Electronic Check Processing Under Increased Scrutiny By U.S. Bank Regulators Because Of Increased Risk of Money Laundering

As banking and payment processing technology continually evolve, so too does the threat that such technology may be used for illicit and illegal purposes, such as money laundering. One such technology that has recently come under increased scrutiny is electronic check processing, specifically through a procedure known as Remote Deposit Capture (“RDC”).

In 2004, U.S. banks dramatically increased their capacity to process checks. With the passage of the Check Clearing for the 21st Century Act, (“Check Clearing Act”) banks were permitted to process check images through RDC instead of the physical paper check itself. Prior to the Check Clearing Acts passage, in order for paper checks to be processed, the physical check was required to move from the location where it was deposited to the bank from which it was written. Thus, by allowing U.S. banks to process check images electronically, check-cashers from around the world could now avoid the hassle and expense of transporting large bundles of checks to banks as part of their daily operations.

However, while RDC has allowed for the faster processing of checks, the susceptibility of electronic check processing to be used unlawfully because of the difficulties and limitations which currently exist in data mining scanned checks for suspicious activity has come under scrutiny. As a result, regulators, such as the Financial Crimes Enforcement Network (“FinCEN”) and the Office of the Comptroller of the Currency (“OCC”), have increased their scrutiny of U.S. Banks electronic check processing activities.

For example, on April 5, 2012, the OCC and Citibank, N.A., entered into a Consent Order after the OCC identified numerous AML compliance program deficiencies at the bank. Among the OCCs findings were that: 1) the Bank failed to adequately monitor its [RDC]/international cash letter instrument processing in connection with foreign correspondent banking; and 2) as a result the inadequate monitoring, “the Bank failed to file timely [Suspicious Activity Reports (“SARs”)] involving RDCs. . . .” In order to comply with the Consent Order, within 90 days of the order, Citibank must develop, implement and maintain clear written policies, procedures and processes governing the use of RDCs by all clients of the bank, including policies and procedures pertaining to the issuance of SARs in relation to RDC activity. A copy of the Consent Order can be read here.

Additionally, in its October 2011 SAR Activity Review, FinCEN found that, while “SAR filings indicated no real differences in the various fraud and money laundering schemes perpetrated through the RDC check deposit channel when compared with check deposits completed through more traditional means, . . . the choice of the RDC deposit channel may have facilitated certain schemes or the expansion of services to non-traditional customers somewhat more effectively than traditional check deposit channels.” Thus, while the type of illicit activity may not vary between RDC deposits and paper deposits, the ability to be detected may.

As RDC technology evolves, FinCEN encourages banks to develop robust AML compliance programs to address these technological issues. As stated by FinCEN:

In some cases, special precautions and commensurate due diligence efforts may be appropriate when processing items from non-U.S. correspondent accounts or foreign-located customers. Banks may wish to perform periodic reviews of and generate risk management reports on the AML issues associated with RDC. Banks also may wish to ensure that their transaction monitoring systems adequately capture, monitor and report on suspicious activities occurring through RDC, especially as transactional levels increase.

See also Federal Financial Institutions Examination Council, Risk Management of Remote Deposit Capture for a more detailed analysis of risk factors that RDC providers should consider when developing an AML compliance program.

As electronic banking technology evolves, so too must financial institutions AML compliance programs. If you have questions pertaining to anti-money laundering compliance, the BSA, or how to ensure that your business maintains regulatory compliance at both the state and federal levels, contact Fuerst Ittleman PL at contact@fidjlaw.com.

IRS Commissioner Ignores Taxpayer Advocate’s Recommendations Seeking to Address Unduly Harsh Penalties Faced by Participants of the Offshore Voluntary Disclosure Program

As we previously reported here, in August of 2011 the Internal Revenue Service (IRS) Taxpayer Advocate Service released Taxpayer Advocate Directive 2011-1 (TAD) which addressed the IRSs failure to treat certain participants of the 2009 Offshore Voluntary Disclosure Program (OVDP) fairly and demanding that the IRS change the way it administered the OVDP.

The OVDP was a program under which taxpayers could voluntary disclose the existence of their offshore financial accounts in exchange for the IRSs leniency in the imposition of penalties arising from the taxpayers failure to disclose these accounts in a timely fashion.  As stated by the IRS:

Recent IRS enforcement efforts in the offshore area have led to an increased number of voluntary disclosures. Additional taxpayers are considering making voluntary disclosures but are reportedly reluctant to come forward because of uncertainty about the amount of their liability for potentially onerous civil penalties. In order to resolve these cases in an organized, coordinated manner and to make exposure to civil penalties more predictable, the IRS has decided to centralize the civil processing of offshore voluntary disclosures and to offer a uniform penalty structure for taxpayers who voluntarily come forward. These steps were taken to ensure that taxpayers are treated consistently and predictably.

