Transnational crime gangs make fraud a global epidemic

By Steve Barkhuizen
June 17, 2014
Insurers must learn a counter morphing global threat by cartels

imageAbstract: Insurance fraud increasingly is becoming riddled with large transnational rings, and also is a terrorism-financing vehicle. Complex rings come from melting pots of nations, and often a ring may have members from several countries. They effectively hide their operations behind networks of shell companies, front companies and off-shore financial centers. Russians are America’s top domestic crime threat. In fact a Russian-dominated gang tried to steal $400 million in false injury claims from staged crashes in New York. The Italian Mafia has been linked to staged crashes in Italy. An international vehicle-fraud ring tried to fund Chechen separatists. Insurers must see the bigger global picture and motives when dealing with claims. The aim should be to deprive complex rings the networks, resources and funding needed to maintain their operations.

Insurance fraud increasingly operates at the level of organized transnational crime rings. In some cases terrorists and even national governments use insurance schemes to fund illicit activities.

Insurance schemes are part of a modern global crime nexus that steals an estimated $1 trillion per year.1 Criminal groups based in nations throughout the globe are exploiting the interlinked nature of modern trading, transportation, banking and monetary systems that fluidly move people and commerce throughout the global economy and across international borders.

imageGrowing symbiotic connections among crime cartels such as drug cartels, terrorists, large scale insurance fraud rings, cyber thieves, crime syndicates, criminal state actors and other players seek sophisticated ways to use each other’s networks and skill sets for mutual profit in the subterranean global criminal economy. Often they exploit porous, broken or developing nations. Their growing infiltration of lawful commerce threatens free markets and financial systems critical to the stability of the global economy.

There are no firm estimates on how much insurance money transnational and terrorist organizations steal annually, but their presence is well-established and damaging.

Insurance fraud, for example, provides a profitable way for international crime rings to launder their proceeds. Life insurance is an especially popular washing vehicle.

In fact, $80 million in drug money was washed through life-insurance policies issued in the Isle of Man and other locations in one case, a U.S. Customs global investigation reveals.2

International drug traffickers, for example, purchased more than 200 life-insurance policies through brokers. They named cartel and family members as beneficiaries. The policies were bought with drug money, and then were cashed out prematurely despite the penalties.3
Criminals also use property-casualty insurance to launder dirty money from time to time. A typical example is a gang that insures high-value goods such as artwork obtained with the proceeds of their criminal activity.

The gang invariably submits a fraudulent claim against the policy. The claim payout effectively launders the crime proceeds several times over, through the purchase of the goods (with dirty money) and insurance policy (with more dirty money) plus the ensuing fraudulent claim.

“I have seen Eurasian organized crime groups transmit the proceeds of healthcare fraud, identity theft and cybercrime, by exploiting alternate channels outside the mainstream banking system,” U.S. Justice Department official Jennifer Shasky Calvery said in 2012 testimony before the U.S. House of Representatives.4

Transnational crime rings are a prominent force in the insurance fraudscape. Ring members may come from several nations, and their insurance crimes may cross diverse national borders as well. Combatting them is a high U.S. priority. Insurance-fraud takedowns are among prominent recent successes.5

The U.S. is a natural target of schemers within this context. More than 7,000 U.S. insurers collect at least $1 trillion in premiums each year. This vast size contributes significantly to the cost of insurance fraud by providing more opportunities and bigger incentives.

Insurance fraud in the U.S. (excluding health insurance fraud) exceeds $40 billion per year.6 Healthcare fraud adds tens of billions more. Both sectors are frequent targets of transnational gangs, though firm data on the trend is unknown.

A global crime ring defrauded 70 U.S. insurers and made in excess of $11 million in false workers compensation claims. Ring members used a network of 19 fictitious medical clinics and stole the identities of thousands of victims to submit false claims. They used stolen doctors’ identities to create false medical reports. The final convictions were handed down in 2011.

The crime proceeds were laundered through Dubai, Armenia and the Philippines. Ring members hailed from Iran, Germany, The Philippines, Mexico and Armenia.

“Consistently, we see [fraud rings] exploit shell companies, front companies, offshore financial centers, and free trade zones.” Some 102 members of another international crime group called Armenian Power were arrested in the U.S. for no-fault auto-insurance fraud, among other suspected crimes. The ring was closely tied to a so-called Thief-in-Law — a high level Russian criminal figure who offers protection, prosecutors say. The ring allegedly dealt directly with high-ranking Armenian/Russian crime figures abroad and in the U.S. Among other insurance scams, ring members allegedly owned Florida clinics that made phantom or needless treatments for supposed injuries from staged crashes.

