Wednesday, July 31, 2019
The Federal Trade Commission filed an administrative complaint against data analytics company Cambridge Analytica, and filed settlements for public comment with Cambridge Analytica’s former chief executive and an app developer who worked with the company, alleging they employed deceptive tactics to harvest personal information from tens of millions of Facebook users for voter profiling and targeting.
As part of a proposed settlement with the FTC, two of the defendants—app developer Aleksandr Kogan and former Cambridge Analytica CEO Alexander Nix—have agreed to administrative orders restricting how they conduct any business in the future, and requiring them to delete or destroy any personal information they collected. Cambridge Analytica has filed for bankruptcy and has not settled the FTC’s allegations.
The FTC alleges that Cambridge Analytica, Nix, and Kogan deceived consumers by falsely claiming they did not collect any personally identifiable information from Facebook users who were asked to answer survey questions and share some of their Facebook profile data. The FTC separately announced that Facebook will pay a record-breaking $5 billion penalty and submit to new restrictions that will hold the company accountable for the decisions it makes about its users’ privacy as part of a settlement resolving allegations that the company violated a 2012 FTC privacy order.
Kogan is the developer of a Facebook application called the GSRApp—sometimes referred to as the “thisisyourdigitallife” app. The GSRApp asked its users to answer personality and other questions, and collected information such as the “likes” of public Facebook pages by the app’s users and by the “friends” in their social network. During the summer of 2014, the FTC alleges, Kogan, together with Cambridge Analytica and Nix, developed, used, and analyzed data obtained from the GSRApp. The information was used to train an algorithm that then generated personality scores for the app users and their Facebook friends. Cambridge Analytica, Kogan, and Nix then matched these personality scores with U.S. voter records. The company used these matched personality scores for its voter profiling and targeted advertising services.
For this project, Kogan was able to re-purpose an existing app he had on the Facebook platform, which allowed the app to harvest Facebook data from app users and their Facebook friends. In April 2014, Facebook announced it would no longer allow app developers to access data from an app user’s Facebook friends. Facebook, however, allowed developers with existing apps on the Facebook platform to access this data for another year. The FTC alleges that the GSRApp was able to take advantage of this access to collect Facebook profile data from 250,000 to 270,000 users of the GSRApp located in the United States, as well as 50 million to 65 million of those users’ Facebook friends, including at least 30 million identifiable U.S. consumers.
The app users were paid a nominal fee to take the GSRApp survey. Almost half of the app users, however, originally refused to provide their Facebook profile information. To address this issue, the GSRApp began telling app users that it would not “download your name or any other identifiable information—we are interested in your demographics and likes.”
The FTC alleges, however, that this was false, and that the GSRApp in fact collected users’ Facebook User ID, which connects individuals to their Facebook profiles, as well as other personal information such as their gender, birthdate, location, and their Facebook friends list.
In addition, the FTC alleges that Cambridge Analytica falsely claimed until at least November 2018 that it was a participant in the EU-U.S. Privacy Shield framework, even though the company allowed its certification to lapse in May 2018. The Privacy Shield establishes a process to allow companies to transfer consumer data from European Union countries to the United States in compliance with EU law. The FTC also alleges that the company failed to adhere to the Privacy Shield requirement that companies that cease participation in the Privacy Shield affirm to the Department of Commerce, which maintains the list of Privacy Shield participants, that they will continue to apply the Privacy Shield protections to personal information collected while participating in the program.
As part of the proposed settlement with the FTC, Kogan and Nix are prohibited from making false or deceptive statements regarding the extent to which they collect, use, share, or sell personal information, as well as the purposes for which they collect, use, share, or sell such information. In addition, they are required to delete or destroy any personal information collected from consumers via the GSRApp and any related work product that originated from the data.
The Commission vote to issue the proposed administrative complaint against Cambridge Analytica, and to accept the proposed consent agreements with Kogan and Nix, was 5-0. The FTC will publish a description of the consent agreement packages in the Federal Register soon. The agreements will be subject to public comment for 30 days after publication in the Federal Register after which the Commission will decide whether to make the proposed consent orders final. Once processed, comments will be posted on Regulations.gov.
NOTE: The Commission issues an administrative complaint when it has “reason to believe” that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of up to $42,530.
The FTC acknowledges the cooperation of the United Kingdom’s Information Commissioner’s Office. To facilitate international cooperation in this case, the FTC relied on key provisions of the U.S. SAFE WEB Act, which allows the FTC to share information with foreign counterparts to combat deceptive and unfair practices.
Tuesday, July 30, 2019
Facebook, Inc. will pay a record-breaking $5 billion penalty, and submit to new restrictions and a modified corporate structure that will hold the company accountable for the decisions it makes about its users’ privacy, to settle Federal Trade Commission charges that the company violated a 2012 FTC order by deceiving users about their ability to control the privacy of their personal information. Watch archival video of the press conference.
The $5 billion penalty against Facebook is the largest ever imposed on any company for violating consumers’ privacy and almost 20 times greater than the largest privacy or data security penalty ever imposed worldwide. It is one of the largest penalties ever assessed by the U.S. government for any violation.
The settlement order announced today also imposes unprecedented new restrictions on Facebook’s business operations and creates multiple channels of compliance. The order requires Facebook to restructure its approach to privacy from the corporate board-level down, and establishes strong new mechanisms to ensure that Facebook executives are accountable for the decisions they make about privacy, and that those decisions are subject to meaningful oversight.
“Despite repeated promises to its billions of users worldwide that they could control how their personal information is shared, Facebook undermined consumers’ choices,” said FTC Chairman Joe Simons. “The magnitude of the $5 billion penalty and sweeping conduct relief are unprecedented in the history of the FTC. The relief is designed not only to punish future violations but, more importantly, to change Facebook’s entire privacy culture to decrease the likelihood of continued violations. The Commission takes consumer privacy seriously, and will enforce FTC orders to the fullest extent of the law.”
“The Department of Justice is committed to protecting consumer data privacy and ensuring that social media companies like Facebook do not mislead individuals about the use of their personal information,” said Assistant Attorney General Jody Hunt for the Department of Justice’s Civil Division. “This settlement’s historic penalty and compliance terms will benefit American consumers, and the Department expects Facebook to treat its privacy obligations with the utmost seriousness.”
More than 185 million people in the United States and Canada use Facebook on a daily basis. Facebook monetizes user information through targeted advertising, which generated most of the company’s $55.8 billion in revenues in 2018. To encourage users to share information on its platform, Facebook promises users they can control the privacy of their information through Facebook’s privacy settings.
Following a yearlong investigation by the FTC, the Department of Justice will file a complaint on behalf of the Commission alleging that Facebook repeatedly used deceptive disclosures and settings to undermine users’ privacy preferences in violation of its 2012 FTC order. These tactics allowed the company to share users’ personal information with third-party apps that were downloaded by the user’s Facebook “friends.” The FTC alleges that many users were unaware that Facebook was sharing such information, and therefore did not take the steps needed to opt-out of sharing.
In addition, the FTC alleges that Facebook took inadequate steps to deal with apps that it knew were violating its platform policies.
In a related, but separate development, the FTC also announced today separate law enforcement actions against data analytics company Cambridge Analytica, its former Chief Executive Officer Alexander Nix, and Aleksandr Kogan, an app developer who worked with the company, alleging they used false and deceptive tactics to harvest personal information from millions of Facebook users. Kogan and Nix have agreed to a settlement with the FTC that will restrict how they conduct any business in the future.
New Facebook Order Requirements
To prevent Facebook from deceiving its users about privacy in the future, the FTC’s new 20-year settlement orderoverhauls the way the company makes privacy decisions by boosting the transparency of decision making and holding Facebook accountable via overlapping channels of compliance.
The order creates greater accountability at the board of directors level. It establishes an independent privacy committee of Facebook’s board of directors, removing unfettered control by Facebook’s CEO Mark Zuckerberg over decisions affecting user privacy. Members of the privacy committee must be independent and will be appointed by an independent nominating committee. Members can only be fired by a supermajority of the Facebook board of directors.
The order also improves accountability at the individual level. Facebook will be required to designate compliance officers who will be responsible for Facebook’s privacy program. These compliance officers will be subject to the approval of the new board privacy committee and can be removed only by that committee—not by Facebook’s CEO or Facebook employees. Facebook CEO Mark Zuckerberg and designated compliance officers must independently submit to the FTC quarterly certifications that the company is in compliance with the privacy program mandated by the order, as well as an annual certification that the company is in overall compliance with the order. Any false certification will subject them to individual civil and criminal penalties.
The order also strengthens external oversight of Facebook. The order enhances the independent third-party assessor’s ability to evaluate the effectiveness of Facebook’s privacy program and identify any gaps. The assessor’s biennial assessments of Facebook’s privacy program must be based on the assessor’s independent fact-gathering, sampling, and testing, and must not rely primarily on assertions or attestations by Facebook management. The order prohibits the company from making any misrepresentations to the assessor, who can be approved or removed by the FTC. Importantly, the independent assessor will be required to report directly to the new privacy board committee on a quarterly basis. The order also authorizes the FTC to use the discovery tools provided by the Federal Rules of Civil Procedure to monitor Facebook’s compliance with the order.
