these people enter into these businesses by getting into debt and are never able to recoup their initial investment let alone make money for it that could justify the effort and hours spent. Most disconcertingly, many of the participants enter without any risk disclosure from the MLM company:  Multilevel-marketing companies like LuLaRoe are forcing people into debt and psychological crisis
  • This New Yorker piece goes into greater detail about the ways that MLMs play up the aspirational nature of their branding to recruit participants who join unaware of the attendant possible risks. In this case, companies such as DoTerra market aromatic oils to which all kinds of medicinal properties are ascribed without any regulatory or legal legitimacy to reinforce this. Participants in these MLMs often claim that their suffering from psychology, physical, and other medical problems have been almost miraculously addressed by using the products they are selling. The companies operate in a gray area of not giving medical advice but nonetheless suggesting that the products can help with health or lifestyle problems, creating an echo chamber where customers and participants assure themselves that they are both sick and able to be cured by buying expensive essential oils and other homeopathic, non-regulated products: How Essential Oils Became the Cure for Our Age of Anxiety 
  • Here’s yet another perspective on how female participants have been manipulated through MLM company marketing and social media to stake their financial well-being on unattainable goals of personal enfranchisement and economic success. In their efforts to reach toward these goals, participants often find themselves instead in over their heads, without proper training or sufficient expertise selling products that are not regulated, effective, or sometimes even safe:  How Women Making Men Rich Has Been Misbranded As Feminism
  • MLM participants aren’t only at danger of fraud, misrepresentation, and other risks from the companies for which they are sellers. In a commercial market run by independent sellers and conducted via person to person sales, often online and even on social media, sellers are vulnerable to disputes with customers. Buyers can be fraudulent or even predatory and sellers often find themselves out on both the product and their money. MLMs such as LuLaRoe often do not step in to intervene on behalf of their representatives, who have a consultancy relationship with the company and therefore are not afforded the same protections as employees might be. The style of selling is overwhelmingly casual, social marketing conducted via comments on pictures on social media or at parties, making direct salespeople especially susceptible to scammers:  Do MLMs Protect Their Online Sellers From Fraud?
  • Since 2012, hedge fund manager Bill Ackman has been embroiled in an ongoing dispute with Herbalife. Ackman has spent years shorting Herbalife in hopes that its stock price will be driven to zero by public and regulatory identification of the company of a pyramid scheme. Due at least in part to the publicity generated by Ackman and likeminded individuals, in 2016 Herbalife settled with the Federal Trade Commission to resolve their charges that the company had made deceptive disclosures to distributors who lost money. As part of the FTC settlement, Herbalife agreed to provide evidence that its products are being sold to actual customers and not just participants within the pyramid who are funding their own involvement and keeping the façade going to recruit new people underneath them. The standard this settlement sets for the MLM industry, should the FTC keep pace with investigation and enforcement priorities in this, could greatly complicate the way these companies operate: Herbalife Deal Poses Challenges For The Industry

To find out more about MLMs, how they have become so ubiquitous in today’s employment market, and the risks they pose to participants and the economy in general, check out the great piece from a 2016 episode of Last Week Tonight with John Oliver.

Fraud in sports: Marathon cheaters

This is the first of a five-part series discussing fraud in sports. This starts with today’s post which will discuss runners who have been publicly exposed as cheaters in marathons. Next Tuesday’s post will be about imposters and scammers in the world of thru-hiking, a popular endurance sport where people long-distance trail hike in areas like the Appalachian Trail in the Eastern United States or the Pacific Crest Trail which stretches from California to Washington. On Tuesday December 19, the third post will be about sports fraud via gambling, including betting by players and illicit investment schemes. The fourth post on December 26 will be about game fixing, such as the Black Sox Scandal in which several players on the Chicago White Sox conspired to throw the World Series. The fifth and final post, on January 2, will be about major doping scandals, including Lance Armstrong and allegations of systematic doping by the Russian Olympics delegation.

Marathon cheating is a phenomenon that has both fascinated and infuriated running commentators. In a community which is fixated on qualifying times, personal bests, and self-identifications as hobbyist or elite runners which can be separated by mere seconds of pace time, honesty about runner times and speeds is sacred.   In this context, runners who cut courses short, falsify results, or claim publicity for false achievements, undermine the most fundamental measures of success in the marathon running world.

