A Cautionary Tale of One Lawyer's Journey into PPE Brokerage and Best Practices

Updated: Nov 16



Update Nov. 16, 2020: Please be advised that due to the amount of fraud in the PPE industry, I am no longer accepting any PPE cases.


Summary Points

Recently, I was retained in my capacity as an attorney to document several prospective transactions involving the purchase and sale of several hundred million 3M N95 respirator masks for use in hospitals and other front-line employers. I had no prior experience brokering personal protective equipment, so I anticipated a bit of a learning curve. Because I have ample experience papering all kinds of deals worldwide, I wasn't worried about meeting the transaction closing on schedule. After days of back and forth communications involving several people using email, WhatsApp and Zoom, I finally spoke to a gentleman who, true to his title as an industry broker of PPE, broke it all down.


PPE Brokerage Process


"It starts by the buyer submitting an LOI to the seller," he explained. "The LOI sets forth what product the buyer wants and how much they are willing to pay. If the seller agrees, then the attorneys for each of the parties get involved." He continued, "the buyer issues an ICPO and an SPA for the product which the seller needs to sign. Then the buyer places the funds in escrow and sends proof to the seller, like a BCL."

I was feverishly taking notes. "What about the brokers commission?" I interjected. "How do they get paid?"


He replied with confidence, "an IMFPA is issued by the buyer and the seller to each of their brokers, and that document also includes an NCNDA."

Now, I understood what all those acronyms were that everyone was throwing around! But we weren't finished yet. "Okay, so we have an LOI, ICPO, SPA, IMFPA with an NCNDA, and some king of BCL demonstrating funds are in escrow. So, then what happens?"


"The seller releases the SGS Report to the buyer for the buyer's inspection together with lot numbers and proof of life, as requested," he answered.


"Proof of life!" I exclaimed. "Has someone been kidnapped?"


"No!" he laughed. "It's some kind of video or photo with today's newspaper next to the goods to show that the goods are in the warehouse today. If the seller is satisifed with the SGS Report, the lot numbers and a proof of life, then the money and goods gets transferred."


Opportunities for Fraud



The process seemed simple enough, except that it wasn't. Each time I talked to a broker, seller or attorney, I was warned about an industry rampant with fraud, money laundering and all sorts of nefarious characters. Sufficiently forewarned, I examined the first set of documents sent my way which referenced the International Chamber of Commerce, or ICC as it is called. Immediately, I noticed references to ICC Regulations 400/500/600. So, as any good lawyer should do, I looked them up. Within moments, Google returned the ICC website hit Traders warned about non-existent ICC instruments quoted on the Internet.


"No such ICC documents or rules exist. Their appearance on websites should be seen as indicating a possible scam. They may in some cases be used to lend credibility to faudulent transations."


Now this was alarming. I wondered, had I encountered fraud with my first transaction? Maybe if I could salvage the contents of the documents while removing the improper references we could move forward, and so that's what I did. The buyer, a large hospital system, placed nearly eight million dollars in escrow. I supplied proof to the seller's attorney and asked for the SGS Report, lot numbers and proof of life. Then, the seller went dark. No report materialized. I sent a stern email reminding the seller of his obligations to produce. The seller replied that there was no SGS Report, no lot numbers and no stock. Further, the seller stated that at no time did he ever have the product, and in any case, the BCL was crap.


I was annoyed, frustrated even. I knew the seller had provided written representations that they most certainly did have the stock. And I had a reply from their attorney that the proof of funds in escrow was personally verified by him and he instructed his client to accept. I poured over previous communications; didn't they promise it? Then I found it. They most certainly did guarantee their stock to us, so what could have gone wrong? Did they sell it to a higher bidder? Or did they just lie? Meanwhile, the broker was calling everyone he had to locate other stock. This was going to be my client's first transaction, so we relied heavily on the more experienced broker with many more industry connections.


Meanwhile, I did some research. Could my client become a 3M channel partner? I had setup distribution channels for many other companies and I was really comfortable with the business model. I contacted colleagues, researched the 3M website, sent emails and even contacted the 3M Chairman and CEO Mike Roman on LinkedIn. He replied he was forwarding my request for assistance to his staff, but I never heard from them. Meanwhile, the buyer was calling and messaging me every few hours for an SGS Report. Determined to get this hospital their equipment, I stumbled on a 3M publication released on 18 May 2020 entitled Fraudulent Activity, Price Gouging, and Counterfeit Products. This publication clearly explains that 3M is actively committed to combating fradulent activity that includes


"... people fraudulently representing themselves as being affiliated with 3M and having authentic 3M product to sell, selling (or offering to sell) 3M products at grossly inflated prices, selling counterfeit products falsely claimed to be from 3M, and falsely claiming to manufacture 3M products. ... 3M ... will aggressively pursue third-parties that seek to take advantage of this crisis. We are working with law enforcement authorities around the world - including, in the U.S., the U.S. Attorney General, state Attorneys General, and local authorities."


