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In our alert called “Criminal Investigations in the UK: What to Watch for the UK and the EU in 2023”, we predicted the introduction of a new “failure to prevent” offence. We predicted that such a new offence would likely have far-reaching, and potentially seismic, consequences on organizations both (i) in having to ensure that the procedures that they have in place to prevent fraud are reasonable, but also (ii) on the (higher) success rate of law enforcement to prosecute a large organization if an employee commits fraud for the organization’s benefit. 

On April 11, 2023, the UK Home Office tabled an amendment to the Economic Crime and Corporate Transparency Bill, introducing a “failure to prevent fraud” offence. Whilst such an offence has not yet received Royal Assent, it is thought likely that it will shortly be passed into law. If passed into law, we expect that there will be a period of several months before the law comes into effect, to allow the government to draft and publish guidance.

According to the fact sheet published by the UK Home Office on April 11, 2023,[1] the new offence will make an organization liable where a specified fraud offence is committed by an employee or agent, for the organization’s benefit, and the organization did not have reasonable procedures in place. It also provides the following additional detail:

  1. Scope. The offence will apply to all large bodies corporate and partnerships, and to all sectors. However, to ensure the burden on organizations is proportionate, only large organizations will be in scope. This is likely to be defined as including organizations meeting two out of three of the following criteria: (i) more than 250 employees, (ii) more than £36 million turnover and (iii) more than £18 million in total assets.
  • Offences in Scope. Fraud and false accounting offences will be in scope including fraud by false representation (section 2 Fraud Act 2006), fraud by failing to disclose information (section 3 Fraud Act 2006), fraud by abuse of position (section 4 Fraud Act 2006), obtaining services dishonestly (section 11 Fraud Act 2006), participation in a fraudulent business (section 9, Fraud Act 2006), false statements by company directors (Section 19, Theft Act 1968), false accounting (section 17 Theft Act 1968), fraudulent trading (section 993 Companies Act 2006) and cheating the public revenue (common law).  Money laundering offences are unlikely to be included because relevant organizations are already required by law to have anti money laundering procedures in place.  The government will have the power to add further offences to those offences within the scope of the new legislation.
  • Potential Defenses. Organizations will be able to avoid prosecution if they have, and can demonstrate that they have, reasonable procedures in place to deter the offending.  The factsheet provides that the government will publish guidance providing organizations with more information about what constitutes reasonable procedures before the new offence comes into force. The offence will not be enforced until the guidance is published.
  • Penalty. An organization will be liable to receive an unlimited fine.
  • Individual Accountability. There will be no individual liability for failure to prevent fraud, because individuals within companies can already be prosecuted for committing, encouraging or assisting fraud.
  • Extra territoriality. If an employee commits fraud under UK law, or targeting UK victims, their employer could be prosecuted, even if the organization (and the employee) are based overseas.

Whether the new offence results in a higher number of convictions is yet to be seen but, as with the existing failure to prevent bribery and failure to prevent facilitation of tax evasion offences, the introduction of the new legislation is intended to drive better corporate behaviors.  Organizations likely to be caught by the new offence would be well advised to start to consider the adequacy or otherwise of their fraud prevention procedures. 

[1] https://www.gov.uk/government/publications/economic-crime-and-corporate-transparency-bill-2022-factsheets/factsheet-failure-to-prevent-fraud-offence

On March 1 and 7, 2023, the National Security Bill (the “Bill”) will enter the Report stage of the House of Lords, during which members of the House of Lords will be given a further opportunity to examine and make amendments to the Bill. The Bill was first introduced by the Home Secretary on May 11, 2022 and, since its introduction, has undergone various readings, stages and amendments in both the House of Commons and the House of Lords. The Bill is expected to return to the House of Commons for approval, and subsequent Royal Assent, towards the end of 2023.

As the 202-page Bill is currently drafted, if passed, it will, among other things:

  1. reform existing espionage laws and include new offences to tackle state-backed sabotage and foreign interference (Part 1 of the Bill);
  2. enhance police powers to support the investigation of state threats (Part 2 of the Bill);
  3. create a registration scheme requiring the registration of certain arrangements with foreign governments (Part 3 of the Bill); and
  4. restrict the ability of convicted terrorists to receive civil legal aid and prevent their exploitation of civil damage systems (Part 4 of the Bill).

The third of the above proposals – the creation of a registration scheme – aims to introduce something similar to a US-style foreign lobbying register, and will require those carrying out certain arrangements on behalf of a foreign power to register with the UK Secretary of State.

Foreign Influence Registration Scheme

Introduction

According to the UK government’s Policy Paper entitled “Foreign Influence Registration Scheme (FIRS): National Security Bill factsheet” (the “Policy Paper”), the aim of Foreign Influence Registration Scheme (“FIRS”):

“…is to deter foreign power use of covert arrangements, activities and proxies. It does this by requiring greater transparency around certain activities that foreign powers direct, as well as where those activities are directed or carried out by entities established overseas or subject to foreign power control.”[1]

In essence, FIRS will mandate that foreign organizations (excluding foreign governments) that carry out political influencing activities on behalf of a foreign state register their interactions with UK policy and decision makers. The definitions used in Part 3 of the Bill are broad including, for example, defining “political influence activity” as including communications with senior decision makers such as UK ministers (and ministers of the devolved administrations), election candidates, MPs and senior civil servants, but also communications to the public “where it is not already clear that the communications are being directed by a foreign principal, and disbursement of money, goods or services to UK persons.”  

Exemptions to the registration requirements are likely to be minimal, although lawyers have been excluded in relation to defined legal activities. Moreover, the Policy Paper states that the following will be not be required to register:

  1. individuals acting for a foreign power in their official capacity as employees;
  2. individuals to whom privileges and immunities apply in international law;
  3. family members who are part of the household of members of diplomatic and consular staff;
  4. those providing essential services to a diplomatic mission or consulate e.g., catering or building services;
  5. domestic and international news publishers; and
  6. arrangements to which the UK is a party.

Registration of foreign influence arrangements and political influence activities carried out by foreign principals (the primary tier)

The registration scheme currently envisaged by the Bill will require, among other things, the registration of:

  • a “foreign influence arrangement”: namely an arrangement to carry out “political influence activities” within the UK at the direction of a “foreign principal” (section 68(1) of the Bill). The requirement to register with the Secretary of State will lie with the person making the arrangement with the foreign principal, and must be done “before the end of the period of 10 days beginning with the day on which [the person making the arrangement] makes the arrangement” (section 68(2) of the Bill); and
  • “political influence activity”: namely where the activity is being carried out by the foreign principal itself (on whom the obligation to register falls). 

A foreign principal is defined as a foreign power, or a foreign body corporate, or association established outside of the UK. The Policy Paper states that “we would not expect other governments to register with the scheme in respect of influencing activity that they themselves are undertaking.” Accordingly, other governments are excluded from the requirement to register “political influence activity” (but not a “foreign influence arrangement”).

According to the Policy Paper, “political influence activity” that will require registration will include:

“…making communications to senior decision makers such as UK ministers (and ministers of the devolved administrations), election candidates, MPs and senior civil servants. It also includes communications to the public where it is not already clear that the communications are being directed by a foreign principal, and disbursement of money, goods or services to UK persons. To be registerable, this activity has to be for the purpose of influencing UK public life for example elections, decisions of the government or the proceedings of either House of Parliament.”

The Bill envisages a number of new offenses, including failure to register a foreign influence arrangement within 10 days of making the arrangement, carrying out political influence activity where the overarching arrangement is not registered and the person knows that the activity is being directed by a foreign principal, and carrying out political influence activity where the person knows that information provided in connection with the arrangement is false, inaccurate or misleading. The penalty for a foreign influence offense is a maximum of two years imprisonment, a fine, or both.

Registration of foreign activity arrangements and activities carried out by a specified person (enhanced tier)

In addition to the “primary tier,” the Bill also tables a power, subject to Parliamentary approval, for the UK Secretary of State specifically to designate – or specify – a foreign power, part of a foreign power or an entity subject to foreign power control where it is considered necessary for the safety and interests of the UK. To date, there have been no designations but it is thought that this “enhanced tier” will allow the UK government to impose more robust requirements on hostile nations who are suspected of attempting to carry out malign influence.

The scheme will require the registration of:

  • arrangements to carry out any activity within the UK at the direction of a specified power or entity. Again, the requirement to register with the Secretary of State will be on the person making the arrangement with the specified foreign power, part of a foreign power or an entity subject to foreign power control; and
  • activity carried out by specified foreign power-controlled entities. The specified entity will be responsible for registering with the scheme. Again, specified foreign governments will not be required to register with the scheme.

The Bill introduces a number of foreign activity offenses, with the penalties for a foreign activity offence being a maximum of five years imprisonment, a fine or both.

Criticisms of FIRS

FIRS was introduced (and, in principle at least, initially welcomed) as an attempt – similar to schemes in other foreign nations including the United States – to protect British politics from hostile and malign foreign influence. 

Previous iterations of the Bill have, however, faced a lot of opposition including:

  1. FIRS fails to differentiate between hostile powers (such as China, Iran and Russia) and those countries with whom Britain has a friendly relationship (such as the EU and United States). Despite a number of requests that the government provide a “whitelist” of countries whose businesses would not have to register, the Bill has not yet been amended to include such a list;
  • the definitions used in the Bill are broad (see above) and could have unintended consequences, including a chilling effect on legitimate lobbying activity;
  • the registration obligations will place an unnecessary level of bureaucracy on non-UK businesses proposing to invest in the UK or overseas charitable organizations aiming to operate in the UK. In response, amendments tabled by the House of Lords on February 23, 2023 include that foreign businesses, charities, and other bodies acting in their own interests and who are not acting at the direction of a foreign state should be exempt from the requirement to register;
  • FIRS fails to deal with domestic lobbyists. This is of particular concern in circumstances where the UK’s current lobbying laws are thought to be inadequate; and
  • it has not (yet) been made clear what information will need to be provided in order to register with FIRS. The UK government has, however, said that the Secretary of State will make “clear, simple and proportionate” regulations – subject to parliamentary approval – detailing what information will be required, and that it is likely to include “who they are in an arrangement with, what activity they have been directed to undertake and when the arrangement was made.”

Conclusion

Whilst FIRS’ stated aim was laudable – to deal with valid concerns about emerging threats from a handful of malign states – as it is currently envisaged, FIRS raises a number of potential difficulties for a wide range of businesses operating in the international arena. We must now wait to see whether any further amendments will be made by the House of Lords.

[1] https://www.gov.uk/government/publications/national-security-bill-factsheets/foreign-influence-registration-scheme-firs-national-security-bill-factsheet#:~:text=The%20Foreign%20Influence%20Registration%20Scheme,covert%20arrangements%2C%20activities%20and%20proxies.

