Regulators are trying to shoot the messenger.

In a first-of-its-kind criminal case, the Department of Justice has indicted FedEx for distributing controlled substances and prescription drugs for illegal Internet pharmacies and has accused the shipping company of money laundering. The outcome of the case could have broad implications for delivery services and could force several companies to rethink their anti-money laundering programs.

FedEx currently faces a long list of criminal charges for shipping controlled substances and misbranded drugs for two separate illegal online pharmacies. The Justice Department says the deliveries violate the Controlled Substances Act; Food, Drug and Cosmetic Act; and numerous state laws. Last month it filed a revised indictment against FedEx, adding money-laundering to the list of charges, claiming FedEx accepted payments that it knew derived from illegal activity.

The indictment “highlights the importance of holding corporations that knowingly enable illegal activity responsible for their role in aiding criminal behavior.”
Melinda Haag, U.S. Attorney

The indictment “highlights the importance of holding corporations that knowingly enable illegal activity responsible for their role in aiding criminal behavior,” U.S. Attorney Melinda Haag said in a statement.

Patrick Fitzgerald, senior vice president of marketing and communications for FedEx, responded that FedEx has not engaged in any illegal activity and that the company intends to vigorously defend itself. “The government is suggesting that FedEx assume criminal responsibility for the legality of the contents of the millions of packages that we pick up and deliver every day,” he said.

“We are a transportation company; we are not law enforcement,” Fitzgerald added. “The responsibility to monitor, regulate, or police the activities of doctors and pharmacists lie with licensing, regulatory, and law enforcement authorities, not shipping companies.”

Some legal experts agree that the enforcement action reflects a troubling trend by the government of pursuing legitimate businesses, rather than targeting the criminals themselves. “The Department of Justice is treating FedEx not as a legitimate service provider, but as a co-conspirator of its customers,” Barry Pollack, a member of law firm Miller & Chevalier, says.

FedEx isn’t the first company to face such charges. UPS agreed to forfeit $40 million in payments from illegal online pharmacies and entered into a non-prosecution agreement with the Justice Department in March 2013.

FedEx is the first to vow to fight the charges. “If you’re going to call their bluff, expect that there will, in fact, be an indictment,” Sergio Acosta, a partner with law firm Hinshaw & Culbertson, says. “They’re not going to back off of that threat, which is an important lesson to keep in mind.”

The FedEx prosecution is also important because the broader implications of the case don’t just apply to delivery companies doing business with illegal online pharmacies. “It could apply to almost any business,” Pollack says.

To what extent do virtual currency providers, such as Bitcoin, have an obligation to stop money laundering, for example?  What if an airline carrier suspected that drug lords were buying airline tickets? Would the airline then have an obligation to search those individuals, and what happens if they don’t?

“There’s a difference between what a company chooses to do, and whether it’s criminal if it doesn’t,” Nicholas Gess, of counsel at law firm Bingham, says.

Know Your Customer

The Justice Department is taking the stance that companies have a responsibility to ensure their services aren’t being used to aid criminal activities, similar to the know-your-customer (KYC) due diligence required of financial institutions. The important difference, however, is that “no such mandate from Congress has been legislated imposing a KYC duty on companies transporting packages,” Gess says.

Delivery shipping companies can only do so much to ensure their customers aren’t using its services for unlawful purposes, Pollack says. One way to mitigate the risk may be to keep a blacklist of illegal online pharmacies that have been in trouble with the government in the past, and then simply choose not do business with them anymore, he says.

The question is where to draw the line, Pollack says.

How much expense do you want to incur to train employees to spot red flags?

How much in lost profits are you willing to accept by not doing business with potentially illegal entities?

How do you weigh that decision against the risk of a criminal prosecution?

Other legal experts say FedEx dug its own hole. “It’s just an example of what happens when the government feels that they’re not being taken seriously,” says Jaime Guerrero, a partner with law firm Foley & Lardner.

To prevail in this case, FedEx would have to prove that it was unaware that it was doing business with an illegal online pharmacy, or that it was never informed of the risk it was taking by doing so, Guerrero says. Another valid argument would be if they had put remedial processes into place and people where circumventing those controls without the company’s knowledge.

Looking the Other Way?

Based on the indictment, however, that doesn’t seem to be the case here. According to the indictment, FedEx received warnings from the government as early as 2004 that it was doing business with illegal online pharmacies, and yet continued to deliver packages from them.


Below is a statement from Patrick Fitzgerald, FedEx SVP, marketing and communications, defending the charges levied against the company.
The U.S. Department of Justice has notified us of a superseding indictment against FedEx in San Francisco, California. The government’s new indictment relates to the multi-year investigation of the same two groups of online or internet pharmacies that allegedly shipped prescription medications in violation of federal law. 
FedEx is innocent of these and all of the charges filed in this matter.  We will plead not guilty.  We will continue to defend against this attack on the integrity of FedEx.   We continue to ask for a list of all internet pharmacies engaging in illegal activity so we can turn off shipping for those companies immediately.  We have asked for a list, and they have sent us indictments.
FedEx, like all common carriers, transports a wide range of goods, including some that can be harmful if misused or abused.  Illegal activity by online pharmacies that results in prescription drug abuse and deaths is a problem that needs to be solved.  We stand ready to help deliver the solution by working with law enforcement, but the responsibility to monitor, regulate or police the activities of doctors and pharmacists lies with licensing, regulatory and law enforcement authorities, not shipping companies. 
The revised indictment adds counts related to services provided to and payments from online pharmacies. FedEx, of course, requires customers to pay for our services.  The collect on delivery service referenced in the indictment is available to all of our millions of FedEx Express customers.
Source: FedEx.

FedEx is arguing that the government is the one that has made cooperation difficult. “We have repeatedly requested that the government provide us a list of online pharmacies engaging in illegal activity,” Fitzgerald said. “Whenever the [Drug Enforcement Administration] provides us a list of pharmacies engaging in illegal activity, we will turn off shipping for those companies immediately. So far the government has declined to provide such a list.”

But that’s not the only legal hurdle FedEx must overcome. The indictment further claims FedEx couriers in Kentucky, Tennessee, and Virginia expressed safety concerns to senior management, including that online pharmacy customers stopped FedEx trucks on the road demanding their packages, and that the delivery addresses included parking lots, schools, or vacant homes. In response to these concerns, FedEx adopted a procedure of holding packages from problematic online pharmacies for pick up at specific stations, rather than delivering them to the recipient’s address.

In any situation where a company receives a subpoena from the government, “the first step is to conduct an internal investigation,” Guerrero says. Investigate what it is the government is alleging, and see if there is any truth to the allegations, he says.

If convicted, FedEx could face a penalty up to twice the gross gain of the offense, which the indictment estimates to be around $820 million. That puts its potential fine north of $1.6 billion. “It’s hard to believe that FedEx will litigate this case through trial just because the risk is so high,” Pollack says. The more likely outcome is that FedEx resolves the case with a monetary penalty that is “well south of what FedEx would be exposed to if it went to trial and lost,” he says.

If FedEx were to prevail in this case, the outcome could dissuade the government from bringing similar prosecutions against other shipping companies, Pollack says. To the extent the indictment is a one-off versus the first in a new enforcement trend, he says, “will largely be dictated by how this case resolves itself.”