Vince Walden welcomes Lee Tiedrich to the Walden Pond podcast this week. Lee is a partner at Covington and Burling where she co-chairs the firm’s global and multidisciplinary artificial intelligence (AI) practice. AI is at the intersection of law and technology, she says. The technology is growing faster than the law, and Covington helps clients navigate the evolving legal landscape so they can capitalize on the opportunities presented by AI. Other aspects of their work include product counseling, advising clients how to improve their operational efficiency using AI, and advising clients about how to adapt their business based on the policy landscape.

Listen to the episode now:

What is AI?

Lee defines AI as using computing to automate, imitate or emulate human behavior. There are three key components to AI, algorithms and code, data, and hardware. Advancement in digital and hardware technology is greatly responsible for the enthusiasm for AI in the market. Lee predicts that the adoption and development of AI will continue to grow.

Compliance Professionals Need to Know

If you’re using AI or planning to, you should be aware of the key issues and policy developments, especially in your jurisdiction. The policy landscape is evolving rapidly. If AI is relevant to your business, become informed of where the policy is going and think about how that impacts your business and what type of changes you might need to make to your operations. Another issue that’s relevant to compliance professionals is how to make AI trustworthy to enjoy its benefits while mitigating against unintended harms. Lee says that governance is an effective tool to help manage the data, development, and deployment of AI. Given the rapidly evolving landscape and the growing interest in AI, organizations should dedicate some resources to understanding the AI legal landscape.

Resources

InsideTechMedia.com

China continues to be a high-risk location for US companies to do business. While the current administration has laid numerous tariffs on Chinese goods, the fact that it holds 6 billion potential consumers will continue to draw western companies to its shore to do business. Yet the latest US company to run afoul of the Foreign Corrupt Practices Act (FCPA) in China is Herbalife Nutrition Ltd. While the company has not yet been hit with a FCPA violation, it is under FCPA scrutiny.

In 2017, Herbalife disclosed that the Securities and Exchange Commission (SEC) had requested information about the company’s anti-corruption program in China. Yesterday, the Department of Justice (DOJ), in a Press Release, announced that charges have filed an Indictment against two former Herbalife employees for allegations of paying bribes to Chinese government officials for over 10 years and also lying to the SEC about their dealings in China. As reported by Dick Cassin, on the FCPA Blog, Jerry Li, the former head of Herbalife’s China subsidiary, was charged with one count of conspiracy to violate the FCPA’s internal control provisions, one count of perjury and one count of destruction of records in a federal investigation. Also charged was Mary Yang, the former head of the external affairs department of Herbalife’s China subsidiary. She was charged with one count of conspiracy to violate the FCPA’s internal control provisions. The charges of internal control violations are some of the most serious that can be brought against an individual as each charge has the potential of a 20-year prison sentence.

According to Geoffrey Berman, US Attorney for the Southern District of New York, the two allegedly “approved the extensive and systematic payments of bribes to Chinese government officials over a 10-year period to promote and expand the company’s business in China. Moreover, in an effort to obstruct the government’s investigation into the widespread corruption scheme, Li lied under oath about the bribe payments when interviewed by the SEC and also destroyed evidence.”

The bribery scheme was both audacious and bold. The two submitted false expense accounts on an astronomical basis, “according to the indictment, during just six months in 2012, Mary Yang allegedly collected $772,000 in reimbursements for purportedly entertaining 4312 government officials at 239 meals, or more than one meal per day.” I should note this included weekends. Over the 10-year period from 2007 to 2016, “Herbalife’s external affairs department in China reimbursed its employees more than $25 million for entertaining and gift giving to Chinese officials.”

Clearly something very wrong was going on in China. At this point it is not clear if there was a failure of internal controls, an override of internal controls or simply no internal controls in place. However you slice it, the fraudulent reimbursement scheme was running at approximately $2.5 million per year and the $772,000 for six months in 2012 is not even half of the fraudulent reimbursements under this calculus.

But there was much more for Li as not only was he charged with lying under oath, the Indictment actually quoted from his interview with the SEC where he was asked directly if (1) he offered any payments to Chinese governments officials. Answer – No; and (2) if was aware of any such payment. Answer – No. But his recalcitrant conduct did not end with simply lying to investigators. He had installed “a wiping application on his company computer…that allowed him to erase 200 files from the laptop in a manner that would render the deleted files unrecoverable.” There was no word on whether the DOJ or SEC was able to recover these deleted files.

