Google Agrees to Forfeit $500 Million As Part of Non-Prosecution Agreement

On August 19, 2011, Google entered into a non-prosecution agreement with the United States Department of Justice to settle allegations that the search engine knowingly and improperly assisted Canadian online pharmacies in advertising prescription drugs and controlled substances that targeted the United States in violation of  21 U.S.C. § 952 and 21 U.S.C. § 331 though its AdWords advertising program. As part of the non-prosecution agreement, Google agreed to forfeit $500 million to the United States government. A copy of the non-prosecution agreement can be read here.

Generally speaking, the Food, Drug, and Cosmetic Act (“FDCA”) prohibits pharmacies located outside the United States from selling and shipping prescription drugs to consumers in the U.S. See 21 U.S.C. § 331(a) and (d). One of the more popular ways for international pharmacies to engage in business with U.S. consumers is via the internet. Federal prosecutors alleged that since 2003 Google has been aware of the illegality of prescription drug sales by online Canadian pharmacies advertising on its AdWords program. (AdWords is an online advertisement program run by Google which allows advertisers to post ads, for a fee, that specifically target selected regions or countries for business.) The non-prosecution agreement also alleges that Google knew that many of these online pharmacies distributed prescription drugs and controlled substances through their websites without valid prescriptions from a doctor. Additionally, federal prosecutors allege that between 2003 and 2009, Google provided customer support to these online pharmacy advertisers to optimize their ads and improve the effectiveness of their websites.

As a result of these allegations, Google agreed to forfeit $500 million to the federal government. The $500 million total includes both the revenues earned by Google from the advertisements as well as the estimated revenues the online Canadian pharmacies received through the sale of drugs to American customers. Google has also agreed to enhance its compliance program for online ads. Upon learning of the governments investigation, Google made several changes to its advertising policies regarding online pharmacies. Google has since required all online pharmacies to be certified by either the National Association Boards of Pharmacy in the US or the Canadian International Pharmacy Association. Additionally, Google now prohibits foreign online pharmacies from advertising in the United States on AdWords. Google has also brought suit against several pharmaceutical advertisers for violating its advertising rules.

The governments non-prosecution agreement with Google may signal a new approach at combating illegal drug trafficking. In this case, though Google was not involved in the actual sale, distribution, or transfer of drugs from foreign pharmacies to the United States, the Department of Justice has treated Google as an aider and abettor of these pharmacies, and thus liable for the unlawful conduct of the pharmacies. However, it should also be noted that because this is a non-prosecution agreement and not a plea bargain, no judicial approval is needed for its terms. Therefore, it is conceivable that had Google not agreed to enter into this agreement, federal prosecutors may not have been able to obtain an indictment and conviction.

Lawyers at Fuerst Ittleman are experienced in representing individuals and corporations facing scrutiny from the government regarding regulatory and white collar criminal allegations. For more information regarding Fuerst Ittlemans white collar criminal defense practice, contact an attorney today at contact@fidjlaw.com.

4th DCA Rules: Real Time Cell Phone Location Tracking Does Not Violate 4th Amendment

On September 7, 2011, the Florida Fourth District Court of Appeal upheld a lower court ruling that law enforcement did not violate the Fourth Amendment by using “real time” cell site location information (“CSLI”) to track the movements and location of a suspect on public roads. A copy of the Courts Opinion can be read here.

In this case, the defendant, Shawn Alvin Tracey, was the subject of a narcotics investigation when law enforcement filed an application for an order authorizing the installation and use of a pen register and a trap and trace device to enable law enforcement to see who Tracey was calling and who was calling him. (A “pen register” is a device or process that records or decodes dialing, routing, addressing, or signaling information transmitted by an instrument or facility from which a wire or electronic communication is transmitted, but such information does not include the contents of any communication. A “trap and trace device” is a device or process that captures the incoming electronic or other impulses that identify the originating number or other dialing, routing, addressing, or signaling information reasonably likely to identify the source of a wire or electronic communication, but such information does not include the contents of any communication.) See § 934.02, Fla. Stat. However, neither the application nor the Order granting the use of the pen register and trap and trace device mentioned the collection of and use of CSLI.

