As we previously reported here, in 2011, Florida Chief Financial Officer Jeff Atwater announced the creation of the “MSB Facilitated Workers’ Compensation Fraud Workgroup” to develop comprehensive reforms to combat workers’ compensation fraud schemes and close loopholes that allowed MSBs to be exploited by individuals committing workers’ compensation premium fraud. In 2012 the Florida Legislature unanimously passed CS/HB 1277, which adopted many of the Workgroups’s recommendations, and those changes to the law became effective July 1, 2012.

In 2013, the Florida Legislature passed House Bill No. 217 which requires check cashers licensed in Florida to submit certain transaction information to Florida’s Office of Financial Regulation (“OFR”) through an electronic check cashing database. The transaction information includes, among many other factors, the payee’s workers’ compensation insurance policy number or exemption certificate number when the payee is a business. This requirement was aimed specifically to crack down on workers’ compensation premium fraud.

However, just last week, Florida C.F.O. Atwater announced the arrest of the owner of a construction company allegedly involved in a workers’ compensation fraud scheme. This is just the latest in a string of workers’ compensation fraud arrests in South Florida in 2016. Just like many of the other similar schemes, it is alleged that the owner of the construction company used a money services business (“MSB”) to cash the company’s $11 million in payroll checks.

MSBs, and specifically check cashing businesses, have become a central focus in these workers’ compensation fraud cases because the companies that perpetrate the fraud consistently utilize the services of check cashers—rather than banks—in order to complete the fraudulent transactions. This is not to say that all the MSBs used in these schemes are willing participants of the fraud—rather, many are unwitting victims themselves.

This recent arrest and others like it demonstrate that in spite of Florida’s comprehensive changes to its workers’ compensation and check cashing laws, fraudsters remain determined to commit this type of fraud using MSBs, leaving workers’ compensation fraud a top priority for Florida law enforcement.

How the Fraud Works and the Involvement of MSBs

While each workers’ compensation fraud scheme is factually different, there has been a consistent structure seen predominately in the construction industry in Florida’s metropolitan areas. Typically, a participant in the fraud will open a shell company on-line through the Florida Department of State, Division of Corporations using a nominee owner and naming the company with a generic name (one that does not indicate the type of work purportedly conducted by the company). The shell company owned by the nominee owner has no actual place of business, employees, or operations. It is merely formed so that it can obtain, with the help of the facilitator, a minimal (inadequate) and relatively inexpensive workers’ compensation insurance policy by misrepresenting to the insurance company the type of work it conducts and the amount of workers it employs. For instance, the company will claim that it employs a small construction crew of 2-4 workers involved in relatively low risk activities such as roofing repair, drywall installation, or paving.

Once the policy is issued, the facilitator of the fraud then offers the company’s policy for “rent” to uninsured subcontractors for a fee. Often times the facilitator will “rent” out the company’s policy to multiple uninsured subcontractors at the same time. The uninsured subcontractors will then approach general contractors using the name of the shell company to bid on a particular project and use the certificate of insurance as “proof” of their insurance. Because the certificate does not list the amount of coverage of the policy, the general contractor will not realize the insurance is wholly inadequate. The uninsured subcontractor is typically able to outbid other subcontractors who are compliant with Florida’s laws on workers’ compensation insurance because they are “saving” in some cases nearly 20% by circumventing the insurance requirement.

The uninsured subcontractor posing as the shell company will complete the job and receive payment from the general contractor typically in the form of a corporate check made payable to the shell company. This is where the check casher comes into play. Because banks typically require business checks to be deposited into the business account and do not cash these types of checks, the nominee owner of the shell company or the facilitator will take the check to a check casher. Typically the nominee owner and/or the facilitator will have already established a relationship with the check cashers and have already been identified as “authorized” persons on behalf of the shell company in the check casher’s “Know Your Customer” (“KYC”) files. The check casher will then cash the check for the shell company and take its check cashing fee. From the cash received, the facilitator will take his or her cut and return the balance of the cash to the uninsured subcontractor to pay the workers.

In some instances the check casher is “in on the fraud” and will take a larger fee than is legally authorized and/or falsify the required Currency Transaction Report (“CTR”) for transactions over $10,000.00 in the name of the nominee owner to avoid naming the facilitator or other co-conspirators on the report. However, in other instances, the check casher is merely a victim being used by the fraudsters. Yet, even in those cases where the check casher is not a willing participant in the fraud, the check casher and its principals can nevertheless find themselves in regulatory and even criminal trouble.

