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

Corporate cultural change: Consistent and visible enforcement

This is the second in a series of five posts suggesting best practices for implementing corporate cultural change.  For an overview of all the tips on this subject, check out this preview postLast week’s post discussed tone and conduct at the top.  Today’s post is about enforcement.  Next Monday’s post, on March 12, will discuss effective policies.  The fourth post in the series, on March 19, will focus on procedures to complement those policies.  Finally, on March 27, the fifth post in the series will discuss tips for going beyond training in order to create effective and engaging employee education initiatives to boost awareness and compliance culture.

Last week’s post discussed the importance of commitments by executive boards, senior management, and top leadership in organization to expressing tone and modelling conduct to enable change.  Once the path is cleared for institutions to follow, by the statements and actions that aim to define and promote the necessary change, effective and bold enforcement actions must follow.


Round-up on FCC compliance

This is the seventh in a series of seven posts about regulatory compliance priorities and enforcement trends.  The first post was about the Commodity Futures Trading Commission (CFTC).  The second post was about the Federal Trade Commission (FTC).  The third post was about the Securities & Exchange Commission (SEC).  The fourth post was about the Food & Drug Administration (FDA).  The fifth post was about the U.S. Department of Agriculture (USDA).  Last week’s post was about the Environmental Protection Agency (EPA).  Finally, today’s post, the final one, will be about the Federal Communications Commission (FCC).

The U.S. Federal Communications Commission (FCC) is the US regulator charged with supervising interstate communications via the mediums of radio, television, wire, satellite, and cable.  The FCC was created by the Communications Act of 1934 to replace the Federal Radio commission, a predecessor regulator with jurisdiction over radio only, and incorporate the telecommunications regulation responsibilities of the Interstate Commerce Commission, in recognition of the advancement of communication and broadcasting technologies.

The modern FCC has six main operating objectives: providing affordable access to broadband internet; maintaining a competitive framework for communications services providers; ensuring the efficiency and efficacy of spectrum (radio); setting media regulations which encourage digitalisation, competition, and diversity; cooperating with public safety and homeland security crisis communications; and contributing to ongoing modernization of the FCC itself as innovation evolves.  Within these objectives, the FCC sets media policy pertaining to broadcast, cable, and satellite television and broadcast radio regarding content, indecency, ownership, and transition to digital.  Interstate telecommunications services including landed telephone, internet, mobile services, and a variety of other radio and broadcasting networks and databases are also within the FCC’s purview.

Certainly the biggest story in recent years involving the FCC has been the changes to the Obama-era Net Neutrality rule.  For a basic but thorough explanation of Net Neutrality, recent changes to its regulatory handling, and the various interests at stake, check out this QuickTake from Bloomberg.

  • Cooperation with the FTC: In the aftermath of the rollback of net neutrality protections ensured by the FCC in its December 2017 vote, much of the regulatory attention has been on assurances that the FTC will step into the gap to pick up on vital enforcement efforts.  The two agencies have agreed to a memorandum of understanding on their collaboration with each other, much of which appears to be based on pre-Net Neutrality classifications which established shared jurisdictions for the FCC and the FTC.  The details of this plan, however, both in its depth and its ultimate application, remain to be seen:  FCC and FTC outline how they’ll cooperate after net neutrality vote   
  • Legal engagement with states: Facing regulatory rollback at the federal level and judging legislative action to be unlikely, some states have started to consider creating their own legal frameworks in absence of a higher supervisory authority providing oversight. California is one state which has been vocal about wanting to fill the regulatory gap created by federal rollbacks by creating state systems to establish accountability, and the topic of Net Neutrality is a hot-button one for states to get involved.  Because the FCC’s order bars states from making their own overt rules about Net Neutrality, lawmakers will need to get creative about using their resources and existing regulatory authority to capture broadband internet service providers (ISPs) in their jurisdiction to force constructive compliance:  In the Wake of the FCC’s Net Neutrality Repeal, California Eyes Its Own Net Neutrality Law  
  • …And cities: California is far from the only state spurred into action by the Net Neutrality change, as over 20 states have mounted various challenges to the decision and/or efforts of their own to require ISPs doing business in their states to observe Net Neutrality.  Cities are engaged also, with New York City officials considering the ways the city can enforce the principles of Net Neutrality on its own:  States and Cities Keep the Battle for Net Neutrality Alive 
  • Corporate political engagement: Changes in regulatory position and public policy on topics of great consumer interest are practical candidates on which corporations can engage and take political position. The Net Neutrality repeal was not only controversial but provoked a wide range of emotional and intellectual reactions from the public.  So, it’s an interesting and compelling corporate social responsibility (CSR) tactic for many companies to engage politically about Net Neutrality and thereby enhance their relevance to and credibility with current and prospective customers.  Burger King got a lot of attention for doing so not only boldly but informatively:  Why is Burger King better at explaining net neutrality than the FCC?  