On January 23, 2023, a federal district court approved a pretrial diversion agreement between the Department of Justice (DOJ) and Ryan Hee, a former regional manager for a healthcare staffing company. The deal, which will likely result in Hee walking away without a conviction, is yet another lackluster result for DOJ’s thus-far largely unsuccessful effort to criminally prosecute alleged anticompetitive conduct in the labor markets.

Indeed, despite a spate of victories at the motion to dismiss stage (covered in our previous posts here, here, and here), DOJ has yet to secure a labor-side Sherman Act conviction at trial. Years after its initiation, DOJ’s effort has yielded only two convictions. [1] The pretrial diversion agreement with Hee does little to change this.

Continue Reading With Pretrial Diversion Agreement, DOJ’s Antitrust Division Achieves Another “Meh” Victory In Its Continued Effort to Police Labor Markets

In this blog post, we provide an overview of the updates to the Criminal Division’s Corporate Enforcement Policy (CEP) and discuss the impact of these changes on the corporate enforcement policies for criminal violations of sanctions and export controls, criminal violations of antitrust laws, and civil violations of the False Claim Act.

On January 17, 2023, Assistant Attorney General Kenneth A. Polite, Jr. announced changes to the Department of Justice’s (“DOJ”) Corporate Enforcement Policy (“CEP”), including applying the most recent FCPA Corporate Enforcement Policy to all corporate criminal cases handled by the DOJ’s Criminal Division. The FCPA Corporate Enforcement Policy, codified in § 9-47.120 of the Justice Manual, provides that if a company voluntarily self-discloses, fully cooperates, and timely and appropriately remediates, there is a presumption of declination absent certain “aggravating circumstances involving the seriousness of the offense or the nature of the offender.” The clear goal of this and other recent pronouncements from senior DOJ leadership is to tip the scales in favor of early disclosure by setting forth concrete incentives for corporations that discover potential criminal violations. 

Importantly, the CEP now explicitly states that a company presenting “aggravating circumstances,”[1] while not eligible for a presumption of declination, may still obtain a declination if (1) the company had an effective compliance program and system of internal accounting controls at the time of the alleged misconduct, (2) the voluntary self-disclosure was made “immediately” upon the company becoming aware of the allegation of misconduct, and (3) the company provided “extraordinary cooperation” to DOJ investigators. For companies that do not receive a declination but do receive credit, the CEP also increases the available discounts from fines under the U.S. Sentencing Guidelines (“USSG”), both for companies that voluntarily self-disclose and those that do not.

Although the updated CEP heavily emphasizes the benefits of voluntary self-disclosure and cooperation, its implications for companies will largely depend upon the Criminal Division’s application of the policy, including through DOJ prosecutors’ interpretation of important, undefined terms such as “immediate” disclosure and “extraordinary” cooperation.

Moreover, although the CEP applies to the entire Criminal Division, it could potentially have ripple effects on the corporate enforcement policies in place in other DOJ components. For example, the CEP does not revoke or alter the DOJ National Security Division’s (“NSD”) Export Control and Sanctions Enforcement Policy for Business Organizations (the “Export Control and Sanctions Enforcement Policy”). That NSD policy is generally consistent with the CEP, but it does not spell out affirmatively, as the new Criminal Division policy does, the circumstances that a company must demonstrate to be considered for a non-prosecution agreement (“NPA”) rather than a criminal resolution in the face of aggravating factors. Similarly, the Antitrust Division and Civil Division have their own corporate enforcement policies in place, each of which has aspects uniquely tailored to those respective regimes. It therefore remains to be seen whether these other Divisions within DOJ will adjust their corporate enforcement policies to align more precisely with the CEP.  

Declinations when Aggravating Circumstances are Present

Under the prior version of the CEP, companies could qualify for a presumption of declination if there was an absence of aggravating factors and if they: voluntarily disclosed; provided full cooperation; and timely and appropriately remediated. The revised CEP clarifies that companies may still qualify for a declination even where aggravating circumstances are present, but only under very specific and stringent requirements to qualify for such a result. Those requirements are: 

  • The voluntary self-disclosure was made immediately upon the company becoming aware of the allegation of misconduct;
  • At the time of the misconduct and disclosure, the company had an effective compliance program and system of internal accounting controls, which enabled the identification of the misconduct and led to the company’s voluntary self-disclosure; and
  • The company provided extraordinary cooperation with the Department’s investigation and undertook extraordinary remediation that exceeds the respective factors listed in the CEP.

The impact of the updated policy will largely depend upon how prosecutors apply these standards in practice. 

First, it will be important to evaluate how DOJ prosecutors in practice apply the standard of voluntary self-disclosure “made immediately upon the company becoming aware of the allegation of misconduct.” As currently articulated, the standard of immediate self-disclosure of a mere allegation is arguably unrealistic and does not appear to afford companies the opportunity to meaningfully investigate potential misconduct to determine whether there is even any potential misconduct (as opposed to a mere allegation) to disclose. 

Second, the requirement to demonstrate an effective compliance program goes beyond the FCPA Corporate Enforcement Policy’s prior requirement of demonstrating effective remediation. Although the definition of an “effective compliance program” at the time of misconduct likely comports with the Evaluation of Corporate Compliance Programs guidance, the new requirement and the way that it is articulated will mean that companies will have to affirmatively demonstrate the effectiveness of the compliance program both previously and at the time of the disclosure. This will mean that companies will have to devote even more money and resources (i.e., internal as well as external counsel) to making that case to the Department of Justice.

Third, while the concept of “extraordinary cooperation” has been referenced in a number of corporate settlements in recent years, that standard remains ill-defined, and DOJ enjoys substantial discretion in applying it. Assistant Attorney General Kenneth Polite emphasized that providing information that DOJ might not otherwise be able to obtain is part of the assessment, but that ultimately “we know ‘extraordinary cooperation’ when we see it, and the differences between ‘full’ and ‘extraordinary’ cooperation are perhaps more in degree than kind.” This leaves companies and their counsel with significant uncertainty as to what will be considered sufficient in any given matter.

USSG Discounts

The discounts available for companies that do not receive a declination but do receive credit are now greater, both for those that voluntarily disclose and those that do not. While the FCPA Corporate Enforcement Policy (and its later extension to the Criminal Division more broadly) provided for a maximum “50% reduction off of the low end” of the USSG fine range for non-recidivist companies that voluntarily self-disclose, fully cooperate, and appropriately remediate, the updated CEP provides for “at least 50% and up to 75% reduction off of the low end” of the USSG fine range for companies that meet those standards, except in the case of recidivists. Under the CEP, the Criminal Division will recommend up to a 50% reduction off of the low end of the USSG fine range for companies that do not voluntarily disclose but still fully cooperate and appropriately and timely remediate.

Furthermore, while this was always the case, it is notable that the revised policy expressly stresses the discretion that prosecutors have to recommend the specific percentage reduction and starting point in the fine range based on the particular facts and circumstances. It will be important to watch how prosecutors utilize this discretion in practice, and companies and their counsel will want to analogize (or distinguish) their cases from resolutions reached under the revised CEP going forward.

The CEP’s Potential Impacts on Corporate Enforcement Policies in Specific Areas

Export Control and Sanctions Violations

By comparison, as described above, when a company voluntarily self-discloses potentially willful violations of US export controls and sanctions laws to the NSD’s Counterintelligence and Export Control Section (“CES”), fully cooperates, and timely and appropriately remediates, there is a presumption of an NPA and no fine, absent aggravating circumstances. While the Export Control and Sanctions Enforcement Policy’s standards for receiving credit for voluntary self-disclosure, full cooperation, and timely and appropriate remediation are identical to those set forth in the prior FCPA Corporate Enforcement Policy, the NSD’s guidelines set forth specific aggravating factors that apply to criminal violations of US sanctions and export control laws by companies.[2]

If, due to aggravating factors, a different criminal resolution – i.e., a deferred prosecution agreement or guilty plea – is warranted for a company that has voluntarily self-disclosed, fully cooperated, and timely and appropriately remediated its export control or sanctions violations, the DOJ will accord, or recommend to a sentencing court, a fine that is, at least, 50% less than the amount that otherwise would be available. Unlike violations of the FCPA, criminal violations of sanctions and export control laws, which are typically charged as violations of the International Emergency Economic Powers Act (“IEEPA”), do not rely on the USSG in determining criminal fines. Rather, prosecutors charging IEEPA violations rely upon the alternative fine provision in 18 USC § 3571(d) and on forfeiture authority. Under 18 USC § 3571(d), the fine would ordinarily be capped at an amount equal to twice the gross gain or gross loss. Per NSD’s policy, however, when a company voluntarily self-discloses, fully cooperates, and timely and appropriately remediates, DOJ will cap the recommended fine at an amount equal only to the gross gain or gross loss (i.e., 50 percent of the statutory maximum), and the company would also be required to pay all disgorgement, forfeiture, and/or restitution resulting from the misconduct at issue. 

Importantly, the Export Control and Sanctions Enforcement Policy’s guidelines do not apply to administrative fines, penalties, and forfeitures commonly imposed by the State Department’s Directorate of Defense Trade Controls (“DDTC”), the Department of Commerce’s Bureau of Industry and Security (“BIS”), and the Treasury Department’s Office of Foreign Assets Control (“OFAC”) for export control and sanctions violations, all of which have their own guidelines. However, per § 1-12.100 of the Justice Manual, attorneys prosecuting these cases are expected to coordinate with other enforcement authorities and consider the total amount of fines, penalties, and forfeiture paid to DDTC, BIS, and/or OFAC in determining the criminal penalty.

Criminal Antitrust

Unlike other areas of corporate criminal enforcement under the DOJ umbrella, the Antitrust Division has had its own long-standing Leniency Program in place that provides broad protections to companies who participate in the Program. Under the Leniency Program, codified in § 7-3.000 of the Justice Manual, corporations who are the first in a conspiracy to report their cartel activity to the Antitrust Division and cooperate in the investigation can completely avoid criminal conviction, fines, and prison sentences.

Although broader DOJ enforcement policy changes typically try to avoid – and often expressly carve out – any interference with the Antitrust Division’s Leniency Program, the Antitrust Division often follows significant enforcement policy changes with its own issuance of enforcement guidance that is more precisely tailored to the contours of the Leniency Program. In this case, however, the Antitrust Division acted first (albeit after Deputy Attorney General Lisa Monaco’s issuance of her eponymous memo in October 2021). Last April, with the professed goal of making the program more straightforward and accessible, the Antitrust Division implemented updates to the Leniency Program, and these changes, as well as some of the prior aspects of the Leniency Program, emphasize the same requirements put forth in the CEP. Namely, these revisions require, as a condition of non-prosecution, that a company promptly reports potential misconduct, has an effective compliance program in place, addresses any compliance shortcomings that contributed to the misconduct, provides significant cooperation to the DOJ’s investigation, and undertakes remediation efforts that will address the root causes of the conduct.  