Voluntary Disclosure. Questions and Answers, Question 20.  (May 6, 2009).  (emphasis added).

Taxpayers who fail to report their offshore accounts on a Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts, commonly known as an “FBAR”) face onerous penalties. United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign accounts exceeded $10,000 at any time during the year on the FBAR.  The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign account. See 31 U.S.C. § 5321(a)(5).  As discussed by the IRS, however, nonwillful violations are subject to a civil penalty of not more than $10,000. Voluntary Disclosure. Questions and Answers, Question 15.  (May 6, 2009). (emphasis added).

As discussed by the Taxpayer Advocate in the TAD, the IRS lured participants in this program with promises of leniency, consistency, and predictability. 

With significant FBAR penalties as leverage, the IRS “strongly encouraged” people who failed to file these and similar returns and report income from foreign accounts to participate in the 2009 Offshore Voluntary Disclosure Program (OVDP), rather than quietly filing amended returns and paying any taxes due. It warned that taxpayers making “quiet” corrections could be “criminally prosecuted,” while OVDP participants would generally be subject to a 20 percent “offshore” penalty in lieu of various other penalties, including the FBAR penalty. While the OVDP appeared to be a great deal for those involved in criminal tax evasion, it was a terrible deal for many whose violations were not willful or who would be eligible for reasonable cause exceptions.

Taxpayer Advocate Directive 2011-1, 4.  (August 16, 2011).  (emphasis added).   

Accordingly, taxpayers who entered the OVDP having committed nonwillfull violations of the FBAR obligations could be required to pay penalties amounting to 20 percent of the assets in their foreign account, which in most cases exceeded the $10,000 cap under the ordinary regime for nonwillfull violations of the FBAR.  Notably, Question 35 of the original OVDP Frequently Asked Questions and Answers addressed this situation by providing that under no circumstances would a taxpayer be required to pay a penalty greater than what he would otherwise be liable for under existing statutes for failing to file a FBAR.  Thus, under the original terms of the OVDP, the IRS promised to compare the 20 percent offshore penalty to the total penalties that would otherwise apply to a particular taxpayer and impose the lesser of the two.

In March 2011, however, the IRS issued a Memorandum to all OVDP Examiners which retroactively changed the terms of the 2009 OVDP two years after the implementation of the program.  The memo directed IRS examiners to stop accepting less than 20 percent penalties and assume that all violations are willful unless proven otherwise.

Due to the change in practices, the TAD explained that the IRS harmed taxpayers seeking to correct honest mistakes, and thus requested the IRS revoke its March 2011 memorandum.

On August 30, 2011, the IRS appealed the TAD, arguing that under the program, “an agent could make a comparison that determine the taxpayers liability under OVDP was higher than that under existing statutes and could give the taxpayer the benefit of a lower tax liability.” It also found that the Taxpayer Advocates assertion that certain “taxpayers [are] worse off than if he or she had not entered the OVDP” was not based in fact and “contrary to guidance issued by the Deputy Commissioner Services and Enforcement.” Appeal of Taxpayer Advocate Directive 2011-1. Memorandum for Steven T. Miller, Deputy Commissioner for Services and Enforcement.  (August 30, 2011). 

In response to the IRSs Appeal, the Taxpayer Advocate issued recommendations regarding TAD 2011-1 on October 26, 2011, indicating that the IRSs OVDP guidance documents have “created confusion and consternation” in large part because “the IRS has remained silent about the seemingly reasonable way . . . that it will apply FBAR penalties.”  Recommendations Regarding Taxpayer Advocate Directive 2011-1.  Memorandum for Douglas Shulman, Commissioner of Internal Revenue Service.  (October 26, 2011).

The Taxpayer Advocate asked the IRS Commissioner to respond to the recommendations by January 26, 2012 and specifically cited to IRC §7803(c)(3), which provides that the “Commissioner shall establish procedures requiring a formal response to all recommendations submitted to the Commissioner by the National Taxpayer Advocate within 3 months after submission to the Commissioner.”  However, the Commissioner failed to do so.

The Taxpayer Advocate reinforced her concerns in the Taxpayer Advocate Service 2011 Report to Congress as follows:

While the maximum penalty for a “willful” failure to report foreign accounts on Form td F 90“22.1, Report of Foreign Bank and Financial Accounts (FBAR) is severe, people who voluntarily correct inadvertent violations are generally not subject to a significant penalty. Nonetheless, the IRS “strongly encouraged” nearly everyone with a violation to participate in the 2009 offshore voluntary disclosure program (OVDP) or face potentially excessive civil and criminal penalties. More than a year after the 2009 OVDP ended, the IRS changed key terms of the program to the detriment of those with inadvertent violations, damaging the IRSs credibility. The IRSs statements also leave the public confused and concerned that excessive FBAR penalties may apply to inadvertent violations.

