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Never the Same: Part 1 – Why Supply Chain Will Never Be the Same After the Russian Invasion

After the Russian invasion of Ukraine, the world of business will never be the same again. Deputy Attorney General (DAG) Lisa Monaco recently said that the world’s “geopolitical landscape is more challenging and complex than ever. The most prominent example is of course Russia’s invasion of Ukraine.” It is “nothing less than a fundamental challenge to international norms, sovereignty and the rule of law that underpins our society.” This is even more so in the current business climate.
Over this five-part series, I will consider how business will never again be the same and how a confluence of events has changed business forever. I am joined in this exploration by Brandon Daniels, Chief Executive Officer (CEO) of Exiger. We will explore the irrevocable changes in Supply Chain, trade and economic sanctions, anti-corruption, cyber-security and environmental, social and governance (ESG). In Part 1, we begin with changes in the supply chain as there may well be no area of businesses which has experienced the tectonic shifts that have occurred in the marketplace over the past couple of years than in Supply Chain.
Daniels identified three key reasons for these shifts. The first began with the realization of the untenable actions of the major player on the US supply chain, China. This realization had begun pre-pandemic, when it became clear of the massive theft of US intellectual property by Chinese businesses which led to a huge counterfeit goods problem coming out of China. Daniels estimated that “70% of the world’s counterfeit market is driven by China.” The second was the slave labor issue with China, particularly the Uyghurs. This extensive use of slave labor gave China an economic advantage which in many cases could not be overcome. It was economic warfare by another name.
All of this was exacerbated by the pandemic and we saw what it meant to have an economic and geopolitical adversary as one of your key suppliers during a true worldwide healthcare crisis. This confluence of events led to several key changes in thinking about supply chain. First, supply chain efficacy is not about weather events, it is not about logistics, it is not about just in time. There are much broader sets of issues for supply chain that had not come to the fore previously but came much more clearly into focus, such as geopolitical tensions. According to Daniels, “we realized that supply chain is multifaceted in terms of issues.”
Next came the recognition of the need for more and greater government oversight and regulation. The need to stamp out modern slavery led to the passage of the Uyghur Forced Labor Prevention Act. This law significantly expanded compliance requirements for companies to certify that goods made with forced labor in the Xinjiang Uyghur Autonomous Region of the People’s Republic of China do not enter the United States. Interestingly, the law created the presumption that all goods produced in Xinjiang were produced using forced labor, with the burden of proof resting on companies to demonstrate that materials, parts, and goods originating in China were not mined, produced, or manufactured wholly or in part in Xinjiang. There was also a business and government realization that many of the key rare earth elements and minerals widely used in US manufacturing process came from China and now Russia.
Daniels put all of this into perspective when he said, “you had this big earthquake in the pandemic, but then you had all these fault lines that we didn’t realize that were on the edge of a precipice. We were in these really brittle places and just all fell apart with the Russian invasion of Ukraine. From rare earth elements like neodymium which is used in securing a F35 to electric car batteries, to metals and heavy metals used in standard manufacturing processes such as aluminum, iron and neon; supply chain disruptions were all acerbated by the Russian invasion of Ukraine on top of the ongoing disruptions from the pandemic and beyond.”
Finally, was a new element to the supply chain calculus, what Daniels termed “the ethical conundrum.” Russia has engaged in a brutal unjustified war that has disrupted the flow of goods and services from both Russia and Ukraine. Neon, a key element for processing chips, is heavily concentrated in Ukraine as are some of our largest outsourced engineering software companies. As the US and EU governments have responded with a series of harsher and more robust economic and trade sanctions the pressures on supply chain have increased. You must look at greater and more ongoing due diligence and greater sustainability.
These issues have moved beyond simply national security issues in the governmental and public sector. As DAG Monaco said, “Increasingly, you and your clients are on the front lines in responding to these geopolitical realities…our goal is not only to hold people accountable, but to disrupt these threats using all the tools available to us.” Private companies must understand they are now a part of what Daniels characterized as “continuous non-kinetic warfare.”
But in addition to this new type of warfare of which every business is now a part of going forward, it all ties back to US economic prosperity. While this was clear in the US adversarial relationship with China pre-pandemic; it accelerated during the pandemic and now after the Russian invasion of Ukraine. If you could not get a mask so that you could go to work during the pandemic, that health issue became an economic issue. If you were doing business with a Russian oligarch, the reputational damage to your top line will negatively impact your company, perhaps in a material manner.
Tomorrow we consider why economic and trade sanctions will never be the same.

