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Mandated Compliance Programs as the New Normal? Williams-Sonoma Agrees to $987,000 CPSC Civil Penalty & Comprehensive Compliance Program
Expert Article by Christie Grymes Thompson. Christie will be speaking at ACI’s Consumer Products Regulation & Litigation Conference on June 26th to 27th,2013.
The tide continues to rise for Consumer Product Safety Commission (“CPSC”) civil penalties as the Commission announces a $987,000 penalty against Williams-Sonoma, Inc. and the company’s agreement to implement an extensive compliance program. On Monday, the CPSC announced that Williams-Sonoma has agreed to pay the civil penalty to resolve allegations that the company knowingly failed to report a defect in its Pottery Barn wooden hammocks. Williams-Sonoma also agreed to implement a comprehensive compliance program that arguably encompasses far more than the company’s alleged failure to report in a timely manner.
According to the settlement agreement, the wood in the hammock stands allegedly deteriorated over time, and Williams-Sonoma had received notice of a consumer injury resulting from the failure of the hammock as early as November 2004 and had received its eighth incident report by the end of October 2006. The company, however, did not report to the Commission until September 2008, when it knew of 45 incidents. In October 2008, Williams-Sonoma and the CPSC announced the recall of 30,000 hammock stands. Because the alleged failure to report occurred prior to September 2008, it was subject to the CPSC’s previous civil penalty cap of $1.825 million instead of the current cap of $15 million.
In addition to the civil penalty, Williams-Sonoma agreed: (1) to implement and maintain a comprehensive compliance program designed to ensure compliance with all safety statutes and regulations enforced by the Commission (not just the Consumer Product Safety Act, which was the subject of the penalty); and (2) to maintain and enforce a system of internal controls and procedures designed to ensure timely and accurate reporting to the CPSC. The comprehensive compliance program is the same as that imposed in the settlement agreement entered with Kolcraft Enterprises, Inc. earlier this year. In a statement issued in connection with the Williams-Sonoma settlement, Commissioner Nord expressed concern that, for a second time, the CPSC had insisted on a comprehensive compliance program absent evidence of widespread noncompliance and that “the compliance program language in [the] settlement is another step toward just such a de facto rule.” She also noted that using recalls to justify imposing mandates unrelated to the problem (in this case, timely reporting) discourages participation in the voluntary recall process.
Companies with products subject to the CPSC’s jurisdiction should note that mandated compliance programs appear to be the new normal for civil penalty agreements, regardless of a company’s history with the Commission as civil penalty demands continue to increase.
ACI has developed Consumer Products Regulation and Litigation as a safety net for companies struggling to balance regulatory compliance and litigation risks.
When: Wednesday, June 26 to Thursday, June 27, 2013
Where: Chicago-Mart Plaza (Riverview) Hotel, Chicago, IL
For more information, and to register: click here
Expert guest article from ADLawAccess.com, by Christie Grymes Thompson, posted on 02/06/13. Christie Grymes Thompson will be speaking ACI’s conference on Consumer Products.
The Consumer Product Safety Commission (“CPSC”) recently announced a settlement with Whalen Furniture Manufacturing, Inc. (d/b/a Bayside Furnishings), resolving allegations that the company failed to file a timely Section 15(b) Report and imposing a $725,000 civil penalty. The penalty demonstrates that the CPSC will be particularly aggressive when it goes to a company to seek information, even if the product meets certain safety standards.
Over a two-year period, Whalen sold approximately 7,700 children’s boat-shaped beds that contain a toy chest with a 20-pound lid in the “bow.” The CPSC alleges that, in November 2007, Whalen received notice that a toddler had died after the toy chest lid fell on his head, but did not file a full incident report with the CPSC until March 2008 and only at the staff’s request. Whalen denies the allegations and states that it believed the reported death did not represent a “legitimate incident” and that the beds passed toy chest safety tests completed by third-party testing agencies.