Post-Net Neutrality rule-making, the FCC will likely seek a new alignment on a broad variety of issues impacting its wide mandate.  As demonstrated by the diverse range of priority topics below, the FCC will have a full regulatory agenda for 2018, and rehabilitation of its public image and its processes through which it engages with consumers, lawmakers, and stakeholders, will be a top priority for the agency.  As discussed in this article, the challenges are inherent in rebounding from 2017 and setting a fresh set of priorities for 2018.

As this series on regulatory enforcement and compliance interests has shown, whatever the current rhetoric on the proper reach of supervision may be, these agencies will always have a huge impact on life and business.  Whether this is through regulatory expansion, delay and inaction, or rollback, the choices made on regulatory agendas have sweeping influence on topics as diverse as investor protection, public health and safety, the environment, consumer rights, and all areas of the securities and financial markets.



Interesting cases of retractions by scientific journals from Retraction Watch

Retraction Watch is a blog that started in 2010 with the objective of publicizing, studying, and contributing to the investigation of retractions in scientific journals of academic research and writing. The validity of academic papers is often held to a vaulted status because of the famed system of vetting through peer review and editorial boards before publication. Identifying mistakes in this context, then, whether through inadvertent technical errors, minor or major, or some intentional misrepresentation or fraudulent conduct, is an interesting and necessary practice in order to uphold academic integrity.


Round-up on FTC compliance

This is the second in a series of seven posts about regulatory compliance priorities and enforcement trends.  Last week’s post was about the Commodity Futures Trading Commission (CFTC).  Today’s post will be about the Federal Trade Commission (FTC).  On Thursday January 4, the post will be about the Securities & Exchange Commission (SEC).  On Thursday January 11, the post will be about the Food & Drug Administration (FDA).  On Thursday January 18, the post will be about the U.S. Department of Agriculture (USDA).  On Thursday January 25, the post will be about the Environmental Protection Agency (EPA).  Finally, on Thursday February 1, the post will be about the Federal Communications Commission (FCC).

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

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

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

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

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


Round-up on CFTC compliance

This is the first in a series of seven posts about regulatory compliance priorities and enforcement trends.  Today’s post will be about the Commodity Futures Trading Commission (CFTC).  On Thursday December 28, the post will be about the Federal Trade Commission (FTC).  On Thursday January 4, the post will be about the Securities & Exchange Commission (SEC).  On Thursday January 11, the post will be about the Food & Drug Administration (FDA).  On Thursday January 18, the post will be about the U.S. Department of Agriculture (USDA).  On Thursday January 25, the post will be about the Environmental Protection Agency (EPA).  Finally, on Thursday February 1, the post will be about the Federal Communications Commission (FCC).

The Commodity Futures Trading Commission (CFTC) is the US regulator charged with supervisory authority over the futures and option markets. Created in 1974 by the Commodities Futures Trading Act, the CFTC is an independent regulatory agency with the purpose to monitor and protect the markets by prohibiting fraudulent activity or other misconduct and to control against risk from these. In the aftermath of the 2008 global financial crisis and the markets reforms which were implemented during the economic recovery, the CFTC has played a more prominent role in the largely unregulated general derivatives (contracts that derive their value from the performance of an underlying entity, such as an asset, index, or interest rate) and specifically, swaps (derivative contracts where two counterparties exchange cash flows of each other’s financial instruments) markets, to encourage transparency and gradually move toward a more stringent supervisory framework.