As part of Facebook’s order-mandated privacy program, which covers WhatsApp and Instagram, Facebook must conduct a privacy review of every new or modified product, service, or practice before it is implemented, and document its decisions about user privacy. The designated compliance officers must generate a quarterly privacy review report, which they must share with the CEO and the independent assessor, as well as with the FTC upon request by the agency. The order also requires Facebook to document incidents when data of 500 or more users has been compromised and its efforts to address such an incident, and deliver this documentation to the Commission and the assessor within 30 days of the company’s discovery of the incident.
Additionally, the order imposes significant new privacy requirements, including the following:
- Facebook must exercise greater oversight over third-party apps, including by terminating app developers that fail to certify that they are in compliance with Facebook’s platform policies or fail to justify their need for specific user data;
- Facebook is prohibited from using telephone numbers obtained to enable a security feature (e.g., two-factor authentication) for advertising;
- Facebook must provide clear and conspicuous notice of its use of facial recognition technology, and obtain affirmative express user consent prior to any use that materially exceeds its prior disclosures to users;
- Facebook must establish, implement, and maintain a comprehensive data security program;
- Facebook must encrypt user passwords and regularly scan to detect whether any passwords are stored in plaintext; and
- Facebook is prohibited from asking for email passwords to other services when consumers sign up for its services.
Alleged Violations of 2012 Order
The settlement stems from alleged violations of the FTC’s 2012 settlement order with Facebook. Among other things, the 2012 order prohibited Facebook from making misrepresentations about the privacy or security of consumers’ personal information, and the extent to which it shares personal information, such as names and dates of birth, with third parties. It also required Facebook to maintain a reasonable privacy program that safeguards the privacy and confidentiality of user information.
The FTC alleges that Facebook violated the 2012 order by deceiving its users when the company shared the data of users’ Facebook friends with third-party app developers, even when those friends had set more restrictive privacy settings.
In May 2012, Facebook added a disclosure to its central “Privacy Settings” page that information shared with a user’s Facebook friends could also be shared with the apps used by those friends. The FTC alleges that four months after the 2012 order was finalized in August 2012, Facebook removed this disclosure from the central “Privacy Settings” page, even though it was still sharing data from an app user’s Facebook friends with third-party developers.
Additionally, Facebook launched various services such as “Privacy Shortcuts” in late 2012 and “Privacy Checkup” in 2014 that claimed to help users better manage their privacy settings. These services, however, allegedly failed to disclose that even when users chose the most restrictive sharing settings, Facebook could still share user information with the apps of the user’s Facebook friends—unless they also went to the “Apps Settings Page” and opted out of such sharing. The FTC alleges the company did not disclose anywhere on the Privacy Settings page or the “About” section of the profile page that Facebook could still share information with third-party developers on the Facebook platform about an app users Facebook friends.
Facebook announced in April 2014 that it would stop allowing third-party developers to collect data about the friends of app users (“affected friend data”). Despite this promise, the company separately told developers that they could collect this data until April 2015 if they already had an existing app on the platform. The FTC alleges that Facebook waited until at least June 2018 to stop sharing user information with third-party apps used by their Facebook friends.
In addition, the complaint alleges that Facebook improperly policed app developers on its platform. The FTC alleges that, as a general practice, Facebook did not screen the developers or their apps before granting them access to vast amounts of user data. Instead, Facebook allegedly only required developers to agree to Facebook’s policies and terms when they registered their app with the Facebook Platform. The company claimed to rely on administering consequences for policy violations that subsequently came to its attention after developers had already received data about Facebook users. The complaint alleges, however, that Facebook did not enforce such policies consistently and often based enforcement of its policies on whether Facebook benefited financially from its arrangements with the developer, and that this practice violated the 2012 order’s requirement to maintain a reasonable privacy program.
The FTC also alleges that Facebook misrepresented users’ ability to control the use of facial recognition technology with their accounts. According to the complaint, Facebook’s data policy, updated in April 2018, was deceptive to tens of millions of users who have Facebook’s facial recognition setting called “Tag Suggestions” because that setting was turned on by default, and the updated data policy suggested that users would need to opt-in to having facial recognition enabled for their accounts.
In addition to these violations of its 2012 order, the FTC alleges that Facebook violated the FTC Act’s prohibition against deceptive practices when it told users it would collect their phone numbers to enable a security feature, but did not disclose that it also used those numbers for advertising purposes.
The Commission vote to refer the complaint and stipulated final order to the Department of Justice for filing was 3-2. The Department will file the complaint and stipulated final order in the U.S. District Court for the District of Columbia. Chairman Simons along with Commissioners Noah Joshua Phillips and Christine S. Wilson issued a statement on this matter. Commissioners Rohit Chopra and Rebecca Kelly Slaughter issued separate statements on this matter.
Monday, July 29, 2019
Call for AALS Speaker/Participants: Online & Hybrid Learning Pedagogy Best Practices and Development of Standards
The most unique session format at the AALS Annual Meeting, discussion group programs provide an opportunity for a small group of invited participants to engage in a focused discussion on a specific topic. If you are interested in participating, please submit an abstract by August 23rd, 2019.
This AALS Discussion Group will review the existing Model Standards for online law school programs and develop updated standards and best practices. This Discussion Group requests the submission of Discussion White Papers based on evolving and improving aspects of the Model Standards for online programs that are available under the “Online & Hybrid Learning Pedagogy Model Standards Development” information. We will examine, discuss and update the 2015 Model Standards, and discuss how these standards might be deployed, and who might be responsible for applying the standards as in an advisory manner or as an accreditor. As time allows, we will also discuss updating the 2015 Recommended Practices and examine how schools may propel their programs toward these loftier goals.
Sunday, July 28, 2019
Four Chinese Nationals and Chinese Company Indicted for Conspiracy to Defraud the United States and Evade Sanctions
A federal grand jury has charged four Chinese nationals and a Chinese company with violating the International Emergency Economic Powers Act (IEEPA), conspiracy to violate IEEPA and defraud the United States; conspiracy to violate, evade and avoid restrictions imposed under the Weapons of Mass Destruction Proliferators Sanctions Regulations (WMDPSR); and conspiracy to launder monetary instruments.
The indictment returned yesterday by a federal grand jury in Newark, New Jersey charges Ma Xiaohong (Ma); her company, Dandong Hongxiang Industrial Development Co. Ltd. (DHID); and three of DHID’s top executives – general manager Zhou Jianshu (Zhou), deputy general manager Hong Jinhua (Hong) and financial manager Luo Chuanxu (Luo) – with violating IEEPA, conspiracy to violate IEEPA and to defraud the United States and conspiracy to launder monetary instruments. Download us_v._dhid_et_al._indictment.pdf
“Through the use of more than 20 front companies, the defendants are alleged to have sought to obscure illicit financial dealings on behalf of sanctioned North Korean entities that were involved in the proliferation of weapons of mass destruction,” said Assistant Attorney General John Demers. “But through the tireless efforts of federal law enforcement, we were able to shine a light on their lawless conduct and take the first step in bringing them to justice.”
“Any Chinese company conspiring to do business with sanctioned WMD proliferators through the U.S. banking system should think twice,” said Assistant Attorney General Benczkowski. “This indictment shows the Department’s resolve to use every tool of criminal prosecution to detect illicit financial transactions and enforce U.S. sanctions.”
“Ma, her company, and her employees tried to defraud the United States by evading sanctions restrictions and doing business with proliferators of weapons of mass destruction,” said U.S. Attorney Carpenito. “We will continue to work closely with our partners in the National Security and Criminal Divisions in order to identify and prosecute defendants like these, in order to preserve a safer and more fair environment for all.”
According to the indictment, DHID was a Chinese company whose core business was trade with North Korea. DHID allegedly openly worked with North Korea-based Korea Kwangson Banking Corporation (KKBC) prior to Aug. 11, 2009, when the Office of Foreign Assets Control (OFAC) designated KKBC as a Specially Designated National (SDN) for providing U.S. dollar financial services for two other North Korean entities, Tanchon Commercial Bank (Tanchon) and Korea Hyoksin Trading Corporation (Hyoksin). President Bush identified Tanchon as a weapons of mass destruction proliferator in June 2005, and OFAC designated Hyoksin as an SDN under the WMDPSR in July 2009. Tanchon and Hyoksin were identified and designated because of their ties to Korea Mining Development Trading Company (KOMID), which OFAC has described as North Korea’s premier arms dealer and main exporter of goods and equipment related to ballistic missiles and conventional weapons.
Beginning after the designation of KKBC as an SDN in August 2009, Ma allegedly conspired with Zhou, Hong and Luo to create or acquire numerous front companies to conduct U.S. dollar transactions designed to evade U.S. sanctions. The indictment alleges that from December 2009 to September 2015, the defendants established front companies in offshore jurisdictions such as the British Virgin Islands, the Seychelles, Hong Kong, Wales, England, and Anguilla, and opened Chinese bank accounts held in the names of the front companies at banks in China that maintained correspondent accounts in the United States. The defendants used these accounts to conduct U.S. dollar financial transactions through the U.S. banking system when completing sales to North Korea. These sales transactions were allegedly financed or guaranteed by KKBC. These front companies facilitated the financial transactions to hide KKBC’s presence from correspondent banks in the United States, including a bank processing center in Newark, New Jersey, according to the allegations in the indictment. As a result of the defendants’ alleged scheme, KKBC was able to cause financial transactions in U.S. dollars to transit through the U.S. correspondent banks without being detected by the banks and, thus, were not blocked under the WMDPSR program.