In furtherance of 3M's efforts to combat fraud and price-gouging, they have launched a hotline that purchasers of 3M products can call to authenticate the source of the PPE they want to purchase. Also included are product list prices for respirators so buyers can avoid and report price-gouging.


True to my investigative nature, I called that hotline and was promptly answered by a lovely 3M representative who did a fantastic job answering all my questions as follows:


Q. Where can I find a list of 3M distributors?


A. 3M does not publish the list of authorized distributors because private PPE brokers produce fraudulent documents with the distributor's name on it to look official, and it places the distributor in an untenable position.


Q. How can I find out if a business claiming to be a 3M PPE authorized distributor really is authorized by 3M?


A. Call this same 3M COVID-19 Fraud hotline, tell us the name of the distributor, and we will be happy to check our records and confirm whether that company is authorized by us.


Q. Can 3M distributors sell PPE to anyone they want?


A. No, they cannot. They can only sell direct to customers who employ front-line workers who require PPE. She then showed me a distributor update on the 3M website which clearly states that 3M authorized distributors must avoid brokers and other third parties.


Q. What happens if a 3M distributor is found to be selling outside of their permitted channels?


A. The distributor's authorization from 3M will be terminated.


Q. What about importing/exporting 3M PPE? Can I acquire PPE from one of your overseas factories?


A. No, due to current regulations, 3M is only allowed to distribute PPE within the country where the PPE is manufactured. So, all PPE present here in the U.S. is manufactured in the U.S. and cannot be imported from any overseas operations. This is also stated in the distributor update.


Q. How can I become a 3M PPE distributor?


A. At this time, 3M is not opening new distribution channels and is only working with prior, existing authorized distributors, as stated in the distributor update.


Q. I have heard of brokers placing orders for millions, hundreds of millions and even billions of masks, but then someone told me they spoke with a 3M representative who told me you don't even manufacture that much product. Can 3M fill those large orders?


A. No, 3M does not produce that many masks. Those order sizes are ridiculous and completely fraudulent.


Q. So, people who say they have 3M products in private lots, inside warehouses, in the millions of units, they are all lying?


A. Yes, this is fraud, likely involving counterfeit goods, and we are actively pursuing every case we can together with state and federal law enforcement agencies. There are so many instances of fraud, we cannot possibly get them all, but we are trying very hard, and that's why we have this hotline.


Q. What about the SGS Reports? Does 3M give their production run and lot number information to SGS for inclusion in these reports?


A. No. 3M does not share any production run information with SGS and we do not include lot numbers with our products. Those items simply do not exist in regards to 3M PPE products, and any references to that is fraud.


Q. What other updates and information have you released about the purchase and sale of PPE that I can learn about?


A. All of our PPE related information and documentation can be found on our website under "Business Products/Worker Health and Safety/Covid19".


Criminal Charges are Real, and Real Serious


Right out of law school I worked as a criminal defense attorney for the public defender's office in Ft. Myers, Florida, so I was naturally curious about what sort of cases the Department of Justice and the FBI were bringing against folks who dealt in counterfeit PPE and price-gouging. One gentleman I spoke with explained that he was aware of instances of Know-Your-Customer (KYC) results uncovering PPE buyers, sellers and brokers affiliated with Mexican cartels, a Libyan terrorist organization and even Russian mafia! Intrigued, I did a little more digging.


On 26 May 2020, the US DOJ issued a press release about a man named Romano from NJ who was arrested for a $45 Million scheme to defraud and price gouge NYC. In this case, Romano, a used car dealer, created a fictitious authorization letter in March 2020 authorizing him to sell millions of units of 3M-brand PPE. Brokers acting on Romano's behalf approached NYC who desperately needed the equipment and, during negotations, represented they could supply 3M-brand PPE. The prices quoted were 400% above the list price for the respirators. Although he was unsuccessful in closing the deal, he was charged with one count of conspiring to commit wire fraud and one count of wire fraud, each which carries a maximum sentence of 30 years in prison, and one count of conspiring to violate the Defense Production Act which carries a maximum sentence of one year in prison.


As reported by Aaron Katersky of ABC News, two California residents were arrested on charges they tried to scam an investor out of millions of dollars using photographs of boxes of masks, claiming to have contracts and agreements to sell millions of masks that they didn't actually own. They even wrapped and labeled empty boxes to try and pass them off as containing PPE.