CSLI works as follows: “Cell phones whenever on, now automatically communicate with cell towers, constantly relaying their location information to the
towers that serve their network and scanning for the one that provides the strongest signal/best reception. This process, called Ëœregistration, occurs approximately every seven seconds.” See Tracey v. Florida, No. 4D09-3565, at 3 (Fla. 4th DCA September 7, 2011). As a customer location changes, their cell phone will search for and communicate with multiple towers. Cell phone companies track which cell phone towers are serving a phone. CSLI can accurately place the location of a cell phone within 200 feet in urban areas. Accuracy improves to within 50 feet when via the built in GPS feature of most phones. As a result, the real time location of any cell phone can be traced.

In this case, law enforcement used the CSLI of Traceys phone to track his movements from the west coast of Florida to several known and suspected drug stash houses. Upon observing Traceys movements the officers stopped and arrested Tracey for driving with a suspended license. The subsequent search uncovered a kilogram brick of cocaine in his car. Prior to trial Tracey moved to suppress any evidence obtained as a result of law enforcement using CSLI arguing that: 1) law enforcement exceeded the scope of the Courts surveillance order; 2) electronic surveillance statutes do not authorize the surveillance of CSLI; and 3) probable cause is required in order for law enforcement to use CSLI.

In finding that the lower court properly allowed the evidence into trial, the Court noted that it was bound to follow U.S. Supreme Court precedent in interpreting the Fourth Amendment. In United States v. Knotts, 460 U.S.276 (1983), the U.S. Supreme Court held: “A person traveling in an automobile on public thoroughfares has no reasonable expectation of privacy in his movements from one place to another.” As such, the Court found that because the case “concerns the governments tracking of an individuals location on public roads, this case does not involve a Fourth Amendment violation.”

The Court noted that “a compelling argument can be made that CSLI falls within a legitimate expectation of privacy. . . . Location information can be extraordinarily personal and potentially sensitive, revealing Ëœprecisely the kind of information that an individual wants and reasonably expects to be private.” However, while people “may maintain an expectation of privacy with respect to their location in private areas,” because the location tracked was that of a person on a public road, no such expectation of privacy existed.

Additionally, the Court found that although law enforcement failed to meet the burden necessary to allow for electronic monitoring, “under Florida law the exclusionary rule is not a remedy” for such violations. Rather, the criminal and civil penalties found in Chapter 934 of the Florida Statutes provide the exclusive remedy for such violations. See §§ 934.21, Fla. Stat., 934.27, Fla. Stat.

While the decision was based on historical US Supreme Court precedent, the case provides an illustrative example of how the Court must balance expectations of privacy against enhanced search capabilities of law enforcement because of technological advances. This principle is applicable in a variety of proceedings, including the white collar criminal cases in which Fuerst Ittleman attorneys regularly appear. For more information regarding Fuerst Ittlemans white collar criminal defense practice, contact an attorney today at contact@fidjlaw.com.

11th Circuit Overturns Sanctions Levied Against Federal Prosecutors

On August 29, 2011, the United States Court of Appeals for the Eleventh Circuit, in a divided decision, overturned a $602,000 sanction and public reprimand of federal prosecutors for prosecutorial misconduct. The 11th Circuit held that the district court abused its discretion when it “imposed sanctions against the United States for a prosecution that was objectively reasonable.” The Circuit Court also held that Judge Gold (of the United States District Court for the Southern District of Florida in Miami) violated the due process rights of the two lead federal prosecutors when he issued public reprimands without notice of charges and an opportunity to be heard. Additionally, the Courts opinion may have reshaped the bounds of prosecutorial conduct sanctionable under the Hyde Amendment. A copy of the 11th Circuits opinion can be read here.

The sanctions and reprimand were ordered by Judge Gold in 2009 for actions federal prosecutors took in the case of United States v. Ali Shaygan. Dr. Shaygan was a pain-management doctor who was indicted on 23 counts of distribution of controlled substance outside the scope of his medical practice in violation of 21 U.S.C. § 841(a)(1). However, Dr. Shaygan filed a motion to suppress statements made after his arrest because D.E.A. agents continued questioning after Dr. Shaygan invoked his right to counsel. In reaction to the motion to suppress, lead federal prosecutor Sean Cronin warned defense attorneys that “pursing the motion to suppress would result in a Ëœseismic shift” in the case against Shaygan. Id. at 7.

Following the prosecutors “seismic shift” comments, the government filed a superseding indictment of 141 counts. Prosecutors also began a collateral investigation into Dr. Shaygans defense team for witness tampering. During its investigation, federal prosecutors enlisted Dr. Shaygans former patients as confidential informants and authorized them to tape phone conversations with the defense attorneys. However, prosecutors failed to comply with internal policy of the U.S. Attorneys Office because they did not receive authorization for the investigation or the recordings from the United States Attorney. Additionally, the prosecutors failed to turn over discovery related to witness tampering investigation.