The Most Serious Problems Encountered by Taxpayers. Taxpayer Advocate Service 2011 Report to Congress, p. 21.  (December 31, 2011).

In light of these issues, the Taxpayer Advocate expressly recommended that “the IRS issue public guidance committing not to seek excessive penalties for the inadvertent violations, revoke the March 1 memorandum, and clarify that participants of the 2009 OVDP will not be required to pay more than they would be liable for outside the program.”  Id.  She also recommended that the IRS “amend signed agreements for those who would pay less outside the program.”  Id.  Under IRC §7803(c)(3), the recommendations contained within the Taxpayer Advocate Service 2011 Report to Congress required a response by March 31, 2012.

Subsequently, the American Citizens Abroad (ACA), an advocacy group of U.S. citizens living overseas, wrote to IRS Commissioner Doug Shulman expressing concern regarding the IRSs utilization of the OVDP to camouflage a policy of taxing assets of Americans abroad by imposing large penalties for simple FBAR filing omissions. The ACA thus requested that IRS examiners account for the individual circumstances of taxpayers abroad who were previously unaware of the FBAR filing requirements, pursuant to the U.S. system of citizenship-based taxation.  Further, the ACA requested the Commissioner to comply with the measures recommended in the TAD and the 2011 Report to Congress and revoke the memo. Pursuant to IRC §7803(c)(3), the Commissioner had 90 days to formally respond to the Taxpayer Advocates recommendations contained within the 2011 Report to Congress. This deadline expired on March 31, 2012 without any response from the Commissioner.

Rather than responding to the TAD or any of the concerns raised by the ACA, Commissioner Shulman expressed pride in the revenues resulting from penalties paid by OVDP participants during a speech at the National Press Club.

As we increased our enforcement efforts and gained significant momentum, we gave taxpayers a chance to come in voluntarily and avoid going to jail. In a typical year, we used to get 100 or so taxpayers who used our voluntary disclosure program. For this program, we thought that figure would rise to maybe 1,000.  So, we are very pleased that through the end of 2011, weve had approximately 33,000 voluntary disclosures from individuals who came in under several special programs we started in 2009. To date, these individuals have paid back taxes and stiff penalties amounting to more than $4.4 billion, and the number continues to grow. We are now mining the information we have received to date and have launched our next wave of investigations on banks, bankers, intermediaries and taxpayers.

Prepared Remarks Commissioner of Internal Revenue Douglas H. Shulman before the National Press Club. IR-2012-42 (April 5, 2012). 

The purpose of the Taxpayer Advocate Service is to mandate administrative or procedural changes which violate Taxpayers rights. In the history of the Tax Advocate Service, the office has only issued six TADs aimed to force IRS compliance on issues that the advocate deems abusive or inequitable to Taxpayers.  Thus, it is clear that such directives are only issued in response to matters of utmost significance.

The inclusion of a specific deadline in IRC §7803(c)(3) by which the Commissioner must respond to the recommendations of the Taxpayer Advocate reveals Congresss intention that the concerns expressed by the Taxpayer Advocate must be  taken seriously and addressed in a timely manner.  This deadline is not unlike other deadlines enacted by Congress throughout the Internal Revenue Code which, when missed by taxpayers, are predictably dealt with much more harshly by the Commissioner.

The Commissioners failure to adhere to his statutory duty to respond to the recommendations by the Taxpayer Advocate coupled with his remarks during his speech before the National Press Club reflect that his objectives are focused solely on generating revenue, without any regard to taxpayers rights or whether such revenue is properly collected.

Fuerst Ittleman will continue to monitor the exchange between the IRS and the Office of the Taxpayer Advocate for more developments.  You may also monitor these exchanges here on the IRS website.  If you have any questions regarding the OVDP, FBAR penalties, or offshore voluntary disclosure generally, please contact us at contact@fidjlaw.com.

Third Circuit Court of Appeals Affirms Decision Against Taxpayer Whose Check Was Incorrectly Processed

On April 19, 2012, the Third Circuit in the case of United States of America v. Zarra, case no. 11-3622, affirmed the decision of the District Court granting summary judgment in favor of the government.  A full copy of the decision can be found here.

The facts of the case are fairly straightforward:

The taxpayers owed the IRS $179,501 for 1999, and in order to pay that debt, executed a check in the amount of $179,501 payable to the IRS, but due to a bank error, only $179.50 was actually transferred to the IRS from the Taxpayers account.  In July of 2000 the IRS made an assessment for the balance, and in June of 2010, the government filed suit to collect pursuant to 26 USC 7403.

After filing suit, the government moved for summary judgment arguing that there was no genuine material facts regarding the Taxpayers underpayment.  The District Court agreed.  The Third Circuit affirmed noting that the tax was assessed in July 2000 and the IRS Form 4340 documenting the assessment date was “presumptive proof of a valid assessment.”