In response to the crisis and increase in fraud, President Trump issued an Executive Order pursuant to section 102 of the Defense Production Act which prohibits hoarding of designated items. The order authorizes the Secretary of Health and Human Services (HHS) to protect scarce healthcare and medical items by designating them as protected. Once designated, the statute makes it a crime for anyone to accumulate that item in excess of their reasonable needs, or for the purpose of selling it in excess of prevailing market prices. See 50 U.S.C. §§ 4512, 4513. The Office of the Attorney General (OAG) issued a memorandum on 24 March 2020 explaining that the OAG will work closely with HHS and FEMA to identify violators of the new rule, and to seize healthcare and medical items as necessary to redploy them to the people who need them most. Further, the OAG then directed the creation of a task force to address PPE hoarding and price gouging, led by Craig Carpenito, U.S. Attorney in the District of New Jersey, to lead each United States Attorney's Office and relevant Department components to investigate and prosecute violations.


Solutions for Legitimate Industry Parties


The news isn't all bad. There are legitimate solutions to properly transact in PPE, even if it originates with 3M. To find a 3M authorized distributor, you can conduct an internet search and verify the results by calling the 3M hotline number, or you can contact your local 3M PPE sales representative by clicking here. However, because of the tight controls on supply chains involving 3M-brand PPE, it's best you operate in the capacity of a consultant to assist buyers in connecting with legitimate 3M authorized distributors to successfully source goods.


When trading in PPE that aren't 3M-brand, be sure to keep clear and copious records of all your activities, contacts and communication with each business, broker, attorney and individual you speak to. It's also critically important that you keep records of financial transactions related to the deal, including account information and commissions paid. Further, you must conduct Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) checks on each party to the transaction. More familiar in the banking context, KYC and AML are processes used to verify the identity of a person or business. Examples include passports or birth certificates, social security cards or driver's licenses, or some combination of those. There are several third party companies that provide KYC/AML processing checks in varying degrees, including checking the identity of parties against the Office of Foreign Assets Control (OFAC) sanctions list. OFAC provides a resource center complete with a searchable list of specially designated nationals and blocked persons that must be consulted before transacting with overseas pesons, businesses and organizations. Engaging in transactions with sanctioned parties can result in substantial fines and incarceration.


You should also consider working with IBM's Rapid Supplier Connect and CDAX payment system to conduct PPE transactions. A collaboration between IBM and Chain Yard's co-branded network Trust Your Supplier, Rapid Supplier Connect is a blockchain driven marketplace that provides "...a single-source of truth combined with a marketplace to meet non-traditional suppliers and see their inventory availability."



Right now, Rapid Supplier Connect is offering free Trust Your Supplier (TYS) access to both buyers and suppliers. Once onboarded, you can search to discover suppliers, contact them and agree on terms, the CDAX paymaster holds funds to ensure safe transfer, the goods are shipped to the buyer which are then inspected and acknowledged, and the funds are released to the supplier. Suppliers can create a "digital passport" on TYS which contains their business information which can then be shared with any buyer on the network. TYS will validate suppliers self-reported information using 3rd party data. Suppliers found engaging in fraud will be removed from the network. Governments, healthcare providers, and retailers are eligible to participate as buyers on the network, but brokers and distributors are not eligible to participate as buyers.


CDAX Paymaster Service will "...secure funds on behalf of the buyer in a custody and settlement account and hold goods ordered contractually from the supplier under a consignment arrangement until the buyer verifies the acceptance of the ordred goods and sends a code to release funds to seller, at which point funds are released to pre-agreed seller accounts and Paymaster tranfers title and goods to the buyer." While I have not verified this with CDAX, someone who regularly works with CDAX recently told me that the transaction fee charged to use CDAX is 1.5% of the total transaction cost.


Conclusion


The last couple of weeks have been a wild and entertaining ride to be sure. I've met a lot of new people around the world including lawyers, brokers, suppliers, and even big buyers like hospitals. I'm happy to report that in most cases, the folks I have worked with are of good character and full of integrity. They are honorable business people who simply want to get quality PPE products into the hands of front-line healthcare workers. Unfortunately, the bad apples are just mucking it up, making a colossal mess of the industry so it is nearly impossible to navigate . While it's true I spoke to a lot of attorneys who have worked in the space for longer than me, no one I met has drilled down to unravel the complexity and identify guided solutions. I think the reason I was able to figure it out was because I have business and legal experience specific to criminal defense, international business, and blockchain for supply chains - a most unusual combination. Without ample experience in all three, I can't imagine how I would have put it together.


In conclusion, I am incredibly thankful I had had the foresight to be completely transparent and to insist on total due diligence on every part of the deal that didn't close, or I could potentially be in a lot of trouble as an attorney bearing a higher standard of responsibility. If you are working in this industry, as an attorney, I advise you to consider the advice and recommendations I provide, and to apply them as minimum best practices. And finally, if you are working with an attorney, be sure to provide them with a copy of this article and insist they also follow these standards as minimum best practices. Believe me when I tell you, "My lawyer made me do it!" is no defense to criminal charges.

© 2020 by IntelliLaw. 

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