The $725,000 civil penalty continues the trend of the CPSC seeking higher civil penalties for untimely reports. All penalties imposed since October 2011 have been for over $400,000, and this penalty is the second largest since September 2011.
Expert Article by Office of Governor Edmund G. Brown Jr.
Governor Edmund G. Brown Jr. today proposed reforms to strengthen and restore the intent of Proposition 65, a three decade old law enacted to protect Californians from harmful chemicals, that has been abused by some unscrupulous lawyers driven by profit rather than public health.
The administration, through the California Environmental Protection Agency, will work closely with the Legislature and stakeholders to revamp Proposition 65 by ending frivolous “shake-down” lawsuits, improving how the public is warned about dangerous chemicals and strengthening the scientific basis for warning levels.
“Proposition 65 is a good law that’s helped many people, but it’s being abused by unscrupulous lawyers,” said Governor Brown. “This is an effort to improve the law so it can do what it was intended to do – protect Californians from harmful chemicals.”The package of reforms will build on legislative efforts already underway, including a proposal to limit frivolous lawsuits.“Proposition 65 serves a vital public interest. It provides the public with information about carcinogens and toxins that may be present in the products we use in our everyday lives. But for Prop 65 to be effective, this information must be clearly stated and we need to work with the Legislature to prevent groups from exploiting or misconstruing this information for their own personal gain,” said California EPA Secretary Matt Rodriquez.
Voters approved Proposition 65 in 1986. The measure requires the Governor to annually publish a list of chemicals known to the state to cause cancer or reproductive toxicity. If a business in California sells a product containing chemicals listed by the state in excess of safe levels, the business must provide a clear warning to the public. Similar provisions apply to California workplaces.
The administration, stakeholders and the Legislature will discuss reforms to:
• Cap or limit attorney’s fees in Proposition 65 cases.
• Require stronger demonstration by plaintiffs that they have information to support claims before litigation begins.
• Require greater disclosure of plaintiff’s information.
• Set limits on the amount of money in an enforcement case that can go into settlement funds in lieu of penalties.
• Provide the State with the ability to adjust the level at which Proposition 65 warnings are needed for chemicals that cause reproductive harm.
• Require more useful information to the public on what they are being exposed to and how they can protect themselves.
While Proposition 65 has motivated businesses to eliminate or reduce toxic chemicals in consumer products, it is also abused by some lawyers, who bring nuisance lawsuits to extract settlements from businesses with little or no benefit to the public or the environment.
Under provisions of Proposition 65, a private attorney can bring a complaint against a business if the business knowingly exposes consumers to state-noticed chemicals.
Since 2008, nearly 2,000 complaints have been filed by these “citizen enforcers.”
In one case, Consumer Defense Group Action brought 45 Proposition 65 notices of violation against banks based on second-hand smoke near bank entrances or ATMs. The group claimed that the banks had failed to post warnings, and alleged that the banks controlled the behavior of smokers in those areas. In responding that there was no basis for the claim and misrepresentations within the notices, the Attorney General warned that the group’s notices could “constitute unlawful business practices.”
Governor Brown’s proposed reform follows a strong record of pursuing regulatory changes to improve the state’s business climate. Since taking office in 2011, the Governor has approved legislation to improve the workers’ compensation system, the regulatory and fee structure for the timber industry, Americans with Disabilities Act (ADA) compliance requirements and the facility inspection process for the life sciences industry. In addition to these legislative actions, Brown has established the Governor’s Office of Business and Economic Development (GO-Biz) to help companies deal with regulatory “red tape.”
When: Wednesday, June 26 to Thursday, June 27, 2013
Where: Chicago-Mart Plaza (Riverview) Hotel, Chicago, IL
For more information, and to register: click here
Industry related article from Examiner.com, by Mary Schwager, posted on 05/07/13:
Williams-Sonoma fined for failure to report defects in Pottery Barn products
Williams-Sonoma: BUSTED! The retailer is dishing out nearly a million dollars to pay a civil penalty to the Feds for failing to report product safety defects it knew about. Companies are supposed to report any defects, product failures or people injured by defective merchandise to the US Consumer Product Safety Commission ASAP. Looks like the company didn’t follow that ASAP part.