Protecting Against Becoming an Unwitting Participant in these Fraud Schemes

What is perhaps most alarming for the MSB industry is that an MSB can find itself in trouble on a state and federal level as a result of its involvement in these schemes—even if the MSB did not know about the workers’ compensation fraud scheme. By merely failing to adhere to the legal requirements and responsibilities imposed on MSBs, an MSB can find itself facing serious penalties spanning from regulatory fines, to license revocation, to prison time. In many cases, the strongest defense that an MSB can have to protect against liability is an iron-clad, fully compliant AML/BSA policy that is actually implemented. Bona fide compliance is the best defense.

It is imperative that check cashers adhere to the federal and state laws and regulations governing check cashing and file all required Currency Transaction Reports (“CTRs”) and any necessary Suspicious Activity Reports (“SARs”). A perfectly written compliant AML/BSA policy is worthless if it is not properly implemented at all levels of the business including any agent or authorized vendor of the MSB.

MSBs and their agents must also be monitor each transaction closely to assess the risks and other reporting requirements that might arise. For instance, Florida MSBs engaged in check cashing are required to monitor and report aggregate transactions that exceed $1,000 per person per day. Recent guidance from FinCEN, which can be found here, makes clear that risk assessment is not something that can simply be addressed at the onset of the business and then placed on the back-burner. Both principals and agents are required to continually reassess their risk exposure, address additional risks that are presented, and rectify weaknesses or deficiencies that are revealed in their AML programs. AML risks can be jurisdictional, product-related, service-related, or client-related. Here in South Florida, the jurisdictional, client-related, and service-related risks include but are certainly not limited to workers’ compensation fraud schemes through shell construction companies and stolen identity tax refund check fraud as addressed in FinCEN’s 2015 Geographic Targeting Order. It is imperative that MSBs understand these risks and understand how these frauds are committed to adequately address them through compliance controls.

Conclusion

It is clear that Florida law enforcement is still cracking down on workers’ compensation fraud with an eye on the MSBs that service them. It is unclear from reports whether the MSB linked to the Pompano Beach construction company fraud is suspected to be complicit in the scheme or just an unwitting victim exploited by the fraudsters. However, this story and countless others like it demonstrate how critically important it is for all MSBs to be vigilant in monitoring all transactions and conducting proper Know Your Customer (“KYC”) procedures as well as adhering to all state and federal laws and regulations regarding AML and reporting requirements.

The anti-money laundering and white collar criminal defense attorneys at Fuerst Ittleman David & Joseph have extensive experience representing MSBs in a variety of criminal proceedings and regulatory enforcement actions at the state and federal levels. For more information, please contact us at 305-350-3690 or contact@fidjlaw.com.

 

 

March of 2016 was a busy month for the law governing asset forfeitures. First, at the national level, in Luis v. United States, the United States Supreme Court ruled that the pretrial restraint of legitimate, untainted assets needed to retain a criminal defendant’s counsel of choice violates the Sixth Amendment. A copy of the opinion can be here. At the state level, Gov. Rick Scott signed into law S.B. 1044 which provides sweeping reforms to Florida Contraband Forfeiture Act making it more difficult for law enforcement to seize assets through civil forfeiture and expanding protections to those subject to such forfeitures. A copy of S.B. 1044 can be read here.

In Luis, the defendant was charged with obtaining $45 million through health care fraud. Pretrial, the Government argued that Luis had spent most of the $45 million she was charged with fraudulently obtaining. Thus, in an effort to preserve Luis’s remaining funds for possible restitution, the Government moved for an injunction pursuant to 18 U.S.C. § 1345 to prevent Luis from spending her remaining assets. These assets included not only the remaining ill-gotten gains, but also untainted assets, i.e. those assets and funds not connected with the crimes charged. However, such a freeze was allowable under 18 U.S.C. § 1345 because it allowed for an injunction freezing: 1) ill-gotten gains, i.e. those fund fraudulently obtained; 2) property “traceable” to the crime; and 3) “property of equivalent value.”

Luis argued that a freeze of her untainted assets, i.e. “property of equivalent value,” would prevent her from using her own untainted funds to pay for her legal defense and would therefore violate her Sixth Amendment right to counsel. The District Court disagreed and found that, while an injunction may prevent the defendant from obtaining the counsel of her choice, the Sixth Amendment did not give her the right to use her own untainted funds for that purpose. The Eleventh Circuit affirmed.

In overturning the lower court’s decision and holding that the pretrial freeze of untainted assets needed to retain a criminal defendant’s counsel of choice violates the Sixth Amendment, the Supreme Court focused on two key areas: 1) the fundamental right to counsel versus the Government’s preferred punishment, i.e. restitution; and 2) the distinction between untainted and tainted assets. As to the former, the Court made clear that although the right to counsel is not unlimited, the Sixth Amendment grants a defendant “a fair opportunity to secure counsel of his own choice” that he “can afford to hire.” Here, the Court found that to allow the Government to freeze untainted assets pretrial would allow the Government to undermine the value of this fundamental right in order to secure assets for the Government’s preferred method of punishment, in this case restitution. The Court found that when compared to the right of counsel, the Government’s interest lies “further from the heart of a fair, effective criminal justice system.”

