Testimony of Dennis Lormel, Section Chief, Financial Crimes
Section, FBI
Before the House Financial
Services Committee
March 6, 2001
"FBI's Perspective
on Criminal History Record Information Checks on Individuals
Conducting Insurance Business"
Mr. Chairman, I am pleased to
appear today on behalf of the FBI and share with your subcommittees
the FBI's perspective on criminal history record information
checks on individuals conducting business in the area of insurance.
I am also pleased to have the opportunity to discuss the sharing
of information among regulators within the various financial
sectors and law enforcement.
Let me begin by emphasizing
that the FBI places a high priority on investigating financial
crimes and is committed to working with the subcommittees,
the House Financial Services Committee and all of Congress
to ensure that law enforcement and the respective financial
services industries have the necessary tools to combat these
crimes. The FBI is aware of the interest and efforts to combat
fraud throughout the various finance-oriented industries.
In the cyber era, the services provided by banks, securities
firms and insurance companies are increasingly similar. The
advances in technology and the development of cyber financial
products and services is continuing to meld the offerings
of banks, securities firms and insurance companies. As a by
product there is increased commonality among regulators. The
Gramm-Leach-Bliley Act's (GLBA's) purpose was to establish
a comprehensive framework to permit affiliations among commercial
banks, securities firms and insurance companies --- allowing
a level playing field while, maintaining the safety and soundness
of the financial system. It also recognized the need for greater
regulatory consultation and coordination.
I am thankful to all who were
involved and their leadership in working to enact the GLBA,
particularly in the face of an ever-changing global economy,
the consolidation of financial services and emerging new technology.
The FBI has been requested to
testify on two different areas, although somewhat related:
1.) our position on FBI criminal history record information
(CHRI) checks of individuals conducting business in the area
of insurance and; 2.) our position and support on the sharing
of information between the various finance-oriented businesses.
In these regards, let me state that the Department of Justice
is studying the need for any additional legislation in these
areas. We are therefore not prepared to suggest or comment
upon any legislative approaches at this time. I will first
provide a brief discussion relating to the insurance industry
and FBI CHRI checks.
Background
Let me discuss the financial
impact the insurance industry has on the economic security
of the United States and its citizens. According to the coalition
against insurance fraud, United States (U.S.) premiums in
1998 totaled $639 billion. According to a recent report by
the alliance of American insurers --- a national trade association
representing over 300 property/casualty insurance companies
--- the insurance industry contributes almost $200 billion
to the U.S. Gross National Product (GNP) each year. This is
approximately 2.4 percent of the total GNP. By comparison,
this is almost double the security industry's contribution
of 1.3 percent and closer to the banking industry's 3.3 percent.
The insurance industry currently employs approximately 2.5
million people, with a total payroll of approximately $100
billion. Financial interests by the insurance industry are
enormous. Insurance industry holdings of state and local government
bonds totaled $227 billion or 15 percent of all outstanding
municipal bonds. This percentage is the largest of any financial
sector except mutual funds, which hold 16 percent. Insurers
also hold almost a third of all available corporate bonds.
Individuals engaged in insurance
activities hold positions of great trust. They bear a tremendous
fiduciary responsibility and have access to and control vast
financial investments.
Recent Cases
Some recent FBI investigations
will disclose the amount of trust placed with some of these
individuals and the magnitude of fraud as a result of this
trust. The National Heritage Life insurance company was the
largest insurance company failure in U.S. history. The National
Heritage Life case resulted in over $450 million in losses.
Since the mid-1990's, 16 defendants were convicted. The most
egregious crimes were committed by Shaolom Weiss and Keith
Pound, who were recently sentenced to 845 and 700 years respectively.
This is believed to be the longest sentence ever imposed in
not only an insurance fraud prosecution but for any white
collar crime. This investigation also resulted in a $100 million
forfeiture verdict. In a recent viatical-related insurance
fraud matter, Frederick Brandau was sentenced to 55 years
imprisonment.
Current Enforcement Activities
In 1994, Congress recognized
the fiduciary nature of insurance employment when it enacted
the Violent Crime Control and Law Enforcement Act, which,
among other provisions, included new federal criminal and
civil enforcement provisions aimed directly at insurance fraud,
18 U.S.C. Sections 1033 (1033) and 1034 (1034). In passing
1033, Congress held that, among other statutory regulations,
"Any individual who has been convicted of any criminal
felony involving dishonesty or a breach of trust, or who has
been convicted of an offense under this section [1033], and
who willfully engages in the business of insurance whose activities
affect interstate commerce or participate in such business
shall be guilty of a crime." Congress further stated
that any individual who is engaged in the business of insurance
whose activities affect interstate commerce and who willfully
permits this participation of any individual so convicted
shall be fined or imprisoned.