The defective product is a hammock stand made by Pottery Barn, a company owned by Williams-Sonoma. Here’s a link to the original recall in case you have one in your backyard.
The CPSC put out a news release today saying:
Williams-Sonoma, Inc., of San Francisco, Calif., has agreed to pay a $987,500 civil penalty.
In addition to paying a monetary penalty, Williams-Sonoma has agreed to implement and maintain a compliance program designed to ensure compliance with the safety statutes and regulations enforced by the Commission. Williams-Sonoma has also agreed to maintain and enforce a system of internal controls and procedures designed to ensure that:
Information required to be disclosed by the firm to the Commission is recorded, processed, and reported, in accordance with applicable law;
All reporting made to the Commission is timely, truthful, complete, and accurate; and
Prompt disclosure is made to Williams-Sonoma’s management of any significant deficiencies or material weaknesses in the design or operation of such internal controls that are reasonably likely to adversely affect, in any material respect, the company’s ability to report to the Commission.
Williams-Sonoma further agreed to provide written documentation of such improvements, processes, and controls, upon request of CPSC staff; to cooperate fully and truthfully with CPSC staff; and to make available all information, materials, and personnel deemed necessary to staff to evaluate the company’s compliance with the terms of the agreement.
The settlement resolves CPSC staff’s charges that the firm knowingly failed to report to CPSC immediately, as required by federal law, a defect involving Pottery Barn wooden hammock stands. Williams-Sonoma imported the wooden hammock stands between March 2003 and July 2008, and distributed them exclusively through Pottery Barn and PBteen catalogs and websites, and Pottery Barn Outlet stores. The hammock stands were sold nationwide for approximately $300.
CPSC staff alleged that when used outdoors, the wood in the hammock stands can deteriorate over time and break. Because the deterioration was occurring inside the metal bracket and was hidden from view, there was sometimes no outward indication to consumers that the wood was rotting until a consumer sat in the hammock and the beams broke. This posed fall and laceration hazards to consumers.
Williams-Sonoma did not file its full report with CPSC until September 11, 2008. On October 1, 2008, Williams-Sonoma and CPSC announced the recall of 30,000 wooden hammock stands. By that time, Williams-Sonoma was aware of 45 incidents involving the hammocks, including 12 reports of injuries requiring medical attention for lacerations, neck and back pain, bruising, and one incident involving fractured ribs.
Federal law requires manufacturers, distributors, and retailers to report to CPSC immediately (within 24 hours) after obtaining information reasonably supporting the conclusion that a product contains a defect which could create a substantial product hazard, creates an unreasonable risk of serious injury or death, or fails to comply with any consumer product safety rule or any other rule, regulation, standard, or ban enforced by CPSC.
Happening for the first time in New Delhi, this highly-rated 3rd India Summit on Anti-Corruption will bring together leading anti-corruption industry experts and counsel in India for unparalleled networking and benchmarking opportunities.
Reducing Legal Risks and Strengthening Compliance Efforts in the Face of Unprecedented Government Scrutiny
When: Wednesday, March 20 to Friday, March 22, 2013
Where: ONE UN New York, New York, NY, USA
For more information, and to register: click here
Use this code to benefit from a special discount when registering: LNKPHC
Industry related articlefrom Lexology.com, by Cadwalader Wickersham & Thaft LLP, Adam S. Lurie, Brian T. McGovern, Bret A. Campbell, Martin L. Seidel and Jason Jurgens, posted on 02/21/13:
Federal court finds that FDA drug approval is not complete defense to False Claims Act allegation involving on-label promotion
On January 30, 2013, in United States ex rel. v. Bristol Myers Squibb Company & Sanofi-Aventis U.S., LLC et al., Civ. No. 11-00246 (S.D. Ill.) (“BMS & Sanofi-Aventis”), the Court denied a motion to dismiss the relator’s second amended False Claims Act (“FCA”), 31 U.S.C. § 3729 et seq. complaint alleging the defendants made false efficacy claims regarding Plavix, even though the United States Food and Drug Administration (“FDA”) approved Plavix for the promoted uses. This decision is significant for several reasons, including because (a) it will likely embolden the continued emergence of new FCA relator and government enforcement theories concerning the marketing of drugs; (b) it does not expressly distinguish another recent court decision suggesting that FDA approval for a promoted use will preclude FCA liability for promotional activities consistent with that approved use; and (c) it will require life-science companies to remain vigilant as they monitor the promotion of their products, even for approved uses.