Ultimately, the jury found Dr. Shaygan not guilty on all counts. However, following the trial, Judge Gold ordered the federal prosecutors trying the case, Mr. Cronin and Ms. Andrea Hoffman, to appear for a sanctions hearing. As a result, Judge Gold ordered the United States to pay $601,795.88 in attorneys fees to the defense and publicly reprimanded both attorneys.

The basis for Judge Golds award of attorneys fees was the Hyde Amendment. The Hyde Amendment, which was passed as part of the Appropriations Act of 1998, permits the court, in a criminal case, to award to the defendant, if he is the prevailing party, reasonable attorneys fees where the court finds the position of the United States was “vexatious, frivolous, or in bad faith.” Judge Gold found that the prosecutors acted in bad faith following the motion to suppress when they filed the superseding indictment, launched the witness tampering investigation, and violated discovery rules by failing to disclose the information of the investigation to the defense.

In reversing Judge Golds Order, the 11th Circuit held that the District Court applied an incorrect legal standard for awarding fees under the Hyde Amendment. The 11th Circuit found that subjectively motivated ill-will of an individual prosecutor “alone cannot support a sanction against the United States under the Hyde Amendment.” Id. at 28. Instead, bad faith is viewed under an objective standard. As such, as long as a prosecutor had an “objective reasonable basis” in law, i.e. not frivolous, and fact, i.e. not vexatious, an award of attorneys fees under the Hyde Amendment is improper. Id. at 30-32. The Court stated: “A rule that would allow a determination of bad faith whenever a prosecutor uses harsh words, such as Ëœseismic shift, and harbors some ill-will toward the defense would chill the ardor of prosecutors and prevent them from prosecuting with earnestness and vigor. The Hyde Amendment was not intended to do that.” Id. at 37.

The 11th Circuit also disagreed with Judge Golds reasoning that discovery violations alone can support an award for attorneys fees under the Hyde Amendment. Rather, the decision of whether the position of the United States is sanctionable should be based on the case as a whole. Id. at 41. The Court also held that the District Court denied the prosecutors due process when publically reprimanding them: “Due process requires that the attorney (or party) be given fair notice that his conduct may warrant sanctions and the reasons why.”

Judge Edmondson of the Eleventh Circuit dissented from the Courts majority opinion regarding its interpretation of whether the award for attorneys fees was appropriate under the Hyde Amendment. Judge Edmondson wrote that the phrase “or bad faith” in the Hyde Amendment “covers, and was intended to cover, prosecutorial positions beyond those positions that are baseless or exceed constitutional constraints: the limit that [the majority] imposes.” Id. at 49. According to Judge Edmondson, the Hyde Amendment encompasses not only instances where prosecutors lack a reasonable basis in law and fact, but also situations where prosecutors pursue objectively reasonable prosecutions motivated by ill-will. “The idea that litigation can be conducted in a manner that is both proper in form and, at the same time, wrongful “ because of the bad ulterior motive for which the litigation is used “ is no innovative idea in the law. . . . I have little doubt that a crafty lawyer can act with improper motive and, at the same time, appear to stay technically within the outside borders of the law.” Id. at 52 n. 5.

The Miami Herald has reported that Dr. Shaygans defense attorneys will seek a rehearing before the 11th Circuit en banc. The Miami Heralds article can be read here.

This decision raises interesting issues involving the bounds of sanctionable prosecutorial conduct in criminal investigations. Fuerst Ittleman will continue to monitor the progress of these issues in this case. For more information, contact us at contact@fidjlaw.com.

OFAC Announces Settlement With JPMorgan Chase Bank N.A. For Multiple Violations

On August 25, 2011, the Office of Foreign Assets Control (“OFAC”) of the United States Department of the Treasury announced that it had reached a settlement with JPMorgan Chase Bank, N.A. for alleged violations of multiple sanctions programs related to doing business with Cuba, Iran, Sudan, and Liberia as well as sanctions programs designed to prohibit the support of terrorism and the proliferation of weapons of mass destruction. As part of the settlement agreement, JPMorgan has agreed to remit $88,300,000 to OFAC. The settlement is the largest ever paid by a U.S. financial institution for sanctions violations. A copy of OFACs press release can be read here.