Ma, Zhou, Hong and Luo face a statutory maximum sentence of 20 years in prison and a $1 million fine on the charge of violating IEEPA, a maximum of five years in prison and a $250,000 fine on conspiracy to violate IEEPA and to defraud the United States, and a maximum of 20 years in prison and a $500,000 fine on the charge of conspiracy to launder monetary instruments. The maximum potential sentence in this case is prescribed by Congress and is provided here for informational purposes only, as any sentencing of the defendants will be determined by a judge.
Friday, July 26, 2019
Hungary Subsidiary of Microsoft Corporation Agrees to Pay $8.7 Million in Criminal Penalties to Resolve Foreign Bribery Case
Microsoft Magyarország Számítástechnikai Szolgáltató és Kereskedelmi Kft. (Microsoft Hungary), a wholly-owned subsidiary of Microsoft Corporation, has agreed to pay a criminal penalty of more than $8.7 million to resolve the government’s investigation into violations of the Foreign Corrupt Practices Act (FCPA) arising out of a bid-rigging and bribery scheme in connection with the sale of Microsoft software licenses to Hungarian government agencies. Download Non-Prosecution Agreement & Statement of Facts
According to Microsoft Hungary’s admissions, beginning by at least 2013 and continuing until at least 2015, a senior executive and other employees of Microsoft Hungary participated in a scheme to inflate margins in the Microsoft sales channel in connection with the sale of Microsoft software licenses to Hungarian government agencies. In furtherance of that scheme, Microsoft Hungary executives and employees falsely represented to Microsoft that steep discounts were necessary to conclude deals with resellers who bid for the opportunity to sell Microsoft licenses to government customers. In actuality, the savings were not passed on to the government customers, but instead were used for corrupt purposes and were falsely recorded as “discounts” and stored in various tools and databases on Microsoft servers in the United States in violation of the Foreign Corrupt Practices Act.
Microsoft Hungary entered into a nonprosecution agreement and agreed to pay a criminal penalty of $8,751,795 to resolve the matter. The Department reached this resolution based on several factors. Although Microsoft Hungary did not voluntarily self-disclose the misconduct, Microsoft Hungary received credit for its and Microsoft Corporation’s substantial cooperation with the Department’s investigation and for taking extensive remedial measures. For example, Microsoft Hungary terminated four licensing partners and Microsoft Corporation has implemented an enhanced system of compliance and internal controls, company-wide, to address and mitigate corruption risks. Accordingly, the criminal penalty reflects a 25 percent reduction off the bottom of the applicable U.S. Sentencing Guidelines fine range for the company’s full cooperation and remediation.
In a related matter with the Securities and Exchange Commission (SEC), Microsoft Corporation agreed to pay to the SEC disgorgement and prejudgment interest totaling approximately $16,565,151 for conduct in Hungary.
A father and son who ran a complex investment fraud scheme by which they stole more than $10 million over the course of seven years were sentenced today to 60 months and 27 months in prison, respectively.
Donald Watkins Sr., 70, of Atlanta, Georgia, and Donald Watkins Jr., 47, of Birmingham, Alabama, were sentenced by U.S. District Judge Karon O. Bowdre of the Northern District of Alabama. Judge Bowdre also ordered Donald Watkins Sr. to serve five years of supervised release and to pay restitution in the amount of $14,000,100.00 and ordered Donald Watkins Jr. to serve three years of supervised release and to pay restitution jointly with his father in the amount of $13,850,000.
The father and son co-defendants were convicted on March 8, 2019, following a jury trial that lasted over two weeks. Donald Watkins Sr. was convicted of seven counts of wire fraud, two counts of bank fraud and one count of conspiracy. Donald Watkins Jr. was convicted of one count of wire fraud and one count of conspiracy.
According to evidence presented at trial, between approximately 2007 and 2013, Donald Watkins Sr. sold “economic participations” and promissory notes connected with Masada Resource Group, a company that he ran as manager and CEO. Investors paid more than $10 million dollars after Donald Watkins Sr. and Donald Watkins Jr. falsely represented that the money would be used to grow Masada, which Donald Watkins Sr. described as a “pre-revenue” company that supposedly had technology that could convert garbage into ethanol. Instead of investing the money into Masada, however, Donald Watkins Sr. and Donald Watkins Jr. diverted funds to pay personal bills and the debts of their other business ventures, the evidence showed. Victim money was used to pay for Donald Watkins Sr.’s alimony, hundreds of thousands of dollars in back taxes, personal loan payments, a private jet and clothing purchased by Donald Watkins Jr. and his wife. Emails introduced at trial also showed that Donald Watkins Sr. and Donald Watkins Jr. planned to obtain millions of dollars for these purposes from one victim on multiple occasions, when they knew that this victim and other victims trusted them to put their money to use in growing Masada.
Donald Watkins Sr. also was convicted of defrauding Alamerica Bank, an entity in which Donald Watkins Sr. held a controlling interest through his ownership of Alamerica Bank Corp stock, the evidence showed. In order to pay hundreds of thousands of dollars in litigation expenses associated with another one of Donald Watkins Sr.’s business ventures, Donald Watkins Sr. executed a plan to use a straw borrower to take out money from Alamerica Bank and use those funds to pay the defendant’s litigation expenses. This straw borrower—Donald Watkins Sr.’s long-time mentor and a prominent figure in the Birmingham community—took over $900,000 in loans from Alamerica Bank and then immediately permitted Donald Watkins Sr. to use those funds for his personal benefit, the evidence showed.
Thursday, July 25, 2019
- New leak reveals how multinational companies used Mauritius to avoid taxes in countries in Africa, Asia, the Middle East and the Americas
- Law firm Conyers Dill & Pearman and major audit firms, including KPMG, enabled corporations operating in some of the world’s poorest nations to exploit tax loopholes
- A private equity push into Africa backed by anti-poverty crusader and rock star Bob Geldof benefited from Mauritius’ treaties that divert tax revenue away from Uganda and elsewhere
- Multi-billion dollar U.S. companies Aircastle and Pegasus Capital Advisers cut taxes through confidential contracts, leases and loans involving Mauritius and other tax havens
- Officials from countries in Africa and Southeast Asia told ICIJ that tax treaties signed with Mauritius had cost them greatly and that renegotiating them was a priority
Mahin Mojtahedzadeh (Mahin), age 74, a citizen of Iran, pleaded guilty today to conspiring to unlawfully export gas turbine parts from the United States to Iran.
Mahin pleaded guilty to one count of conspiring to violate the International Emergency Economic Powers Act (IEEPA) and the Iranian Transactions and Sanctions Regulations. She admitted that she was the President and Managing Director of ETCO-FZC (ETCO), an export company with an office in Dubai in the United Arab Emirates. ETCO is a supplier of spare and replacement turbine parts for power generation companies in the Middle East, including Iran.
Mahin admitted that from 2013 through 2017, she worked with companies in Canada and Germany to violate and evade U.S. sanctions against Iran, by having these companies first acquire more than $3 million dollars’ worth of turbine parts from two distributors in Saratoga County, New York.
When the U.S. parts arrived in Canada and Germany, respectively, these companies and Mahin then arranged for the parts to be re-shipped to ETCO’s customers in Iran. At all times, U.S. law prohibited the export and re-export of U.S.-origin turbine parts to Iran without a license from the U.S. Office of Foreign Assets Control (OFAC), which neither Mahin nor her co-conspirators possessed.
“By supplying Iran with millions of dollars’ worth of illegally exported turbine machinery, the defendant provided equipment that is critically important for Iran’s infrastructure,” said Assistant Attorney General Demers. “This sort of sanctions violation allows the Iranian government to withstand the pressure of U.S. sanctions – pressure that is intended to end Iran’s malign behavior. We will continue to hold to account those who aid Iran in evading the United States’ comprehensive embargo.”
“Mahin Mojtahedzadeh worked for years to illegally acquire gas turbine parts for power plants in Iran,” said U.S. Attorney Jaquith. “She will now be punished for undermining the efficacy of economic sanctions that are intended to protect the national security of the United States.”
“The proliferation of sensitive U.S. technologies to Iran remains a clear threat to our national security,” said Special Agent in Charge Hendricks. “The FBI, along with our interagency partners, will continue to identify, investigate, and eliminate proliferation efforts aimed at circumventing our export control laws and economic sanctions to illegally obtain sensitive technologies”
“HSI's export enforcement initiatives safeguard national security and protect our interests across the world,” said HSI Special Agent in Charge Kevin Kelly. “The defendant’s admission of willful attempts to thwart these efforts is inexcusable and her guilty plea is an example of the significant repercussions for such actions.”