The BMS & Sanofi-Aventis Decision
In BMS & Sanofi-Aventis, relator’s second amended complaint alleged, among other things, that the defendants:
Promoted “Plavix as a superior drug to aspirin for certain indicated usages, and charg[ed] approximately one hundred times more for Plavix than could be charged for aspirin, when in fact Plavix was no more effective than aspirin for certain indicated usages.”1
“Targeted such efforts at physicians and prescribers whose patients relied upon public assistance programs such as Medicaid [and] Medicare . . . [and caused them to] submit many prescriptions for Plavix that resulted in grossly inflated costs” to the government “when compared to aspirin.”2
“[M]anipulated clinical trial data to support fraudulent claims regarding Plavix’s efficacy relative to cheaper alternatives, such as aspirin[,] mischaracterized clinical studies which contradicted the sales campaign. . . . [and] targeted doctors whose patients rely on [government programs] for health care treatment so as to wrongfully inflate sales and profits . . . .”3
Defendants moved to dismiss the complaint, arguing that relator failed to state an FCA claim because, among other reasons, relator did not allege any false certification of compliance with a statute or regulation, and because relator’s allegations related only to Plavix prescriptions for uses that the FDA had approved. Defendants asserted that:
Relator asks this Court essentially to overrule the FDA’s approval of Plavix for treatment of stroke patients and to substitute its judgment for the independent medical judgment of physicians who prescribed Plavix. Relator’s allegations are unprecedented. Defendants are aware of no case that has held a drug manufacturer liable for fraud under the FCA for on-label promotion without allegations of illegal kickbacks.4
The court, however, rejected this argument. The court first explained that pursuant to 42 U.S.C. § 1395y, a prescription must be “reasonable and necessary” as a prerequisite to Medicare reimbursement. In light of this requirement, the Court held that relator sufficiently alleged an FCA claim because – if accepted as true – defendants’ actions “caused physicians and pharmacists to submit claims for reimbursement of prescribed treatment that was not ‘reasonable and necessary’ and thus false.” 5
The court further concluded that “the fact a drug is FDA-approved does not mean it is ‘reasonable and necessary’ in every instance it is prescribed” and held that plaintiff sufficiently alleged that defendants caused “physicians to certify that Plavix was reasonable and necessary when it was not . . . .”6 Here, the court noted that the relator alleged that “defendants instructed their sales force to present various data and studies in a manner designed to confuse physicians and make them believe that Plavix was more effective than cheaper alternatives.”7
The Significance of the BMS & Sanofi-Aventis Decision
While the court recognized that the defendants’ arguments may be more effective at the summary judgment stage, the BMS & Sanofi-Aventis decision is nevertheless significant.
