Category: Criminal Law

Year in Review: Criminal Enforcement by the DOJ Antitrust Division in 2023

Introduction

When it comes to antitrust criminal enforcement, 2023 will be remembered as the year when the US Department of Justice’s (DOJ) Antitrust Division redefined and tested the outer boundaries of its authority. Here is a look back at the key events that defined the DOJ’s year in criminal antitrust enforcement.

Losses in Labor Markets

The DOJ continued its focus on labor markets in 2023 by pursuing per se no-poach and wage-fixing prosecutions despite resounding resistance by fact finders. In these cases, the DOJ alleged that companies and executives restrained trade in labor markets in violation of Section 1 of the Sherman Act through agreements that restricted movement and suppressed the wages of workers.

Courts have allowed these per se no-poach and wage-fixing cases to survive the motion to dismiss stage of litigation, but the DOJ’s success has routinely ended there. In 2022, the DOJ tried its first criminal no-poach case in US v. DaVita, which was successfully defended by McDermott and resulted in a complete acquittal of both corporate and individual defendants. In 2023, the DOJ fared no better:

  • In US v. Manahe (D. Maine), the DOJ charged four business managers in an alleged conspiracy to fix the wages and restrict the hiring of personal support specialist workers for two months during the pandemic. The government presented evidence such as text messages discussing hourly wages and recordings of meetings between the defendants, while the defendants countered by showing that the discussed prices were not implemented, and a draft agreement went unsigned. The jury acquitted all four defendants following a two-week trial in March 2023.
  • As we previously reported, the DOJ suffered a blow in US v. Patel (D. Connecticut) in April 2023. During a four-week trial, the government alleged that defendants conspired to restrict the hiring and recruiting of skilled workers and engineers in the aerospace industry. The defense moved for a judgment of acquittal under Rule 29 of the Federal Rules of Criminal Procedure, an extreme lever that judges rarely pull to end a trial before it reaches the jury. Judge Victor A. Bolden granted the motion and acquitted all the defendants. He found that the engineers’ freedom to switch companies and the number of exceptions to the agreements could not support finding market allocation as a matter of law.
  • In November 2023, the DOJ stunningly moved to dismiss its own case alleging a conspiracy by outpatient medical care competitors not to solicit senior-level employees. The case was three years into litigation; in its motion, the DOJ simply stated that dismissal would conserve court time and resources. This was the DOJ’s last pending no-poach case against a corporation.

If the DOJ’s labor markets cases have a theme, it is this: If at first you don’t succeed, try, try again. Despite four straight losses and a voluntary dismissal, the DOJ remains undeterred in bringing additional criminal wage-fixing and no-poach suits. The Biden administration’s “whole of government” approach to enforcement means that shared resources and collaboration among agencies, including the DOJ and the National Labor Relations Board, will continue into 2024. Assistant Attorney General Jonathan Kanter left no doubt that the DOJ is doubling down on its executive authority despite a losing track record in court: “Let me confirm: We are just as committed as ever to, when appropriate, using our congressionally given authority to prosecute criminal violations of the Sherman Act in labor markets.” Addressing the Women’s White Collar Defense Association in December 2023, Deputy Assistant Attorney General Doha Mekki echoed, “We look forward to charging more no-poach and wage-fixing cases.”

Per Se Problems

The DOJ stumbled in a different per se setting in December 2023, when a three-judge panel on the US Court of Appeals for the Fourth Circuit affirmed fraud charges but reversed the per se bid-rigging conviction of a steel and aluminum manufacturing sales manager turned executive. In US v. Brewbaker, the appellate panel found that “caselaw and economics show that the indictment failed to state a per se antitrust offense as it purported to do.”

In its 2020 indictment, the DOJ alleged that Brent Brewbaker of Contech Engineered Solutions conspired with a North Carolina distributor and exclusive dealer, Pomona Pipe Products, to share total bid pricing information on North Carolina Department of Transportation (NCDOT) aluminum projects and use that information to purposefully submit losing bids. This allegedly appeased Pomona and maintained Contech’s status on NCDOT’s “emergency bid list.” Contech pled guilty, but Brewbaker continued to trial. A jury found him guilty of bid rigging and other fraud charges; he appealed.

The Fourth Circuit held that the DOJ’s indictment implicated Contech and Pomona as horizontal competitors in NCDOT aluminum projects and as vertical competitors through their manufacturer-dealer relationship, resulting in a “hybrid” restraint. The DOJ sought to isolate Contech’s role as a manufacturer and competing bidder for NCDOT aluminum projects, focusing solely on the horizontal nature of the restraint and subsequently arguing for per se treatment.

The panel did not accept the DOJ’s argument that the conspiracy itself involved only horizontal conduct and instead considered the parties’ competitive relationship, which involved both horizontal and vertical aspects. The panel found that “agreements that look otherwise identical in form produce different economic effects based on how the parties relate to one another,” and stated that the DOJ’s theory would “force . . . arbitrary and likely impossible line-drawing” to determine which “part” of the entity to consider. The court continued, “The Sherman Act doesn’t ignore reality; it treats the entire business entity as the single party it is. . . . Antitrust law does not turn on such artificial mental gymnastics.”

Under this premise, the court moved through an analysis of case law and economic rationale to determine appropriate scrutiny. Although there is no direct guidance on hybrid restraints in the bid rigging context, the panel contrasted the present case with Leegin Creative Leather Products, 551 U.S. 877 (2007), where the Supreme Court of the United States applied per se scrutiny to a price fixing case despite both horizontal and vertical elements. In Brewbaker, the court found instead that the restraint in the indictment should not have been subject to the per se standard based on precedent, nor would it invariably lead to anticompetitive effects upon economic analysis—all making per se scrutiny inappropriate. As a result, and in a blow to the DOJ, the court reversed Brewbaker’s Sherman Act conviction.

In Full (Strike) Force

The DOJ’s Procurement Collusion Strike Force (PCSF) succeeded in securing several guilty pleas and stiff penalties in 2023. The PCSF is tasked with training government personnel and enforcing antitrust and fraud laws related to government contract bidding, grants and program funding.

PCSF Director Daniel Glad spoke to the National Association of State Procurement Officials in November 2023, highlighting the state and agency partnerships that comprise the PCSF. He pushed for even greater collaboration with state officials in 2024 and coming years, noting the recent influx of funds from the Infrastructure Investment and Jobs Act, which authorized billions of dollars in transportation and infrastructure programs. Later that month, the PCSF held its first summit to discuss strategies, priorities and resources. As reported by the DOJ, attendees included 11 “law enforcement partners” from across the country and 22 US Attorneys’ Offices.

These partnerships have surely strengthened the PCSF, and it has an extensive track record of successful convictions and guilty pleas. Among them are the following:

  • In January 2023, military contractor Aaron Stephens pleaded guilty to rigging bids related to the maintenance and repair of military tactical vehicles, following his alleged co-conspirator Mark Leveritt’s guilty plea July 2022. In August 2023, Stephens received an 18-month prison sentence and a $50,000 criminal fine. Leveritt received a six-month sentence and a $300,000 fine.
  • Also in January 2023, a construction company owner received a 27-month sentence and was ordered to pay a $1.75 million fine for fraudulently securing government contracts meant for service-disabled veteran-owned small businesses.
  • A Metropolitan Transportation Authority (MTA) employee out of New York pleaded guilty to engaging in wire fraud related to MTA excess vehicle auctions. Assistant Attorney General Jonathan Kanter described the conduct as “stealing from the public” and promised that the DOJ would continue to “detect and punish” those who abuse the public trust. Two additional guilty pleas by fellow MTA employees followed.
  • An insulation contractor out of Connecticut was the seventh person sentenced in a bid rigging and contract fraud investigation, resulting in a 15-month prison sentence and a restitution fine of more than $1 million. The alleged scheme related to insulation contracting at both public and private institutions, including universities and hospitals.
  • In March 2023, a Georgia jury found three military contractors guilty of conspiring to defraud the United States and two counts of major fraud related to two years of conduct.
  • A construction company owner faced a 78-month prison sentence and an almost $1 million restitution fine for bid rigging and bribery involving the California Department of Transportation (Caltrans). Defendant Bill Miller previously pled guilty to recruiting others to submit sham bids and to paying almost $1 million in cash bribes to a Caltrans contract manager. The manager himself received a 49-month prison sentence and a similar restitution fine, and a co-conspirator who submitted false bids received 45 months in jail and a $797,940 restitution fine.
  • A Texas judge ordered corporate defendant J&J Korea to pay almost $9 million for wire fraud and conspiracy to restrain trade related to subcontract work for US military hospitals in South Korea. A grand jury indicted two corporate officers for the same conduct in 2022.
  • Three military contractors received their sentences in December 2023 following a jury trial related to their alleged procurement fraud scheme. The defendants’ sentences included prison, supervised release and fines ranging from $50,000 to $250,000.

