INSURANCE FRAUD I. General Overview Insurance fraud continues to be an investigative priority for the FBI’s Financial Crimes Section, due in large part to the insurance industry’s significant status in the U.S. economy. The U.S. insurance industry consists of thousands of companies and collects nearly $1 trillion in premiums each year. The size of the industry, unfortunately, makes it a prime target for criminal activity; the Coalition Against Insurance Fraud (CAIF) estimates that the cost of fraud in the industry is as high as $80 billion each year. This cost is passed on to consumers in the form of higher premiums. In fact, the National Insurance Crime Bureau (NICB) calculates that insurance fraud raises the yearly cost of premiums by $300 for the average household. The FBI is attempting to identify the most prevalent schemes and the top echelon criminals defrauding the insurance industry in an effort to reduce this type of fraud. The FBI works closely with the National Association of Insurance Commissioners, NICB, CAIF, as well as state fraud bureaus, state insurance regulators, and other federal agencies to combat insurance fraud. In addition, the FBI is a member of the International Association of Insurance Fraud Agencies, an international non-profit organization whose mission is to maintain an international presence to address insurance and insurance-related financial crimes on a global basis. Currently, the FBI is focusing a majority of its resources relating to insurance fraud on the following schemes: Hurricane Katrina Insurance Fraud - In late August 2005, Hurricane Katrina made landfall along America’s Gulf Coast, severely damaging the region and causing approximately $100 billion in damages. According to the CAIF, Katrina generated approximately 1.6 million insurance claims totaling $34.4 billion in insured losses. The destruction caused by the storm has resulted in a marked increase in insurance fraud in the area. Of the more than 80 billion government dollars appropriated for reconstruction efforts in the region, it is estimated that insurance fraud accounts for between $4 and $6 billion. Insurance fraud related to the 2005 hurricane season has taken on a variety of forms. Policy holders, for example, have been tempted to exaggerate or falsify claims in the wake of Katrina. According to the Louisiana State Police, many policy holders without flood insurance are submitting fire or stolen property claims for items that were actually damaged by flood waters. Additionally, some policyholders are “double dipping”—that is, holding multiple policies with different carriers, claiming the same damage expenses with both companies, and eventually receiving two payments for what should have been one claim. Other individuals are intentionally damaging their own property in order to increase repair cost estimates, ultimately increasing the payments they receive from insurers. Other fraud stemming from Hurricane Katrina is perpetrated by unscrupulous contractors. In one common scheme, contractors are convincing victims that a deposit is required before a job can be initiated. After receiving the deposit money, however, the contractors fail to complete, or even begin, the agreed upon repair work. Another fraudulent scheme used by corrupt contractors is “bid-rigging.” In bid-rigging, contractors raise the cost of a construction job by conspiring in the bidding process. The homeowner is quoted two inflated bids and one lower (but still inflated) bid. The work is completed by the lowest bidder and kickbacks are paid to the other firms and the homeowner. Insurance-Related Corporate Fraud - Although Corporate Fraud is not unique to any particular industry, there has been a recent trend involving insurance companies caught in the web of these schemes. The temptations for fraud within the corporate industry can be greater during periods of financial downturns. Insurance companies hold customer premiums which are forbidden from operational use by the company. However, when funding is needed, unscrupulous executives invade the premium accounts in order to pay corporate expenses. This leads to financial statement fraud because the company is required to “cover its tracks” to conceal the improper utilization of customer premium funds. Premium Diversion/Unauthorized Entities - The most common type of fraud involves insurance agents and brokers diverting policyholder premiums for their own benefit. Additionally, there is a growing number of unauthorized and unregistered entities engaged in the sale of insurance-related products. As the insurance industry becomes open to foreign players, regulation becomes more difficult. Additionally, exponentially rising insurance costs in certain areas (i.e., terrorism insurance, directors’/officers’ insurance, and corporations), increases the possibility for this type of fraud. The schemes typically involve entities which utilize a myriad of sophisticated schemes for verification of submitted fraudulent financial statements to the state