In struggling to address the evolving COVID-19 pandemic, the United States and many other countries continue to face major shortages of Personal Protective Equipment (PPE), such as N95 masks, gowns and other vital materials including diagnostic and antibody tests and hand sanitizers. The continued shortages have launched a lucrative global market for these materials that can only be described as the "Wild West," with all-too-many examples of illegal price gouging, fraudulent and counterfeit products being seized by overwhelmed government officials, and instances of customers paying millions of dollars for large shipments of vital medical products that sadly have ended up being fake and too dangerous to use. This situation is also complicated by the fact that manufacturers and suppliers of the PPE are located in many jurisdictions including China, Vietnam, Malaysia, Hong Kong and Taiwan, which often have different business and legal cultures.
The U.S. government has tried to bring order to this chaos, among other things through the Federal Emergency Management Agency's (FEMA) Supply Chain Task Force, through tighter regulation by the U.S. Food and Drug Administration (FDA), and through enforcement actions, such as arrests and prosecutions by the U.S. Department of Justice (DOJ), as well as seizures of fraudulent goods by U.S. Customs and Border Protection (CBP) at Ports of Entry (POEs) before they are imported into the country.
In addition, the Financial Crimes Enforcement Network (FinCEN) – the U.S. Department of the Treasury unit that collects, analyzes and disseminates intelligence on financial crimes and terrorist financing activity – has worked to advise financial institutions by alerting them to the rising number of scams relating to PPE and other medical products.
FinCEN has inter alia, provided examples of suspicious transactions and conduct that should raise red flags indicating potential fraud, price gouging, or other crimes. FinCEN's advisories are based on its analysis of COVID-19-related information obtained through public reports, data provided by financial institutions under the Bank Secrecy Act (BSA), law enforcement partners and intelligence agencies. These data provide information on possible illicit activity related to the pandemic including (1) fraudulent cures, tests, vaccines and services; (2) nondelivery scams; and (3) price gouging and hoarding of medical items like face masks and sanitizers.
In one of these advisories, from May 18, 2020, FinCEN identified 22 potential red flags in all, with the indicators falling into each of the three areas noted above. As no single red flag is necessarily indicative of suspicious activity, financial institutions should consider additional contextual information before determining whether the transaction is indeed fraudulent. FinCEN encourages financial institutions to perform additional inquiries and investigations when appropriate.
Several federal agencies have detected fraudulent COVID-19-related treatments, tests, vaccines and associated services being offered to the public. Examples of fraudulent medical services include false or unsubstantiated claims related to purported treatments for COVID-19, claims related to products that purportedly disinfect homes or buildings, and the distribution of fraudulent or unauthorized at-home COVID-19 tests. Financial indicators of a scam may include:
The COVID-19 pandemic has disrupted global shipping supply chains and created immediate and substantial demand for medical-related goods, including PPE. This demand has created an opportunity for criminals to defraud consumers and companies through non-delivery of merchandise. In these scams, a customer pays a company for goods the customer will never receive. These fake companies advertise test kits, masks, drugs and other goods they never intend to deliver, and sometimes never possess at all. Victims can include unsuspecting companies, hospitals, governments and consumers, and these fraudulent transactions occur through mediums as varied as websites, robocalls or on the Dark Web. Some schemes involve shell companies to facilitate transactions.
Financial indicators of these scams may include:
According to FinCEN, a Virginia financial institution was recently able to successfully prevent a $317 million non-delivery scheme based on several of these red flags. In that transaction, a foreign government contacted a U.S.-based law firm for help procuring 50 million N95 masks for the foreign country's national police department. The U.S. firm reached out to a healthcare/telemedicine company (Company A), which in turn reached out to Company B that purportedly represented "a conglomerate of doctors" that had purchased millions of masks. Company B supplied Company A with contracts falsely claiming that Company B had 50 million masks, and requiring a payment of $317 million into an escrow account. To execute the transactions, the foreign government sent $317 million to the U.S. firm for further transfer to Company A's account held at a Virginia financial institution.
The Virginia financial institution became suspicious, however, that Company A's account had only been opened the previous day, and the account owner never mentioned to the financial institution that the owner was expecting a $317 million wire transaction. The Virginia financial institution contacted the U.S. Secret Service (USSS), which reviewed BSA data and interviewed the accountholder for Company A. The investigation revealed that Company A, a victim, had been hired as a "broker" for the $317 million non-delivery scam. USSS interviewed the CEO of Company B who admitted that he had never had possession of 50 million masks.
FinCEN and the DOJ also have received numerous reports of suspected hoarding and price gouging related to the COVID-19 pandemic. The DOJ established the Hoarding and Price Gouging Task Force on March 24, 2020, to address COVID-19-related market manipulation, hoarding and price gouging. According to the DOJ, hoarding and price gouging are defined as the act by any person or company of accumulating an unreasonable amount of any of these materials for their personal use, or accumulating any of these materials for purposes of selling them far above prevailing market prices. On March 23, 2020, President Donald Trump issued Executive Order 13910, pursuant to section 102 of the Defense Production Act, which prohibits hoarding of designated items.
Financial indicators of these scams may include:
Increased demand for PPE has created a ripe opportunity for bad actors to take advantage of the marketplace. Medical-related fraud, non-delivery of goods and price gouging are of particular concern. FinCEN and USSS have already identified a number of schemes targeting the unsuspecting consumer – often large financial institutions – and as demand stays high, increased suspicious activity is likely. Purchasers of medical products should stay aware of the potential scams, and can do so using some of the red flags identified above, many of which broadly apply.
Before contracting with a supplier, considering a logistics operation, or attempting to import or export goods to or from the United States, companies are advised to discuss the transaction with legal counsel. Holland & Knight attorneys have extensive experience in all of the areas discussed above and are available to assist in answering questions regarding a specific transaction or issue. For further information, please contact the authors of this alert.
DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact your responsible Holland & Knight lawyer or the authors of this alert for timely advice.
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