Triggers and Red Flags That Lead to FTC Investigations

Triggers and Red Flags That Lead to FTC Investigations

The Federal Trade Commission, or FTC, is responsible for protecting consumers and promoting competition in the marketplace. Part of their job is investigating potential violations of consumer protection or antitrust laws. While FTC investigations are generally non-public, there are certain triggers and red flags that commonly lead to the FTC opening an investigation against a company.

Premerger Notification Filings

One of the most common triggers for an FTC investigation is a premerger notification filing under the Hart-Scott-Rodino (HSR) Act. This law requires companies over a certain size to file a notification with the FTC and Department of Justice before completing large mergers or acquisitions. The agencies review these filings to see if the proposed transaction raises any antitrust concerns. If it does, they will likely open an investigation before deciding whether to challenge the merger.

Consumer or Business Complaints

The FTC often initiates investigations based on complaints received from consumers or competitors. These may allege fraudulent, deceptive or unfair business practices. For example, if the FTC receives a number of complaints about a company’s advertising being misleading, they may open an investigation into false advertising or other consumer protection violations. The FTC has an online complaint form that makes it easy for consumers to report concerns. So if your business sees a spike in complaints, be prepared for the FTC to come calling.

Whistleblowers

Current or former employees who report illegal activity – aka whistleblowers – are another common trigger. A disgruntled employee may contact the FTC if they believe their employer is engaged in unlawful conduct, such as price fixing schemes. The FTC takes whistleblower tips very seriously. So if you have reason to think an employee may file a complaint, it’s best to do an internal investigation immediately to get ahead of any FTC scrutiny.

Congressional Inquiries

Members of Congress often make inquiries to the FTC regarding issues of concern to their constituents. For example, a Senator may request that the FTC look into predatory lending practices in their state. These types of Congressional inquiries frequently lead to FTC investigations against companies engaged in questionable conduct.

News Articles

The FTC monitors news reports for potential consumer protection or antitrust violations. If journalists uncover bad business practices, the FTC will likely launch an investigation. For instance, if a newspaper publishes an exposé on anti-competitive practices in a particular industry, the companies named will probably face scrutiny. So if your company ends up the target of a negative news report, be prepared for the FTC to come calling.

Suspicious Financial Reporting

Banks and other financial institutions are required to file Suspicious Activity Reports (SARs) on transactions that may indicate criminal activity. Common red flags are things like payments from shell companies or transfers to high-risk jurisdictions. If the FTC notices a pattern of suspicious financial activity, it may trigger an investigation into potential fraud, money laundering or other illegal conduct.

Tips from Informants

The FTC receives many tips from informants with inside information on unlawful business practices. For example, an informant may contact the FTC alleging that a group of companies is engaged in price fixing. Informants may be motivated by financial rewards or whistleblower protections. Regardless, the FTC takes tips very seriously, so a detailed informant complaint will likely spur an investigation.

Referrals from Other Agencies

Other government agencies like the FBI, IRS or state attorneys general often refer cases to the FTC when they uncover evidence of consumer protection or antitrust violations. These referrals will immediately prompt the FTC to open an investigation into the referred company. So if another agency has been looking into your business, expect to hear from the FTC soon after.

Failed Compliance Audits

The FTC routinely conducts compliance audits and inspections of companies subject to certain FTC orders or consent decrees. If the audit reveals violations of the order, the FTC will likely initiate an investigation and potential enforcement action. So if your company is under an FTC order, meticulous compliance is essential to avoid triggering an investigation.

Suspicious Patterns in Big Data

The FTC is increasingly using big data analytics to identify suspicious activity patterns that may indicate fraud, deception or antitrust violations. For example, analyzing pricing data across competitors may reveal collusion or price fixing schemes. So if your company’s data reveals suspicious trends, expect the FTC to come calling with questions.

Violations of Other Statutes

If a company violates other federal laws like the CAN-SPAM Act or Children’s Online Privacy Protection Act, it will likely trigger an FTC investigation for unfair or deceptive practices. So violations of other statutes enforced by the FTC often lead to expanded investigations of general consumer protection issues.

National Security Threats

The FTC investigates mergers, acquisitions and conduct that may pose threats to national security interests. This includes reviewing foreign investments in U.S. companies that may compromise national security. It also covers investigating conduct like espionage, trade secret theft, or risks to critical infrastructure. So any activity that implicates national security will bring intense FTC scrutiny.

Responses to FTC Investigations

If your company is the target of an FTC investigation, it is critical to respond appropriately in order to mitigate the risk of an enforcement action. Here are some tips:

• Take it seriously. FTC inquiries should never be ignored.
• Hire experienced counsel. An FTC investigation is no place for amateurs.
• Conduct an internal investigation. You need to understand the full scope of any issues.
• Be cooperative with investigators. Lack of cooperation only raises suspicions.
• Consider self-reporting any violations. It shows good faith and may reduce penalties.
• Explore all settlement options. Settlement is generally preferable to litigation.
• Tighten up compliance. Correct any weaknesses that may have led to issues.
• Refrain from retaliating against whistleblowers or destroying documents.

While receiving an inquiry from the FTC is daunting, handling it professionally can mitigate the fallout. Still, the best strategy is to avoid practices that attract FTC scrutiny in the first place.

References

Fighting Identity Theft with the Red Flags Rule: A How-To Guide for Business. Federal Trade Commission.[1]

Red Flags Rule. Federal Trade Commission.[2]

Identity Theft Red Flags and Address Discrepancies Under the Fair and Accurate Credit Transactions Act of 2003. Federal Trade Commission.[3]

The Enforcers. Federal Trade Commission.[4]

Frequently Asked Questions about the FTC’s Red Flags Rule and Veterinary Practices. American Veterinary Medical Association.[5]

UA Identity Theft Prevention Program. University of Alaska.[6]