FBI Says Fighting Financial Crimes a Priority; Insurance Cases Top 200

May 23, 2008

The Federal Bureau of Investigation pursued 529 financial crime cases in its most recent fiscal year, including 209 insurance fraud cases.

During it fiscal year 2007, the 209 insurance fraud cases investigated by the FBI resulted in 39 indictments and 47 convictions. The FBI says it realized $27.2 million in restitutions and $427,000 in fines from its insurance investigations.

The FBI said it expects the number of cases and subsequent arrest and conviction statistics to rise in the near future as more fraud is uncovered in the wake of Hurricane Katrina.

The insurance fraud cases are included in the FBI’s Financial Crimes Report to the Public, Fiscal Year 2007. The report discusses corporate fraud, securities and commodities fraud, health care fraud, mortgage fraud, insurance fraud, mass marketing fraud, and asset forfeiture/money laundering.

“Financial crimes affect the economic security of millions of Americans, and the FBI is dedicated to working with our partners in industry and law enforcement to combat these offenses,”; said Assistant Director Kenneth W. Kaiser, FBI Criminal Investigative Division.

Some key findings presented in the report include:

As of the end of FY 2007, 529 corporate fraud cases were being pursued by the FBI, several of which involve losses to public investors that individually exceed $1 billion.

FBI securities and commodities fraud cases increased from 937 in 2006 to 1,217 in FY 2007, and resulted in $24 million in recoveries, $1.7 billion in restitution orders, and $202.7 million in fines.

The 2,493 health care fraud cases investigated by the FBI resulted in 839 indictments and 635 convictions of health care fraud criminals.

The 1,204 pending mortgage fraud cases in FY 2007 resulted in 321 indictments, 206 convictions, $595.9 million in restitution orders, and $21.8 million in recoveries.

The FBI investigated 548 money laundering cases in FY 2007, resulting in 141 indictments, 112 convictions, $66.9 million in restitution orders, $2.2 million in recoveries, and $11.4 million in fines.

Insurance Fraud
The report said the FBI considers insurance fraud an investigative priority, due in large part to the insurance industry’s significant status in the U.S. economy.

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. The National Insurance Crime Bureau (NICB) calculates insurance fraud raises the yearly cost of premiums by $300 for the average household.

The FBI goes after what it sees as the most prevalent schemes and the top echelon criminals defrauding the insurance industry, working with the National Association of Insurance Commissioners, NICB, CAIF, as well as state fraud bureaus, state insurance regulators, and other federal agencies. Currently, the FBI reports it is focusing a majority of its resources relating to insurance fraud on the following schemes:

Arson Fraud Related to Mortgage Industry Credit Crisis – Whether unable or unwilling to meet their mortgage obligations, it is believed that some number of distressed homeowners, property flippers, and/or other real estate investors have resorted to committing arson to avoid real estate foreclosure. The insurance policy holders for these properties are then able to extract otherwise unattainable proceeds/profits through the filing of false insurance claims. The FBI said that this illicit activity is being prioritized due to market forecasts calling for increasing numbers of real estate foreclosures.

Hurricane Katrina Insurance Fraud – In late August 2005, Hurricane Katrina caused approximately $100 billion in damages along the Gulf Coast. 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, according to the FBI report. Of the more than $80 billion in government funds appropriated for reconstruction efforts in the region, it is estimated insurance fraud accounts for between $4 and $6 billion. The FBI created the Insurance Fraud Task Force (IFTF) to investigate the spike in insurance fraud related to Katrina.

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, according to the FBI report.

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, said the FBI report. 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 that purport to provide workers compensation insurance to enter the marketplace, offer reduced premium rates, and misappropriate funds without providing insurance, the FBI says. 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.

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. 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.

The FBI cites a case involving Mutual Benefits Corp. (MBC), a viatical settlement company, as among its most significant recent cases. More than 30,000 investors worldwide were defrauded of approximately $1 billion by the principals of MBC, who misrepresented the investment and failed to disclose prior regulatory actions. In October 2006, Peter Lombardi, former MBC president, pled guilty to securities fraud and received a 20-year sentence. In 2007, six additional subjects were charged as part of the scheme, and five have been convicted. Sentences for the additional subjects range between one and 10 years. The SEC and IRS are assisting with this investigation.

Source: FBI

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