Global Pirates: Fraud in the Offshore Insurance Industry

Global Pirates THE NORTHEASTERN SERIES ON WHITE-COLLAR AND ORGANIZATIONAL CRIME Edited by and GLOBAL PIRATES Fraud in the Offshore Insurance Industry ROBERT TILLMAN Boston Northeastern University Press Copyright by Robert Tillman All rights reserved. Except for the quotation of short passages for the purposes of criticism and review, no part of this book may be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage and retrieval system now known or to be invented, without written permission of the publisher. Library of Congress Cataloging-in-Publication Data Tillman, Robert. Global pirates : fraud in the offshore insurance industry / Robert Tillman. p. cm. — (Northeastern series on white collar and organizational crime) Includes bibliographical references and index. --- (pbk. : alk. paper) — --- (cloth : alk paper) . Insurance crimes. I. Title. II. Series. .Ј—dc Designed by Gary Gore Composed in Adobe Garamond by Coghill Composition in Richmond, Virginia. Printed and bound by The Maple Press Company in York, Pennsylvania. The paper is Sebago Antique, an acid-free sheet. Manufactured in the United States of America For A.M.T., who made it all worthwhile CONTENTS Introduction 1 The Alan Teale Empire 2 Opening Up Those Golden Gates 3 Promises, Promises 4 Fantasy Islands Conclusions Notes Index INTRODUCTION On Father’s Day , Diane Collras and her husband were driving their new Pontiac Trans Am to church in the San Fernando Valley of California when they were broadsided by another car, hurling Mrs. Collras twenty feet from her vehicle. She left the hospital a week later, burned and scarred. ‘‘But the hardest scar came when I went home,’’ she later told a legislative panel.1 Once home, she tried to get in touch with her insurance company but got little response. Gradually she began to realize her claims were never going to be paid. You’ve been calling almost every day. You get a machine or you get somebody who’s very, very funny who says, ‘‘We’ll have him call you back. He’s on another line; he’s out, he’s this, he’s that . .’’ And then all of a sudden phones start being, ‘‘This line is disconnected. We have no new service.’’2 The Collrases’ problem was that they had unknowingly purchased their car insurance from an offshore company, Union Pacific Fire and Marine, based in the British Virgin Islands. Their insurance broker, whom they had found in the yellow pages, neglected to mention where the company was located or the fact that it was not licensed by the state when he took their check for $,. Afterward, with her Trans Am still sitting in a wrecker’s yard, Mrs. Collras explained her situation to a group of California legislators: We’re paying on two cars. The lady who hit us, she wants to take our house. We’ve got two teens, teenagers, that want to go to college. We’re losing part of our lives because you don’t tell anybody what these companies even are, and then when you ask about them, you can’t even get a straight answer from the Department of Insurance, the Surplus Lines Association, or even your own state Senator. .’’3 The Collrases’ plight was likely not weighing heavily on the minds of Union Pacific Fire and Marine owners when they fled to Costa Rica with $ million in premiums collected from their policyholders.4 Mrs. Collras was aware that there were many other victims like herself, but 3 4GLOBALPIRATES she was unlikely aware of the fact that the problem went far beyond California and unscrupulous auto insurance scam artists. In fact, she and her husband were just two of thousands of victims of a global con game. Like characters in an old Twilight Zone episode, they had unwittingly stumbled into the often surreal world of the offshore insurance industry, a world in which sophisticated white-collar criminals operate beyond the reach of government regulators to set up elaborately orchestrated scams that drain illegal profits out of the $ trillion U.S. insurance industry. Congressman Ron Wyden, who in was a member of a congressional committee investigating offshore insurance crooks like the infamous Carlos Miro, likened the situation to the mythical land of Oz. This whole Carlos Miro empire of phony companies and bogus insurance reminds me of these fairyland kind of stories. The obstreperous lawyers are like the strawmen in the Wizard of Oz and the agents are just a bunch of tinmen without hearts. They go out and try to pave a yellow brick road with policyholders’ money across the sea to Mr. Miro’s magical land of Oz in the Caribbean, Ireland and London, and the fact is the state regulatory system has been like the cowardly lion without the courage to prevent or punish this continuing farce. All the while, you’ve got Mr. Miro hiding behind the smoke and the screens and the mirrors in effect to take advantage of the huge loopholes in today’s regulatory process for his own personal enrichment.5 With a strong dose of sarcasm and cynicism, Congressman Wyden’s