Eleventh Circuit Court of Appeals Sustains Required Records Exception to the Fifth Amendment

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On February 7, 2013, the U.S. Court of Appeals for the Eleventh Circuit affirmed the decision of the U.S. District Court for the Northern District of Georgia holding that the Required Records Exception overrides a taxpayer/criminal defendant’s Fifth Amendment assertion against incrimination when in respect to foreign bank account records.  A copy of the Eleventh Circuits decision is available here.

The Eleventh Circuit joined with the Seventh Circuit in In re Special Feb. 2011-1 Grand Jury Subpoena Dated Sept. 12, 2011, 691 F.3d 903, 90509 (7th Cir. 2012), available
here, the 9th Circuit in In re Grand Jury Investigation M.H., 648 F.3d 1067, 107179 (9th Cir. 2011), cert. denied, 133 S. Ct. 26 (2012), available here, and the 5th Circuit in In re Grand Jury Subpoena, 696 F.3d 428, 43236 (5th Cir. 2012). Our prior blog entry regarding the Seventh Circuits position on this issue is available here.

The facts of the case are as follows:

A grand jury investigation occurred in the Northern District of Georgia by the IRS and the U.S. Dept. of Justice. The government suspected that the Target, along with his wife, maintained foreign bank accounts both together and individually. For the years under investigation, the Target and his wife filed joint tax returns. Among other things, the governments investigation focused on the Target and his wifes failures to: (1) disclose on their tax returns their ownership of or income derived from their foreign accounts; and (2) file, with the U.S. Department of the Treasury, Forms TD F 90-22.1, Reports of Foreign Bank and Financial Accounts (FBAR) for these alleged accounts.

On June 29, 2011, the grand jury issued subpoenas duces tecum to both the Target and his wife. The subpoenas required the Target and his wife to produce any foreign financial account records that they were required to keep pursuant to the federal regulations governing offshore banking.

The Target and his wife informed the government that they would not produce the subpoenaed records. The government filed a motion seeking to compel their compliance with the subpoenas. In its motion, filed in the district court, the government argued that the Bank Secrecy Act (BSA) and its implementing regulations required the Target and his wife to keep the foreign financial account records sought by the subpoenas.

The Target and his wife filed a response to the governments motion to compel, arguing that the Required Records Exception did not apply to them based on the particular facts and circumstances of their case.  On November 7, 2011, the district court granted the governments motion to compel.  The Target and his wife did not comply with the district courts order. On March 5, 2012, the government moved the district court to hold the Target and his wife in contempt pursuant to 28 U.S.C. § 1826. The district court issued an order holding the Target and his wife in contempt for their failure to comply with the district courts earlier November 7 order.

On appeal, the Eleventh Circuit dispensed with the taxpayer/Target’s argument holding, among other things, that the Fifth Amendment did not apply.  The Eleventh Circuit reasoned that the Supreme Court has made clear that when the government is authorized to regulate an activity, an individuals Fifth Amendment privilege does not prevent the government from imposing recordkeeping, inspection, and reporting requirements as part of a valid regulatory scheme; citing Shapiro v. United States, 335 U.S. 1, 3233 (1948), available here. Interestingly, the 11th Circuit’s opinion fails to mention United States v. Hubbell, 530 U.S. 27 (2000), which held that although there is no Fifth Amendment privilege for the contents of documents, compulsory process may implicate the Fifth Amendment where the witness’s act of producing is inherently testimonial.

The takeaway from this case is that the IRS and the Department of Justice will continue to assert that there are no viable Fifth Amendment protection for taxpayers who have been compelled to produce evidence of their foreign bank accounts. As the Ninth, Seventh, Fifth, and Eleventh Circuits have ruled on this issue, it remains to be seen whether the other Circuits will follow, or whether the Supreme Court will agree to hear a case on this issue.

The attorneys at Fuerst Ittleman David & Joseph have extensive experience in both civil and the criminal tax litigation before the U.S. District Courts and the U.S. Circuit Courts of Appeal. You may contact us by calling 305.3560.5690 or by emailing us at contact@fidjlaw.com

Recent Conviction of Medical Marijuana Distributor Highlights Continuing Federal Efforts To Prosecute Medicinal Marijuana Under The CSA

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On January 7, 2013, Aaron Sandusky, operator of three medicinal marijuana dispensaries in Southern California, was sentenced to ten years in federal prison for violating federal drug laws. Sandusky’s conviction highlights the interplay between State and Federal law and provides an example of how operators of medicinal marijuana dispensaries still face the threat of federal prosecution even though their activities may fully comply with State law.

As we have previously reported, in spite of the fact that 18 States have sanctioned the use of marijuana in various forms, the federal government has proceeded unchecked in its efforts to criminalize the entire industry. More specifically, marijuana remains classified as a Schedule I drug under the Controlled Substances Act (“CSA”), 21 U.S.C. § 801 et seq, which means that marijuana has been found by Congress to: 1) have a high potential for abuse; 2) have no currently accepted medical use in treatment in the US; and 3) lack accepted safety for use under medical supervision. Therefore, although it may be legal under state law to possess cultivate, and/or distribute marijuana, such actions still violate federal law.

For example, in Gonzales v. Raich, 545 U.S. 1 (2005), the Supreme Court directly addressed the issue of whether Congress, pursuant to its Commerce Clause authority, could regulate and prohibit the local cultivation of marijuana which complied with California state law. In holding that the CSA’s prohibition of locally grown and used marijuana was permissible, the Court found that Congress had a rational basis for concluding that local marijuana substantially affects interstate commerce. The Court found that Congress can regulate purely intrastate activity that is not itself “commercial,” i.e., not produced for sale, if it concludes that failure to regulate that class of activity would undercut the regulation of the interstate market in that commodity. The Court went on to find that due to the inability to distinguish or prevent locally cultivated marijuana from entering the interstate market, the failure to regulate it would undermine the purposes of the CSA as a whole.

In addition to prosecutions for violating federal law, federal authorities have used various other techniques in an attempt to quash the burgeoning medical marijuana industry. Such techniques include the use of civil asset forfeiture pursuant to 21 U.S.C. § 881 and disallowing medicinal marijuana dispensaries from taking business deductions pursuant to 26 I.R.C. §  280E. More information regarding the joint Department of Justice and Internal Revenue Service efforts can be read in our previous report.

In this case, Mr. Sandusky was charged with: 1) conspiracy to manufacture and possess marijuana with intent to distribute it, 2) conspiracy to operate a drug-involved premises and 3) possession of marijuana with intent to distribute it. Sandusky was ultimately convicted in October 2012. While Mr. Sandusky faced a maximum of life in prison, United States District Court Judge Percy Anderson sentenced Sandusky to ten (10) years in prison, the federal mandatory minimum for such charges.

