What Every Multinational Company Should Know About … The Rising Risk of Customs False Claims Act Actions in the Trump Administration
On February 20, 2025, the Deputy Assistant Attorney General for the Commercial Litigation Branch at the U.S. Department of Justice (DOJ), Michael Granston, emphasized using the False Claims Act (FCA) to address U.S. Customs & Border Protection (Customs) violations at the Federal Bar Association’s annual qui tam conference. According to Granston, the Trump administration will seek to “aggressively” deploy the FCA as a “powerful” enforcement mechanism against importers that take steps to evade customs duties, including all the new tariffs being imposed by the Trump administration.
The application of the FCA for underpayments of customs tariffs is already a growing trend. The increased tariffs and attention will combine to increase the number of FCA actions targeting tariff underpayments and the potential amount of recoveries. The U.S. government has unparalleled access to detailed import data covering nearly all imports, giving it the ability to run algorithms to see discrepancies and anomalies that might indicate the underpayment of tariffs. The FCA also can be enforced by whistleblowers who file qui tam suits in the government’s name, in hopes of receiving a share of the recovery in successful cases. Taken together, these factors mean the scene is set for a vast expansion of the use of the FCA as a tool to combat tariff underpayments.
Against this scrutiny, importers should ensure they accurately determine and pay all tariffs, including the new Trump tariffs. The remainder of this article summarizes the heightened risks that the FCA poses in the Trump administration, as well as some practical steps companies can take to minimize the risk of an FCA action.
The Application of the False Claims Act to Customs Violations
The False Claims Act, 31 U.S.C. § 3729 et seq., is a special form of civil remedy used by the government to recover funds the government paid as a result of fraud — typically, a false statement or document that supports a demand for government monies. The FCA allows the government to recover treble damages plus penalties up to $28,619 for each violation. Thus, the FCA authorizes the government to seek not only any tariff underpayments but also three times the amount of the underpayment and penalties for each instance of underpayment. Needless to say, the FCA poses enormous financial risk to importers.
The statute also enables private individuals to act as whistleblowers (or “relators”) by filing qui tam actions on behalf of the government. If the action is successful, the relator can receive up to 30% of the money recovered in the litigation, plus attorney’s fees, with the rest going to the government. This potential for recovery has spawned an active plaintiffs bar that encourages the filing of qui tam actions.
Indeed, the 979 qui tam actions filed by relators in the fiscal year ending in September 2024 constituted a 37% increase over the prior year and a 60% increase over 2019 filings. In addition, the government also originated 423 investigations on its own — almost triple the number the government originated five years ago. Further, the government reported that it recovered almost $3 billion in settlements and judgments in 2024, which followed a nearly-as-high recovery of $2.8 billion recovered in 2023.
In his speech, Granston explained the FCA could be a powerful tool in recovering under-reported tariffs. With the Trump administration announcing a dizzying array of new tariffs, the amount of tariffs imposed — and the risk of FCA actions — are both certain to increase. The emphasis on tariffs and trade continued at the conference. Jamie Ann Yavelberg, director of the Fraud Section of the Civil Division, identified tariff evasion as a “key area” for enforcement, with a focus on false statements about country of origin, declared value of goods, and the number of goods involved.
The following are examples of the Department of Justice’s use of the FCA to address underpayment of customs duties and show the broad range of customs issues that can support an FCA action:
One importer paid almost $22.8 million to settle FCA allegations that it misclassified its vitamin products to avoid paying the full amount of customs duties due, as well as its failure to pay back duties owed after correcting certain misclassifications.
Another importer paid $22.2 million to settle FCA allegations that it misrepresented the nature, classification, and valuation of its imported construction products to evade antidumping and countervailing duties, as well as improperly claiming preferential treatment under free trade agreements, with the relator receiving $3.7 million.
A third importer paid $45 million to resolve allegations that it misrepresented the country of origin on goods that should have been declared to be of Chinese or Indian origin, thereby evading high antidumping and countervailing duties imposed on the entries from those countries.
A fourth importer paid $5.2 million for allegedly evading antidumping and other duties by falsely describing wooden bedroom furniture imported from China as “metal” or “non-bedroom” furniture on documents submitted to CBP while also manipulating images of their products in packing lists and invoices, directing their Chinese manufacturers to ship furniture in mislabeled boxes and falsifying invoices to try to evade detection.
Finally, another importer paid $4.3 million for allegedly failing to include assists (customer-provided production aids) in the declared value of its entries.
Key areas where FCA cases are most likely to arise include:
The misclassification of goods, to move them from a higher to a lower tariff classification.
The misclassification of goods, to move them out of the coverage of the new Trump tariffs such as those imposed on aluminum and steel derivative products.
Incorrectly declaring the wrong country of origin, to avoid the Section 301 tariffs imposed on China or on countries subject to the new tariff proclamations such as China, Canada, or Mexico.
Failing to pay antidumping or countervailing duties, which often have very high tariff rates.
Failing to accurately declare the correct value of goods.
Failing to include assists (production aids provided by the customer) or royalties within the declared value.
Failing to have a customs transfer pricing study in place, if this results in the undervaluation of goods imported from an affiliated company.
Failing to correct past entry information if Customs notifies the importer of a change that impacts the duty rate, such as by issuing a Form 28 Request for Information or Form 29 Notice of Action. When this occurs, Customs expects that importers will use the Post-Summary Corrections Process to correct all analogous prior entries and to pay back duties on those prior entries.
Another factor that increases FCA risk is that Customs maintains two additional whistleblower programs of its own — one under the Enforcement and Protect Act (EAPA), for reporting of antidumping and countervailing duty evasion, and an eAllegations portal for all other claims of tariff evasion. It remains to be seen whether the new administration will mine these sources for FCA enforcement purposes.
Practical Steps Importers Can Take to Minimize Potential FCA Actions
Given the likelihood of increased enforcement, as well as the sharply rising levels and types of tariffs, importers should prioritize customs compliance, as any underpayments raise the specter not only of customs penalties but also potential FCA damages and penalties.
Customs-Related Steps
In a high-tariff environment, the stakes for compliance miscues are substantial and include potential penalties and interest for underpayments as well as FCA risks. Some key areas to consider for ongoing customs compliance include the following:
Inaccurate classifications can result in incorrect duties or penalties, so confirm your company has procedures to correctly classify goods using the correct Harmonized Tariff Schedule (HTS) codes and maintains a regularly updated import classification index to reflect new products or changes in tariff codes.
Confirm that your organization maintains a detailed customs compliance manual that outlines procedures for classification, valuation, origin determination, recordkeeping, interactions with brokers and Customs, and other relevant matters that impact the accuracy of information reported to Customs and can create underpayments.
Review and ensure there are procedures to track and properly report assists, royalties, or other non-invoice costs that might affect the declared value of imported goods. Misreporting these costs could lead to underpayments of duties and penalties.
Ensure that there are procedures to regularly review entries after entry to identify potential errors in valuation, origin declarations, classification, or other entry-specific items that impact how much duties are owed.
Regularly use post-summary corrections as a means of correcting error, as most entry-related information can be corrected until liquidation without penalty (generally, around 314 days after entry).
In addition to post-entry checks, more detailed customs audits can uncover underlying issues that can lead to customs penalties. Major importers should consider conducting regular customs audits, pulling a judgmental sample of entries for thorough examination to determine if there are areas that contain errors.
Ensure your company maintains procedures for overseeing customs brokers and freight forwarders, including written protocols that are consistently followed to ensure there is proper oversight of customs brokers and freight forwarders.