Check fraud, kidnapping, extortion, illegal gambling and identity theft were among the other crimes the vast operation managed, the U.S. Justice Department alleges in a coordinated multi-state series of busts.7

Another Armenian-American crime group with ties abroad made more than $100 million in bogus health-insurance claims against Medicare and other insurers. The operation ran a network of 118 clinics across 25 states. The group’s chief, Armen Kazarian, was the first Thief-in-Law convicted of racketeering in the U.S. and received 37 months in federal prison. The ring “puts the traditional Mafia to shame,” saidU.S. Attorney Preet Bharara.8 Insurance schemes in the U.S. may be orchestrated by shadowy overseas players. Florida is home to numerous insurance-fraud rings whose members originate from a melting pot of nations.

“These organizations are using part of this money for other things. It’s been documented through investigations of this money leaving the county, leaving the state of Florida, whether it be back to Cuba, Mexico, the Cayman Islands, Costa Rica. Soit’s a lot bigger than what a lot of people understand, and the fact is that it’s not just a staged crash and it’s not just insurance fraud,” Det. Ronnie Cooper, a special investigator with the Hillsboro, Fla. sheriff’s office, said in testimony about organized crime to the Florida state legislature last year.9

Russians are the top U.S. domestic organized crime threat, says the nonpartisan Congressional Research Service. In fact, a Russian-dominated ring in New York City tried to steal $400 million in false injury claims from setup and phantom car crashes.

“In the United States, Russian organized criminals are involved in long-established organized crime activities such as ... white-collar criminal activities including money laundering and fraud of various types,” says an analysis by the federal Congressional Research Service.

“The types of fraud and scams that Russian criminals participate in cross industries from health care and strategic commodities (e.g., precious metals) fraud to credit card, insurance, securities and investment fraud.”10 [italics added]State-sponsored insurance crimes are an emerging threat as well. The cash-poor North Korean government allegedly has stolen hundreds of millions of dollars by scamming international insurers.11

North Korea has orchestrated suspicious reinsurance scams involving disasters such as transportation accidents, floods and factory fires, according to experts. The reinsurance covers the state-owned insurers.

In one incident, a North Korean ferry sank off the coastal city of Wonsan, causing the death of 129 people. The North Koreans claimed that all passengers were automatically given insurance when they bought the tickets. The reinsurance claim amounted to $6 million. The North Koreans denied the insurers’ own divers access to the wreck.12 In another case, the regime’s state insurance company may have exaggerated the damage caused by widespread flooding to steal monies. A photo issued by government officials purportedly showing victims wading in floodwaters was altered. Among the seeming disparities, the so-called flood victims were strangely dry. The Associated Press withdrew the image.13

imageThe UK has identified nearly 5,500 organized-crime groups comprising 37,000 people.They commit economic crimes such as insurance fraud in the UK. Overall, these diverse operationssteal at least £24 billion a year.14

As distinct from local urban street gangs, organized crime rings often maintain close ties with rings in other nations. Much of their work involves moving goods across the UK’s borders. Overseas groups also are operating within the UK.

Organized fraud rings contribute heavily to a larger fraud picture in the UK. In general, undetected bogus claims fraud cost the UK an average of £2.1 billion a year, adding about £50 to every insurance policy, estimates the UK’s central agency, the Insurance Fraud Bureau.15 The IFB coordinates action against organized insurance fraud, and currently is investigating cases valued at over £1.2 billion. General insurers in the UK identified 133,000 fraudulent claims in 2010.16 This equates to 2,500 claims a week.

Motor fraud is the most organized and costly. The most common form of motor fraud in the UK involves staging fake accidents or luring innocent motorists to collide with the fraudsters by slamming on brakes at roundabouts and junctions. The fraudsters then exaggerate damage and injuries, and claim expensive medical treatment, vehicle storage and repair costs, loss of earnings and hired rental cars. Such claims can cost UK insurers up to £30,000 per claim.

Transnational gangs are involved in the lucrative trade. Staged crashes by organized crime steal £1billion in the UK each year, says a report by the European Parliament in September 2013. In fact organized crime is the top concern of UK insurers.