While the Antitrust Division’s prompt reporting requirement for complete non-prosecution has some of the same ambiguity as the CEP’s similar requirement, the Antitrust Division’s Guidance allows for companies seeking non-prosecution to conduct a timely, preliminary internal investigation to confirm the violation occurred before reporting the violation to the Antitrust Division. This appears to be significantly different from the CEP’s prerequisite to declination, where aggravating circumstances are present, of “immediate” reporting of a mere “allegation.” Moreover, the Leniency Program, unlike the CEP, does not create stricter requirements for those “first in” companies seeking declination that present aggravating circumstances, except that the Antitrust Division will carefully review the culpability of a company that served as the ringleader of the conspiracy before granting the company leniency.  

Overall, and likely based on the number of years the Antitrust Division’s program has been in place, the Antitrust Division has a more robust set of guidance to assist companies going through this process than the CEP provides. Last year, the Antitrust Division released 35 pages of FAQs covering all aspects of the program. While much of the implementation of the Leniency Program will depend on the facts and circumstances of the case as well as the viewpoints of the prosecutors involved, these FAQs will resolve some of the ambiguity that will arise from the CEP’s more limited guidance, but also, at times, may put more onerous burdens on companies. In addition, the Antitrust Division has numerous examples of successful and unsuccessful leniency applications over decades of implementation to use as further guidance. While we expect the Antitrust Division to review its program in comparison to the CEP, including whether to follow CEP’s suit in quantifying the amount of credit given under certain cooperation/aggravating factor scenarios, we also expect that prosecutors may look towards the voluminous guidance from the Antitrust Division as they implement the CEP.

False Claims Act

DOJ’s Civil Division most recently issued corporate enforcement guidance applicable to civil violations of the False Claims Act in May 2019, now codified in § 4-4.112 of the Justice Manual. That guidance follows the typical framework for cooperation credit set forth in the CEP – timely voluntary disclosure, prompt cooperation, and appropriate remediation – but lacks the more precise quantifications of cooperation credit available that the CEP now puts in place for corporate criminal resolutions. Although it is likely that the Civil Division will revisit this guidance in light of the issuance of the CEP, the nature of civil FCA violations may not lend itself to perfect or even near-perfect alignment with the CEP. For example, there is no applicable sentencing fine range to use as a baseline for granting civil FCA defendants cooperation credit in the form of percentage discounts, and the amount covered by corporate resolutions is driven largely by the loss to the government, which will almost certainly not be the subject of any cooperation credit-driven discount. However, given the CEP’s clear goal of providing transparency as to the extent of cooperation credit available, and the benefits of doing so in the civil FCA context, we may see a revision to this guidance that provides precision on what multiplier might apply to the amount of damages under certain cooperation/aggravating factor scenarios (the FCA provides for the imposition of up to treble the amount of damages to the government), and/or what per-claim civil penalty within the statutory range might apply (in addition to treble damages, the imposition of civil penalties ranging from $12,537 to $25,076 per claim can also be imposed).  

Conclusion

While the CEP acknowledges that voluntary self-disclosure is just that – voluntary, not mandatory, except where required by specific regulatory regimes – the overall tenor is a heavy emphasis on voluntary self-disclosure in corporate matters handled by the Criminal Division. As companies wait to see how the Criminal Division enforces the CEP, and whether the NSD, the Antitrust Division, or the Civil Division updates their respective enforcement policies to align with the CEP, it is prudent for companies to proactively invest in risk-based compliance programs and carefully weigh the potential costs and benefits of voluntary self-disclosure. 

For further information, please contact a member of Steptoe’s Investigations & White Collar Defense or Export Controls and Sanctions Practice.

[1] Aggravating circumstances include the involvement of executive management of the company in the misconduct; a significant profit to the company from the misconduct; egregiousness or pervasiveness of the misconduct within the company; or criminal recidivism.

[2] Aggravating factors include exports of items controlled for nuclear nonproliferation or missile technology reasons to a proliferator country; exports of items known to be used in the construction of weapons of mass destruction; exports to a Foreign Terrorist Organization or Specially Designated Global Terrorist; exports of military items to a hostile foreign power; repeated violations, including similar administrative or criminal violations in the past; and knowing involvement of upper management in the criminal conduct.

In a surprising break from past trends for US enforcement of the Foreign Corrupt Practices Act (FCPA), none of the five corporate enforcement actions resolved by the US Department of Justice (DOJ) in 2022, and only two of the six cases resolved by the Securities & Exchange Commission (SEC), involved Asia Pacific countries. Not so surprising, however, were the number of individuals arrested, convicted, or sentenced who were connected to DOJ corporate actions of long ago. And while the DOJ undertook some corporate enforcement housecleaning (declinations and dismissals), some new investigations announced this year that involve Asia Pacific indicate that attention to the region remains. Finally, we discuss two cases establishing important FCPA precedent arising from conduct in Asia, just to meet our Top Ten numbers.

Here are 2022’s top ten FCPA enforcement actions in the Asia-Pacific region.

1. KT Corporation

On February 11, 2022, South Korea-based telecommunications company KT Corporation agreed to pay USD 6.3 million to settle SEC civil charges that the company violated FCPA books and records and internal accounting controls provisions by providing improper payments to Vietnamese and South Korean government officials. According to the SEC, the scheme included inflated bonuses and gift cards which were cashed out for setting up a slush fund for gifts to government officials and lawmakers overseeing the telecommunication industry. Besides, KT also made charitable payments to unregistered organizations established by “close associates” of high-level South Korean government officials.

Takeaway: The allegations reflect the power of the books and records and internal accounting control provisions applicable to issuers, including non-US issuers, particularly in countries with higher corruption risks. For a more detailed analysis, please see Steptoe’s blog on this enforcement action.

2. Oracle Corporation

On September 27, 2022, American technology giant Oracle Corporation agreed to settle SEC FCPA violations for more than USD 23 million, 10 years after its first FCPA settlement involving its India subsidiary in 2012. According to the SEC, between 2016 and 2019, Oracle subsidiaries in India, Turkey, and the UAE, created and maintained slush funds to bribe foreign officials and their families in return for business. The bribery included excessive discounts, marketing reimbursement, as well as travel and accommodation expenses for attending technology conferences or taking side trips.

Takeaway: For companies with subsidiaries or for those that conduct business through third parties, efforts should be made to enhance training and communications surrounding company compliance issues, anti-corruption, and internal controls.

3. Ng Chong Hwa (Roger Ng)

On April 8, 2022, a federal grand jury convicted Ng Chong Hwa (a.k.a “Roger Ng”), a Malaysian national and former Goldman Sachs managing director, on three FCPA conspiracy and money laundering charges. In the long-running 1 Malaysia Development Berhad (1MDB) case, Ng conspired with others between 2009 and 2014, to launder billions of dollars, including funds 1MDB raised in 2012 and 2013 through three bond transactions it executed with Goldman Sachs. Ng coordinated with his conspirators to circumvent Goldman Sachs’ internal accounting controls for business contracts. For further background, see our The Top Ten Asia-Pacific FCPA Enforcement Actions  for 2019 and 2020.  

Takeaway: Ng’s case, started under the last administration and woven together by the prosecutors as an intricate tale of “glory and greed,” is illustrative of the current trend in FCPA enforcement strategies to target not only corporate entities but also the individuals responsible for corrupt payments.

4. Leonard Francis (“Fat Leonard”)

On September 21, 2022, Leonard Francis, a Malaysian defense contractor nicknamed “Fat Leonard” was arrested in Venezuela after fleeing before his sentencing in California for an extensive bribery scheme that lasted more than a decade and involved dozens of US Navy officers. The bribery scheme was operated through Francis’ Singapore-based company, Glenn Defense Marine Asia, which provided port services to the US Navy’s ships and submarines in the Pacific Ocean. Francis pleaded guilty in 2015, and as part of his plea deal, he helped prosecutors secure 33 convictions, including four of five Navy officers convicted in June 2022 for accepting luxury travel, elaborate dinners, and prostitutes from Francis in exchange for classified information about the Navy’s ship schedules.

Takeaway: Francis’ company’s bidding price and rates were less than one-third of its competitor, but was secured by lavish gifts with a value of up to USD 100,000 paid to officers without internal controls.

5. Cary Yan & Gina Zhou

On December 1, 2022, two Marshal Island nationals pleaded guilty to FCPA conspiracy and now face maximum five year sentences. Between 2016 and 2020, Cary Yan and Gina Zhou used their New York-based NGO, which also claimed affiliation with the United Nations, to pay bribes (interest-free loans, trips to Hong Kong and New York) to high-level government officials in the Republic of the Marshall Islands, to pass certain legislation that would carve out a Hong Kong-like semi-autonomous region in the Marshall Islands – a largely empty coral atoll almost deserted after nuclear testing. Yan and Zhou succeeded in getting the legislation sponsored in 2018, but it was rejected by the then-RMI President.

Takeaway: The two were arrested when their plane landed in New York but they pleaded guilty before trial just two months later. Conseqently, just who stood to benefit from and was bankrolling this scheme will remain unknown unless RMI takes action, as there are still some limits to the FCPA’s extraterritorial reach.   

6. Yanliang (Jerry) Li

On June 27, 2022, in the Herbalife investigation, the SEC obtained a USD 550,092 default judgment against Yanliang (Jerry) Li, former managing director of the Chinese subsidiary of Herbalife Nutrition Ltd. For over a decade, beginning in 2006, Li falsified company expense reports concealing bribes to Chinese government officials to obtain direct selling licenses and to curtail government investigations of the company’s business practices. Herbalife Nutrition Ltd. resolved related allegations with the DOJ and SEC in August 2020.

7. New Investigations

Among the record low FCPA investigations disclosed, below are Asia-based matters:

Ideanomics, Inc., a US-based company that conducts its operations globally, disclosed an ongoing internal investigation into its China operations that may involve possible FCPA-related misconduct, but without any indication of having reported the investigation to regulators.

Boston Scientific Corporation, a biomedical and biotechnology engineering firm and multinational manufacturer of medical devices, disclosed an internal investigation in response to a whistleblower letter alleging FCPA violations in Vietnam. The company is currently cooperating with the US government agencies for an independent investigation of this matter, after receiving a subpoena from the DOJ.

8. Declination, Closure, and Legacy

Cisco Systems, Inc. (Cisco): On February 22, 2022, Cisco announced that the SEC and the DOJ had declined to take action against the company for potential FCPA violations. Cisco’s FCPA violations were characterized as a scheme by former employees in China to make or direct payments to “various third parties, including employees of state-owned enterprises.”