  • In the 1980 Boston Marathon, Rosie Ruiz, a 26-year old New Yorker, finished first among the female runners with an impressive time of just over two hours and thirty minutes. In the face of her amazing accomplishment, Rosie was nonplussed and composed – probably because she cut the course and did not run the 26.2 miles. Ruiz had her medal revoked when other runners stated that they witnessed her running onto the course at mile 25. It turned out that she exited the marathon course near the beginning and took the subway there, where she re-entered and claimed a false victory. Upon investigation, it was discovered that Ruiz’s Boston qualification time, run in the 1979 New York Marathon (her only other marathon before), was fake also, achieved because Ruiz again cut most of the course by riding the subway to re-enter near the end. Ruiz’s fraud rocked the marathon running community, in which road racers had a strong honor code that they felt was pure and safe from cheating that had afflicted sports with equipment or environments that could be altered or adjusted for cheating: Backtalk; 20 Years Later, the Legend of Rosie Ruiz Endures
  • Kip Litton intended to be well-known far outside of his social circles in Clarkston, Michigan as a champion marathoner. However, he has gained notoriety for a different accomplishment in marathon running entirely: prolific misrepresentation of his results and of races run. As Litton shot to the head of the pack in a number of small marathons, his fellow runners became confused by and curious about his quick rise to the top. By investigating race photographs and triangulating his likely performance based upon verifiable race times and per mile paces from previous chip-timed runs, other runners discovered that Litton was falsifying his performance. He was able to pull off this fraud by strategically picking races where he could cut courses or claim to have run qualifying times without even participating at all. The evidence of Litton’s misconduct assembled by the amateur investigators is fascinating and pathological in its devotion to his fraud, even amid Litton’s disqualifications from various races after inconsistencies were pointed out to directors: Marathon Man 
  • Social media has provided a fertile environment for inventive marathon cheating. Legitimate runners who share photos showing their bibs, the identifying numbers that runners wear pinned to their chests or backs during the race, have had those photos stolen and used for bib replication. Runners then use the fake bibs to “bandit,” or run incognito and illicitly, at races. This could be to avoid paying registration fees, to falsify qualifying records, for a prank, or for a creative type of identity theft. As discussed above, the runner community is vigilantly self-policing, and the fascination with these bandits leads to far-reaching vigilante investigations and reporting to race administrators to “out” cheaters:  Inside the Weird World of Social Media Marathon Cheating 
  • The 2017 Mexico City Marathon was mired in scandal when almost 6,000 runners, nearly 20% of the field of 29,000 runner, were disqualified for cheating. Investigation showed that many runners missed timing mats. Others, however, blatantly cut the course, either by riding the subway (harkening back to Rosie Ruiz in New York in 1979 and Boston in 1980) or “bib mules,” runners who wear bibs intended for other runners who do not compete at all, in order to falsify their results (typically to post a qualifying time for Boston or another exclusive race). What exactly happened in Mexico City remains unclear, but it seems to have been a combination of opportunistic runners who took advantage of technological difficulties or shortcomings at the race, and runners cutting the course short by missing timing mats. Such a dramatic disqualification rate should lead the Mexico City organizers and indeed anyone who is behind setting up and administrating a major race event to take a deep look at their internal controls and ensure that future races are set up to diminish the possibilities for going off-course or bandit running:  What the Hell Happened at the Mexico City Marathon?
  • For runners who achieve their results legitimately, race day represents many months or even years of hard efforts brought to fruition. Therefore, for serious runners, cheating and falsifying results is a real insult to all of their work and cheapens the prestige they seek of a credible accomplishment. Therefore many marathon runners who are active in the online communities such as the LetsRun forums take their annoyance or offense at this perceived dishonesty to the next level, launching widespread investigations into uncovering and calling out impropriety. Many runners who do not cheat see those who have cut courses or faked times bragging online, promoting themselves via social media, and their outrage at these actions speaks to the philosophical morality of running. At its most elemental level, and despite the many data-driven external successes one can achieve in the sport, running is a pursuit of internal success, a battle within the self for endurance and accomplishment. Cheating hinders and harms this. People who investigate and call out cheaters hope that they are working as deterrents to runner dishonesty as well as acting as a sort of informal self-regulatory organization for the running community: How to Catch a Marathon Cheat  

For a lot more fascinating examples of and insight into marathon cheating, check out the site Marathon Investigation. Run by Derek Murphy, a business analyst, marathoner, and running fan, the site is a comprehensive survey of impropriety and cheating at marathons all over the world. It offers a really compelling look into the analytical and research aspects of investigating and tracking potential cheaters by using historical data, GPS records, published running times, maps, race photos, and much more publicly available data. For more about Murphy and his motivations and methods, read this profile.

