On April 15, 2019, the Internal Revenue Service (“IRS”) announced that it had just completed a two-week educational campaign focusing on employment tax issues. According to the IRS’s release, it dispatched Criminal Investigation (“CI”) agents to nearly 100 businesses that were showing signs of potential serious noncompliance. During these visits, business owners were informed about ways to catch up with back payroll taxes. During these meetings, the CI agents discussed how to stay current and the potential for civil and criminal penalties. The IRS also announced that, over those two weeks, it had taken several dozen legal actions against potential employment tax violators, including indicting twelve individuals and executing four search warrants. The IRS said that federal courts imposed criminal sentences in six cases in which defendants were convicted of crimes involving payroll tax violations. Continue reading “The IRS Announces Conclusion of Two-Week Campaign Focused on Employment Tax Compliance”
The Consumer Product Safety Act requires manufacturers, importers, and distributors of consumer products to report hazardous defects. Failure to comply can subject the individual officers and employees to criminal penalties.
On March 28, 2019, two California executives were indicted for failing to disclose defects with their dehumidifiers, despite multiple reports showing the product could catch fire easily. In United States v. Simon Chu and Charley Loh, 19-CR-00193 (C.D. Cal.), defendants Simon Chu and Charley Loh were charged with conspiracy to commit wire fraud, failing to furnish information under the Consumer Product Safety Act (“CPSA”), and defrauding the U.S. Consumer Product Safety Commission (“CPSC”), while executives of two unindicted and unnamed co-conspirator companies. The indictment also charges the individual defendants with one count of wire fraud and one count of failure to furnish information under the CPSA.
Chu and Loh are alleged to have known as early as 2012 that the Chinese dehumidifiers that they imported and sold were defective and could catch fire. According to the indictment, in July 2012, the two men received a video from a consumer showing a burning dehumidifier. They later tested the plastic used in their products and found that, not only did the plastic burn, but the materials used did not meet safety standards. Nevertheless, Chu and Loh continued to sell the dehumidifiers, and withhold information about the defects, to avoid the costs of a recall. Continue reading “The Justice Department Brings Its First-Ever Prosecution of Corporate Officers for Criminal Violations of the Consumer Product Safety Act”
State and federal authorities are ramping up civil and criminal enforcement efforts against merchants who use electronic sales suppression (“ESS”) software, also known as zappers and phantom-ware (collectively “zappers”). These devices are usually software patches that retailers apply to their Point of Sale (“POS”) software. POS software is designed to record every transaction, and its internal records usually cannot be altered by the retailer (or its employees). When zappers are installed (usually by a USB flash drive), some percentage of the business’ transactions are never recorded, thereby permanently altering corporate books and records from the outset. Given that zappers are usually only operational when a flash drive is plugged into the POS software, it is next to impossible for outside auditors to detect their use. Obviously, in a cash-intensive business, the use of a zapper makes recreating a paper trail impossible.
In the last few years, state governments have placed a greater emphasis on identifying merchants that use zappers. Their concern is real. Continue reading “Don’t Get Zapped: Enforcement against Businesses That Use Sales Suppression Software Is on the Upswing”
This article explores two recent developments in False Claims Act (“FCA”) litigation—one that should provide reassurance to potential FCA defendants, and one that may trouble them.
Government Dismissals of FCA Cases
In January 2018, Michael Granston, the Department of Justice (“DOJ”) civil fraud chief, issued a memorandum on FCA case dismissals (the “Granston Memo”). As previously discussed in our April 2018 article, False Hope for False Claims Act Defendants? Government Dismissals of Qui Tam Cases May Increase, the Granston Memo provided guidance to DOJ lawyers about when they should dismiss FCA cases. Historically, such dismissals have been rare. In fact, a 2013 study by Stanford Law School professor David Freeman Engstrom concluded that since 1986, the government had unilaterally dismissed only 30 of 4,000 unsealed whistleblower FCA complaints.