Panasonic Avionics Corporation (PAC): On March 11, 2022, the US District Court for the District of Columbia granted the DOJ motion to dismiss the charges against PAC, a subsidiary of the Japan-based electronics company Panasonic Corporation as it had fulfilled its obligations under a 2018 deferred prosecution agreement (DPA). Panasonic paid USD 137.4 million in criminal penalties for a scheme to retain consultants for improper purposes and conceal payments to third-party sales agents, in violation of the accounting provisions of the FCPA.

Telefonaktiebolaget LM Ericsson (Ericsson): On December 14, 2022, Swedish telecommunications giant Ericsson announced that the DOJ had extended its monitorship until June 2024. The mandatory monitor was imposed as part of a 2019 international bribery settlement for corruption that involving “at least five countries,” including China, Vietnam, and Indonesia. Since entering into the DPA, DOJ has claimed that Ericsson has twice failed to comply with the settlement terms: first, in October 2021 for allegedly withholding information from the DOJ, and later in March 2022 for allegedly failing to disclose subsequent violations. 

Safran S.A.: On December 21, 2022, French aerospace defense company Safran received a declination from the DOJ, and agreed to disgorge USD 17.9 million in profits for its US subsidiary’s bribery to a China-based business consultant for train lavatory contracts with the Chinese government between 1999 and 2015, before Safran acquired the subsidiary. The DOJ declined prosecution because of Safran’s timely and voluntary self-disclosure of the misconduct, its “full and proactive” cooperation and remediation, and its effort to enhance its anti-corruption training and compliance program.

9. United States v. Coburn

On May 4, 2022, New Jersey federal district judge Kevin McNulty unsealed a decision ordering Cognizant Technology Solutions Corp. (Cognizant) to produce unredacted versions of memoranda and notes from its FCPA internal investigation into two of its former executives facing trial on 12 counts of bribery in India. Cognizant had resolved its liability with the SEC and the DOJ in 2019, following the internal investigation. The court had ruled in early February 2022 that Cognizant and its outside counsel had waived privilege and work product protection over the documents by disclosing details of the investigation to the DOJ.

Takeaway: Part of Cognizant’s cooperation included its counsel’s providing detailed accounts of 42 privileged witness interviews of 19 company employees, which were “sweeping in scope” and could constitute a “read out” to prosecutors of specific portions of its memoranda of the interviews. The Cognizant decisions highlight the risks in preserving privileges that companies must consider when cooperating with government investigations, especially when there could be potential collateral litigations in relation to the same matter.

10. Hoskins II

On August 12, 2022, the US Court of Appeals for the Second Circuit affirmed the district court’s acquittal of defendant Lawrence Hoskins, a British citizen who was alleged to have supported Alstom Power Inc. (API), the US subsidiary of French multinational corporation Alstom S.A. in a bribery scheme in Indonesia. In Hoskins I, the Court dismissed Hoskins’ conviction under the conspiracy and accomplice theories of FCPA liability, as Hoskins was not employed by API nor had he traveled to the United States during the relevant period. In Hoskins II, the prosecution had proceeded with the case under an agency theory of liability, but the Court, over a dissenting opinion, ruled that the evidence presented at trial was insufficient for a reasonable jury to find that Hoskins was an “agent” within the meaning of the statute.

Takeaway: The implications of Hoskins I and Hoskins II are significant, as there is real potential for an entire class of non-US employees of multinational companies who may be intimately involved in providing support for US companies’ operations worldwide. Given the divergence in approaches between courts in different circuits, the extent of the FCPA’s extraterritorial reach to foreign nationals is far from settled, and we will be closely following relevant future developments. For detailed analysis, please see Steptoe’s blog post.

Conclusion

Asia-Pacific FCPA-based internal investigations and enforcement actions continued to be challenging in 2022, given Covid constraints and the time and resources required, particularly for individual liability. Nonetheless, the enforcement actions opened in 2022 and the on-going efforts to prosecute individuals and corporations in the region do not signal a pivot away from the Asia-Pacific. Characterization of bribery as a national security issue coincides with the national security focus on China and elsewhere in the region. Accordingly, the volatile regulatory and geopolitical environment should cause companies in the region generally to continue to enhance their compliance programs and foster a culture of compliance, particularly in their Asia Pacific subsidiaries.

The Department of Justice (DOJ) Antitrust Division secured another labor-side antitrust prosecution win earlier this month in United States v. Patel, a case centered on an alleged no-poach and non-solicitation agreement among Pratt & Whitney and several of its subcontractors, when Judge Victor A. Bolden of the District of Connecticut denied the defendants’ joint motion to dismiss.[1] But with a potentially difficult trial set to begin in late March, any celebration within DOJ’s halls about the ruling is premature. As we discussed extensively in a prior client alert, the Antitrust Division has developed a track record over the years of defeating motions to dismiss labor-side Sherman Act prosecutions, only to be handed acquittals by unimpressed juries. Thus, while Patel presents the Antitrust Division with another opportunity to vindicate its strategy of availing itself of the criminal justice system to police labor markets, it could also end in an embarrassing third successive trial defeat. And for the reasons explained below, it is far from clear that Patel will be an easier case for DOJ than its predecessors. Given these high stakes, employers would be wise to continue to closely follow Patel.

The Alleged Conspiracy

As alleged, defendants Mahesh Patel, who was a manager at Raytheon subsidiary Pratt & Whitney, and Robert Harvey, Harpreet Wasan, Tom Edwards, Gary Prus and Steven Houghtaling, each of whom was an executive at one of five outsourced engineering service providers used by Pratt & Whitney, agreed “to restrict the hiring and recruiting of engineers and other skilled-labor employees” between 2011 and 2019.[2] The agreement, which was made orally but was reflected in a number of emails among the participants, restricted all of the defendants from hiring the contractors’ employees and prohibited them from contacting, interviewing, and recruiting applicants who were employed by one of the other companies.[3] Enforcement was primarily handled by Patel, who also served as an intermediary for communications among the other companies. The indictment quotes various communications between the co-conspirators, including an email from one contractor to Patel, “I am very concerned that [one of the other contractors] believes they can hire any of our employees . . . . Could you please stop this person from being hired by [the other contractor]?” as well as discussions of how the no-poach agreement would help the companies suppress wages.[4] The indictment lists various devices used to conceal the misconduct: the agreement was unwritten, meetings about it were held in private, and the employees who were the subject of the agreement were provided false and misleading information about its existence.[5]

The Court’s Ruling

In deciding the defendants’ motion to dismiss the indictment under Federal Rule of Criminal Procedure 12(b), Judge Bolden was faced with arguments that have now been made a few times in similar recent cases in other jurisdictions, and his ruling fell in line with those arguments.

As before, the principal issue for decision was whether the defendants’ alleged no-poach agreement should be analyzed under the “rule of reason” framework, which requires the court to weigh the restraint’s competitive harms against its competitive benefits, or alternatively whether it amounted to a per se violation of the Sherman Act, which would dramatically lighten DOJ’s burden at trial.[6]

In DaVita, another recent criminal no-poach case, the court applied a three-part test:

  • Did the conduct fit into a category that has previously been found to warrant per se treatment, such as price fixing, bid rigging, or horizontal market allocation?
  • If not, should the court create a new category of per se unreasonableness?
  • If the answer to either of the foregoing questions is “yes,” was the conduct a naked restraint on trade (that is, its only purpose was to stifle competition), or was it ancillary to a procompetitive purpose?[7]

In Patel, the court considered precisely the same factors, and arrived at precisely the same conclusions, as the DaVita court. With respect to factor (1), it held that the alleged no-poach agreement would, if proven at trial, amount to market allocation, one of “the well-established categories that historically have required per se treatment.”[8] In arriving at this holding, the court considered the Second Circuit’s previous holdings that wage-fixing, another type of anticompetitive conduct affecting the labor market, could constitute price-fixing, which is another per se category.[9] In the court’s view, therefore, it was no great stretch to conclude a no-poach or non-solicitation agreement could constitute per se illegal market allocation. Judge Bolden also cited to the ruling in DaVita itself, as well as several similar civil cases.[10]

With respect to factor (2), though, the Patel court held that it would be inappropriate to create a new category of per se unreasonableness for no-poach agreements. In support of this conclusion, it noted that courts regularly uphold no-poach and non-solicitation agreements under the rule of reason analysis.[11] This ruling was arguably dicta insofar as Judge Bolden’s determination, under factor (1), that the no-poach agreement fell within an already established category of per se unreasonable conduct, was dispositive, but highlights that labor-related no-poach and wage fixing agreements are being treated just like other anticompetitive conduct.

Under factor (3), the court considered whether the alleged agreement was “ancillary to a legitimate business collaboration.”[12] Defendants argued that the agreement was part of Pratt & Whitney’s outsourcing of engineering services to the other companies, and it was reasonable and natural for companies who were contracting with each other for engineering and other services to agree not to poach each other’s employees. As the defendants put it, the no-poach agreement made it “practicable to complete the contracted-for tasks on a timely basis; supported [Pratt & Whitney’s] ability to make commitments to future projects; allowed for the recoupment of training and recruitment costs; and mitigated the risk of ‘disintermediation’ between a customer and supplier (i.e., the process of ‘eliminat[ing] the middleman’).”[13] The court rejected this argument, noting that because the contractors were actually competitors, and the existence of a no-poach agreement among them was not ancillary to a legitimate business collaboration, it was an unreasonable restraint on trade.[14]

Like others before them, the Patel defendants unsuccessfully raised constitutional defenses. Specifically, the defendants made two arguments. First, the defendants argued that they lacked fair notice under the Due Process Clause because “Second Circuit courts before 2021 had only applied the rule of reason to no-poach, non-solicitation agreements.” In response, Judge Bolden noted that the no-poach agreement was a form of market allocation, and market allocation has long been subject to per se treatment. And “the fact that Defendants allegedly allocated the market in a novel way does not create a Due Process concern.”[15]

The defendants also raised (and lost) another constitutional defense: that the Fifth and Sixth Amendments prohibited the court from treating the alleged conduct as a per se violation because such treatment would mean the government does not need to prove that the conduct was “unreasonable,” an element of the offense. Here, the court had a ready response, noting that in United States v. Koppers Co., 652 F.2d 290, 294 (2d Cir. 1981), the Second Circuit had expressly held that “[s]ince the Sherman Act does not make ‘unreasonableness’ part of the offense, it cannot be said that the judicially-created per se mechanism relieves the government of its duty of proving each element of a criminal offense under the Act.”[16]

A Pyrrhic Victory for DOJ?

DOJ has said it is “pleased” with Judge Bolden’s ruling.[17] And for good reason — it is yet another carefully reasoned judicial opinion that seems to confirm the DOJ Antitrust Division’s theory that the Sherman Act is an available tool for combating anticompetitive conduct in the labor market through criminal enforcement.