In December 2023, the PCSF also secured a seven-count indictment using wiretap evidence to charge two forest firefighting services executives with bid rigging, allocating markets and fraud. Wiretap evidence is rarely used in cartel investigations and marks a meaningful step in PCSF’s investigative approach. PCSF likely has already begun obtaining wiretap evidence in other cases and, based on its success in 2023, will continue pursuing aggressive investigative and litigation strategies moving forward.

Partnerships and Collaboration

Taking the PCSF to the global stage, the DOJ announced a joint initiative with Mexico’s Federal Economic Competition Commission and the Canadian Competition Bureau to collaborate on “outreach to the public and business community about anti-competitive conduct, as well as on investigations, using intelligence sharing and existing international cooperation tools” in the run-up to the 2026 FIFA World Cup to be hosted across the three countries.

In addition to its international partnerships for the World Cup, the DOJ is tackling technology with global efforts. In November 2023, DOJ leaders met with G7 competition authorities in Tokyo to discuss competition in digital markets and enforcement priorities. This was one in a series of meetings among authorities that have taken place since 2019 with a goal of setting and issuing guidance on shared priorities for regulating competition in tech. Following the summit, the group published a “communique” grounded in concern around emerging technologies, including risks in the criminal realm. The leaders noted, “As firms increasingly rely on AI to set prices to consumers, there is risk that such tools could facilitate collusion or unfairly raise prices.”

This sentiment is consistent with statements made earlier in the year by DOJ leadership. For example, Principal Deputy Assistant Attorney General Doha Mekki highlighted the role of technology in information exchanges. She described the current “inflection point” of algorithms, data and cloud computing as creating new market realties. Assistant Attorney General Jonathan Kanter stated that artificial intelligence’s “boundless potential” comes with “risks [that] transcend borders.” The consistency of rhetoric and global dedication to tackling the risks of emerging technology signals a potentially busy 2024 in this space.

The DOJ also continued its practice of partnering with fellow domestic law enforcement agencies. For example, the DOJ secured three guilty pleas in August 2023 for bid rigging asphalt paving services contracts in Michigan from 2013 to 2021. The DOJ worked with the Offices of Inspector General for the US Department of Transportation and the US Postal Service, and highlighted the partnership in public statements on the pleas. Deputy Assistant Attorney General Manish Kumar said, “Along with our law enforcement partners, the division will continue to seek justice when corporations and their leaders deprive customers of fair and open competition.” Cross-agency collaboration is a hallmark of the DOJ’s criminal enforcement and there is no reason to believe this practice will change in 2024.

Anything but Generic Remedies

In August 2023, the DOJ announced that it had entered into two unprecedented deferred prosecution agreements (DPAs) to resolve price fixing charges in the generic drug industry against Teva Pharmaceuticals USA, Inc., and Glenmark Pharmaceuticals, Inc. Teva and Glenmark agreed to pay $250 million and $30 million, respectively, in criminal penalties and compliance monitoring, with Teva also obligated to donate $50 million worth of drugs to aid organizations. These agreements included divestitures of the companies’ product lines for the cholesterol drug pravastatin, alleged as central to the alleged price fixing conspiracy underlying the agreements. These arrangements are unusual for two reasons.

DPAs

First, DPAs are typically unfavored by the government and used as incentives for cooperation early in investigations. It is striking that the DOJ entered into these agreements in such an advanced stage of litigation, where five other corporations and three individuals had already admitted to the implicated conspiracy. DPAs are agreements between the government and defendants in which the defendants accept certain penalties in exchange for prosecutors stopping their pursuit of the underlying charges. Prosecutions are “deferred” indefinitely while defendants fulfill their end of the bargain. Although both DPAs and plea agreements involve admitting wrongdoing, DPAs allow defendants resolution without admission of legal guilt. In the event defendants fail to meet the terms of the agreement, the government resumes its prosecution and seeks convictions.

“Extraordinary” Remedial Measures

Second, both DPAs involved unheard of divestitures of product interests in the cholesterol drug pravastatin, with Teva’s DPA requiring an additional measure of $50 million in donated clotrimazole and tobramycin to humanitarian organizations. All three generic drugs were impacted by the charged conspiracy. This remedy is first of its kind—criminal antitrust enforcers historically have sought monetary and prison sentences only. However, DOJ criminal enforcers driving outside of their historic lane is not necessarily inconsistent or surprising. The current administration has repeatedly committed to “using the whole legislative toolbox” in litigation.

Deputy Assistant Attorney General Manish Kumar stated in October 2023 that these divestitures were appropriate in the “heavily regulated” context of generic pharmaceuticals, where a corporate conviction could have precluded Teva and Glenmark’s participation in federal drug programs to such an extent that the companies would have gone out of business. Of course, these are not the first defendants to face corporate convictions in heavily regulated industries, and they are not even the first to do so in this specific alleged conspiracy.

Whether this specific tool will build or break down competition, whether criminal enforcers are equipped to evaluate the impact of divestiture, and whether it is appropriate to test this novel approach in an industry with an alleged prolific conspiracy among major players and thus among potential buyers remains to be seen. For better or worse there will be more data points to answer these and other uncertainties: Kumar noted that the DOJ hopes to implement divestitures as criminal remedies “in other contexts” moving forward.

Investigation Nearing Its End

On November 16, 2023, in a surprising turn of events shortly after the DOJ announced the resolutions with Teva and Glenmark, the DOJ moved to dismiss a February 2020 indictment against Ara Aprahamian, a former senior executive of Taro Pharmaceutical Industries charged with fixing prices, rigging bids and allocating markets for generic drugs. The district court granted the motion to dismiss the indictment with prejudice. Prior to filing the motion, the DOJ had been preparing for a February 2024 criminal trial against Aprahamian. As a result of these recent actions, the DOJ has no remaining public proceedings in connection with its investigation of pricing in the generic drug industry. And, in December 2023, a district court overseeing the multidistrict civil litigation against generic drug manufacturers for the same alleged conduct terminated the DOJ’s intervenor status in the case. Thus, the DOJ’s nearly decade-long investigation of the generic drug industry appears to be ending.

Monaco on Mergers and Corporate Compliance 

In a speech at the Society of Corporate Compliance and Ethics’ Annual Compliance & Ethics Institute, Deputy Attorney General Lisa Monaco emphasized the importance of compliance programs and announced a safe harbor policy for voluntary self-disclosures of antitrust wrongdoing by companies engaged in mergers and acquisitions.

Compliance

Deputy Attorney General Monaco focused her remarks on the increased importance of, and scrutiny on, corporate compliance programs. She noted that under a new initiative, every resolution by the Criminal Division requires companies to add compliance-promoting criteria to compensation systems. She also shared that the Division is enacting “clawback credits” to incentivize tying executive compensation to compliance. Remaining focused on bottom lines, she warned: “Invest in compliance now or your company may pay the price—a significant price—later.” These sharp words are consistent with the DOJ’s increased rhetoric on and policy prioritization of compliance programs throughout 2023.

