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Over the years, the United States Attorneys Office has prosecuted a number of cases involving fraudulent schemes to reduce or avoid workers compensation insurance premiums. Like most white collar crimes, such cases tend to be complex and time consuming, requiring a substantial investment of prosecutorial resources not to mention the demands upon the court system in conducting trials and imposing sentences. So why do we bring such cases? Or, to put it another way, which cases are worth prosecuting?
The answers depend, in part, on whos asking. When insurance professionals ask, they are often wondering, When will the government step in to help protect me from fraud, and when am I on my own? When professional investigators ask, they want to know, Is this particular matter worth all the time and effort Im putting into it? Are you going to take the case? When members of the public ask they usually want to know, Does this kind of activity warrant criminal prosecution? Is this the best use of our law enforcement resources?
There are several ingredients that go into answering these questions, but they all figure into a prosecutors charging decision.
Lets start by identifying what we are talking about
Virtually all prosecutions of premium fraud involve employers attempts to evade the costs of workers compensation insurance. From a prosecutors perspective, the fact that it is workers compensation insurance, and not some other kind of insurance is very important. Why?
Because workers compensation insurance is part of a comprehensive, mandatory system, established by law. This is not a situation in which parties have voluntarily entered into a contract and have later quarreled about their rights and obligations under that contract. In critical respects, workers compensation operates as a kind of taxation and public welfare system. The insurance companies do not choose which employers they do business with they are required to extend coverage when an employer is assigned to them through the pool operated by the state-chartered Workers Compensation Rating and Inspection Bureau (WCRIB). Nor do the insurance companies generally negotiate the premiums they charge. Those rates are set based on annually updated actuarial analyses of each job classification by the WCRIB and ultimately the Insurance Commissioner. And unlike liability insurance, where fraud by an insured may void the insurers liability, the workers compensation insurers are generally held responsible for insuring all injured workers employed by their customers, even if the customers were not truthful with the insurer. And because insurance rates are set for each occupation, the costs of fraud by one employer are generally passed along to other employers in the same industry.
Thus, workers compensation insurance premium fraud often involves similar kinds of harm and often the same methods as tax evasion.
What kinds of schemes have been prosecuted?
The most common fraud schemes involve, in one way or another, understating payroll. Some businesses pay only a portion of their payroll on the books and use under-the-table cash payments to avoid reporting their true payroll to either the tax authorities or to their workers compensation insurers. In such cases, the evidence for a premium fraud charge tends to be nearly the same as the evidence we would use to prove tax fraud. Thus, as a practical matter, a case worthy of prosecution as a tax case may also present an equally worthy insurance premium fraud case. Other methods of hiding payroll may be a little subtler, such as claiming that a companys workers are really all independent contractors, or that a companys workers are really employed by subcontractors. Employers may also attempt to evade experience modification adjustments by fraudulently creating alter-ego companies or they may misreport their employees job duties. These kinds of schemes are often harder to detect and harder to prove. At a minimum they require additional evidence, beyond the pure dollar figures that can be used to make out a tax fraud case.
What does this mean for prosecutions?
When a fraud involves more qualitative information evidence of fraudulent intent will have to be stronger to support a prosecution. For example, if an employer has represented that particular employees are sales personnel rather than on-site construction workers, it will be necessary to show both that the employer knew the employees real duties and that the employer was responsible for the false representation to the insurer. By the same token, an investigator may suspect that a new company opened by an employers son or a brother-in-law is really just the same business with a new name, set up to avoid the original businesss track record for accidents. But unless there is a pattern of repeated use of alter-ego corporations, a prosecutor will want to see demonstrably false or forged documents before resting a premium avoidance prosecution on such circumstances. Similarly, a companys low-ball estimate of its anticipated payroll at the beginning of a policy term is unlikely to warrant prosecution, unless it is accompanied by a history of providing insurance company auditors with false payroll summaries or forged tax returns.
Are particular businesses or individuals particularly likely to be targeted for prosecution?
Premium fraud may arise in virtually any industry. However, employers in relatively dangerous fields, such as various sectors of the construction industry, may be particularly tempted to evade premiums simply because insurance costs for high-risk occupations are very substantial. By the same token, the seasonal and cyclical nature of the construction business may create opportunities for employers to conceal or misrepresent a portion of their workforce.