“We will fully and aggressively enforce our nation’s restrictions on exports to Iran. Controls on exports to Iran help apply maximum pressure on Iran to end its promotion of instability and terrorism worldwide,” said Special Agent in Charge Jonathan Carson, of U.S. Department of Commerce, Office of Export Enforcement. “The Office of Export Enforcement will continue to leverage our unique authorities to pursue violators wherever they are, worldwide. We will continue to work with our law enforcement partners to achieve this goal.”
Mahin faces up to 20 years in prison, as well as a fine of up to $1 million, when she is sentenced on Nov. 12, 2019 by United States District Judge Mae A. D’Agostino. A defendant’s sentence is imposed by a judge based on the particular statute the defendant is charged with violating, the U.S. Sentencing Guidelines and other factors.
Two of Mahin’s co-conspirators have previously pleaded guilty.
Olaf Tepper, age 52, and a citizen of Germany, pleaded guilty to conspiring to violate IEEPA. On Aug. 3, 2018, Judge D’Agostino sentenced him to 24 months in prison, and to pay a $5,000 fine. Tepper was the founder and Managing Director of Energy Republic GmbH (Energy Republic), based in Cologne, Germany, which re-exported U.S.-origin turbine parts to Iran, as part of a conspiracy with Mahin.
Mojtaba Biria, age 68, and a citizen of Germany, also pleaded guilty to conspiring to violate IEEPA, and is scheduled to be sentenced on Aug. 14, 2019. Biria was Energy Republic’s Technical Managing Director.
These cases are the result of a joint investigation by FBI, HSI and BIS, and are being prosecuted by Assistant U.S. Attorneys Rick Bellis and Michael Barnett, with assistance from Trial Attorney Scott A. Claffee of the National Security Division’s Counterintelligence & Export Control Section.
Wednesday, July 24, 2019
Facebook Agrees to Pay $5 Billion and Implement Robust New Protections of User Information in Settlement of Data-Privacy Claims
The Department of Justice, together with the Federal Trade Commission (FTC), today announced a settlement that requires Facebook to implement a comprehensive, multi-faceted set of compliance measures designed to improve user privacy and provide additional protections for user information. The settlement also requires Facebook to pay an unprecedented $5 billion civil penalty — the most ever imposed in an FTC case and among the largest civil penalties ever obtained by the federal government.
In a complaint filed today, the United States alleges that Facebook violated an administrative order issued by the FTC in 2012 by misleading users about the extent to which third-party application developers could access users’ personal information. The complaint further alleges that Facebook violated the Federal Trade Commission Act by deceiving users about their use of this and additional sensitive information.
As reflected in the stipulated order filed with the complaint, Facebook has agreed to settle these allegations by paying a $5 billion civil penalty and implementing robust, new compliance measures that will change how Facebook prioritizes and approaches user privacy issues. These new compliance measures include appointment of an independent assessor to monitor Facebook’s conduct, privacy reviews for all new or modified Facebook products, establishment of a new Independent Privacy Committee on Facebook’s Board of Directors, annual compliance certifications by Facebook CEO Mark Zuckerberg, and various reporting and record-keeping requirements. Under the stipulated order, the Department of Justice and FTC will share responsibility for monitoring and enforcing Facebook’s compliance.
“The Department of Justice is committed to protecting consumer data privacy and ensuring that social media companies like Facebook do not mislead individuals about the use of their personal information,” said Assistant Attorney General Jody Hunt for the Department of Justice’s Civil Division. “This settlement’s historic penalty and compliance terms will benefit American consumers, and the Department expects Facebook to treat its privacy obligations with the utmost seriousness.”
“Despite repeated promises to its millions of world-wide users that they could control how their personal information is shared, Facebook took steps to undermine consumers’ choices,” said FTC Chairman Joe Simons. “The magnitude of the $5 billion penalty and sweeping conduct relief are unprecedented in the history of the FTC. The relief is designed not only to punish previous violations but, more importantly, to change Facebook’s entire privacy culture to decrease the likelihood of continued violations. The Commission takes consumer privacy seriously, and will enforce FTC orders to the fullest extent of the law.”
This matter was handled by attorneys in the Civil Division’s Consumer Protection Branch, including Deputy Assistant Attorney General David M. Morrell, Director Gustav W. Eyler, Assistant Director Andrew E. Clark, Senior Litigation Counsel Lisa K. Hsiao, and Trial Attorneys Patrick R. Runkle and Jason Lee, in conjunction with staff at the FTC’s Division of Enforcement.
- How much did U.S. multinationals repatriate following the 2017 Tax Cuts and Jobs Act?
- Which countries and industries repatriated the most in 2018?
- Which countries are the largest destinations for U.S. multinational enterprises’ direct investment?
- Which countries’ multinational enterprises have the largest direct investment positions in the United States?
- In which industries is foreign direct investment concentrated?
The U.S. direct investment abroad position, or cumulative level of investment, decreased $62.3 billion to $5.95 trillion at the end of 2018 from $6.01 trillion at the end of 2017, according to statistics released by the Bureau of Economic Analysis (BEA). The decrease was due to the repatriation of accumulated prior earnings by U.S. multinationals from their foreign affiliates, largely in response to the 2017 Tax Cuts and Jobs Act. The decrease reflected a $75.8 billion decrease in the position in Latin America and Other Western Hemisphere, primarily in Bermuda. By industry, holding company affiliates owned by U.S. manufacturers accounted for most of the decrease.
The foreign direct investment in the United States position increased $319.1 billion to $4.34 trillion at the end of 2018 from $4.03 trillion at the end of 2017. The increase mainly reflected a $226.1 billion increase in the position from Europe, primarily the Netherlands and Ireland. By industry, affiliates in manufacturing, retail trade, and real estate accounted for the largest increases.
Effects of the 2017 Tax Cuts and Jobs Act (TCJA) on U.S. Direct Investment Abroad
The TCJA generally eliminated taxes on dividends, or repatriated earnings, to U.S. multinationals from their foreign affiliates. Dividends of $776.5 billion in 2018 exceeded earnings for the year, which led to negative reinvestment of earnings, decreasing the investment position for the first time since 1982. Tables 3 and 4 provide information on the country and industry breakdown of dividends.
By country, nearly half of the dividends in 2018 were repatriated from affiliates in Bermuda ($231.0 billion) and the Netherlands ($138.8 billion). Ireland was the third largest source of dividends, but its value is suppressed due to confidentiality requirements. By industry, U.S. multinationals in chemical manufacturing ($209.1 billion) and computers and electronic products manufacturing ($195.9 billion) repatriated the most in 2018.
U.S. direct investment abroad (tables 1 – 6)
U.S. multinational enterprises (MNEs) invest in nearly every country, but their investment in affiliates in five countries accounted for more than half of the total position at the end of 2018. The U.S. direct investment abroad position remained the largest in the Netherlands at $883.2 billion, followed by the United Kingdom ($757.8 billion), Luxembourg ($713.8 billion), Ireland ($442.2 billion), and Canada ($401.9 billion).
By industry of the directly-owned foreign affiliate, investment was highly concentrated in holding companies, which accounted for nearly half of the overall position in 2018. Most holding company affiliates, which are owned by U.S. parents from a variety of industries, own other foreign affiliates that operate in a variety of industries. By industry of the U.S. parent, investment by manufacturing MNEs accounted for 54.0 percent of the position, followed by MNEs in finance and insurance (12.1 percent).
U.S. MNEs earned income of $531.0 billion in 2018 on their cumulative investment abroad, a 12.8 percent increase from 2017.
Foreign direct investment in the United States (tables 7 – 10)
By country of the foreign parent, five countries accounted for more than half of the total position at the end of 2018. The United Kingdom remained the top investing country with a position of $560.9 billion. Canada ($511.2 billion) moved up one position from 2017 to be the second-largest investing country, moving Japan ($484.4 billion) into third, while the Netherlands ($479.0 billion) and Luxembourg ($356.0 billion) switched places as the fourth and fifth largest investing countries at the end of 2018.
By country of the ultimate beneficial owner (UBO), the top five countries in terms of position were the United Kingdom ($597.2 billion), Canada ($588.4 billion), Japan ($488.7 billion), Germany ($474.5 billion), and Ireland ($385.3 billion). On this basis, investment from the Netherlands and Luxembourg was much lower than by country of foreign parent, indicating that much of the investment from foreign parents in these countries was ultimately owned by investors in other countries.
Foreign direct investment in the United States was concentrated in the U.S. manufacturing sector, which accounted for 40.8 percent of the position. There was also sizable investment in finance and insurance (12.1 percent).
Foreign MNEs earned income of $208.1 billion in 2018 on their cumulative investment in the United States, a 19.7 percent increase from 2017.
Updates to Direct Investment Statistics Delayed
Updates to BEA’s detailed country and industry statistics for U.S. direct investment abroad and for foreign direct investment in the United States for 2016 and 2017 were delayed due to the impact of the partial federal government shutdown that started in late December 2018. BEA will update the 2016 and 2017 statistics in 2020 along with updates to the 2018 statistics."