But defeating motions to dismiss does not mean winning at trial. In United States v. DaVita, the district court denied the defendants’ motion to dismiss, holding that no-poach agreements allocating or dividing an employment market constitute per se violations of the Sherman Act[18] — but the defendants prevailed at trial, evidently convincing the jury that the agreement at issue did not “end meaningful competition” in the labor market and undermining the credibility of the government’s witnesses by noting that many of them were parties to immunity or leniency agreements. Similarly, in United States v. Jindal, the district court held that wage-fixing agreements always amount to per se violations of the Sherman Act[19] — but at trial, the jury granted acquittals on both Sherman Act counts, likely because the government’s key witness had changed her testimony after entering into a leniency agreement with the government.

In fact, DOJ has yet to secure a labor-side Sherman Act conviction at trial; the only convictions DOJ has won in labor-side Sherman Act cases were a conviction on an obstruction of justice charge (with the Sherman Act charges resulting in acquittals)[20] and a pre-trial guilty plea to a Sherman Act charge.[21]

DOJ should not expect an easy trial win in Patel either. Even in rejecting the defendants’ argument that their conduct was, as a matter of law, ancillary to a procompetitive purpose, the court conceded that the defendants could “contest [DOJ’s] allegations [to the contrary] with facts not included in the Indictment . . . [at] a later stage of the proceedings.”[22] For instance, the defendants may be able to show that the Pratt & Whitney contractors cooperate, rather than compete, to work on the outsource agreements; or that, as the defendants argued in their dismissal briefing, “the alleged no-poach agreement could have procompetitive effects such as ‘promot[ing] consistent staffing, avoid[ing] disruptions, and incentiviz[ing] outsource firms to invest in recruitment and training of outsource engineers by preventing free riding.’”[23] The defendants could also employ some of the same tactics used by the defendants in Jindal and DaVita, such as undermining the credibility of the government’s witnesses and introducing doubt as to the alleged co-conspirators’ intentions in discussing the topic of hiring each other’s employees.

The third time may not be the charm for the government. And if Patel doesend in another round of acquittals, the Biden Administration may have no choice but to pursue additional methods of fighting anticompetitive conduct in the labor markets, such as existing civil enforcement tools or others that would require new legislation.

[1] United States v. Patel, 3:21-cr-00220 (D. Conn.).

[2] Indictment ¶¶ 10-16, 19, United States v. Patel, 3:21-cr-00220 (D. Conn. Dec. 15, 2021), ECF No. 20.

[3] Id. ¶¶ 20-21.

[4] Id. ¶ 22.

[5] Id. ¶ 29.

[6] See Ruling and Order on Motions, United States v. Patel, 3:21-cr-00220, 2022 WL 17404509, *5-6. (D. Conn. Dec. 2, 2022), ECF No. 257.

[7] See United States v. DaVita, 1:21-cr-00229, 2022 WL 266759, at *4 (D. Colo. Jan. 28, 2022).   In a guidance document published in 2016, DOJ and the FTC similarly defined a “naked” (as opposed to ancillary) no-poach agreement as one that is “is separate from or not reasonably necessary to a larger legitimate collaboration between the employers. . . . Legitimate joint ventures (including, for example, appropriate shared use of facilities) are not considered per se illegal under the antitrust laws.”  Department of Justice Antitrust Division, Federal Trade Commission, Antitrust Guide for Human Resource Professionals 3 (Oct. 2016), https://www.justice.gov/atr/file/903511/download.

[8] Patel, 2022 WL 17404509, at *7.

[9] See, e.g., Todd v. Exxon Corp., 275 F.3d 191, 201 (2d Cir. 2001) (Sotomayor, J., concurring) (“If the plaintiff in this case could allege that defendants actually formed an agreement to fix . . . salaries, [the] per se rule would likely apply.”); Nat’l Basketball Ass’n v. Williams, 45 F.3d 684, 690 (2d Cir. 1995) (“[E]mployers who were horizontal competitors for labor [are] prohibited from agreeing upon terms and conditions of employment.”) (citing Anderson, 272 US 359).

[10] Patel, 2022 WL 17404509, at *9.

[11] Id. at *8.

[12] Id. at *11.

[13] Id.

[14] Id. at *14. Separately, the court also noted that the conspiracy was not merely a “vertical” one among Pratt & Whitney and each of its contractors (which would mean it was subject to the rule of reason) but rather a “horizontal” agreement among all of the contractors as well as Pratt & Whitney.

[15] Id. at *18-19.

[16] Id. at *19-20.

[17] Bryan Koenig, Raytheon Manager, Staffing Execs Can’t Slip No-Poach Counts, Law360 (Dec. 2, 2022), https://www.law360.com/articles/1554639.

[18] See DaVita, 2022 WL 266759, at *5-7.

[19] United States v. Jindal, No. 4:20-CR-358, 2021 WL 5578687, at *5-7 (E.D. Tex. Nov. 29, 2021)).

[20] See our earlier client alert here.

[21] Matthew Perlman, DOJ Gets 1st ‘No Poach’ Guilty Plea With School Nurse Case, Law360 (Oct. 27, 2022), https://www.law360.com/articles/1544215 (“A health care staffing company pled guilty in Nevada federal court Thursday to charges over an alleged scheme to suppress the wages of nurses working in Las Vegas schools, marking the first successful prosecution of criminal charges in a labor-side antitrust case.”).

[22] Id. at *14.

[23] Patel, 2022 WL 17404509, at *12.

The Department of Justice (DOJ) “KleptoCapture” Task Force (the “Task Force”), launched shortly after Russia’s invasion of Ukraine earlier this year, is characterized by DOJ as a key part of the current Administration’s broader anti-corruption initiative. The role of the Task Force is to support the enforcement of sanctions and export control restrictions imposed against Russia in response to the conflict. Earlier this month, Andrew Adams, the Task Force’s director, discussed its work to date, expected future developments, and implications for private sector companies.[1] Highlights of his remarks are summarized below, along with our comments on key points addressed.

The Importance of Private-Sector (Willing or Unwilling) “Facilitators”

The Task Force’s scope goes beyond specific persons who were either designated by the Treasury Department or added to the Commerce Department’s export control lists. It also focuses on private-sector actors who facilitate others’ evasion of US economic sanctions and export controls, acting as so-called “facilitators.”  Generally speaking, according to Director Adams, there are three types of facilitators: those who are actively facilitating; those who are knowingly being exploited; and those who are being victimized.

Director Adams indicated that cooperation by private-sector actors is a critical component of the Task Force’s enforcement efforts. In building its cases, the Task Force regularly engages with companies and individuals in the banking, insurance, maritime, and aviation services sectors because these actors often end up serving as facilitators.

“Success is not defined solely by DOJ outcomes” – Multilateral and US Inter-Agency Cooperation

Director Adams emphasized that recent enforcement actions brought by the Task Force have involved a substantial amount of foreign cooperation. The countries that have provided support include not only those that have traditionally cooperated with the DOJ but also other “fairly far flung” jurisdictions that are now committed to enforcing sanctions around the world.

US inter-agency cooperation is also a core part of the Task Force’s strategy. The Task Force has at least weekly interactions with the Russian Elites, Proxies, and Oligarchs Task Force (REPO), a joint task force established by the DOJ and the Department of Treasury to accelerate oligarch asset forfeiture efforts. At these meetings, the Task Force and REPO discuss updates on foreign laws and enforcement related to the seizure of assets.

As a result of this enforcement coordination with local and foreign counterparts, what the Task Force views as a successful action has changed. Now, director Adams indicated, success is not defined solely by actions brought by the Task Force itself but also through assisting the initiation of actions of other counterparts, including local agencies and foreign partners.  

Data Privacy Laws Not a Significant Barrier

Director Adams also indicated that data privacy laws or other data-related policies of foreign jurisdictions have not hindered the Task Force’s ability to obtain information when public or private actors are cooperating with the US Government. If a company is cooperative, the Task Force has found ways to allow the company to share information while complying with applicable foreign law. In fact, there has been what he terms a “sea change” in terms of obtaining information from foreign governments. With foreign governments imposing sanctions that are similar to the US regime, the Task Force confronts fewer data privacy barriers because most data sharing agreements include a “dual criminality” provision, in which information related to misconduct can be shared if it relates to conduct criminalized in both the US and the foreign jurisdiction.

“The Forfeiture Hammer”

The Task Force’s approach, according to director Adams, is to use all potential authorities to bring any charge against either specifically designated persons or facilitators, or to seize their assets. To do so, the Task Force uses a wide variety of statutes. In general, the most common charges are sanctions evasion and money laundering. In addition, the Task Force has brought charges under wire fraud, bank fraud, visa fraud, and narcotics trafficking statutes, as well as the Foreign Agents Registration Act and conspiracy and aiding and abetting under Sections 371 and 2, respectively.

The possibility of bringing charges under the Racketeer Influenced and Corrupt Organizations (RICO) Act is also being carefully considered as a tool for prosecuting sanctions evasion and export control violations. The goal would be to use RICO’s powerful scope to prosecute not only individual persons, but the entire criminal “network” as a racketeering enterprise. This presents a challenge because, while most of the violations listed by director Adams above are among the predicate crimes that can trigger racketeering liability under the RICO statute (money laundering, wire fraud, bank fraud, visa fraud, and narcotics trafficking), export and sanctions violations are not. As a result, director Adams reported that he has participated in Congressional hearings on behalf of the Task Force, requesting that violations of the International Emergency Economic Powers Act (IEEPA) and the Export Control Reform Act (ECRA) be added to the list of crimes that constitute racketeering activity within the meaning of the RICO Act.

What that would mean for the government’s forfeiture efforts is less clear. From the day the Task Force was announced in March 2022, asset forfeiture was its primary focus. Indeed, DOJ officials made clear that a leading goal of the Task Force was to use civil asset forfeiture authority to seize and forfeit luxury assets of designated foreign nationals who were beyond the reach of US criminal jurisdiction. It is easy to see why using RICO would be attractive to prosecutors. Director Adams’ description of RICO’s “forfeiture hammer” is an apt one in the sense that the RICO forfeiture provisions are extremely broad in scope and reach. However, they are also available only in federal criminal RICO prosecutions that result in convictions of one or more persons who own the assets the government seeks. As Director Adams noted, one of the historically unique features of the US forfeiture regime is its expansive civil asset forfeiture authority. That balance appears to be shifting, however since the conflict in Ukraine, with members of the European Union in particular evaluating and working on expanding their  civil asset forfeiture capacity. The seizures announced by the Task Force so far have relied on civil forfeiture authority, which permits the seizure and forfeiture of property anywhere in the world, even in the absence of criminal charges. As an action against the property itself, civil forfeiture requires only that the government prove (by the relaxed civil standard of preponderance of the evidence rather than the criminal standard of beyond a reasonable doubt) that the property sought has a statutorily-defined nexus to a qualifying criminal offense. Moreover, if the owner of the property receives proper notice of a judicial civil forfeiture action and fails to appear to defend against it in a US court, the property will be forfeited by default.

