Organized Crime Groups Turning to Car Insurance Fraud

When criminals do a smash-and-grab-style robbery, they typically break in quickly, steal what they can, and get out before authorities arrive – most likely in a fast getaway car.

But bad guys in recent years have shown little fear parking in major cities to defraud auto insurers by smashing cars and grabbing illicit capital through overblown and fictitious medical claims from sham clinics, a rising problem bilking auto insurance companies out of billions of dollars a year and raising rates for drivers trying to follow the rules.

The scams are a major issue for auto insurance companies, many of which are not required to create formal financial crime countermeasure programs, and financial institutions holding accounts for both the insurers and the straw clinics, which need access to the international financial system to cash checks and wire money to domestic and international co-conspirators.

The fake claims by organized crime groups and local stooges have historically added as much as $7 billion or more in excess payments to auto injury claims, resulting in double-digit increases to insurance premiums paid by drivers around the country, according to the Washington, DC-based Coalition Against Insurance Fraud, an anti-fraud alliance.

Organized crime mobs capitalize on lucrative insurance fraud schemes

The current hotbeds of staged accidents and fake clinics are South Florida, the city of Hialeah, New York in the Bronx and likely other large cities, including Los Angeles and Chicago, said Carol Kaplan, director of East Coast public affairs for the Des Plaines, Ill.-based National Insurance Crime Bureau (NICB).

The staged accidents, and related claims at fake clinics, which could also be engaging in broader healthcare or Medicare frauds, are “big business,” Kaplan said. “These rings are highly organized and really know what they are doing, from hiring lawyers and getting them in on the scheme to hiring runners to recruit people off the street to get $100 pretending to be in an accident.”

The non-profit group aids a wide variety of insurers by being a repository of data on suspicious and fraudulent individuals, companies, clinics and entities. The NICB also provides guidance and red flags on persistent and emerging threat trends to members.

Part and parcel to the problem is that many states, and even at the federal level, don’t have the resources to go after car insurance fraud, unless the cases involve millions of dollars in false claims and the investigation time can be justified.

Organized crime groups are turning more to car insurance fraud “because it can be a very lucrative scam if it’s done correctly,” said James Quiggle, director of communications for the Coalition Against Insurance Fraud, which brings together consumers, companies and governments to better thwart ever-creative fraudsters.

“Crime rings are learning how to mass produce false claims against insurance companies, in particular auto insurers,” he said. “There is tremendous upside profit potential for fake injury claims from set and phantom car crashes. Often, the rings will also set up medical clinics that are merely straw operations in urban areas where large volumes of claims to insurance companies would seem plausible.”

Large foreign organized crime groups and local opportunists are also probing the defenses of other states, such as Minnesota and Michigan, Quiggle said, adding that certain regions are considered by criminals “more lax, or have a softer touch when it comes to auto insurance fraud, which would augur well for a determined crime ring.”

Gaps in anti-money laundering controls propagate crime

Many states don’t have agencies devoted to examining the clinics to see if they are just straw operations. One rung up, the auto insurance companies themselves also get little oversight from state or federal agencies in terms of the strength of their fraud or anti-money laundering (AML) defenses.

Since May 2006, certain insurance companies became subject to AML program provisions, which include engaging in a certain depth of due diligence to gauge customer risk, monitoring accounts and reporting suspicious activity to the country’s financial intelligence unit.

But the rules only captured insurance companies issuing or underwriting “covered products,” such as permanent life insurance policies, other than group policies, annuity contracts, other than groups, and any other insurance product with cash value or investment features.

The government agency tasked with examining insurance firms for their AML compliance, the IRS AML division, is also woefully outnumbered and short staffed, with no formal actions taken against an insurance firm for financial crime program failings.

In addition, banks, unlike insurance, firms, can share information on suspected fraudulent clinics with each other under Patriot Act Section 314 (b) safe harbor provisions, which could allow them to see what is occurring across multiple banks, potentially gathering enough details to reach the threshold where they need to file a suspicious activity report to the government.

That is where the NICB comes in.

The group sifts through “massive amounts of data” from members, such as car insurance, property and casualty firms and others, “acting as data miners, looking for patterns,” such as the same person filing multiple claims with different companies, Kaplan said.

