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

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

During the 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.

The report found that 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 also 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 report also showed that 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 NICB, CAIF, the National Association of Insurance Commissioners, 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 the mortgage industry crisis; Hurricane Katrina insurance fraud; insurance-related corporate fraud; premium diversion/unauthorized entities; and workers’ compensation fraud.

Arson Fraud. 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 FBI said that this illicit activity is being prioritized due to market forecasts calling for increasing numbers of real estate foreclosures.

Hurricane Katrina Fraud. 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 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 to pay corporate expenses. This leads to financial statement fraud.

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, increases the possibility for this type of fraud, said the FBI report.

Workers’ Compensation Fraud. Workers’ comp insurance accounts for as much as 46 percent of a small business owners’ general operating expenses, according to the FBI. This has made it ripe for entities that purport to provide workers’ comp insurance to enter the marketplace, offer reduced premium rates, and misappropriate funds without providing insurance, the FBI said. These investigations are focused on allegations that numerous entities within the professional employer organization industry are selling unauthorized and non-admitted workers’ compensation coverage to businesses across the United States.