Check back next week, Tuesday December 12, for the second post in this series of five, which will be about fraud in sports as illustrated by thru-hiking fakers and scammers.

Tips for conducting compliance investigations

The task of a compliance officer is not to “set it and forget it.” Apart from planning and advising on risk management strategies, and monitoring business implementation of the attendant policies and procedures, compliance professionals must remain vigilant about the potential for violations. Internal compliance violations can run the causal gamut – they could be because of internal controls failures, unwitting omissions due to lack of awareness, or outright misconduct and malfeasance.

Compliance officers should approach an investigation into a compliance exception thoughtfully and with careful preparation. If the planning for or administration of the investigation is flawed from the beginning then the investigation results will not be reliable. In many fields, such as scientific research, planning investigation tactics and strategy is a discipline all of its own, demanding special expertise in statistical methodology standards.

For purposes of the internal investigations of compliance officers, a common-sense approach, focused on fairness and transparency, can take the place of technical expertise in conducting informal internal investigations that will still generate reliable and meaningful results. Compliance professionals should keep the following fundamental themes in mind when designing an investigation effort:

  • Reject foregone conclusions: Compliance investigation inquiries can be sensitive and intimidating. Most people do not want to do the wrong thing and will be worried or even frightened by the possibility that they have broken rules or regulations. They will fear that their jobs are at risk or worry about the reputation of the company due to the misconduct. Therefore, take the investigation seriously, even if its scope is limited or it’s routine. Don’t decide the outcome before the information is gathered. Investigations should be motivated by intellectual curiosity, in the case of annual or planned investigations, or, in the case of ad-hoc or event-driven investigations, an objective desire to protect and promote integrity, which knows no master.
  • Work carefully: Sloppiness and poor preparation will doom an investigation from the beginning. Compliance professionals should work carefully and check their work as they go along. Simple errors such as directing queries to the wrong recipients or asking for information that is out of scope of the investigation can cause a terrible impression with stakeholders and disrupt the efforts of the investigation.   Communication is key, and information communicated to all parties throughout the investigation should be accurate, clear, and appropriate at all times.
  • Give support, not interference: Compliance often collaborates with other functions such as HR, Legal, and Risk; this collaboration should be encouraged, not complicated or avoided. In planning investigation strategy, work together with partners and stakeholders whenever possible (legal privilege and confidentiality, where it applies, must of course always be respected). Sharing information helps to make conclusions stronger and to avoid inefficient duplication of efforts.
  • Follow through with enforcement when misconduct is evidenced: Investigations are toothless when the results are just put on a shelf and forgotten. Enforcement action must come next, and in every outcome, there is appropriate follow-up. In instances where misconduct is discovered, whether it is from negligence or intentional wrongdoing, disciplinary action should be taken with concrete consequences. Substantive structural changes should be made also the risk control framework to seek to prevent or identify earlier the non-compliant behaviour whenever possible. Punishing the wrongdoer is not enough; addressing the root causes of the wrong-doing has to happen too.
  • Feed-forward when no malpractice is discovered: Not every investigation will be an open and shut case where there are good people and bad people and everything wraps up neatly. It may be that the investigation yields no evidence that anything material happened. It’s also possible that the investigation would show some unrelated deficiencies, such as in communication strategies or employee awareness. Finally, the investigation could produce inadvertent lessons for the compliance officer him or herself to take back to a future risk assessment and planning session. Whatever these conclusions are, don’t discard them just because they don’t lead to a punitive action. Feed them forward into risk controls improvements and future compliance program efforts.

Compliance officers who consider the above suggestions in planning their own investigation strategy will be focused on obtaining neutral, credible information. They will communicate clearly and engage stakeholders supportively. Enforcement actions stemming from the investigation efforts will be pro-active and productive. With these approaches, compliance officers can establish credibility and effectiveness in conducting internal investigations.

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.

Whistleblowers in the pharmaceutical industry

This is the second of a three-part series profiling whistleblowers in different industries. This started with last Tuesday’s post looking at the financial services industry, including UBS, HSBC, and Citigroup. Today’s post will be focused on the pharmaceutical industry, looking at whistleblowers who exposed fraudulent sales and marketing practices, ethical issues in the development and research phase, and more. The third and final post in this set on next Tuesday will be about whistleblowers who exposed high-profile corporate fraud in major companies such as Enron and General Electric.