Customs traditionally has not imposed penalties if an importer initiates a voluntary self-disclosure before the government begins its investigation. Importers should be aggressive in using voluntary self-disclosures to minimize the likelihood of customs penalties and related FCA liability risks.
Request confidential treatment for your company’s import data. Much of the information filed as part of the entry process is available for review by companies, such as PIERS and Panjiva, which aggregate import data and sell it to the public. By filing a government confidentiality request and keeping it up to date, your company can limit the ability of third parties (including competitors and whistleblower law firms) to analyze import data to discern trading patterns, supply chains, and exposure to high-risk regions or high-tariff products.
Compliance and Whistleblower Steps
In addition to the customs-related steps listed above, maintaining a robust corporate compliance program that addresses customs issues and general whistleblowing concerns can help prevent an internal complaint from turning into a qui tam suit. Some measures to consider include the following:
Maintain an Effective Compliance Program. Maintain a corporate compliance program that meets DOJ’s expectations for effectiveness, and ensure the program is coordinated with a well-tailored customs compliance program. Effective compliance programs are marked by senior leadership support, adequate resources, use of risk assessments, well-developed policies and procedures, tailored trainings, encouragement of internal reporting, and meaningful responses to complaints. Given the heightened risk environment, make sure your company has a compliance officer or team that understands customs issues and can follow up on reports of potential customs violations.
Encourage Internal Reporting & Whistleblower Protection. Establish a confidential internal reporting mechanism (e.g., hotline). Protect employees from retaliation to encourage internal reporting over external whistleblower actions. Investigate and address complaints promptly and transparently.
Conduct Regular Training & Education.Train employees on Customs and FCA requirements and the risks of false claims. Effective training is tailored to the roles and responsibilities of given groups of employees.
Strengthen Internal Controls & Audits. Perform regular post-entry checks and internal audits to identify and correct potential customs violations and underpayments.
Respond Proactively to Potential Violations.Act quickly if an issue is detected to correct errors, and consider self-reporting to Customs when necessary, both to lock in a no-penalty situation with Customs and to reduce the likelihood of qui tam suits.
Respond Promptly and Fully to All Customs Forms 28 (Requests for Information), Form 29s (Notices of Action), and Informal Inquiries. Importers should designate an internal employee to be an ACE contact so that your company receives Customs notices at the same time as the customs broker, instead of relying on the broker to forward any notices. Any requests for information or Customs actions should be investigated thoroughly and have a well-supported response (generally required within 30 days).
Follow Through on Customs Notices. If Customs makes a determination, such as reclassifying a product, then Customs requires that the importer search through its recent imports and reflect the Customs decision for all identical or analogous entries. In some cases, substantial customs penalties or FCA liability have arisen from the failure to do so. Ensure that the full implications of any Customs action are thoroughly understood and that your company uses the Post-Summary Corrections process to reflect any changes mandated by Customs. Consider using a voluntary self-disclosure to reflect changes to older entries.
Follow Up Thoroughly on Any Civil Investigative Demand (CID) from DOJ or Any Qui Tam Complaint.The receipt of a CID or qui tam complaint always requires the highest level of attention, given the draconian penalties the FCA authorizes. Follow up on the receipt of these items to take swift action to investigate and defend against those claims, using outside counsel with experience in the FCA and customs issues.
By proactively addressing customs compliance, importers can help minimize the risk not only of customs penalties but also the risk of qui tam lawsuits. Especially in a high-tariff environment, customs compliance and taking all available steps to ensure the proper payment of all tariffs lawfully due is essential and needs to be at the top of the list for any risk-based compliance program.
US Treasury Announces That the Corporate Transparency Act Will Not Be Enforced Against Domestic Companies, Their Beneficial Owners or US Citizens
As noted in our previous Corporate Advisory, the Financial Crimes Enforcement Network (FinCEN) announced on February 27, 2025, that it will not take enforcement action against a Reporting Company that fails to file or update a Beneficial Ownership Information Report (BOIR) as required by the Corporate Transparency Act (CTA), pending the release of a new “interim final rule.”
On March 2, 2025, the US Department of the Treasury (Treasury) issued a press release expanding on FinCEN’s announcement. The Treasury release states that even “after the forthcoming rule changes take effect[,]” the Treasury will not enforce fines and penalties under the CTA against domestic Reporting Companies, beneficial owners of domestic Reporting Companies or US citizens.
The release also outlines Treasury’s intention to propose additional rulemaking that would limit CTA reporting obligations solely to foreign Reporting Companies. Under the CTA, a foreign Reporting Company is defined as any entity that is formed under the laws of a foreign country and registered to do business in the United States by filing a document with a secretary of state or a similar office under the laws of a State or Indian tribe. As a result, the proposed rulemaking would significantly narrow the CTA’s application.
Given the Treasury’s announcement, non-exempt domestic Reporting Companies and their beneficial owners may wish to consider ceasing CTA compliance efforts until there are further developments in this space. Non-exempt foreign Reporting Companies should continue preparing CTA filings in anticipation of forthcoming guidance regarding extended filing deadlines.
Alexander Lovrine contributed to this article.
Social Engineering + Stolen Credential Threats Continue to Dominate Cyber-Attacks
CrowdStrike recently published its 2025 Global Threat Report, which among other conclusions, emphasized that social engineering tactics aimed to steal credentials grew an astounding 442% in the second half of 2024. Correspondingly, use of stolen credentials to attack systems increased.
Other observations in the report include:
Adversaries are operating with unprecedented speed and adaptability;
China expanded its cyber espionage enterprise;
Stolen credential use is increasing ;
Social engineering tactics aim to steal credentials;
Generative AI drives new adversary risks;
Cloud-conscious actors continue to innovate; and
Adversaries are exploiting vulnerabilities to gain access
The details behind these conclusions include that the time an adversary starts moving through a network “reached an all-time low in the past year. The average fell to 48 minutes, and the fastest breakout time we observed dropped to a mere 51 seconds.” This means that threat actors are breaking in and swiftly moving within the system, making it difficult to detect, block, and tackle.
Vishing “saw explosive growth—up 442% between the first and second half of 2024.”
CrowdStrike’s observations are instructive to plan and harden defenses against these risks. Crucial pieces of the defense are:
Continued education and training of employees (including how social engineering schemes work;
The importance of protecting credentials;
How credentials are used to enter into a system.
Although we have been repeatedly educating employees on these themes, the statistics and real life experiences show that the message is not getting through. Addressing these specific risks through your training program may help ebb the tide of these successful social engineering campaigns.
2025 Picks Up Steam with Increased Scrutiny of Health Care Transactions and Corporate Structures
A new year brings about new legislation.
Given the recent trend of health care transactions coming under increased scrutiny at the state level, EBG has released its map summarizing states that already have laws regulating health care transactions. As legislatures reconvene around the country, there continues to be regulatory scrutiny of health care transactions and private equity investment in health care. Below is a brief summary of recently proposed legislation.
California
On February 12, 2025, the California Senate introduced SB 351, which is remarkably similar to AB 3129, a bill the EBG team wrote about extensively in 2024 and that Governor Gavin Newsom vetoed in September 2024. The proposed legislation has three key components: (i) it adds new defined terms, including “hedge fund” and “private equity group,” in an attempt to capture all parties involved with Management Service Organizations (“MSOs”) and Dental Service Organizations (“DSOs”); (ii) it provides a list of prohibitions for any “private equity group” or “hedge fund” that is “involved in any manner with a physician or dental practice doing business in the state; and (iii) it contains a provision that restates existing California law on restrictive covenants and California’s prohibition on restrictions barring a provider from competing with a practice in the event of termination or resignation. Whether this bill advances and is ultimately signed remains unclear. EBG is actively monitoring this legislation.