The teaching of Zarrra is that failure to pay the full amount due, even if it is a bank error, does not absolve a taxpayer from liability to the IRS. 

The attorneys at Fuerst Ittleman regularly represent taxpayers involved in complex disputes with the IRS.  You can contact us by calling us at 305.350.5690 or by email at contact@fidjlaw.com.

FDA Issues Draft Guidance on Use of Nanotechnology in Cosmetic Products

On April 20, 2012, the U.S. Food and Drug Administration (“FDA” or the “Agency”) issued a Draft Guidance for Industry entitled “Guidance for Industry: Safety of Nanomaterials in Cosmetic Products” (the “Guidance”) which outlines the FDAs current thinking on the safety assessment of nanomaterials in cosmetic products. According to FDA, the Guidance is “intended to assist industry and other stakeholders in identifying the potential safety issues of nanomaterials in cosmetic products and developing a framework for evaluating them.”

Nanomaterials, developed using nanotechnology, can have chemical, physical, and biological properties that differ from those of their conventionally-scaled counterparts. Nanomaterials are measured in nanometers”equal to about one-billionth of a meter”and are so small that they cannot be seen with a regular microscope. While FDA has not adopted a formal definition of “nanotechnology,” “nanoscale,” or related terms, “nanotechnology” is defined by the National Nanotechnology Initiative Program as “the understanding and control of matter at dimensions between approximately 1 and 100 nanometers, where unique phenomena enable novel applications.” Other definitions of “nanotechnology” consider other factors such as function, shape, charge, the ratio of surface area to volume, and other physical or chemical properties.

The Food, Drug, and Cosmetic Act (“FDCA”) does not subject cosmetics or cosmetic ingredients, with the exception of color additives, to premarket review or approval in order to be legally marketed in the United States. Therefore, except for color additives and some ingredients that are prohibited or restricted by regulation, a cosmetics manufacturer may use any ingredient in the formulation of a cosmetic without obtaining FDA approval, provided that the use of the use of the ingredient does not otherwise cause the cosmetic to be adulterated under section 601 of the FDCA (21 U.S.C. § 361) or misbranded under section 602 of the FDCA (21 U.S.C. § 362). Manufacturers of a cosmetic product are responsible for making sure a cosmetic product is not adulterated or misbranded. Cosmetic manufacturers and distributors are legally responsible for the safety of the products they market and should have proper testing and substantiation to support each products safety.

The current general framework for a cosmetic products safety assessment includes hazard identification, dose-response assessment, exposure assessment, and risk characterization. FDA believes that this current system for assessing safety is appropriately robust and flexible to be applied to nanomaterials. However, cosmetics manufacturers should make sure that data and testing methods properly address the unique properties and function of nanomaterials used in the cosmetic product.

In the Guidance, FDA recommends that safety assessment for cosmetic products using nanomaterials should address the following factors:

  • The physio-chemical characteristics,
  • Agglomeration and size distribution of nanomaterials at the toxicity testing conditions which should correspond to those of a final product,
  • Impurities,
  • Potential product exposure levels, and the potential for agglomeration of nanoparticles in the final product,
  • Dosimetry for in vitro and in vivo toxicology studies,
  • In vitro and in vivo toxicological data on ingredients and their impurities, dermal penetration, irritation of the skin and eyes, sensitization studies, mutagenicity/genotoxicity studies, and
  • Clinical studies to test the ingredient, or finished product, in human volunteers under controlled conditions.

The safety of a cosmetic product with nanomaterial ingredients should be evaluated by analyzing the physio-chemical properties and toxicological endpoints of each ingredient in relation to the expected exposure levels resulting from the intended use of the finished product. FDA encourages cosmetic manufacturers to consult with the Agency to address any questions related to safety and the test methods used to substantiate a products safety.

To ensure that FDA considers comments on the Guidance when developing the final guidance, electronic or written comments should be submitted within 90 days of the publication of the notice of availability in the Federal Register. Electronic comments should be submitted to https://www.regulations.gov. Written comments should be submitted to the Division of Dockets Management, (HFA-305), Food and Drug Administration, 5630 Fishers Lane, Rm. 1061, Rockville, MD 20852.

For more information on the FDAs regulation of cosmetics products or nanotechnology, please contact us at contact@fidjlaw.com or (305) 350-5690.