Variety of fraud schemes abound, criminals concoct new ways to fool authorities

That has resulted in some patterns coming to the fore.

Key red flag indicators include certain clinics, particularly just-opened operations, filing significantly more claims that similar-sized clinics in the same area or if there are multiple patients with similar injuries all citing the same doctor or clinic, Kaplan said.

One telltale indicator at the outset is how many people are in the car. If it’s packed with five or six people and they are “all complaining of back pain,” that could mean the accident was staged, especially if there are no visible cuts and bruises, she said. As well, if the car looks as if it hasn’t been running in a while, it could mean the fraudsters picked it up at a junkyard to set the scene.

Some of the more obvious red flags are also some of the most comedic, such as some clinics billing a patient for service for 24 hours – in one day, Kaplan said, adding that other doctors engage in “copy and paste” billing where they put the same diagnosis and treatment for each customer, regardless of the severity of the accident.

“They think no one is going to notice,” she said, adding that the clinics, in one day, will bill for x-rays, chiropractic adjustments, massage, acupuncture and physical therapy related activities. “It’s a one stop shop. There are so many services, though, that no one could possibly do that much work in a day.”

Earlier this month, local investigators in the South Florida cities of Hialeah, Hialeah Gardens and Medley attempted to more aggressively penalize those engaged in fraud tied to car insurance, similar to checkpoints for driving under the influence, and created checkpoints to stop drivers and check if their insurance cards were legitimate, according to media reports.

The NICB has seen a growing “national epidemic” of individuals creating and printing out fake insurance cards in a bid to be able to drive but not pay what can be sizable premiums due to high accident rates in the region and a “fraud tax” boosting monthly payments even higher, according to CBSMiami.com.

At the initiative earlier this month, officers would stop individuals and then call the number on the card to verify current policy holders. In the end, police found two individuals with fake insurance cards and arrested nearly 30 others for various traffic-related offenses.

A household can easily be paying several hundred dollars a year more in insurance premiums due to individuals holding fake cards, getting into accidents, and not being able to pay for damages and getting treated at clearly fraudulent clinics.

‘No-fault laws’ a magnet for crime

Though considered in many instances on the lower end of the risk spectrum by banks, the potential for car insurance companies to be involved in organized crime fraud and money laundering schemes hit its zenith in early 2012 when federal investigators cracked what they called the largest auto-fraud scheme in US history, occurring out of New York.

In the scheme, prosecutors arrested nearly three dozen individuals, including foreign Russian gangsters, 10 doctors and several attorneys, for setting up fake accident scenes and bogus clinics, eventually bilking auto insurers out of nearly $300 million.

The group took advantage of the state’s personal injury protection (PIP) system, where drivers and passengers can get as much as $50,000 in benefits for accident-related injuries, regardless of who is at fault. Some defendants got cash kickbacks for patient referrals, while some patients received coaching about what injuries to fake, exaggerate and claim, the indictment stated.

The groups on purpose target states, such as Florida and New York, that have “no-fault” laws that allow crash victims to get up to $10,000 and $50,000 in coverage for medical expenses, regardless of who is at fault in the accident, with the insurance company taking the loss, said a federal investigator involved in such cases, who asked not to be named.

When the clinic acquires and cashes checks from the auto insurance companies, and then wires the funds to foreign group members, they are laundering money, enabling the bank to potentially flag the account and ask more questions of the customer, said the person.

For instance, at the outset of the relationship, the bank, if the clinic is in a high risk region, should ask more detailed initial due diligence questions, including how long the clinic has been open, its expected amount of business and if it has had any other bank accounts recently or currently has accounts at other institutions, said the investigators.

Critical to these responses is delving down to the beneficial owner of the operation, due to the fact that if the clinic is operated by a foreign organized crime group, it will likely muddy or obfuscate such details.

“Banks need to get a better sense of who is running these clinics as many of them will have a nominee owner,” the person said, adding that if the owner is a foreign LLC in a secrecy jurisdiction or the owner is someone with no real connections or history in the medical field, the bank should consider not opening the account or alerting law enforcement immediately.