The CFTC’s principal mission is to ensure the successful and efficient operations of the futures markets, by keeping competition fair and preventing market abuse or other threats to financial integrity and efficacy. As the futures markets and particularly the derivatives and swaps markets are very international, the CFTC collaborates heavily with international partners and oversees a huge variety of diverse financial institutions and service providers, including exchanges, clearing houses, dealers, and commodity pool operators.

The CFTC has often been seen as the smaller, less powerful or prominent cousin agency to the Securities and Exchange Commission (SEC). However, as the CFTC refines its position within the financial regulatory landscape of the global markets and within the US economy, certain issues and emphases have emerged which distinguish the CFTC.

  • Bitcoin: The CFTC made headlines in November 2017 in paving the way for CME Group and Cboe Global Markets Inc to trade bitcoin futures contracts. Investors and markets professionals all over the world have been waiting for the first regulatory verdicts in the US on how cryptocurrencies markets may be handled. The CFTC has answered this boldly, indicating a permissive attitude toward the trading practices coupled with a strict expectation for robust monitoring and reporting to enable oversight of the famously volatile and active bitcoin trading markets. The CFTC had already declared in 2015 that it would treat bitcoin as a commodity, and the ensuing years have shown US financial regulators struggling to agree on what the cryptocurrency is in terms of financial markets and what risks and protections might be applicable for those wishing to invest or speculate in it. The CFTC has chosen to give the futures trading a yellow light, allowing it to go ahead with a cautious eye toward the intense enforcement and investor protection needs that could arise and obtaining assurances from the exchanges that they will proactively cooperate and share the necessary data with the CFTC: Bitcoin Futures Are Coming and Regulators Are Racing to Catch Up
  • Whistleblowers: While far outpaced by the SEC’s much more well-known and publicized whistleblower program, the CFTC’s program was created at the same time as the SEC’s, by the post-financial crisis Dodd-Frank Act in 2010. In 2017, while still modest in comparison to the SEC, the CFTC is having a banner year for payments of whistleblower rewards. These rewards come from sanctions imposed by the CFTC due to validated whistleblower claims against CFTC-covered organizations. This represents a reporting increase by whistleblowers to the CFTC of 70 percent over 2016, indicating that whistleblowers are recognizing the value of the CFTC as an enforcement body. Therefore this uptrend in handling of whistleblower claims could likely continue: Why Wall Street Should Worry About the CFTC Whistleblower Program
  • Deregulation: The overall trend in the US is toward a preference for fewer or more efficient and targeted regulations. This is a clear reversal especially in the financial markets, where in the years after the global financial crisis the momentum was toward more complex and far-reaching regulatory and supervisory oversight on the economy and market participants. This was a reasonable and necessary response to not only the recession but the numerous and varied financial scandals and frauds that were uncovered and damaged the markets and society’s trust in the financial systems. These risks and root causes of misconduct and abuse are still present, so balancing a regulatory posture which prefers a lighter touch against the need for investor protector and facilitation of transparent and equitable markets is a challenge for all regulatory agencies, including the CFTC: CFTC Enforcement Actions Drop Sharply in 2017
  • MiFID II: The revised Markets in Financial Instruments Directive, or MiFID II, is a wide-sweeping set of EU financial regulatory rules coming into effect in January 2018. These new regulations will have huge impact on the way banks and other financial institutions interact with and make money from the markets. While these are European laws, the globality of the markets means that regulators and market participants all over the world are contending with how to handle these new supervisory guidelines. The Futures Industry Association (FIA) has been actively lobbying the CFTC on behalf of its members, including large banks such as Goldman Sachs and Morgan Stanley, to confirm that the new European requirements will not bring expensive new limitations in the US as well: Wall Street Has New MiFID Migraine, Now in Futures Market
    In continuation of this, one important area in which the CFTC has already been deal-making with the EU in anticipation of the approaching MiFID II application is with derivatives trading venues. The European Commission and the CFTC have agreed upon mutual recognition of trading venues so that those in the United States can benefit from an equivalence decision recognizing them as eligible for compliance with MiFID II requirements by virtue of their satisfaction of CFTC requirements: EU and CFTC Implement Mutual Recognition of Derivatives Trading Venues
  • Blockchain: Apart from regulating bitcoin as a commodity, the CFTC hopes to benefit from the technology that underlies cryptocurrencies, blockchain. The CFTC has voluminous amounts of data from the diverse market platofrms and service providers that it supervises and has historically struggled to parse and study these huge troves of data efficiently and meaningfully. The CFTC hopes that the reporting reliability, transparency, and information security offered by the ledger technology blockchain can enable better review and analysis of this data. Traditional procurement requirements have often dogged attempts to implement more advanced or emerging technologies, but one of the priorities of the CFTC and other US government agencies currently is to leverage innovation such as from financial technology (fintech), regulatory technology (regtech), and supervisory technology (suptech): CFTC Looks to Blockchain to Transform How It Monitors Markets