FDA Issues Draft Guidance on the Safety and Regulatory Status of Nanotechnology in Food

On April 20, 2012, the U.S. Food and Drug Administration issued a Draft Guidance addressing the use of nanotechnology by manufacturers of food ingredients, manufacturers of food contact substances, and end users of ingredients or food contact substances. The draft guidance entitled, “Guidance for Industry: Assessing the Effects of Significant Manufacturing Process Changes, Including Emerging Technologies, on the Safety and Regulatory Status of Food Ingredients and Food Contact Substances, Including Food Ingredients that are Color Additives,” (“Draft Guidance”) is intended to describe the factors the food industry should consider when determining whether changes in manufacturing processes, including those involving nanotechnology, create a significant change that:

  • Affects the identity of the food substance;
  • Affects the safety of the use of the food substance;
  • Affects the regulatory status of the use of the food substance; and
  • Warrants a regulatory submission to FDA.

As described by FDA in its Draft Guidance, any manufacturing change, including those involving nanotechnology, have the potential to be significant.

FDA has not formally defined “nanotechnology.” The term most commonly is used to refer to “the intentional manipulation, manufacture or selection of materials that have at least one dimension in the size range of approximately 1 to 100 nanometers.” When considering whether an FDA-regulated product contains nanomaterials or otherwise involves the application of nanotechnology, FDA will ask:

  1. whether an engineered material or end product has at least one dimension in the nanoscale range (approximately 1 nm to 100 nm); or
  2. whether an engineered material or end product exhibits properties or phenomena, including physical or chemical properties or biological effects, that are attributable to its dimension(s), even if these dimensions fall outside the nanoscale range, up to one micrometer.

Considerations for Assessing the Impact of a Significant Manufacturing Process Change on the Safety and Regulatory Status of a Food Substance

Before a food substance can be legally marketed in the United States, it must satisfy a safety assessment, such as obtaining premarket approval or be “generally recognized as safe” or “GRAS.” Over time, the manufacturing process for a food substance may change. If the manufacturing process changes are significant, the food substance may no longer fall within the scope of a food additive regulation, a GRAS listing, an effective food contact notification, or an existing determination of GRAS status. The Draft Guidance provides the following list of examples that may be considered by the Agency as significant changes in manufacturing processes:

  • A change in one or more starting materials;
  • A change in the concentration of starting  materials;
  • A change in catalyst;
  • A change in the source microorganism (including a change in strain) used for a food substance derived from fermentation of a microorganism; and
  • A change in food manufacturing or ingredient technology, such as the use of emerging technologies that affect the particle size distribution of a food substance.

When determining if a significant change in a manufacturing process has occurred and whether that change requires a new authorization, it is important to determine if the change has altered the identity or intended use of the food substance. In the Appendix to the Draft Guidance, FDA provides three (3) specific examples of situations in which the FDA reconsidered the regulatory status of the use of a food substance and concluded that a significant change in the manufacturing process did not negatively impact safety.

Recommendations for Assessing the Effect of a Significant Manufacturing Process Change on the Safety and Regulatory Status of a Food Substance

            The Draft Guidance provides specific steps for assessing the effect of a significant manufacturing process change on the safety and regulatory status of a food substance that is the subject of a food additive or color additive regulation in title 21 of the Code of Federal Regulation, affirmed or identified as GRAS, subject to an effective Food Contact Notification, or subject to an existing determination that a use of a food substance is GRAS. In the specific instance of nanotechnology, the Agency states, “[a]t present, for nanotechnology applications in food substances, there are questions related to the technical evidence of safety as well as the general recognition of that safety, [which] are likely to be sufficient to warrant formal premarket review and approval by FDA, rather than to satisfy criteria for GRAS status.”

Anyone can submit comments on the Draft Guidance at any time. However, in order to ensure that FDA considers comments on this Draft Guidance when developing the final guidance, electronic or written comments should be submitted within 90 days of the publication of the Notice of Availability in the Federal Register. Electronic comments should be submitted to https://www.regulations.gov. Written comments should be submitted to the Division of Dockets Management, (HFA-305), Food and Drug Administration, 5630 Fishers Lane, Room 1061, Rockville, MD 20852.

For more information on food ingredients and nanotechnology, please contact us at contact@fidjlaw.com or (305) 350-5690.

Centers for Medicare and Medicaid Services Urged To Issue Final Rule on Physician Gift and Disclosure Regulations

On April 4, 2012, Senators Charles Grassley (R-IA) and Herb Kohl (D-WI), authors of the Physician Payments Sunshine Act (“Sunshine Act”), wrote a letter to the Centers for Medicare and Medicaid Services (“CMS”) pushing CMS to issue its statutorily mandated final rule implementing the Sunshine Act provisions of the Patient Protection and Affordable Care Act (“PPACA”). As we previously reported, section 6002 of the PPACA is also known as the Sunshine Act because it is based on the previously proposed, but never enacted, Physician Payment Sunshine Act.

In their letter, Senators Grassley and Kohl said they were “disappointed” that CMS missed the October 1, 2011 statutory deadline for implementing the Sunshine Act. They requested that CMS issue the final rule on implementation no later than June of this year so that partial data collection for 2012 can begin. Furthermore, Senators Grassley and Kohl “strongly urge[d] CMS to work closely with stakeholders to finalize these rules so that they comprise a feasible approach to providing valuable data that patients deserve.”