Whistleblowers in the pharmaceutical industry make an important contribution to protecting consumer safety when they come forward to raise concerns about business practices in their organizations. Corporate misconduct in this industry has direct impact on patient care and individual health. Therefore the actions of whistleblowers can serve to not only shed light on fraudulent or abusive actions by organizations or individuals within them, but also to prevent future harm to scientists and researchers working in the business, third party partners within their supply chain, and end-user consumers.

  • Jim Wetta, AstraZeneca: Jim Wetta was a sales employee at AstraZeneca who blew the whistle over misleading marketing practices for the antipsychotic drug Seroquel. AstraZeneca had been approved by the US Food and Drug Administration only for treatment of schizophrenia and bipolar disorder. However, the company took on a major sales effort to market Seroquel for off-label use by children under the care of psychiatrists and elderly people suffering from dementia. The company used continuing education seminars, mandatory for doctors to maintain their licenses to practice medicine, to market the off-label uses of the drug which were not previously approved by the FDA. In 2010, AstraZeneca settled with the Department of Justice for $520 million and faced thousands of product liability claims over the marketing of Seroquel. Check out this New York Times article for more information on what happened in this drug marketing case. 
  • Robert Rudolph, Eli Lilly: Robert Rudolph also worked in sales, in his case Eli Lilly. Along with eight other whistleblowers, he went to the federal government with evidence of illegal sales practices by Eli Lilly in the marketing of Zyprexa, a drug approved, like Seroquel, for use in treating schizophrenia and bipolar disorder. In 2001, the company began to market Zyprexa for a variety of off-label uses, especially in the elderly. Apart from this marketing process, Zyprexa representatives also took names from patient lists at doctors’ offices to try to get them to switch to Zyprexa, a blatant privacy violation. Further, throughout this time the company inflated the stock price by counting drug samples as sales. Rudolph, a long-time employee at Eli Lilly who was at the end of his career, saw the corporate culture changing in a bad way and felt that the pervasion of these practices into the business needed to be stopped. In 2009, Eli Lilly agreed to a $1.4 billion fine in a DOJ settlement. For an idea of the reputational risk this case caused Eli Lilly, take a look at this 2009 opinion piece on the dangers of the company’s practices to society.
  • John Kopchinksi, Pfizer: Like Wetta and Rudolph, John Kopchinski was a sales representative, in his case at Pfizer. In 2003, Kopchinski filed a “qui tam” lawsuit under the False Claims Act, which allows whistleblowers to aid the government in recovering money stolen in frauds that resulted in the government losing money. Kopchinski exposed evidence that Pfizer was promoting 13 drugs, most prominently the arthritis drug Bextra, for off-label uses that the FDA had previously rejected and unapproved doses. Kopchinski was fired by Pfizer after reporting his claims, but continued with the lawsuit until 2009. Pfizer went on to settle with the government for $2.3 billion. For more about Kopchinski’s legal battle with Pfizer, read this 2009 NPR piece.   
  • Adam Resnick, Omnicare: In another qui tam lawsuit filed under the False Claims Act, in 2006 Adam Resnick sued Omnicare, a pharmacy providing drugs to nursing homes, for Medicare and Medicaid fraud carried out in a series of kickback schemes with nursing home operators. This corrupt practice could potentially lead nursing home administrators to make decisions about what kind of drugs they give to residents not based upon patient care, but rather based upon what pharmaceutical supplier has enriched them in exchange for their continued business. Omnicare and the involved facilities settled their cases with the government in 2010. Resnick himself has a challenging past: he was a compulsive gambler who went to prison for check-kiting which led the collapse of the bank where he worked. As part of his rehabilitation from engaging in fraud he dedicated himself to exposing it instead. For more information on the Omnicare case, look to this 2010 article from the Chicago Tribune.
  • Cheryl Eckard, GlaxoSmithKline: Cheryl Eckard was a quality assurance manager for GlaxoSmithKlein. In 2002, she reported evidence that the company was selling defective and mis-identified drugs from its Puerto Rico plant. Eckard lost her job in 2003 after repeatedly complaining, but the FDA and DOJ found so many issues in the plant that GlaxoSmithKlein became an example for other pharmaceutical companies for what not to do. Due to products being mixed up in the manufacture and distribution process, the antidepressant Paxil and diabetes medication Avandamet were tainted. Some of the pills fell apart while others did not have the active ingredient required for them to be effective treatment. The factory where they were made did not have an effective quality controls framework in place. GlaxoSmithKline paid $750 million to the DOJ for their oversight shortcomings. For more information on the production problems Eckard exposed, read this 2010 article from the Guardian.