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Due Diligence Lessons from Elizabeth Holmes and Theranos

Elizabeth Holmes was found guilty this week on 4 of 11 charges against her. The jury was unable to reach agreement on the remaining seven charges against her. Multiple media outlets have reported on the verdict. They include the Verdict itself in the Wall Street Journal (WSJ); what the verdict means for Silicon Valley, in the New York Times (NYT); questions on the victims of the Theranos fraud in Bloomberg and, of course, the lingering questions or how or even will Holmes serve any time, as reported in Fortune. Others have questioned whether the guilty verdict is an indictment of the entire Silicon Valley “fake it ‘til you make it” culture, as reported in The Verge.
I had two recent podcasts on the trial, Holmes and Theranos. The first, with white collar defense lawyer Kevin O’Brien, looked at the trial itself, the prosecution and defense cases as well as whether Holmes testimony hurt or helped her defense. The second, with Exiger President Brandon Daniels, considered the types of due diligence which you should engage in when considering a major investment. Both episodes were well received, pointing to the ongoing fascination with this major fraudster and how to parse out some lessons learned for the compliance professional.
From the testimony it was clear that Holmes knew exactly what she was doing all along. As reported by The Verge, “When it came to the investors, prosecutors had Holmes dead to rights. Unlike with the patients, she was in the room. There were emails and recordings. Holmes’ ties were clearer, and what she knew was clearer, too. The easiest part of this case to prove was about money, and that was where the prosecution spent the bulk of its time. Did Holmes lie to investors? The jury thought so on three counts”. In other words, the Theranos blood testing scam never did work.
But what are the lessons for the compliance professional? Daniels made clear in his podcast there were several lessons not only for companies looking to invest but in multiple business relationships such as potential joint venture partners, funded development partners and other types of business partnerships and ventures. He pointed out one thing to look at is your potential partner’s supply chain purchases; check it and challenge it. With Theranos, if someone saw the supply chain relationships with traditional blood testing equipment, it would lead him/her to ask, “Why is that occurring?” So why would Theranos be purchasing a competitor’s equipment?
If the answer came back the equipment is for testing and development comparison, why were those purchases at scale? Why did Theranos need so much of its competitor’s testing equipment. We now know it was because Theranos was testing blood samples on the Siemens blood testing equipment and claiming it was done on Theranos equipment.  If it was for comparison purposes, you would not have expected Siemens’s equipment to have been purchased in such large numbers.
Another area for due diligence is whether the potential partner has the production capacity to build the units that they intend to achieve. This is critical when you are moving from protype to a commercial enterprise, as Theranos did with Walgreens. Of course, Walgreens not only failed to do the basic due diligence required on the Theranos blood testing machine but actually removed experts from its pre-acquisition due diligence team who raised such questions.
Another difficult area in investment due diligence is how to evaluate the founder(s) of a startup as potential post-acquisition or post-merger leadership candidates. Many startups have a leader who has a vision. Holmes did have a vision. I am firmly convinced that Holmes had a vision of a bloodless draw for testing. But often visionaries are not really execution people. They may not even be operational people, but they are visionaries.
Daniels noted, “maverick leaders, who have a unique vision, a unique idea, and then tap into a fundamental, almost primal need in a market are always going to get a lot of attention. Especially ones that are cult to personality which Elizabeth Holmes rightly has in place.” But even here, you need to ask some direct questions. Does the company really have the expertise at the very top to understand that what they are attempting to do is possible? Moreover, do they have the capacity, the expertise, the fundamental understanding of the component of the device, or the innovation that would be necessary to know if full scale production is even possible
A key step in the production process is a prototype. Is there a minimum viable product (MVP) that can be built and tested? This would help inform if key management personnel have “a fundamental understanding of how the core parts of the process work? Do they have an understanding how they lived the market need? Finally, have they prototyped the product to the point where you could actually demonstrate that it will work, even if you’re eons away from it being productized and scaling?” From there you should move on the to having a “seasoned medical professional, a seasoned medical device expert either in-house or as a company partner and the right management team to assess whether or not what they were doing is viable is so important.”
Theranos also serves as an excellent example of the mandates from the Department of Justice (DOJ) in Mergers and Acquisitions (M&A) in a best practices compliance program. You must start with pre-acquisition due diligence but that is only the starting point. The data you glean in pre-acquisition due diligence should serve as your baseline for ongoing monitoring of any company you acquire in the post-acquisition phase. It is this coupling of pre-acquisition due diligence with the post-acquisition phase in a best practices compliance program which is another key lesson from Theranos.
In investment due diligence, due diligence tends to be a point-in-time which looks at the dynamics of the business, but you need to couple due diligence on an ongoing basis because the risks you assess today may well change tomorrow. Daniels noted, “you have to continuously monitor the issues to make sure that your investments decisions in terms of production, your decisions in terms of your capabilities are sound and there is continuous monitoring.”
The Holmes verdict will be studied as a part of the overall story of Theranos. There are many lessons to be learned from Theranos for the compliance professional. But perhaps we should start with one of the most basic forms of due diligence. If it sounds too good to be true, it probably isn’t true. Or if you want to channel your inner Ronnie Reagan, “Trust but verify” even in due diligence.