The same is not true of criminal forfeiture, even under RICO, where if the person indicted in the underlying case is located in a jurisdiction where he or she is not subject to arrest or extradition, the forfeiture cannot be accomplished. For property of those persons, such as the sanctioned Russian foreign nationals that have been the main targets of the Task Force to date, Congressional expansion of the scope of racketeering activity to include IEEPA and ECRA violations is unlikely to be of any practical value to the government, at least insofar as forfeiture is concerned.

Nevertheless, the shift in focus away from individual assets like yachts and airplanes to persons and entities acting as facilitators is important because it may signal recognition that the Task Force overestimated its ability to use US civil forfeiture law to accomplish this goal. Despite the extraterritorial nature of the regime, many forfeiture experts were skeptical of the legal theories on which the government relied in obtaining the seizure warrants for the $90 million yacht Tango, seized in April 2022 in Spain, and the $300 million Amadea, seized in May 2022 in Fiji, which the government purported were beneficially owned by, respectively, Viktor Vekselberg and Suleiman Kerimov. The Tango remains in a Spanish port, and the Amadea was piloted into San Diego Harbor several months ago under a US flag, but the DOJ has yet to take any steps to perfect the forfeiture (that is, the extinguishing of other ownership interests and vesting of title in the government) of either of them.

Relatedly, the DOJ issued a press release in June 2022 announcing that it had obtained a seizure warrant for two airplanes allegedly owned by Roman Abramovich, who has not been designated by the United States, citing violations of US export controls. But there have been no publicly-reported efforts by the government to effect the seizure of either of the planes, a necessary precursor to formal civil forfeiture proceedings. The government will eventually have to either release or file a civil judicial forfeiture case against each of the Tango and the Amadea. And yet, director Adams’ statement that “success is not defined solely by DOJ outcomes” suggests that the Task Force has reconsidered whether US civil forfeiture is the right tool for this particular job. The government’s lack of pre- and post-seizure action and the new statement of intent to rely on foreign cooperation, combined with the growing acceptance of civil forfeiture referenced above, may indicate a desire to hand these matters off to like-minded allies with less restrictive forfeiture laws and procedures. In the meantime, the government and its allied government partners will be obliged to maintain all assets seized under US law to preserve their value, an expensive proposition considering that the annual maintenance cost of a luxury yacht is generally about ten percent of its value.

Corporate Transparency Act

The Corporate Transparency Act (CTA) was enacted in 2021 to protect the US financial system from being used for illicit activities, especially money laundering. The CTA requires entities to, among other things, file a beneficial ownership information report with the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN), identifying the individuals behind these entities.

In September 2022, FinCEN issued its Final Rule to implement the CTA, which establishes further details on this CTA reporting, including when the reports have to be filed and by whom, what information has to be shared, and when updates are necessary. The effective date of the rule is January 1, 2024. The reports will be kept in a non-public database, with access limited primarily to law enforcement agencies.

Director Adams considers the CTA to be an important tool for the Task Force because it requires that the private sector know its counterparties. In addition, based on the information contained in the required filings, the Task Force will be able to identify “slip-ups down the line” as time goes on. In the future, in investigating a sanctions violation, the Task Force will be able to look back at an earlier report and piece together a beneficial ownership that, later in time, violators were trying to hide.

Cryptocurrency Exchanges

Centralized cryptocurrency exchanges subject to US jurisdiction qualify as financial institutions under the Bank Secrecy Act, and also have to comply with the Russia sanctions regime. In that context, Director Adams confirmed that the Task Force is monitoring financial institutions, including non-traditional ones such as cryptocurrency exchanges, to identify weak points in the US government’s sanctions enforcement. In these cases, the Task Force will partner with either the appropriate US Attorney’s office or the national cryptocurrency enforcement team to the extent that the jurisdictions of these agencies overlap.

Maritime, Aviation, and Energy Industries Face Enforcement Risk

The sanctions and export control restrictions imposed by the United States against Russia have resulted in novel risk factors for companies in certain industries. Director Adams emphasized that even companies in industries that have not yet been the focus of the current US sanctions and export controls enforcement should consider enhancing their compliance programs to address the risk factors related to such regime. Key examples are maritime services, aviation services, and energy, as well as any company doing business in jurisdictions adjacent to Russia.

Companies can leverage publicly available information related to cases brought by the Task Force to identify problematic jurisdictions, typical fact patterns, and common control failures. That information, along with a sound risk assessment and gap analysis, can be critical areas for improvements in export- and sanctions-related compliance policies and procedures.

[1] Director Adams’ comments were made in the context of the American Conference Institute’s 39th Annual Conference on the Foreign Corrupt Practices Act (FCPA) held on November 30-December 1 in Washington, DC.

On October 31, 2022, Nathan Nephi Zito pleaded guilty in the US District Court for the District of Montana for his attempt to monopolize the markets for highway crack-sealing services in Montana and Wyoming. This marks the first win for the US Department of Justice (DOJ) in a criminal monopolization case in more than 40 years. In a statement made on October 31, Assistant Attorney General Jonathan Kanter of the DOJ’s Antitrust Division emphasized the DOJ’s continued focus on prosecuting “blatant and illegitimate monopoly behavior that subjects the American public to harm.” 

DOJ began signaling its interest in criminally prosecuting monopolization cases under Section 2 of the Sherman Act earlier this year. In a January 2022 speech, Assistant Attorney General Kanter noted the “dearth of Section 2 case law addressing modern markets.” The criminal prosecution of monopolization cases opens a new area of focus for DOJ and is a major departure from longstanding DOJ policy that has generally shied away from Section 2 criminal prosecutions. In the last decades, the majority of criminal cases brought by the Antitrust Division involved Section 1 of the Sherman Act (which prohibits anticompetitive agreements that restrain trade or commerce, deeming them per se illegal because they have been found to produce little to no procompetitive outcomes.)  The last criminal prosecution under Section 2 was brought in the late 1970s against two airlines for conspiring to exclude a competing airline.

Later, in March 2022, DOJ formally announced that it intended to investigate and pursue alleged Section 2 monopolization violations by individuals and companies. Speaking at the ABA’s White-Collar Conference in San Francisco, Former Deputy Assistant Attorney General Richard Powers announced that the Antitrust Division would shift towards Section 2 enforcement and that the Antitrust Division intended to investigate and pursue alleged Section 2 violations by individuals and companies.

Despite speculation that the rebirth of Section 2 criminal prosecutions would involve allegations of product bundling, predatory pricing, or exclusionary dealing arrangements, the prosecution and plea of Mr. Zito, alas, offers nothing nearly as interesting, and appears to cover conduct that, but for the absence of success in reaching an “agreement” with a competitor, would normally fall within the scope of Section 1. If Mr. Zito had not pleaded guilty to a violation of Section 2, DOJ could have alternatively sought to prosecute him on wire fraud charges where he could have faced a significantly longer prison sentence (10 years under the Sherman Act versus 20 years for wire fraud). This disparity may have incentivized Mr. Zito to become the first individual in decades to plead guilty to a Section 2 offense.

Zito is the owner and president of a Billings, Montana-based paving and asphalt construction company. On September 19, he was charged with one count of knowingly engaging in anticompetitive conduct with the intent to gain monopoly power. According to the charge, Zito approached a competitor as early as January 2020 and proposed that the competitor stop competing with Zito’s company for highway crack-selling projects in Montana and Wyoming. In exchange, Zito would leave the South Dakota and Nebraska markets to the competitor. To incentivize this “strategic partnership,” Zito also offered to pay the competitor $100,000 as additional compensation for lost business in Montana and Wyoming. According to the plea agreement, this scheme is directly in violation of Section 2 of the Sherman Act, which makes it a felony to “monopolize any part of the trade or commerce among the several States, or with foreign nations.” Notably, this also includes attempts to monopolize, and does not require evidence of any agreement, as Zito found out the hard way, when the prospective co-conspirator contacted the government. This is different than Section 1 cases where an agreement or “meeting of the minds” is required.

Zito faces a maximum sentence of 10 years’ imprisonment and a maximum fine of $1 million. His sentencing is scheduled for February 23, 2023. The plea is a result of an investigation conducted by the DOJ Antitrust Division’s San Francisco office, the US Attorney’s Office for the District of Montana, and the Department of Transportation Office of Inspector General. This effort was a part of the DOJ’s Procurement Collusion Strike Force (PCSF), a joint law enforcement group created in November 2019 to combat antitrust crimes and related fraudulent schemes in the government procurement, grant, and funding areas. The PCSF has been responsible for many of the Antitrust Division’s recent investigations.

This charge and corresponding guilty plea illustrate that the DOJ officials’ statements regarding the focus on heightened enforcement of Section 2 were not empty threats. However, it is unclear whether the Antitrust Division will use Section 2 to criminally prosecute more traditional monopolistic behavior (i.e., exclusive dealing arrangements, predatory pricing, product-bundling), or whether Section 2 will be used merely as a means to seek criminal sanctions for unsuccessful attempts to reach agreements proscribed under Section 1.

It is also important to keep in mind that the Antitrust Division’s leniency program does not apply to Section 2 of the Sherman Act; it applies only to Sections 1 and 3(a) of the Act. Therefore, when a company finds evidence of employees seeking to reach an agreement with competitors to fix prices, rig bids or allocate markets, it should, prior to availing itself of the leniency program, assess whether there is sufficient evidence that an agreement had ultimately been reached. Otherwise, they could end up disclosing conduct to the Antitrust Division that it may choose not to, and may not even be authorized to, grant leniency for.

Finally, it is worth noting that Section 2 criminal prosecutions based on more traditional monopolistic behavior will be much more difficult to bring and prove than those based solely on attempted Section 1 violations, because Section 2 requires proof of both the defendant’s market power and that his/her conduct had anticompetitive effects. Given the Antitrust Division’s string of recent trial losses based on previously untested theories of criminal liability (read: no-poach), we suspect that the Division may take its time and act deliberately in finding and developing a strong first criminal case under Section 2 that is based on more traditional monopolistic behavior.

In this issue:

  • A settlement involving a construction company that improperly claimed credit for using disadvantaged business entities on federally-funded New Jersey construction contracts that did not actually perform the work.
  • An Anti-Kickback Statute case where the district court denied defendant’s motion to compel certain Medicare claims data and rejected the “benefit of the bargain” approach to damages for AKS-tainted Medicare claims.
  • An FCA case involving a motion to stay discovery during the pendency of a dispositive motion.