Of the numerous violations alleged to have been committed by JPMorgan, OFAC determined that three were “egregious.” The egregious violations included violations of the Cuban Assets Control Regulations, the Weapons of Mass Destruction Proliferators Sanctions Regulations, and the Reporting, Procedures, and Penalties Regulations. The Cuban Assets Control Regulations (“CACR”) generally prohibits U.S. banking institutions from accepting transfers of credits and funds of a Cuban nationals Cuban assets. See 31 C.F.R. § 515.201. (More information about the CACR can be found on OFACs website here.) OFAC alleged that between December 12, 2005 and March 31, 2006, JPMorgan processed 1,711 wire transfers of approximately $178.5 million for Cuban nationals in violation of the CACR. Additionally, OFAC alleged that JPMorgan was alerted by another financial institution of possible violations as early November 2005. OFAC alleged that JPMorgan investigated, found that the transfers were in fact in violation of the CACR and failed to self-report the violations to OFAC and take steps to prevent violations from recurring.

OFAC also alleged violations of the Weapons of Mass Destruction Proliferators Sanctions Regulations (“WMD Sanctions”). Under the WMD Sanctions program, all property and interests in property of persons and businesses who have been identified by regulation, that are in the United States, are blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in. See 31 C.F.R. § 544.201. According to OFAC, JPMorgan violated the WMD Sanctions when it made a loan of $3 million to a bank that then used the borrowed funds to issue a line of credit to purchase a vessel affiliated with the Islamic Republic of Iran Shipping Lines, which is subject to WMD Sanctions and therefore blocked. OFAC found this violation to be egregious because, despite voluntarily self disclosing to OFAC, JPMorgan withheld its self-disclosure for over 3 months from the time it learned of the violation and received repayment of the loan after its self-disclosure without OFAC authorization.

The final “egregious” violation was a violation of the Reporting Procedures and Penalties Regulations (“RPPR”). The RPPR, found at 31 C.F.R. Part 501, establishes the standard reporting and recordkeeping requirements, as well as the procedures governing transactions pursuant to the various economic sanctions programs operated by OFAC. OFAC alleged that between November 8, 2010 and March 1, 2011, JPMorgan failed to produce numerous documents in its possession in response to an OFAC administrative subpoena and repeatedly asserted that no such documents were in its possession. However, OFAC investigations, which included communications with third-party financial institutions, revealed multiple responsive documents that were still in JPMorgans possession that had not been turned over. As a result of OFACs investigation, JPMorgan subsequently produced more than 20 additional responsive documents. Similar to its CACR violation, JPMorgan did not self disclose the violation to OFAC.

In determining that JPMorgans violations were egregious, OFAC determined as follows: “JPMorgan is a very large, commercially sophisticated financial institution, and [its] managers and supervisors acted with knowledge of the conduct constituting the apparent violations and recklessly failed to exercise a minimal degree of caution or care with respect to [its] U.S. sanctions obligations.”

The JPMorgan settlement provides an illustrative example of the multiple complex sanctions schemes with which financial institutions must comply. If you have questions pertaining to the numerous OFAC sanctions programs, or for questions on how to ensure that your business maintains regulatory compliance at both the state and federal levels please contact us at contact@fidjlaw.com.

Arizona Naturopathic Doctor Pleads Guilty to Selling Stem Cells

On August 18, 2011, Fredda Branyon, a naturopathic physician in Arizona, entered into a plea agreement with the U.S. Attorneys Office in Houston, Texas regarding charges of illegally selling stem cells. In late July, prosecutors filed charges against Ms. Branyon for allegedly selling stem cells in violation various federal law. In the charging document, the government alleged that Branyon, the operator of a clinic in Scottsdale, engaged in a conspiracy whereby she caused the stem cells to be introduced into interstate commerce in violation of the federal Food, Drug, and Cosmetic Act (FDCA). Additionally, Branyon was charged with ten counts of mail fraud, one for each shipment of stem cells from her clinic in Arizona into the State of Texas. Violations of the FDCA are punishable by up to 3 years imprisonment while violations of the mail fraud statute are punishable by up to 20 years imprisonment. According to the plea agreement, Branyon pled guilty to just one charge of violating the FDCA. The rest of the charges will be dismissed at her sentencing hearing. The plea agreement can be reviewed by clicking here.