Mr. Sandusky’s case is the fourth nationwide where federal prosecutors have filed charges against medical marijuana dispensary owners in states where such dispensaries comply with State law. The other prosecutions previously occurred in California, Michigan, and Montana. Additionally, because marijuana sale and distribution violates federal laws prohibiting drug trafficking, dispensary owners face the possibility of other separate yet interrelated federal charges. The Montana indictment of Christopher Williams is an example of this. As the Helena Independent Record reports, in addition to being charged with conspiracy to grow and distribute marijuana, Williams was also charged with possession of a firearm during a drug-trafficking offense. Williams currently faces five years to life in federal prison and is scheduled to be sentenced February 1, 2013.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience dealing with administrative law, regulatory compliance, and white collar criminal defense. You can reach an attorney by emailing us at contact@fidjlaw.com.

Ninth Circuit Interprets Fifth Amendment’s “Foregone Conclusion” Exception in IRS Summons Enforcement Case

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On January 8, 2013, the United States Court of Appeals for the Ninth Circuit affirmed the decision of the U.S. District Court for the Northern District of California in the case of United States v. Sideman & Bancroft LLP.  A copy of the slip opinion is available here.

The facts of the case are as follows:

A taxpayer was under investigation by the Criminal Investigation Division of the Internal Revenue Service.  As part of that investigation, the IRS obtained a search warrant to locate the taxpayers tax documents. On October 13, 2010, the IRS executed the search warrant, looking for the documents in taxpayers residence, business, and car. The IRS failed to locate the documents while executing the search warrant but did find references to the taxpayers accountant.  The IRS then contacted the accountant who indicated that the taxpayer had given her tax documents.  The accountant explained that she no longer had the documents as she had delivered them to the taxpayers civil tax attorney.  The IRS subsequently contacted the tax attorney who informed the IRS that he had given the documents he received from the accountant to the taxpayers criminal tax attorney.

The IRS then drafted a summons to obtain the records from the taxpayers attorneys. The IRS described the documents based on the detailed description of the documents provided to the IRS by the accountant.  On October 27, 2010, the IRS issued a summons to the taxpayers tax attorneys seeking the tax documents turned by the accountant.

The taxpayers tax attorneys refused to produce the documents because, according to the tax attorneys, the production would violate the taxpayers Fifth Amendment rights. In general, the Fifth Amendment prohibits a criminal defendant from being forced to testify against himself, and it is well settled that that this protection extends not only to oral questioning but also applies to prevent an individual from having to produce documents if the act of production itself would be testimonial. This protection also extends to prevent an individuals attorney from being compelled to produce documents if that production would violate the individuals Fifth Amendment rights.

In response, the IRS filed a petition in the Northern District of California seeking enforcement of the summons. The district court granted the IRSs petition to enforce, finding that the summonsed documents fell within the “foregone conclusion” exception to the Fifth Amendment. This exception generally provides that if it is a “foregone conclusion” that records exist and are possessed by a person, producing them in response to a subpoena is not sufficiently testimonial to merit Fifth Amendment protection.

On appeal, the taxpayer relied on the case of Fisher v. United States, 425 U.S. 391 (1976), available here, where the Supreme Court explained that where an individual transfers documents to his or her attorneys to obtain legal assistance in tax investigations, those documents, “if unobtainable by summons from the client, are unobtainable by summons directed to the attorney by reason of the attorney-client privilege.”

However, the Fisher court also held that “where Ëœ[t]he existence and location of the papers are a foregone conclusion and the taxpayer adds little or nothing to the sum total of the Governments information by conceding that he in fact has the papers[,] . . . enforcement of the summons does not touch upon constitutional rights.” In this case, based on the information provided by the taxpayers accountant to the IRS, the Ninth Circuit noted that the District Court found the IRS had precise knowledge of the location of the boxes containing folders and the documents, and knew with “reasonable particularity” the existence and the tax attorneys possession of the taxpayers tax records prior to issuing the summons. Thus, the Ninth Circuit ruled that the district court correctly applied the “foregone conclusion” exception and affirmed its decision.

Among other things, this case teaches that disclosures of information by accountants and lawyers to the IRS during the course of a criminal investigation may negatively impact a taxpayers case.  Taxpayers, accountants, and attorneys must all be diligent in protecting and preserving claims of privilege against the Government.

The attorneys at Fuerst Ittleman David & Joseph have extensive criminal and civil tax litigation experience including petitions to quash IRS summons and petitions to quash grand jury subpoenas.  You can contact us by email at contact@fidjlaw.com or by calling us at 305.350.5690.

Eleventh Circuit Holds Fair Debt Collections Act Requires That District Court Adjudicate Any Contested Ownership Interests In Property Subject To A Writ Of Execution

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In addition to the criminal penalties which stem from a fraud based convictions, a court may also order a convicted defendant to pay restitution. “The purpose of restitution . . . , however, is not to punish the defendant, but to make the victim whole again by restoring to him or her the value of the losses suffered as a result of the defendant’s crime.” United States v. Newman, 659 F.3d 1235, 1241 (2011). The Fair Debt Collection Procedure Act (“FDCPA”), 28 U.S.C. §§ 3001-3015, provides the exclusive means for the United States to obtain a satisfaction of a judgment in a criminal case that imposes restitution.

Pursuant to the FDCPA, one of the means the United States may use to satisfy a judgment is to obtain a writ of execution. See 28 U.S.C. § 3203.  However, issues often arise when the government attempts to obtain a writ of execution and levy co-owned or jointly-owned property. On November 29, 2012, the United States Court of Appeals for the Eleventh Circuit issued its opinion in United States v. Duran, et al., No. 12-2227 (11th Cir. Nov. 29, 2012),  holding that under the FDCPA a District Court must determine any contested ownership interests in property subject to a writ of execution.

In May 2011, Lawrence Duran pled guilty to conspiracy to defraud Medicare. In addition to a sentence of 50 years imprisonment, Mr. Duran was also ordered to pay $87 million in restitution to the United States. On October 19, 2011, the United States applied for a writ of execution against an apartment in New York to partially satisfy the judgment. Within its writ, the Government alleged that Mr. Duran had “possession, custody, or control” and “a substantial nonexempt interest” in the apartment. Opinion at 3. Based on these representations, the clerk issued a writ of execution on the apartment ordering the United States Marshal to satisfy the judgment against Mr. Duran by “levying on and selling” the apartment. Id.

However, prior to Mr. Duran being sentenced, he and his wife Carmen divorced. As part of the divorce settlement, Carmen was given sole title to the apartment which was the subject of the writ. As a result, on November 17, 2011, Carmen Duran moved to dissolve or stay the writ of execution arguing that the United States could not levy the apartment to satisfy the restitution judgment against her ex-husband because he lacked any ownership interest in the residence. Additionally, Mrs. Duran argued that the levy was improper because the Government failed to provide her with any notice of the issuance of the writ. Instead, the Government only provided service to the parties to the criminal proceeding. The District Court denied Mrs. Durans motion on the basis that it lacked jurisdiction to make a ruling on her claims of ownership. Instead, the District Court found that the proper forum for such a dispute would be New York State court.

In vacating and remanding the District Courts decision, the Eleventh Circuit engaged in a step-by-step analysis of the requirements and obligations which must be satisfied in order to levy property with disputed ownership. First, the Court noted that the United States may levy “all property in which the judgment debtor has a substantial nonexempt interest.” Opinion at 6.

