Month: July 2023

Fentanyl. 2 mg. A lethal dose in most people. Courtesy: Drug Enforcement Administration in the public domain.

US companies transacting with chemical and pharmaceutical firms in China must conduct thorough due diligence research on their Chinese counterparts to mitigate the risk of unknowingly engaging with an entity involved in the production of fentanyl or its precursor chemicals. The White House has made combatting fentanyl a major priority, citing the dangers of illicit synthetic opioids which are easier to produce and transport and are significantly more lethal. US companies should expect increased governmental oversight and possible changes to US designations and other restrictions against Chinese firms.

  • China is the main—albeit indirect—source of fentanyl entering the United States, and despite Beijing’s ostensible efforts to control fentanyl-type drugs and related chemicals, they continue to make their way into the hands of Mexican drug cartels and subsequently into the United States.
  • As the opioid crisis tragically claims more American lives, US lawmakers are increasingly targeting Chinese entities involved in the production of fentanyl-related chemicals by introducing legislative proposals to sanction Chinese chemical manufacturers and law enforcement officials who neglect to combat the trafficking of these substances.

China now ranks as the fourth largest supplier of medicines to the United States, largely because of Beijing’s efforts to advance its domestic pharmaceutical sector by reducing the cost of drug development and aligning its regulatory framework with global standards. China’s efforts have led to the outsourcing of active pharmaceutical ingredients (APIs) to foreign countries, with China supplying the US market with 13 percent of its total APIs. Interspersed with the legitimate pharmaceutical trade with China is the shipment of fentanyl powder, precursor materials for manufacturing fentanyl, unregistered pill presses, stamps, and dies. Many of these shipments end up in Mexico, where they are used by the Sinaloa Cartel and Cartel Jalisco Nueva Generacion (CJNG)—the primary smugglers of illicit fentanyl to the United States—to manufacture fentanyl and then transported into the country.

  • The US Department of the Treasury’s Office of Foreign Assets Control (OFAC) in May sanctioned Youli Technology Development Co., Ltd. and Yason General Machinery Co., Ltd. for their involvement in shipping pill press machinery to entities known for counterfeit pill manufacturing in the United States and Mexico.
  • The Justice Department recently charged four China-based chemical manufacturing companies with crimes related to fentanyl production and trafficking. One of the companies, Amarvel Biotech, shipped more than 200 kilograms of precursor fentanyl chemicals from China to the United States.

Despite US pressure, China is unlikely to crack down on its exports of fentanyl-related products without receiving concessions from the United States, including sanctions relief. Beijing has recently demanded that the United States remove export restrictions against China’s Ministry of Public Security’s Institute of Forensic Science—which was included on the Bureau of Industry and Security’s Entity List in 2020—in exchange for cooperation on the fentanyl crisis, suggesting that China exploits its international counternarcotics efforts to achieve its economic and foreign policy objectives. The severe punishments the Chinese government metes out for drug crimes internally compared with relatively light penalties imposed for mislabeling of precursor chemicals for overseas shipments further supports this assessment.

China’s emphasis on growth of the biotech sector has created a powerful industry that local officials may be hesitant to disrupt, making the likelihood of prosecutions of drug-related crimes, such as mislabeling of products shipped abroad, less likely. In addition, deteriorating US-China relations, China’s assertion that the US opioid crisis is the result of internal failings, and Beijing’s refusal to acknowledge the role its pharmaceutical companies play in the illicit drug trade puts the onus on US firms to research the activities of potential clients and business partners in the pharmaceutical sphere, which can be challenging since companies that are involved in the illicit fentanyl trade can also be involved in legitimate pharmaceutical business.

US companies in the chemical and pharmaceutical sectors that transact with Chinese entities should employ robust compliance teams to ensure they are not implicated in the illicit fentanyl trade, exacerbating the opioid crisis. Linguistic and jurisdictional expertise, as well as monitoring media coverage of current and potential business partners, are critical to ensuring that Chinese companies with ties to illicit fentanyl production are identified. Monitoring reports from government agencies involved in efforts to combat the fentanyl crisis can also help compliance teams identify red flags that could indicate trouble.