As discussed in the plea agreement, Branyon had been purchasing umbilical cord tissue (from which the cells were derived) from a birthing facility, where new mothers donated their cord blood for research purposes. After purchasing the donated tissue, Branyon recruited the services of a medical school professor, who then obtained the cells from the cord blood. Having in her possession viable stem cells, Branyon then entered into an arrangement with a Texas medical clinic to supply it with stem cells. While the arrangement on its face stated that the cells were “for research purposes only,” the plea agreement states that Branyon knew the cells were to be used to treat patients. In addition to the sale of the cells, the plea agreement emphasizes that Branyon had been operating various websites whereby she had advertised these stem cells for the treatment of certain diseases, including amyotrophic lateral sclerosis (ALS) and multiple sclerosis (MS).

Branyon, according to the plea agreement, also agreed to cooperate with the government against others involved with violations of the law.

Under the FDCA and U.S. Food and Drug Administration (FDA) regulations, it is against federal law to cause an unapproved new drug to be shipped into interstate commerce. The FDA has recently asserted that stem cells that are removed from the body for medical treatment of a patient are a new “drug”.  Fuerst Ittleman has attorneys with great experience in representing medical professionals and others involved in the use of human stem cells for the medical treatment of a variety of physical ailments. The regulation of stem cells and their usage is an evolving area of the law in which Fuerst Ittleman is deeply involved and constantly monitoring.

Two Telecommunications Executives Convicted by Miami Jury on all Counts for their Involvement in Scheme to Bribe Officials at State-Owned Telecommunications Company in Haiti

On August 5, 2011, Joel Esquenazi and Carlos Rodriguez, former executives of Terra Telecommunications Corporation (Terra), were convicted by a federal jury on all counts for their roles in a scheme to pay bribes to Haitian government officials at Telecommunications DHaiti S.A.M. (Haiti Teleco).

Esquenazi, the former president of Terra, and Rodriguez, the former executive vice president of Terra, were convicted of one count of conspiracy to violate the Foreign Corrupt Practices Act (FCPA) and wire fraud; seven counts of FCPA violations; one count of money laundering conspiracy; and 12 counts of money laundering. Terra had a series of contract with Haiti Teleco, the the sole provider of land line telephone service in Haiti, that allowed the companys customers to place telephone calls to Haiti.

The Foreign Corrupt Practices Act makes it a federal crime for U.S. persons or companies, along with their subsidiaries and agents, to bribe officials of foreign countries in return for some business advantage. The conspiracy to commit violations of the FCPA and wire fraud count carries a maximum penalty of five years in prison and a fine of the greater of $250,000 or twice the value gained or lost. The FCPA counts each carry a maximum penalty of five years in prison and a fine of the grater of $100,000 or twice the value gained or lost. The conspiracy to commit money laundering count and the money laundering counts each carry a maximum penalty of 20 years in prison and a fine of the greater of $500,000 or twice the value of property involved in the transaction.

According to prosecutors, the defendants participated in a scheme to commit foreign bribery and money laundering from November 2001 through March 2005. The telecommunications company paid more than $890,000 to shell companies to be used for bribes to Haiti Teleco officials. To conceal the bribe payments, the defendants used the shell companies to receive and forward the payments. The defendants also created false records claiming that the payments were for “consulting services,” which were never performed.

The purpose of the bribes was to obtain various business advantages from the Haitian officials for Terra, including the issuance of preferred telecommunications rates, reductions in the number of minutes for which payment was owed, and the continuance of Terras telecommunications connection with Haiti.

Sentencing for both defendants was scheduled for October 13, 2011. Esquenazi was remanded into federal custody immediately after the verdict, while Rodriguez remains free on bond.

The verdict is significant because most FCPA prosecutions are resolved prior to trial via plea agreements or deferred prosecution agreements with the government. The government is emphasizing prosecutions of the FCPA against individuals, not just corporations for the deterrent effect of prison sentences on other potential violators. Most FCPA prosecutions are conducted by a team of prosecutors and agents based in Washington dedicated to that task.

Lawyers at Fuerst Ittleman are experienced in representing individuals and corporations facing scrutiny from the government regarding foreign bribery and money laundering allegations. We also conduct internal investigations of businesses to determine whether those businesses are in compliance with the FCPA and money laundering laws when conducting their international business.

U.S. Court of Appeals for the Second Circuit Overturns Gen Re and AIG Convictions

On Monday, August 1, 2011, the U.S. Court of Appeals for the Second Circuit overturned the 2008 convictions of four former executives of General Reinsurance Corporation (Gen Re) and one from American International Group (AIG). The Courts opinion can be found here.