However, the Court noted that the FDCPA limits the authority of the United States to levy against jointly-owned property. Pursuant to 28 U.S.C. § 3010 (a), “[c]o-owned property shall be subject to execution to the extent such property is subject to execution under the law of the State in which it is located.” Additionally, “with regard to levying against property under a writ of execution, Ëœco-owned property is subject to execution only to the extent such property is subject to execution under the law of the State in which it is located.” Opinion at 6 (citing 28 U.S.C. § 3203(a)).

As to notice, the Court went on to find that 28 U.S.C. § 3202 requires that the United States serve a copy of the notice on all co-owners and any person with an interest in the property prior to the taking. More importantly, the Court noted that the burden is on the Government to make a “diligent inquiry” to determine who may be an interested party or co-owner. Opinion at 6.

Finally, the Court found that the FDCPA requires the District Court to adjudicate any contested ownership interests in property subject to a writ of execution. As explained by the Eleventh Circuit:

The [FDCPA] provides that the United States may levy only property in which a judgment debtor has a “substantial nonexempt interest.” To that end, the district court must determine whether the debtor has any ownership interests in the property, and the district court must determine the ownership interests of any person who moves to dissolve or modify any writ.

Opinion at 7 (internal citation omitted). Thus, because the district court both failed to determine whether Mr. Duran had a substantial nonexempt interest when the United States levied the property, and failed to determine the respective ownership interests between Mr. and Mrs. Duran in the property subject to the writ of execution, the Eleventh Circuit found that the District Court erred in refusing to adjudicate Carmens motion to dissolve. As such, the Eleventh Circuit vacated the District Courts order and remanded. The Eleventh Circuit instructed the District Court to determine the respective ownership interests, if any, of Mr. and Mrs. Duran in the apartment when the United States obtained the writ of execution and whether Mr. Duran had a “substantial nonexempt interest” in the apartment that the Government could levy.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive civil and criminal litigation experience before the U.S. District Courts, the U.S. Tax Court, the U.S. Court of Federal Claims, and the U.S. Circuit Courts of Appeal. You can contact us by calling 305.350.5690, or by emailing us at contact@fidjlaw.com.

Switzerland’s Oldest Bank, Wegelin & Co., Pleads Guilty to Tax Violations, Agrees to Pay $74 Million to the United States

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On January 3, 2013, the United States Attorneys Office for the Southern District of New York announced that Switzerlands oldest bank, Wegelin & Co. (“Wegelin”), has pled guilty “to conspiring with U.S. taxpayers and others to hide more than $1.2 billion in secret Swiss bank accounts and the income generated in these accounts from the Internal Revenue Service (the ‘IRS’).”  The plea agreement is available here, and the indictment charging Wegelin with violating 18 U.S.C. 371 (commonly referred to as a “Klein conspiracy”) is available here

As the press release, indictment, and plea agreement reveal, Wegelin pled guilty to conspiring with U.S. taxpayers and others to hide more than $1.2 billion in secret Swiss bank accounts and the income generated in these accounts from the Internal Revenue Service (the “IRS”). One of the managing partners of Wegelin, Otto Bruderer, appeared on behalf of the bank to enter the guilty plea before U.S. District Judge Jed S. Rakoff. This case represents the first time that a foreign bank has been indicted for facilitating tax evasion by U.S. taxpayers and the first guilty plea by a foreign bank to tax charges.

As part of its guilty plea, Wegelin agreed to pay approximately $20 million in restitution to the IRS and a $22.05 million fine. In addition, Wegelin agreed to the civil forfeiture of an additional $15.8 million, representing the gross fees earned by the bank on the undeclared accounts of U.S. taxpayers. Together with the April 2012 forfeiture of over $16.2 million from Wegelins correspondent bank account, this amounts to a total recovery to the United States of approximately $74 million.

Publicly available documents detail the manner by which Wegelin violated U.S. law:

  • Opening and servicing undeclared accounts for U.S. taxpayer-clients in the names of sham corporations and foundations formed under the laws of Liechtenstein, Panama, Hong Kong, and other jurisdictions for the purpose of concealing some clients identities from the IRS;
  • Accepting documents that falsely declared that the sham entities were the beneficial owners of certain accounts, when in fact the accounts were beneficially owned by U.S. taxpayers, and making them part of Wegelins client files;
  • Permitting certain U.S. taxpayer-clients to open and maintain undeclared accounts at Wegelin using code names and numbers to minimize references to the actual names of the U.S. taxpayers on Swiss bank documents;
  • Ensuring that account statements and other mail for U.S. taxpayer-clients were not mailed to them in the United States;
  • Communicating with some U.S. taxpayer-clients using their personal email accounts to reduce the risk of detection by law enforcement; and
  • Issuing checks drawn on, and executing wire transfers through, its U.S. correspondent bank account for the benefit of U.S. taxpayers with undeclared accounts at Wegelin and at least two other Swiss banks. In so doing, Wegelin sometimes separated the transactions into batches of checks or multiple wire transfers in amounts that were less than $10,000 to reduce the risk that the IRS would detect the undeclared accounts.

As a result of its guilty plea and fines, Wegelin has  announced that it will “cease to operate as a bank.”
This case demonstrates that the U.S. Department of Justice is serious about punishing foreign banks that facilitate tax evasion by enabling U.S. taxpayer to avoid their income tax obligations.

The attorneys at Fuerst Ittleman David & Joseph anticipate that the Wegelin case will be just the first in a string of prosecutions of foreign banks.  Further, we anticipate that the U.S. Department of Justice will continue to be active in prosecuting those individuals that hide money in foreign banks, fail to report their foreign holdings as required by the Bank Secrecy Act, and fail to properly report and pay the correct amount of tax due and owing to the IRS.
The attorneys at Fuerst Ittleman David & Joseph have extensive experience litigation criminal and civil tax cases before the U.S. District Courts, the U.S. Tax Court, the U.S. Court of Federal Claims, and the U.S. Courts of Appeal.  You can contact us by email at contact@fidjlaw.com or by calling us at 305.350.5690.

United States v. Caronia: Second Circuit Rules Manufacturers Cannot Be Criminally Prosecuted for Off-Label Promotion of Drugs Under FDCA

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On December 3, 2012, the United States Court of Appeals for the Second Circuit issued a landmark decision in United States v. Caronia, holding that “the government cannot prosecute pharmaceutical manufacturers and their representatives under the FDCA for speech promoting the lawful, off-label use of an FDA-approved drug.” In its opinion, available here, the court rejected the Governments interpretation of the FDCA as prohibiting manufacturer promotion of off-label uses and held that such a prohibition on manufacturers speech is an unconstitutional violation of the First Amendment. This decision is significant because it could change the way the FDA continues to regulate drugs under the misbranding and adulteration provisions of the FDCA.