Mergers & Acquisitions Safe Harbor Policy

Deputy Attorney General Monaco also commented on the recently unveiled DOJ-wide safe harbor allowing companies to report misconduct by the companies they seek to acquire or merge with. The covered conduct must be discovered through the M&A process. Conduct that should have otherwise been disclosed or which could have been publicly known does not count. Conduct already known to the DOJ is not entitled to safe harbor protection either.

Monaco stated, “Going forward, acquiring companies that promptly and voluntarily disclose criminal misconduct within the Safe Harbor period [six months from date of closing], and that cooperate with the ensuing investigation, and engage in requisite, timely and appropriate remediation, restitution, and disgorgement [within one year of closing]—they will receive the presumption of a declination.” In line with remarks by enforcers earlier in the year, Monaco specifically highlighted cybersecurity, tech and national security as areas of heightened risk and thus heightened scrutiny. Corporations in these markets should take heed of the DOJ’s emphasis on corporate compliance in 2024.

Looking Ahead

In 2023, criminal antitrust authorities used novel approaches at every stage of enforcement—from charging decisions to partnerships, to litigation, to remedies— and they show no sign of slowing down in 2024. The emergence of new technologies and a policy promise to forego old guideposts takes the DOJ further from the familiar, and perhaps further from its expertise.

In a high-stakes election year and with an influx of federal funds in infrastructure and defense spaces, the DOJ will likely hit the accelerator sooner than it hits the breaks. Markets that impact maximum voters, including employment, tax-funded government contracts, national security and healthcare, are likely focuses. All considered, it is more important than ever for businesses and individuals to stay up to date on policy priorities, revamp and champion internal compliance programs, and seek agile counsel in the ever-changing landscape of criminal enforcement to avoid costly investigations.

© 2024 McDermott Will & Emery
For more on Antitrust Criminal Enforcement, visit the NLR Antitrust & Trade Regulation section.

Three Individuals Sentenced for $3.5 Million COVID-19 Relief Fraud Scheme

Three Individuals Sentenced for $3.5 Million COVID-19 Relief Fraud Scheme

On February 6, three individuals were sentenced for fraudulently obtaining and misusing Paycheck Protection Program (PPP) loans that the US Small Business Administration (SBA) guaranteed under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

According to court documents and evidence presented at trial, in 2020 and 2021, defendants Khadijah X. Chapman, Daniel C. Labrum, and Eric J.O’Neil submitted falsified documents to financial institutions for fictitious businesses to fraudulently obtain $3.5 million in PPP loans intended for small businesses struggling with the economic impact of COVID-19. Chapman was convicted in November 2023 of bank fraud. Labrum and O’Neil pleaded guilty in 2023 to bank fraud. Following their convictions, Chapman was sentenced to three years and 10 months in prison, Labrum was sentenced to two years in prison, and O’Neil was sentenced to two years and three months in prison.

Read the US Department of Justice’s (DOJ) press release here.

False Claims Act Complaint Filed Against Former President and Co-Owner of Mobile Cardiac PET Scan Provider

The DOJ filed a complaint in the US District Court for the Southern District of Texas under the False Claims Act (FCA) against Rick Nassenstein, former president, chief financial officer, and co-owner of Illinois-based Cardiac Imaging Inc. (CII), which provides mobile cardiac positron emission tomography (PET) scans.

The complaint alleges that Nassenstein caused CII to pay excessive, above-market fees to doctors who referred patients to CII for cardiac PET scans. The government alleges that the compensation arrangements violated the Stark Law, which prohibits health care providers from billing Medicare for services referred by a physician with whom the provider has a compensation arrangement unless the arrangement meets certain statutory and regulatory requirements. Claims knowingly submitted to Medicare in violation of the Stark Law also violate the federal FCA.

The complaint alleges that CII provided cardiac PET scans on a mobile basis and paid the referring physicians, usually cardiologists, to provide physician supervision as required by Medicare rules. From at least 2017 through June 2023, Nassenstein allegedly caused CII to enter into compensation arrangements with referring cardiologists that provided for payment to the cardiologists as if they were fully occupied supervising CII’s scans, even though they were actually providing care to other patients in their offices or patients who were not even on site. CII’s fees also allegedly compensated the cardiologists for additional services the physicians did not actually provide. The complaint alleges that CII paid over $40 million in unlawful fees to physicians and submitted over 75,000 false claims to Medicare for services provided pursuant to referrals that violated the Stark Law.

The lawsuit was originally a qui tam complaint filed by a former billing manager at CII, and the United States, through the DOJ, filed a complaint in partial intervention to participate in the lawsuit.

The case, captioned US ex rel. Pinto v. Nassenstein, No. 18-cv-2674 (S.D. Tex.), follows an $85.5 million settlement in October 2023 by CII and its current owner, Sam Kancherlapalli, for claims arising from this conduct.

Read the DOJ’s press release here.

San Diego Restaurant Owner Charged with Tax and COVID-19 Relief Fraud Schemes

On February 2, a federal grand jury in San Diego returned a superseding indictment charging a California restaurant owner with wire fraud, conspiracy to commit wire fraud, tax evasion, filing false tax returns, conspiracy to defraud the United States, conspiracy to commit money laundering, and failing to file tax returns.

According to the indictment, Leronce Suel, the majority owner of Rockstar Dough LLC and Chicken Feed LLC, conspired with a business partner to underreport over $1.7 million in gross receipts on Rockstar Dough LLC’s 2020 federal corporate tax return. From March 2020 to June 2022, Suel and the business partner then allegedly used this fraudulent return to qualify for COVID-19-related loans pursuant to the PPP and Restaurant Revitalization Funding program. In connection with those loans, Suel also allegedly certified falsely that he used the loan money for payroll purposes only. The indictment alleges that Suel and his business partner laundered the fraudulently obtained funds through cash withdrawals from their business bank accounts and stashed more than $2.4 million in cash in their home.

The indictment further charges that Suel failed to report millions of dollars received in cash and personal expenses paid for by his businesses as income, in addition to reporting false depreciable assets and business losses.

If convicted, Suel faces prison sentences up to 30 years for each count of wire fraud and conspiracy to commit wire fraud, 10 years for each count of conspiracy to commit money laundering, five years for tax evasion and conspiracy to defraud the United States, three years for each count of filing false tax returns, and one year for each count of failing to file tax returns.

Read the DOJ’s press release here.

© 2024 ArentFox Schiff LLP
For more on Regulated Industries, visit the NLR Biotech, Food, Drug section.

Corporate Transparency Act Requires Disclosure of Information Regarding Beneficial Owners to FinCEN

The new year brings the most expansive disclosure requirements for U.S. business entities since the Depression. Starting January 1, 2024, U.S. companies and foreign companies operating in the United States will be required to report their beneficial owners and principal officers to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) pursuant to the Corporate Transparency Act (CTA) adopted as part of the 2021 National Defense Authorization Act, unless subject to specific exemptions.

Who Is Required to Report?
The CTA’s filing requirements (31 CFR 1010.380(c)(1)) apply to both domestic reporting companies and foreign reporting companies.

