Tag: fraud

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Trends in business compliance

Round-up on compliance issues with blockchain technology

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

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

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

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

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

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Compliance in current and historical events

Whistleblowers in the pharmaceutical industry

This is the second of a three-part series profiling whistleblowers in different industries. This started with October 24’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.

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Trends in business compliance

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.

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Compliance and ethics business case studies

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.

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Compliance in current and historical events

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.

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Compliance in current and historical events

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.

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Compliance and ethics business case studies

Wells Fargo’s culture of non-compliance

Wells Fargo is embroiled in an ongoing crisis regarding fraudulent business practices in many areas of its banking enterprise. The scandal continues to unfold and touch different areas of Wells Fargo’s operations, from unwanted credit card accounts to unauthorized auto insurance products to excessive fees for merchant banking.

So far the only tangible outcome of congressional investigations, endless scrutiny by the press, and a supervisory board shake-up has been continued discovery of further misleading and dishonest conduct at the expense of the bank’s customers. It remains to be seen whether Wells Fargo can rehabilitate itself and regain the trust of the public and its many stakeholders in government and the financial services industry.

Clearly, however, such a pervasive fraud as this one indicates that Wells Fargo is afflicted with a culture of non-compliance. Rather than valuing ethical and sustainable approaches to commercial interests and putting duty of care to the client first, Wells Fargo chased profits via volume and local management encouraged unethical decision-making to enable bankers to pad the bottom line for themselves and the bank.

This conduct appears to have been only worsened by the financial crisis of 2008, when employees drove themselves to hit increasing sales quotas by engaging in gaming, which is opening accounts only to close them shortly thereafter and then open new accounts. Unethical practices, such as these unauthorized account openings and use of false identifications on accounts, at local branches were openly known as business as usual during this period. Wells Fargo appears to have incentivized this conduct in order to meet financial goals during a complicated, depressed market. Employees questioned the practices but ultimately acquiesced because jobs were hard to come by in the business and the income was precious.

A deeper look into Wells Fargo’s corporate culture in these years reveals a cutthroat, competitive environment where sales principles were constantly reinforced and valued over all others. Demands for profits and achievements in opening new accounts and selling products to generate fees were never tempered by encouragement to remember that treating the customer with honesty and respect was the most important business principle of all. Branch managers allowed and encouraged fraudulent conduct by their employees in order to meet regional and head office standards and appear successful. In this culture, worsened by the overall pressure of the Great Recession in general and the financial services industry specifically, good people did many bad things.

The only choice for Wells Fargo going forward in order to restore their credibility is to cultivate a bank-wide culture of compliance. Employee awareness of integrity, fiduciary duties, and obligations to ethical and honest decision-making must be instilled and reinforced regularly. Management, both locally and at the top, must set a rigorous tone of devotion to compliance practices. Sales quota directives should always be accompanied by moral warnings and should be set at a level where cheating is not the inevitable method for success. Sustainability of business practices, over time, should be expressed as the way to make money and service clients: quality, not quantity. Single-minded competitive pressure may be inherent to the sales business, but this needs to be tempered by having compliance and ethics as a core goal and performance metric.

For a more detailed look into the conduct causes behind Wells Fargo’s financial fraud scandals, read Bethany McLean’s story for Vanity Fair.

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Compliance in current and historical events

Martin Shkreli and unethical leadership

“Pharma bro,” financier, and entrepreneur Martin Shkreli is as well-known for his controversial antics on social media and in the press as he is as a biotech CEO. Shkreli gained public attention in 2014 and 2015 for acquiring the rights to market drugs and then hugely raising prices, first at Retrophin with Thiola and next at Turing Pharmaceuticals with Daraprim. In August 2017, Shkreli was found guilty on two counts of securities fraud and one count of conspiracy to commit securities fraud by a jury in New York after standing trial where he was accused of defrauding investors in a Ponzi scheme.

Shkreli gains and sustains attention by modelling reprehensible conduct and immature, immoral behavior. His entire persona is calculated to shock and outrage, promoting a confident attitude in the face of ethical and even legal wrongdoing. The prominence of such a flamboyantly, defiantly negative character presents an affront to the conventions of compliance and ethics in business.