Regulatory Framework

Under 21 U.S.C. § 355(a) of the FDCA, a drug must be approved by the FDA for specific use prior to being distributed into interstate commerce. Once the FDA approves a drug for distribution, physicians can prescribe the drug for both FDA-approved and unapproved (or “off- label”) uses. Courts and the FDA have long recognized the public value in allowing physicians to, in their best judgment, prescribe drugs for off-label use when in the best interest of the patient.

According to the FDA, the FDCA permits off-label prescription by physicians but does not allow “misbranding” by manufacturers through off-label promotion. The FDA has interpreted off-label promotion to be misbranding, stating that “[a]n approved drug that is marketed for an unapproved use (whether in labeling or not) is misbranded because the labeling of such drug does not include Ëœadequate directions for use.” (See FDAs Draft Guidance for Industry here.) It is important to note, however, that the FDCA and its associated regulations do not expressly prohibit the “promotion” or “marketing” of drugs for off-label use.

Factual Background

Alfred Caronia, an employee of Orphan Medical, Inc. (“Orphan”), now known as Jazz Pharmaceuticals, was found guilty of conspiracy to introduce a misbranded drug into interstate commerce in violation of the FDCA. Orphan manufactured the drug Xyrem, a central nervous system depressant, which contained gamma-hydroxybutryate (“GHB”), otherwise known as the “date rape drug”. Orphan obtained FDA approval for Xyrem for two indications: 1) to treat narcolepsy patients who experience cataplexy and 2) to treat narcolepsy patients with excessive daytime sleepiness. Due to the serious safety concerns related to the use of Xyrem, the FDA required Orphan to use a “black box” warning on its label stating that the drugs safety and efficacy were not established in patients under 16 years of age.

Mr. Caronia was hired by Orphan as a Specialty Sales Consultant to promote Xyrem. Under Orphans procedures, sales consultants were not permitted to respond to questions regarding the off-label use of Xyrem. Instead, sales consultants were required to fill out “medical information request forms” and Orphan would send information to the inquiring physicians. Any physician employed by Orphan as a promotional speaker, however, was permitted to answer off-label use questions. In 2005, the federal government launched an investigation of Orphan and Dr. Peter Gleason, a physician promotional speaker. The federal governments investigation was specifically focused on the off-label promotion of Xyrem. With the assistance of a government cooperator, who posed as a prospective Xyrem customer, the federal government audio-recorded Mr. Caronia and Dr. Gleason promoting Xyrem for unapproved uses. Specifically, Mr. Caronia was recorded as promoting Xyrem for use in the treatment of muscle disorders, chronic pain, and Fibromyalgia, as well as for treatment in patients under age sixteen. Xyrem was not approved for use in the treatment of these conditions or in patients under the age of sixteen. As a result of these statements, Mr. Caronia was charged and convicted with conspiracy to introduce and introducing a misbranded drug into interstate commerce in violation of 21 U.S.C. §§ 331(a) and 333(a)(2). Mr. Caronia appealed, arguing that the misbranding provisions of the FDCA prohibit off-label promotion, and therefore unconstitutionally restrict speech.

U.S. v. Caronia: Decision and Legal Rationale

The question before the Second Circuit Court of Appeals was whether the governments prosecution of Mr. Caronia under the FDCA for promoting an FDA-approved drug for off-label use was constitutionally permissible. In a 2-1 decision, the court found that “a conviction obtained under the governments application of the FDCAwould run afoul of the First Amendment” and vacated Mr. Caronias criminal conviction. In reaching its decision, the court relied heavily on the reasoning of the United States Supreme Court in IMS v. Sorrell. In that case, the Supreme Court first held that “[s]peech in aid of pharmaceutical marketingis a form of expression protected by the Free Speech Clause of the First Amendment.” In reaching this conclusion, the Court engaged in a two-step inquiry. First, the court considered whether the government regulation restricting speech was content and speaker-based. Second, the Court considered whether the government had shown that the restriction on speech was consistent with the First Amendment under the applicable level of scrutiny. The Court determined that because the statute set forth content- and speaker-based restrictions, it was subject to heighted scrutiny. Specifically, the Court held that the law, which prohibited pharmaceutical companies from using prescriber-identifying information for marketing purposes, disfavored speech with a particular content (marketing) when expressed by certain disfavored speakers (pharmaceutical manufacturers). Therefore, because “the creation and dissemination of information are speech within the meaning of the [Constitution],” the Supreme Court held that the Vermont law unconstitutionally restricted speech.

In reaching its decision in U.S. v. Caronia, the Second Circuit, like the Supreme Court in IMS v. Sorrell, engaged in a two-step inquiry: 1) whether the government regulation restricting speech was content-and speaker-based; and 2) whether the government had shown that the restriction on speech was consistent with the First Amendment under a heightened level of scrutiny. First, the court found that the governments interpretation of the FDCAs misbranding provisions as prohibiting off-label promotion is content-based because it distinguishes between “favored speech” and “disfavored speech” on the basis of ideas. Specifically, the court found that under the governments interpretation of the FDCA, speech about government-approved use of drugs is permitted, while certain speech about the off-label use of drugs is prohibited. Second, the court found that the governments regulation restricting speech only targeted one kind of speaker (pharmaceutical manufacturers), while allowing others to speak freely without restriction. Under the FDCA, off-label prescriptions and drug use are legal, which means that physicians and academics, for example, can speak about off-label use without consequence, while the same speech is prohibited when delivered by pharmaceutical manufacturers. The FDAs “construction Ëœthus has the effect of preventing [pharmaceutical manufacturers]”and only [pharmaceutical manufacturers]”from communicating with physicians in an effective and informative manner.” Therefore, the governments construction of the FDCAs misbranding provisions is content- and speaker-based, and subject to heightened scrutiny under Sorrell.

The court then examined the constitutionality of the governments restriction on commercial speech under the test set forth in Central Hudson Gas & Electric Corp. v. Public Service Commission. In applying the Central Hudson test, the court determined that the governments regulation of Mr. Caronias off-label promotion is unconstitutional because it does not directly advance the governments interest in drug safety and public health and is more extensive than necessary to achieve those interests.

The opinion explained that because the FDA contemplated and accepted off-label prescription and drug use as part of its regulatory framework, “it does not follow that prohibiting the truthful promotion of off-label drug usage by a particular class of speakers would directly further the governments goals” of preserving the FDAs drug approval process and reducing patient exposure to unsafe and ineffective drugs. Moreover, the court explained that selectively prohibiting manufacturer commercial speech “paternalistically” interferes with the ability of physicians and patients to receive treatment information, which could “inhibit, to the publics detriment, informed and intelligent treatment decisions.” Therefore, the governments construction of the FDCA “provides only ineffective or remote support for the governments purpose” because it “essentially legalizes the outcome”off-label use”but prohibits the free flow of information that would inform that outcome.”