It immediately became illegal
for certain individuals to either be employed in the business
of insurance or continue to work in the business of insurance.
Public law (Pub. L.) 92-544
authorizes the FBI to exchange CHRI with officials of state
and local governmental agencies for licensing and employment
purposes. This can only be authorized by a state statute which
has been approved by the Attorney General of the United States.
One of the primary purposes for enacting Pub. L. 92-544 was
to establish a national policy with adequate sanctions and
administrative safeguards regarding the dissemination of FBI
CHRI to state and local governments for non-criminal justice
licensing and employment purposes. Fingerprint submissions
to the FBI under Pub. L. 92-544 must be forwarded to the FBI
through the state identification bureau within each state.
Furthermore, a governmental agency within the state must be
designated as the recipient of the FBI CHRI, as such information
cannot be disseminated to a private entity without specific
authorizing federal legislation.
A recent review conducted by
the FBI Criminal Justice Informations Systems (CJIS) Division
disclosed that multiple states have statutes approved pursuant
to Pub. L. 92-544 for submission of fingerprints for non-criminal
justice licensing and employment purposes. A review of these
specific statutes indicates a broad diversity of criteria
for selecting and screening applicants. For example, one state
may require that only licensed agents be fingerprinted, while
another may require that officers, directors, stockholders,
managers, adjustors, solicitors and brokers be fingerprinted.
According to the National Association of Insurance Commissioners
(NAIC), only three states (California, Florida and Idaho)
consistently access the FBI criminal database for regulatory
purposes.
At present, all state insurance
departments do not have clear federal authority to obtain
FBI CHRI checks regarding persons who seek to hold positions
of trust in companies providing financial services to the
public. Congress has enacted federal legislation authorizing
access to national CHRI for the screening of prospective employees
in areas involving important national interests, without requiring
states to subsequently enact state laws to access FBI CHRI.
Most recently, Congress enacted Pub. L. 105-277 to give all
states the authority to request FBI CHRI for persons seeking
employment at direct care providers in nursing homes. The
FBI reports that 10.5 percent of all civil non-criminal justice
applicant fingerprint checks in fiscal year 2000 disclosed
criminal record information. The intent of 1033's prohibition
is to prevent certain persons from having the opportunity
to harm the public or insurers. There are no statistics to
disclose the amount of fraudulent losses eliminated, as a
result of screening applicants and current employees through
the fingerprint identification process. However, based on
the 10.5 percent positive identification rate, one can only
believe that it is substantial. Two select examples are noted
below.
Recent Cases:
One individual was a convicted
felon (state fraud related conviction) who used an assumed
name in the mid 1990's to conduct business within the insurance
industry. His fraudulent actions resulted in as much as $6
million in losses and he was convicted on numerous counts
of various fraudulent acts. In another investigation, an individual
was recently indicted on conspiracy, money laundering and
mail fraud charges relating to his alleged fraudulent actions,
possibly resulting in as much as $50 million in losses associated
with the viatical life insurance settlement industry. This
individual was previously convicted and served time for illegal
sale of arms and various fraud convictions.
An insurance agent who is licensed
in one state may conduct business in any number of other states.
The policyholders are protected to varying degrees by their
own state's insurance guaranty program. If fraudulent activity
resulted in the insolvency of an insurance company, this activity
can trigger the need for coverage from numerous state guaranty
programs to the extent that policyholders of the failed insurer
are residents of different states. Although the fraudulent
activity may occur in a state that licensed an agent (based
on not doing a CHRI check) who was in violation of 1033, should
this activity cause immense financial losses to an insurance
company that is headquartered in another state and has policyholders
throughout the nation, the guaranty fund of each state may
be severely impacted, affecting policyholders and taxpayers
in various states. Many insurers domiciled in some states
are eligible to offset a portion of the amounts assessed by
the state's guaranty funds against premium taxes collected
by these states.
If an insurer is made aware
of a felony conviction, it must then make a determination
if that felony involved dishonesty or breach of trust. The
statute does not identify felonies that involve dishonesty
or breach of trust. Identical language appears in several
federal statutes, including provisions related to federally
insured banks, savings and loans, credit unions, small business
investment companies, etc. There does not appear to be any
court decisions outlining standards for determining which
crimes involve dishonesty or breach of trust in the context
of 1033. Each state has its own set of statutes and case law
that defines what is, or is not, dishonesty or breach of trust.