  • Domestic reporting companies are corporations, limited liability companies and any other entity registered to do business in any state or tribal jurisdiction by the filing of a document with the secretary of state or similar official.
  • Foreign reporting companies are business entities formed under the law of a foreign country that are registered to do business in any state or tribal jurisdiction by the filing of a document with the secretary of state or similar official

The CTA provides 23 categories of exemption. The following types of entities are not required to file reports with FinCEN:

  • Large Operating Companies
    This exemption applies to entities that (1) have 20 people or more full time employees in the United States, (2) have gross revenue (or sales) in excess of $5 million on their prior year’s tax return and (3) have a physical office in the United States.
  • Securities Reporting Issuers
  • Governmental Authorities
  • Banks
  • Credit Unions
  • Depository Institution Holding Companies
  • Money Services Businesses
  • Brokers and Dealers in Securities
  • Securities Exchanges and Clearing Agencies
  • Other Exchange Act Registered Entities
  • Investment Companies and Investment Advisers
  • Venture Capital Fund Advisers
  • Insurance Companies
  • State-Licensed Insurance Producers
  • Commodity Exchange Act Registered Entities
  • Accounting Firms
  • Public Utilities
  • Financial Market Utilities
  • Pooled Investment Vehicles
  • Tax-Exempt Entities
  • Entities Assisting a Tax-Exempt Entity
  • Subsidiaries of Certain Exempt Entities
  • Inactive Entities

It is worth noting that the definition of reporting companies is not limited to corporations and limited liability companies. Limited partnerships, professional service entities and other entities may qualify as reporting companies and, if so, are required to comply with the CTA’s reporting requirements.

How Does a Company Comply?
FinCEN requires affected companies to file beneficial ownership information reports (BOI Reports) using an electronic filing system. See the BOI E-Filing System.

What Information Should Be Reported?
Reporting companies must identify beneficial owners in their BOI Reports.

Beneficial owners are defined as individuals who directly or indirectly (1) exercise substantial control over a reporting company or (2) own or control at least 25 percent of ownership interests of a reporting company. Ownership interests covered by the CTA may include profits interests, convertible instruments, options and contractual arrangements as well as equity securities. In addition, owners who hold their ownership interests jointly or through a trust, agent or other intermediary are also required to be identified – although minors are generally exempted from reporting obligations.

Senior officers (typically, the president, CEO, CFO, COO and officers who perform similar functions); individuals with the ability to appoint senior officers or a majority of the board of directors or a similar body; and anyone else who directs, determines or has substantial input to other important decisions of a reporting company also need to be identified in BOI Reports as individuals exercising substantial control over reporting companies.

Reporting companies created on or after January 1, 2024, also must identify “company applicants” in their BOI Reports. Company applicants are the individuals who filed the documents creating the reporting company and individuals primarily responsible for directing or controlling the filing of documents creating a reporting company.

BOI Reports must contain the following information regarding the reporting company:

  • Legal name
  • Any trade name or d/b/a name
  • Address of the company’s principal place of business in the United States
  • Jurisdiction of formation
  • Taxpayer Identification Number.

BOI Reports must contain the following information regarding each beneficial owner and company applicant:

  • Full legal name
  • Date of birth
  • Current address
  • Copy of a passport, driver’s license or other identification document.

Every person who files a BOI Report must certify the information contained is true, correct and complete.

Information contained in BOI Reports will not be available to the public. However, FinCEN is authorized to disclose such information to:

  • U.S. federal agencies engaged in national security, intelligence or law enforcement activity
  • With court approval, to certain other state or local law enforcement agencies
  • Non-U.S. law enforcement agencies at the request of a U.S. federal law enforcement agency, prosecutor or judge
  • With the consent of the reporting company, financial institutions and their regulators
  • Federal regulators in assessing financial institutions compliance with customer due diligence requirements
  • The U.S. Department of the Treasury for purposes including tax administration.

Is There a Fee?
No fee is required in connection with filing of BOI Reports.

When Do Companies Need to File?
U.S. and foreign reporting companies that were formed or registered to do business in the United States prior to January 1, 2024, must file their initial BOI Reports no later than January 1, 2025. U.S. and foreign reporting companies formed on or after January 1, 2024, must file their initial BOI Reports within 90 days of receipt of notice of formation.

Reporting companies are required to file updated reports with FinCEN within 30 days of occurrence of a change in any of the information contained in their BOI Reports.

What If There Are Changes or Inaccuracies in the Reported Information?
Inaccuracies in BOI Reports must be corrected within 30 days of the date a reporting company becomes aware of or had reason to know of such inaccuracy. FinCEN has indicated that there will be no penalties for filing inaccurate BOI Reports if such reports are corrected within 90 days of their filing.

What If a Company Fails to File?
The willful failure to report the information required by the CTA or filing fraudulent information under the CTA may result in civil or criminal penalties, including penalties of up to $500 per day as long as a violation continues, imprisonment for up to two years and a fine of up to $10,000. Senior officers of an entity that fails to file a required report may be held accountable for such failure.

If you have questions regarding the provisions of the CTA or its applicability to your company, you may go to the FinCEN website.

© 2024 Wilson Elser
For more on the Corporate Transparency Act, visit the NLR Corporate & Business Organizations section.

Recent FinCEN FAQs Provide Additional Guidance on Compliance

The US Financial Crimes Enforcement Network (FinCEN) released several new FAQs this month to provide further clarity on the Corporate Transparency Act’s (CTA) provisions.
Notably, FinCEN provided guidance on who is considered “primary responsible” for directing a filing, as well as what is necessary to qualify under the subsidiary exemption, among other matters.

The CTA’s requirements went into effect on January 1, 2024. As we’ve previously detailed, reporting companies formed prior to that date will be required to file their initial reports with FinCEN no later than January 1, 2025. A reporting company created during 2024 is required to file its initial report within 90 days of its creation or registration, and one created on or after January 1, 2025, will have 30 days to file its initial report. A previously registered company will need to update its registration within 30 days of a change in its beneficial ownership or other information reported to FinCEN. For detailed overviews of the CTA, please visit our earlier posts located here, here, and here.

Company Applicants: Who is “Primarily Responsible” for Directing a Filing?
The CTA requires that reporting companies formed on or after January 1, 2024, disclose their “company applicant.” An individual is a “company applicant” if (1) they directly file the company’s formation or registration documents with a secretary of state or similar office or (2) if more than one person is involved in the filing, they are primary responsible for directing or controlling the filing. A maximum of two individuals can be reported as company applicants.

The FAQs clarify that the person who signs the formation document, such as an incorporator, is not necessarily a company applicant. Instead, the rule focuses on the person responsible for making decisions about the filing, including how the filing is managed, what contents to include, and when and where filing will occur.

FinCEN provides three scenarios to illustrate the rule. In two of the scenarios, an attorney or a paralegal instructed by that attorney completes a company creation document using information provided by a client and sends the document to a corporate service provider to be filed with a secretary of state. In this scenario, the attorney will one of the company applicants, and the employee at the corporate service provider who directly filed the document with the secretary of state will be the other company applicant. In the third scenario, the attorney’s client initiated the company creation directly with the corporate service provider — in this case, the client will be a company applicant (as will the employee at the corporate service provider who directly filed the document).

Subsidiary Exemption: Is Partial Control of a Subsidiary’s Ownership Interests By an Exempt Entity Sufficient to Qualify for the Subsidiary Exemption?
The short answer is — no.

The CTA lists 23 categories of entities that are exempt from the beneficial ownership information (BOI) reporting requirements. A subsidiary of certain categories of exempt entities will also be exempt if the subsidiary is controlled or wholly owned, whether directly or indirectly, by one or more of such exempt entities.

The FAQs clarify what happens when the exempt entity partially controls the subsidiary. Partial control is insufficient for an entity to fall within the subsidiary exemption — a subsidiary’s ownership interests must be fully, 100% owned or controlled by the exempt entity to qualify for this exemption. Thus, control of ownership interests means that one or more exempt entities entirely control all of the ownership interests in the reporting company, in the same way that an exempt entity must wholly own all of a subsidiary’s ownership interests for the exemption to apply.