Clear Definitions and Guidelines

As we previously reported, the Sunshine Act requires drug and device manufacturers to report certain “payments or other transfer of value” made to physicians. The Sunshine Act also requires CMS to design an “Internet website” where the public can search and view such “payments or other transfer of value” made to physicians by drug and medical device manufacturers. In the letter, the Senators encouraged CMS to be clear and to narrowly define precise payment categories so as to allow all stakeholders to work under the same assumptions. Additionally, they ask CMS to consider removing the proposed “other” payment category “so that it does not obscure the true nature of some payments.”

The Senators also urged clarity with regard to indirect research payments. Specifically, they urged CMS to more clearly define instances when indirect research payments and indirect research payments to third parties are reportable, and how and in which context such payments will be reported on CMSs website that will publically available. According to the Senators, this clarity will be very important if physicians will be contacted directly by pharmaceutical companies and reported publicly, physician participation in research activities could be hindered.

Accurate Data/Errors

The Senators also urged CMS to update the website with the correct information as soon as CMS is made aware of errors in the reported data. The Senators stated that CMS should include mechanisms by which the agency can update errors on a quarterly basis because prolonged errors could cause confusion among the public, physicians, and manufacturers.

In an effort to reduce inaccurate payments and disputes, the Senators asked CMS to consider requiring manufacturers to share the data they plan to report to CMS directly to covered physicians before reporting the data to CMS. When disputes do arise, the Senators agree that CMS must develop a mechanism to which the disputes can be reported as smoothly as possible; but insist that CMS not become the default dispute arbiter between manufacturers and physicians.

Other Issues

In addition to the clarity and accuracy of the data, the Senators also addressed concerns with the website that will be designed to report the payments to physicians and outreach to physicians. Specifically, the Senators insist that the website be designed in a “user friendly” manner and the data should be in an “easy-to-use” format with terms and names that are recognizable to patients. The website should also define the terms of value and provide context so that the public best understands what these payments are for and in what capacity they were made. The Senators also encouraged CMS to work directly with stakeholders to best determine how to release the publicly available data on the website.

The Senators also encouraged CMS to increase its outreach to physicians and other covered recipients about the Sunshine Act. This is important because many physicians and other covered recipients are unaware of the Sunshine Act and how it affects them. A recent survey of 500 compliance officers and physicians in the March 1, 2012 issue of “Inside CMS” reported that 47% had not heard of the Sunshine Act.

Implementation Questions

In addition to their general comments, the Senators request that CMS answer the following questions by April 18, 2012:

  1. Can CMS commit to completing a final rule by this summer so that data collection can begin in 2012?
  2. Since CMS missed the initial required Congressional deadline, has CMS increased the resources or personnel assigned to the implementation of the Sunshine Act, including a dedicated information technology lead?
  3. Will CMS commit to issuing an RFP to begin designing the website?
  4. Does CMS have a dedicated working group assigned to implementation of the Sunshine Act, and what technical expertise and program areas are represented?
  5. Does CMS have a public education and outreach plan to raise awareness of the new law with the provider community and with health care consumers?
  6. Has CMS allocated dedicated implementation funds for the Physicians Payment Sunshine Act?

The public comment period for the proposed rules closed in February. CMS is now reviewing and considering the comments as it promulgates the final rules. We will continue to monitor the Sunshine Act and final rules. For more on payment disclosures and reporting requirements under the Sunshine Act, please contact us at contact@fidjlaw.com or (305) 350-5690.

Fourth Circuit Creates Circuit Split in Virgin Islands Tax Case

On April 16, 2012, the Fourth Circuit Court of Appeals based in Richmond, Virginia affirmed the decision of the Tax Court denying the motion to intervene filed by the Government of the U.S. Virgin Islands (“GVI”) in McHenry v. Commissioner of Internal Revenue, case nos. 11-1239, 11-1366.  As we previously blogged, the Tax Court held that the GVI could not intervene in a Tax Court case of a taxpayer who was a resident (or former resident) of the USVI and claimed tax credits under the USVI’s economic development program.  In the McHenry case, the Tax Court held that its prior opinion in Appleton v. Comm’r, 135 T.C. 461 (2010) available here, was controlling and that the GVI could not intervene to challenge the IRS’s position that the statute of limitations contained in IRC Section 6501 applied to those taxpayers residing in the USVI. 

Previously, the Third Circuit Court of Appeals and the Eight Circuit Court of Appeals had reversed the Tax Court’s ruling on the issue of whether the GVI could intervene. According to the Third and Eighth Circuits, the GVI should have been permitted to intervene. The Third Circuit’s opinion is available here, and the Eight Circuit opinion is available here.