Connecticut
Connecticut is no stranger to bills targeting private equity in health care and the 2025 legislative session is no different. Below is a brief summary of the proposed bills:
SB 261 – This bill is intended to “limit the ability for private equity firms to purchase medical care facilities and further protect health care clinicians from the corporate practice of medicine.” The bill would impose restrictions on private equity firms’ ability to lease property back to a hospital after purchasing land rights and would also add restrictions that would prevent any direct or indirect interference with a clinician’s independent practice authority and the exercise of their professional judgment.
SB 469 – This bill is intended to “improve public health in the state” by restricting the acquisition of hospitals by private equity firms, prohibiting hospitals from participating in real estate investment trust and requiring physician-led ownership for medical groups and ambulatory surgical centers.
SB 567 – This bill would expand the authority of the state attorney general (“AG”) and Commissioner of Health Strategy to regulate private equity ownership of certain health care facilities and restrict self-dealing property transactions.
SB 837 – This bill is intended to “promote health care industry competition and better health care quality in the state” by amending Connecticut’s material transaction notification statute by requiring notification of any group practice’s transaction with a private equity company. It also removes the “presumption” in favor of approving certificate of needs applications for the transfer of ownership of a large group practice.
HB 6570 – This bill is aimed at preventing the consolidation of health care services by nonmedical entities and safeguarding patient access to quality health care. It would: (i) prohibit a private equity firm from acquiring ownership or control of a health care provider’s practice or health care facility, and (ii) require the administrator of each health care provider practice and health care facility to disclose the ownership structure of the provider or facility.
HB 6873 – This would strengthen the notice requirements that parties to a material change health care transaction must give to the AG, within 60 days instead of 30. The AG shall review the notice, evaluate the transaction’s compliance with antitrust laws, and, if the transaction would not otherwise require a certificate of need, consult with the Office of Health Strategy regarding the effect of the transaction on access, quality, and affordability of health care in the parties’ primary service areas.
Illinois
SB 1998 – Introduced February 6, 2025, as drafted this bill would amend the Illinois Antitrust Act, which already requires health care facilities or provider organizations to provide notice to the state AG regarding “covered transactions.” These are defined as mergers, acquisitions, or contracting affiliations between two or more health care facilities or provider organizations not previously under common ownership or contracting affiliation. Under the proposed amendment, the Illinois AG must provide written consent to a covered transaction if a private equity group or hedge fund provides any financing. Notably, under the proposed amendment, only notice is required if the transaction does not include private equity or hedge fund financing.
Indiana
In March 2024, Indiana amended its state law, effective July 1, 2024, to require written notice of health care entities’ mergers and acquisitions (see our prior post). The latest bill is HB 1666, which the Indiana House of Representatives passed on February 13, 2025, would remove the existing $10 million threshold and thereby expand reporting requirements to cover any merger or acquisition between an Indiana health care entity and another health care entity. Under the proposed amendment, the notice would be sent to a statutorily created “merger approval board,” which would retain the ability to approve or deny the proposed transaction subject to criteria detailed in HB 1666. In addition to the notice and approval obligation, HB1666 would require health care entities to file annual reports and disclose ownership information to specified state agencies. The bill is currently in the Indiana Senate and is expected to pass in some form.
New Mexico
SB 14 – As drafted this bill, would enact the Health Care Consolidation and Transparency Act, which would provide—with a number of exceptions—oversight of mergers and acquisitions and other transactions involving direct or indirect changes of control or assets of health care entities. As drafted the bill contains notice requirements; would provide for preliminary and comprehensive reviews of proposed transactions by the Office of Superintendent of Insurance; and would require approval, approval with conditions, or disapproval of proposed transactions by that office. The legislation further contains reporting requirements with respect to disclosure of health care entity ownership and control.
New York
In 2023, New York enacted N.Y. Pub. Health Law § 4550-4552 requiring health care entities to submit to the state Department of Health written notice of proposed material transactions, including: (i) the anticipated impact of the material transaction on cost, quality, access, health equity, and competition in the impacted markets; and (ii) any commitments by the health care entity to address anticipated impacts. Governor Kathy Hochul’s 2026 budget proposal (Part S) would amend Section 4552 to strengthen material transactions reporting requirements changing the notice deadline to 60 days before the closing date of the transaction (as opposed to 30).
The amended law would also require a statement as to whether any party to the transaction (including a controlling person or parent company), owns any other health care entity that within the past three years has closed operations, is in the process of closing operations, or has experienced a substantial reduction in services; and a statement as to whether a sale-leaseback agreement, mortgage or lease, or other payments associated with real estate are a component of the proposed transaction.
The department would conduct a preliminary review of all proposed transactions, which may consist of a full cost and market impact review (“CMIR”). If a CMIR is required, the department may require parties to delay the proposed transaction closing until the CMIR is completed, but in no event shall the closing be delayed more than 180 days from the date of the preliminary review of the proposed transaction. Further, parties to a material transaction would be required to notify the department annually—for a five-year period—of factors and metrics to assess the impacts of the transaction.
Notably, under the Governor’s proposed budget, the changes to N.Y. Pub. Health Law § 4550-4552 would not require Department of Health approval for any material transactions but simply notice consistent with the requirements set forth in the proposed amendment.
Oregon
SB 951 –As drafted this bill would prohibit an MSO, an individual who works as an independent contractor with an MSO, or a shareholder, director, officer or employee of an MSO from owning or controlling shares in, serving as a director or officer of, being an employee of, working as an independent contractor with, or otherwise managing, directing the management of or participating in managing a professional medical entity with which the MSO has a contract for services. The current draft of the bill specifies what conduct constitutes ownership or control of a professional medical entity; voids noncompetition agreements, nondisclosure agreements, and nondisparagement agreements between certain business entities and medical professionals, with specified exceptions, and prohibits retaliation.
Texas
HB 2747 – As drafted this bill would require certain health care entities, including providers, facilities, and provider organizations (which includes MSOs) to submit notice of material change transactions to the state AG not less than 90 days before the transaction; and grants the AG authority to conduct certain related studies on health care markets, imposing civil and administrative penalties.
Vermont
H 71 – Relating to health care entity transaction oversight and clinical decision making, as drafted this bill would require health care entities to provide notice to a board and state AG before entering into certain proposed transactions. The board, in consultation with the AG, would review, approve, approve with conditions, or disapprove the proposals. The measure would also: 1) prohibit corporations from practicing medicine or otherwise interfering with health care providers’ professional judgment and clinical decision making, and 2) require public reporting on ownership and control of certain health care entities.
Washington
HB 1881/SB 5704 – This legislation would enhance requirements regarding notice for material changes to the operations and governance structure of participants in the health care marketplace.
SB 5387 – As drafted this bill would generally prohibits the corporate practice of health care by deeming it unlawful for an individual, corporation, partnership, or other entity without a license to practice a health care profession, own a health care practice, employ licensed providers, etc. The current version of the bill sets forth requirements for licensed health care providers establishing and owning a health care practice and limits certain activities of shareholders, directors, or officers of a health care practice; and generally prohibits those without a license from interfering with/controlling the professional judgment or ultimate clinical decisions of a licensed health provider in various settings. It also sets forth conditions constituting unprofessional conduct by license holders.