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FCPA Compliance Report

Brandon Daniels-Ongoing v. Point in Time Due Diligence


In this episode of the FCPA Compliance Report, I visit with Brandon Daniels, President of Exiger. Brandon is a long-time favorite on the FCPA Compliance Report, and he always brings a unique perspective to a variety of compliance topics. In this episode, we look at the Theranos case from a very different angle than the criminal fraud trial of Elizabeth Holmes. We consider the due diligence lessons from Theranos. Highlights of this podcast include:

  1. What is the difference between ongoing due diligence v. point in time due diligence?
  2. How does Due Diligence on potential investments different (or not) from DD on other types of 3rd parties?
  3. What areas should you look at in DD of potential business partners/investments?
  4. How do you perform DD on leaders or senior management of potential business partners/investments?
  5. What should people or skill sets be on your DD team? For instance, would you suggest being on a DD team to evaluate Theranos?
  6. How do you evaluate the risk, or are you simply trying to ID red flags?
  7. Does DD provide insight into the leader of potential business partners/investments continuing after the deal is done?

Resources
Brandon Daniels on Exiger website
Pre-investment, IPO, and Fund-Raising DD

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Compliance and Coronavirus

Brandon Daniels on Data Management and Data Security Moving out of Covid-19


Welcome to Exiger week on Compliance and Coronavirus. As the Voice of Compliance, I wanted to start a podcast which will help to bring both clarity and sanity to the compliance practitioner and compliance profession during this worldwide health and healthcare crisis. In this episode, I visit with Brandon Daniels is the President of Global Markets. A regulatory expert and technology practitioner, Daniels brings more than 15 years in senior management across the financial services, life sciences and energy sectors. He is a leader in technological innovation in regulatory investigations and compliance management. Some of the topics include:

  • How security and US national security will play a bigger role moving out of Covid-19.
  • What will be some of the biggest changes in 2021?
  • What will be the role of a CCO in this increased era of corporate security?
  • Why the management of data will be so critical going forward?
  • Why Supply Chain will be a critical area moving forward?

Resources
For more information, check out Exiger’s website here.

Categories
Compliance and Coronavirus

Compliance and Coronavirus-Brandon Daniels on Data Management and Data Security Moving out of Covid-19

Welcome to Exiger week on Compliance and Coronavirus. As the Voice of Compliance, I wanted to start a podcast which will help to bring both clarity and sanity to the compliance practitioner and compliance profession during this worldwide health and healthcare crisis. In this episode, I visit with Brandon Daniels is the President of Global Markets. A regulatory expert and technology practitioner, Daniels brings more than 15 years in senior management across the financial services, life sciences and energy sectors. He is a leader in technological innovation in regulatory investigations and compliance management.
Some of the topics include:

  • How security and US national security will play a bigger role moving out of Coivd-19.
  • What will be some of the biggest changes in 2021?
  • What will be the role of a CCO in this increased era of corporate security?
  • Why the management of data will be so critical going forward?
  • Why Supply Chain will be a critical area moving forward?

Resources
For more information, check out Exiger’s website here.

Categories
FCPA Compliance Report

FCPA Compliance Report-Episode 434, Brandon Daniels on Using Investigations to Drive Continuous Improvement

In this episode of the FCPA Compliance Report, I visit with Brandon Daniels, who is the President of Global Technology Markets for Exiger. Daniels is regulatory expert and technology practitioner, bringing more than 15 years in senior management across the financial services, life sciences and energy sectors. He has a reputation for technological innovation in regulatory investigations and compliance management. Some of the highlights include

  1. Daniels’ professional background, how he got to Exiger and his current role at the company.
  2. Some of the key technological innovations Daniels has recently seen in the way in which investigations are being handled?
  3. We discuss how can Exiger’s technological solutions help a CCO get their arms around the unstructured data which is available to them inside their organization?
  4. How can technology be used to create predictive models to rank offshore companies for potential tax and corruption risk?
  5. How can a technological solution can be used to help perform a compliance risk assessment?
  6. How do Exiger technological solutions assist compliance professionals to improve their corporate culture?

For more information on Exiger, check out the firm’s website here. For more information on Brandon Daniels, check out his firm profile here.