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Offshore underbelly: the ability to perpetrate insurance fraud offshore is enhanced by the capabilities of the Internet. The financial loss to insurers is compounded by the loss of trust in the industry that fraud causes. (Fraud: Q&A Industry Strategies).

The financial networks that help terrorists conduct their attacks show how modern communication technology and the globalization of commerce also help unregulated offshore insurers swindle U.S. policyholders out of hundreds of millions of dollars each year, according to a recently published book.

In the book Global Pirates: Fraud in the Offshore Insurance Industry, author Robert Tillman details how technology helps "financial knaves and buccaneers" foist their scams on an unsuspecting public. They sell policies they never intend to honor, attracting customers with low premiums and undercutting the legitimate competition. Then they disappear before governments can catch up to them. Tillman, who is an associate professor of sociology at St. John's University in New York and author and co-author of several books on white-collar crime, describes how regulators and law-enforcement organizations are ill-equipped to fight this complex and sophisticated type of crime.

Tillman outlined how offshore insurance fraud is perpetrated in a recent interview with Best's Review.

Q. What do terrorists and the global pirates have in common?

Since 9/11, we've all become more aware of the financial networks that facilitate terrorism. What needs to be further recognized and understood is the fact that the same conditions and mechanisms that support terrorists are also used by financial criminals and organized crime groups. There is, for example, considerable evidence that offshore insurance companies have been used for money laundering. There is also evidence that traditional organized crime groups in the United States have attempted to use offshore reinsurance companies to pull off large-scale frauds. As I argue in the book, the distinction between white-collar criminals and organized crime groups has blurred to the point where it is difficult to tell them apart.

The obstacles to investigating and stopping these groups are both technical and political. International financial criminals are drawn to countries that have few resources to devote to monitoring their activities. In the early 1990s, the British Virgin Islands, for example, was home to 200 insurance companies but had only two full-time regulators to oversee them. The problems are political in the sense that countries have to be persuaded that it is in their interests to crack down on financial criminals.

Q. I can see how fictitious capital might be hard for regulators to track. But you also write about fictitious countries--the Dominion of Melchizedek and the Kingdom of EnenKio, for example. Surely these would raise red flags among regulators?

Cyber-countries like the Dominion of Melchizedek may seem silly, but they are remarkably difficult to shut down, and their potential for harm is significant. Thousands of people worldwide have been ripped off by individuals claiming to represent Melchizedek--a fictitious country whose existence is confined largely to the Internet. Even more significant, as I suggest in the book, is the fact that real countries, with actual physical geographies, are engaging in many of the questionable practices as are Melchizedek and other cyber-countries. One can now, for example, purchase an "economic citizenship" not only from Melchizedek but also from many Caribbean and South Pacific countries recognized by the United Nations as legitimate.

The Dominion of Melchizedek, the Kingdom of EnenKio and other virtual nations are representative of the threat posed by cyber-criminals. Until recently, the U.S. law-enforcement community was slow to respond to this threat, but the CyberSmuggling Center, established by the Customs Bureau, is a good start.

Q. When you discuss in the book how high-tech communications systems have rendered geographic locations nearly obsolete, you argue that geography hasn't disappeared, but has become more fluid. What do you mean?

Recently, academics concerned with issues of globalization have been debating the relevance of geography in a "borderless" world of e-commerce, global financial markets linked in real time and the easy movement of individuals across sovereign borders, both legally and illegally. At the same time, many of our political institutions and agencies, like insurance regulators, remain bound by geographical limitations on their authority. This gap between the realities of the global economy and the limitations on the power of regulators has been exploited by criminals such as those described in Global Pirates.

Alan Teale, the late and infamous insurance swindler, seemed to understand this gap and its potential long before academics and members of the law-enforcement community. Today's sophisticated financial criminals recognize that geography is not a fixed constraint, and that, to a certain extent, one can transcend geographical boundaries by operating from a Web site or creating your own country, or by moving your operations, at least on paper, to a tiny South Pacific country like Nauru, and still be an active participant in economic markets around the world.

The same features of the global economy--borderless markets, instant communication with consumers worldwide, and the free movement of operations to locations anywhere in the world that offer the lowest costs-- that globalization advocates have trumpeted as the hallmarks of a new era in economic history, have also made it very difficult to control the sophisticated white-collar criminals of today, and even more difficult in the future.

Q. The U.S. government is combating fraud through the Treasury Department and the Paris-based Organization for Economic Cooperadon and Development. How effective are these efforts?