All of these allegations (and at this point, they are still allegations) point to not only a company culture completely out of control in terms of criminal violations but also a failure of internal controls. It could be quite serious for Herbalife as it is under DOJ scrutiny for an entire series of fraudulent business practices. In 2016, Herbalife agreed to pay “$200 million to settle FTC [Federal Trade Commission] charges that it deceived customers about how much money they could make selling Herbalife products. The company also agreed to restructure its U.S. operations.” Obviously, the company’s business practices left a lot to be desired.

For the compliance practitioner, these two indictments provide solid reminders why ongoing monitoring is such an important tool. Any review or oversight into the reimbursement requests coming out of the China business unit would have immediately flagged the high employee reimbursement requests, particularly when viewed over a multi-year period. This should have immediately triggered an internal investigation. Evidently it did not. Moreover, the six-month period where Yang had over 239 meal requests should also have triggered a deep dive investigation. When your meal reimbursement request is over one meal per day for any time period over a week (or perhaps two when traveling) a tickler system should be activated.

Finally, by 2016 the country of China generated 20% of Herbalife’s total business revenue, exceeding $4 billion. When you have that high a percentage of your sales generated in a known high-risk region for corruption venue, such as China, special care must be taken to manage that risk. It does not mean that risk should forestall your business effort because with high-risk can come high reward. It simply means there must be a higher risk management solution.

At this point, it is not clear what the responsibility, if any, will be of Herbalife. However, they currently are under government scrutiny for their FTC violations. Further, the announcement of the FCPA investigation did not come until after the FTC violations had been settled which might lead to some speculation that the monitor uncovered the FCPA violations. If so, the company might not have self-disclosed these potential FCPA violations, raising the stakes for a corporate FCPA violation.

Richard Lummis is on assignment this week so I take this week’s episode solo to discuss how you can begin to evaluate a leader’s conduct around not simply compliance and ethics but also how a leader can improve culture. Highlights of this podcast include:

  1. The DOJ wants to see more evidence of leadership.
  2. How can a leader use current events to lead culture?
  3. What messages can a CEO push out around culture?
  4. A leader should be an ambassador of compliance, ethics and culture.

Something is very rotten in both Denmark around its banks regarding AML and the Houston Astros and their leadership. Before and during the World Series, Astros management engaged in either some of the most boneheaded conduct imaginable or was simply disingenuous in the way it handled the Brandon Taubman outburst involving Sports Illustrated reporter Stephanie Apstein. First, the Astros claimed it never happened and that she made up the story, then the team reversed course and admitted it happened, finally culminating in a letter of apology from team owner Jim Crane.

But now it is much worse, at least from the ethical perspective and that of a toxic culture. Ken Rosenthal and Evan Drellich, writing in The Athletic, reported that the Astros stole signs electronically in 2017, the year they won their first World Series. Former Astros pitcher, Mike Fiers, (cleverly labeled a ‘disgruntled ex-Astro’) said that the Astros used a center-field camera to help steal signs during their 2017 championship season. He went on to note that Astros hitters had used a video feed piped into a monitor near the dugout to decode signs and relay them to hitters during games. Apparently, it had long been suspected that the Astros were gaming the system and now a former Astros has confirmed those suspicians.

Houston management, of course, was Shocked, just Shocked that such allegations were made. Jeff Passan, writing in ESPN.com, said that the Astros were opening an internal investigation into the matter. Commenting at MLB’s Winter Meetings, General Manager Jeff Luhnow said, “the team wanted to gather facts before discussing the matter further. I have heard what you all have heard, which is allegations. This isn’t the first one I heard and it’s not the first one you all have heard. Like I said, I think the best course of action is not to speculate right now.”

My favorite management remark came from Houston General Manager Jeff Luhnow who was quoted in the Houston Chronicle for the following admission, “We haven’t done everything properly, but I do feel confident that in general, most of the time, we did things right and we try and follow the rules. “We try to be good citizens and we try to compete as hard as we can.”” Chronicle columnist Jerome Solomon translated “Luhnow’s confusing coachspeak” for the uninitiated. Solomon wrote, “You read what he said. This is what he meant: “Basically, for the most part, generally speaking that is, as these types of things go, if you want to look at it like that … we cheated.”

There you have it. The manager of the team saying yea, we did it.