In overturning the convictions, the Court declared that the trial judge erred in allowing prosecutors to offer evidence that was prejudicial to the executives and in improperly instructing the jury on causation. The Court ordered new trials for Ronald Ferguson, Gen Res former chief executive; Elizabeth Monrad, Gen Res former chief financial officer; Christopher Garand, Gen Res former senior vice president; Robert Graham, Gen Res former assistant general counsel; and Christian Milton, AIGs former vice president.

The five executives were accused of defrauding AIG investors early in the last decade by almost $600 million by masking losses to AIG. AIG later became known to the general public as a big beneficiary of the federal bailout, receiving $182.3 billion. The criminal case against the defendants arose out of investigations in 2005 by the Securities and Exchange Commission and the New York State Attorney Generals office into AIGs accounting. Prosecutors claimed the alleged fraud on the AIG investors centered on a “sham transaction to inflate AIGs loss reserves by $500 million, which preceded by several years the financial crisis of AIG.” The defendants were convicted of conspiracy, mail fraud, securities fraud and making false statements to the Securities and Exchange Commission and sentenced to terms ranging from one to four years.

However, the three-judge federal appeals court panel said that the trial judge erroneously let prosecutors display three charts with misleading AIG stock-price data. In its 77-page opinion, the panel said that the charts suggested that the “sham transaction” caused AIGs shares to plummet 12 percent during the relevant time period, and that suggestion was without foundation. The charts cast the defendants as causing an economic downturn affecting every family in America.

The Court ordered new trials for the defendants, causing a significant setback to the Department of Justice. The initial convictions in 2008 were seen as a milestone in the governments efforts to prosecute white-collar crime. However, recently, the government has declined to pursue or has failed to win convictions in a number of high-profile cases, particularly those stemming from the financial crisis.

For more information regarding Fuerst Ittlemans white collar criminal defense practice, contact an attorney today at contact@fidjlaw.com.

Court finds Florida’s Drug Abuse Prevention and Control Law Unconstitutional

On July 27, 2011, Judge Mary Scriven of the United States District Court for the Middle District of Florida declared Floridas Drug Abuse Prevention and Control law, § 893.13, Fla. Stat. as amended by § 893.101, Fla. Stat., unconstitutional. The Court found that the law violated due process because it eliminated mens rea as an element of felony delivery of a controlled substance thus making the law a strict liability offense. A copy of the opinion can be read here.

Mens rea, a Latin phrase meaning “guilty mind,” is best described as the intent one has to commit a crime. As described by Judge Scriven, the concept of requiring not only an actus reus, i.e. a criminal act, as well as a mens rea, i.e. a criminal intent, to obtain a conviction is a fundamental part of American and common law criminal jurisprudence. These two requirements are reflected in the principle stated by Sir Edward Coke that the “act does make a person guilty unless the mind be also guilty.”

However, over time, the federal and state governments have developed numerous criminal statutes that require no proof of criminal intent. In order to be found guilty of violating such laws, the government is only required to prove that a person did the prohibited act, even if the actions occurred by accident or mistake. Laws that do not require a mens rea element are known as strict liability or in some cases, general intent offenses. A majority of strict liability offenses are regulatory or public welfare offenses which are crimes that punish actions a reasonable person should know would seriously threaten a communitys health or safety. Examples of regulatory offenses include the misbranding and adulteration provisions of the FDCA. See 21 U.S.C. § 331. Recently, the rise of the proliferation of strict liability crimes was the subject of an article in the Wall Street Journal. A copy of that article can be read here.

Although legislatures can create strict liability offenses, they are generally disfavored by the courts. Courts will uphold such offenses as constitutional only if: 1) the penalty imposed in slight; 2) a conviction does not result in a substantial stigma to the offender; and 3) the statute regulates inherently dangerous or deleterious conduct. See Staples v. United States, 511 U.S. 600 (1994).

In this case, Mackel Shelton was convicted of delivery of cocaine, a controlled substance, in violation of Floridas Drug Abuse Prevention and Control law found at § 893.13, Fla. Stat. Under the statute, a person is guilty of a drug offense if: 1) he delivers any substance, and 2) the substance is a controlled substance under the act. Additionally, Floridas Drug Abuse Prevention and Control law expressly states that “knowledge of the illicit nature of a controlled substance is not an element of any offense under this chapter.” See § 893.101, Fla. Stat. As a result, a defendant could be convicted of deliver of cocaine “without regard to whether he does so purposefully, knowingly, recklessly or negligently.” Such was the basis of Mr. Sheltons conviction.