The process for creating, manufacturing, and distributing pharmaceutical products is long and complex, with many decision points where individuals may make choices in a narrow ethical frame or a limited context which prevents them from seeing the consequences of unethical actions or even the existence of better possible choices. Whistleblowers can help to demystify this process and illuminate for public scrutiny the problems in the design of the system that may cause good people to make bad decisions.

Check back next week, Tuesday November 14, for the final post in this three-part feature on whistleblowers in historical events. Next Tuesday’s post will discuss individuals who exposed fraudulent business practices in landmark cases of corporate fraud and bad business practices.

Round-up on counterfeiting of consumer goods

Counterfeiters have existed for time immemorial. Ever since the concept of value was introduced by exchange of money and the idea of authenticity or identity first became established, fraudsters have aimed to produce fake money and forged documentation. Following the counterfeit money were unauthorized copies of the products that the money could purchase, a trade which has become ubiquitous and sometimes even represents a larger market than that for the authentic item.

With the spread of globalization, a diverse range of counterfeit products are sold and bought all over the world. Sometimes this is without any attempt by the seller to deceive, with the fake product offered to a consumer who willingly buys a bootleg or replica copy. Others are to customers who think they are purchasing the real thing, often from a very expensive or luxury brand or of a very popular and desired item.

No matter the intent behind the transaction, commerce in counterfeit items is growing all the time and presents many dilemmas for corporate investigators and law enforcement in identifying the fraudulent practices and protecting both brands from this illicit trade while preventing consumers, wittingly or otherwise, from engaging in it.

  • Most of the world’s counterfeit items are produced and manufactured in China – enough so that the trade in these fraudulent goods is a $400 billion industry, by some accounts representing as much as 10% of China’s GDP. This is a striking paradox, as many authentic items such as Nike shoes and Apple iPhones are produced practically alongside knockoff versions of the same. While the traditional logic is that counterfeit goods are part of the assumed risk of doing manufacturing business in China, corporations are actively trying to take control via clever action against fraudsters. Brand protection efforts include hiring private investigators to find and seize fake goods and try to navigate the complicated, labyrinthine underground of the Chinese counterfeiting industry:  To Catch a Counterfeiter
  • South Korea has joined China as one of the major world centers for counterfeit activity. However, unlike many of the goods which come from China, which are low-quality replicas that make unconvincing fakes to the educated consumer, the market in South Korea is knowingly demanding for “copycat brands.” These consumer desire is driven by the prevalence of streetwear fashion which replicates items worn by celebrities and seen on the internet from brands which are not easily purchased or even available in South Korea. In order to answer customers’ requests to be up on these global trends, counterfeiters are making high-quality fakes to sell to the fashion savvy who might not even care whether their items are real, as long as they are able to access the desired style:  Why South Korea Is the Home of Counterfeit Culture
  • More than what’s in a name – what’s in a set of parentheses? For years Costco has sold rings advertised on their in-store signage as “Tiffany” rings. There is no affiliation between the rings sold by the wholesale giant and those available at the specialty jewellery retailer Tiffany & Co. While Costco made no claim that it was selling imitations of the Tiffany & Co. rings, Tiffany alleges that calling the rings “Tiffany” on the signage was a false identification, and that consumers could have been misinformed and mistakenly purchased the rings believing they were Tiffany & Co. A judge has ruled that Tiffany is entitled to almost $20 million in damages and interest from Costco for this marketing scheme, indicating that “Tiffany” is not to be used a generic term to describe the setting of a ring to consumers, as Costco alleged it was intending to do:  Costco owes Tiffany more than $19 million for selling counterfeit rings 
  • Counterfeit goods in the apparel market are well-known, everyone having seen before the ubiquitous fake Louis Vuitton and other designer bags that brands have been fighting against for years. Another area in fashion where fakes are becoming prevalent is makeup. The black market in the beauty industry is growing all the time, with counterfeiters making and selling popular products to satisfy demand when the real ones sell out quickly, aren’t available in certain markets, or are highly priced. The safe and hygienic production of makeup is a very complicated business, involving health standards, inspections, and scientific processes, which fraudsters do not typically invest time or money to replicate along with the products. Consumers having gotten sick and injured from using these fake makeup products which are often ordered online or bought in the discount shopping districts where knockoff handbags used to be the main fare. Especially concerning is that many people purchase these fake cosmetics in bulk, to fraudulently resell online as the real thing or to use on unsuspecting clients as makeup artists:  We Went Inside Beauty’s Black Market & It’s Worse Than You Think
  • Equally concerning to consumer protection and safety as fake cosmetics is the growing prevalence of knockoff wine. The Chinese market is participating in rising prices and demand in a hot retail wine market, for auction buyers, home drinkers, and restaurant suppliers alike. Along with these eager buyers, as always, come the sellers of counterfeit and contraband products. Fake imported wines abound in China. On high-ticket wines, empty bottles of the real thing are actually sold on the black market and then re-filled with fake wine to be sold to unaware purchasers. Aside from damaging the high-end market with a flood of counterfeit wines, there are also concerns for the average consumer. Sometimes dangerous ingredients and chemicals are added to cheap wine to change the color or taste in order to fool consumers, who can then get sick from the doctored alcohol:  China Is Facing An Epidemic Of Counterfeit And Contraband Wine