  • Shkreli is far from alone in his controversial and ethically questionable pricing and business practices, though his attention-seeking behaviour and criminal prosecution has kept him in the spotlight. He’s also joining other corporate wrongdoers in his business at exploiting opportunities for profit typical in the pharmaceutical industry, despite their effects later on consumers:  Newly Convicted ‘Pharma Bro’ Martin Shkreli Shined a Light on Pharma’s Biggest Scandals
  • And, despite Shkreli’s preciousness and loud belief that he is a genius, he can also be seen as just another fraudster in a long American tradition of trusting bad people because of a cultural eagerness for innovation and disruption:  There Is Nothing New Under the Sun, Martin Shkreli Edition
  • Emotional intelligence is a popular term in management theory, borrowing ideas from psychology to suggest that leaders who understand their own emotions and those of others, and sensitively incorporate this information into their decision-making and leadership style, are more capable. Typically this is used to inspire positive behaviour like better communications or more sustainable business strategy. Shkreli is a defiant example of the opposite effect, claiming brilliance yet totally disregarding emotional interdependence and the greater good of society. In his mold, ethical behavior and integrity have no relevance to his sense of personal victory:  The Emotional Intelligence of ‘Pharma Bro’ Martin Shkreli
  • Time will tell what the sentencing outcome will be for Shkreli’s recent criminal convictions (many legal commentators think he will receive limited jail time, Shkreli’s defense team has suggested he may serve none at all), but a guilty verdict which would subdue some people has made this famous misbehaver even more boastful:  Martin Shkreli’s lawyers fail to corral bragging ‘pharma bro’ ahead of sentencing
  • Can Shkreli’s legal team convince him that his “people skills” need to be improved to keep him out of prison in the future? Seems unlikely, as his reputation of being bold, odd, and obnoxious gets him attention and keeps him relevant, which seemed to have been appealing to the investors he defrauded, some of whom made money anyway because of side agreements with him. Clearly he sees himself as another peculiar but brilliant business visionary, pointing out the danger in the cult of personality around difficult and immoral leaders who mistreat their employees and partners and use eccentricity as a pretense for selfish, unethical behavior:  Martin Shkreli’s Lawyer: ‘Pharma Bro’ Has an Image Problem

Even through his criminal prosecution, Shkreli seeks and thrives off the attention he gets for acting out in poor taste. He uses moral relativism and the “everyone else is doing it” defense for his unethical and fraudulent behavior, and the profits he gains for himself as the justification.   His financial success should not be admired or enabled by any organization wishing to sustain a business while contributing to a more transparent and responsible society for the future.

Corporate cultures must not reward this type of person with commercial partnerships or philosophical support; while they may make profits, they do so through scheming to deceive and defraud. People like Shkreli are the true rare bad apples that narrow the ethical framework and make the right choices problematic for the otherwise good people they influence.

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Compliance in current and historical events

Enron and the mood in the middle

The Enron scandal is one of the most famous examples of modern corporate fraud and corruption. The publicity of the fraud, subsequent bankruptcy of the firm, trial of principals Kenneth Lay and Jeffrey Skilling, and the cascading negative impact on employees and shareholders form a notorious history of corporate malfeasance and misleading investors.

Enron was an energy company that dominated its market in the 1980s and 1990s. Originally involved in the distribution of electricity and natural gas and creation of the related infrastructure, through a series of mergers and acquisitions and expansions of corporate strategy, Enron extended its business into commodities trading, retail energy, water distribution, and data management. Enron was well-known for its commercial success, immense corporate wealth, and aggressive marketing and promotion strategies. Enron was also a fraud, with many of its purported assets overestimated in value or non-existent, and its immense liabilities and losses hidden in other entities so that its financial statements appeared much more positive than they ever actually were.

More has been written about the pervasively fraudulent practices that led to Enron scandal, and the individuals and motivations behind them, than probably any other corporate bankruptcy in history. Many of the principles of, and the unfortunate justifications for, a robust compliance and ethics program can be illustrated by this case. One of the more interesting points of analysis involves the conduct of employees during the fraud and their reaction to signs they may have noticed but not reported, followed by the eventual widespread discovery of the scandal.

Professional skepticism is undervalued in many corporate cultures. Enron employees were so enchanted by the aspirational allure that the company offered that they too often became blind to risks and unethical behavior, and missed or refused the opportunity to get out or to report the fraud.   The focus in discussions over corporate governance and compliance programs often focuses on “tone at the top” (senior management and supervisory boards) or the impact corporate collapses have on shareholders and the public – but a more important question is what about these employees who were there during the fraud, may have noticed signs, did not or could not do anything, and after are left with nothing but a sense of betrayal? The question of how to encourage these employees to mitigate risks or report wrongdoing, even in the face of personal loss or certain reprisals, challenges and inspires compliance professionals to strive for positive change.

This tale of corporate non-governance, as it was, demonstrates that putting compliance and ethics on the back burner in favor of commercial and competitive pursuits can have a far-reaching disastrous impact. The intersection of business and compliance will always be a tense spot, underscored by commercial pressures, cultural differences, and never-ending change. However, a closer, more understanding relationship between the two disciplines is the best path to modelling the employee conduct that is necessary for longevity and sustainability of success.

For compelling anecdotes from a personnel perspective of the Enron scandal, this 2002 article by Charles Fishman is a good read.