Recently, FCA and government enforcement actions have focused on the “off-label” promotion of drugs – that is, the marketing and promotion of drugs for uses that the FDA did not approve. In contrast, the BMS & Sanofi-Aventis matter concerns “on-label” FDA approved uses, a developing front in government and relator attacks on life science promotional practices. In other words, this action seeks punishment for causing purportedly unnecessary or excessive use of FDA approved purposes. Thus, the government and relators may look to this decision when developing FCA onlabel theories where there is no false certification of compliance with a statute or regulation, no allegation of a kickback, or based upon claimed violations of FDA requirements – which the defendants in BMS & Sanofi-Aventis argued courts had previously, and soundly, rejected.8
In addition, BMS & Sanofi-Aventis did not expressly distinguish United States ex rel. v. Pfizer, Civ. No. 04-0704 (E.D.N.Y. Nov. 15, 2012) where, according to the defendants, the court held FDA approval of an “on-label” use precluded FCA liability. There the court rejected the relator’s claim that Pfizer violated the FCA because it marketed Lipitor to patients who did not warrant drug intervention according to the National Cholesterol Education Program Guidelines, which were referenced in the drug’s label. The court dismissed the relator’s claims, however, because Pfizer was “marketing the drug, after all, for an FDA sanctioned purpose – to lower cholesterol.” Then the court stated that because Pfizer did not engage in “off-label” marketing it had “not violated the FCA.”9
Notwithstanding BMS & Sanofi-Aventis, life-science companies facing government or relator claims concerning an on-label, FDA-approved use, should continue to look to the Pfizer decision and other analogous decisions where regulatory approval helped defeat liability.
As many life-science companies know all too well, however, defending against an FCA claim or related enforcement action can be costly and time-consuming. Thus, it is important for those entities to continue to monitor carefully the promotion of their products, including for FDA approved on-label uses, and to tailor their compliance programs accordingly.
Not only does the conference attract a “who’s who” in the products liability space, but the speaking faculty is comprised of in-house counsel, outside counsel, prominent government enforcers, and renowned members of the state and federal bench, providing advice for defeating claims and litigating more efficiently
When: Monday, December 9 to Wednesday, December 11, 2013
Where: Marriott Marquis, New York City
For more information, and to register: click here
ACI’s 17th Annual Drug & Medical Device Litigation conference (December 3-5, 2012)
ACI’s 17th Annual Drug & Medical Device Litigation conference (December 3-5, 2012) was a resounding success, bringing together more than 400 litigators from across the country. We appreciate the support of all of our sponsors and attendees, and look forward to welcoming everyone back in 2013.
Preparations are already underway for the 2013 iteration of Drug & Med, taking place December 9–11, 2013 at the Marriott Marquis in New York City. This conference is the leading forum to network with their peers, and craft strategies to surmount new litigation challenges. Participants at the 2012 iteration of the conference included:Allergan, Bayer, Biomet, Boehringer Ingelheim, Boston Scientific, DePuy Synthes, Eli Lilly, Johnson & Johnson, Medtronic, Merck, Novo Nordisk, Purdue Pharma, Pfizer, Sandoz, Teva, and many more!
Hear for yourself from those who were in attendance:
Expert Article by Amy Ross Lauck
According to the Treasury Inspector General for Tax Administration (TITGA), the number of tax-related ID theft incidents has grown significantly since 2008, and the problem appears to be getting worse. The IRS reported that the number of tax-related ID theft incidents in the calendar year 2011 alone was nearly three times the number of incidents reported in 2009 and 2010. 
The IRS indicated it was able to self-identify and prevent issuance of approximately $6.5 billion in fraudulent tax refunds during the 2011 calendar year. Despite these efforts, an analysis conducted by TITGA found that the number of fraudulent tax returns that were actually filed and processed by the IRS during the 2011 calendar year was significantly larger than what the IRS was able to detect and prevent.
According to TITGA, a significant majority of taxpayers (approximately 72 percent of taxpayers in 2011) are requesting to have their tax refunds direct deposited to their checking or savings account, or to a prepaid card. Unfortunately, direct deposit also has become the preferred method used by fraudsters to obtain fraudulent tax refunds. This type of disbursement method allows fraudsters to simply spend down the funds or withdraw funds from an ATM without having to provide identification, as would normally be required when cashing a paper refund check. ID theft is typically a prerequisite to tax refund fraud because federal income tax returns are tracked using individual taxpayer names and taxpayer identification numbers (TINs). Fraudsters have used various methods to obtain taxpayer information, including establishing fraudulent tax preparation businesses, phishing schemes and collusion with tax preparers or IRS employees.
