PITTSBURG, Kan. — Earlier this week, the Department of Justice announced a wide range of charges, including conspiracy to commit money laundering and substantive money laundering, against several people connected to a network of companies that once controlled Oswego Community Hospital in Labette County, which closed last year.
The next day, Kansas Attorney General Derek Schmidt’s office issued a press release and, along with attorneys general of a majority of U.S. states, sent a letter to Senate Banking Committee leadership urging the U.S. Senate to pass a bill known as the Improving Laundering Laws and Increasing Comprehensive Information Tracking of Criminal Activity in Shell Holdings (ILLICIT CASH) Act.
"Over the past several decades as commerce has modernized and expanded across the globe, so too has crime," Schmidt said in the release. "We’re long overdue for an update to our federal money laundering framework to bring it into the 21st Century so state officials can access better tools to crack down on the use of our own American institutions to further criminal activity by terrorists and drug traffickers."
The ILLICIT CASH Act, Schmidt and the other attorneys general argued, "will greatly reduce criminals’ and terrorists’ abuse" of U.S. regulatory and financial institutions.
"Corporations and other legal entities are generally creatures of state—not federal—law. But most States do not collect information that identifies who actually owns or benefits from an entity. Without information about the people behind an entity, States cannot know whether the entity is a shell concealing illegal activities," their letter to the Senate Banking Committee notes.
"Shell companies, which often have no physical presence and generate little to no activity, allow criminals of all kinds—like drug traffickers, terrorist financiers, tax evaders, and corrupt government officials—to anonymously shelter and transfer the proceeds of their crimes. Through shell companies, criminals can use American banks and other financial institutions."
While they may not qualify as terrorists or drug traffickers, those charged in the indictment unsealed Monday appear to potentially fall into the category of those whose use of shell companies to obscure their inappropriate financial activities might have been identified and stopped sooner if the kind of reforms Schmidt and the other attorneys general are calling for had already been in place.
Those accused of conspiracy to commit health care fraud, wire fraud, and money laundering in the alleged scheme were part of "an elaborate pass-through billing scheme using rural hospitals in several states as billing shells to submit fraudulent claims for laboratory testing," according to the DOJ, which allowed them to inappropriately bill insurance companies for more than a billion dollars.
"The indictment alleges that the conspirators would take over small, rural hospitals, often in financial trouble, using management companies they owned and operated. The conspirators would then bill private insurance companies through those rural hospitals for millions of dollars of expensive urinalysis drug tests and blood tests, conducted mostly at outside laboratories they often controlled or were affiliated with, using billing companies that they also controlled. While outside laboratories did most of these laboratory tests, the conspirators allegedly billed private insurance companies as if these laboratory tests were done at the rural hospitals," the DOJ noted in its press release Monday.
"According to the indictment, these rural hospitals had negotiated contractual rates with private insurers that provided for higher reimbursement than if the tests were billed through an outside laboratory. Accordingly, the scheme used the hospitals as a shell to fraudulently bill for such tests. Further, the indictment alleges that the lab tests were often not even medically necessary. The conspirators allegedly would obtain urine specimens and other samples for testing through kickbacks paid to recruiters and health care providers, often sober homes and substance abuse treatment centers. The indictment also alleges that the conspirators engaged in sophisticated money laundering to promote the scheme and to distribute the fraudulent proceeds."
According to Schmidt and the other attorneys general, reforms such as the ILLICIT CASH Act could make it harder to engage in such sophisticated money laundering schemes.
"To combat criminal abuses of shell companies, some States have enacted reforms. Oregon, for example, recently enacted legislation that required entities to register a natural person and banned the use of virtual offices as registered agents, among other reforms," their letter noted.
"Although these reforms have effectively reduced the use of Oregon as a home for shell companies, the unscrupulous can dodge such reforms by establishing an entity in a State with lax reporting requirements and using it to cloak their activities in other States. Because the States lack uniform disclosure requirements, money laundering and terrorism financing persist."
It seems highly likely that establishment of corporate entities in states with lax reporting requirements was an important element in allowing those indicted this week in the alleged health care fraud scheme that affected rural hospitals in Kansas to get away with it for as long as they did.
While most of those indicted in the alleged multi-state scheme were Florida residents, EmpowerHMS — the company that operated hospitals in Kansas affiliated with the alleged conspirators indicted this week — though headquartered in Kansas City, Kansas, was a Delaware limited liability company, according to a bankruptcy document involving a related company.
Delaware has long been notorious for its lax incorporation rules.
The ILLICIT CASH Act "will combat money laundering and terrorism financing by requiring uniform, nationwide disclosure of beneficial owners by many small corporations and limited liability companies. The Financial Crimes Enforcement Network of the U.S. Department of Treasury (FinCEN) will then keep all the disclosed beneficial ownership information in a federal registry. And entities that must disclose this information must also update FinCEN within 90 days of any change in their beneficial owners," Schmidt and the other attorneys general wrote in their letter this week.
"If all the ILLICIT CASH Act did were require entities to disclose their beneficial owners to FinCEN, we think the Act would be an important weapon to fight criminal abuse of American financial institutions. But the Act does more. It also requires that FinCEN release beneficial ownership information to local, tribal, state, or federal law enforcement, national security, or intelligence agencies. Storing beneficial ownership information in a centralized location is good. Sharing it with law enforcement is even better. With access to comprehensive beneficial ownership information, law enforcement can put an end to unlawful use of our financial institutions by criminals and terrorists."