Nestle Announces Creation of Food Sciences Institute In Wake Of Federal Trade Commission Settlement

On September 27, 2010, Nestle, S.A., (“Nestle”), announced the creation of Nestle Heath Science, S.A., a new wholly owned subsidiary, and the Nestle Institute of Health Sciences in an effort to better understand the role of foods in disease prevention. Nestlés announcement comes in the wake of its subsidiary, Nestle HealthCare Nutrition, Inc. (“Nestle HealthCare”), recent settlement with the Federal Trade Commission, (“FTC”), regarding the substantiation of its health related claims for its product BOOST Kid Essentials (“BOOST”), a childrens drink that contains probiotics, beneficial bacteria that are found in food and known for aiding digestion and fighting harmful bacteria.

Prior to the settlement, the FTC alleged in its complaint against Nestle HealthCare that Nestle HealthCare made deceptive claims in its advertisements for BOOST. The FTC alleged that the ads falsely claimed that the product could prevent upper respiratory infections in children, protect against colds and flu by strengthening the immune system, and reduce absences from school due to illness. As part of the settlement agreement, the FTC prohibited Nestle from making health related claims in the future unless those claims are based on competent and reliable scientific evidence consisting of at least two well-controlled human clinical studies.

According to Nestlés press release, the new Nestle Institute of Health Sciences, designed by Nestle to bridge the gap between the food and pharmaceuticals industries, will conduct biomedical research in an effort to find more effective and cost efficient ways to prevent and treat diseases such as diabetes and obesity. Nestle hopes to use the information obtained though this research to design nutritional strategies and products that will improve health and longevity.

One of the major problems that the health food industry faces is the ability to scientifically prove that its products work, i.e. treat or cure what the product is designed to relieve. With the FTCs recent announcement in the Nestle settlement that health related claims must be supported by at least two well-controlled human clinical studies, food manufacturers will find it more difficult to substantiate health related claims in their products. By establishing a food sciences institute, Nestle has created a venue that will allow it to conduct the clinical studies now required to substantiate health related claims made in its products.

For more information on FTC regulations and substantiation requirements, please contact us at contact@fidjlaw.com.

Medicare To Implement New Billing Procedures, Proposes New Regulations To Combat Fraud

On September 27, 2010, President Obama signed into law the Small Business Lending Act which contains a new anti-fraud provision that will significantly change how the Center for Medicare and Medicaid Services (“CMS”) bills for services. Under the new provision, CMS will be required to end its 45 year policy of approving claims quickly without first verifying that the services were actually provided and that the claims submitted are not the product of fraud.

The new law requires CMS, which pays out $500 billion annually in Medicare and Medicaid claims, to adopt new billing software with “predictive modeling” by next year in hopes of reducing fraud. Predictive modeling software is currently used by the credit card industry to detect questionable bills and stop payments if fraud is suspected. Under CMSs current system, nicknamed “pay and chase” by government officials, over $60 billion dollars per year are lost to fraud. By implementing predictive modeling software, CMS will be alerted to suspicious claims, providers, and facilities before payment is rendered, thereby allowing CMS to stop payment on these claims and investigate whether fraudulent activity has taken place.

CMS will start the competitive bidding process by software manufacturers in January of 2011 and will begin phasing in the technology in the 10 states with the highest rates of Medicare fraud by July 2011. Additionally, CMS will require its Medicare contractors to use the new technology for claims processing for hospitalization and outpatient services, the bulk of Medicares costs. The new law provides that the Department of Health and Human Services track the actual savings to the Medicare program after implementation of the software for one year. At that time, should Congress find that the savings are significant, funding will be expanded to allow the program to be used in 10 additional states.

The new law comes at the same time as CMS unveiled new proposed regulations to crack down on fraud. The proposed regulations would make it easier for CMS to suspend payments to providers. Under the proposed rules, payments to providers can be suspended upon a showing of “credible allegations” of fraud that merit further investigation, including tips from consumers. Additionally, the proposed rules would require state Medicaid programs to stop using medical providers that have been kicked out of Medicare or another states Medicaid program.