Financial institutions and service providers, including prepaid access providers, play a significant role in helping the Treasury Department and law enforcement identify and prevent tax refund fraud because tax refund fraud, particularly via direct deposit, is commonly carried out by depositing refund proceeds to one or more accounts established through a financial services provider or multiple financial services providers. Although the prepaid industry has been diligently assisting the Treasury Department and law enforcement in mitigating tax refund fraud, the continued perception by certain media outlets and members of Congress that the industry is perhaps not doing enough or is potentially even enabling the fraud is disappointing to say the least. The prepaid industry, the Treasury Department and law enforcement share a common goal in wanting to identify and prevent tax refund fraud. Steps must be taken by all parties involved to assist in this effort. (See sidebars at xxx.)
The IRS has indicated it will employ a number of initiatives for the 2013 tax filing season to help detect tax-related ID theft before fraudulent tax refunds are processed. These initiatives include:
• Designing new ID theft screening filters, including filters to identify changes in taxpayer circumstances from year to year.
• Expanding its efforts to assist victims of ID theft by assigning victims identity protection personal identification numbers (PINs) and placing ID theft indicators on victims’ accounts for additional screening.
• Expanding its efforts to prevent payment of fraudulent tax refunds claimed using deceased individuals’ names and TINs.
• Analyzing data from prior ID theft cases to identify commonalities and trends that could be used to detect and prevent future tax refund fraud.
• Attempting to use (1) current income and withholding information for individuals who receive Social Security benefits and (2) prior third-party income and withholding information to validate current-year income documents submitted in connection with questionable tax returns.
• Establishing a specific code that financial institutions may use to reject questionable direct deposits specifically for name mismatches or questionable tax refunds.
• Developing new filters to identify multiple deposits to the same account and instances where it appears tax return preparers and IRS employees may be improperly using the direct deposit program for unintended purposes.
• Developing messaging to remind taxpayers and tax return preparers that taxpayers should not be direct depositing any portion of their refund to an account they do not own.
TITGA has identified a number of other recommendations to assist the IRS in combating tax refund fraud. These recommendations include:
• Employing a real-time tax system to allow the IRS to verify current third-party income and withholding information to identify potentially fraudulent returns with false income documents. This recommendation would necessitate legislation to provide the IRS the ability to access and use current income information available through the National Directory of New Hires (“NDNH”) database.
• Limiting the number of tax refunds that can be deposited to the same tax account and coordinating with other Federal agencies and financial institutions to develop a process to ensure that tax refunds issued via direct deposit to either a bank account or prepaid account are made only to an account held in the taxpayer’s name.
• Working with the Department of Treasury Financial Crimes Enforcement Network (“FinCEN”) to develop procedures that can be implemented to ensure authentication of individuals’ identities and prevent the direct deposit of tax refunds to debit cards issued or administered by financial institutions that do not take reasonable steps to authenticate individuals’ identities.
• Adopting common industry practices for authenticating taxpayers’ identities, not only in the processing of tax returns but also when taxpayers call or write to the IRS requesting assistance with their refund (e.g., asking out of wallet questions or other ID verification information).
• When the IRS processes a tax return with an address different from the one it has on file, notifying the taxpayer that his or her account has been changed with the new address and suspending correspondence at the new address until the taxpayer has validated the address change.
The IRS is evaluating the feasibility of implementing these recommendations, but has previously indicated that budget cuts and staffing reductions have impaired its ability to combat all the potentially fraudulent tax refunds it identifies. Nevertheless, the initiatives the IRS has recently employed will, hopefully, help curb the incidence of tax refund fraud going forward.