Where does the residual value for "Just Do it" and the 'cool kids' retro branding of All Stars belong? I have received several requests in the U.S. about my initial thoughts on the EU Commission’s 56-page published (public version) State Aid preliminary decision with the reasoning that The Netherlands government provided Nike an anti-competitive subsidy via the tax system. My paraphrasing of the following EU Commission statement [para. 87] sums up the situation:
The Netherlands operational companies are remunerated with a low, but stable level of profit based on a limited margin on their total revenues reflecting those companies’ allegedly “routine” distribution functions. The residual profit generated by those companies in excess of that level of profit is then entirely allocated to Nike Bermuda as an alleged arm’s length royalty in return for the license of the Nike brands and other related IP”
The question that comes to my mind is: "Would I pay $100 for a canvas sneaker designed the 20's that I know is $12 to manufacture, distribute, and have enough markup for the discount shoe store to provide it shelf space?" My answer is: "Yes, I own two pair of Converse's Chuck Taylor All Stars." So why did I spend much more than I know them to be worth (albeit, I wait until heavily discounted and then only on clearance). From a global value chain perspective: "To which Nike function and unit does the residual value for the 'cool kids' retro branding of All Stars belong?"
U.S. international tax professionals operating in the nineties know that The Netherlands is a royalty conduit intermediary country because of its good tax treaty system and favorable domestic tax system, with the intangible profits deposited to take advantage of the U.S. tax deferral regime that existed until the TCJA of 2017 (via the Bermuda IP company). Nike U.S., but for the deferral regime, could have done all this directly from its U.S. operations to each country that Nike operates in. No other country could object, pre-BEPs, because profit split and marketing intangibles were not pushed by governments during transfer pricing audits.
The substantial value of Nike (that from which its profits derive) is neither the routine services provided by The Netherlands nor local wholesalers/distributors. The value is the intangible brand created via R&D and marketing/promotion. That brand allows a $10 – $20 retail price sneaker to sell retail for $90 – $200, depending on the country. Converse All-Stars case in point. Same $10 shoe as when I was growing up now sold for $50 – $60 because Converse branded All-Stars as cool kid retro fashion.
Nike has centralized, for purposes of U.S. tax deferral leveraging a good tax treaty network, the revenue flows through NL. The royalty agreement looks non-traditional because instead of a fixed price (e.g. 8%), it sweeps the NL profit account of everything but for the routine rate of return for the grouping of operational services mentioned in the State Aid opinion. If Nike was an actual Dutch public company, or German (like Addidas), or French – then Nike would have a similar result from its home country base because of the way its tax system allows exemption from tax for the operational foreign-sourced income of branches. [Having worked back in the mid-nineties on similar type companies that were European, this is what I recall but I will need to research to determine if this has been the case since the nineties.]
I suspect that when I research this issue above that the NL operations will have been compensated within an allowable range based on all other similar situated 3rd parties. I could examine this service by service but that would require much more information and data analysis about the services, and lead to a lesser required margin by Nike. The NL functions include [para 33]: “…regional headquarter functions, such as marketing, management, sales management (ordering and warehousing), establishing product pricing and discount policies, adapting designs to local market needs, and distribution activities, as well as bearing the inventory risk, marketing risk and other business risks.”
By example, the EU Commission states in its initial Nike news announcement:
Nike European Operations Netherlands BV and Converse Netherlands BV have more than 1,000 employees and are involved in the development, management and exploitation of the intellectual property. For example, Nike European Operations Netherlands BV actively advertises and promotes Nike products in the EMEA region, and bears its own costs for the associated marketing and sales activities.
Nike’s internal Advertising, Marketing, and Promotion (AMP) services can be benchmarked to its 3rd party AMP providers. But by no means do the local NL AMP services rise to the level of Nike’s chief AMP partner (and arguably a central key to its brand build) Wieden + Kennedy (renown for creating many industry branding campaigns but perhaps most famously for Nike’s “Just Do it” – inspired by the last words of death row inmate Gary Gilmore before his execution by firing squad).
There is some value that should be allocated for the headquarters management of the combination of services on top of the service by service approach. Plenty of competing retail industry distributors to examine though. If by example the profit margin range was a low of 2% to a high of 8% for the margin return for the combination of services, then Nike based on the EU Commission’s public information falls within that range, being around 5%.
The Commission contends that Nike designed its transfer pricing study to achieve a result to justify the residual sweep to its Bermuda deferral subsidiary. The EU Commission states an interesting piece of evidence that may support its decision [at para 89]: “To the contrary, those documents indicate that comparable uncontrolled transactions may have existed as a result of which the arm’s length level of the royalty payment would have been lower…”. If it is correct that 3rd party royalty agreements for major brand overly compensate local distributors, by example provide 15% or 20% profit margin for local operations, then Nike must also. [I just made these numbers up to illustrate the issue]
All the services seem, on the face of the EU Commission’s public document, routine to me but for “adapting designs to local market needs”. That, I think, goes directly to product design which falls under the R&D and Branding. There are 3rd parties that do exactly this service so it can be benchmarked, but its value I suspect is higher than by example ‘inventory risk management’. We do not know from the EU document whether this ‘adapting product designs to local market’ service was consistent with a team of product engineers and market specialists, or was it merely occasional and outsourced. The EU Commission wants, like with Starbucks, Nike to use a profit split method. “…a transfer pricing arrangement based on the Profit Split Method would have been more appropriate to price…”. Finally, the EU Commission asserts [para. 90]: “…even if the TNMM was the most appropriate transfer pricing method…. Had a profit level indicator been chosen that properly reflected the functional analysis of NEON and CN BV, that would have led to a lower royalty payment…”.
But for the potential product design issue, recognizing I have not yet researched this issue yet, based on what I know about the fashion industry, seems rather implausible to me that a major brand would give up part of its brand residual to a 3rd party local distributor. In essence, that would be like the parent company of a well-established fashion brand stating “Let me split the brand’s value with you for local distribution, even though you have not borne any inputs of creating the value”. Perhaps at the onset of a startup trying to create and build a brand? But not Nike in the 1990s. I think that the words of the dissenting Judge in Altera (9th Cir June 2019) are appropriate:
An ‘arm’s length result is not simply any result that maximizes one’s tax obligations’.
The EU Commission obviously does not like the Bermuda IP holding subsidiary arrangement that the U.S. tax deferral regime allows (the same issue of its Starbucks state aid attack), but that does not take away from the reality that legally and economically, Bermuda for purposes of the NL companies owns the Nike brand and its associated IP. The new U.S. GILTI regime combined with the FDII export incentive regime addresses the Bermuda structure, making it much somewhat less comparably attractive to operating directly from the U.S. (albeit still produces some tax arbitrage benefit). Perhaps the U.S. tax regime if it survives, in combination with the need for the protection of the IRS Competent Authority for foreign transfer pricing adjustments will lead to fewer Bermuda IP holding subsidiaries and more Delaware ones.
My inevitable problem with the Starbucks and Nike (U.S. IP deferral structures) state aid cases is that looking backward, even if the EU Commission is correct, it is a de minimis amount (the EU Commission already alleged a de minimis amount for Starbucks but the actual amount will be even less if any amount at all). Post-BEPS, the concept and understanding of marketing intangibles including brands is changing, as well as allowable corporate fiscal operational structures based on look-through (GILTI type) regimes. More effective in the long term for these type of U.S. IP deferral structures is for the EU Commission is to spend its compliance resources on a go-forward basis from 2015 BEPS to assist the restructuring of corporations and renegotiation of APAs, BAPAs, Multilateral PAs to fit in the new BEPS reality. These two cases seem more about an EU – U.S. tax policy dispute than the actual underlying facts of the cases. And if as I suspect that EU companies pre-BEPS had the same outcome based on domestic tax policy foreign source income exemptions, then the EU Commission’s tax policy dispute would appear two-faced.
I’ll need to undertake a research project or hear back from readers and then I will follow up with Nike Part 2 as a did with Starbucks on this Kluwer blog previously. See Application of TNMM to Starbucks Roasting Operation: Seeking Comparables Through Understanding the Market and then My Starbucks’ State Aid Transfer Pricing Analysis: Part II. See also my comments about Altera: An ‘arm’s length result is not simply any result that maximizes one’s tax obligations’.
Want to help me in this research or have great analytical content for my transfer pricing treatise published by LexisNexis? Reach out on firstname.lastname@example.org
Prof. William Byrnes (Texas A&M) is the author of a 3,000 page treatise on transfer pricing that is a leading analytical resource for advisors.
Tuesday, July 23, 2019
2019’s Tax Facts Offers a Complete Web, App-Based, and Print Experience
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Monday, July 22, 2019
Sunday, July 21, 2019
TEXAS A&M UNIVERSITY SCHOOL OF LAW aims to hire multiple outstanding scholars, across an array of fields, over the next several years.
Since integrating with Texas A&M six years ago, the School of Law – based in Dallas/Fort Worth – has achieved a remarkable forward trajectory by dramatically increasing entering class credentials; adding nine new clinics; strengthening student services; and hiring twenty-six new faculty members. The Appointments Committee welcomes expressions of interest in all areas, including especially from candidates who will add to the diversity of our faculty. Areas of particular interest include:
cybersecurity, privacy, and health law (with emphasis on healthcare finance, policy, regulation, delivery, and unfair competition).
