GAO: Regulatory Weaknesses Gave Frankel an Opportunity.

Weaknesses in insurance regulation and oversight contributed to Martin Frankel's alleged $200 million fraud going undetected for years, according to a report by the federal General Accounting Office.

Those weaknesses were found at the state level and with certain support services at the National Association of Insurance Commissioners. Circumstances surrounding the scandal were unusual enough to raise questions beyond those asked in a routine examination, the GAO said. "The answers or in some cases, lack of answers, to those questions could have resulted in a much earlier exposure of the scam," the report states.

Three key aspects of regulatory oversight were found to be weak: change of ownership approval; routine financial analysis; and on-site examinations.

The GAO report cites, for example, "inadequate due diligence" performed on the buyer application. "In the case of the Thunor Trust, the money to purchase the first insurance company was supposedly provided by three individuals or grantors," the report said. "However, during our review of change in ownership application data, we found no evidence that state regulators sought financial information from the grantors to validate their financial condition despite the trust's dependence on the grantors for funds."

Limited sharing of information among state insurance regulators also contributed to the atmosphere that allowed Frankel's scam to spread, the GAO said.

The GAO conducted its review in states where the principal insurers connected with the scam were domiciled -- Tennessee, Mississippi, Missouri, Oklahoma and Arkansas -- as well as in Virginia, Alabama, New York, Illinois and Connecticut.