The More Things Change, The More Things Need to Change: Competing in an Unregulated Environment

The last twenty years have seen tremendous changes in how we interact, both personally and professionally. Social media and crowdfunding have, to varying degrees, impacted our daily lives. There is no question that these platforms have had a positive effect: users can raise funds on a large scale for disaster relief, track down old friends, or connect with like-minded people. However, these same platforms offer opportunities for abuse as, for example, funds can also be raised for extremist groups, social media can be used for online bullying, and scams can be perpetrated against the vulnerable. Recent events, including the January 6^th Capitol riot and the unusual trading activities in GameStop shares, show that some Internet platforms present unusual challenges for regulators and, more broadly, society in general. This quandary—i.e., how to benefit from the positive while restricting the negative—is perhaps best illustrated by the ongoing debate concerning social media where efforts to limit access to platforms have been criticized by some as attacks on free speech. And addressing this issue is further complicated by the fact that when public or government pressure has led established platforms to self-regulate, new platforms surface to service those users whose activities have been restricted.

But social media and crowdfunding sites are not the only platforms that have left regulators scrambling to catch up as risks associated with their misuse, such as the funding of extremist groups, have become apparent. Cryptocurrency and related businesses have enjoyed rapid growth as the value of bitcoin has rocketed, but many still wonder what role these companies will ultimately play in our financial markets. Of more immediate concern to critics, however, is the risk of money laundering as anonymous cryptocurrency is continuously being refined to keep the details of transactions untraceable. Most importantly, all platforms (including social media, crowdfunding, crypto-related, and online gaming sites) operate in competitive markets, where doing the right thing—such as instituting thorough “know your customer” policies—can drive customers to competitors. The net result is that an inchoate regulatory regime places self-regulating companies taking active measures at a competitive disadvantage to companies that ignore regulatory concerns or provide “window dressing” compliance.

This landscape will change only when new regulations are adopted and aggressively enforced, a process that can take years. In the meantime, compliant companies are left with the choice of hoping the regulatory environment changes quickly or taking action themselves to level the playing field. It may seem daunting to act, but there are steps companies can take. Specifically, reputable investigative firms can assist compliant companies by documenting the misdeeds of non-compliant competitors—information that can ultimately be shared with regulators. Misdeeds we have seen include:

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• Opaque Ownership: Because regulation of the above-cited industries varies widely by country, some companies go to great lengths to hide their ownership in order to escape regulation in particular jurisdictions. Efforts to determine ownership can lead to what sometimes appears to be a game of corporate “whack-a-mole,” where ownership records lead from one opaque entity to another. Through our international offices and network of contacts, we have frequently been able to obtain the records necessary to document the true ownership of companies while also showing how those owners took steps to disguise their interests, thereby evidencing their consciousness of guilt.
• Lax or Non-Existent Know Your Customer Policies: Depending on the industry and jurisdiction, laws may mandate thorough KYC policies. On several occasions, through discreet testing, we have been able to document significant gaps in company compliance regimes.
• Lax or Non-Existent Geo-Blocking: Some Internet platforms are required to restrict access to customers in certain jurisdictions, a process known as “geo-blocking.” Time and again we have seen companies make minimal geo-blocking efforts as they try to maintain and expand their customer base within regulated jurisdictions.
• Links to Bad Actors: As certain platforms face a more regulated future, companies have tried to distance themselves from individuals whose known participation could prevent the companies from being licensed. While assisting compliant companies, we have been able to document competitors’ undisclosed links to bad actors as well as those actors’ histories of illegal and/or unethical activities.

There is no question that is it difficult to compete in an industry with non-existent or developing regulation. Not all companies survive such an environment. However, as abuses continue, there is little question that some level of regulation will result and, hopefully, bad actors will be weeded out when they lose their competitive advantages. Until then, with no timeframe for significant regulatory changes, compliant companies will need to fend for themselves.