Massachusetts
HB 5159 – As EBG wrote in January 2025, Massachusetts recently passed a sweeping health care market oversight bill that takes effect April 8, 2025. Among other things, HB 5159 extends the authority of the state’s Health Policy Commission (“HPC”) regarding Notices of Material Change to indirect owners and affiliates of health care providers, such as private equity companies, significant equity investors, MSOs, and health care REITs. The law also broadens the transactions that are subject to the HPC’s Material Change requirements to include: (i) significant expansions in capacity of a provider or provider organization; (ii) transactions involving a significant equity investor resulting in a change of ownership or control of a provider or provider organization; (iii) real estate sale lease-back arrangements and other significant acquisitions, sales, or transfers of assets; and (iv) conversions of a provider or provider organization from a nonprofit to a for-profit. The HPC will be authorized to require the submission of information from significant equity investors.
Notably, legislation has been introduced in the Massachusetts General Court (SD.1910) which seeks to update the months old legislation.
Privacy Tip #434 – Use of GenAI Tools Escaping Corporate Policies
According to a new LayerX report, most users are logging into GenAI tools through personal accounts that are not supported or tracked by an organization’s single sign on policy. These logins to AI SaaS applications are unknown to the organization and are “not subject to organizational privacy and data controls by the LLM tool.” This is because most GenAI users are “casual, and may not be fully aware of the risks of GenAI data exposure.” As a result, a small number of users that can expose large volumes of data. LayerX concludes that “[a]pproximately 18% of users paste data to GenAI tools, and about 50% of that is company information.” LayerX’s findings include that 77% of users are using ChatGPT for online LLM tools.
We have outlined on several occasions the risk of data leakage with GenAI tools, and this report confirms that risk.
In addition, the report notes that “most organizations do not have visibility as to which tools are used in their organizations, by whom, or where they need to place controls.” Further, “AI-enabled browser extensions often represent an overlooked ‘side door’ through which data can leak to GenAI tools without going through inspected web channels, and without the organization being aware of this data transfer.”
LayerX provides solid recommendations to CISO’s including:
Audit all GenAI activity by users in the organization
Proactively educate employees and alert them to the risks of GenAI tools
Apply risk-based restrictions “to enable employees to use AI securely”
Employees must do their part as well. CISOs can implement operational measures to attempt to mitigate the risk of data leakage, but employees should follow organizational policies around the use of GenAI tools, collaborate with employers on the appropriate and authorized use of GenAI tools within the organization, and take responsibility for securing company data.
How PPM Health Plans Can Solve the MEWA Problem
While a physician practice management (PPM) structure allows for compliance with corporate practice of medicine laws and ease of administration, it often creates inadvertent health plan issues that should be navigated carefully to avoid compliance issues and/or difficulties with selling PPM entities.
In Depth
MEWA PROBLEM
The PPM structure helpfully allows physicians to focus on the clinical practice of medicine through a physician practice professional corporation (PC), while outsourcing the business of the practice of medicine to a management services organization (MSO, which, together with the PC, is referred to as the PPM). Ideally, employees of the MSO and employees of each PC associated with the PPM structure could be combined and covered under a single group health plan to allow for experience rating of a larger group of employees, which leads to cost savings for the PPM structure and all employees, and simplifies the offering of healthcare coverage administration.
Because the MSO and the PC under the PPM structure typically do not have adequate common ownership – purposefully so to ensure the PPM structure complies with the corporate practice of medicine rules – allowing the PC and MSO entities to participate in the same health plan can create health plan compliance concerns, such as a multiple employer welfare arrangement (MEWA). It is preferable to avoid creation of a MEWA, as MEWA requirements can be burdensome and prohibitive, including exposure to state laws (some of which outlaw self-funded MEWAs) and extensive reporting requirements to certain states and the US Department of Labor. As a result, having a MEWA can result in state and/or federal penalties and the structure presents significant complications when it comes to selling the PPM to a third party.
MEWA ALTERNATIVES
All, however, is not lost. Rather than separately purchasing commercially available group health insurance (e.g., in the small group market, which is expensive and lacking in transparency), MSOs and PCs have several other options to provide group health plan coverage and avoid or accommodate being a MEWA. These include the following:
The MSO and PCs establish “mirror plans,” where each entity maintains a self-funded group health plan but stop-loss insurance may be pooled among entities. Alternatively, the MSO and PCs may use a group captive medical stop-loss structure to manage risk associated with stop-loss insurance for self-funded plans.
The MSO and PCs establish separate “level-funded” plans, where the MSO and PCs establish and maintain their own self-funded group health plans.
The MSO and PCs purchase fully insured group health coverage that is underwritten as a single, large group through a professional employer organization (PEO). While this usually in fact creates a MEWA, MEWA compliance is the responsibility of the PEO provider not the PPM structure.
SB21: Delaware Responds In The DExit Battle
The annual DGCL amendments this year carry a little more urgency than before. SB21 was rushed through to the Delaware Senate in mid-February, bypassing the normal process that involves recommendation by the Council of the Corporation Law Section of the Delaware State Bar Association (the “CLC”). At the legislature’s request, the CLC is weighing in with recommended changes to SB21, and that version is the current front runner to get approved by the legislature and adopted this year, and is the version (as currently available) described below. Delaware’s hurried process can be seen as a response to a gathering movement by corporations to reincorporate in other jurisdictions, dubbed “DExit”, which threatens Delaware’s mantle as the undisputed leader in state corporate law, and a material revenue source for the State. The movement seems to have at least two underlying causes. One is cyclical. Delaware’s judge made law periodically either swings too far in the pro-plaintiff direction, or otherwise produces controversial decisions, alienating companies incorporated in Delaware. This is followed by a course correction, sometimes judicial and sometimes legislative. A second cause is jurisprudence around the level of judicial scrutiny applied to actions taken by controllers, with particularly pronounced criticism coming from companies with “rockstar” CEOs and founders.[1]
There were several decisions in 2023 that provoked backlash, including Moelis,[2] which invalidated a controller’s stockholder agreement in a decision that was sharply at odds with prevailing M&A practice, and Activision,[3] some aspects of which were unusually formalistic and ran contrary to common M&A practices. Both decisions were legislatively overturned in the 2024 DGCL amendments. Another decision, Palkon v. Maffei,[4] applied the entire fairness standard of review to a reincorporation transaction, eliciting the ire of controllers given the speculative nature of the purported controller benefit. That decision was overturned by the Delaware Supreme Court this year. But perhaps the biggest judicial catalyst for DExit is Tornetta v. Musk[5], where in 2024 the Court of Chancery invalidated Elon Musk’s performance award at Tesla, despite its having received board and minority stockholder approval. The value of the award ($56 billion at the time of litigation), the size of the fee award to plaintiff’s counsel ($345 million), and the profile of the company and its CEO, guaranteed that the judicial decisions emanating from the dispute would receive a lot of attention, particularly from other large founder-led tech companies.[6]
SB21 seeks to recalibrate through expanding DGCL Section 144, which regulates the voidability of contracts and transactions in which officers and directors are interested, to also regulate challenges to controlling stockholder contracts and transactions, and to expand applicability of the rule to fiduciary duty challenges. SB21 also seeks to recalibrate through tightening up DGCL Section 220, the rule governing inspection of books and records, which has been a vehicle for a significant increase in litigation in the last few years. In tandem with SB21, the Delaware Senate introduced Senate Concurrent Resolution 17 (“SCR17”), requesting that the CLC prepare a report with recommendations for legislative action relating to excessive awards of attorney’s fees in certain corporate litigation cases.