The proposed rules also include a ranking system of all types of medical providers within the Medicare system by their risk for engaging in fraud. The providers with the highest risk would be required to undergo fingerprinting and criminal background checks before engaging in business. The rules also provide that all new home health agencies and home-health equipment suppliers that are not publicly traded will be subject to this increased screening.

For more information regarding Health Care Reform and its effect on Medicare and Medicaid regulations please contact us at contact@fidjlaw.com.

US Department Of The Treasury Continues Its Implementation Of Tougher Sanctions Against Iran

On September 28, 2010, the Office of Foreign Assets Control (“OFAC”) of the United States Department of the Treasury issued new regulations amending the Iranian Transactions Regulations, (“ITR”), of the Code of Federal Regulations. The new regulations come as OFAC continues its efforts at implementing the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”). Passed on July, 1, 2010, CISADA supplements the Iran Sanctions Act of 1996 by expanding sanctionable activities and providing for additional types of sanctions.

The new regulations revoke 31 C.F.R. §§ 560.534 and 560.535 from the ITR. As a result, OFAC will no longer authorize, by either general or specific license, the commercial importation or dealing in of certain foodstuffs and carpets of Iranian origin into the United States. Additionally, the new regulations implement the import and export prohibitions in section 103 of the CISADA. Section 103 economic sanctions include prohibitions on the importation of goods or services of Iranian origin directly or indirectly into the US and on US origin goods, services, or technology from the US or a US person to Iran. A copy of the OFAC Federal Register announcement can be at Iranian Transactions Regulations amendment.

While the new regulations prohibit the import and export of goods and services to and from Iran, numerous exceptions, such as the exportation of goods for humanitarian assistance and the exportation of technology necessary for personal internet communication, exist under both the CISADA and the ITR. Additionally, importers must be aware of the definition of “goods of Iranian origin” under the ITR. Under the ITR, goods “of Iranian origin” not only include goods grown, produced, manufactured, extracted, or processed in Iran but also goods which have entered into the stream of commerce in Iran. Therefore, foodstuffs and carpets of third-country origin which are transshipped through Iran become goods of Iranian origin under the ITR and thus prohibited from importation into the US.

For more information regarding OFAC and strategies on maintaining compliance with federal regulations, please contact Fuerst Ittleman at 305-350-5690 or contact@fidjlaw.com.

FinCEN Proposes Reporting Regulations For Cross-Border Electronic Transmittals Of Funds By Financial Institutions

On September 27, 2010, the Financial Crimes Enforcement Network (“FinCEN), of the U.S. Department of the Treasury, issued a notice of proposed rulemaking for publication in the Federal Register. The proposed rule would require money services businesses (“MSB”) and certain depository institutions to affirmatively report records of certain cross-border electronic transmittals of funds (“CBETF”) to FinCEN. Under the proposed rules, MSBs would be required to report all CBETF transactions of $1,000 or more.

Under the current regulatory scheme, the financial institutions that would be subject to the proposed rule must maintain and make available upon request to FinCEN records of CBETF information. However, the proposed rule goes further and affirmatively requires these institutions to report such transactions.

The proposed rules were issued pursuant to the requirements of the Intelligence Reform and Terrorist Prevention Act of 2004. This act gave the Secretary of the Treasury the power to require financial institutions to report CBETF if the Secretary determined that reporting is reasonably necessary to prevent money laundering and terrorist financing. If the proposed rule takes effect, U.S. depository institutions that are either the first to receive funds transferred electronically from outside the US or the last to transmit funds internationally would be required to report all such transmittals of funds of $1,000 or more.

FinCEN has also proposed a rule to require an annual filing by all depository institutions of a list of taxpayer identification numbers of accountholders who transmitted or received a CBETF. FinCEN believes that this proposed rule would allow for greater utilization of the CBETF data that would be gathered, and enhance law enforcement efforts to combat tax evasion by those seeking to hide assets offshore. A copy of the proposed rules can be read at FinCEN Proposes Rule On Reporting Requirements For Cross-Border Transactions.

For more information regarding FinCEN regulations please contact us at contact@fidjlaw.com.

