New Risks as COVID-19 Forces Rapid Technology Adoption

The digital transformation of businesses around the world has been a steady, incremental evolution. But when COVID-19 uprooted our lives in the second quarter of 2020 and dramatically changed how we work, we witnessed an acceleration of technology adoption never before seen. While companies scrambled to adapt during this global pandemic, they leaned heavily on critical tech solutions that appeared necessary to sustain operations during an age of lockdowns and limited to no travel. These efforts have been exceptional and have helped companies and economies survive a very difficult 2020.

But as we know from working with compliance professionals every day during this unprecedented period, rapid integration has come with costs.

The 2020 Connected Compliance report was recently issued by Baker & McKenzie in an attempt to quantify what we have been witnessing anecdotally: The rush to adopt new technologies during the COVID-19 pandemic has already led to a dramatic increase in civil and criminal enforcement actions, as well as a seismic shift in the risk of exposure to organizations. By conducting a global survey of 2,000 compliance leaders, we were able to take a closer look into COVID-19’s impact on compliance teams in the U.S. and around the world. While some of our findings were expected, many other insights indicated that the pandemic’s impact has been greater than we thought.

Most notably, ill-considered and rapidly implemented technology has already resulted in enforcement and investigations, according to 47 percent of the U.S. compliance leaders we surveyed. That is alarming to say the least. With investigations in 2021 and following years likely to rise in relation to data privacy and cybersecurity – as well as tax, transfer pricing, fraud and antitrust – complex and sometimes interdependent matters will require the increased attention of compliance leaders.

In light of the uptick in enforcement proceedings, over half of the surveyed compliance leaders in the U.S. believe COVID-19 has materially increased the risk exposure of their organization. And according to half of the U.S. compliance leaders, as COVID-19 has accelerated adoption of digital products, approaches and tools, their organizations have made rapid changes to their supply chain without the usual level of due diligence.

We have seen first-hand that as companies quickly transitioned to remote offices and videoconferencing this past year, they did not factor in account security, data privacy and compliance considerations. Many companies still do not realize that Zoom recordings are potentially subject to discovery. This can create thorny issues because pre-pandemic, if parties wanted to discuss a sensitive matter, they would do so over the phone. Now, as many of these conversations are taking place over Zoom, they are often being recorded (sometimes formally and sometimes, perhaps, surreptitiously) and are, therefore, potentially discoverable.

But discovery of company Zooms are not the only risk. Companies adopting new technologies to permit remote work – necessarily permitting broad swaths of employee remote access to key data – are not doing enough to safeguard against attacks by those seeking access to the key information for nefarious purposes. For example, there has been a notable rise in the previous several months of “vishing” schemes, where hackers trick company employees into handing over their VPN credentials so they can access and exfiltrate sensitive company files. Indeed, the threats to sensitive company data are not simply external: Bad actors within companies, due to poorly considered security protocols, have more access to key data now than ever before, along with far less physical supervision than was normal pre-pandemic. The result will almost certainly be a dramatic uptick in the number of investigations and prosecutions for trade secrets misappropriation and economic espionage, among many other crimes. These cases can be alarmingly expensive and problematic for impacted companies, especially those that become targets for prosecution for criminal trade secrets theft or other crimes, such as Computer Fraud and Abuse Act violations, on the basis of their employees’ activities.

Most concerningly, these “new normal” security issues potentially give rise to criminal and quasi-criminal liability. Enforcement agencies can launch investigations based on public filings that fail to account for (or conceal) these types of securities risks. As mentioned above, the potential for criminal trade secret enforcement is ever present, and defense contractors and downstream suppliers should be particularly careful to ensure that new technologies do not inadvertently create ITAR compliance issues. It is a near certainty that the Biden DOJ will launch enforcement proceedings against companies in an effort to change company behavior to ensure increased data security compliance.

Out of the Loop

Not only are organizations implementing new technology with little consideration for compliance risk, our research found that compliance is often removed from conversations related to technology acquisition decision-making. A staggering 47 percent of global compliance leaders said they were rarely consulted on compliance risk at the start of strategic decision-making on technology and digital acquisitions. A slightly smaller but still significant 43 percent say that their compliance function has no way of knowing what new technology is being implemented in the business and are not consulted on purchasing decisions.

Given the pre-COVID surge in cybersecurity and data privacy investigations and COVID-related upticks in investigations relating to supply chains, revenue pressures and fraud, it’s not encouraging to hear compliance is being shut out of decision-making around new technology investments. Given these trends, compliance teams, often the first line of defense against such investigations, need to be more vocal about these considerations.

AI and Compliance

Our research also shows that while technology is a source of new risk to be managed, it is also emerging as an essential connector for the compliance function itself. The pandemic has led to a re-examination of traditional approaches, and many compliance teams are considering a radical reimagining of the function by embracing technology as an enabler of compliance integration and efficiency.

From artificial intelligence (AI) and predictive analytics to e-discovery and regtech (the management of regulatory matters through technology), the future of compliance is undoubtedly digital.  According to our respondents, within the next two years, the overwhelming majority of compliance leaders plan to further adopt AI and other means of predictive analytics to identify and address risks within their organizations.

2021 Outlook

Looking ahead, we at Baker & McKenzie believe the speed and scale of new investigations, especially in light of the new United States presidential administration, will ramp up as a result of economic uncertainty and radical change. This also appears inevitable to our surveyed compliance leaders. Up to 64 percent predict that scrutiny of tech-enabled business models and data privacy issues will be at the top of regulators’ to-do list as a result of COVID-19.

In certain companies and market sectors, we have observed that calls to internal compliance hotlines have jumped in recent months and, assuming the economic distress triggered by the pandemic mirrors that of the global financial crisis, we can be confident that this uptick is also reflected in the number of tip-offs to enforcement agencies. Lay-offs go hand-in-glove with whistleblowing activity — the leads that regulators rely on for expediting new investigations and criminal proceedings, particularly in terms of white-collar crime.

The number of cybersecurity investigations is also almost certain to rise as a result of mass remote-working and traditional companies attempting to pivot underinvested digital infrastructure quickly. Forty-five percent of compliance leaders think that rapid shifts in the way employees work (remotely) because of the pandemic has already created significantly increased data privacy risk. Executives are weighing difficult decisions, balancing cost with continuity as they seek to protect data and IP as well as revenue. But bolting on adequate digital security to legacy technology or transforming systems to be secure-by-design are not simple or quick tasks to accomplish, even when companies are not in “crisis mode,” adapting to pandemic changes.

The significant time and resources involved in making a traditional global organization digitally “water tight” suggests crisis-level problems will continue to be generated by the speed at which recent technological pivots have been made.

Caveat emptor, indeed.

Jessica would like to thank Michael Hidalgo for his assistance with this article.