Office Of Financial Regulation Report Finds That Money Services Businesses Help Facilitate Ongoing Workers’ Compensation Premium Fraud

Aug 08, 2011   

On August 2, 2011, the Financial Services Commission of the Florida Office of Financial Regulation issued a report to the Governor and his Cabinet regarding workers compensation fraud in the State of Florida. The report revealed that money services businesses have played an active, critical, and sometimes unknowing part in defrauding the workers compensation insurance market. Money Services Businesses are regulated by the Office of Financial Regulation pursuant to Chapter 560, Florida Statutes. A copy of the Office of Financial Regulations report can be read here.

According to the report, the scheme is designed to allow uninsured subcontractors to procure contracting jobs while avoiding paying workers compensation insurance premiums and payroll taxes on the money earned. (Florida law requires that subcontractors possess a valid workers compensation policy in order to obtain contracts from a general contractor).

The scheme works as follows: First, individuals, known as “facilitators” incorporate “shell” companies, i.e. companies with no business operations, labor force, or physical location other than a P.O. Box, designed to appear as subcontractors on paper. Often times, the facilitators identity is completely unknown as fictitious owners are listed as the owners and officers of the corporation. Next, the shell company obtains a minimal workers compensation insurance policy. Once the shell company has obtained insurance, it proceeds to “rent” its certificate of insurance to uninsured subcontractors. The facilitators allow the uninsured subcontractor to use the shell companys name and workers compensation policy in return for a fee. Uninsured subcontractors who have “rented” the shell company will then have paperwork that appears to be compliant with state law, thus allowing them to enter into construction contracts with General Contractors.

The MSBs involvement in the fraud scheme occurs upon completion of the contract between the subcontractor and the general contractor.  Once the work is completed by the uninsured subcontractor, payment is made to him by the general contractor via check made payable to the “rented” shell company. It is at this stage where an MSB, often a check casher, enters into the scheme because, unlike banks, which normally require that checks made payable to a business or third party be deposited directly into the payees account, a check casher will pay out business-to-business checks, if cashed by persons authorized by the payee. According to the report, “these Ëœauthorized persons are usually the facilitator, and others designated by the facilitator, introduced to and known by the owner/operator of the MSB.”

Upon cashing the check in the name of the shell corporation, two fees are taken out. First, the check casher takes 1.5 to 2% for itself as the fee for cashing the check. Next, a 6-8% fee for the facilitator is taken out as the “rent” paid by the uninsured subcontractor for using the shell companys name and insurance policy. The remaining goes to the uninsured subcontractor as payment for his services. In some cases, the check casher is unaware that its actions are part of a larger fraudulent scheme. Often times in such situations, the check casher becomes an unknowing part of the scheme because of a lack of due diligence in its AML compliance programs.

However, the report also indicated that in some cases the facilitators are actually the MSB owners themselves who act in concert with contractors to find uninsured subcontractors for construction contracts. Additionally, the report noted that in some cases complicit MSBs would falsify Currency Transaction Reports in order to protect the identity of the facilitator by naming the fictitious owners in the CTR. In accordance with the Bank Secrecy Act and its implementing regulations, an MSB is required to file a CTR for every transaction in currency in excess of $10,000. The failure to file a CTR or the falsifying of a CTR violates both state and federal law. More information on BSA requirements for MSBs can be found on FinCENs website here.

As a result of this scheme, “rent” paid to the shell company is not reported to the shells insurance carrier and is not subject to payroll taxes because the payments appear on paper as legitimate contractor-to-insured-subcontractor payments. Additionally, because uninsured subcontractors save money by avoiding workers compensation insurance premiums, they are able to charge a significantly cheaper rate for their services to their co-conspiring general contractors. These general contractors are then able to lower their bid prices and win construction contract jobs away from legitimate businesses. The report estimates that contractors who participate in the “renting” scheme are able to charge up to 20% less then competition for the same work. The practical effects are far reaching. First, legitimate contractors have difficulty winning bids on construction jobs because they cannot quote prices as low as the conspiring contracting companies. Second, none of the ill-gotten gains are assessed workers compensation insurance premiums or payroll taxes, resulting in a loss of revenue for the state.

Additionally, this scheme makes clear the importance of MSBs having robust AML compliance programs in place so that the MSB does not become an unknowing facilitator of fraud. MSBs must ensure that they maintain detailed and up to date records as required by law. MSBs must also ensure that their employees are properly trained in AML compliance in order to spot suspicious transactions and activities.

If you have questions pertaining to the Office of Financial Regulations, the BSA, anti-money laundering compliance, or how to ensure that your business maintains regulatory compliance at both the state and federal levels please contact us at contact@fidjlaw.com.