FBI COULD BRING CRIMINAL CASES IN INSURANCE INDUSTRY PROBES

By R.J. Lehmann
Washington Bureau Manager
Bestwire
May 05, 2005


WASHINGTON (BestWire) - The U.S. Federal Bureau of Investigation is mobilizing dozens of agents from its Financial Crimes Section to investigate allegations of corporate fraud in the insurance industry, raising the specter of possible criminal charges of companies or executives in connection with probes of such industry practices as the use of finite reinsurance.

Agents from throughout the bureau's 56 field offices who investigate insurance-related corporate fraud cases will be asked to coordinate inquiries with the Washington headquarters, where investigators will look for broader patterns, the bureau confirmed in connection with the release of its 2005 Financial Crimes Report.

This year's report -- which details the FBI's approach across a broad range of industries to investigate accounting schemes, self-dealing by corporate executives, and obstruction of justice to conceal illegal activities -- noted that "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."

With the disclosure, the FBI becomes the latest federal agency to confirm a probe of the industry. Investigations into the alleged use of loss-mitigation, or finite, products to smooth companies' earnings statements have gained momentum over the past six months, leading to subpoenas issued by the U.S. Securities and Exchange Commission, the U.S. Justice Department and New York state Attorney General Eliot Spitzer to many property/casualty insurers and reinsurers. Pennsylvania Insurance Commissioner Diane Koken, who serves as president of the National Association of Insurance Commissioners, further confirmed that state insurance regulators have been tapped by the FBI to provide guidance on the "technical requirements for accounting and reporting of reinsurance transactions, including arrangements that limit a reinsurer's risk of loss."

"We understand the FBI is seeking to determine whether the accounting practices recently identified represent an industry-wide concern," Koken said in a written statement. "Several states are currently pursuing a number of investigations in this area, and have been reconsidering existing financial reporting standards since last December."

However, the commissioner said such technical assistance is "routinely" provided by regulators to both state and federal investigations, adding that details of any specific investigation of insurer activity are "treated as confidential."

Among the most high profile insurance-related targets of recent federal investigations has been a $500 million finite reinsurance transaction between American International Group Inc. (NYSE:AIG) and Berkshire Hathaway Inc.'s General Reinsurance Corp., as well as AIG transactions with Bermuda-based Richmond Insurance Co. Ltd. and with Union Excess Reinsurance Co. Ltd. and Capco Reinsurance Co. Ltd., both of Barbados. AIG already has admitted that those transactions had been improperly accounted for, in that not enough risk actually had been transferred for them to be called insurance deals (BestWire, March 30, 2005).

But according to consultant Donald Light of Celent Communications, those investigations could pale in comparison to the potential consequences should the FBI actually pursue criminal convictions, particularly given the old saw that no financial services firm has ever survived criminal indictment.

"There are a lot of financial services firms, and a lot of criminal indictments, and who knows what might have happened in 1927, but in recent memory, it's certainly been true," Light said. "Any time you have 75 agents looking at one thing, criminal indictment is absolutely a threat. "

The bigger question, Light noted, is whether FBI agents will be successful in finding evidence of wrongdoing that isn't already known, or whether their strategy will be to "force a criminal interpretation of stuff that is already known."

"In the grey areas that figure prominently around finite reinsurance, actuaries can scratch their heads about some of these issues, and have big arguments about them," Light said. "So can the FBI create a case that flies in court? That I'm not so sure about."

And despite the perception in some quarters that the industry has been wracked by scandal -- as the finite re probes come on the heels of allegations of bid-rigging and improper commissions by large commercial brokers -- American Insurance Association spokesman Dennis Kelly said many public pronouncements comparing the current environment to episodes of malfeasance in other industries have been off-base.

"While we only know what we read, we don't believe there is widespread corruption in the insurance industry, or that a comparison to the (savings and loan) crisis is appropriate at all," Kelly said.

According to the financial crimes report, despite the passage of Sarbanes-Oxley in 2002, accounting schemes designed to deceive investors and Wall Street analysts about the true financial condition of a corporation still constitute the majority of corporate fraud cases pursued by the FBI, and the bureau anticipates "the number of cases will continue to flourish," with three to six new cases being initiated each month.

Currently, there are 405 corporate fraud cases being pursued by FBI field offices, representing a 100% increase from the number of pending cases at the end of Fiscal Year 2003. Of those cases, 18 involve losses to public investors which individually exceed $1 billion, the bureau said.

Copyright 2005 A.M. Best Company, Inc.



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