NJ Construction Co. Settles Out of Turnpike FCA Suit

Industry: Construction

Topics: Subcontractor liability, Disadvantaged Business Entities Program

A New Jersey construction company, C. Abbonizio Contractors (C. Abbonizio), settled a False Claims Act lawsuit alleging that the company misrepresented the amount of subcontract work performed by socially and economically disadvantaged business entities (DBEs) in connection with a federally-funded New Jersey Turnpike project.[1]

C. Abbonizio received a $39 million subcontract from PKF Mark II (PKF) to perform earthwork and pipe installation in support of PKF’s prime construction project. PKF’s prime contract required PKF to make a good faith effort to subcontract 15% of the total contract value to DBE subcontractors. As a result, as part of its subcontract, C. Abbonizio agreed to use DBEs to complete 15% of its work. According to the Government, C. Abbonizio, however, circumvented this requirement and paid DBEs to serve as “middlemen” and purchase materials from other businesses while creating invoices that made it appear as though the DBEs were actually performing the work. The government alleged that one of the companies that C. Abbonizio used as an intermediary put magnetic signs with its own logo on another company’s truck. C. Abbonizio transmitted information to PKF asserting that these pass-through entities were performing work in order for PKF to claim DBE participation credit. In turn, PKF included this information in reports to New Jersey Department of Transportation claiming DBE credit.[2]

Takeaway: This settlement serves as a reminder that subcontractors are also subject to FCA liability where they mislead prime contractors and cause false claims to be passed on to the government.

 

United States v. Teva Pharms. USA, Inc., No. 20-CV-11548 (NMG), 2022 WL 6820648 (D. Mass. Oct. 11, 2022)

Industry: Healthcare

Topics: Anti-Kickback Statute, Discovery Issues

In one of the numerous ongoing enforcement efforts out of the US Attorney’s Office in Boston relating to the pharma industry’s funding of patient assistance foundations, the District of Massachusetts last week overruled defendant Teva Pharmaceuticals’ (Teva) objection to a magistrate judge’s denial of Teva’s motion to compel the production of Medicare claims data to assess and rebut the Government’s allegations that Teva’s program, which donated $328 million to two third-party foundations to cover patients’ copays for Copaxone, a multiple sclerosis drug manufactured by Teva, violated the FCA as violations of the Anti-Kickback Statute (AKS).

Prior to Teva’s filing of the motion to compel, the government produced “all data concerning Medicare Part D Copaxone claims from January 1, 2006 to December 31, 2017.” In its motion to compel, however, Teva sought additional data, including all claims for drugs and medical services submitted by Medicare patients with multiple sclerosis, and all records describing the timeframes during which Medicare beneficiaries diagnosed with multiple sclerosis had Medicare coverage, as well as the types of coverage.

The magistrate judge denied Teva’s motion, finding that the requested data was irrelevant to (1) Teva’s price increases for Copaxone, (2) Teva’s intent to induce purchases, (3) the government’s conspiracy claim, (4) additional penalties, and (5) calculation of damages. Teva objected to the magistrate judge’s ruling, asserting that framing the denial on relevance grounds rather than Federal Rule of Civil Procedure 26(b)(1) proportionality standards was erroneous. Teva asserted that the requested data was proportional and relevant to damages and liability. Teva also objected to the magistrate judge’s order, claiming that the requested claims data would allow Teva to develop evidence of the government’s true loss, and the data was necessary to show which patients received assistance from the two foundations for non-Copaxone drugs that were reimbursed.

Applying the “clearly erroneous” standard of deference to the magistrate judge’s ruling, the court overruled Teva’s objections.

First, the court held that the parties briefed the Rule 26(b)(1) factors and that it was not clearly erroneous for the magistrate to conclude that producing this data would be a significant burden to the government, and the application of a relevance rather than proportionality standard was not clearly erroneous.

Second, the court rejected Teva’s contention that it required data showing which patients received assistance from the two foundations, because, to be liable under the FCA’s AKS provision, it is only relevant that Teva intended to induce patients to purchase Copaxone through its donations.

Third, relatedly, the court found that the data also was not relevant to Teva’s argument that price increases were due to market forces and not Teva’s donations because Teva’s drug pricing could not be based on the requested Medicare data that Teva never had access to.

Fourth, the court agreed with the magistrate that the evidence related to the reimbursement of non-Copaxone claims was irrelevant to the government’s conspiracy allegation because that data “is not indicative of the existence of a conspiracy.”

Fifth, the court only briefly addressed Teva’s allegation that the requested data was relevant to FCA penalties. The court, however, held the order was not clearly erroneous because Teva did not adequately demonstrate the relevancy of the data.

Finally, the court rejected Teva’s argument that it required sales cost data to respond to the government’s calculation of damages and determine damages under a “benefit of the bargain” approach. The court, however, explained that there was no authority to support the “benefit of the bargain” approach to calculating damages for AKS-tainted Medicare claims. Rather, the damages are equal to the full value of the AKS-tainted Medicare claim – an approach not yet adopted by the First Circuit but adopted by other circuits.[3]

Takeaways: This case reiterates that any requests for production in civil False Claims Act cases must request information directly relevant to an element of the alleged violation. Teva failed because the overly-expansive document request could not relate to the elements of the claim. This decision also is significant in its rejection of a “benefit of the bargain” theory of damages, opting instead to treat claims tainted by kickbacks as having zero value for damages purposes, adding further to the disagreement among courts as to the appropriate measure of damages for AKS-tainted claims.

 

United States v. Physician Surgical Network, Inc., No. 6:20-cv-1582 (WWB-EJK), 2022 WL 6163122 (M.D. Fla. Oct. 7, 2022):

Topic: Discovery Issues

The District Court for the Middle District of Florida recently issued a decision denying a defendant’s motion to stay discovery in an FCA lawsuit, despite a pending motion to dismiss. The court reasoned that a pending dispositive motion alone does not justify staying discovery. Rather, the court explained that the movant must show good cause and reasonableness, and the court must look to the merits of the pending dispositive motion to see if its meritorious and truly case dispositive.

The defendant argued that the plaintiff’s complaint was defective and that the plaintiff sought “overbroad and expansive” discovery that would be unduly burdensome and, if the motion to dismiss was granted, result in unnecessary costs to the litigants and the court. In reviewing the defendant’s motion, the court weighed the harm of delay against the possibility that the pending motion to dismiss would be granted, obviating the need for discovery.

Ultimately, while acknowledging that discovery can be costly and time-consuming, the court rejected the defendant’s argument. First, the court concluded that the motion to dismiss could not be considered “likely meritorious,”— meaning that there was not a likelihood that the motion to dismiss would be granted based on a preliminary review of the motion’s merits. Second, the court held that with the discovery deadline of February 2, 2023, a stay would cause management issues by “condensing the time to engage in discovery and to resolve any resulting motions.” The court, however, noted that the defendant could prepare a separate motion to address any unduly burdensome discovery requests.

Takeaways: If a court deems a dispositive motion not likely to be meritorious, then the court is unlikely to stay discovery during the pendency of the dispositive motion even though discovery might be costly to a party and ultimately obviated if the motion.

 

[1] The government included C. Abbonizio’s president in the initial suit, but the court ultimately dismissed the president from the case in March 2021 finding that the government failed to show a direct connection between the president and the company’s scheme.

[2] The terms of the settlement have not been made public.

[3] See, e.g., United States ex rel. Drakeford v. Tuomey, 792 F.3d 364, 386 (4th Cir. 2015) (noting in an illegal referral case that the “the government has suffered injury equivalent to the full amount of the payments”); United States v. Rogan, 517 F.3d 449, 453 (7th Cir. 2008) (stating in a case involving kickback-tainted Medicare claims that the damages constituted the entire amount of the claims at issue).

Time for another update…

The United States Asserts Its Position on Rule 9(b) Before Supreme Court in Response to Owsley Cert Petition

The Solicitor General’s office has once again expressed its view that the Supreme Court should deny a petition for a writ of certiorari requesting that the Court clarify the pleading standard – specifically the level of particularity required under Federal Rule of Civil Procedure 9(b) – to plead a claim under the False Claims Act (FCA). On September 9, 2022, the Solicitor General submitted an amicus brief in United States ex rel. Owsley v. Fazzi Associates, Inc., 21-936, expressing that it was the view of the United States that the Supreme Court should deny the petition for writ of certiorari. In May 2022, the Solicitor General urged the Supreme Court to deny a petition for writ of certiorari in another Rule 9(b) FCA case – Johnson et al. v. Bethany Hospice and Palliative Care LLC, 21-462.

Background

The writ for petition of certiorari in Owsley requests review of a Sixth Circuit decision affirming dismissal of a relator’s FCA complaint for failure to meet Rule 9(b)’s particularity standard.[1] In Owsley, the relator, a quality assurance nurse, alleged that her employer, a home health agency, and the other respondents consisting of other home health agencies and healthcare organizations, altered patient data to make patients appear sicker in order to submit upcoded or inflated claims for Medicare reimbursement.

The Sixth Circuit affirmed the district court’s dismissal of the relator’s complaint, reasoning that although the complaint “describe[d] in detail, a fraudulent scheme,” and alleged “personal knowledge of the billing practices employed in the fraudulent scheme,” the relator had “ma[de] little effort . . . to identify any specific claims that [the Appellee] submitted pursuant to the scheme.”[2] The Sixth Circuit explained that “the touchstone is whether the complaint provides the defendant with notice of a specific representative claim that the plaintiff thinks was fraudulent.”[3]  The relator had failed to meet this burden.

Solicitor General’s Amicus Brief

Although there has been much discussion in recent years surrounding the application of Rule 9(b) by federal courts, the Solicitor General’s brief asserts that courts “have largely converged” on an approach that provides relators with two paths to satisfy the requirements of Rule 9(b): Relators can either “identify specific false claims,” or “plead other sufficiently reliable indicia supporting a strong inference that false claims were submitted to the government.”[4]

Contrary to Petitioner’s assertions that circuit courts were divided on the requirements of the 9(b) pleading standard, the Solicitor General’s brief argued that “[t]he divergent outcomes in the courts of appeals . . . simply reflect courts’ application of a fact intensive standard to a range of different types of allegations.”[5] As a result, the Solicitor General argued, the Supreme Court’s further review would be unlikely to produce greater uniformity or clarify the Rule 9(b) pleading standard. The Solicitor General also noted that in an invited amicus curiae brief in United States ex rel. Nathan v. Takeda Pharmaceuticals North America, Inc., 572 US 1033 (2014) (No. 12-1349), the United States opposed adoption of a “per se rule that a relator must plead the details of particular false claims – that is, the dates and contents of bills or other demands for payment – to overcome a motion to dismiss.”[6] According to the United States, such a rule would undermine the FCA’s effectiveness. Rather, a relator’s complaint satisfies Rule 9(b) if it “alleges particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.”[7] The Solicitor General’s brief asserts that the circuit courts have consistently applied this standard.