An individual may seek relief
from the prohibition against engaging in the business of insurance
by obtaining the written consent of the insurance regulatory
official (the appropriate state insurance commissioner) authorized
to regulate the insurer who employs this individual. Each
state has their own ruling on granting waivers on a case by
case basis.
In addition to the Violent Crime
Control and Law Enforcement Act of 1994, the GLBA provides
that state insurance regulators shall coordinate with the
federal regulatory agencies and achieve a national system
of agency licensing. Neither of these specific federal mandates
can be properly met by state officials without the ability
to have FBI CHRI checks.
The NAIC has noted, that while
the insurance industry should remain state regulated, there
is a role for the federal government to play in the area of
law enforcement in concert with state insurance regulators
and the NAIC. Federal statutes are to be viewed as enhancing,
not superseding, state law enforcement and will help to serve
as additional deterrence to and punishment of individuals
who engage in illegal insurance activities.
For five years, the Energy and
Commerce Committee's Subcommittee on Oversight and Investigations
conducted investigations and held oversight hearings on the
insurance industry. These hearings demonstrated that enforcement
of insurance laws and regulations is one of the weakest links
in the insurance regulatory system. In February, 1990, the
Subcommittee focused attention on the need for federal criminal
legislation in its report "failed promises." In
this report, the subcommittee examined four major insurance
company failures and concluded that existing state remedies
were ineffective against the fraudulent behaviors that drove
these companies into insolvency. As a result, Congress enacted
federal criminal statutes (1033 and 1034) to help insurance
regulators deal with interstate insurance fraud schemes.
Many of the states have varying
procedures/practices in place with respect to the enforcement
of 1033. Some states have no policy or procedures in place
and some do not believe their respective insurance department
could interpret or enforce 1033. Other states believe that
companies/employees must determine for themselves whether
they must seek consent. Numerous states have policy and procedures
in place to enforce 1033 based on the NAIC guidelines for
state insurance regulators. We commend the NAIC for their
proactive efforts and progress in seeking to establish uniformity
throughout the industry.
All too often the perpetrators
of fraud and deceptive practices in the insurance field not
only are able to carry out their schemes with impunity, but
equally troubling they move on to another insurance company
to inflict still more harm to the good name of insurance.
Even more troubling is that con men from other industries
are migrating more and more to the insurance industry because
of the lack of uniformity and controls.
I will now address the information
sharing portion of our testimony. The GLBA financial modernization
legislation highlights the importance of consultation and
information sharing among federal financial regulators and
state insurance regulators. Although the legislation is recent,
regulators in certain finance-oriented industries have recognized
the need to improve their coordination and have taken or plan
to take a number of actions. Generally, the actions consist
of establishing formal agreements for sharing information
and creating working groups to discuss matters of mutual interest.
These regulatory actions are in their infancy.
The FBI commends the General
Accounting Office (GAO) on its excellent report: "Insurance
regulation: Scandal highlights need for strengthened oversight,
September 2000, GAO report to the honorable John D. Dingell."
The report is a prime example of the need for a coordinated
sharing of information. However, even with practices in place
within a single industry, various state regulators were not
sharing suspected fraudulent activity with other state regulators.
Martin Frankel, a former securities broker who was barred
from the industry in 1992, allegedly migrated to the insurance
industry and continued to operate as a rogue by engaging in
illegal activity. The insurance companies negatively affected
by the scam were regulated by individual states. Another entity
tied to the scam, a broker-dealer, was subject to regulation
in the securities industry. The migration of undesirable persons,
or rogues, from one industry to another is one of many issues
of concern for financial service regulators that are attempting
to implement the GLBA aimed at modernizing the financial services
industry.
A recent example illustrates
the failure to communicate and cooperate within a single financial
sector business. In Florida, 18 individuals were charged pursuant
to indictments pertaining to a scheme involving the "planting"
of members of a specific group in banks as tellers. These
tellers identified large accounts and, subsequently, co-members
of the group presented counterfeit checks to them for cashing.
The losses due to the alleged fraud exceeded $1.6 million.
Two banks and several branches of these banks in various jurisdictions
fell victim. There was no "bank-wide" coordination
of background checks of bank personnel. Each branch conducted
their own checks and did not share the information with other
branches. After being fired, these tellers would simply be
hired by another branch of the same bank.
I want to conclude by emphasizing
the FBI's continued commitment to work with the subcommittees,
the House Financial Services Committee, Congress, the regulatory
agencies, the financial services industries and other law
enforcement agencies in addressing concerns relating to the
merging and over-lapping of the financial sectors. These are
exciting times in the American economy as technology continues
to rapidly change America and the world.
|