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


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.


Must-read ICIJ investigative project reports

The International Consortium of Investigative Journalists (ICIJ) is an independent, international network of over 200 investigative journalists in more than 70 countries worldwide. Their reporting focuses on international crime, corruption, and transparency of political and financial power held by governments and corporations. ICIJ works worldwide with local media partners to publish complex investigative reports often focusing on organizational corruption at the highest levels of power and the impact their activities have on people and communities in their home countries as well as in the developing world.

Like this blog’s earlier feature on the work of the Organized Crime and Corruption Reporting Project (OCCRP), reporters associated with ICIJ often follow highly complicated financial trails at major banking institutions and supporting organizations in the financial services industry, in order to uncover tax evasion, theft of national assets, bribery, and other financial crimes.

  • Luxembourg Leaks (2014): This blog has previously discussed the Luxembourg Leaks in the feature post on whistleblowers in the financial services industry. This investigative report was based on documents provided to ICIJ by, among others, a French employee of the Big 4 accounting firm PricewaterhouseCoopers. The ensuing investigation showed that Big 4 firms were facilitating registration of multinational companies in Luxembourg in order to evade local taxes and take advantage of banking secrecy laws that would prevent disclosure of even the existence of their offshore accounts to their home countries. Companies named in these papers included IKEA’s Australian operations, Pepsi, Disney, and the Koch Brothers’ business empire. 
  • Swiss Leaks (2015): Continuing in the vein of uncovering undisclosed accounts and financial arrangements maintained under the protection of a banking secrecy regime, this investigation revealed HSBC Private Bank (Suisse) maintained banking relationships with clients connected to arms trafficking, blood diamonds, and bribery. Many of the clients serviced by HSBC were connected to discredited political regimes in countries such as Egypt, Tunisia, and Syria. These were clients who due to their illegal or sanctioned activity would not be accepted for banking services in other countries. The documents showed that HSBC not only accepted them but repeatedly assured them that their wealth would be shielded from tax authorities or other inquiring government entities. 
  1. Evicted and Abandoned (2016): This investigation ran an external audit on projects supported by the World Bank. The International Finance Corporation, which provides private sector loans on behalf of the World Bank, has given financing to governments and corporations accused of egregious human rights violations. In some cases these financing activities continued after evidence of the violations was made public. Funds from World Bank projects were subsequently misappropriated and diverted by local governments to fund violent and harmful campaigns against the people who were supposed to be helped, and social and environmental impact was disregarded. 
  • The Panama Papers (2016): Receiving widespread media attention and igniting local investigations in many countries and by many financial institutions, the Panama Papers project was one of the biggest stories in money laundering investigation of recent years. ICIJ worked on this project in collaboration with OCCRP and Suddeutsche Zeitung, the German media organization which originally received the cache of documents from Mossack Fonseca, a trust company in Panama that facilitated legal incorporation of offshore shell entities for many of the world’s wealthiest people and powerful political figures. Many of these shell entities were later involved in illegal activities including tax evasion, fraud, and money laundering. 
  • The Paradise Papers (2017): The most recent of ICIJ’s reports, like the Paradise Papers, this details the facilitation of secret financial arrangements by offshore service providers, this time including one of the world’s most high-profile law firms working in this industry. This time the focus was on legal incorporations in Bermuda, Singapore, and Mauritius. The Paradise Papers differ somewhat from the Panama Papers in that they do not purport to uncover widespread illegal activity, but rather legal activity that is secret or inconsistent with representations otherwise made to the public. Political figures in the US, the UK and Canada, and their donors or other financial supporters, were included this time with information exposing their previously undisclosed offshore arrangements and ownership stakes. The Paradise Papers also provided great detail on the “tax engineering” of many major companies, including Apple, Nike, Allergan, and commodities giant Glencore.   While currently legal, it is expected that the public controversy over these increasingly “creative” tax arrangements may lead to deeper regulatory inquiry as to whether they should remain legitimate practices going forward. 