The Texas A&M System is an Equal Opportunity/Affirmative Action/Veterans/Disability Employer committed to diversity. Texas A&M University is committed to enriching the learning and working environment for all visitors, students, faculty, and staff by promoting a culture that embraces inclusion, diversity, equity, and accountability. Diverse perspectives, talents, and identities are vital to accomplishing our mission and living our core values. The School of Law provides equal opportunity to all employees, students, applicants for employment or admission, and the public, regardless of race, color, sex, religion, national origin, age, disability, genetic information, veteran status, sexual orientation, or gender identity.
Candidates must have a J.D. degree or its equivalent. Preference will be given to those with outstanding scholarly achievement and strong teaching skills. Successful candidates will be expected to engage in scholarship, teaching, and service. Rank as an Executive Professor, Assistant Professor, Associate Professor, or Professor will be determined based on qualifications and experience.
Applicants should email a cover letter (indicating teaching and research interests) and CV/references to Professor Milan Markovic, Chair of the Appointments Committee, at email@example.com. The Appointments Committee will treat all applications as confidential, subject to the requirements of state and federal law.
Saturday, July 20, 2019
Justice Department Announces Addendum to Swiss Bank Program Category 2 Non-Prosecution Agreement with Banque Bonhôte & Cie SA
The Department of Justice announced today that it has signed an Addendum to a non-prosecution agreement with Banque Bonhôte & Cie SA, Ltd. (Bonhôte) of Neuchâtel Switzerland. The original non-prosecution agreement was signed on Nov. 3, 2015. At that time, Bonhôte reported that it held and managed 63 U.S. Related Accounts, with assets under management exceeding $88 million, and paid a penalty of $624,000. In reaching today’s agreement, Bonhôte acknowledges it should have disclosed additional U.S.-related accounts to the Department at the time of the signing of the non-prosecution agreement.
The Swiss Bank Program, announced on Aug. 29, 2013, provided a path for Swiss banks to resolve potential criminal liabilities in the United States relating to offshore banking services provided to United States taxpayers. Swiss banks eligible to enter the program were required to advise the Department that they had reason to believe that they had committed tax-related criminal offenses in connection with undeclared U.S.-related accounts. As participants in the program, they were required to make a complete disclosure of their cross-border activities, provide detailed information on an account-by-account basis for accounts in which U.S. taxpayers had a direct or indirect interest, cooperate in treaty requests for account information, and provide detailed information about the transfer of funds into and out of U.S.-related accounts, including undeclared accounts, that identifies the sending and receiving banks involved in the transactions.
The Department executed non-prosecution agreements with 80 banks between March 2015 and January 2016. The Department imposed a total of more than $1.36 billion in Swiss Bank Program penalties. Pursuant to today’s agreement, Bonhôte will pay an additional sum of $1,200,000 and will provide supplemental information regarding its U.S.-related account population, which now includes eight additional accounts with assets under management of approximately $33 million.
Every bank that signed a non-prosecution agreement in the Swiss Bank Program represented that it had disclosed all known U.S.-related accounts that were open at each bank between Aug. 1, 2008, and Dec. 31, 2014. Each bank also represented that during the term of each non-prosecution agreement it would continue to disclose all material information relating to its U.S.-related accounts. Other than the failure to disclose the additional eight U.S.-related accounts, Bonhôte has otherwise fully cooperated with the Department with respect to the bank’s obligations under the non-prosecution agreement and with the additional U.S.-related accounts.
“The Department of Justice continues to examine the information provided by Swiss banks to the Department and will continue to work closely with our partners at the Internal Revenue Service to ensure that American taxpayers are meeting their reporting and tax obligations with respect to foreign bank accounts,” said Principal Deputy Assistant Attorney General Richard E. Zuckerman, head of the Tax Division. “We expect banks to fully cooperate with the Department and continue to provide information about U.S. offshore accounts.”
Principal Deputy Assistant Attorney General Zuckerman thanked Senior Counsel for International Tax Matters and Coordinator of the Swiss Bank Program Thomas J. Sawyer, Senior Litigation Counsel Nanette L. Davis, and Trial Attorney Kimberle E. Dodd of the Tax Division.
Thursday, July 18, 2019
U.S. Extradites Former Colombian Minister of Agriculture Convicted of Embezzlement and Illegal Government Contracting
The United States today extradited Andres Felipe Arias Leiva, who served as Colombia’s Minister of Agriculture and Rural Development from 2005 to 2009, to face a prison sentence in that country based on a 2014 conviction by the Supreme Court of Colombia for two offenses committed while Arias served in public office.
Assistant Attorney General Brian A. Benczkowski of the U.S. Department of Justice’s Criminal Division and U.S. Attorney Ariana Fajardo Orshan of the Southern District of Florida made the announcement.
“Andres Arias’s extradition is a testament to the United States’ commitment to our extradition treaty obligations and the strength of our law enforcement partnership with Colombia,” said Assistant Attorney General Benczkowski. “I thank the team from the Office of International Affairs and the U.S. Attorney’s Office for the Southern District of Florida for their tireless, years-long efforts to ensure that Arias serves his prison sentence in Colombia.”
“Assistant U.S. Attorneys for the Southern District of Florida, alongside attorneys for the Department’s Office of International Affairs, have worked hard to ensure that former Colombian government official Andres Arias would be extradited back to his home country to serve a sentence imposed by that nation’s highest court,” said U.S. Attorney Fajardo Orshan. “We are grateful to the dedication of Assistant U.S. Attorney Robert J. Emery and Associate Director Christopher J. Smith and Trial Attorney Rebecca A. Haciski of the Criminal Division’s Office of International Affairs of the U.S. Department of Justice for their work in making this possible. Our Office is committed to upholding the rule of law and ensuring that justice is appropriately carried out for all parties.”
Arias, a citizen of Colombia who entered the United States in 2014 and was residing in Weston, Florida, was convicted on July 16, 2014, by the Criminal Cassation Division of the Supreme Court of Colombia on two offenses, Embezzlement for Third Parties, in violation of Article 397 of the Colombian Criminal Code, and Conclusion of Contract Without Fulfilling Legal Requirements, in violation of Article 410 of the same code. Arias was present and represented by counsel at his trial in Colombia, and following his conviction, the Colombian court sentenced him to serve 209 months in prison. As detailed in the 193-page decision issued by the Supreme Court of Colombia, Arias’s criminal conduct related to the diversion of funds within the Colombian government’s Argo Ingreso Seguro program, which he was responsible for implementing during his term as Minister of Agriculture and Rural Development, a cabinet-level position in Colombia’s executive branch, from 2005 to 2009.
The United States acted on a request for Arias’s extradition submitted by the Republic of Colombia, which Arias vigorously contested in both the Southern District of Florida and the U.S. Court of Appeals for the Eleventh Circuit. On Sept. 28, 2017, a U.S. magistrate judge in the Southern District of Florida ruled that Arias could be extradited to Colombia to serve the sentence based on his conviction. Arias then filed a petition for a writ of habeas corpus, which the district court for the Southern District of Florida denied on Oct. 5, 2018. Arias appealed that decision to the Eleventh Circuit. Following extensive briefing and argument, the litigation culminated on July 8, 2019, when the court of appeals rejected Arias’s arguments against extradition. Consistent with the views of the U.S. Department of State and 40 years of extradition practice between the United States and Colombia, the court of appeals affirmed that the extradition treaty between the two countries remains in full force and effect.
Following a thorough review of Arias’s case, the Department of State issued a warrant ordering Arias’s surrender to Colombian authorities. Today, the U.S. Marshals Service executed that warrant, transported Arias to Colombia, and delivered him to the custody of Colombian authorities. Arias’s extradition is now complete.
A Texas state district judge has been convicted of bribery and obstruction, announced Assistant Attorney General Brian A. Benczkowski of the Justice Department’s Criminal Division and U.S. Attorney Ryan K. Patrick for the Southern District of Texas.
Following a six-day trial, Rodolfo “Rudy” Delgado, 65, of Edinburg, Texas, was convicted of one count of Conspiracy; three counts of Federal Program Bribery; three counts of Travel Act Bribery and one count of Obstruction of Justice. Delgado was originally charged in January 2018 by complaint, and then indicted in February 2018. The grand jury issued three superseding indictments.
“Corrupt judges can harm a community’s confidence in our judicial system,” said Assistant Attorney General Benczkowski. “Today’s verdict takes an important step toward restoring that confidence, and affirms that no one – especially not a judge – is above the law.”
“The bribery of a judge may be the worst break of the publics’ trust in government,” said U.S. Attorney Patrick. “Rudy Delgado used his position to enrich himself. He didn’t just tip the scales of justice, he knocked it over with a wad of cash and didn’t look back. Delgado’s actions unfairly tarnish all his former colleagues.”
Delgado is currently a justice in the Thirteenth Court of Appeals for the State of Texas. He was previously the presiding judge for the 93rd District Court for the State of Texas, which has jurisdiction over Texas criminal and civil cases located within Hidalgo County. As a district judge, Delgado conspired with an attorney from January 2008 to November 2016 to accept bribes in exchange for favorable judicial consideration on criminal cases pending in his courtroom.