In its ruling in McHenry, the Fourth Circuit gives the Third and Eighth Circuit decisions little more than lip service, relegating both to a single footnote.  According to the Fourth Circuit, because the GVI does not administer IRC sections 932 (which provides for a tax filing with the USVI) or 934 (which authorizes the USVI to provide tax credits under the economic development program), intervention would be inappropriate.  The Fourth Circuit distinguished the Third Circuit’s opinion in Appleton by noting that the Third Circuit “stated conclusorily” that Rule 24(b)(2)’s requirement that the Virgin Islands administer the statute at issue "appears to be satisfied, as Appleton’s tax assessments are based on an income calculation which takes into account credits created pursuant to 26 U.S.C. § 934, under the [Virgin Islands’ Economic Development Program]."  Slip op. at 13. 

The Fourth Circuit further held: “Moreover, we conclude that the Third Circuit was incorrect in assuming that the tax credits claimed by Appleton were ‘credits created pursuant to I.R.C. § 934.’ Instead, they were credits created by the Virgin Islands for taxes payable to the Virgin Islands pursuant to the Economic Development Program and the Virgin Islands’ tax laws. Those Virgin Islands credits were in no way implicated in Appleton’s statute of limitations defense under U.S. tax laws, nor are they in McHenry’s defense.”  Slip op. at 14.

A full copy of the Fourth Circuit opinion is available here.

The most obvious takeaway from the McHenry opinion is that now in USVI residency cases, the GVI will be allowed to intervene in the Third and the Eight Circuits, but not in the Fourth.  There are currently 3 cases pending in the 11th Circuit on this same issue, so it is yet to be determined how this issue will be resolved in the Court. We will monitor this issue closely and update our blog with more information as soon as it is available 

The attorneys at Fuerst Ittleman have extensive experience litigating against the IRS and the Tax Division of the U.S. Department of Justice, including USVI residency cases.  You can contact an attorney by calling us at 305.350.5690 or by emailing us at: contact@fidjlaw.com.

FDA’s Import Trade Auxiliary Communication System (“ITACS”) Now Available

With an increased number of imports entering the United States, new enforcement initiatives under such programs as the Food Safety Modernization Act, decreasing budgets and a limited number of employees, complaints about the U.S. Food and Drug Administration (“FDA”) from the trade community have been on the rise.  One particular sore spot for the Agency is communications.  In an era of text messages, tweeting, and instant posting of documents on the internet, the FDA was still sending and receiving its messages to and from importers and brokers through fax machines and paper copies.

All of that is starting to change now.

On March 14, 2012, the FDA’s Division of Import Operations and Policy (“DIOP”) unveiled its Import Trade Auxiliary Communication System (“ITACS”) to members of the National Customs Brokers and Forwarders Association of America (“NCBFAA”).  According to FDA, the new ITACS system is being implemented in order to improve communication between FDA and the import trade community.

ITACS is an internet portal with three critical functions for importers:

  1. The ability to check on the status of an entry/lines;
  2. The ability to submit entry documentation electronically; and
  3. The ability to submit goods availability information for targeted shipments electronically.

The importance of ITACS to the trade community cannot be understated.  Using ITACS, importers and their brokers will no longer need to send or fax paper-versions of entry and goods availability documents to the FDA for their entries.  This will reduce lost documents and help eliminate the uncertainty of importers as to whether their documents were ever received by the FDA.  The automatic creation of an audit trail in ITACS means that the question of when a documents was sent and received by the FDA will no longer be in question.

ITACS is also beneficial to the trade community in that importers and brokers will be able to receive more detailed entry statuses than what are currently transmitted to filers via the U.S. Customs and Border Protection (“CBP”) Automated Broker Interface (“ABI”) system.  This will reduce the need for phone calls to the FDA district offices to check on the status of entries.  (Also, no more waiting for the FDA to return your call either.)

Finally, ITACS should reduce the confusion between importers/brokers and FDA about the date and location of shipment availability information.

The trade community is not alone in welcoming ITACS on the scene.  The new system also benefits the FDA in that it:

  • Enables FDA to focus its resources on expediting review of entries and focusing on completion of designated shipment examinations;
  • Provides all FDA staff with easy access to entry documents via FDA’s Import system;
  • Reduces the numbers of faxes, phone calls, and paper for FDA; and
  • Eliminates the need to log information in FDA’s Import system;

In its presentation to the NBCFAA entitled “ITACS:  Overview and Walkthrough of Functionality,” the FDA highlighted several important points about ITACS for the trade community to remember.  First, the availability of goods for examination should not be submitted through ITACS until the shipment has been uploaded and is physically present for FDA staff to examine.  Also, importers and filers with a current web browser and a valid CBP entry number may use ITACS.  Finally, the FDA warned that there are currently some issues with file size capacity and that documents must be in PDF format to be uploaded.  Also, ITACS will only display statuses for “open” entries.  Therefore, if a final FDA admissibility decision has been made for all lines of an entry (e.g., a release), the entry will be considered “closed” in FDA’s import system and the importer or filer will need to check the ABI Messaging or Notices of FDA Action for the status. 