CBP Withdraws Proposed “Last Sale” Rule

Preservation of First Sale Doctrine Seen as Victory for Importers

U.S. Customs and Border Protection (CBP) published a notice in the Federal Register today formally withdrawing its proposed rule to determine the value of imported merchandise for customs valuation purposes based on the last sale prior to importation of the merchandise. In a victory for importers who spent years fighting the rule, CBP will preserve the “first sale” doctrine for import valuation.

Merchandise is often bought and sold in a series of transactions between the foreign manufacturer and various foreign middlemen prior to the merchandises entry into the United States. Embraced by Customs over twenty years ago, the first sale rule allows U.S. importers to set the customs value of the merchandise upon the first sale between the manufacturer and a middleman. This allows U.S. importers to capture the manufacturers price for the goods, and avoid paying customs duties upon the additional mark-ups charged by foreign middlemen. The result for importers was big savings in duties and fees paid to the United States.

In January 2008, however, CBP proposed new rules which would base the customs value of imported merchandise on the price paid in the last sale prior to the merchandises entry into the United States. While CBP believed that this “last sale” rule would more correctly estimate the entered value of the goods, industry groups and leading American importers argued that the real result of the proposed rule would be higher prices for American consumers and the complete jettisoning of court and Customs rulings on valuation upon which importers had been able to rely.

Members of the Senate and House soon climbed aboard the bandwagon calling for the withdrawal of the proposed last sale rule. A “Sense of the Congress” provision was passed in May 2008 instructing CBP not to implement the proposed rule before January 1, 2011, and not without first consulting with Congress and trade advisory groups, and only then with the approval of the Secretary of the Treasury.

The outcry over the proposed rule was even greater when then-CBP Commissioner Ralph Basham acknowledged that the rule had been proposed without substantive consultations with Congress and the trade community.

While the proposed last sale rule has languished, and CBP has been publicly stating since August 2008 that it would not implement the proposed rule, current CBP Commissioner Alan Bersin only recently committed to formally withdrawing the rule. In a letter to the National Association of Manufacturers (NAM), Bersin also committed to clearing up the backlog of ruling requests, and to developing an internal process to highlight to management any substantive regulatory initiatives, major proposed rulings and modifications of existing rulings prior to their publication.

Todays withdrawal of the proposed last sale rule and the Bersin letter to the NAM are seen as signs that CBP is starting to address some trade regulatory issues that have been nagging importers for years. As Bersin describes, the Agency is widely expected to soon announce final rules on country of origin markings, and proposed rules increasing the values for de minimis and informal entry shipments; these values have not been updated in over 15 years.

POM Sues FTC over New Substantiation Standard for Food and Dietary Supplement Claims

POM Wonderful LLC (“POM”) filed a Complaint against the Federal Trade Commission (“FTC”) on September 13, 2010. POM alleges that the FTC has adopted a “new standard” for substantiation that it is applying against food and dietary supplement companies. The “new standard” is reflected in two recently published consent orders against Nestle USA and Iovate Health Sciences, Inc., in which the FTC prohibits future claims by the companies unless the claims are supported by two well-controlled human clinical studies. The “new standard,” if POM is correct, marks a drastic change in FTC policy regarding substantial of claims.

According to the Complaint, FTC specifically referred POM to the Nestle and Iovate Consent Orders and asserted that the requirements contained in those consent orders constituted the “new standard” that FTC was applying with legal force and effect. POM alleges that the FTC is no longer interpreting present standards or rules by adopting the “new standard” for substantiation, but instead, the FTC has engaged in formal rulemaking without adhering to the process of notice and comment as required by the Administrative Procedures Act.

Furthermore, POM also alleges that the FTC is requiring advertisers to obtain prior Food and Drug Administration (FDA) approval before making certain disease claims about food, beverages, and dietary supplements. Disease claims are health related claims in which a product represents that it treats, mitigates, or prevents disease. According to POM, the FTC is requiring prior FDA approval for disease claims regardless of whether or not the claims are true or supported by competent, reliable scientific evidence. In addition, the FTC is requiring advertisers to conduct two well-controlled clinical studies for non-disease claims. If POMs allegations accurately reflect current FTC policy, these requirements may constitute a violation of the advertisers First Amendment rights and go beyond the authority of the FTC.

For more information on FTC regulations and substantiation requirements, please contact us at contact@fidjlaw.com.

