Month: April 2019

On March 29, the U.S. Department of Justice announced that on March 28, a federal grand jury in the Central District of California indicted two senior corporate executives with two corporations on multiple counts for their roles in a scheme involving defective and dangerous dehumidifiers made in China.  Simon Chu and Charley Loh, who served respectively as part owners, chief administrative officer, and chief executive officer of the same two corporations in California, were charged with (1) conspiracy (a) to commit wire fraud, (b) to fail to furnish information under the Consumer Product Safety Act (CPSA), and (c) to defraud the U.S. Consumer Product Safety Commission (CPSC); (2) wire fraud; and (3) failure to furnish information under the CPSA.  The Department indicated this was the first time that any individual had been criminally charged for failure to report under the CPSA.

Under section 15 of the CPSA, a manufacturer, importer, distributor, and/or retailer of consumer products, and an individual director, officer, or agent of such companies, has a legal obligation to immediately report certain types of information to the CPSC, including a defective product that could create a substantial risk of injury to consumers or a product that creates an unreasonable risk of serious injury or death.  Under sections 20 and 21 of the CPSA, failure to fully and immediately report this information may warrant, respectively civil or criminal penalties, including up to 5 years’ imprisonment for a knowing and willful violation.

According to the indictment in this case,

as early as September 2012, Chu, Loh, and their companies received multiple reports that their Chinese dehumidifiers were defective, dangerous, and could catch fire. They also allegedly knew that they were required to report this product safety information to the CPSC immediately. Despite their knowledge of consumer complaints of dehumidifier fires and test results showing problems with the dehumidifiers, the indictment alleges that Chu and Loh failed to disclose their dehumidifiers’ defects and hazards for at least six months while they continued to sell their products to retailers for resale to consumers.

The indictment also alleges

that as part of their scheme, Chu and Loh deliberately withheld information about the defective and dangerous Chinese dehumidifiers from the retail companies that bought the dehumidifiers; the insurance companies that paid for damage caused by the fires resulting from the dehumidifiers; and the CPSC. Loh and Chu allegedly continued to sell the Chinese dehumidifiers to retailers with false certifications that the products met safety standards; caused a company employee to solicit materials that would falsely portray to an insurance company that the dehumidifiers were safe and not defective; and sent an untimely report to the CPSC that falsely stated that the dehumidifiers were not defective or hazardous.

Note:  This indictment is significant for consumer products-related companies because the Justice Department has chosen for the first time to indict individuals under the CPSA’s “failure to report” provisions.  Although the merits of the case have yet to be decided, chief compliance officers at companies that manufacture, import, distribute, or retail consumer products should use this case to remind company executives (including officers and directors) and employees, as well as outside agents, of their companies’ obligations to comply with the CPSA’s reporting requirements.  Because the lack of prior criminal enforcement of those requirements may have made some companies less than attentive to them, corporate compliance teams should also review the elements of their CPSA compliance program, to ensure that processes are in place to identify situations that may require CPSA reporting and that employees will follow those processes to prepare and submit such reports promptly as appropriate.

On March 31, The Times published an extensive article on a United Kingdom criminal network that reportedly obtained an estimated £8 billion from value-added tax (VAT) and benefit fraud, as well as additional money from mortgage and credit card fraud, and allegedly sent £80 million, to al-Qaeda in Pakistan and Afghanistan.

The article, based on leaked police and intelligence files, said that the network – consisting of British Asians based in London, Buckinghamshire, Birmingham, northwest England, and Scotland – conducted the VAT and benefit frauds over more than two decades.  It also reported that the network, which has ties with to the July 7, 2005 terrorist suicide bombings in London — sent 1 percent of its income, approximately £80m, to al-Qaeda, where it funded madrasahs, training camps, and other terrorist activities in Pakistan and Afghanistan.

HM Revenue & Customs (HMRC) and the United Kingdom Special Branch first learned in 1995 from an informant that members of the network “were engaged in mortgage fraud with the help of corrupt banking agents and mortgage brokers.  The informant reportedly said that “Asian customers are coming in with carrier bags full of cash on a regular basis,” and asserted “that the money was placed in bank accounts under false names before being ‘sent out of the country by an Asian solicitor for terrorist or drugs purposes’.”

The investigation ultimately concluded that the network “was using a network of factories and companies and exploiting their workers for identity and benefit frauds, the sale of counterfeit goods, car crash scams and mortgage and credit card frauds.”  HMRC investors learned that the network “used ‘hijacked or altered national insurance numbers to create false records’ and exploited ‘illegal immigrant labour’ before laundering the cash ‘through bogus offshore companies’.”

The Times also reported that it was unable to reveal the identities of certain specific network members because of court orders dating back nearly 10 years.  While certain members of the network were defendants in a series of related trials on charges that included fraud and money laundering, judicially imposed reporting restrictions at the start of the first trial “prevent the identification of any of the gang because several kingpins fled the UK before they could be arrested. . . . The Crown Prosecution Service (CPS) continues to insist that nothing can be reported until the masterminds have been returned to the UK to face trial.”

One network member who could be identified was Afra Syab Ilyas.  Ilyas, an accountant in England, reportedly left for Afghanistan in the late 1990s to fight for the Taliban, and was killed in an artillery shelling near Kabul.  Laptops that Central Intelligence Agency and MI6 officers found in Afghanistan after the 2001 9/11 terrorist attack later established that Ilyas was a part of the network in the United Kingdom and “a key source of funding” that flowed to al-Qaeda before 9/11.

Another identified connection to the network was Shehzad Tanweer, one of the terrorists involved in the July 7 London bombings.  Although HMRC intelligence officers found that link at least two years before the attack, “senior HMRC officials declined to use the intelligence to mount prosecutions and take the gang out of operation until after the bombings.”

Note: Chief Compliance Officers and their financial crimes teams should review this article, as well as a related Times article describing the types of criminal activity in which the network engaged, for the details it provides about documented relationships between organized criminal networks and terrorist financing.  This information should also be included in internal briefings and training of executives and employees as a prominent examples of the linkages between, fraud, money laundering, and terrorist financing.