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Most premium fraud schemes are fairly simple. They might involve in some cases a single employer juggling employee records to lower his monthly premium. But some exotic enterprises have arisen lately that have caught the attention of state and local investigators.

For the past four years, Geoffrey Branch, a premium fraud investigator for the Florida Department of Financial Services, has targeted shell companies that were formed for the purpose of creating phony certificates of workers' compensation insurance.

He is now assisting state prosecutors in going after two companies representing $44 million in payroll exposure which have possibly evaded millions in workers' compensation premiums this way.

People whom Branch refers to as "facilitators" set up these shell companies and obtain comp coverage for minimal cost. A subcontractor who employs 50 roofers could bid on a job from a roofing contractor looking to service 100 homes and tell the contractor to contact the shell company to obtain proof of coverage.

"The facilitator then sends the certificate back to the roofing contractor and he checks the state database and sees that it is valid because the database will not indicate the kind of work the certificate covers nor the number of employees," he says.

DFS spokeswoman Nina Banister says efforts are under way to revise database rules so they will include more detailed information, such as number of employees and job classifications that might hinder such operations in the future.

Branch says he has records of one company obtaining 400 certificates of insurance that can then be rented out to any subcontractor.

So what happens when there is a claim?

"If it is a minor cut or injury the facilitator may just tell the claimant to go to a clinic and then pay for it out of his own pocket," he says.

In fact, Neil Johnson, who heads the premium fraud unit at Liberty Mutual Insurance Company, says that an insured that shows no minor claims often raises a red flag with carriers.

In the event of a catastrophic claim, "everyone just points fingers at each other and they all walk away without having to do anything," he says.

While the shell company will be liable for the claim, often times it is run by someone who is not even in the country and for the most part beyond any civil or criminal remedies, Branch noted.

Alternate financial institutions such as check-cashing businesses play a critical role in the scheme. The subcontractor will cash his weekly payroll check at such a place that will not ask the kind of questions any legitimate bank would.

"In fact, the way some of these schemes were first uncovered was when local law enforcement officials wondered why someone would cash a check for a 10 percent fee when a bank would do it for free," Branch says.

Branch says one check cashing business in Broward County cashed $42 million worth of payroll checks in one quarter. "That is more than the four Bank of America branches in the area did," he noted.

If you take the money services businesses out of the equation the scheme stops, he added.

Branch says he was not aware of how widespread the practice he described is nationally.

Dominic Dugo, an assistant district attorney for the San Diego County District Attorney's office, who set up what is believed to be one of the first premium fraud task forces in the country in 1996, says he is aware of similar schemes in his state, although he says that the Florida enterprise issuing 400 certificates was far beyond the scope of any shell operations he was aware of in his state.

September 1, 2008

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