FinCEN Warns of Scams Relating to PPE and Other Medical Goods During COVID-19 Pandemic

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.

Medical-Related Frauds, Including Fraudulent Cures, Tests, Vaccines and Services

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:

• U.S. authorities have identified the company, merchant or business owners as selling fraudulent products
• indications that a merchant is selling at-home vaccines, treatments or cures
• the customer engages in transactions to or through personal accounts
• the product's branding images found in an online marketplace appear to be slightly different from the legitimate product's images, suggesting counterfeit
• the merchant is advertising the sale of highly sought-after goods related to the COVID-19 pandemic and response at either deeply discounted or highly inflated prices
• the merchant is requesting payments that are unusual for the type of transaction or unusual for the industry's pattern of behavior
• patterns of high chargebacks and return rates in their customers' accounts

Non-Delivery Fraud of Medical-Related Goods Scams

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:

• the merchant does not appear to have a lengthy corporate history (e.g., the business was established within the last few months), lacks physical presence or address, or lacks an Employer Identification Number
• searches in corporate databases reveal that the merchant's listing contains a vague or inappropriate company name, multiple unrelated names, a suspicious number of name variations, multiple "doing business as" (DBA) names or does not align with its business model
• merchants are reluctant to provide the customer or financial institution with invoices or other documentation supporting the stated purpose of trade-related transactions
• the merchant's business model is opaque, and the true nature of the company and its operations is difficult to ascertain
• the merchant cannot provide shipment-tracking numbers to the customer or proof of shipment to a financial institution so it may process related financial transactions
• the merchant claims several last-minute and suspicious delays in shipment or receipt of goods; for example, the merchant claims that the equipment was seized at port or by authorities, that customs has not released the shipment, or that the shipment is delayed on a vessel and cannot provide any additional information about the vessel to the customer or their financial institution
• the merchant cannot explain the source of the goods or how the merchant acquired bulk supplies of highly sought-after goods related to the COVID-19 pandemic
• domestic or foreign governments have identified the business or its owners as being associated with fraudulent or criminal activity
• a newly opened account receives a large wire transaction that the account holder failed to mention during the account opening process
• suppliers have tried to pass off forged certificates for independent experts' inspection of products at the originating factory and altered manufacturers' labels

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.

Price Gouging and Hoarding of Medical-Related Items

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:

• a customer begins to use a personal account for business purposes after January 2020, and is selling highly sought-after COVID-19 related medical goods online
• the customer begins using their money services or bank account differently
• the customer's accounts are sending or receiving electronic fund transfers to/from a newly established company that has no internet or physical presence
• the customer's account is used in transactions for COVID-19-related goods, such as masks and gloves, with a company that is not a medical supply distributor, is involved in other non-medical-related industries, or is not known to have repurposed its manufacturing to create medical-related goods
• the customer makes unusually large deposits that are inconsistent with the customer's profile or account history; upon further investigation, the customer states, or open-source research indicates, that the customer was selling COVID-19-related goods not usually sold by the customer

Conclusion

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.

Holland & Knight Can Help

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.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.