Amendments to DGCL Section 144
Current paragraph (a) of Section 144 protects against the voidability of contracts and transactions due to the interest of one or more officers or directors, where the contract or transaction is authorized in good faith by the board or a board committee by a majority of the disinterested directors, is approved by the stockholders (in each case with knowledge of the material facts) or is fair to the corporation. As amended, paragraph (a) would protect against equitable relief or damages awards. It thus would expand from a narrow focus on validity to serve as a broad shield against fiduciary duty challenges. Approval by the board requires a majority of disinterested directors, and if a majority of board members are not disinterested, approval of a committee of two or more members, all of whom are independent.
New paragraphs (b) and (c) would for the first time bring controlling stockholders within the ambit of Section 144. One of the criticisms of current case law is that to avoid an entire fairness standard of review and obtain the shielding effect of the business judgment standard of review, controllers must comply with the narrow strictures of In re MFW[7] and its progeny,[8] including obtaining approval of both (i) a special committee composed of disinterested and independent directors, and (ii) disinterested stockholders. Paragraph (b) significantly relaxes the procedural hurdles for controllers to obtain the liability shield outside of going private transactions. Under paragraph (b), for a controlling stockholder transaction to be protected against equitable relief or damages awards, either (i) or (ii) is required, but not both. As for paragraph (a), the special committee must have two or more members, all of whom are independent. The approval of disinterested stockholders must be by a majority of votes cast, in contrast to the majority of shares held by disinterested stockholders currently required under MFW.
For public companies, the amendments provide that a director is presumed to be disinterested with respect to a transaction to which the director isn’t a party, if the board has determined that the director satisfies the criteria for determining independence from the corporation and, if applicable, the controlling stockholder, under stock exchange rules. The presumption is “heightened and may only be rebutted by substantial and particularized facts that such director has a material interest in such act or transaction or has a material relationship with a person with a material interest in such act or transaction.” Moreover, being the nominee of someone with a material interest does not, by itself, show that a director is not disinterested. This new test addresses scope creep that occurred through a series of Delaware cases, where the test has expanded in recent years to include social ties.[9]
Under new paragraph (c), for going private transactions, approval of both a special committee and disinterested stockholders is required. But, given the liberalization of the stockholder approval requirement described above, the test is easier to meet than under existing case law. Moreover, paragraph (c) does not incorporate the “ab initio” requirement under MFW, but merely provides that the transaction “is conditioned on a vote of the disinterested stockholders at or prior to the time it is submitted to stockholders for their approval or ratification.” For public companies, a “going private transaction” is a “Rule 13e-3 transaction” as defined under the Securities Exchange Act of 1934. For non-public corporations, it is, generally stated, an M&A transaction pursuant to which all or substantially all of the shares of capital stock held by disinterested stockholders are cancelled or acquired.
Another criticism of existing case law is the expanding definition of who can be deemed to be a controlling stockholder. This is also addressed in the amendments, through introduction of a specific definition of a “controlling stockholder” as a person that, together with affiliates and associates, either (i) owns or controls a majority in voting power of outstanding voting stock of the corporation entitled to vote in the election of directors, (ii) has the contractual or other right to cause the election of nominees constituting a majority of members of the board, or (iii) has the power functionally equivalent to such a majority owner, and holds at least one-third in voting power of outstanding voting stock of the corporation. The one-third threshold is an important bright line that is likely to lead to a reduction in litigation against controllers.
The amendments also override recent case law holding that controlling stockholders owe a fiduciary duty of care to the corporation,[10] by introducing the functional equivalent of exculpation under DGCL Section 102(b)(7), but without the need to opt in. The amendments provide that controlling stockholders are not liable in that capacity to the corporation or to its stockholders for monetary damages for breach of fiduciary duty, other than for breach of the duty of loyalty, acts or missions not in good faith, or derivation of an improper personal benefit.
The amendments to Sections 144 and 220 apply to all acts and transactions (including book and records demands) before, on or after the date the Governor signs them into law, but do not apply to any judicial proceeding that is completed or pending on or before February 17, 2025. The synopsis states that this lack of retroactivity “shall not in any way affect the ability of a court, by reference to existing case law, to reach an outcome consistent with one that would be dictated by this Act.”[11]
Amendments to DGCL Section 220
Amendments to Section 220 delineate, through a “books and records” definition, the documents that stockholders can obtain, including items such as a charter and bylaws (and instruments incorporated by reference), minutes of meetings of stockholders, emails to stockholders within the last 3 years, minutes of meetings of the board and board committees and information packages for those meetings, agreements under DGCL 122(18), annual financial statements, and D&O independence questionnaires. Importantly, this does not include emails or text messages among directors, officers, or managers, access to which has allowed plaintiff’s attorneys to engage in sometimes expansive fishing expeditions. The amendments limit a court’s ability to order the production of a broader set of books and records, but they do provide that a court can require production of additional records if the corporation does not have minutes of meetings of stockholders, boards or board committees, or annual financial statements. This underscores the importance for corporations of maintaining good minutes in order to limit the scope of document productions in books and records actions.
The amendments also limit the time period for which a shareholder can inspect books and records (that is, only books and records within three years of the date of the demand) and impose conditions on a stockholder’s ability to inspect and copy the books and records themselves. A stockholder’s demand must be “made in good faith and for a proper purpose” and describe “with reasonable particularity the stockholder’s purpose and the books and records the stockholder seeks to inspect.” The books and records sought must be “specifically related to the stockholder’s purpose.” This change appears to replace the currently low standard requiring only a “credible basis,” but the CLC’s recommended changes to the amendments in SB 21 permit shareholders to request a broader set of documents in the event that the shareholder can show a “compelling need for an inspection of such records to further the stockholder’s proper purpose” and the shareholder has shown “by clear and convincing evidence that such specific records are necessary and essential to further such purpose.” Whether this change to the amendments is incorporated into the final bill remains to be seen.
The amendments permit the corporation to impose reasonable restrictions on the “confidentiality, use, or distribution” of the books and records, to redact unrelated material, and to require that the stockholder incorporate by reference the books and records into any complaint the stockholder files. This change codifies what has been Delaware courts’ current practice.
SCR 17
SCR 17 focuses on the trade-off between preventing excessive attorney’s fees in stockholder litigation, and appropriately incentivizing law firms to bring actions on a contingent fee basis that protect stockholder rights. The Resolution requests the Council of the Corporation Law Section of the Delaware State Bar Association to:
prepare, on or before March 31, 2025, a report with recommendations for legislative action that might help the Delaware Judiciary ensure that awards of attorney’s fees provide incentives for litigation appropriately protective of stockholders but not so excessive as to act as a counterproductive toll on Delaware companies and their stockholders that threatens to make the overall “benefit-to-cost” ratio of corporate litigation negative.
The Resolution specifically requests the Council to consider the utility of fee caps. Foley & Lardner LLP will continue monitoring the progress of SB 21 and SCR 17 as they progress. Both are moving quickly. The Senate Judiciary Committee has scheduled a hearing on the proposed amendments on March 12, 2025.
[1] To the extent that rockstar founders/CEOs seek the same level of autonomy controlling corporations as they could have managing limited liability companies, that is not the focus of the proposed amendments, and it is difficult seeing the Delaware legislature granting their wish. It would undermine Delaware’s goal of navigating between being a business-friendly jurisdiction and protecting the rights of stockholders, and would undermine one of its competitive advantages, which is the sophistication of its judiciary. The CLC recommendations appear to dial back some of the loosening of procedural constraints under SB21.
[2] W. Palm Beach Firefighters’ Pension Fund v. Moelis & Co., 311 A.3d 809 (Del. Ch. 2024).