What will Major League Baseball (MLB) and, more specifically, MLB Commissioner Rob Manfred do? First, as Buster Olney wrote in ESPN.com, MLB must take over the investigation, as the Astros are neither competent to investigate themselves nor do they have any credibility at this point. On the competency front, Olney said it should only take two questions to get to the bottom of this issue. “Astros owner Jim Crane can call Jeff Luhnow, Houston’s general manager and head of baseball operations, and ask: What happened? And if Luhnow doesn’t know, he can call his video operator and ask: What happened? That’s all it should take.”

On the credibility front, perhaps if the Astros had not been formally charged in a prior sign-stealing imbroglio, they might have some. But the Astros were caught doing so in the ALCS against the Cleveland Indians back in 2018, when MLB’s investigation revealed “Houston stationed a club employee in the camera well next to the Indians’ dugout, amid concerns about sign-stealing.” Houston was fined $500,000 over that incident.

What about the obviously broken culture in Houston? This is way beyond win at all cost. This is a culture which says we are going to lie, cheat and steal and we simply do not care what you think about it. This toxic and broken culture is going to do something no other team in baseball could do; diminish what the Astros achieved over the past 3 years becoming only the 6th team in history to win over 100 games in three consecutive seasons.

Michael Rosenberg, writing in SI.com, said, “Now they have to choose between these two perceptions: 1. The Astros have the best team in baseball and they cheated. 2. The Astros have the best team in baseball because they cheated. Understand: “The Astros didn’t cheat” is not an option. People know. They read former Astros pitcher Mike Fiers detail the system on the record. The Astros were not the only ones to break the rules, but they pretty obviously did break them. There is no doubt what the Astros did is wrong. How much did it help? We can debate that forever. But the only reason to do it is because it helps.”

From now until the end of time these players will always live with the title “Cheaters”. Of course, just like the Patriots in SpyGate and DeflateGate, they may not care as after all they brought the World Series trophy to Houston for the first time ever in 2017. Obviously, Houston ownership and team management do not care that they either participated in or allowed cheating. But I think they will find that in baseball, just like in the business world, it really does not matter how much you win if you lied, cheated and stole to get there.

How high up in the organization did this cheating scandal go? Well if you believe the detailed report of the whistleblower, there was a camera hidden in an outfield scoreboard which showed the catcher’s signs, this information was then relayed into the dugout where some type of audio signal would be given to the batter. It could a baseball bat hit against container or very loud whistling from the dugout. All that means, it required a PO requisition, approved by someone in management. Then there was installation and sending the signal into the locker room or dugout where a monitor was set up for someone to see and interpret the catcher’s signs and then the information relayed to the batter.

This means the players, the manager and those who pay the bills and those who sign off on the expenditures. Sounds like it goes up pretty high to me. What are the odds that the Astros find it was a single ‘rogue employee’ much like Taubman who amazingly out of the blue made an incredibly inappropriate remark? Of course, in the aftermath of the Taubman affair, the Astros Team President, Reed Ryan (son of Nolan Ryan), was ‘promoted’ to head of Special Projects and the owner’s son was brought in to run the team so perhaps there was accountability.

Something is very rotten in Houston and like most fish, the rot starts at the top.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2019

Welcome to the Great Women in Compliance Podcast, co-hosted by Lisa Fine and Mary Shirley. In this episode of #GWIC, Lisa speaks with Renata Moreti, Head of Controls, Compliance and Ethics for Diageo in Peru, Ecuador, Bolivia, Argentina and Chile.  Renata has had a varied career in ethics and compliance, and has been based primarily in Brazil and Chile, with a short time in Madrid.   When Renata moved to Chile, she wanted to take her understanding of wine to a new level and became so passionate about what she was learning that she became a sommelier…as well as working with sommeliers to be aware of ethics and compliance requirements.

Renata talks about how following her passion for wine outside her ethics and compliance life enhanced her professional work – how to amaze employees with ethics and compliance trainings and knowledge as she does with wine and food experiences.  She also discusses her experiences being based in South America and including trainings that have worked for her and also best practices for those who work with South America and are based in other places.

And, just in time for the holidays, she has provided some information about Chilean wines and a link to her Instagram page: @bomdiaframbuesa

If you enjoy this episode or the podcast generally, please rate this podcast in your favorite podcast player where you can find this discussion with Renata and all of our other episodes.

Join the Great Women in Compliance community on LinkedIn here.