FDA and CMS Consider Parallel Review of Medical Products

The U.S. Food and Drug Administration (FDA) and Centers for Medicare and Medicaid Services (CMS) recently announced in a Federal Register Notice that they are considering establishing a parallel review process for medical products, including pharmaceuticals, biologics, and medical devices. The goal of the parallel review process is to reduce the time between FDA marketing approval or clearance decisions and CMS national coverage decisions (“NCDs”). Currently, FDA will first conduct a premarket review that assesses the safety and effectiveness of the medical products. CMS conducts a second review to determine whether the medical product will be covered by Medicare.

The agencies envision that the manufacturer of a specific medical product will request that the agencies undertake the parallel review process and the agencies will then both provide their agreement to participate in the parallel review process. The FDA would make its approval or clearance determination first because CMS would not normally provide coverage to a medical product that was not approved or cleared by the FDA. Each agency will continue to use its own regulatory and evidentiary standards for decision-making. The medical product sponsor would be expected to meet the legal requirements for both the FDA and CMS.

The agencies are seeking comments from the public on what products would be appropriate for parallel review, what procedures should be developed, how a parallel review process should be implemented, and any other issues related to operation of the process. In addition, the agencies are announcing the intent to begin a pilot program for parallel review of medical devices. All electronic or written comments must be submitted by December 16, 2010.

For more information on how FDA and CMS review medical products and how the parallel review process may be beneficial to your product, please contact us at contact@fidjlaw.com.

Oprah And Rachel Ray Assist The Federal Trade Commission In Taking Down Allegedly Deceptive Acai Marketers

The Federal Trade Commission (FTC) has obtained a court order against the Arizona­based marketers of Acai dietary supplements, Central Coast Nutraceuticals, Inc, also known as CCN. The order prohibits sales of CCNs products including the weight-loss product AcaiPure and a “colon cleanser” touted to prevent cancer, but which the FTC has said is essentially a “run-of-the-mill” laxative. Also named in the FTCs complaint were CCNs affiliated companies and personnel: iLife Health and Wellness, Simply Naturals, Fit for Life, , Health and Beauty Solutions, Graham D. Gibson, and Michael A. McKenzy.

The FTC alleged that a big part of the deception centered on bogus “free trial” offers and corrupt billing practices in which “numerous unauthorized charges” were made to customers credit-cards and debit cards. Consumers were offered free products to “try” but did not receive adequate disclosure form CCN that they would be automatically enrolled in a membership program, charged for additional products. and that CCN would continue to charge them under their memberships until such time as the consumer opted out. Such practices are in violation of the FTC Act and the Electronic Fund Transfer Act.

Other deceptive practices noted in the complaint included a plethora of unsupported health claims by CCN. AcaiPures weight-loss claims supposedly were backed by “double-blind, placebo-controlled weight loss studies” which turned out to be non­existent. Consumers were also told that “most consumers taking AcaiPure report weight loss anywhere from 10-25 pounds in the first month,” a claim that similarly had no support. Another CCN unsubstantiated claim was that Colopure could help prevent colon cancer.

Lastly, the Commission alleged that the companies engaged in false celebrity endorsements by using the names and likeness of Oprah Winfrey and Rachael Ray to promote the products. Both Winfrey and Ray provided statements to the FTC that they have no involvement with the products, did not use the products and do not endorse the product.

The FTC reported that it had received over 2,800 complaints about this business and believes that consumers were duped out of at least $100 million dollars since 2009. 

The temporary restraining order is just the first step in the FTCs law suit against CCN. It is still unknown if criminal charges will be levied as in addition to the civil penalties being sought. In addition, the FTC continues to seek a permanent injunction against CCN and its affiliated companies. 

For more information on FDA and FTC regulations and marketing guidelines, please contact us at contact@fidjlaw.com.

$30 Million Seized From Vatican Bank In Money Laundering Probe

Italian monetary authorities have seized $30 million from a Vatican bank account and placed the Vatican Banks director general, Paolo Cipriani, and its chairman, Ettore Gotti Tedeschi, under investigation for possible violations of Italys anti-money laundering laws. Italian prosecutors have announced that the money was seized as a precaution until the investigation can be completed.

