Check-cashing scheme seen as big threat to Florida's comp system
While underreporting and misclassifying employees still occurs, a new type of fraud has emerged to cheat the workers' comp system. Florida authorities recently announced arrests in their effort to end a practice they say could be costing the state $1 billion annually, and they suspect it's occurring in other states as well. Industry stakeholders are collaborating with the state to stem the practice.
Each of the multiple felonies carries a penalty of up to 30 years in prison.
"In our view this is one of the largest threats to premium collection in workers' comp in Florida," said Major Geoff Branch of the Florida Division of Insurance Fraud. "It's going to keep going."
The arrests followed the enactment of legislative reforms resulting from a study by a money service business working group convened by Florida Chief Financial Officer Jeff Atwater in the fall of 2011. The group included representatives from the Florida Department of Financial Services, Attorney General's Office of Statewide Prosecution, Office of Financial Regulation, the Office of Insurance Regulation, and other industry stakeholders.
Additionally, the Division of Insurance Fraud entered into a first-of-its kind memorandum of understanding with the Broward Sheriff's Office creating a joint task force.The arrests and prosecutions took place as a result of task force investigations. July's arrests were part of an effort called Operation Dirty Money.
Operation Dirty Money.
"This focuses on a number of identified shell companies being utilized to funnel payroll through to avoid detection by workers' comp carriers as far as premium collections," Branch said. "We identified one main person . . . he would recruit, over many years, seven or eight people to set up companies that only existed on paper."
As Branch explained, the so-called facilitator would incorporate shell companies, obtain minimum insurance policies under the guise they were start-up businesses, and provide minimum workers' comp coverage. The facilitator would then market the shell companies and their certificates of insurance to uninsured subcontractors.
An example would be an uninsured subcontractor with 10 employees that sought roofing work but either could not get or did not want to pay for workers' comp coverage. The facilitator would provide the name of a shell company and tell the uninsured subcontractor to submit bids on a job and say the employees worked for the shell company. After the work was performed, the general contractor would draw a check payable to the shell company and give it to the uninsured subcontractor who would take it to the facilitator or a participating money service business.
"The check is negotiated and two fees are taken out," Branch said. "The first fee is 1-2 percent to the check cashing store; the second fee is 3-5 percent, which goes to [the facilitator] for his 'entrepreneurial spirit' in setting up the team."
Cost of the fraud.
The first alleged facilitator arrested, Hugo Rodriguez, was believed to be running shell companies worth an estimated $70 million. Overall, the arrests have netted more than $140 million in fraudulent transactions associated with 12 shell companies, state officials said. The task force has identified nearly 40 targets representing $525 million worth of labor exposure or payroll that went through them.
Workers' comp carriers, businesses, and injured workers are suffering the consequences of the fraud, Branch said.
"The legitimate honest businesses not only are paying their fair share, but competing against folks who are not," he said. "They are losing bids" and must absorb the costs of premium avoidance.
Injured workers run the risk of not being compensated for their injuries. In cases where an injured worker goes to a hospital and is not advised about the workers' comp system, medical care becomes the responsibility of society.
In cases of catastrophic injuries that send a worker to the emergency room, "a workers' comp company that collected no money is on the hook to pay the claim, at least initially," Branch said. "Even though that carrier may have been duped, even if they don't know there are a large number of employees operating, initially that carrier will be on the hook. It will try to subrogate to the general contractor or whomever, but remember, the payment will go to the general contractor to the shell company; so on paper it will appear they were employees of the shell company."
The investigation began in southeastern Florida where Branch is headquartered. Officials plan to expand it elsewhere in the state.
"We have gathered information that this scheme is going on in many areas," Branch said. "We're going to go wherever our intelligence leads us."
Read more at the WorkersComp Forum homepage.
September 17, 2012
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