As part of an investigation conducted by the FBI, Delgado also accepted bribes on three separate occasions in exchange for agreeing to release three of the attorney’s clients on bond in cases pending before his court. The first two bribes totaled approximately $520 in cash and the third bribe, which occurred in January 2018, totaled approximately $5,500 in cash. After Delgado learned of the FBI’s investigation, he also attempted to obstruct justice by contacting the attorney and providing a false story about the payments.
Wednesday, July 17, 2019
Justice Department Obtains $1.4 Billion from Reckitt Benckiser Group in Largest Recovery in a Case Concerning an Opioid Drug in United States History
Global consumer goods conglomerate Reckitt Benckiser Group plc (RB Group) has agreed to pay $1.4 billion to resolve its potential criminal and civil liability related to a federal investigation of the marketing of the opioid addiction treatment drug Suboxone. The resolution – the largest recovery by the United States in a case concerning an opioid drug – includes the forfeiture of proceeds totaling $647 million, civil settlements with the federal government and the states totaling $700 million, and an administrative resolution with the Federal Trade Commission for $50 million.
Suboxone is a drug product approved for use by recovering opioid addicts to avoid or reduce withdrawal symptoms while they undergo treatment. Suboxone and its active ingredient, buprenorphine, are powerful and addictive opioids.
“The opioid epidemic continues to be a serious crisis for our nation, and I’m proud of the work the Department of Justice and our partners are doing to address this epidemic,” said Principal Deputy Associate Attorney General Claire Murray.
“We are confronting the deadliest drug crisis in our nation’s history. Opioid withdrawal is difficult, painful, and sometimes dangerous; people struggling to overcome addiction face challenges that can often seem insurmountable,” said Assistant Attorney General Jody Hunt for the Department of Justice’s Civil Division. “Drug manufacturers marketing products to help opioid addicts are expected to do so honestly and responsibly.”
Resolution of the Criminal Investigation
Until December 2014, RB Group’s wholly owned subsidiary, Indivior Inc. (then known as Reckitt Benckiser Pharmaceuticals Inc.) marketed and sold Suboxone throughout the United States. In December 2014, RB Group spun off Indivior Inc., and the two companies are no longer affiliated. On April 9, a federal grand jury sitting in Abingdon, Virginia, indicted Indivior for allegedly engaging in an illicit nationwide scheme to increase prescriptions of Suboxone. The United States’ criminal trial against Indivior is scheduled to begin on May 11, 2020, in the United States District Court in Abingdon, Virginia. Indivior is presumed innocent until proven guilty.
To resolve its potential criminal liability stemming from the conduct alleged in the indictment of Indivior, RB Group has executed a non-prosecution agreement that requires the company to forfeit $647 million of proceeds it received from Indivior and not to manufacture, market, or sell Schedule I, II, or III controlled substances in the United States for three years. In addition, RB Group has agreed to cooperate fully with all investigations and prosecutions by the Department of Justice related, in any way, to Suboxone.
“Today’s announcement demonstrates that this office will work tirelessly to address all facets of the opioid epidemic,” First Assistant United States Attorney Daniel P. Bubar of the Western District of Virginia said. “This historic resolution is the product of a continued partnership with the Virginia Medicaid Fraud Control Unit, FDA, HHS, and the U.S. Postal Service.”
“This is a landmark moment in our fight to hold drug companies responsible for their role in the opioid crisis,” said Virginia Attorney General Mark Herring. “We will not allow anyone to put profits over people, or to exacerbate or exploit the opioid crisis for their own benefit. The Virginia Medicaid Fraud Control Unit’s expertise, capacity, and diligent investigation, combined with strong relationships with local, state, and federal partners, helped make this resolution possible.”
“Opioid addiction and abuse is an immense public health crisis and taking steps to address it is one the FDA’s highest priorities,” said Acting FDA Commissioner Ned Sharpless, M.D. “Providing misleading information about product benefits puts the public at risk. We also are particularly concerned with schemes to game the drug approval process to prevent generic competition for important medicines. The FDA, including criminal investigators in our Office of Regulatory Affairs and the lawyers in our Office of Chief Counsel, will continue to work with the Department of Justice to investigate and hold accountable those who devise and participate in schemes to the detriment of the public health.”
“The U.S. Postal Service spends billions of dollars per year in workers compensation-related costs, most of which are legitimate,” said Kenneth Cleevely, Special Agent in Charge of the Eastern Field Office for the U.S. Postal Service Office of Inspector General. “However, when medical providers or companies choose to flout the rules and profit illegally, special agents with the USPS OIG will work with our law enforcement partners to hold them responsible. To report fraud or other criminal activity involving the Postal Service, contact our special agents at www.uspsoig.gov or 888-USPS-OIG.”
According to the indictment, Indivior—including during the time when it was a subsidiary of RB Group—promoted the film version of Suboxone (Suboxone Film) to physicians, pharmacists, Medicaid administrators, and others across the country as less-divertible and less-abusable and safer around children, families, and communities than other buprenorphine drugs, even though such claims have never been established.
The indictment further alleges that Indivior touted its “Here to Help” internet and telephone program as a resource for opioid-addicted patients. Instead, however, Indivior used the program, in part, to connect patients to doctors it knew were prescribing Suboxone and other opioids to more patients than allowed by federal law, at high doses, and in a careless and clinically unwarranted manner.
The indictment also alleges that, to further its scheme, Indivior announced a “discontinuance” of its tablet form of Suboxone based on supposed “concerns regarding pediatric exposure” to tablets, despite Indivior executives’ knowledge that the primary reason for the discontinuance was to delay the Food and Drug Administration’s approval of generic tablet forms of the drug.
The indictment alleges Indivior’s scheme was highly successful, fraudulently converting thousands of opioid-addicted patients over to Suboxone Film and causing state Medicaid programs to expand and maintain coverage of Suboxone Film at substantial cost to the government.
The Civil Settlement
Under the civil settlement, RB Group has agreed to pay a total of $700 million to resolve claims that the marketing of Suboxone caused false claims to be submitted to government health care programs. The $700 million settlement amount includes $500 million to the federal government and up to $200 million to states that opt to participate in the agreement. The claims settled by the civil agreement are allegations only and there has been no determination of liability.
The civil settlement addresses allegations by the United States that, from 2010 through 2014, RB Group directly or through its subsidiaries knowingly: (a) promoted the sale and use of Suboxone to physicians who were writing prescriptions without any counseling or psychosocial support and for uses that were unsafe, ineffective, and medically unnecessary and that were often diverted for uses that lacked a legitimate medical purpose; (b) promoted the sale or use of Suboxone Film to physicians and state Medicaid agencies using false and misleading claims that Suboxone Film was less susceptible to diversion and abuse than other buprenorphine products and that Suboxone Film was less susceptible to accidental pediatric exposure than tablets; and (c) submitted a petition to the Food and Drug Administration on Sept. 25, 2012, claiming that Suboxone Tablet had been discontinued “due to safety concerns” about the tablet formulation of the drug and took other steps to delay the entry of generic competition for Suboxone in order to improperly control pricing of Suboxone, including pricing to federal healthcare programs.
“With the nation continuing to battle the opioid crisis, the availability of quality addiction treatment options is critical. When treatment medications are used, it is essential they be prescribed carefully, legally, and based on accurate information, to protect the health and safety of patients in federal healthcare programs,” said Gary L. Cantrell, Deputy Inspector General for Investigations at the U.S. Department of Health and Human Services. “Along with our federal and state law enforcement partners we will continue working to protect these vulnerable beneficiaries.”
“Opioid manufacturers – like all drug manufacturers – have a duty to market their products both truthfully and safely,” said Craig Carpenito, U.S. Attorney for New Jersey. “Opioid manufacturers have an additional and critically important duty to maintain effective controls to prevent their highly dangerous products from being abused and diverted.”
“The opioid crisis has caused devastation throughout the country, including in the lives of Federal employees, annuitants, and their families,” said Thomas W. South, Deputy Assistant Inspector General for Investigations for the Office of Personnel Management. “The OPM OIG is committed to working with the Department of Justice and our other law enforcement partners to combat this epidemic. As always, patient safety is our number one priority.”
The civil settlement resolves the claims against RB Group in six lawsuits pending in federal court in the Western District of Virginia and the District of New Jersey under the qui tam, or whistleblower provisions of the False Claims Act, which allow private citizens to bring civil actions on behalf of the United States and share in any recovery.
Under a separate agreement with the Federal Trade Commission (FTC), RB Group has agreed to pay $50 million to resolve claims that it engaged in unfair methods of competition in violation of the Federal Trade Commission Act, 15 U.S.C. § 53(b). The FTC is filing a complaint in the United States District Court for the Western District of Virginia alleging anticompetitive activities by RB Group designed to impede competition from generic equivalents of Suboxone. RB Group no longer manufactures or markets drug products. As part of a consent decree, RB Group agreed that it would notify the FTC if it began marketing drug products in the United States. RB Group further agreed that if it filed a Citizen Petition with the FDA in connection with a drug product, it would simultaneously disclose to both the FDA and the FTC all studies and data relevant to that Citizen Petition. RB Group further agreed not to withdraw a drug from the market or otherwise disadvantage a drug after obtaining approval to market another drug containing the same active ingredient.