We applaud the FDA’s move to improve communications between the Agency and the trade community.  We are also looking forward to the future improvements to ITACS promised by the FDA, most notably, the direct, electronic transmission of Notices of Action to both the importer and its broker (versus the paper mailings and faxes that happen today) and the ability to perform online queries for FDA Firm Identifiers and Product Codes.

The link to ITACS can be found at https://itacs.fda.gov.

For more information about the ITACS system or for assistance with the importation or regulation of your food, drug, medical device or cosmetic product, please contact the Food & Drug Law practice group at Fuerst Ittleman at 305-350-5690 or contact@fidjlaw.com.

Foreign Corrupt Practices and International Trade

Robert J. Becerra, Esq. of Fuerst Ittleman PL was one of the two presenters in the Florida Bar, International Law Section Continuing Legal Education webinar entitled, "Managing Criminal Exposure under the FCPA and Other Laws Impacting International Trade", held March 15, 2012. The webinar reviewed and highlighted the criminal laws most likely to ensnare the companies and executives involved in international trade, such as exporters, importers of food, drugs, and other regulated products, and logistics companies. The webinar presentation will soon be available from the Florida Bar. Mr. Becerra and Fuerst Ittleman PL concentrate on representing clients involved in all facets of international trade and advising them on compliance with the law and defending against accusations of violations by the government.

FDA Announces it Will Not Ban BPA

The saga surrounding BPA continues. After much ado, the U.S. Food and Drug Administration (FDA) has announced that it will not ban bisphenol A (BPA). Today the FDA denied in its entirety a citizen petition requesting that the FDA prohibit BPA has a substance for use in human food.

What is BPA?

BPA is a controversial chemical used in production of polycarbonate polymers and epoxy-based enamels and coatings. It is “an industrial chemical that has been present in many hard plastic bottles and metal based food and beverage cans since the 1960s.” An overview on BPA provided by the FDA can be found here. While past research on BPA indicated that the chemical is safe, more recent research has raised concerns relating to potential effect of BPA on the endocrine system. For instance, the “Chapel Hill” report indicated that there could be some safety concerns related to use of BPA.

The uses of BPA as a food contact chemical were approved through food additive policies prior to the enactment of FDAs food additive regulations and notification processes for food contact substances in place today. As an approved food additive, BPA can be used by any food manufacturer without prior notification to the FDA. 

Background: NRDCS BPA Battle

In August of 2008, the FDA released a draft safety assessment stating that “an adequate margin of safety exists for BPA at current levels of exposure from food contact uses.” Disagreeing with the FDA, the Natural Resources Defense Council (NRDC) filed a citizen petition in October of 2008 requesting that the FDA take action and banning BPA as a food additive. In January 2010, the FDA seemed to change its course when it issued its “Update on Bisphenol A for Use in Food Contact Applications,” stating that it has “some concern about the potential effects of BPA on the brain, behavior, and prostate gland in fetuses, infants, and young children.”

Eventually, the FDA responded to NRDC with a form letter, stating that it lacked the resources to make a decision on the citizen petition. NRDC then petitioned the Court of Appeals for the District of Columbia Circuit to direct the FDA to render a decision. In June of 2011, the D.C. Circuit issued a ruling that it lacked exclusive jurisdiction and that the claim should be raised in district court. Persistently, NRDC filed a complaint in district court asking that the FDA be compelled to substantively respond to NRDCs petition by a specified date. Finally, in December of 2011, the FDA came to an agreement with NRDC and committed to issuing a decision on the NRDC petition by March 31, 2012.

Todays Decision

In rejecting NRDCs citizen petition in its entirety, the FDA stated that it “takes this concern seriously” but that NRDCs petition “was not sufficient to persuade FDA, at this time, to initiate rulemaking to prohibit the use of BPA in human food and food packaging.” The FDA indicated that scientific studies done on the effects of BPA in small animals cannot be applied to humans. The FDA also indicated that the sample sizes for the studies used in support of the petition may not be large enough to draw conclusive results. However, FDA has emphasized that it will continue to examine the safety of BPA and expects to issue a new update on the safety issues surrounding BPA within the next year. According to FDAs denial, the agency “is performing, monitoring, and reviewing new studies and data as they become available.”

NRDC has not announced whether or not it will take further action. Fuerst Ittleman will continue to monitor this matter and further agency announcements related to the status of BPA. For more information about the regulation of food additives and food contact substances, please contact us at contact@fidjlaw.com or (305) 350-5690.