Like OCCRP, ICIJ has become a highly-regarded media organization in the twenty years since its formation. The work that the journalists of ICIJ do to investigate and expose corruption and crime is critical for the effort to enforce expectations that those in positions of power be held accountable for their actions, which even if legal, can be ethically unacceptable and abusive of the people they purport to serve. These investigations serve a crucial public service in exposing both criminal activity and legal arrangements which nonetheless may not meet society’s standards for transparency or lead later to the facilitation of illegal activity.


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.


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.


Round-up on compliance investigation and enforcement trends

Keeping up to date on developments in compliance investigation and enforcement priorities is important for planning compliance programs and setting strategic agendas. In a constantly changing regulatory environment, continuing education is a must. Recent developments suggest that regulators are regrouping and preparing new priorities, while companies are trying to contend with regulations and avoid looming legal challenges.

  • Prosecution of white-collar criminals is at an all-time low as some companies appear to be considered “too big to jail” and risk-adverse trial strategy rules the day:  Why Corrupt Bankers Avoid Jail
  • Airbnb, possibly setting precedent for other “shared economy” companies without traditional regulatory compliance frameworks, looks to pre-emptively contend with legal challenges by striking deals with municipalities:  Airbnb Tries to Clear Away Political and Legal Challenges in New York and San Francisco
  • The ECJ may declare Uber a transportation company later this year, opening the tech giant to much stricter regulatory scrutiny; in anticipation, Uber has withdrawn from some EU member states where the regulatory burden already overwhelms its appetite for the market: Europe’s Top Court Leaning Towards Dealing Uber a Big Regulatory Blow
  • HSBC, amidst negotiations with the U.S. Department of Justice as it is under investigation for its role in the bond market pre-2008 crisis, is concerned over regulatory gaps in the global financial market that may be unpredictably fragmented by Brexit, in which cooperation between regulators and investigators could become more problematic:  HSBC chief sounds alarm over financial regulation and Brexit
  • Amid mounting prosecutorial pressure and investigation efforts worldwide, a guilty plea and cooperation from ex-Credit Suisse Banker:  Ex-Credit Suisse Banker Helping U.S. After Tax Guilty Plea
  • Scandal at Wells Fargo continues to unfurl its tentacles into new areas of the bank’s business, now reaching into auto loan customers who were charged for unauthorized car insurance; previous attempts at punishment or reform now seem insufficient in light of the scope and scale of the wrongdoing, upping the ante on what is considered justice in corporate crime:  Give Wells Fargo the Corporate Death Penalty

This summer’s trends indicate diminished enforcement efforts, regulators regroup and try to ascertain a new approach to holding corporate criminals accountable for their ethical lapses, in light of previous attempts failing to adequately discourage wrongdoers. In the meantime, companies finding themselves cornered by regulatory pressures hope to gain time to comply or the blessing to continue as-is by negotiating agreements or reaching settlements with regulators.