  • Fentanyl originating from China is primarily shipped in small quantities with high purity (above 90 percent) through intermediary transit countries and mislabeled or stated as not being for human consumption to avoid detection.
  • There is evidence of fentanyl operations moving from China to India as certain precursor chemicals become harder to obtain in China. Understanding the means through which these substances are shipped and the ways illicit actors adapt to regulations can help point to illegal operations.
  • To avoid detection Chinese and Mexican criminal networks also engage in trade of wildlife products, timber, and real estate, avoiding formal banking systems through in-kind trades. If a potential business partner in China is also involved in the wildlife trade or real estate, and accepts virtual currencies as payments, their activities may warrant a closer look.
  • Banks and financial institutions should be aware of certain typologies related to the trafficking of fentanyl and other synthetic opioids, including online sales from Chinese companies to risky jurisdictions in Mexico, where transnational criminal organizations purchase fentanyl and its precursors for manufacture and sales to the United States. The use of front companies operating in a chemical manufacturing field or shell companies that do not appear to be related to the pharmaceutical industry to collect payments should also raise red flags.

The Drug Enforcement Administration in May flagged the use of social media applications and encrypted communications platforms in fentanyl trafficking. Research into social media accounts of Chinese pharmaceutical companies and their employees could provide insights into possible illicit activities. Expert analysis can also provide insights into supply chains that could involve money laundering and chemical precursors.

Expert FiveBy analysts can help conduct the necessary due diligence while adapting to constantly changing US sanctions and export controls, as well as financial methodologies that could help your firm or financial institution avoid possible involvement in the fentanyl trade and the consequent financial penalties and reputational risk.

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This week’s regulatory compliance note—a tri-seal effort between the Commerce Department’s Bureau of Industry and Security (BIS), the Justice Department, and OFAC—summarized the procedures for voluntary self disclosure of potential violations of sanctions and export controls. The note also highlighted that disclosures can result in significant mitigation of civil or criminal liabilities, while also helping expose threats to US national security and foreign policy objectives.

  • The compliance note highlights that prompt, voluntary self-disclosures could result in a reduction—and, in some cases, a waiver—of the potential criminal liability.
  • If a company voluntarily self-discloses potential criminal violations, fully cooperates, and remediates the causes of violations, the Justice Department generally will not seek a guilty plea, and the company likely will receive a non-prosecution agreement and avoid a fine, although the note stresses that a non-prosecution agreement may not apply if aggravating factors exist.
  • A disclosure only to OFAC or BIS, but not to the Justice Department’s National Security Division will not qualify for the non-prosecution policy.
  • OFAC and BIS both stress that a company will significantly reduce its penalties if it discloses, researches, and mitigates the root causes of their violations in a timely manner.

Aggravating factors could include failure to have a compliance program, willful ignorance of US sanctions and export controls, or attempts to hide violations.

A thorough look at settlements reached between regulators and violators shows that voluntary self-disclosure is a significant mitigating factor in reducing fines and penalties. A settlement between British American Tobacco in April showed the company not only to have engaged in egregious conduct, transacting with North Korean entities and generating revenue for the Kim regime, but also failed to disclose the conduct and attempted to conceal it. The violations resulted in more than $508 million in fines.

In contrast, a settlement with Microsoft that same month showed that the company not only voluntarily disclosed possible violations that occurred between 2012 and 2019, but also implemented significant remedial measures upon discovery of the apparent violations, resulting in a roughly $3 million fine—a fraction of the maximum penalty.

The note highlights the importance of having a robust and comprehensive compliance program, with timely disclosure and remediation being part of the process. A self-initiated lookback at potential violations, an examination of the root causes of the violations that includes data, linguistic, jurisdictional, and legal analysis, and appropriate enhancements to existing compliance efforts can not only mitigate penalties, but also help US firms and financial institutions avoid violations in the first place.

FiveBy has the capabilities, certified sanctions specialists, data and forensic analysts, and cultural and linguistic experts to help your firm or financial institution examine root causes of possible violations, structure a comprehensive self-disclosure to regulators, and enhance compliance efforts to help avoid inadvertent violations in the future. Click below to request a free consultation.

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