anal- ogy succinctly summarizes the elements of an extraordinarily complex set of white-collar crimes that emerged in the s and continue to plague the United States and other countries today. Congressman Wyden’s committee had discovered the existence of a large network of criminals who were in the business of setting up insurance companies offshore, in places such as Antigua, Barbados, and Ireland, where financial regulations are minimal and restrictions on outside access to insurance companies’ books are high. These offshore companies would then sell insurance policies and other products to American citi- zens to whom they had no intention of honoring their obligations. Congress- man Wyden’s committee would come to the conclusion that ‘‘[t]he combination of easy money based on easy promises makes the insurance industry an irresistible target for financial knaves and buccaneers’’6 (italics added). This is a book about these ‘‘financial knaves and buccaneers’’—their schemes and the larger forces that made them possible. While it is a book that INTRODUCTION 5 describes specific groups of white-collar criminals and their crimes, it is also a book about the changing nature of society, to wit, globalization and its criminal consequences. At one level, these criminals are simply old-fashioned con artists using tried and true techniques such as Ponzi schemes. At another level, the knaves and buccaneers are individuals who have taken advantage of rapidly changing financial markets and the regulatory environments that surround them. In this sense, their crimes are the white-collar crimes of the future— crimes that combine the traditional elements of clever salesmanship and gull- ible victims with elements drawn from the ‘‘new economy,’’ an economy that is more information based, less geographically bound, and much more volatile than in the past. To explain these events, a broader theoretical argument will be advanced that can be summarized as follows. The process of globalization has generally led to deregulatory policies in which governments have ceded their authority to regulate commerce. This liberalization of regulations has created ‘‘regulatory voids’’—industry niches that are largely ungoverned. These conditions, in turn, create opportunities for white-collar criminals to hatch schemes that take advantage of the absence of regulation. This is not an iron law. Globalization and deregulation can occur without criminal consequences. Nonetheless, the fact that the process can be observed, as we shall see, not only in the offshore insurance industry but also in the banking and securities and other industries, suggests a broader pattern that needs to be explained. The Problem Emerges Concerns over problems in the insurance industry increased in the late s as policy makers who were just becoming aware of the debacle that was taking place in the savings and loan industry were worried that the insurance industry might have been facing a similar crisis. One of the problems was the growing number of insurance company insolvencies. In the sixteen-year period between and , a total of property/casualty insurers were declared insolvent; in the five-year period between and , that number soared to .7 Several congressional committees held hearings to examine the sources and extent of problems in the industry and found that, while there were sig- nificant problems among licensed, domestic insurers, the problems were even more glaring among unlicensed companies operating in the United States from offshore bases. In the House, hearings were held in February by a committee headed by Representative John Dingell of Michigan. Dingell’s committee focused its attention on several large insurance companies that had recently failed, result- 6GLOBALPIRATES ing in billions of dollars in losses that would ultimately be paid for by taxpay- ers.8 In its report, Failed Promises, the committee compared problems in the savings and loan industry with emerging problems in the insurance industry. The driving force behind [the savings and loan crisis] was management greed and incompetence, accompanied by self-dealing, conflicts of interest, lavish life-styles, violations of laws and regulations, and out- right fraud . The same patterns of industry and regulatory conduct have emerged from the Subcommittee’s recent investigations of insurance company insolvencies.9 One of the insurance company failures that Dingell’s committee dissected was Transit Casualty, whose losses were estimated to total between $ billion and $ billion, leading the committee to refer to it as the ‘‘Titanic of insolvencies.’’ A key actor in the Transit failure was a Cuban-born, U.S. resident named Carlos Miro. After abandoning Transit’s sinking ship, Miro started his own company, Anglo American Insurance, that was licensed in Louisiana, a state where three successive insurance commissioners wound up being indicted on corruption charges.

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