insurance regulatory body in order to hide the true nature of the fictitious assets listed in the statements. This generates large insurance premiums solely to be diverted. Viatical Settlement Fraud - A viatical settlement is a discounted, pre-death sale of an existing life insurance policy on the life of a person known to have a terminal condition. The parties to a viatical settlement include the insured party, insurance agent/broker, insurance company, viatical company/broker, and the investor. Viatical settlement fraud occurs when misrepresentations are made on the insurance policy applications, in effect, hiding the fact that the party applying for a policy has already been diagnosed with a terminal condition. On the investor end, the fraud occurs when misrepresentations are made to the investors by the viatical companies about life expectancies of insured parties and guaranteed high rates of return. With the cooperation of the insurance industry, through referrals from industry liaison and other law enforcement agencies, the FBI continues to target the individuals and organizations committing insurance fraud. The FBI continues to initiate and conduct traditional investigations as well as utilize sophisticated techniques, to include undercover investigations, to apprehend the fraudsters. Workers Compensation Fraud - The Professional Employer Organization (PEO) industry operates chiefly to provide workers compensation insurance coverage to small businesses by pooling businesses together to obtain reasonable rates. Workers compensation insurance accounts for as much as 46 percent of a small business owners’ general operating expenses. Due to this, small business owners have an incentive to shop workers compensation insurance on a regular basis. This has made it ripe for entities who purport to provide workers compensation insurance to enter the marketplace, offer reduced premium rates and misappropriate funds without providing insurance. The focus of these investigations is on allegations that numerous entities within the PEO industry are selling unauthorized and non-admitted workers compensation coverage to businesses across the U.S. This insurance fraud scheme has left injured and deceased victims without workers compensation coverage to pay their medical bills. II. Overall Accomplishments During FY 2006, 233 cases investigated by the FBI resulted in 53 indictments and 54 convictions of Insurance Fraud criminals. The number of cases and subsequent arrest and conviction statistics will likely rise in the near future as more fraud is uncovered in the wake of Hurricane Katrina. The following notable statistical accomplishments are reflective in FY 2006 for Insurance Fraud: $30 million in Restitutions and $3 million in Seizures. The chart below is reflective of the number of pending cases from FY 2002 through FY 2006. Fiscal Year 2002 - 413 Fiscal Year 2003 - 326 Fiscal Year 2004 - 289 Fiscal Year 2005 - 270 Fiscal Year 2006 - 233 Insurance Fraud Pending Cases, Fiscal Years 2002 to 2006 III. Significant Cases HURRICANE KATRINA RELATED FRAUD (SACRAMENTO): In the wake of Hurricane Katrina, The American Red Cross established a national call center in Bakersfield, California to process and disburse relief funds to victims of the disaster. After the Red Cross noticed a disproportionate amount of disbursements in the immediate Bakersfield area when compared to the rest of the state, an investigation was launched. It is estimated that $500,000 was lost due to fraud conducted by workers at the call center. As of December 1, 2006, a total of 73 individuals have been indicted in the case, including 24 Red Cross contract employees, 61 subjects who have pled guilty to various felony charges, including charges of wire fraud and false statements and 25 subjects have been sentenced. A Hurricane Katrina Fraud Task Force, consisting of FBI, DOJ, U.S. Attorneys’ Offices, Office of Inspector General, U.S. Secret Service, the Federal Trade Commission, the Securities and Exchange Commission and various state and local law enforcement agencies has been initiated to address frauds relating to the Hurricane. MUTUAL BENEFITS CORPORATION (MIAMI): Mutual Benefits Corporation (MBC) was a viatical settlement company offering interests in insurance policies to investors worldwide. Over 28,000 investors worldwide were defrauded of approximately $956 million by the principals of MBC, who misrepresented the investment and failed to disclose prior regulatory actions. Additionally, MBC falsified the life expectancies of the insured and paid kickbacks to physicians for signing fraudulent documents that were provided to investors. In October 2006, Peter Lombardi, former MBC President, pled guilty to Securities Fraud. As a part of his plea agreement, Lombardi has agreed to be responsible for $956 million in restitution to the victim investors in this fraud. The SEC and IRS assisted in this investigation.
Posted on: Mon, 12 Jan 2015 20:47:44 +0000
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