Selected Additional Matters Covered by the New FAQs
Reporting Company Ownership Subject to Dispute: If ownership of a reporting company is the subject of active litigation, all individuals who own or control (or claim to own or control) at least 25% of the company’s interests are considered beneficial owners, and BOI must be submitted for each individual (in addition to BOI for all individuals who exercise substantial control over the company). If, after the legal dispute is solved, the reporting company has different beneficial owners from those initially reported, an updated BOI report must be filed within 30 calendar days after the litigation is resolved.
Third-Party Couriers or Delivery Service Employees: Third-party courier or delivery service employees who solely deliver documents to a secretary of state are not company applicants, as long as the third-party courier, the delivery service employee, and the delivery service that employs them play no other roles in the creation or registration of the reporting company.
Automated Incorporation Service: An automated incorporation service’s employees are not company applicants if the service solely provides software, online tools, or generally applicable written guidance for the creation of a reporting company and its employees are not directly involved in filing creation documents.
No Photo on Identification Document for Religious Reasons: If a beneficial owner’s or company applicant’s identification document does not include a photograph for religious reasons, the reporting company may submit an image of that identification document when submitting its report, provided that the document is otherwise an acceptable type of identification. If the individual in question obtains a FinCEN identifier, then the burden of providing the identification document to FinCEN would fall on the individual and not on the company (which would only need to report the FinCEN identifier).
No Permanent Residential Address: When a reporting company must report an individual’s residential address, but no such permanent address is available, the reporting company should report the residential address that is current at the time of filing the report. If the address later changes, the reporting company must submit an updated report within 30 days from such change. The use of a FinCEN identifier by the individual will eliminate the company’s need to submit an updated report, although the individual would be required to update his or her address with FinCEN directly.

© 2024 ArentFox Schiff LLP

by: Evgeny Magidenko of ArentFox Schiff LLP

For more news on Corporate Transparency Act Compliance, visit the NLR Corporate & Business Organizations section.

A New Year for Whistleblowers? Emergency Action Needed to Make Current Whistleblower Laws Work

In 2021 the White House, in conjunction with every major executive agency, approved The United States Strategy on Countering Corruption. In this authoritative and non-partisan Anti-Corruption Strategy, the United States for the first time formally recognized the key role whistleblowers play in detecting fraud and corruption. Based on these findings it declared that it was the official policy of the United States to “stand in solidarity” with whistleblowers, both domestically and internationally. As part of the Anti-Corruption Strategy the United States recognized that whistleblower qui tam reward laws must play a major role in combating financial frauds, such as money laundering. The proven ability of whistleblowers to detect fraud among corporate and government elites led the United States government to formally identify them as key players in preventing fraud, strengthening democratic institutions, and combating corruption that threatens U.S. national security.

Despite these findings, leading federal agencies responsible for enforcing whistleblower rights have failed to implement the U.S. Anti-Corruption Strategy’s whistleblower-mandates. Many of their current rules and practices directly undercut and undermine the very whistleblower rights identified by the White House Strategy as playing an essential role in combating corruption.

The 118th Congress will end on January 3, 2025. Thus, there is one year remaining for Congress and the current-sitting executive officers to act on a number of pending whistleblower initiatives, all of which have strong bipartisan support, are based on the plain meaning of laws already passed by Congress, and which are individually or collectively essential for the implementation of the U.S. Anti-Corruption Strategy. Outside of political interference by those who stand to lose when whistleblowers are incentivized and protected, there is no legitimate reason why these reforms cannot be quickly approved. The actions listed below are needed for the Strategy to be implemented, but whose approval has been stalled or blocked by resistant executive agencies or a timid Congress:

  • AML Whistleblower Regulations. The Treasury Department must enact regulations fully implementing the money laundering and sanctions whistleblower provisions of the Anti-Money Laundering Act. This law has been in effect since January 1, 2021, but Treasury has failed to implement the required regulations. Congress did its job, but Treasury has dropped the ball on approving the regulations necessary to ensure that the law is enforced. President Biden must demand that his Secretary of Treasury fully implement the anti-corruption Strategy his White House has approved as a critical national security measure.
  • Justice Department Whistleblower Regulations. Since January 1, 2021 the U.S. Department of Justice (DOJ) has been required, as a matter of law, to accept anonymous and confidential whistleblower disclosures concerning violations of the Bank Secrecy Act, including illegal money laundering and the use of crypto currency exchanges to facilitate violations of law. In December 2022, this requirement was by law extended to whistleblowers, worldwide, who wish to report violations of sanctions covering Russia, Hamas, ISIS, and other covered entities. In contempt of its legal requirements the Justice Department has ignored this law, and has failed to adopt regulations permitting anonymous whistleblowing. Congress did its job, Justice has dropped the ball. President Biden must demand that his Attorney General fully implement the anti-corruption Strategy his White House has approved as a critical national security measure.
  • SEC Whistleblower Regulations. Although the Securities and Exchange Commission’s (SEC) Whistleblower Program has radically improved since its failure to respond to whistleblower disclosures regarding the fraudster Bernie Madoff, regulations approved over 12-years ago continue to violate the statutory rights granted whistleblowers under the Dodd-Frank Act and strip otherwise qualified whistleblowers of their rights. For example, although the law gives whistleblowers the right to provide “original information” to the SEC through a news media disclosure, the SEC has never enforced this right. This has resulted in numerous extremely important whistleblowers to be denied protection or compensation. In the context of foreign corruption, DOJ statistics inform that 20% of all Foreign Corrupt Practices Act (FCPA) cases (which are covered under Dodd-Frank) are based on news media disclosures. Based on these numbers, one in five whistleblowers who report foreign corruption are illegally denied compensation under current SEC rules. An audit by the Organization of Economic Cooperation and Development released data regarding how whistleblowers were being harmed by the SEC’s interpretation of the law, including the failure to protect whistleblowers who make initial reports to international regulatory or law enforcement agencies, even if these agencies work closely with the United States. The SEC can resolve these issues by issuing clarifying decisions and exemptions consistent with the plain meaning of the Dodd Frank law and Congress’ clear intent. President Biden must demand that his appointments to the SEC fully implement the anti-corruption Strategy his White House approved.
  • Stop Repeal by Delay. The Internal Revenue Service (IRS) and the SEC both fail to compensate whistleblowers in a timely manner. These delays, which the IRS admits average over 10-years, cause untold hardship to whistleblowers, many of whom have lost their jobs and careers, and their only hope for economic survival is the compensation promised under law. In response to these untenable and unjustifiable delays, Congress has introduced two laws to expedite paying legally required compensation to whistleblowers, the SEC Whistleblower Reform Act and S. 625, the IRS Whistleblower Reform Act. Both amendments have strong bipartisan support and should be/could be passed quickly. See https://www.grassley.senate.gov/news/news-releases/grassley-warren-reintroduce-bill-to-strengthen-sec-whistleblower-program and https://www.grassley.senate.gov/news/news-releases/grassley-wyden-wicker-cardin-introduce-bipartisan-bill-to-strengthen-irs-whistleblower-program.
  • Strengthen the False Claims Act. The False Claims Act (FCA) whistleblower qui tam provision has proven to be the most effective law ever passed protecting the government from greedy contractors, fraud in Medicare and Medicaid, and from criminal procurement practices. Over $70 billion has been recovered by the taxpayers directly from fraudsters, and countless billions has also been paid in criminal fines. Two bipartisan amendments to the FCA are languishing in Congress.  The first is designed to prevent federal contractors from colluding with government officials when trying to justify their frauds. The second permits the federal government to administratively sanction contractors in smaller cases, where prosecutors rarely file charges in court.  The Administrative False Claims Act, S. 659, has been unanimously passed by the Senate but is stalled in the House of Representatives. The False Claims Act Amendment targeting collusion has strong bipartisan support, but is awaiting votes in Congress.  See    https://www.grassley.senate.gov/news/news-releases/senators-introduce-bipartisan-legislation-to-close-loophole-in-fight-against-fraud    https://www.grassley.senate.gov/news/news-releases/bipartisan-fraud-fighting-bill-unanimously-passes-senate.
  • Pass the CFTC Fund Improvement Act. The whistleblower reward law covering violations of the Commodity Exchange Act has proven successful beyond the wildest dreams of Congress. Billions upon billions in sanctions has been recovered from fraudsters who have manipulated markets ripping off consumers across the globe. These unprecedented whistleblower-triggered prosecutions have created an unintended problem: there are inadequate funds available to compensate whistleblowers as required under law. It is unconscionable for Congress to pass a law mandating that whistleblowers obtain compensation when they risk their jobs, reputations, and even their lives to serve the public interest, but then refuse to allocate funding to pay the mandatory rewards. The CFTC Fund Improvement Act, S. 2500, which has strong bipartisan support, would fix this problem. It needs to be immediately passed. Congress must live up to its promises.  See  https://www.grassley.senate.gov/news/news-releases/grassley-nunn-and-hassan-lead-bipartisan-bicameral-effort-to-bolster-successful-whistleblower-program.
  • Demand that Federal Agencies Respect, Honor, and Compensate Whistleblowers. One of the most unacceptable and unjustifiable hardships facing whistleblowers is the continued resistance to protecting whistleblowers in numerous (most) federal agencies.  This is exemplified by the complete failure of agencies to use their discretionary powers to protect or compensate whistleblowers. The Department of Commerce/NOAA can reward whistleblowers who report illegal fishing or “IUU” fishing violations and crimes committed by large ocean fishing boats operated by countries like China. Yet they have repeatedly failed to implement their whistleblower laws. The same can be said of the Department of Interior/Fish and Wildlife Service which have ignored the Lacey and Endangered Species Acts’ strong whistleblower reward provisions, allowing billions in illegal international wildlife trafficking to fester. Likewise, the Coast Guard largely ignores the whistleblower provisions of the Act to Prevent Pollution from Ships, turning down numerous whistleblower tips and failing to conduct investigations. Worse still, is the Justice Department’s penchant for prosecuting whistleblowers – even those who report crimes voluntarily to the Department pursuant to whistleblower disclosure laws.  President Biden must take action and demand that all executive agencies use their discretionary authorities permitted under law to incentivize and protect whistleblowers consistent with the anti-corruption Strategy his administration has approved.