Companies and governments worldwide are doing their most to crackdown on the illegal production and manufacture of counterfeit goods, and to prevent the sale of these products to consumers. This is an effort which requires international cooperation and a constant pursuit to stay up to date in the counterfeiters’ methods in order to attack and prevent their attempts. Consumer protection and brand value to corporations are both at risk in the continued spread of these illicit practices and products.

Deep dive on what happened at Enron

Almost 16 years after Enron declared bankruptcy in December 2001, questions about the root causes of the financial fraud and ensuing publicity of the corrupt business practices there persist. Despite the subsequent years where other major bankruptcies and the global financial crisis may have somewhat desensitized the public to these scandals from the greater business world, the many answers to the “why” of Enron’s fraudulent business practices are still fascinating to contemplate.

  • Enron: The Smartest Guys in the Room: This 2005 documentary, based on the 2003 book of the same name written by Fortune magazine reporters Bethany McLean and Peter Elkind, and directed by noted filmmaker Alex Gibney, is the seminal work on the Enron scandal. The film goes back deep into Enron’s history to unpack why its success of the 1980s and 1990s and its desire for sustained growth and competitive edge in new business areas, drove its fraudulent practices ever deeper into the corporate culture. Great attention is paid to those “smartest guys” – Kenneth Lay, Jeffrey Skilling, Andrew Fastow – and their sometimes philosophical, occasionally political, and always profit-motivated, views of management that contributed to the fraud.

 

  • The Crooked E: The Unshredded Truth About Enron: This television movie from 2003 is based on the book Anatomy of Greed by Brian Cruver.   Cruver was an ex-Enron employee and detailed his personal experiences there in addition to those of several anonymous colleagues, some very senior members of the organization. The movie shows how the lack of organizational integrity made an impression on Cruver, a good person who found himself doing bad things because of the unethical environment and processes in which he was working. The excesses of the corporate culture are shown in great detail and in contrast to the suffering of shareholders, including many employees who had their retirement funds entirely invested in the company, that followed the company’s collapse in 2001.

 

  • Enron Explained: An Insider’s Account: On a similar, but non-dramatized note, this 2006 C-SPAN American Perspectives program provides a deeper look at the workings of the accounting practices and corporate culture at Enron. This time it is from Robert Bradley, who was the Director of Public Policy Analysis at Enron. Bradley provides detail into the technical aspects of the accounting fraud as well as his personal perspective on Kenneth Lay. From Bradley’s point of view, Lay’s actions should be viewed in light of the narrow framework in which he had worked, achieving great success in his years at Enron by focusing on profit-driven business strategies that promoted driving for financial gains and did not emphasize strategic ethical decision-making. While certainly not an excuse for lack of personal accountability, or a legal defense, this is a powerful lesson for how strong organizational contexts and heuristics can impact employee integrity.

 

  • Bigger than Enron: The PBS documentary series Frontline took on the Enron story in 2002. This program suggests presciently that the bankruptcy of Enron, which immediately became one of the largest scandals in the history of American business, could actually have the harbinger of the deeper systemic weaknesses. From the current standpoint, of course, this points directly to the subsequent economic and regulatory crisis in the global financial markets that began to unfold in public in 2007-2008. From this perspective, the root causes of that crisis go much deeper than the fiscally unsustainable growth of the sub-prime mortgage market and subsequent securitizations. Instead, epic failures in the oversight system – from management, from government, and from outside business partners such as auditors – exposed investors to huge losses and enabled corporate fraud such as occurred at Enron and other major companies before and, indeed, after its 2001 collapse.