There is increasing concern in UK insurance anti-fraud circles about the use of so-called “accident management companies” (AMCs). In October 2011, for example, six men were convicted of submitting 120 false accident claims worth £2 million through a number of sham AMCs set up solely to submit the claims.

False claims worth £440,000 were submitted via AMCs in another conspiracy. None of the accidents happened. A gang of 26 men that staged and induced more than 92 accidents worth £1.6 million was arrested for staging car crashes and making fraudulent claims.

The Italian Mafia allegedly also has been linked to staged crashes. A Mafia clan in Southern Italy faked hundreds of wrecks a year to steal millions of Euros annually in false injury claims and car repairs, prosecutors charged in a massive bust in July 2013.17 Local insurers, doctors, lawyers and auto-repair shops allegedly were involved.

The stolen insurance money allowed the reputed local mob boss Guiseppe Giampa to buy guns and drugs, and pay his “employees.” Incredibly, Giampa turned informant on his own suspected insurance scheme.18

“Hezbollah has also become well-integrated in the domain of transnational organized crime, deriving profits from a wide range of illicit enterprises.” Insurance fraud also funds terrorism. The absence of reliable government and other legitimate means of funding terror forces terrorists to resort to crime. Much involves white-collar crime, including insurance schemes. Terrorist activities require funding for weapons and bomb-making, and for training, travel and living expenses. The need for anonymity during planning of terrorist activities also requires deception such as false identities.

A Google search brings up hundreds of examples of diverse white-collar crimes that terrorists commit. For example, Imam Samudra, the so-called Bali Bomber, raised $150,000 by hacking bank accounts and credit lines.

It is logical that terror rings also might look to insurance fraud. The extent of fraud as a terrorism funding vehicle, however, is unknown.

Two Germany-based al-Qaeda members plotted to fake the death of one plotter in a car crash in Egypt to collect more than $6.1 million in a massive life-insurance con. Most of the money would help fund al-Qaeda activities. The purported crash victim, a Palestinian, then would continue to Iraq as a suicide bomber. The main plotter was a reputed al-Qaeda recruiter in Europe and received seven years in prison in Germany. The Palestinian received six years.19

“Hezbollah has also become well-integrated in the domain of transnational organized crime, deriving profits from a wide range of illicit enterprises such as drug trafficking, credit card fraud and insurance scams, among potentially many others,” says a report by the Congressional Research Service.20

Members of a UK-based terror cell recently were caught in the early stages of plotting a bombing attack on London. They planned to use insurance money by faking injuries from setup crashes to help fund the alleged plot. “Whiplash for the sake of Allah,” one member said under wire tap. They pleaded guilty to terror-related charges.21

Insurance-terror cases only occasionally surface publicly in the U.S. Law enforcement likely keeps such cases classified and behind closed doors due to national security concerns. The few cases that do go public paint chilling portraits of how terror groups are trying to exploit U.S. insurance systems. Ahmed Hannon was convicted of insurance fraud and material support of terrorism in connection with his “economic jihad” scheme to defraud auto insurers with fake injuries for a minor auto crash. He provided fake invoices for medical bills, lost wages and rental-car costs.22

Hor and Amera Akl torched a Jeep Cherokee to collect more than $17,000 worth of insurance money as part of a scheme to help smuggle funds to Hezbollah.23

imageAn international vehicle-fraud ring helping fund Chechen separatists was broken up in Los Angeles. Owners of more than 200 vehicles lied to insurers that someone stole their vehicles. The vehicles were registered to Los Angeles residents and hidden in shipping containers destined for the Republic of Georgia. Upon arrival, they were sold for several times their value, and the money aided the Chechen rebels seeking a separate state from Russia. The LAPD, FBI and Georgian authorities broke open the suspected scheme by uncovering 14 hidden late-model SUVs that had arrived in Georgia in shipping containers labeled “aid.”24

The terror-funding connection in an earlier insurance case is largely circumstantial but noteworthy. Musa and Ahmad Jebril bought 13 houses and two apartment buildings in the Detroit area using false identities and documentation to secure mortgages.

The father-son team also opened bank accounts in the names of non-existent companies to handle incoming funds raised from renting the properties. They insured the buildings for more than their market value, vandalized them and submitted false insurance claims for the damages. Their activities took place over a 15-year period, and their support for terrorist activities covered the same timeframe.