A first step in changing the anti-whistleblower culture that undermines the public interest within most federal agencies is for the President to enforce the National Whistleblower Appreciation Day resolution that has been unanimously passed by the U.S. Senate over the past ten years. The resolution urges every executive agency to acknowledge the contributions of whistleblowers and educate their workforce as to these contributions. See https://www.grassley.senate.gov/news/news-releases/ten-years-running-grassley-wyden-lead-whistleblower-appreciation-day-resolution (S. Res. 298).

The importance of President Biden’s requiring all federal agencies to institute to Senate resolution is clear, based on the text of the resolution asking that all agencies “inform[] employees, contractors working on behalf of the taxpayers of the United States, and members of the public about the legal right of a United States citizen to ‘blow the whistle’ to the appropriate authority by honest and good faith reporting of misconduct, fraud, misdemeanors, or other crimes; and acknowledging the contributions of whistleblowers to combating waste, fraud, abuse, and violations of laws and regulations of the United States.”

These seven reforms all have bipartisan support and/or can be immediately implemented through executive action. There is simply no justification for delaying the implementation of these minimum and absolutely necessary reforms.

But the buck does not stop at the top. Strong and vocal public support can push all of these bipartisan reforms across the finish line. The American people – across all demographics, stand behind whistleblowers. How do we know this? The highly respected Marist polling agency conducted a scientifically valid survey of “likely American voters.” Their findings speak for themselves:

  • 86% of Americans want stronger whistleblower protections
  • 44% of “likely voters” state that the position of candidates on this issue would impact their vote. 

Despite the divisions within American society the Marist Poll findings demonstrated that the American public is united in supporting whistleblowers:

  • 84% of people without a college education want stronger protection for whistleblowers
  • 89% of people with a college education want stronger protection for whistleblowers
  • 85% of people earning under $50,000 want stronger protection for whistleblowers
  • 89% of people earning over $50,000 want stronger protection for whistleblowers
  • 86% of people living in urban areas want stronger protection for whistleblowers
  • 83% of people living in rural areas want stronger protection for whistleblowers
  • 86% of women want stronger protection for whistleblowers
  • 87% of men want stronger protection for whistleblowers
  • 88 % of Independents want stronger protection for whistleblowers
  • 78 % of Republicans want stronger protection for whistleblowers
  • 94 % of Democrats want stronger protection for whistleblowers

The only thing holding back effective whistleblower laws in the United States is the lobbying power of special interests and powerful government officials’ hostility toward dissent. This must end. Whistleblowing has proven to be the most effective means to detect waste, fraud, abuse and threats to the public health and safety. The United States Strategy on Countering Corruption represents a roadmap for action. It’s time for the President, Congress and those running agencies such as the Department of Treasury and the SEC to get the job done.

Copyright Kohn, Kohn & Colapinto, LLP 2023. All Rights Reserved.

by: Stephen M. Kohn of Kohn, Kohn & Colapinto 

For more news on Current Whistleblower Laws, visit the NLR Criminal Law / Business Crimes section.

Beware of Corporate Transparency Act Scams and Fraud

The Corporate Transparency Act’s (CTA) Beneficial Ownership Information reporting requirements are set to take effect on January 1, and bad actors are already using the CTA’s requirements to solicit unauthorized access to Personally Identifiable Information. To that end, the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) recently issued a warning regarding such scams. FinCEN describes these efforts as follows:

“The fraudulent correspondence may be titled “Important Compliance Notice” and asks the recipient to click on a URL or to scan a QR code. Those e-mails or letters are fraudulent. FinCEN does not send unsolicited requests (emphasis added). Please do not respond to these fraudulent messages, or click on any links or scan any QR codes within them.”

© 2023 Varnum LLP
For more news on Corporate Transparency Act Scams and Fraud, visit the NLR Corporate & Business Organizations section.

Privacy Tip #382 – Beware of Fake Package Delivery Scams During Holiday Season

There are lots of package deliveries this time of year. When shopping online, companies are great about telling you when to expect the delivery of your purchase. Fraudsters know this and prey on unsuspecting victims especially during this time of year.

Scammers send smishing texts (smishing is just like phishing, but through a text), that embeds malicious code into a link in the text that can infect your phone or try to get victims to provide personal information or financial information.

It is such a problem, that the Federal Trade Commission (FTC) recently issued an Alert to provide tips to avoid these scams.

The tips include:

What to do

  • If you get a message about an unexpected package delivery that tells you to click on a link for some reason, don’t click.
  • If you think the message might be legitimate, contact the shipping company using a phone number or website you know is real. Don’t use the information in the message.
  • If you think it could be about something you recently ordered, go to the site where you bought the item and look up the shipping and delivery status there.
  • No matter the time of year, it always pays to protect your personal information. Check out these resources to help you weed out spam text messages, phishing emails, and unwanted calls.

These are helpful tips any time of year, but particularly right now.

Copyright © 2023 Robinson & Cole LLP. All rights reserved.
For more news on Holiday Package Delivery Scams, visit the NLR Antitrust & Trade Regulation section.

New FEHA Regulations Alter How, When Employers Can Consider Applicant’s Criminal Histories

The California Civil Rights Council (CRD) (formerly the DFEH) has issued new regulations that modify the Fair Employment and Housing Act (FEHA), the law that governs how and when California employers can consider a job applicant’s criminal history when making employment decisions. The new regulations took effect on October 1, 2023, and provide more coverage, prohibitions and requirements for potential employers to consider.

IN DEPTH

THE LAW

Under the FEHA, employers are prohibited from inquiring into a job applicant’s criminal history prior to extending a conditional offer of employment, including through job applications, background checks and internet searches.

The FEHA also requires that if an employer is considering taking an adverse action with respect to a job applicant or employee, the employer must first conduct an individualized assessment of the job applicant’s criminal history—including determining whether the applicant’s criminal history has a “direct and adverse” effect on their ability to perform the functions of the position.

While the thrust of the law remains the same, the new regulations expand the scope of who is covered by the FEHA, the kinds of inquiries the law prohibits, the kinds of evidence employers must accept and consider regarding an applicant’s justification for the past offense in question and the process for recission of a conditional offer of employment.