Takeaways: There are three pending petitions for writ of certiorari before the Supreme Court requesting that the Court resolve the purported Circuit split as to the FCA pleading standard. For two of those petitions – Owsley and Johnson v. Bethany Hospice and Palliative Care LLC, Case No. 21-462 – the Court invited the Solicitor General to submit briefs expressing the views of the United States. In both instances, the Solicitor General urged the Court to decline review. It remains to be seen whether the Court will take up any of the three cases. While the Solicitor General has indicated that the Supreme Court’s review is not necessary, greater clarity regarding the heightened pleading standard for FCA complaints could discourage the filing of baseless FCA qui tam complaints or encourage the resolution of such complaints at the motion to dismiss stage.

DOJ Announces First Ever FCA Settlement Involving PPP Lender

Industry: Banking

Topic(s): PPP

Summary: The Department of Justice (DOJ) recently announced its “first ever” False Claims Act settlement received from a Paycheck Protection Program (PPP) Lender. According to DOJ, Prosperity Bank, a regional bank, approved and processed a PPP loan in the amount of $213,400 for Woodlands Pain Institute PLLC, a primary care institute, even though bank employees knew that Dr. Emad Bishai – the sole owner of Woodland Pain Institute – had falsely certified that no one with more than 20% equity in the applicant entity was subject to an indictment, criminal information, arraignment or other means by which formal criminal charges are brought in any jurisdiction. Contrary to Dr. Bishai’s response of “no,” Dr. Bishai was facing criminal charges related to the prescribing of opioid medicines. Bank employees were apparently aware of these criminal charges and processed the loan anyway. Prosperity Bank received a 5% processing fee ($10,670). Prosperity has agreed to pay the government $18,000 as part of its settlement.

Dr. Bishai entered into a separate settlement for $523,331 in November 2021 to resolve his liability arising from fraudulent medical billing and his submission of the PPP loan application. According to DOJ’s press release, Dr. Bishai repaid the PPP loan in full in 2022.

Akorn Operating Company, LLC Settlement

Industry: Healthcare

Topics: Medicare Part D; Federal Food, Drug, and Cosmetic Act

DOJ recently announced that it had reached a settlement with pharmaceutical firm Akorn Operating Company LLC (hereinafter Pharmaceutical Company), which agreed to pay $7.9 million to resolve allegations that it had violated the FCA by causing the submission of false claims to Medicare Part D for three generic drugs that were no longer eligible for Medicare coverage.

Medicare Part D provides coverage for drugs that may be dispensed only upon a prescription, and excludes coverage for “over the counter” (OTC) drugs. The Food and Drug Administration (FDA) approved three generic pharmaceutical products manufactured and sold by Pharmaceutical Company as “prescription use only” (Rx-only) drugs based on the approval given for the equivalent “Reference Listed Drug” (RLD) for each product.

In certain circumstances, drug manufacturers may initiate a change in marketing status for their products from Rx-only to OTC through a process referred to as an “Rx-to-OTC switch.” However, both Rx-only and OTC versions of the same drug may not be marketed at the same time pursuant to the Federal Food, Drug, and Cosmetic Act (FDCA). Therefore, when the RLD for a generic drug is approved for a switch to OTC use, the manufacturer of a generic equivalent must either seek FDA approval for its own product to switch to OTC status or withdraw its generic’s Rx-only status and stop marketing it.

The FDA approved full Rx-to-OTC conversions of the brand names of three generic drugs manufactured and sold by Pharmaceutical Company in February 2020 and June 2021. This meant that each of these RLDs could be marketed by the relevant application holders for OTC use, could no longer be marked as an Rx-only drug, and were no longer approved to state “Rx-only” on its label or packaging.

The United States alleged that Pharmaceutical Company submitted or caused to be submitted false claims to Medicare Part D, in violation of the FCA, by continuing to sell three generic drugs under Rx-only labeling after the RLDs were converted to OTC drugs. As part of the settlement, Pharmaceutical Company admitted, acknowledged, and accepted responsibility for delaying seeking the required OTC conversions for its three generic drugs, even after learning that their RLDs had been converted to OTC status. In particular, Pharmaceutical Company delayed these conversions because it believed that selling them as Rx-only would be profitable for the company. Pharmaceutical Company also caused the submission of false claims to Medicare Part D by continuing to sell each product under its Rx-only labeling because Medicare does not cover non-prescription drugs and no meaningful difference existed between these products and their now-OTC RLDs.

The settlement resolves a lawsuit brought under the qui tam or whistleblower provisions of the FCA.

Takeaway: Pharmaceutical Company’s settlement demonstrates that the FCA is a powerful tool for combatting misbranding violations under the FDCA.

Other Noteworthy Decisions:

United States ex rel. Clarissa Zafirov v. Fla. Med. Assocs. LLC, 2022 WL 4134611 (M.D. Fla. Sept. 12, 2022)

Industry: Healthcare

Topics: Medicare Advantage, Public-Disclosure Bar, Rule 9(b)

Summary: Relator Clarissa Zafirov, a family care physician, brought suit against Florida Medical Associates doing business as VIPcare, Physician Partners, LLC, and Anion Technologies, LLC (collectively, the Provider Defendants) as well as Medicare Advantage (MA) insurers Freedom Health, Inc, and Optimum Healthcare, Inc. (the MA Defendants), alleging that the Provider Defendants acted in concert with the MA Defendants to artificially increase the risk adjustment scores of their MA enrollees, which in turn fraudulently increased their capitated payments from the government. The Provider Defendants were alleged to have pressured physicians through various means to falsely select only “risk-adjusting diagnosis codes” for patients and submitted unsupported codes if physicians did not comply; “risk-adjusting diagnosis codes” are codes which are predicted to require more expensive treatments and lead to increased Medicare reimbursements. The MA Defendants were alleged to have in turn submitted these incorrect diagnosis codes to Centers for Medicare and Medicaid Services (CMS) in order to increase the capitated payments; the MA Defendants allegedly failed to conduct the oversight of the Provider Defendants required by Medicare, and to take an active role in the Provider Defendants’ operations.

Zafirov’s first FCA complaint was dismissed without prejudice for: (1) failure to allege the FCA violations with the particularity required by Rule 9(b); (2) failure to clear the public-disclosure bar; and (3) because the initial complaint was a “shotgun pleading.” Zafirov filed an Amended Complaint and the Defendants again moved to dismiss the Amended Complaint (1) for failure to plead the FCA claims with particularity; and (2) based on the government action bar.

Regarding Defendants’ Rule 9(b) argument, the Court previously dismissed the initial complaint because it failed to “provide the dates these codes were submitted, the name of the individual or individuals that submitted the codes, how these codes impacted the amount of money that the defendants received from the federal government (materiality), or copies of a single bill or payment,” and because the relator did not allege any personal knowledge of the MA Defendants’ conduct.[8] The Court held that these defects were now cured in the Amended Complaint. Indeed, the Amended Complaint added nearly 100 pages of detailed allegations, including more than twenty examples of specific patients and claims. The Amended Complaint also newly alleged that Zafirov had access to the MA Defendants’ online portal and access to the records of the diagnosis codes submitted to the government. The Court held that Zafirov’s statements in the Amended Complaint alleging personal knowledge of the Provider Defendants’ medical records and access to the MA Defendants’ online portal provided the requisite indicia of reliability and, therefore, satisfied the Rule 9(b) standard. Defendants also alleged that Zafirov failed to sufficiently allege Defendants’ knowledge of falsity, the materiality of the alleged false statements, and causation, all of which the Court rejected.

The government-action bar prevents relators from bringing FCA suits “based upon allegations or transactions which are subject to a civil suit or an administrative civil money penalty proceeding in which the [g]overnment is already a party.” 31 USC. § 3730(e)(3). In deciding whether the government-action bar applies, courts look to whether the qui tam case brought by the relator receives support or advantage from the case in which the government is a party without giving anything useful or proper in return to the government.[9] Here, Defendants asserted that the Amended Complaint tracks the allegations set forth in United States ex rel. Sewell v. Freedom Health, et al., Civil Action No. 8:09-CV-01625 (M.D. Fla.), an FCA suit in which the MA Defendants had already agreed to pay $31,695,593 to settle similar allegations of submitting “unsupported diagnosis codes to CMS, which resulted in inflated reimbursements from 2008 to 2013 in connection with two of their Medicare Advantage plans operating in Florida.”[10] The Court determined that the Defendants’ arguments were inapplicable for two reasons. First, the Amended Complaint did not rely upon Sewell with respect to the Provider Defendants because the Provider Defendants were “neither named nor specifically identified in Sewell and none of the allegations against them were ever raised in that case.”[11] Second, the Court found material differences between the allegations against the MA Defendants in the Amended Complaint and Sewell such that if Zafirov succeeded, the government would receive a financial recovery beyond what was recovered in Sewell. The Court further noted that courts have considered the government’s views as a factor in applying the government-action bar and here, the government opposed dismissal and indicated a belief that Zafirov’s theory of the case is sound (even though it had decided not to intervene).

Takeaways: This decision highlights that allegations providing multiple specific examples of conduct alleged to violate the False Claims Act supported by a relator’s personal knowledge possess indicia of reliability sufficient to meet the Rule 9(b) particularity requirement. In addition, it is noteworthy that the Court placed significant weight on the government’s perception of the relator’s allegations and their lack of overlap with related proceedings in evaluating whether the government-action bar applies.

 Endnotes

[1] United States ex rel. Owsley v. Fazzi Associates, Inc., 16 F.4th 192 (6th Cir. 2021)

[2] Id. at 196-97 (internal citations and quotation marks omitted).

[3] Id. at 197.

[4] Brief for the United States as Amicus Curiae at 8, United States ex rel. Owsley v. Fazzi Associates Inc., No. 21-936 (US Sept. 9, 2022).

[5] Id.

[6] Id. at 9 (internal quotation marks omitted).

[7] Id.

[8] United States v. Fla. Med. Assocs. LLC, 2022 WL 4134611, at *4 (M.D. Fla. Sept. 12, 2022).

[9] United States v. Fla. Med. Assocs. LLC, 2022 WL 4134611, at *8 (M.D. Fla. Sept. 12, 2022).

[10] DOJ Press Release, Medicare Advantage Organization and Former Chief Operating Officer to Pay $32.5 Million to Settle False Claims Act Allegations (May 30, 2017),  https://www.justice.gov/opa/pr/medicare-advantage-organization-and-former-chief-operating-officer-pay-325-million-settle.

[11] United States v. Fla. Med. Assocs. LLC, 2022 WL 4134611, at *8 (M.D. Fla. Sept. 12, 2022)