[3]Sjunde AP-Fonden v. Activision Blizzard, Inc., 2024 WL 863290 (Del. Ch. 2024).
[4] Palkon v. Maffei, 311 A.3d 255 (Del. Ch. 2024), rev’d, 2025 WL 384054 (Del. 2025).
[5] See, e.g. Tornetta v. Musk, 310 A.3d 430 (Del. Ch. 2024).
[6] For example, Tesla, SpaceEx and The Trade Desk have reincorporated out of Delaware. Meta and DropBox are both reportedly considering reincorporating out of Delaware. There are also several very large tech companies that are likely to go public in the near future.
[7] In re MFW S’holders Litig., 67 A.3d 496 (Del. Ch. 2013), aff’d, 88 A.3d 635 (Del. 2014)
[8] In re Match Grp., Inc. Deriv. Litig., 315 A.3d 446 (Del. 2024) (holding that where a controlling stockholder stands on both sides of a transaction with its controlled corporation, the standard of review does not change to business judgment unless both of MFW’s procedural devices – that is, using a special committee and a majority-of-the-minority vote – are used).
[9] See, e.g. In re Dell Technologies Inc. Class V S’holders Litig., 2020 WL 3096748 (Del. Ch. 2020)
[10] See In re Sears Hometown and Outlet Stores, Inc. S’holder Litig., 309 A.3d 474 (Del. Ch. 2024).
[11] Some legal commentators have viewed this as paving the way for the Tornetta decision to be overturned on appeal.
SEC Expands Confidential Review Process for Draft Registration Statements
Go-To Guide:
SEC expands confidential review process for draft registration statements, now available for all Securities Act and Exchange Act registrations.
New policy removes “initial filing” limitation, allowing both private and public companies to submit draft registration statements confidentially.
The policy clarifies accommodation for de-SPAC transactions.
Underwriter details may now be omitted from initial draft submissions, but must be included in later drafts and public filings.
On March 3, 2025, the Securities and Exchange Commission’s Division of Corporation Finance issued new guidance expanding the availability of confidential (nonpublic) review of draft registration statements (DRS).
Background
A DRS is a confidential draft of a registration statement submitted to the SEC for review before a public filing is made, granting issuers flexibility to avoid alerting the public market of the planned offering and sharing sensitive information until a more advanced stage of the offering process, if at all.
The confidential submission process was originally established only for foreign private issuers but was introduced in 2012 under the Jumpstart Our Business Startups Act (JOBS Act) for emerging growth companies (EGCs), allowing them to submit draft registration statements for nonpublic SEC review under Section 6(e) of the Securities Act of 1933, as amended (Securities Act), in order to encourage smaller companies to enter the public markets and streamline the initial public offering (IPO) process.
In 2017, the SEC extended this benefit to all companies—whether or not they qualified as EGCs—when filing:
an IPO registration statement under the Securities Act;
an initial registration statement under Section 12(b) of the Securities Exchange Act of 1934, as amended (Exchange Act), when seeking to list securities on a national securities exchange for the first time; or
an initial submission of a registration statement under the Securities Act during the twelve-month period following the effective date of the IPO registration statement or an issuer’s Exchange Act Section 12(b) registration statement.
The March 2025 guidance extends the benefits of non-public review to all issuers by removing the “initial filing” limitation. Now, both private and public companies can submit a DRS for confidential SEC review in connection with any Securities Act or Exchange Act registration—regardless of whether they are first-time registrants. Affected companies may now forestall market scrutiny of contemplated capital markets transactions triggered by a public SEC filing and, in some cases, during the pendency of the SEC review process, which may offer an advantage for planning and marketing the transaction.
Key Enhancements
1.
Expanded Eligibility for Nonpublic Review
a.
IPOs and Initial Exchange Act Registrations
The confidential review process now applies to initial Exchange Act registrations under both Section 12(b) (exchange listings) and Section 12(g) (required registration for companies exceeding $10 million in assets with a class of equity securities held by either 2,000 shareholders or 500 non-accredited investors), broadening access to the confidential review process.
Previously, companies filing on Forms 10, 20-F, or 40-F to go public outside the traditional IPO registration statement were not permitted to request non-public review.
b.
Subsequent Offerings and Registrations
Previously, the SEC would only accept subsequent DRSs for nonpublic review if they were submitted within the 12-month period following the effective date of either (i) the issuer’s IPO registration statement under the Securities Act, or (ii) the issuer’s initial Exchange Act registration statement under Section 12(b).
Under the SEC’s new policy, issuers may now submit DRSs for confidential review in connection with any Securities Act offering or any registration of a class of securities under Section 12(b) or Section 12(g) of the Exchange Act, regardless of how much time has passed since the issuer became public.
2.
Accommodation for de-SPAC Transactions
Under rules adopted in July 2024, target companies in de-SPAC transactions (where a SPAC, which is a public company, merges with a private company) must be co-registrants when the SPAC files the registration statement.
The SEC has now clarified that these registration statements—where the SPAC is the surviving entity—are eligible for confidential submission if the target company would itself qualify for non-public review under existing policies.
3.
Foreign Private Issuers (FPIs)
FPIs may rely on this expanded non-public review process. Alternatively, if the FPI qualifies as an EGC, it can follow the EGC-specific DRS procedures. FPIs that do not qualify as EGCs may also continue to rely on the separate confidential submission policy the SEC outlined in its May 30, 2012, guidance for FPIs.
4.
Omission of Underwriter Information
Issuers are now permitted to omit underwriter names from initial draft submissions, which is consistent with a practice that has developed when an issuer has not yet selected an underwriter. However, underwriter details must still be included in subsequent confidential draft submissions and in the publicly filed registration statement.
Submitting a Draft Registration Statement
The SEC expects a substantially complete submission—meaning the draft should be as close to final as possible. However, the SEC recognizes that some financial information may not be ready (for example, if a fiscal period has not yet ended), and commented that if the issuer reasonably expects that the missing information will not be required at the time of public filing (e.g., due to permitted reporting accommodations), the SEC will proceed with its review despite the omissions, an accommodation previously limited to EGCs.
Issuers can also continue to request relief under Rule 3-13 of Regulation S-X, which allows them to omit or modify certain financial statement requirements if the omitted information is immaterial and providing it would be unduly burdensome. The SEC will assess these requests based on the issuer’s particular facts and circumstances.
Public Availability and Timing
DRS submissions remain confidential until the issuer publicly files its registration statement. At that point, previously submitted DRS submissions, along with the SEC’s comment letters and the issuer’s responses, become publicly available via EDGAR.
For IPOs and initial Exchange Act registrations, the initial public filing must be made at least 15 days before any road show or, in the absence of a road show, at least 15 days prior to the registration statement’s requested effective date. This 15-day requirement is not new and mirrors the timeline previously applied to EGCs.
For subsequent public offerings and Exchange Act registrations (regardless of how much time has passed since the company became public), the initial public filing must be made at least two business days prior registration statement’s requested effective date. However, unlike the non-confidential registration process for IPOs and initial Exchange Act registrations, the SEC indicated that an issuer responding to staff comments on a DRS will need to do so on a public filing and not in a revised DRS.
Additionally, submissions of Exchange Act registration statements on Form 10, 20-F, or 40-F will need to be publicly filed with the SEC to ensure that the required 30-day or 60-day period runs before effectiveness, in accordance with existing rules.