EXPANDED COVERAGE

First, the new FEHA regulations expand the definitions of “employer” and “applicant.” Previously, an “employer” was defined as “a labor contractor or client employer.” The updated regulations clarify that the definition of employer additionally encompasses any direct or joint employers, agents of the employer, staffing agencies, entities that evaluate the applicant’s criminal history on behalf of an employer, and entities that select or provide workers to an employer from a pool or availability list.

Similarly, the updated regulations clarify that an “applicant” may include, in addition to an individual who has been conditionally offered employment, existing employees who have applied to a different position with their current employer, those who have indicated a specific desire to be considered for a different position with their current employer, and even an existing employee who is subjected to a review and consideration of their criminal history because of a change in ownership, management, policy or practice.

Employers should note that job applicants are still considered “individuals who have been conditionally offered employment” even if they have commenced employment during the post-conditional offer review and criminal background check process. In other words, employers cannot transition an applicant to an employee before beginning the background check process to avoid the FEHA.

EXPANDED PROHIBITIONS

The new regulations make clear that employers are prohibited from including statements in job advertisements, postings, applications or other materials indicating that they will not consider applicants with criminal histories, including statements such as “no felons” or “must have clean record.”

In addition, employers are prohibited from conducting pre-hire internet searches on job applicants, and they cannot consider criminal history even if voluntarily provided by the job applicant during the application or interview process.

Moreover, employers are now barred, at any stage of the hiring process, from the following:

  • Refusing additional evidence voluntarily provided by an applicant contextualizing the offense in question (or another party at the applicant’s request);
  • Requiring an applicant to submit additional evidence, or a specific type of documentary evidence, regarding the offense in question; and
  • Requiring an applicant to disclose their status as a survivor of domestic abuse or comparable statuses, medical records, or the existence of a disability or diagnosis.

EXPANDED ADVERSE EMPLOYMENT ACTION REQUIREMENTS

Currently, employers are required to conduct an individualized assessment of an applicant’s criminal offense and its bearing on the individual’s candidacy before rescinding a conditional offer of employment if the decision is based in whole or in part on the applicant’s criminal history. However, the updated regulations explain that employers must additionally conduct a reassessment after the job applicant has had an opportunity to respond to the pre-adverse action notice and before making a final decision. The result is a four-step process: (1) the initial individualized assessment, (2) the pre-adverse action notice and applicant response, (3) reassessment and (4) the final decision. We discuss each step below.

1 – INITIAL INDIVIDUALIZED ASSESSMENT

The new regulations expand the scope of the employer’s individualized assessment. The regulations require the assessment to be reasoned and evidence-based, take place prior to sending the pre-adverse action letter and consider the following factors:

  • The nature and gravity of the offense or conduct;
  • The time that has passed since the offense or conduct;
  • The nature of the job held or sought; and
  • Evidence of rehabilitation or mitigating circumstances.

2 – THE PRE-ADVERSE ACTION NOTICE AND APPLICANT RESPONSE

If an employer wishes to rescind a conditional offer of employment after conducting an individualized assessment, the employer must notify the applicant in writing. The notice requirements largely remain the same: Employers must identify the conviction(s) they based their decision on, provide a copy of all the reports they utilized (including internet search results), inform the applicant that they have a right to respond before the decision is finalized and explain the kinds of evidence the applicant may provide evidence as part of their response. However, the new regulations do make a few notable changes to the notice requirement:

  • The regulations require the employer to provide the job applicant with notice of their right to respond to a pre-adverse action notice and with a response deadline that is at least five (5) business days from the date the applicant receives the notice.
  • If an applicant timely notifies the employer in writing that additional time is needed to respond, the employer must give the applicant at least five additional business days to respond to the notice before making a final decision. The regulations contain ambiguity regarding what is a “timely” notification.
  • If the pre-adverse action notice is sent to the applicant through email, the notice is deemed received two business days after it is sent, meaning that the five-day response deadline begins to run after the second day post-transmittal.

3 – REASSESSMENT

If the applicant provides evidence related to mitigating circumstances or their rehabilitative efforts since the conviction at issue, the employer must consider the information—a process the new regulations call “reassessment.” The employer must consider factors such as the applicant’s conduct during incarceration, employment history since the conviction or release from incarceration, community service and engagement, and other rehabilitative efforts.

4 – FINAL DECISION

There are no new requirements for employers to consider when making their final decision to rescind a conditional offer of employment.

EMPLOYER LIABILITY IMPOSED BY FEHA

Job applicants may allege violations of the FEHA by arguing that there is a less discriminatory policy or practice that serves the employer’s goals as effectively as its current background check policy or practice without significantly increasing the cost or burden on the employer. These allegations can be lodged through a complaint filed with the CRD or a civil lawsuit for discrimination. A variety of remedies are available for possible violations of the FEHA, such as reinstatement of back pay and benefits, compensatory damages for emotional distress and out-of-pocket losses, injunctive relief and punitive damages. Courts also regularly award attorneys’ fees if job applicants prevail.

PRACTICAL CONSIDERATIONS AND NEXT STEPS

Employers with background check programs can start implementing the following key action items in response to the updated FEHA regulations:

  • Review and update job postings and applications to ensure that they do not include statements suggesting that job applicants are barred from the process because of their criminal history, including “no convicted felons,” “criminal background check required” and language referring to “ex-offenders.”
  • Review background check policies as necessary to ensure compliance with the FEHA’s new requirements, including expanded time periods in communications with job applicants consistent with the four-step process above if considering an adverse action.
  • Ensure detailed and organized documentation of all discussions with job applicants who may be subject to an adverse action in preparation for future challenges to the employer’s hiring process under the new regulations.
  • Consider providing additional or updated trainings to human resources professionals who handle the application and new-hire process, especially to emphasize that internet searches (including social media) of job applicants are strictly prohibited prior to extending a conditional offer of employment. All inquiries should be saved until after a conditional offer of employment has been extended.
© 2023 McDermott Will & Emery
By Marjorie C. Soto Garcia of McDermott Will & Emery 
For more news on Employer Considerations of Criminal History, visit the NLR Labor & Employment section.

Investigation Spurs Launch of Puerto Rico and U.S. Virgin Islands (USVI) Environmental Crimes Task Force

The U.S. Department of Justice (DOJ) recently announced the launch of a new Puerto Rico and U.S. Virgin Islands (USVI) Environmental Crimes Task Force. The DOJ’s announcement, on May 11, 2023, coincided with its announcement of the grand jury indictments of two individuals in Puerto Rico who are accused of committing environmental crimes between 2020 and 2022.

As noted by the DOJ, its formation of the Puerto Rico and U.S. Virgin Islands (USVI) Environmental Crimes Task Force also comes one year after the Department’s formation of an Office of Environmental Justice within its Environment and Natural Resources Division. This suggests that the DOJ is engaging in a long-term strategy to combat environmental crime, with particular emphasis on combating environmental crime in Puerto Rico and the USVI.

For companies and individuals doing business in Puerto Rico and the USVI, this is cause for concern. Even compliance won’t necessarily prevent an investigation; and, in the event of an investigation, insufficient documentation of compliance can present risks regardless of the underlying facts at hand. As a result, companies and individuals doing business on the islands need to prioritize environmental compliance (and adequately documenting their compliance), and they need to have strategies in place to deal effectively with the DOJ’s Puerto Rico and U.S. Virgin Islands (USVI) Environmental Crimes Task Force if necessary.

Puerto Rico and the U.S. Virgin Islands. By announcing the formation of its new task force on the same date that it announced two grand jury indictments, it is also sending a clear message that it will not hesitate to pursue criminal charges when warranted.