 

  • Sherron Watkins at UNC Kenan-Flagler Business School: Sherron Watkins was Vice President of Corporate Development at Enron and is known to history as the author of the August 2001 memo to CEO Kenneth Lay detailing the questionable accounting practices she noticed in the company’s financial reports. Five months later her memo was made public, and she is therefore thought of as the Enron whistleblower. Watkins was criticized in the aftermath of Enron’s bankruptcy for not going public sooner and not immediately escalating her suspicions of the fraud to Enron’s regulators or law enforcement. The speeches Watkins has given in the years since Enron’s bankruptcy, such as this one, focus on how complicated acting as a whistleblower is in reality – not what you would do better than someone else in a hypothetical situation, but what you would or could actually do if it happened to you. This is a challenging ethical dilemma and one that organizations must consider in order to create a reporting system in which whistleblowers are encouraged and protected.

 

The Enron business case remains one of the most famous examples of modern corporate fraud and corruption. Studying the root causes behind the fraudulent accounting and business practices provides insight for why an effective controls and reporting framework is so important for investor protection and markets integrity.

The Madoff Ponzi scheme scandal

For more than 40 years, Bernie Madoff was one of the most prominent figures in the US financial services industry.   His trading firm, Madoff Securities, was founded in 1960 and due to its early adoption of then cutting-edge technology quickly became one of the major market makers in the business. The firm’s technology that it participated in creating later became the NASDAQ trading exchange. Apart from its brokerage business, Madoff Securities also offered investment management and advisory services to many prominent clients. These included banks such as Banco Santander, HSBC, RBS, and BNP Paribas; hedge funds; university endowments; charitable organizations; and famous individuals such as Steven Spielberg, Zsa Zsa Gabor, Sandy Koufax, and Elie Wiesel.

Madoff himself was very well-known in the securities industry. He was on the board of directors of the Securities Industry Association (SIA), the predecessor to the Securities Industry and Financial Markets Association (SIFMA), and served as chairman of SIA’s trading committee. He was also active in the National Association of Securities Dealers (NASD), the self-regulatory organization (SRO) for brokerage firms and exchange markets that predated the Financial Industry Regulatory Authority (FINRA), and served on the board of directors of the SRO, for a period even as its chairman

This last professional designation for Madoff seems ironic now. In reality, Madoff’s investment management business was revealed in December 2008 as a $65 billion Ponzi scheme, the largest financial fraud in US history. This massive fraud was carried out by Madoff and a close group of associates right alongside his legitimate brokerage business and taking full advantage of his huge network of investors and prominent reputation in the industry. In the scheme, trades and returns were completely fabricated and investor redemptions were funded by new infusions from individuals that Madoff aggressively pursued, touting his performance.

Despite numerous SEC investigations of various areas of Madoff’s business, and several outside analysts publicizing urgent and detailed concerns about the business and its purported performance claims which could not be replicated for authentication purposes, this scheme continued unmitigated for at least 15 years, per Madoff’s admission. It may have gone on for as long as 30 years, back to the very beginning of the investment advisory arm of Madoff Securities.

Madoff struggled to keep the fraud going as the global financial crisis caused the markets to contract throughout the fall of 2008, and investors sought redemption. Still, he managed to stay afloat until December 2008, when his sons, Mark and Andrew, confronted him about bonuses he wished to pay amid the mounting investor redemptions. Madoff confessed to his sons that the investment management business was a fraud, and his sons then reported him to law enforcement. In the subsequent months the shocking scale of his fraud and the losses it caused became the subject of public fascination.

For interesting insights on the fraud and scandal surrounding Bernie Madoff’s Ponzi scheme to defraud investors, check out these videos:

  • The Madoff Affair – An episode of the PBS documentary program Frontline from May 2009, when the complete scope of the scandal was still being discovered, which aims to tell the story of the fraud from the beginning and question how it was able to go on for so long.

 

  • The Man Who Knew – This March 2009 60 Minutes segment features Steve Kroft interviewing Harry Markopolos of Rampart Investment Management. Markopolos was a vocal critic and doubter of Madoff’s claimed investment returns. He attempted to alert the SEC on a number of occasions to the fraudulent practices he believed he had discovered in his study of the alleged performance of Madoff Securities, but he was ignored or his claims were not thoroughly investigated.

 

  • Ripped Off: Madoff and the Scamming of America – This is an April 2009 which looks at Bernie Madoff’s fraud in comparison with other Ponzi Schemes of the prior hundred years. With this study, the investigation assesses the magnitude of the damage Madoff’s scheme caused and places it in context of the global financial crisis which was beginning to deepen at the end of 2008.