Moreover, the court found that the governments construction of the FDCA “to impose a complete and criminal ban on off-label promotion by pharmaceutical manufacturers is more extensive than necessary to achieve the governments substantial interests” because other, less speech-restrictive alternatives are available. For example, according to the Second Circuit, the government could create other limits, such as ceilings or caps on off-label prescriptions to minimize off-label use or to address manufacturer evasion of the drug approval process. Alternatively, the government could further develop guides to help physicians and patients differentiate between misleading and false promotion, exaggerations and embellishments, and truthful or non-misleading information. Lastly, the court suggested that the government could even prohibit off-label use altogether if the use of off-label drug use is exceptionally concerning.

The court did limit the scope of its decision: “Our conclusion is limited to FDA-approved drugs for which off-label use is not prohibited, and we do not hold, of course, that the FDA cannot regulate the marketing of prescription drugs.”

Because the First Amendment mandates that the regulation of speech “be a last”not first”resort,” the court held that the government cannot prosecute pharmaceutical manufacturers and their representatives under the FDCA for speech that promotes the lawful, off-label use of an FDA-approved drug. In its opinion, the court also explained that it construed the misbranding provisions of the FDCA as not prohibiting or criminalizing truthful promotion of off-label usage.  For these reasons, the court vacated Mr. Caronias criminal conviction and remanded the case to the district court.

At present, the U.S. v. Caronia decision is only binding on courts within the jurisdiction of the Second Circuit. However, we expect the government to petition for a rehearing or rehearing en banc in the Second Circuit, or for writ of certiorari to the United States Supreme Court. Because it is highly unlikely that the government will do nothing and simply allow the decision to stand, the constitutionality of off-label promotion of approved drugs is far from resolved, even in the Second Circuit. This decision is one that favors members of the pharmaceutical and life sciences industries; however, it remains unclear how, or whether, other courts will join the Second Circuit in finding that manufacturer off-label promotional speech warrants protection under the First Amendment.

Fuerst Ittleman David & Joseph will continue to monitor any developments in the regulation of off-label promotion of FDA-approved products. For more information, please feel free to contact us via email at contact@fidjlaw.com or via telephone at 305.350.5680.

U.S. Indicts Multiple Companies and 165 Parties Added to the BIS Entity List for Alleged Involvement in Russian Military Procurement Network

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On October 3, 2012, two companies and 11 individuals of an alleged Russian military procurement network operating in the United States and Russia were indicted in the U.S. District Court for the Eastern District of New York. The individuals, who work for a Texas-based export company and Russia-based procurement firm, are alleged to have illegally exported high-tech microelectronics to Russian military intelligence agencies. These high-tech microelectronics are subject to U.S. Department of Commerce dual-use export controls due to their potential use in an array of military systems such as radar and surveillance systems, detonation triggers, and weapons guidance systems.

In a coordinated effort, the U.S. Department of Commerce Bureau of Industry and Security (“BIS”) also issued an amendment (found here) to the Export Administration Regulations (“EAR”) to add 165 foreign persons and companies to the Entity List which identifies specific licensing requirements independent of those required under the EAR. These 165 foreign persons and individuals were alleged to have received, transshipped or facilitated the export of microelectronics to Russia and have “been determined by the U.S. government to be acting contrary to the national security or foreign policy interests of the United States.”

The indictment alleges that since October 2008, Alexander Fishenko, the president of the Russia-based procurement firm Apex Systems, LLC (“Apex”), and the Texas-based export company, Arc Electronics, Inc. (“Arc”), along with ten other defendants engaged in a “surreptitious and systematic conspiracy to obtain advanced microelectronics from the U.S. and to export those high-tech goods to Russia, while carefully evading the government licensing system set up to control such exports.”

According to the indictment, Apex functioned as a certified supplier of military equipment for the Russian government. The defendants often provided false end user information in connection with the purchase of goods, concealed their status as exporters, and falsely classified goods as having civilian end uses so as to induce manufacturers and suppliers to sell them the highly sought after microelectronics. Arcs website, for example, falsely claimed to be a traffic light manufacturer when it manufactured no goods and operated exclusively as an exporter. In another instance it is alleged that one of the defendants instructed the Russian procurement company to “make sure that” the end-use certificate indicated “fishing boats, and not fishing/anti-submarine ones” before they start working.

Each individual defendant in the case faces a maximum of 5 years incarceration for the conspiracy charges, 20 years for substantive International Emergency Economic Powers Enhancement Act (“IEEPA”) and Arms Export Control Act (“AECA”) charges, and an additional 20 years for obstruction of justice changes. In addition Fishenko faces a possible additional sentence of 20 years for money-laundering conspiracy charges and an additional 10 years for acting as an unregistered agent of the Russian government. Both Arc and Apex face up to $500,000 in fines for conspiracy counts and $1,000,000 in fines for the substantive IEEPA and AECA counts.

The involvement of Arc, Apex, Fishenko, and the 10 remaining individuals in the alleged Russian military procurement scheme offers proof of suspect activity that has the potential to result in significant incarceration and monetary penalties for these parties. But what about the additional 160+ individuals and companies “ which include suppliers, re-exporters, and transhippers “ which, to their detriment, may have relied on Fishenkos alleged fraud, misclassification of goods, and claims that his exports were for civilian end uses? They now find themselves on the EAR Entity List on the basis of Section 744.11 for acting contrary to the national security or foreign policy interests of the United States. And as such, these individuals and businesses find themselves subject to additional BIS license requirements and limited ability to apply license exceptions for exports and re-exports.

While at this stage there is no way to prove for certain the level of knowledge or active involvement of these 160+ individuals and businesses, we can expect that at least some of them were not fully aware of the nature of Fishenkos business operation and intended Russian military end uses of its high-tech exports.

Exporters, re-exporters, transshippers, and all parties involved in export-related transactions must implement effective export compliance procedures to help insulate themselves from situations such as this, situations in which they can be accountable for their passive involvement in illegal export activities. An effective compliance program and inquiry into products intended end uses prior and throughout the shipment process can provide crucial insight into the legitimacy of an exporters operation.

Furthermore, as set forth in Supplement 1 and 2 of Part 766 of the EAR, an effective compliance program is entitled a high level of consideration with respect to mitigation of actual and suspected violations of the EAR. Exporters, re-exporters, and transhippers are encouraged to complete their due diligence with respect to all of their shipments by implementing proper export controls. While even the most effective export compliance plan may not identify business activity that is a result of fraud or conspiracy (such as in the alleged Russian military procurement network mentioned above), the presence of an established export compliance program may provide BIS sufficient proof of passively involved shipping companies attempts to comply with U.S. export control law. This proof may be just enough to keep unsuspecting businesses off of the Entity List and/or mitigate EAR violation penalties issued by BIS.

Below we have provided some of the guidelines that BIS takes into account when assessing the effectiveness of a companies export compliance program:

  • Whether the company has performed a meaningful risk analysis of the goods being exported and their intended end use
  • The existence of a written compliance program that is communicated to others
  • Whether senior management oversees export compliance program
  • Whether the company screens customer transactions
  • An existence of an internal system for reporting export violations
  • Whether corrective action has been taken in response to export violations

The Customs and Trade Practice at Fuerst Ittleman David & Joseph, PL, has extensive experience in drafting customized export compliance manuals for a wide variety of business types and industry applications. If you want to strengthen your businesss export compliance procedures please feel free to email our offices at contact@fidjlaw.com or phone 305-350-56909.