In finding that § 893.13 violates due process under the United States Constitution, Judge Scriven found that the statute failed all three prongs of the Staples analysis. First, the Court found that because the penalty associated with delivery of cocaine was a maximum of 15 years imprisonment, the penalty was too harsh to be enforced without the State being required to prove that Mr. Shelton acted with criminal intent. The Court noted that “no strict liability statute carrying penalties of the magnitude of Fla. Stat. § 893.13 has ever been upheld under federal law.” Second, the Court found that because a conviction under the statute was a second degree felony with a 15 year sentence, the statute “gravely besmirches an individuals reputation.” As a result, the Court ruled that the statute violated principles of due process because a conviction would result in a substantial stigma to the offender. Finally, the Court found that the statute violated due process as an unconstitutional strict liability offense because it criminalized inherently innocent conduct, namely the delivery of any substance. The Court explained that “where laws proscribe conduct that is neither inherently dangerous nor likely to be regulated, the Supreme Court has consistently either invalidated them or construed them to require a proof of mens rea in order to avoid criminalizing Ëœa broad range of apparently innocent conduct.”

The Courts Order provides a detailed analysis which can serve as a roadmap to criminal defendants and their attorneys seeking to challenge strict liability convictions. The white collar criminal defense lawyers at Fuerst Ittleman are experienced in handling even the most complex cases where clients are facing allegations of criminal actions. The attorneys of Fuerst Ittleman have defended clients in cases involving numerous general intent and strict liability offenses including, money laundering violations found at 18 U.S.C. § 1957, the operation of unlicensed money transmitting businesses found at 18 U.S.C. § 1960, and violations of the FDCA under 21 U.S.C. §§ 331 and 333 as well as prosecutions of corporate officials for FDCA violations under the Park Doctrine. For more information regarding Fuerst Ittlemans white collar criminal defense practice, contact an attorney today at contact@fidjlaw.com.

Office Of Financial Regulation Report Finds That Money Services Businesses Help Facilitate Ongoing Workers’ Compensation Premium Fraud

On August 2, 2011, the Financial Services Commission of the Florida Office of Financial Regulation issued a report to the Governor and his Cabinet regarding workers compensation fraud in the State of Florida. The report revealed that money services businesses have played an active, critical, and sometimes unknowing part in defrauding the workers compensation insurance market. Money Services Businesses are regulated by the Office of Financial Regulation pursuant to Chapter 560, Florida Statutes. A copy of the Office of Financial Regulations report can be read here.

According to the report, the scheme is designed to allow uninsured subcontractors to procure contracting jobs while avoiding paying workers compensation insurance premiums and payroll taxes on the money earned. (Florida law requires that subcontractors possess a valid workers compensation policy in order to obtain contracts from a general contractor).

The scheme works as follows: First, individuals, known as “facilitators” incorporate “shell” companies, i.e. companies with no business operations, labor force, or physical location other than a P.O. Box, designed to appear as subcontractors on paper. Often times, the facilitators identity is completely unknown as fictitious owners are listed as the owners and officers of the corporation. Next, the shell company obtains a minimal workers compensation insurance policy. Once the shell company has obtained insurance, it proceeds to “rent” its certificate of insurance to uninsured subcontractors. The facilitators allow the uninsured subcontractor to use the shell companys name and workers compensation policy in return for a fee. Uninsured subcontractors who have “rented” the shell company will then have paperwork that appears to be compliant with state law, thus allowing them to enter into construction contracts with General Contractors.

The MSBs involvement in the fraud scheme occurs upon completion of the contract between the subcontractor and the general contractor.  Once the work is completed by the uninsured subcontractor, payment is made to him by the general contractor via check made payable to the “rented” shell company. It is at this stage where an MSB, often a check casher, enters into the scheme because, unlike banks, which normally require that checks made payable to a business or third party be deposited directly into the payees account, a check casher will pay out business-to-business checks, if cashed by persons authorized by the payee. According to the report, “these Ëœauthorized persons are usually the facilitator, and others designated by the facilitator, introduced to and known by the owner/operator of the MSB.”