More generally, those who specialize in premium fraud will receive particular focus. Much as tax prosecutions may focus on professionals who set up bogus tax shelters, a premium fraud investigation may focus on consultants who repeatedly assist clients in falsifying their payroll records, or insurance agents who help clients set up alter-ego corporations to avoid their accident history. Likewise, an employee-leasing or temporary employment agency may engage in tax evasion and insurance premium avoidance as a key element of its profit-making strategy. In such businesses under-the-table payroll arrangements and misrepresentations about the kinds of work being performed may be integral to the operation of the business, not just an incidental lapse of business ethics.
How extensive are the schemes that get prosecuted?
Evidence of repeated conduct is often essential in establishing fraudulent intent beyond a reasonable doubt. Thus it is no surprise that, as with tax cases, the overwhelming majority of premium fraud prosecutions involve multi-year schemes. A prosecutor is more likely to be persuaded that a false statement was the result of fraud as opposed to negligence or recklessness when there is a pattern of lies over a substantial period of time. The likelihood of developing evidence from multiple sources and of identifying multiple witnesses is also higher in such long-term schemes. Also, a multi-year scheme is more likely to involve substantial amounts of money.
How does the criminal prosecution process fit with insurers audit and collection functions?
It doesnt, at least not in any direct sense. Ethically, the criminal prosecution process must be separate from other insurance activities. Criminal prosecution is not a substitute for an insurers collection efforts. Apart from under-cover investigations, a prosecutor will generally be looking at conduct that has already occurred and will keep an arms-length distance from any ongoing business dealings. Indeed, an insurer or its representatives should never threaten to refer a matter for criminal investigation or prosecution as part of any negotiation or collection effort. Nor will a criminal prosecutor back off a meritorious investigation just because the target ultimately pays its obligations to the insurer.
Very simply, criminal prosecution should not influence the balance of any such business dealings between insurers and clients, except to the extent that it aims to punish fraud and dishonesty. In Massachusetts, prosecutors have pursued cases in which the insurer and insured had previously reached settlements of their monetary obligations. Conversely, cases have been declined in which insurers faced significant monetary losses, when the prosecutor concluded that those losses were not primarily attributable to criminal conduct or the evidence of criminal intent was lacking.
What if the insurer has been sloppy or careless?
In theory, victim negligence is no defense to a fraud charge. In reality, insurer diligence is a critical consideration in any premium fraud investigation. In some respects this is no different from any other white collar crime affecting an institutional victim. In general there is no reason to assume that prosecutors or judges and juries will be sympathetic to large corporations that have lost money. Unlike individuals who are bilked out of their savings, most corporations can protect themselves, and they can generally afford to hire lawyers to represent their interests.
But the lack of sympathy for the victim is compounded in the insurance premium fraud area because there is a fair amount of resentment deserved or not over the high cost of insurance. A convicted defendant in a premium fraud case once told me he thought some of his employees had taken their jobs just so they could comp him (that is, they would fake on-the-job injuries and claim compensation). This individual saw the whole insurance process as an unfair system for making him pay money to unworthy claimants. From this perspective, he rationalized engaging in a variety of blatantly fraudulent schemes to evade premiums and he shopped aggressively to find an insurance agent who would help him.
To counter negative perceptions about the insurance industry, it is essential to be able to show that an employer who evaded insurance premiums was fairly notified of his/her obligations and that the insurance company diligently followed up and enforced the terms of the insurance policies. The audit process itself is critical. If an auditor fails to keep copies of allegedly forged tax returns that may have been supplied by the employer to back-up forged payroll figures, it will be difficult to persuade a jury that such documents really mattered to the insurer. Similarly, a quick telephone call may qualify as an audit for purposes of calculating final premium at the end of a policy term but in a criminal case it will raise doubts as to whether the employer was fairly on notice as to the seriousness of the required disclosures. After all, in a criminal case the employer is not merely accused of supplying incorrect information, the employer is charged with knowingly lying and doing so with the intent to defraud the insurer.
In short
In the end, there is no single test to identify worthy premium fraud cases. A prosecutor will weigh heavily the egregiousness of the criminal conduct, the size and duration of the fraudulent scheme, and the strength of the evidence of criminal intent. Such cases can sometimes be challenging to present to a jury, but a prosecutor should not shy away from prosecuting serious criminal conduct merely because the immediate victim is an institution. The costs of insurance fraud affect the entire economy and give unscrupulous employers an unfair advantage over those who follow the law. This is not a victimless crime and it is one that can be deterred through aggressive and effective enforcement.
Paul Levenson is an Assistant U.S. Attorney for the District of Massachusetts who practiced in the Economic Crimes Unit for 13 years.
Source: Coalition Against Insurance Fraud
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