Update: Third Party Payment Processor Sentenced to Jail Time for Processing Internet Poker Company Funds

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On October 3, 2012, Judge Lewis A Kaplan of the United States District Court for the Southern District of New York sentenced Chad Elie to five months in prison for his role in facilitating the processing of payments for three online poker companies. A copy of the Department of Justices press release announcing the sentencing can be read here.

As we previously reported, the poker companies, Fill Tile Poker, Absolute Poker, and PokerStars, were shut down by the FBI on April 15, 2011 as part of an investigation and eventual indictment of 11 people for various gambling related charges including violations of the Unlawful Internet Gambling Enforcement Act (“UIGEA”) 31 U.S.C. §§ 5361-5366, bank fraud  18 U.S.C. § 1344, wire fraud 18 U.S.C. § 1343, and money laundering 18 U.S.C. § 1956. A copy of the indictment can be read here.

As a result of the indictment, PokerStars and Fill Tilt reached a $731 million settlement with the federal government. Additionally, several top executives have pleaded guilty for their roles in the alleged UIGEA, bank fraud, and money laundering conspiracy. More information on these guilty pleas and the PokerStars settlement can be read in our prior reports here, here, and here.

According to authorities, the companies used third party payment processors to disguise financial transactions between the companies and U.S. players so that the transactions would appear to be unrelated to online gambling. The third party payment processors would then lie to U.S. financial institutions about the source of the funds processed, often times facilitated by the creation of nonexistence online companies and phony websites.

Authorities alleged that between 2008 and 2011, Elie served as a payment processor for each online poker company. Authorities further allegedly that in order to conceal the sources of the funds he was processing, Elie falsely represented to U.S. banks that he was processing “payday loans” and payments for online club memberships. As a result of these allegations, Elie pleaded guilty to participating in a conspiracy to commit bank fraud and to operating illegal gambling businesses.

In sentencing Elie to five months in prison, rather than the federal Probation Departments recommended sentence of probation, six months home confinement, and community service, Judge Kaplan found that the evidence against Elie indicated that he continued to process payments for the poker companies despite his knowledge of the federal investigation and arrests of other payment processors and company executives. In addition to prison, Elie was ordered to two years of home confinement and was ordered to forfeit $500,000 to the United States. Elies sentencing highlights the potential consequences and criminal penalties payment processors can face when processing ill-gotten assets on behalf of others.

If you have questions pertaining to UIGEA, the BSA, anti-money laundering compliance, and how to ensure that your business maintains regulatory compliance at both the state and federal levels, or for information about FIDJs experience litigating white collar criminal cases, please contact us at contact@fidjlaw.com

Physicians and Pharmacies Must Be Aware of the Dangers and Potential Penalties Associated with Importing Prescription Drugs

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Introduction

As the price of healthcare continues to increase, healthcare practitioners have become more innovative and creative in their attempts to keep costs affordable for their patients. One technique which has increased in its popularity is doctors purchasing prescription drugs from foreign sources, particularly online pharmacies. However, while such techniques may provide for less expensive medical care, the importation of drugs from foreign sources can expose healthcare practitioners to a variety of criminal and civil penalties, and according to the FDA, can seriously endanger patients.

The risks associated with imported prescription drugs

For years, FDA has warned businesses and individuals about the risks associated with buying prescription drugs from foreign sources, specifically Canada. Recently, on September 28, 2012, the FDA issued a news release launching a national campaign called BeSafeRx that is designed to raise public awareness about the dangers of ordering prescription drugs from foreign unapproved sources. According to the FDA, the National Association of Boards of Pharmacy has found that less than three percent (3%) of online pharmacies meet the licensing requirements under federal law. A copy of the BeSafeRx announcement can be read here.

The FDA has taken the position that the dangers consumers face when purchasing foreign prescription drugs include consumption of expired, subpotent, contaminated or counterfeit drugs. Further, because foreign drugs may be manufactured for sale in non-English speaking countries, consumers may receive drugs without adequate directions for use. See South Florida Access to Affordable Prescription Drugs: Costs and Benefits of Alternative Solutions, Hearing before Subcomm. on Oversight and Investigations of H. Comm. on Energy and Commerce, 108th Cong. (2003).  Additionally, as many of these foreign drugs are produced in non-FDA approved facilities, the FDA cannot assure that they were manufactured in compliance with current good manufacturing practice (cGMP) standards. See generally, 21 U.S.C. § 360; 21 C.F.R. part 207.  Thus, per the FDA, consumers are exposed to numerous risks when purchasing drugs from internet pharmacies that dispense foreign drugs.

An example of the dangers consumers and healthcare practitioners face when importing foreign drugs played out earlier this year. In February, the FDA issued Warning Letters to numerous healthcare professionals that may have purchased counterfeit copies of the cancer drug Avastin from Canadian internet pharmaceutical distributors. According to reports, the fake Avastin, which was manufactured in unapproved facilities in Europe then distributed into the United States through Canadian internet pharmacy CanadaDrugs.com, contained no active cancer fighting ingredients. As a result of these events, healthcare practitioners who imported the counterfeit products may face criminal and civil penalties for having participated in adulteration and misbranding violations. See 21 U.S.C. § 351, 21 U.S.C. § 352.

More recently, on September 21, 2012, the FDA issued Warning Letters to over 4,100 identified websites that sell drugs or medical devices to American consumers. The Warning Letter, which was addressed to Canadadrugs, explained that these online pharmacy websites “offer unapproved and misbranded new drugs for sale” and requested each website to “immediately cease marketing violative drug products to United States consumers.” (To read the FDAs Warning Letter, click here.) Furthermore, the FDA sent notices to Registries, Internet Service Providers (ISPs), and domain Name Registrars (NDRs) informing them of the websites allegedly violative practices.

Additionally, on October 4, 2012, the FDA announced the details of Operation Pangea V, a global effort to combat the online sale and distribution of potentially counterfeit and illegal medical products. For the full text of the FDAs press release, please click here. In executing Operation Pangea V, the FDA collaborated with INTERPOL, the World Customs Organization, Permanent Forum of International Pharmaceutical Crime, Heads of Medicines Agencies Working Group of Enforcement Officers, the Medicines and Healthcare products Regulatory Agency of the United Kingdom, the Irish Medicines Board, the London Metropolitan Police, the U.S. Department of Homeland Security, the Center for Safe Internet Pharmacies, and the national health and law enforcement agencies from 100 other participating countries. The cooperative investigations conducted by these law enforcement, customs, and regulatory authorities resulted in civil and criminal charges, seizure of illegal produces, and removal of websites. For more information regarding Operation Pangea V, please see our previous report here.

The following discussion contains an outline of the penalties practitioners may face when importing foreign pharmaceutical drugs. This outline, however, is not exhaustive, as different penalties may be applicable to different importation activities under different circumstances.