“Buprenorphine products are approved for use in the treatment of Americans struggling to overcome opioid addiction, and, in the middle of the nation’s opioid crisis, RB Group allegedly sought to deny those consumers a lower-cost generic alternative to maintain its lucrative monopoly on the branded drug,” said Gail Levine, a Deputy Director of the FTC’s Bureau of Competition.
A Multilateral Effort
The criminal resolution with RB Group was handled by the U.S. Attorney’s Office for the Western District of Virginia and the Department of Justice’s Consumer Protection Branch based on an investigation by the Virginia Attorney General’s Medicaid Fraud Control Unit; FDA - Office of Criminal Investigation; United States Postal Service – Office of Inspector General; and Department of Health and Human Services - Office of Inspector General. The civil settlement was handled by the Civil Division’s Commercial Litigation Branch, the U.S. Attorney’s Office for the Western District of Virginia, and the U.S. Attorney’s Office for the District of New Jersey. Assistance was provided by representatives of the HHS Office of Counsel to the Inspector General; the HHS Office of the General Counsel, CMS Division; FDA’s Office of Chief Counsel; the U.S. Department of Agriculture Office of the General Counsel; the National Association of Medicaid Fraud Control Units; the Defense Criminal Investigative Service; the Office of Personnel Management - Office of Inspector General; the Department of Veterans’ Affairs Office of Inspector General; the Department of Labor - Office of Inspector General; and TRICARE Program Integrity.
Tuesday, July 16, 2019
Substance Abuse Treatment Center Owner Pleads Guilty to $57 Million Money Laundering Conspiracy in Connection with Hospital Pass-Through Billing Scheme
The owner of a Jacksonville, Florida-area substance abuse treatment center pleaded guilty today for his role in a $57 million money laundering conspiracy associated with a pass-through billing scheme involving laboratory testing services.
Kyle Ryan Marcotte, 36, of Jacksonville Beach, Florida, pleaded guilty before U.S. Magistrate Judge Joel Toomey of the Middle District of Florida to a one-count information charging him with conspiracy to commit money laundering. As part of his guilty plea, Marcotte agreed to a forfeiture judgment of $10,220,281.42. Sentencing before U.S. District Judge Timothy Corrigan of the Middle District of Florida has not yet been scheduled.
According to admissions made as part of his guilty plea, Marcotte was the owner of a substance abuse treatment facility in Jacksonville Beach, Florida. In approximately 2015, Marcotte entered into an arrangement with a laboratory owner to send urine samples for the facility’s patients to the owner’s lab for urine drug testing (UDT), in exchange for receiving 40 percent of the insurance reimbursements. The lab owner, in turn, arranged with the managers of Campbellton–Graceville Hospital (CGH) and Regional General Hospital Williston (RGH), rural hospitals in Florida, to have the testing billed to private insurers through CGH and RGH and reimbursed at favorable rates under the hospitals’ in-network contracts with insurers. Marcotte also admitted that he brokered deals with other substance abuse treatment centers to have their UDTs billed through CGH and RGH in exchange for Marcotte receiving 10 percent of the insurance reimbursements, while the other substance abuse facilities would receive 30 percent of the insurance reimbursements.
The lab owner subsequently acquired Chestatee Hospital, in Dahlonega, Georgia, and other rural hospitals. Marcotte admitted that he continued to supply samples from his substance abuse treatment facility and continued to broker deals with other substance abuse treatment centers to have UDTs tested at the lab and billed to insurers through Chestatee and the other hospitals, all in exchange for a percentage of the insurance reimbursements. The reimbursements were transmitted from the hospitals to the lab, which then transmitted them to two companies Marcotte controlled, North Florida Labs and KTL Labs using financial transactions and bank accounts that Marcotte had established to facilitate the payments. Marcotte arranged to transfer a portion of the reimbursements from KTL Labs as kickbacks to the individuals and companies that controlled the substance abuse treatment centers in order to further the fraudulent scheme. Marcotte also transferred a portion of the reimbursements to himself and to purchase real estate and items of real property, he admitted.
Marcotte caused $50 million in payments to be made from KTL Labs’ bank accounts to at least 88 companies and individuals associated with substance abuse treatment centers that supplied urine samples for testing. The total amount of money that was part of the money laundering scheme was $57.3 million, Marcotte admitted.
Sunday, July 14, 2019
The U.S. Census Bureau and the U.S. Bureau of Economic Analysis announced today that the goods and services deficit was $55.5 billion in May, up $4.3 billion from $51.2 billion in April, revised.
Next release: August 2, 2019
(°) Statistical significance is not applicable or not measurable.
Source: U.S. Census Bureau, U.S. Bureau of Economic Analysis; U.S. International Trade in Goods and Services, July 3, 2019
Exports, Imports, and Balance (exhibit 1)
May exports were $210.6 billion, $4.2 billion more than April exports. May imports were $266.2 billion, $8.5 billion more than April imports.
The May increase in the goods and services deficit reflected an increase in the goods deficit of $4.4 billion to $76.1 billion and an increase in the services surplus of $0.1 billion to $20.6 billion.
Year-to-date, the goods and services deficit increased $15.7 billion, or 6.4 percent, from the same period in 2018. Exports increased $5.1 billion or 0.5 percent. Imports increased $20.8 billion or 1.6 percent.
Three-Month Moving Averages (exhibit 2)
The average goods and services deficit increased $1.8 billion to $52.9 billion for the three months ending in May.
- Average exports increased $0.3 billion to $209.5 billion in May.
- Average imports increased $2.2 billion to $262.4 billion in May.
Year-over-year, the average goods and services deficit increased $6.3 billion from the three months ending in May 2018.
- Average exports decreased $1.2 billion from May 2018.
- Average imports increased $5.1 billion from May 2018.
Exports (exhibits 3, 6, and 7)
Exports of goods increased $3.9 billion to $140.8 billion in May.
Exports of goods on a Census basis increased $4.0 billion.
- Capital goods increased $1.4 billion.
- Civilian aircraft increased $0.5 billion.
- Telecommunications equipment increased $0.4 billion.
- Consumer goods increased $0.8 billion.
- Gem diamonds increased $0.3 billion.
- Jewelry increased $0.3 billion.
- Pharmaceutical preparations increased $0.2 billion.
- Foods, feeds, and beverages increased $0.7 billion.
- Soybeans increased $0.7 billion.
- Other goods increased $0.6 billion.
- Automotive vehicles, parts, and engines increased $0.6 billion.
Net balance of payments adjustments decreased $0.1 billion.
Exports of services increased $0.3 billion to $69.8 billion in May.
- Maintenance and repair services increased $0.1 billion.
- Travel (for all purposes including education) increased $0.1 billion.
- Transport increased $0.1 billion.
Imports (exhibits 4, 6, and 8)
Imports of goods increased $8.3 billion to $217.0 billion in May.
Imports of goods on a Census basis increased $8.1 billion.
- Automotive vehicles, parts, and engines increased $2.3 billion.
- Passenger cars increased $1.5 billion.
- Industrial supplies and materials increased $1.8 billion.
- Crude oil increased $1.3 billion.
- Capital goods increased $1.6 billion.
- Semiconductors increased $0.5 billion.
- Computers increased $0.4 billion.
- Computer accessories increased $0.3 billion.
- Consumer goods increased $1.4 billion.
- Other goods increased $1.0 billion.
Net balance of payments adjustments increased $0.2 billion.
Imports of services increased $0.2 billion to $49.2 billion in May.
- Transport increased $0.2 billion.
- Travel (for all purposes including education) decreased $0.1 billion.
Real Goods in 2012 Dollars – Census Basis (exhibit 11)
The real goods deficit increased $4.8 billion to $87.0 billion in May.
- Real exports of goods increased $4.6 billion to $150.5 billion.
- Real imports of goods increased $9.3 billion to $237.5 billion.
Revisions to April exports
- Exports of goods were revised up less than $0.1 billion.
- Exports of services were revised down $0.4 billion.
Revisions to April imports
- Imports of goods were revised up less than $0.1 billion.
- Imports of services were revised down less than $0.1 billion.
Goods by Selected Countries and Areas: Monthly – Census Basis (exhibit 19)
The May figures show surpluses, in billions of dollars, with South and Central America ($4.1), Hong Kong ($2.6), Singapore ($0.6), Brazil ($0.5), Saudi Arabia (less than $0.1), and United Kingdom (less than $0.1). Deficits were recorded, in billions of dollars, with China ($30.1), European Union ($16.9), Mexico ($9.1), Japan ($6.0), Germany ($5.8), Canada ($3.6), Italy ($2.6), France ($2.1), India ($1.9), Taiwan ($1.5), South Korea ($1.4), and OPEC ($0.1).
- The deficit with Canada increased $1.8 billion to $3.6 billion in May. Exports decreased $0.3 billion to $24.3 billion and imports increased $1.5 billion to $27.9 billion.
- The deficit with the European Union increased $1.8 billion to $16.9 billion in May. Exports increased $0.2 billion to $27.2 billion and imports increased $2.0 billion to $44.1 billion.
- The deficit with Japan decreased $0.5 billion to $6.0 billion in May. Exports increased $0.5 billion to $6.6 billion and imports increased less than $0.1 billion to $12.5 billion.
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Next release: August 2, 2019