Ultimately, any successful effort to crack down on offshore fraud and abuse will require foreign governments to change their policies. Groups like the OECD have had some success in this endeavor. However, until recently, the United States opposed such efforts, citing the sovereignty of these countries and the desirability of "tax competition." Opponents of these reform measures see the issue in largely ideological terms: states vs. free markets. Currently, the U.S. position is much more in line with OECD's, but only because the events of 9/11 forced the Bush administration to see the link between terrorism and financial crime. However, once the focus on terrorism has diminished, the administration, led by the treasury secretary, may well return to its earlier position. This is a complex issue, but ultimately, I think, it involves considerable benefits that U.S. corporations derive from offshore tax havens.

OECD has made significant progress in the last couple of years in securing the cooperation of governments that previously thumbed their noses at U.S. and European efforts to crack down on financial crime. However, at least two factors will limit its success. First is the fact that financial criminals are extremely mobile, and when one country agrees to monitor their activities more strictly, they will simply move to another country with no such agreement. Recently, a number of financial criminals have set up shop in remote island-nations in the South Pacific, for example. The second limiting factor was mentioned above and that is the potential for the United States to pull out of any future international efforts to impose sanctions on countries that defy international financial regulatory standards. Without the United States, I'm skeptical about how effective these efforts can be.

Q. What about future efforts to regulate the offshore industry? What should they be?

On the one hand, the enactment of new laws, such as the Patriot Act, suggests new efforts to regulate the offshore industry. On the other hand, most of the provisions of the law refer to banks. And despite the efforts of a few members of Congress, there is still no serious attempt to better regulate the reinsurance industry. So as to the future of regulation, I remain hopeful, but skeptical.

Q. You make a case for federal regulation, especially since criminals can work in several financial-services industries at one time. But can't existing regulators work together?

The criticisms of state regulatory capabilities made by the [U.S. Rep. John] Dingell committee in the late 1980s and early 1990s are largely valid today. While the criminals have gotten a lot more sophisticated, regulators are often hamstrung by the lack of resources and antiquated information systems. The [General Accounting Office] recently pointed to the failure of regulators to share information as a major factor that allowed Martin Frankel to commit his crimes. The fact that offshore insurance crooks have recently teamed up with securities crooks in scams involving the sale of bogus promissory notes also underscores the need to create a federal insurance regulatory body that could share information with regulators from other industries.

Q. Do you have any measure of what the costs of offshore insurance fraud are to society?

Putting a price tag on offshore insurance fraud is difficult because of the absence of systematic data on the subject. Because crooked offshore insurers often operate "under the radar" of regulators, there is often no precise information on losses or numbers of victims. One gets a sense of the scope of the problem, however, when, for example, California regulators estimated that in 1992 Californians lost $200 million in offshore insurance scams. But the costs go beyond monetary losses. In the book, I describe a number of cases where victims suffered physical harm when their medical costs were not covered by policies they or others had purchased from bogus insurers. Even more difficult to quantify is the erosion of trust in our institutions--the business community, government, etc.--that occurs when these crimes are allowed to go unchecked and when victims feel that justice has not been done.

Q. On the other hand, the problems you describe in your book might drive the public to reputable companies.

Consumers will choose reputable companies, 1) if they can afford their products and 2) if they know which ones are reputable. When legitimate companies abandon certain markets, such as inner-city small businesses, consumers are forced to look elsewhere. On the other hand, legitimate companies find it difficult to compete with scam artists whose products are inexpensive because they don't intend to pay claims.

Q. What audience, in particular, do you hope to reach and persuade through your new book?

Despite the fact that the book was published by an academic press, the audience I would like to reach is not academics, but members of the public and policymakers. White-collar crimes, such as those described in the book, are often underappreciated by both groups, except by individuals who've been victimized. I hope that directly or indirectly policymakers will be influenced to devote more attention and resources to the problem. One of the problems with complicated white-collar crimes like offshore insurance schemes is that they are difficult to explain and difficult for some to see as real crimes. In the book, I try to put a human face on these schemes and to show how real people were harmed in very real ways by these crimes.


Position: Associate professor of sociology at St. John's university

Other books: Tillman is the author and co-author of several books on white-collar crime, including Big Money Crime: Fraud and Politics in the Savings and Loan Crisis, which was nominated for the C. Wright Mills award, and Broken Promises: Fraud by Small Business Health Insurers.
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Comment:Offshore underbelly: the ability to perpetrate insurance fraud offshore is enhanced by the capabilities of the Internet. The financial loss to insurers is compounded by the loss of trust in the industry that fraud causes. (Fraud: Q&A Industry Strategies).
Author:Panko, Ron
Publication:Best's Review
Article Type:Interview
Geographic Code:1USA
Date:Jul 1, 2002
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