As to the latter, the Court noted that what made this case fundamentally different from its previous cases regarding asset forfeiture and the Sixth Amendment is that here the assets at issue are untainted. The Court found this important for several reasons. First, as a matter of property law, a defendant only maintains an “imperfect” ownership interest in tainted funds. Assets and funds stolen are the property of the victims, not the defendant, and the tools used to procure ill-gotten gains and assets traceable to such gains are considered to be property of the Government at the instant a crime is planned or committed pursuant to 21 U.S.C. § 853. However, no such situation exists with untainted assets.

The Court considered other factors too. First, as noted above, the right to counsel outweighs the Government’s choice of punishment. Second, limited to no support exists in the common law to support the Government’s position that the Court may engage in unfettered, pretrial forfeiture of otherwise innocent funds. Finally, the Court found that as a practical matter, the right to counsel would be significantly eroded because the result of a pretrial asset freeze would be to create essentially an indigent defendant who would “fall back upon publicly paid counsel, including overworked and underpaid public defenders.” As explained by the Court, “[t]he upshot is a substantial risk that accepting the Government’s views would—by increasing the government-paid-defender workload—render less effective the basic right the Sixth Amendment seeks to protect.”

Turning to Florida, increasingly, civil asset forfeiture, a mechanism through which law enforcement can seize assets without ever charging an asset owner with a crime, has come under scrutiny due to its potential for abuse by law enforcement. However, with the passage of S.B. 1044, Florida has attempted to create significant reforms to the civil assert forfeiture process under the Florida Contraband Forfeiture Act, Fla. Stat. §§ 932.701-932.7062, through a number of measures.

First, S.B. 1044 requires that in order to seize property, in most cases, a property owner must be arrested for a criminal offense that forms the basis for determining that the property is considered a “contraband article.” (A “contraband article” as defined under Florida law is found at Fla. Stat. § 932.701(2)(a).). However, it must be noted that the law provides for an exception in the cases of seizure of “monetary instruments” defined as “coin or currency of the United States or any other currency; a traveler’s check; a personal check; a bank check; a cashier’s check; a money order’ a bank draft of any country; an investment security or negotiable instrument in bearer form or in other form such that title passes upon delivery a prepaid or stored value card or other device that is the equivalent of money and can be used to obtain cash,. Property, or services; or gold, silver, or platinum bullion or coins.” Seizures of monetary instruments can still be made without arrest.

Second, S.B. 1044 increases the evidentiary standard required under Florida law that the state government must meet to forfeit property after seizure. Under the previous version of the Florida Contraband Forfeiture Act, the state was only required to establish the seized property was contraband by “clear and convincing evidence.” However, with the passage of S.B. 1044, this standard has been raised to that of proof beyond a reasonable doubt. Additionally, within 10 days of seizure, the seizing agency shall submit an application of probable cause to a court of competent jurisdiction for an order determining whether probable cause exits for the seizure of the property. These reforms bring civil asset forfeiture more in line with the steps that must be taken and the proof necessary to sustain a criminal conviction.

S.B. 1044 provides for additional measures such as: 1) increasing the filing fee paid by law enforcement at the commencement of forfeiture actions to $1000; 2) requiring that law enforcement post a $1500 bond at the commencement of the forfeiture action which shall become payable to the property owner should the property owner prevail in the forfeiture action; and 3) increasing the amount of attorneys’ fees available to innocent property owners if no probable cause is found at the preliminary hearing level.

It is important to note, while these reforms limit seizures under the Florida Contraband Forfeiture Act, these reforms do not address the issues regarding federal civil asset forfeiture. Additionally, with the recent announcement by the Department of Justice that it has restarted its “equitable sharing” asset forfeiture program, which provides that local law enforcement agencies which partner with federal law enforcement to seize assets pursuant to federal laws get to keep large chucks of the assets seized, it remains to be seen whether S.B. 1044 will curb perceived abuses in the program’s use in Florida. During the “equitable sharing” programs initial launch, local law enforcement often used the program as a way around more restrictive state seizure laws or state programs which placed restrictions on the amounts of forfeited assets an agency could keep for itself. Articles by the Washington post describing the “equitable sharing” program’s controversy can be found here and here.

The anti-money laundering and white collar criminal defense attorneys at Fuerst Ittleman David & Joseph have extensive experience representing clients in a wide variety of forfeiture cases at the state and federal levels. FIDJ’s white collar practice group brings their thorough understanding of criminal law and procedure, civil procedure, constitutional law, and the rules of evidence into every forfeiture matter they handle. For more information, please contact us at 305-350-3690 or contact@fidjlaw.com.