The investigation comes as the Italian government is implementing anti-money laundering directives issued by the European Union. The new measures, designed to prevent money laundering and the financing of terrorism, require all foreign banks operating in Italy, including those of the sovereign Vatican City, to provide detailed information about the origins of money transfers.

Authorities began their investigation after the Bank of Italy notified the Italian government of two suspicious transfers on September 6, 2010, from a Vatican bank account at a Rome branch of Credito Artigiano S.p.A., an Italian bank. The suspicious transactions involved the transfer of $26 million to an account held by the Vatican at a Frankfurt, Germany branch of J.P. Morgan, and a $4 million transfer directed to an account held at the Banca del Fucino in Rome. Authorities are investigating whether the Vatican Bank violated anti-money laundering regulations for failing to reveal to financial authorities where the money involved in the transfers came from.

This new investigation is not the first investigation of the Vatican Bank, formally known as the Institute for Religious Works, for potential money laundering violations. Last year, Italian authorities launched a broad investigation into Italian bank accounts that received transfers from the Vatican Bank. The Vatican Bank was also implicated in the 1980s in a money laundering scandal that lead to the collapse of Italys then largest private bank, Banco Ambrosiano. In the 1980s Banco Ambrosiano collapsed after the disappearance of $1.3 billion in loans to Latin American companies. Though the Vatican Bank denied any wrongdoing, it agreed to pay $250 million to Banco Ambrosiano creditors after the collapse.

If you have questions pertaining anti-money laundering compliance or how to ensure that your business maintains regulatory compliance, contact Fuerst Ittleman PL at contact@fidjlaw.com.

Willful Blindness Jury Instruction Upheld In Tax Conviction

On September 9, 2010, the United States Court of Appeals for the 3rd Circuit held that the use of a “willful blindness” jury instruction satisfies the willfulness element of a criminal tax offense. In finding the jury instruction appropriate, the court concluded that, where warranted by the trial evidence, a willful blindness instruction “properly appl[ies] to a defendants knowledge of his legal duties.”

The 3rd Circuit upheld the conviction of Richard Stadtmauer, an account and executive vice president of Kushner Companies, for conspiracy to defraud the United States and for willfully aiding in the filing of materially false or fraudulent tax returns. The charges against Stadtmauer grew out of an investigation of Charles Kushner, chairman of Kushner Companies. Prior to Stadtmauers charging and conviction, Charles Kushner pled guilty to assisting in the filing of false returns. While Kushner was under investigation Stadtmauer was charged with conspiracy to take $6 million in improper deductions for limited partnerships owned by Kushner.

Mr. Stadtmauers appeal centered on the District Courts instructions to the jury regarding Stadtmauers knowledge of the falsity of his companys tax returns. For the government to establish that Stadtmauer willfully aided in preparing false returns, it was required to prove that Stadtmauer intentionally violated a known legal duty. In his instructions to the jury, U.S. District Court Judge Jose Linares told the jury it could convict if it found that Stadtmauer knew about applicable IRS requirements or if Stadtmauer “deliberately closed hiseyes to what hehad every reason to believe.”

Stadtmauer argued on appeal that the jury instruction did not satisfy the requirement that the government establish that the law imposed a duty on the defendant and that the defendant knew of this duty. Stadtmauer relied heavily on Cheek v. United States, 498 U.S. 192 (1991), a 1991 U.S. Supreme Court case, which Stadtmauer argued prevented the use of willful blindness to satisfy the willfulness element in tax fraud cases. The 3rd Circuit rejected this argument finding that Stadtmauers case was clearly distinguishable stating “Stadtmauers attempt to equate a person who deliberately avoids learning of a legal duty with a personwho is ignorant of that duty by virtue of a good-faith belief or misunderstanding is not persuasive.” The decision of the 3rd Circuit falls in line with decisions of the 1st, 5th, 7th, and 11th Circuits which have also held that Cheek does not prevent a willful blindness instruction in tax fraud cases.

The appeals court also rejected arguments by Stadtmauer that willful blindness improperly applied to intent and that the government was required to provide direct evidence of conscious avoidance to satisfy a willful blindness instruction. A copy of the 3rd Circuits opinion can be read here: U.S. v. Stadtmauer.

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