The DOJ’s Puerto Rico and U.S. Virgin Islands (USVI) Environmental Crimes Task Force: An Overview

To be prepared to deal with the DOJ’s Puerto Rico and U.S. Virgin Islands (USVI) Environmental Crimes Task Force, companies and individuals doing business on the islands need to have a clear understanding of the task force’s composition and law enforcement priorities. Here is an overview of what we know so far:

Federal Agencies with Personnel on the DOJ’s Task Force

While the Puerto Rico and U.S. Virgin Islands (USVI) Environmental Crimes Task Force falls under the DOJ’s law enforcement umbrella, it includes personnel from several federal agencies. Each of these agencies is likely to have its own set of enforcement priorities—setting the stage for wide-ranging investigations in Puerto Rico and the USVI.

As identified by the DOJ, the federal agencies with personnel on the Puerto Rico and U.S. Virgin Islands (USVI) Environmental Crimes Task Force include:

  • Army Criminal Investigation Division (Army CID)
  • Army Corps of Engineers
  • Department of Agriculture Office of Inspector General (DOA OIG)
  • Department of Commerce Office of Inspector General (DOC OIG)
  • Department of Homeland Security Homeland Security Investigations (DHS HSI)
  • Department of Transportation Office of Inspector General (DOT OIG)
  • Environmental Protection Agency Criminal Investigation Division (EPA CID)
  • Environmental Protection Agency Office of Inspector General (EPA OIG)
  • Federal Bureau of Investigation (FBI)
  • Food and Drug Administration Office of Criminal Investigations (FDA OCI)
  • Housing and Urban Development Office of Inspector General (HUD OIG)
  • IRS Criminal Investigation (IRS CI)
  • National Oceanic and Atmospheric Administration Office of Law Enforcement (NOAA OLE)
  • U.S. Coast Guard – Sector San Juan (USCG San Juan)
  • U.S. Coast Guard Investigative Service (USCG IS)
  • U.S. Fish and Wildlife Service (FWS)

The DOJ’s press release announcing the formation of the task force also notes that its personnel will work closely with local authorities on both islands. This includes the Puerto Rico Department of Natural Resources, Puerto Rico Department of Justice, U.S. Virgin Islands Department of Planning and Natural Resources, and U.S. Virgin Islands Attorney General’s Office.

The Task Force’s Enforcement Priorities in Puerto Rico and the USVI

The DOJ’s press release also identifies several areas of enforcement that are priorities for the Puerto Rico and U.S. Virgin Islands (USVI) Environmental Crimes Task Force. As of the date of its launch, the task force’s priorities will include:

  • Air and water quality violations involving agriculture, construction, transportation, and other industries
  • Fraud, waste, and abuse affecting government programs (including, but not limited to, EPA programs)
  • Harm to wetlands, navigable waters, and wildlife (including harm caused by pesticide misuse)
  • Hazardous material spills and transportation violations
  • Marine environmental violations and harm to federal marine resources
  • Public corruption involving environmental compliance and risks
  • Violations involving medications, foods, cosmetics, and other biological products
  • Violations involving workplace and housing conditions affecting residents working in the islands’ protected environments

As you can see, not all of these violations are strictly related to environmental compliance. This reflects the task force’s composition as well as the DOJ’s general disposition to investigate and prosecute all crimes, regardless of the impetus for a particular inquiry. Environmental crime investigations in Puerto Rico and the USVI will present risks for conspiracy, money laundering, tax evasion, wire fraud, and other federal criminal charges as well—and targeted companies and individuals could potentially face these charges even if they are ultimately cleared of any alleged environmental law violations.

Oberheiden P.C. © 2023
For more Environmental Law news, click here to visit the National Law Review.

Changes to Conditions of SEC Rule 10b5-1 Obligations

New amendments to insider-trading regulations are about to go into effect. SEC Rule 10b5-1 has long provided an affirmative defense to insiders who trade under a written plan adopted in good faith and who lack material nonpublic information (MNPI).

Over the years, pundits have noticed that trades under Rule 10b5-1 plans have been unusually profitable, suggesting that some insiders might have misused these plans. As a result, in December 2022, the Securities and Exchange Commission announced amendments and new disclosure requirements to address perceived abuses. Below are the significant provisions that go into effect on February 27, 2023.

New Good-Faith Requirements

Companies have always had to act in good faith when they adopt a Rule 10b5-1 plan. The new amendments extend that obligation, requiring insiders to continue to act in good faith throughout the duration of the plan. See 17 C.F.R. § 10b5-1(c)(1)(ii)(A). This means that insiders not only need to act in good faith when creating a plan but also have an obligation to avoid opportunistic trades or timing disclosures that coincide with trades under the plan.

While this is a heightened requirement, it is not clear who will bear the burden of pleading good faith during any ensuing litigation. The regulation is framed as an affirmative defense, but at least one court had previously interpreted the old regulation as placing the burden on the plaintiff to plead facts specifying that a plan was not entered into in good faith or was part of a plan to evade the regulations. [1] It is not clear how courts will interpret the new regulation and whether they will require a pleading of scienter or bad faith for this new obligation.

Director and Officer Certifications

Directors and officers must now certify that (1) they are unaware of any material nonpublic information about the security or issuer and (2) they are adopting the plan in good faith and not as a part of a plan or scheme to evade the regulations.

Cooling-Off Periods

The amendments impose various “cooling-off periods” for trades under Rule 10b5-1 plans, which could vary based on the identity of the trader. These “cooling-off periods” start when a company adopts a new plan or modifies a plan to alter the sale or purchase price, the ranges, the amount of securities sold or purchased, or the time of the trades.

Directors or officers cannot trade under a plan until the later of (a) 90 days after the plan’s adoption or after certain modifications or (b) two business days after filing a Form 10–Q or Form 10–K [2] that discloses the financial results of a quarter in which the plan was adopted or modified (subject to no more than 120 days). Anyone else (non-officers or non-directors) faces a 30-day cooling-off period after any adoption or modification of a plan. [3]

Multiple or Overlapping Plans

A Rule 10b5-1 defense will not be available to anyone who enters multiple or overlapping plans at the same time. This prohibition includes three exceptions:

First, a series of separate contracts with different broker-dealers acting on behalf of a non-issuer may be treated as a single plan if the plans, taken together, meet the regulation’s other conditions.

Second, a non-issuer may enter into one subsequent plan for the purchase or sale of any security of the issuer on the open market. But trading cannot begin until after all trades under the earlier starting plan are completed or expired, pending the effective cooling-off period.

Third, eligible sell-to-cover transactions will not be considered outstanding or additional plans under this section. The SEC defines an eligible sell-to-cover transaction as a contract, instruction, or plan that “authorizes an agent to sell only such securities as are necessary to satisfy tax withholding obligations arising exclusively from the vesting of a compensatory award, such as restricted stock or stock appreciation rights, and the insider does not otherwise exercise control over the timing of such sales.”

Single-Trade Plans

The final condition imposed by the amendment is the addition of § 10b5-1(c)(1)(ii)(E), which limits the affirmative defense for non-issuers to one single-trade plan designed to affect the open-market purchase or sale of the total amount of securities as a single transaction during a twelve-month period. As with the prior condition, this regulation does exclude eligible sell-to-cover transactions.

Takeaways

Companies, directors, and officers who intend to use a Rule 10b5-1 plan to insulate themselves from accusations of insider trading need to revisit their plans. They need to ensure that the plan articulates a cooling-off period and that the plan includes the director-officer certification. Participants in the plan need to ensure they are conducting themselves in good faith, that they are not joining multiple competing plans during the same period, and that they are abiding by the new restrictions on single-trade plans. Rule 10b5-1 is a powerful tool to insulate insiders from liability, and it is imperative to align these plans with the new regulations.

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ENDNOTES

[1] Arkansas Pub. Emps. Ret. Sys. v. Bristol-Myers Squibb Co., 28 F.4th 343, 356 n.4 (2d Cir. 2022).

[2] Foreign issuers, Form 20-F or Form 6-K.

[3] The SEC did not impose cooling-off periods on issuers but has suggested that it is investigating whether such a period is appropriate.