Upon cashing the check in the name of the shell corporation, two fees are taken out. First, the check casher takes 1.5 to 2% for itself as the fee for cashing the check. Next, a 6-8% fee for the facilitator is taken out as the “rent” paid by the uninsured subcontractor for using the shell companys name and insurance policy. The remaining goes to the uninsured subcontractor as payment for his services. In some cases, the check casher is unaware that its actions are part of a larger fraudulent scheme. Often times in such situations, the check casher becomes an unknowing part of the scheme because of a lack of due diligence in its AML compliance programs.

However, the report also indicated that in some cases the facilitators are actually the MSB owners themselves who act in concert with contractors to find uninsured subcontractors for construction contracts. Additionally, the report noted that in some cases complicit MSBs would falsify Currency Transaction Reports in order to protect the identity of the facilitator by naming the fictitious owners in the CTR. In accordance with the Bank Secrecy Act and its implementing regulations, an MSB is required to file a CTR for every transaction in currency in excess of $10,000. The failure to file a CTR or the falsifying of a CTR violates both state and federal law. More information on BSA requirements for MSBs can be found on FinCENs website here.

As a result of this scheme, “rent” paid to the shell company is not reported to the shells insurance carrier and is not subject to payroll taxes because the payments appear on paper as legitimate contractor-to-insured-subcontractor payments. Additionally, because uninsured subcontractors save money by avoiding workers compensation insurance premiums, they are able to charge a significantly cheaper rate for their services to their co-conspiring general contractors. These general contractors are then able to lower their bid prices and win construction contract jobs away from legitimate businesses. The report estimates that contractors who participate in the “renting” scheme are able to charge up to 20% less then competition for the same work. The practical effects are far reaching. First, legitimate contractors have difficulty winning bids on construction jobs because they cannot quote prices as low as the conspiring contracting companies. Second, none of the ill-gotten gains are assessed workers compensation insurance premiums or payroll taxes, resulting in a loss of revenue for the state.

Additionally, this scheme makes clear the importance of MSBs having robust AML compliance programs in place so that the MSB does not become an unknowing facilitator of fraud. MSBs must ensure that they maintain detailed and up to date records as required by law. MSBs must also ensure that their employees are properly trained in AML compliance in order to spot suspicious transactions and activities.

If you have questions pertaining to the Office of Financial Regulations, the BSA, anti-money laundering compliance, or how to ensure that your business maintains regulatory compliance at both the state and federal levels please contact us at contact@fidjlaw.com.

Beda Singenberger Charged with Swiss Account Conspiracy

Swiss financial advisor Beda Singenberger, 57, was charged with helping more than 60 U.S. taxpayers hide over $184 million in Swiss bank accounts and then avoid U.S. authorities by moving assets from UBS AG to other Swiss banks. The indictment came on the same day that U.S. authorities separately charged several Credit Suisse bankers with helping Americans evade taxes and nearly 2 ½ years after UBS paid a $780 million penalty settlement with the U.S. to avoid prosecution.

According to the indictment filed last Thursday in Manhattan federal court, Singenberger, a Certified Public Accountant, conspired to hide clients income from the IRS from 1998 to 2009. To further his conspiracy, in 2001 he allegedly began creating sham corporations, “foundations, and “establishments,” under the laws of Hong Kong, Liechtenstein, and other foreign jurisdictions to conceal accounts. Several of these entities were named in earlier federal cases against UBS clients.

Then, upon learning in 2008 that U.S. authorities were investigating UBS, Singenberger allegedly helped his U.S. clients move their funds to other Swiss banks without a physical U.S. presence. According to the indictment, he also provided various Swiss banks with fictitious IRS forms which stated that undeclared accounts at those banks were not U.S. clients.

Beda Singenberger operated the wealth management and tax advisory business called “Sinco Treuhand AG” (“Sinco”), which surfaced in connection with an August 2004 internal UBS memo that was released by the U.S. Senate Permanent Subcommittee on Investigations in 2009. The memo sent to Sinco stated, “We invite you to make a short presentation on the structures/vehicles that you recommend to U.S. and Canadian client who do not appear to declare income/capital gains to their respective tax authorities.”

If convicted, Beda Singenberger may face prison time and monetary penalties.

The upswing in indictments signals that U.S. enforcement against hidden offshore accounts is in full force, and that any taxpayers with undisclosed accounts should strongly consider taking part in the Offshore Voluntary Disclosure Initiative before the August 31, 2011 deadline.

The attorneys at Fuerst Ittleman have the expertise to guide you through any voluntary disclosure or Bank Secrecy Act compliance matter. Contact an attorney today at contact@fidjlaw.com.