The Jebrils were convicted of 42 counts of fraud. They also were being investigated for promoting and supporting terrorism, and teaching radical Islamic anti-U.S. classes in their Michigan home. A fax was sent to CNN after the 1995 bombing in Riyadh, Saudi Arabia that killed four Americans. The fax praised the bombing and was traced to the Jebrils’ home.25

Members of the terrorist group Jamaat Ul Fuqra raised more than $355,000 through workers compensation fraud to buy a terrorist- training compound in Colorado.26

The group was organized in Pakistan by Sheikh Mubarik Ali Jilani Hasmi and established in the U.S. Fuqra’s training manuals contained instructions on how to commit forgery, counterfeiting and other deception. The suspects were convicted of the workers compensation and other fraud schemes that spanned more than seven years.

Fuqra was suspected of involvement in at least 13 murders and 16 bombings between 1980 and 2004. The first investigation was initiated by the FBI in 1983. It came in response to a murder and double firebombing in Detroit. The probe led to the discovery of a storage locker containing documents. Those investigations uncovered the workers compensation scheme.

So why have insurance investigators not been completely wise to the terror-funding threat? Probably because the biggest misconception is that terror groups need millions of dollars to fund their activities.

“Part of the problem is that it takes so little to finance an operation,” says Gary LaFree, director of the University of Maryland’s National Consortium for the Study of Terrorism and Responses to Terrorism.27

The 2005 London bombings cost only about £15,000 and the bombing of the USS Cole in 2000 cost around £5,000. Insurance fraud can easily raise this level of funding, given the cost of a typical crash for cash claim.

The FBI and other government agencies have pursued insurance fraud-terror links for some time. The threat of terrorism became America’s main security concern following the 9/11 attacks. Several laws have been enacted or modified since then, including US-Patriot Act, Border Security and Visa Entry Reform Act, and several federal fraud statutes, in an attempt to curb terrorist funding.28 Drug cartels have used life insurance to launder much of their criminal proceeds.

“Federal law-enforcement agencies discovered Colombian cartels were using drug proceeds to buy life-insurance policies, which were subsequently liquidated with the cash value transferred to an offshore jurisdiction,” reveals a U.S. federal terrorism threat assessment.

“The cash surrender value of a life insurance policy is often much less than the amounts invested because of liquidation penalties, particularly if the policy has only been in existence for a few years. From the drug traffickers’ perspective, the liquidation penalty is, in effect a cost of doing business.”

Shell companies, such as those set up by the Jebrils, also are commonly used to receive and wash insurance-fraud proceeds. Shell companies can provide an appearance of legitimacy, and even may establish a positive reputation in the business community that hides their criminal intent.

The shell company usually produces invoices for non-existent products or services that are “paid for” by another party with profits from illegal activities, such as insurance fraud.

Insurers can be easy targets in part because insurer investigators tend to focus on the immediate claim. They seldom consider the bigger picture of geopolitics. Nor do they usually have the time,
resources or management support to probe for potential terror links.

Insurers need to be aware of the threat that terrorists may be using their products to raise funding to continue their activities. There are mechanisms for reporting suspicious activities to relevant government agencies. It is vital therefore, that insurers use them and that financial services companies, including insurers, become a far-more-hostile environment for terrorist financiers.

The aim should be to reduce the transnational and terrorist threats by depriving their networks the financial resources and funds needed to perpetuate their subversive activity. Fraud investigators must become more attuned to the underlying motives behind insurance fraud scams and see the bigger picture in the unfolding and dangerous international landscape.

About the author: Steve Barkhuizen is a Senior Manager (Forensic: Insurance) at KPMG, London and is an accomplished financial crime, fraud and sanctions practitioner. He specializes in insurance, with experience in the UK, Europe, Middle East, Asia and Africa. Before joining KPMG, Barkhuizen was a Financial Crime Manager at a UK general insurer. He developed the firm’s financial crime strategy and award-winning process for investigating and detecting automobile claims fraud (Personal Lines Claims Fraud Initiative of the Year: 2010 Insurance Fraud Awards)