Since the Granston Memo was issued, the government has already advocated for the dismissal of three FCA cases. The first case is pending before the U.S. Supreme Court, Gilead Sciences Inc. v. U.S. ex rel. Jeffrey Campie et al., 17-936. At the end of November, the DOJ filed an amicus brief indicating that it will move to dismiss the case if it is sent back to the district court, as “continued prosecution of the suit is not in the public interest.” The DOJ explained that it is concerned about both parties making “burdensome” requests for Food and Drug Administration (“FDA”) documents and testimony if the case proceeds. According to the DOJ, such requests would distract from the FDA’s public health responsibilities. As the DOJ wrote, “The government has concluded that allowing this suit to proceed to discovery (and potentially a trial) would impinge on agency decisionmaking and discretion and would disserve the interests of the United States.” Continue reading “You Win Some, You Lose Some: Recent FCA Litigation Developments”
This is the sixth installment in a series of articles. For more background on this topic, please read our first article in the series, An Introduction to Financial Technology; our second article, The FinTech Revolution: Enforcement Actions Brought against FinTech Companies and Their Implications; our third article, The FinTech Revolution: The Impact of Blockchain Technology on Regulatory Enforcement; our fourth article, The FinTech Revolution: Complying with Anti-Money Laundering Laws to Avoid Regulatory Enforcement Actions; and our fifth article, The FinTech Revolution: How Data Breaches Can Result in Regulatory Enforcement Actions.
As the FinTech industry rises in popularity, the number of digital transactions—also known as e-commerce—is sky-rocketing, creating ever-greater opportunities for fraud.1 These vulnerabilities are compounded by an expansion in the range and assortment of digital transactions. As a result, there is a critical need for companies in the FinTech industry to ensure that they have sound and comprehensive fraud prevention strategies, policies, and programs in place.
People seeking to engage in fraudulent schemes or artifices are attracted to an industry that is on the cutting edge of technological development where they see opportunities to exploit weaknesses in data protection. Identity theft (the misappropriation of someone else’s identity by targeting his or her personal information), and “phishing” (using fraudulent communications such as websites, text messages, and e-mails to induce people to part with their personal information), are two of the more common types of fraudulent devices that are employed, in addition to other sophisticated fraudulent schemes.2 Continue reading “The FinTech Revolution: Fraud Prevention in the FinTech Space”
In April 2017, white collar and securities attorneys, as well as potential defendants, cheered the Supreme Court’s unanimous opinion in Kokesh v. SEC, which held that civil disgorgement, when imposed as part of a Securities and Exchange Commission (“SEC”) enforcement proceeding, is a “penalty” and therefore subject to a five-year statute of limitations.1 At the time, Kokesh was hailed as limiting the size of future disgorgement awards, in some cases dramatically. However, the court’s categorization of SEC disgorgement as a “penalty” may have much wider ripple effects that could jeopardize billions of dollars in potential future insurance recoveries. This ripple effect first manifested itself in J.P. Morgan Sec., Inc. v. Vigilant Ins. Co., where New York’s intermediate appellate court recently held that an SEC disgorgement settlement was no longer a covered “loss” under the defendant’s insurance policy, because Kokesh recategorized such disgorgements as non-covered “penalties.”2
While Kokesh, on the one hand, may save SEC enforcement targets hundreds of millions of dollars, it also may greatly complicate their insurance claims for the amounts they do pay either in settlement or judgment. In response, potential SEC enforcement targets should: Continue reading “Insurers Seize on Kokesh Ruling to Disclaim Coverage for SEC Disgorgement”
Few Americans consider the United States to be a money laundering haven, but it is. Earlier this year, the European Parliament wrote:
“The USA is seen as an emerging leading tax and secrecy haven for rich foreigners, when in parallel it has reprimanded other countries for helping rich Americans hide their money offshore. It is difficult to estimate how much revenue the United States loses from tax avoidance and evasion, but some have suggested that the annual cost of offshore tax abuses may be around US $100 billion per year.”1
To combat U.S. money laundering by foreign citizens, the Internal Revenue Service (“IRS”) and the U.S. Department of Treasury Financial Crimes Enforcement Network (“FinCEN”) implemented new and strengthened existing reporting requirements for foreign individuals who have financial interests in the United States. Although these regulations are applied broadly, there has been very little discussion about their implementation in the United States. Presumably, there has been even less discussion abroad.
This article focuses on two new, wide-ranging regulatory requirements: 1) the requirement that foreign-owned entities, treated as “disregarded entities” for U.S. federal income tax purposes, file an IRS Form 5472, Information Return of a 25 Percent Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business; and 2) the requirement that all entities report beneficial ownership when opening a bank account. Failure to comply with these requirements may subject foreign nationals and U.S. individuals who do business with them to civil and criminal sanctions. Continue reading “New Treasury Regulations Impose Conflicting Requirements on Foreign Persons with U.S. Interests”