WHAT PREPAID PROVIDERS CAN DO
Like the IRS and law enforcement, prepaid access providers have also been seeking ways to more effectively combat tax refund fraud. If you offer a prepaid program that allows accountholders to load tax refunds to their prepaid accounts, there are three key ways you can assist in identifying and preventing tax-related ID theft and fraud in connection with your prepaid program:
1. Know Your Customer
Properly authenticating an applicant’s identity is a critical step in mitigating the risk of ID theft and preventing tax refund fraud. If your prepaid program allows accountholders to load federal tax refunds to their prepaid accounts, you should ensure that you have a written customer identification program (CIP) including reasonable procedures to allow you to verify the identity of each applicant, particularly before cash access is enabled on the account.
2. Monitor Your Accounts
Account monitoring, both at the time of account opening and on an ongoing basis, is also an essential step in identifying and preventing tax refund fraud. Effective monitoring includes establishing account parameters (e.g., individual and aggregate velocity or dollar limits for associated accounts) and triggers to assist in identifying any red flags or suspicious activity that may suggest an account is being used to facilitate tax-related ID theft and fraud. FinCEN has, in consultation with the IRS and law enforcement, identified several red flags to assist financial institutions in identifying potential tax-related ID theft and fraud. For prepaid accounts, these red flags include:
• Multiple direct deposit tax refund payments, directed to different individuals, from the Treasury Department or state or local revenue offices made to a prepaid account held in the name of a single accountholder.
• Suspicious account openings requested on behalf of individuals who are not present, with the fraudulent actor being named as having signatory authority, particularly if the subsequent source of funds is limited to the direct deposit of tax refund proceeds (typically indicates exploitation of tax returns for the elderly, minors, imprisoned, disabled or recently deceased).
• Opening multiple prepaid accounts by one individual in different names using valid TINs for each of the supplied names but the same mailing address, particularly if tax refund proceeds are direct deposited to these accounts shortly after account activation or in situations where the deposit is followed quickly by ATM cash withdrawals and/or point-of-sale purchases.
• Multiple prepaid accounts that are associated with 1) the same physical address (fraudulent actors may also contact customer service requesting to change their address for their personalized card shortly after opening a temporary card on-line]; 2) the same telephone number or mobile device; 3) the same e-mail address; or 4) the same Internet Protocol (IP) address, which receive tax refund proceeds as the primary or sole source of funds.
In addition to the FinCEN red flags, prepaid providers also may want to consider monitoring for the following:
• Accountholders attempting to load third-party tax refund checks via remote image/deposit capture.
• Inconsistencies in data supplied during application (e.g., providing a Texas phone number but Michigan address).
• Tax refunds direct deposited to accounts with recently added secondary cardholders.
• Multiple cards directed to the same physical location or general geographic vicinity (e.g., same street address but different apartment numbers).
• Seemingly unrelated accounts linked by suspicious and usual email formats (e.g., email@example.com; firstname.lastname@example.org, etc.) or other similar data elements (e.g., similar refund amounts).
• Timing of tax refund, particularly if the refund is received outside the traditional tax season (typically January 15 through April 15).
3. Follow Up on Suspicious Transactions.
To the extent your account monitoring program identifies red flags that might suggest tax refund fraud, you also will want to have procedures in place to ensure that you are timely and appropriately responding to any suspicious activity identified. These procedures might include:
• Attempting to contact the accountholder to confirm account opening and discuss any suspected fraudulent activity. This step may require you to look to third-party resources for contact information as the contact information provided during the application process likely will be unreliable.
• Blocking or returning direct deposits or other transactions that exceed your account parameters or appear to be fraudulent.
• Finally, if you know, suspect or have reason to suspect that a transaction involves funds derived from illegal activity or an attempt to disguise funds derived from illegal activity, you may be required to file a suspicious activity report (SAR) with FinCEN. When completing SARs on suspected tax refund fraud, FinCEN has advised reporting institutions to use the term “tax refund fraud” in the narrative section of the SAR and provide a detailed description of the activity.