endNOTES
[1] Organized Crime Overview, Federal Bureau of Investigation. http://www.fbi.gov/about-us/investigate/organizedcrime/overview
[2] Money Laundering in the Insurance Industry, Asia Insurance Review, Sandra Lawrence, Director of Cogent Group, Singapore, April 2008. https://www.world-check.com/media/d/content_pressarticle_reference/aisaninsurance_08.pdf
[3] ibid.
[4] Testimony before the U.S. House of Representatives Subcommittee on Crime, Terrorism, and Homeland Security, Committee on the Judiciary, Jennifer Shasky, Chief, Asset Forfeiture and Money Laundering Section, U.S. Department of Justice, February 8, 2012. http://www.gpo.gov/fdsys/pkg/CHRG-112hhrg72786/html/CHRG-112hhrg72786.htm
[5] Justice’s Breuer at Senate Hearing on Transnational Crime, November 1, 2011. http://london.usembassy.gov/terror027.html
[6] Federal Bureau of Investigation estimate.
[7] More Than 100 Members and Associates of Transnational Crime Groups Charged, news release, U.S. Department of Justice, February 6, 2011. http://www.justice.gov/opa/pr/2011/February/11-crm-195.html
[8] Leader of Armenian Organized Crime Ring Sentenced in Manhattan Federal Court, news release, U.S. Department of Justice, February 8, 2013.
[9] Legislative testimony ties PIP fraud to organized crime, WFSU, December 9, 2011.
[10] Organized Crime in the United States: Trends and Issues for Congress, Congressional Research Service, Kristin M. Finklea, December 22, 2010. http://www.fas.org/sgp/crs/misc/R40525.pdf
[11] Insurance Fraud By North Korea Outlined, Blaine Harden, Washington Post, June 18, 2009.
[12] North Korea’s New Source of Revenue: Reinsurance Fraud, Yahoo Voices, December 8, 2006. http://voices.yahoo.com/north-koreas-sourcerevenue-reinsurancefraud-130662.html?cat=37
[13] Fraud Linked to Flood Photo, Radio Free Asia, August 1, 2011.
[14] Serious and Organised Crime Strategy, Presented to Parliament, Secretary of State for the Home Department, October 2013. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/248645/Serious_and_Organised_Crime_Strategy.pdf
[15] Insurance Fraud Bureau, homepage. http://www.insurancefraudbureau.org/
[16] Insurance fraud levelssoar, The Guardian, July 28, 2011. http://www.theguardian.com/money/2011/jul/28/insurance-fraud-levels-soar
[17] Italian police strike ‘mortal blow’ in battle against mafia clans, Daily Mail Online, July 26, 2013. http://www.dailymail.co.uk/news/article-2378837/Italian-police-strike-mortal-blow-battle-Mafiaclans-70-arrested-dawn-raid-including-doctors-lawyers.html
[18] Germany Jails Three Men for Supporting al Qaeda, Deutsche Welle, December 5, 2007.
[19] Terrorism and Transnational Crime: Foreign Policy Issues for Congress, John Rollins & Liana Sun Wyler, October 19, 2012. http://fpc.state.gov/documents/organization/200053.pdf
[20] Stock Exchange plotters: Fantasists or a threat? BBC, February 9, 2012.http://www.bbc.co.uk/news/uk-16953938
[21] The dark triad: organized crime, terror and fraud, Journal of Money Laundering Control, Vol. 14 No.1 Frank S. Perry & Richard G. Brody, 1, 2011.
[22] Toledo couple plead guilty in terrorism-related case, Toledo Blade, May 23, 2011. http://www.toledoblade.com/Courts/2011/05/23/Toledo-couple-plead-guilty-in-terrorismrelated-case.html
[23] An L.A. Police Bust Shows New Tactics for Fighting Terror, Wall Street Journal, December 29, 2006.
[24] Father-son convicted of real estate fraud, Inman News, December 6 2004 http://www.inman.com/2004/12/06/father-son-convicted-real-estate-fraud/; The Fraud-Terror Link, Frank S. Perri, JD, CFE, CPA, Fraud Magazine, July/August 2010.
[25] Identifying the Links between White-collar Crime and Terrorism, National White Collar Crime Center, September 2004.
[26] The Fraud-Terror Link, Frank S. Perri, JD, CFE, CPA, Fraud Magazine, July/August 2010.
[27] Identifying the Links Between White Collar Crime & Terrorism, National White Collar Crime Center, September 2004. https://www.ncjrs.gov/pdffiles1/nij/grants/209520.pdf
[28] U.S. Money Laundering Threat Assessment, Money Laundering Threat Assessment Working Group, Department of Treasury, Department of Justice, Department of Homeland Security et al. http://www.treasury.gov/resource-center/terrorist-illicit-finance/Documents/mlta.pdf


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