Coordinating with the SEC
Issuers should consider communicating directly with SEC staff regarding their anticipated transaction timelines—particularly for filings tied to specific pricing windows or deal milestones. The SEC will consider reasonable requests for expedited review for both confidential and public filings.
The SEC staff indicated that for subsequent public offerings and Exchange Act registrations it may consider reasonable requests to expedite the two-business day period that the registration statement has to be public.
Takeaways
This expanded confidential submission process provides issuers with greater flexibility, particularly companies that were previously excluded from confidential review (such as seasoned issuers).
In particular, for seasoned issuers that are unable to access shelf-registrations (due to, for example, baby-shelf limitations), the new guidelines allow issuers seeking to raise capital in a registered offering to file a DRS on Form S-1 or F-1 confidentially, and if there is a no review, to quickly pivot to pricing the deal when market conditions are ripe.
By allowing more issuers to engage in a nonpublic review process with the SEC, the new policy may facilitate more capital formation while preserving key investor protections.
David Huberman also contributed to this article.
Ping-Pong Match Appears Over: US Companies Apparently Definitively Relieved of Compliance Obligations Under the Corporate Transparency Act
The Corporate Transparency Act (the CTA) requires a range of entities, primarily smaller, unregulated companies, to file reports with FinCen, and arm of the Treasury Department, identifying the entities’ beneficial owners, and the persons who formed the entity. The purpose of the CTA was to aid in the detection of terrorism, money-laundering, and tax evasion.
As previously reported, the federal courts in Texas preliminarily enjoined the enforcement of the CTA. When a court recently lifted the last such injunction, FinCen set a new deadline for compliance, but on March 2nd FinCen announced that it would not enforce the CTA pending its issuance of new rules that would make the CTA applicable only to “foreign reporting companies,” as outlined in our client alert.
While we don’t expect any of this to change materially, we advise that you continue to watch this space as the status of the CTA has been quite volatile. We also recommend that you take into account that the CTA is technically effective, just not being enforced. Thus, pending the anticipated adoption of new rules, failure to comply is technically a violation for the purposes, for example, of reps and warranties in transaction documents.
French Senators Propose Repealing or Postponing the Implementation of CSRD Requirements Under French Law
On 26 February 2025, the European Commission published its Omnibus simplification package which aims at simplifying several ESG-related legislations.
In the context of this publication, we offered insight on the proposals announced by the Commission, which notably included i) a proposal for a Directive amending the implementation and transposition deadlines of the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD), and ii) a proposal for a Directive amending the scope and requirements of the CSRD and CSDDD.
The postponement of the CSRD reporting requirements would only concern companies that are not yet subject to reporting. We offer advice on what should companies do on CSRD while they wait for the EU to make up its mind.
Some stakeholders have not waited for the EU to make final decisions before attempting to change companies’ sustainability obligations. While the CSRD was transposed into French law by an Order published in December 2023, several senators proposed on 4 March 2025 to repeal the Order, “in order to avoid major difficulties for companies”.
The same senators also proposed a 4-year postponement on the implementation of sustainability reporting requirements under French law. They argue that the current timeline for the entry into force of the CSRD reporting requirements is already causing significant operational difficulties to French companies. Postponing the implementation of the sustainability reporting obligations for four years would allow companies to better prepare for these new rules, giving them the time needed to structure their reporting effectively, according to these senators.
This position could change and is not definitive insofar as these amendments have been tabled in the Senate on first reading of a bill and are due to be debated in public session on March 10 and (possibly) 11 2025.
These amendments echo the French position published in January 2025, calling for an indefinite delay of the CSDDD, a two-year delay on the CSRD, and well as a significant reduction on the scope of sustainability reporting. However, they may come as a surprise from a country which had already transposed the CSRD and that was a forerunner on the duty of care.
Adèle Bourgin contributed to this article.
How Alcohol Exporters Can Use FDII and IC-DISC to Maximize Tax Savings
For US alcohol exporters – whether crafting bourbon, brewing craft beer, or bottling fine wines – selling to international markets is a significant opportunity for growth. Two US federal income tax regimes, the foreign-derived intangible income (FDII) deduction and the interest charge-domestic international sales corporation (IC-DISC), offer valuable ways to reduce tax liability and boost profits. Each has unique benefits and trade-offs, making them suited to different business needs. This blog post compares FDII and IC-DISC, helping alcohol exporters decide which tool – or combination – best fits their global ambitions.
Note that all discussions of tax rates are limited to US federal income tax. Additional state and local taxes and excise taxes may also apply.
FDII for Export Income
Introduced under the 2017 Tax Cuts and Jobs Act (TCJA), FDII incentivizes US C corporations to earn income from foreign sales while keeping operations stateside by providing a reduced effective tax rate on eligible export income derived from US-based corporations. It targets “intangible” income – profits exceeding a routine return on tangible assets – and applies a deduction directly on the exporter’s tax return.
How FDII Works
Eligible income comes from selling alcohol (e.g., whiskey or wine) to foreign buyers for use outside the United States.
The FDII deduction is 37.5% of qualifying income (dropping to 21.875% after 2025), reducing the effective corporate tax rate from 21% to 13.125% on that portion of income.
No separate entity is required. Claims are made on the existing C corporation’s Form 1120.
Example: A winery exporting $2 million in Pinot noir with $400,000 in net profit might qualify $300,000 as FDII. A 37.5% deduction ($112,500) lowers the tax from $63,000 to $39,375, saving $23,625.
IC-DISC: A Classic Deferral and Rate Reduction Tool
The IC-DISC, a legacy export incentive from the 1970s, operates as a separate “paper corporation” that earns commissions on export sales. It is available to any US business structure (e.g., C corporations, S corporations, and LLCs) and shifts income to shareholders at a lower tax rate or defers it entirely.
How IC-DISC Works
The exporter forms an IC-DISC and pays the entity a commission (up to 4% of export gross receipts or 50% of net export income).
The commission is deductible for the operating company, reducing its taxable income.
The IC-DISC pays no federal tax; instead, its income is distributed to shareholders as qualified dividends (taxed at 20% capital gains rate) or retained for deferral.
Example: A distillery owned by a closely held pass-through entity with $2 million in export sales and $400,000 in net profit pays a $200,000 commission to its IC-DISC. The operating company saves $74,000 in income tax (37%), while shareholders pay $47,600 in capital gains tax (20% plus 3.8% net investment income tax) on the dividend, netting a $27,600 savings.
Comparing Tax Benefits: FDII vs. IC-DISC
Combining FDII and IC-DISC?
For alcohol manufacturers and distributors, using both FDII and IC-DISC is possible. FDII reduces the corporate tax rate on export income, while an IC-DISC could shift additional income to shareholders at the capital gains rate or defer it.
Conclusion
FDII and IC-DISC are potent tools for alcohol exporters, each with distinct strengths. FDII delivers a lower tax rate with minimal effort, ideal for C corporations riding the wave of global demand for American products. IC-DISC offers flexibility, deferral, and broader eligibility, suiting a wider range of businesses with an eye on cash flow. As the craft beer, spirits, and wine industries expand abroad, choosing the right regime – or blending them – can uncork significant savings. Consult a tax professional to tailor the choice to your operation.
The CFTC’s New Advisory on Self-Reporting, Cooperation and Remediation
In an advisory announced February 25, 2025, the Division of Enforcement of the Commodity Futures Trading Commission (CFTC or Commission) announced a new regime for assessing cooperation credit in determining fines in the settlement of enforcement cases. The advisory expressly revokes and replaces all six prior enforcement advisories on cooperation, as well as the advice in the Enforcement Manual on cooperation. The advisory now formally titles cooperation credit as “Mitigation Credit.” The advisory splits the scoring of Mitigation Credit between a score for a particular quality of self-reporting and a score for a particular level of cooperation during an investigation and remediation. A settling party can be eligible for Mitigation Credit based on either self-reporting or cooperation, or both.
