Robert Conrad died last week. For anyone who grew up in the 60s, he was simply James West, star of The Wild Wild West. It was one of the most rootin’ tootin’ shows around, with Jim West as an 1870s super-secret agent, channeling James Bond to the Old West. It featured action, gadgets, coolness and action (did I mention action). Conrad had later successes but did not reached the heights of Jim West. Conrad performed many of his own stunts and was a self-described tough guy. His sidekick on the show was Artemus Gordon played by Ross Martin, who was the brains behind West’s brawn. Conrad had early starts in television in two iconic television shows, Hawaii Eye and 77 Sunset Strip. After The Wild Wild West, Conrad starred in Baa Baa Black Sheep and had a prominent role in Centennial.
I thought about Conrad’s approach to the role of James West in the context of tech in compliance or what I have dubbed ComTech. Compliance has been pushed more to the forefront in anti-money laundering (AML). As banking institutions, financial institutions and the financial services industries continue to tighten and strengthen AML controls, criminals and other nefarious actors will move into non-financial corporations to move money for the simple reason that such robust controls required in the financial realm are not generally required in the non-financial corporate world. Non-financial corporations should have robust AML controls in place and one of the requirements for any best practices AML policy is to “know your customer” (KYC). Artificial Intelligence (AI) will allow a more robust KYC approach.
Another area where compliance is often left behind is in the arena of mergers and acquisitions (M&A). Since the 2012 FCPA Guidance, the focus of compliance in M&A has been more on the pre-acquisition phase of a deal. Often the compliance function is either brought in at the last minute and does not have the time to perform adequate compliance due diligence or there is an overwhelming amount of data to be reviewed and the resources available (or made available) to the compliance function is woefully inadequate. AI has made inroads into this process, to the immense assistance of compliance.
Such a review could include such issues as whether third-party sales representatives have the requisite background due diligence in the files, their status and commission rates paid. There could be a review of top sales and business developments folks in high-risk regions, correlated with a gift, travel and entertainment (GTE) analysis. Finally, you could consider sales in high risk regions or even sales spikes from low risk areas from the compliance perspective.
A prime example of where AI can assist the compliance function is with third parties in Supply Chain (SC) management. Every multi-national has literally thousands of vendors. Getting a handle on those is always a challenge simply because of the numbers involved. By using AI, a compliance practitioner can immediately identify vendors that present anti-corruption compliance or other risks to an organization. Having led an effort to list out all vendors by hand to begin the risk ranking process, I can personally attest to the greater efficiencies AI can bring to the exercise.
There is yet another set of AI tools that can review contracts to see if any specific types of clauses are non-standard. It would seem a relatively easy software coding exercise to adapt such products to compliance clauses. This type of approach could also be used for non-standard governance clauses in joint ventures (JVs) or other types of business venture agreements. Having been assigned the task of reading all my then employer’s JV agreements (87) and third-party sales agents contracts (211) from across the globe and recalling the amount of time it took to do so; I can again personally attest to the greater efficiencies we are considering through the use of AI.
This example also points to one of the key disadvantages to AI and ComTech going forward. In past years, it was through document review and the detailed reading of documents and cases that many junior lawyers were trained. In my experience, reading all those JV agreements and third-party sales agents’ agreements gave me a very good education in contract language and what positions were more and less favorable to each party. This is how many young associates were trained in law firms. This very practical method of training will eventually go away.
This final example also points to one of the key limitations of ComTech. While it might help to have AI review the JV agreements and third-party sales agents’ contracts, it only could identify non-standard contract language. Unfortunately, since most of the agreements and contracts are bespoke, they were uniformly non-standard. Further, the assignment I was given required an analysis of each non-standard contract, so the judgment of a human was required. Even as AI becomes more sophisticated, the judgment of a professionally trained compliance practitioner is still required to validate the areas flagged by AI as anomalies.
There are still compliance professionals, usually legally trained, who fear these innovations. In honor of the return of Sarah Connor to the big screen last year, I want to remind you that Skynet has not yet become self-aware so, at least for a little longer, humans are still in charge. There have always been technological innovations which help make compliance disciplines run more efficiently, more smoothly and more profitably. AI is simply another step in this line of technological developments. There is certainly no reason to be afraid of using it. Given the disruption which has impacted the legal profession through LawTech; disruption is not far behind in the compliance world through ComTech.
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© Thomas R. Fox, 2020