1. Criminal Penalties under the FDCA

Under the FDCA, it is unlawful to import unapproved, misbranded, and adulterated drugs into the United States. This includes the importation of foreign versions of U.S. approved pharmaceuticals as well as those drugs that are manufactured in the United States, exported to other countries, and then subsequently reimported.

Two of the more typical FDCA violations which healthcare practitioners may face as a result of importing misbranded drugs are: 1) introduction or delivery for introduction into interstate commerce of any drug that is adulterated or misbranded; and 2) the receipt in interstate commerce of any drug that is adulterated or misbranded, and the delivery or proffered delivery thereof for pay or otherwise. See 21 U.S.C. § 331 (a), (c). The penalties and punishments associated with these crimes are governed by 21 U.S.C. § 333 and depend on whether the government charges the defendant with committing a violation “with the intent to defraud or mislead.”

Pursuant to 21 U.S.C. § 333(a)(1), a first misbranding violation is a strict liability offense and is a misdemeanor. Thus, no criminal intent need be established by the Government in order to sustain a conviction. However, 21 U.S.C. § 333(c) provides several good-faith exceptions, of which, if the healthcare practitioner qualifies, would absolve them from liability.

The maximum sentence provided by statute for a violation of 21 U.S.C. 331(a) or (c) is 1-year imprisonment, a supervised release of one year; and a maximum fine not in excess of $100,000. 21 U.S.C. § 333(a)(1); 18 U.S.C. § 3571. In addition, section 2N2.1 is the Sentencing Guideline applicable to misdemeanor violations of biological products, devices, cosmetics, and usually used in FDA prosecutions of statutes and regulations relating to foods, drugs, agricultural products.

However, if a healthcare practitioner is charged with violating either 331(a) or (c) with the intent to defraud or mislead, enhanced penalties do exist and such cases are prosecuted as felonies. The penalties associated with a violation of 21 U.S.C. § 333(a)(2) are a term of imprisonment of not more than 3 years and a fine of not more than $250,000. See 21 U.S.C. § 333(a)(2); 18 U.S.C. § 3571.

A violation of 21 U.S.C. § 333(a)(2) is a specific intent crime, see United States v. Mitcheltree. The specific intent requirement in § 333(a)(2) requires:

  1. Proof of misbranding; and
  2. Proof of intent to mislead or defraud “which is connected to the misbranding violation.”

Id. In other words, because “knowledge of the essential nature of the alleged fraud is a component of the intent to defraud, a defendant cannot act with an intent to mislead or defraud under § 333(a)(2) without some knowledge of the misbranding.” Id. (citing United States v. Hiland, 909 F.2d 1114, 1128 (8th Cir. 1990)).

As previously explained, “felony criminal responsibility requires a knowing violation with the specific intent to defraud or mislead.” Mitcheltree, 940 F.2d at 1350. A violation of 333(a)(2) “may be proved with facts indicating knowledge of the misbranding activity and a concomitant intent to defraud or mislead the FDA or its state counterpart.” Id.; see also United States v. Patwardhan,422 Fed. Appx. 614 (9th Cir. 2011); United States v. Bradshaw, 840 F.2d 871 (11th Cir. 1988) (sustaining a conviction under 333(a)(2) where defendant: 1) knowingly sold steroids without a prescription for unapproved use; 2)mislabeled the steroids as vitamins to avoid detection; and 3) made affirmative misrepresentations and omissions to state drug authorities while attempting to obtain a drug wholesalers permit.).

Additionally, while “the cases construing § 333(a)(2) have ordinarily been based on a sellers intent to defraud or mislead purchasers,” a prosecution under 333(a)(2) may be “based upon an intent to mislead or defraud not only natural persons, but also government agencies if there is evidence that a defendant consciously sought to mislead drug regulatory authorities such as the FDA or a similar governmental agency.” Mitcheltree, 940 F.2d at 1347, 1348 (10th Cir. 1991). As described by the Court in Mitcheltree, “if the government proceeds on this theory, there must be a demonstrated link between the § 331 violation and an intent to mislead or defraud an identifiable regulatory agency involved in consumer protection. Id. at 1349 (emphasis in original); see also United States v. Cattle King Packing Co., 793 F.2d 232 (10th Cir. 1986) (finding that the specific intent requirement of the statute could be satisfied by a showing that defendant intended to mislead or defraud the government agency charged with federal meat inspection); Bradshaw, 840 F.2d 871 (11th Cir. 1988) (finding defendant could satisfy the specific intent requirement of the statute by showing that defendant intended to mislead or defraud state agency in charge permitting and licensing). Additionally, “similar governmental agency” is interpreted to include agencies of foreign governments. See United States v. Industrial Laboratories, 456 F.2d 908 (10th Cir. 1972) (finding that the specific intent requirement of the statute could be satisfied by a showing that defendants intended to mislead or defraud Canadian authorities).

2. Additional criminal and civil liabilities

In addition to violations of the FDCA, practitioners who import foreign pharmaceuticals can face a variety of other criminal penalties. For example, according to the Centers for Medicare and Medicaid Services fact sheet, Medicare will not pay for health care or supplies obtained outside the U.S., which includes prescription drugs imported from Canada. 42 U.S.C. § 1395y. As such, doctors could face criminal and civil liability for knowingly importing drugs in violation of the FDCA and submitting a claim to Medicare for the illegally imported drugs.

Such charges may include:

  • Health care fraud for defrauding or obtaining money from a health care benefit program. 18 U.S.C. § 1347. Notably, the doctor does not need to have actual knowledge or specific intent to violate this section. Violations of the health care fraud statute are punishable by fines or imprisonment of no more than 10 years, or both.
  • False claims for knowingly presenting a false claim for payment or approval to the government. 31 U.S.C. § 3729. Violations for false claims are punishable by civil penalty of not less than $5,000 and not more than $10,000.Further, healthcare practitioners could be subject to various fraud charges related to importing drugs from overseas. Such charges may include:
  • Mail and wire fraud for the use of mails or wire communications in furtherance of a scheme to defraud. See 18 U.S.C. § 1341; 18 U.S.C. § 1343.  Violations of the mail and wire fraud statutes are punishable by imprisonment of no more than 20 years, or fines, or both.
  • Bank fraud for obtaining money held by a financial institution through false representations pursuant to 18 U.S.C. § 1344. Violations of the bank fraud statute are punishable by no more than $1,000,000 or imprisonment of no more than 30 years, or both. Section 2B1.1 is the Federal Sentencing Guideline applicable to fraud perpetrated by individuals. Under this guideline, although the “victims loss is usually used as the proxy for the severity of thr crime, the offenders gain, i.e. the proceeds from the illicit activity, can provide an adequate, alternative method of gauging the crimes just penalty when the loss is incalculable. See United States v. Haas, 171 F.2d 259, 269, 270 (5th Cir. 1999) (finding that while “the loss sustained by either the FDA or Haass customers is, for all practical purposes, incalculablethe district court can, however, estimate the gain that Haas received from defrauding the FDA. Thus, Haass gain from his fraudulent importation scheme appears to have been the monies received [from his company] by way of salary and profits.”). Therefore, under the sentencing guideline, the more money involved in a fraud scheme involving  the sale or distribution of misbranded or adulterated drugs, the greater the potential sentence.
  • Smuggling or clandestinely introducing goods because of failure to comply with other statutes. 18 U.S.C. § 545. Violations are punishable by fines or imprisonment of no more than 30 years, or both.Healthcare practitioners must also be aware of the potential liabilities they face if they engage in the re-importation of drugs.
  • Drug re-importation involves exporting U.S. manufactured prescription drugs to a foreign country, then subsequently importing the same drug back into the U.S. by someone other than the U.S. manufacturer, and carries additional penalties under the FDCA. The  FDCA prohibits anyone other than the U.S. manufacturer of a drug to re-import the drug into the U.S. even if the drug was approved and manufactured in the U.S; 21 U.S.C. § 381 (d)(1).The FDA has found that, because it does not have oversight over other countries drug distribution systems, insufficient safeguards in foreign handling and shipping exist to prevent the introduction and retail sale of substandard, ineffective, or counterfeit drugs. 59 Fed. Reg. 11842 (March 14, 1994). Thus, products that are re-imported by anyone other than the manufacturer will be denied entry into the U.S. 21 U.S.C. § 381(d)(3)(B).If a business or individual knowingly violates 21 U.S.C. § 381 (d)(1) by causing prescription drugs manufactured in the U.S. to be re-imported by persons other than the manufacturer of the drug, they may be subject to criminal liability consisting of a maximum of 10 years in prison and a maximum $250,000 fine. 21 U.S.C. § 333(b)(1)(A).It is important to note that those who aid and abet in a criminal violation of the FDCA, or conspire to violate the FDCA, can also be found criminally liable. 18 U.S.C. §§ 2, 371. Thus, businesses or individuals that import drugs from foreign sources in violation of the FDCA could potentially be charged with these offenses as well.

3. Exclusion from participation in federal health care programs

In addition to criminal penalties, practitioners may also face various administrative penalties. For example, 42 U.S.C. §1320a-7b(a) empowers the Secretary of Health and Human Services to exclude certain convicted individuals from participation in any “Federal Health Care Program.” In particular, § 1320a-7(b)(1)(a) authorizes the Secretary to exclude individuals convicted of a criminal offense consisting of a misdemeanor relating to fraud, theft, embezzlement, breach of fiduciary responsibility, or other financial misconduct in connection with the delivery of a health care item or service.

Additionally, § 1320a-7(b)(3) authorizes the Secretary to exclude any individual who has been convicted of a criminal offense consisting of a misdemeanor relating to the unlawful manufacture, distribution, prescription, or dispensing of a controlled substance. See Friedman v. Sebelius, Case No. 11-5028 (D.C. Cir. July 27, 2012).  Further, “items and services furnished, ordered, or prescribed by [an excluded person] will not be reimbursed under Medicare, Medicaid and all other Federal health care programs until [that person] is reinstated by the OIG.” 42 C.F.R. § 1001.2. For more information regarding exclusion from federal health care programs under 42 U.S.C. § 1320a-7b, please see our previous report here.

Conclusion

Healthcare practitioners are in a never-ending struggle to control the costs of patient care, but must nevertheless ensure that the methods they choose comply with federal law. For more information regarding the importation of drugs from foreign sources, our FDA litigation practice, or how to ensure that your business maintains regulatory compliance, contact Fuerst Ittleman David & Joseph PL at (305) 350-5690 or contact@fidjlaw.com.

Update: Online Poker Executives Guilty Plea Highlights the Additional Penalties Payment Processors When Processing Illicit Gambling Proceeds

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On September 19, 2012, Nelson Burtnick, former director of the payment processing department of Full Tilt Poker and PokerStars, pled guilty to charges of conspiracy to commit violations of the Unlawful Internet Gambling Enforcement Act (“UIGEA”), Bank Fraud, and Money Laundering, stemming from the April 15, 2011 indictment of eleven people in connection with their involvement in PokerStars, Full Tilt Poker, and Absolute Poker.

The Department of Justice had charged Burtnick with multiple charges including violations of the Unlawful Internet Gambling Enforcement Act (“UIGEA”), conspiracy to commit bank fraud and wire fraud, operating an illegal gambling business, and money laundering. In his plea deal, Burtnick pled guilty to one count of conspiracy to accept funds in connection with unlawful internet gambling, bank fraud, and money laundering, and two counts of accepting funds in connection with unlawful internet gambling. As a result of his guilty plea, Burtnick faces a maximum of 15 years in prison. A copy of the U.S. Department of Justices press release announcing the guilty plea can be read here.

As we have previously reported here, here and here, ongoing federal prosecutions have targeted internet poker operators and their payment processors for violations of federal law under UIGEA 31 U.S.C. §§ 5361-5366 and the Illegal Gambling Business Act (“IGBA”) found at 18 U.S.C. § 1955. However, as exemplified by Mr. Burtnicks indictment and guilty plea, payment processors face various other violations of federal law when accused of processing illicit gambling proceeds. These violations include bank fraud, found at 18 U.S.C. § 1344, which makes it a crime for “whoever knowingly executes, or attempts to execute, a scheme” to either: 1) defraud a financial institution; or 2) obtain any of the moneys under the custody or control of a financial institution by means of a false or fraudulent representation. Here, prosecutors alleged that Burtnick violated 18 U.S.C. § 1344 by deceiving U.S. financial institutions into processing payments for Poker companies from U.S. gamblers through disguising such payments as payments to non-existent online merchants and non-gambling businesses.

Another federal law of which payment processors must be aware is the prohibition against money laundering found at 18 U.S.C. § 1956. Generally speaking, “money laundering” is the act of concealing or disguising the nature, location, source, or ownership of money begotten through illicit means in order to make such funds appear as if earned through legitimate and lawful activity. More specifically, 18 U.S.C. § 1956(a)(2)(A) prohibits the transportation, transmission, or transfer of a monetary instrument or funds from a place in the U.S. to or through a place outside of the U.S. (or vice versa) “with the intent to promote the carrying on of a specified unlawful activity.” In its Indictment, the Government alleged that Burtnick violated 18 U.S.C. § 1956(a)(2)(A) by disguising payments by U.S. gamblers to Full Tilt and Poker Stars, both offshore entities, as payments to phony internet merchants. Bank accounts in the fake merchants names were opened in U.S. banks through which the poker companies could receive payments from the U.S. based gamblers.

More importantly, each of these crimes is separate and distinct from the illegal gambling activities themselves. Thus, regardless of whether a payment processor is charged under IGBA or UIGEA, acts of payment processors in disguising or misrepresenting the source of funds they process can subject the processor to criminal liability.

If you have questions pertaining to UIGEA, the BSA, anti-money laundering compliance, and how to ensure that your business maintains regulatory compliance at both the state and federal levels, or for information about FIDJs experience litigating white collar criminal cases, please contact us at contact@fidjlaw.com