The advisory provides a “Matrix” that assigns specific percentage penalty discounts for each combination of the credit scores. The scoring is structured to encourage both exemplary cooperation and exemplary self-reporting. For example, exemplary cooperation even with “satisfactory” self-reporting results in only a 35 percent reduction; exemplary self-reporting followed by no cooperation results in a 20 percent discount; and both an exemplary self-report and exemplary cooperation results in a 55 percent reduction in penalty.
The advisory might be a harbinger for better clarity and more predictable outcomes, but only time will tell what its future effectiveness will be. It can be hard to measure the extent to which credit is awarded in the current absence of quantified penalty levels for particular types of violations. If the CFTC Enforcement Division’s initial settlement demand seems excessive, it will be difficult to discern the dollar or percentage value of any credit. However, by delineating specific percentage credits for particular Mitigation Credit, the advisory signals a quantitative approach that over time might provide more predictable rewards for self-reporting and cooperation. There will undoubtedly be disagreements over the Division’s assessments but having the advisory’s specific framework could help focus the debates.
Self-Reporting Process Changes
Voluntariness: A self-report must be made voluntarily, meaning that it must be made prior to an imminent threat of exposure of the potential violation. Importantly, a self-report will be eligible for Mitigation Credit even if it may have been required to be disclosed by a futures commission merchant, swap dealer, major swap participant, swap execution facility or swap data repository in its annual chief compliance officer report, if the self-report was made in a timely manner “notwithstanding the timing of the annual report.”
Disclosure to the “Appropriate Division”: The advisory provides that an investigated party can be credited for self-reporting as long as it self-reported to the “Appropriate Division” of the CFTC. Previously, self-reporting would have been credited only if the report was made directly to the Division of Enforcement. The Appropriate Division is defined to be the primary division that is responsible for the interpretation and application of each regulation that is the subject of the potential violation. Disclosure to the Division of Enforcement, however, will be treated as disclosure to the Appropriate Division, so disclosure to the Division of Enforcement will always qualify.
Timing of Self-Reporting: Self-reporting must be “prompt” but promptness will be measured against the reporting person’s efforts to determine whether there was a potential violation and its materiality in a timely manner, including discovery of the potential violation and escalation, investigation, management review and governance requirements.
Qualifying for “Full Credit”: To receive “full credit” for a self-report, the report must be complete including all material information regarding the potential violation known to the person at the time of the self-report, including description of the issue, date and method of discovery, available root cause analysis and remediation, if any.
Rolling Disclosure can Still Qualify for Full Credit: To encourage voluntary disclosure at the earliest possible time, the Division will recommend full credit for the Person where the Person made best efforts to determine the relevant facts at the time of the self-report, fully disclosed the facts known at that time, continued to investigate and disclosed additional relevant facts as they were identified; and demonstrates adherence to the other requirements in this advisory.
Safe Harbor for Good Faith Mistakes in Self-Reporting: Importantly, the advisory makes the commitment that the Division will not recommend charges for fraud or false statements if errors and inaccuracies occur in self-reports if the self-report or voluntary disclosure was made in good faith and if any inaccurate information in the self-report or voluntary disclosure is supplemented and corrected promptly after discovery of the inaccurate information. This might seem to be simply fair government behavior, but it is welcome to have it in writing.
The Matrix for Mitigation Credit
The advisory’s Matrix assigns particular penalty percentage discounts based on the combination of separate scores for: (1) self-reporting; and (2) cooperation and remediation. The Division will evaluate self-reporting on a three-tier scale: No Self-Report; Satisfactory Self-Report; and Exemplary Self-Report. It will evaluate cooperation and remediation on a four-tier scale: No Cooperation; Satisfactory Cooperation; Excellent Cooperation; and Exemplary Cooperation. Mitigation Credit for self-reporting and cooperation are evaluated separately. This is the Matrix:
Tier 1: No Cooperation
Tier 2: Satisfactory Cooperation
Tier 3: Excellent Cooperation
Tier 4: Exemplary Cooperation
Tier 1: No Self-Report
0%
10%
20%
35%
Tier 2: Satisfactory Self-Report
10%
20%
30%
35%
Tier 3: Exemplary Self Report
20%
30%
40%
55%
Scoring Self-Reporting: The Division of Enforcement will evaluate self-reporting primarily on four factors: (1) the voluntariness of the self-report; (2) whether the self-report was made to the Commission; (3) whether the self-report was made in a timely manner; and (4) whether the self-report was complete.
Tier
Self-Reporting
Tier 1: No Self-Report
No timely self-report; or Self-report was information already known from other sources; or Self-report that was not reasonably related to the potential violation or not reasonably designed to notify the Commission of the potential violation.
Tier 2: Satisfactory Self-Report
Self-report to an Appropriate Division Notified the Commission of the potential violation Did not include all material information reasonably related to the potential violation that the reporting party knew at the time of the self-report
Tier 3: Exemplary Self-Report
Self-report to an Appropriate Division Notified the Commission of the potential violation Included all material information reasonably related to the potential violation that the reporting party knew at the time of the self-report Included additional information that assisted the Division with conserving resources in the Division’s investigation
Scoring Cooperation and Remediation: In evaluating a company’s or individual’s cooperation, the Division of Enforcement will study a wide variety of factors, including remediation measures.
Cooperation: The Division of Enforcement will consider such factors as whether the company or individual provided assistance beyond subpoenas and compulsory processes, voluntarily provided documents and information, made presentations, made witnesses available, performed internal investigations or reviews, provided an analysis and identified the root cause of the violation, took corrective action for remediation, significantly completed remediation and proactively engaged and used significant resources to provide material assistance.
Remediation: The Division of Enforcement will also evaluate remediation as part of cooperation and will primarily consider whether a company or individual engaged in substantial efforts to prevent a future violation. The relevant Operating Division will determine whether the remediation plan is appropriate.
Monitors and Consultants: The advisory introduces an important new role for Operating Divisions in fashioning remedial relief. The advisory states that the appropriate Operating Division will determine whether to recommend the use of a compliance monitor or consultant to ensure completion of remedial undertakings. This means that settlements can involve advocacy with Operating Divisions in addition to the Division of Enforcement. The Division of Enforcement will then have to approve the selection of a monitor, who will have to periodically submit progress reports to the Division of Enforcement. Additionally, the monitor, in conjunction with the individual or company’s senior management, must submit a certification of completion to the undertakings of the company or individual.
Tier
Cooperation
Tier 1: No Cooperation
No substantial assistance beyond required legal obligations
Tier 2: Satisfactory Cooperation
Provided substantial assistance Voluntary production of documents and information Arranging for voluntary witness interviews Basic presentations on legal and factual issues
Tier 3: Excellent Cooperation
Meet the expectations for Satisfactory Cooperation Consistently provided substantial assistance Internal investigations or reviews Thorough analysis of potential violation, root cause, and corrective action for remediation Use of internal or external expert resources and consultants as appropriate
Tier 4: Exemplary Cooperation
Meet the expectations for Excellent Cooperation Consistently provided material assistance Proactive engagement and use of significant resources Significant completion of remediation Use of accountability measures, as appropriate
The Division’s advisory opens the door to more predictable credit for self-reporting and cooperation going forward. Time will tell its contribution to fair outcomes.