 

  • The Hunt for Madoff’s Money– This February 2009 segment from the ABC news program 20/20 asks where the money that Madoff defrauded from his investors went, other than fund withdrawals by others’ withdrawals. The investigation looks at the luxury lifestyle and properties of Madoff and his family members and associates that were enriched by his fraudulent investment management scheme.

 

 

  • Madoff Victims on Guilty Plea – In this March 2009 report from CBS News, nine people who lost their investments in Madoff’s Ponzi scheme speak to Katie Couric about their reactions to the exposure of the massive fraud and his guilty plea that resulted in him being sentenced to 150 years in prison without standing trial.

Must-read OCCRP investigative project reports

The Organized Crime and Corruption Reporting Project (OCCRP) is an investigative reporting organization which focuses on organized crime and corruption. The consortium operates worldwide to publish the results of cross-border investigations into criminal enterprises that are often very complex. In many cases the OCCRP reporters are “following the money” to uncover and publicize bribery, tax fraud, and other crimes that are intimately connected to banking institutions and powerful politicians or state-sponsored organizations.

  • Game of Control (2008-2009) – This investigation centered on the involvement of organized crime in owning football clubs. A deeper look at the business of football in Eastern Europe and the former Soviet Union showed a network extending all around the world that enabled criminal businesspeople to hide their illicit activities by laundering money through football clubs they own, skimming transfer fees for players, and using shell companies for tax evasion and concealment of funds. The investigation uncovered evidence of game rigging, use of stadium property for organized crime operations, and even murders of club leaders linked to Bulgarian organized crime. 
  • The Big Bet (2009) – In this report, the OCCRP looked at the expansion of the gambling industry in Eastern Europe. Countries in the region were providing incentives for the gambling industry to come to stimulate local economies and increase tax revenues for governments, but along with the casinos come all the problems of organized crime and corruption. This investigation probed into the abusive practices of governments in these countries which fail to regulate the gambling industry sufficiently and do not enforce proper taxation, instead accepting bribes to look the other way, and not ensure that the public in these countries receives their share of the benefit from the huge revenues these companies make. 
  • The Panama Papers (2016) – The Panama Papers project was one of the biggest stories in money laundering investigation of recent years. The OCCRP worked on the project in collaboration with the International Consortium of Investigative Journalists and Suddeutsche Zeitung, the German newspaper which received a cache of documents from Mossack Fonseca, an offshore services provider in Panama. These documents provided the evidence of the illicit activities concealed in offshore companies set up by Mossack Fonseca, including tax evasion, fraud, and money laundering. Many of the world’s wealthiest people – politicians and businesspeople, criminals and not – were named in these documents. These included Russian, Azerbaijanim and Ukrainian politicians and their families.
  • The Russian Laundromat (2014-2017) – The OCCRP exposed a vast financial fraud scheme enabling money laundering out of Russia and into Europe through Moldavia. More than $20.8 billion was funnelled out of Russia via this mechanism. By tracking the money down to the accounts all over the world where it ended up, the project exposed systemic bribery and activities in the gray area of the Moldovan legal and supervisory system. Some of the world’s largest banking institutions – among 732 banks in 96 countries and including Dankse Bank, Bank of China, HSBC, UBS, RBS, Nordea, Credit Suisse, Citibank, and Deustche Bank – had this illicit money in their accounts. 
  • The Azerbaijani Laundromat (2017) – The most recent of the OCCRP’s reports, like the Russian Laundromat, this details a criminal money laundering operation that used UK-registered shell companies to move $2.9 billion from from Azerbaijan into Europe. This money came from a secret slush fund of Azerbaijani elites used to bribe officials, buy luxury items, and enrich themselves while Azerbaijani human rights were under ongoing assault and citizens were deprived of funds used by their government for their own illicit purposes. Danske Bank was again mentioned as a major banking institution which processed these transactions through their accounts without sufficient due diligence controls to expose the source. This investigation is ongoing and the subsequent movement of the funds and their uses will continue to be revealed. 

OCCRP has become one of the most respected and awarded non-profit media organizations in the world in the decade it has been publishing investigative reports. This is for good reason, as its work has led to the freezing or seizure of billions of dollars of assets, arrest warrants and firings, and closures of shell or illicit companies connected to criminal enterprises. The insights of these investigations cast a powerful light on the mechanisms of corruption which still have a strong hold on business and political organizations all over the world.