While law enforcement has had recent success in uncovering some significant tax-related ID theft schemes and bringing the perpetrators to justice, more needs to be done on the front end to identify and prevent tax-related ID theft and fraud before the fraudsters abscond with taxpayer funds. Successfully combating this issue will require involvement by and cooperation and communication between all interested parties impacted by this issue, including the Treasury Department, law enforcement and financial services providers. Hopefully, the combined efforts these parties have been employing, including the efforts being employed by prepaid providers, will help put the industry on the right path towards reducing the incidence of tax-related ID theft and fraud during the 2013 tax filing season and beyond.
 “Identity Theft and Tax Fraud,” Hearing before the U.S. House of Representatives Committee on Oversight and Government Reform Subcommittee on Government Organization, Efficiency and Financial Management (November 4, 2011) (testimony of J. Russell George, Treasury Inspector General for Tax Administration).
“There Are Billons of Dollars in Undetected Tax Refund Fraud Resulting from Identity Theft”, Final Audit Report by Treasury Inspector General for Tax Administration, Reference Number 2012-42-080 (July 19, 2012). See also, “Processes for the Direct Deposit of Tax Refunds Need Improvement to Increase Accuracy and Minimize Fraud,” Final Audit Report by Treasury Inspector General for Tax Administration, Reference Number 2012-40-118 (September 25, 2012).
 31 C.F.R. § 210.5 requires tax refunds delivered via ACH deposit to be deposited into an account in the name of the taxpayer. If protocols were in place to mandate this, any tax refund deposit not meeting this requirement would be converted to a paper check and sent to the taxpayer. To cash the refund check, the check recipient would likely need to provide a picture ID matching the name on the check. TITGA believes this would serve as a deterrent to individuals seeking to commit tax refund fraud. To date, the IRS has expressed concern about this type of limitation due to situations in which an account is legitimately held in the name of multiple individuals. Furthermore, many financial institutions currently do not have the automated capability to match the name associated with an ACH deposit to the name listed on the account. The IRS has indicated it will take this recommendation into consideration to determine whether such restrictions can be effectively implemented.
 “Identity Theft and Tax Fraud,” Joint Hearing before the U.S. House of Representatives Committee on Ways and Means Subcommittees on Oversight and Social Security (May 8, 2012) (testimony of J. Russell George, Treasury Inspector General for Tax Administration).
 “Tax Refund Fraud and Related Identity Theft”, FinCEN Advisory FIN-2012-A005 (March 30, 2012).
Ms. Lauck has extensive experience advising financial institutions and third party service providers on legal and regulatory matters relating to various financial products and services, including credit cards, consumer and commercial installment loans, consumer lines of credit, private student loans, prepaid cards, deposit and savings accounts, tax-related financial products, remote image capture services, mobile banking services and other emerging payment solutions.
Ms. Lauck also assists her clients in negotiating complex commercial transactions and financing arrangements, drafting key contracts and consumer disclosures, reviewing marketing materials, developing and implementing new financial products and services, responding to and defending against consumer claims, and working with regulators to resolve supervisory and enforcement matters.
Before returning to private practice, Ms. Lauck served as Senior Legal Counsel at MetaBank d/b/a Meta Payment Systems, where she assisted the Bank in issuing and administering a variety of national credit products. A significant amount of Amy’s time at MetaBank was also focused on prepaid card compliance, particularly with respect to general purpose reloadable cards and savings, overdraft and other features attached to general purpose reloadable cards. Amy also played an integral part in the creation of bank policies and procedures to manage the risks associated with third party program management.
- ’Tis the Tax Season: What Prepaid Access Providers Can Do to Identify and Prevent Tax Refund Fraud (February 14, 2012)
Contact Amy Ross Lauck
Learn What it Takes Ensure Your Operations in India are Compliant with the FCPA, UKBA, and Indian Anti-Corruption Laws
When: Monday, March 04 to Tuesday, March 05, 2013
Where: Le Méridien Hotel, New Delhi, India
For more information, and to register: click here