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Fraud > Exhibit:
Viaticals Fraud > Postal
Inspection
Before the Oversight and Investigations Subcommittee
of the
Financial Services Committee
Good afternoon Chairwoman Kelly and distinguished Members of the Subcommittee.
I am Postal Inspector Greg Beriault, Fraud Team Leader at the U.S. Postal Inspection
Service's Indianapolis Field Office. Thank you for the opportunity to testify
today on the mission of the Postal Inspection Service, and our leadership role
in the campaign to end viatical settlement fraud, a rising menace to consumers,
the insurance industry, and law enforcement.
For over two hundred years, America's Postal Inspectors have had the responsibility
for protecting postal employees, the mails, and postal facilities from criminal
attack. Equally important, Postal Inspectors are also entrusted to protect
consumers and businesses from being victimized by fraudulent schemes or other
crimes involving the mails. As the law enforcement arm of the Postal Service,
we work to rid the mails of drug trafficking, money laundering, and mail bombs;
and are regarded as a world leader in the fight against one of the most despicable
crimes - child pornography.
Today there are approximately 1,900 postal inspectors, 1,400 postal police
officers, and 900 professional, technical and support employees of the Postal
Inspection Service. Our agency has the primary responsibility of enforcing
roughly 200 federal statutes designed to protect the postal communications
system of our nation, and preserve the public's trust and confidence in the
U.S. Mail. The Mail Fraud Statute is the oldest and most effective of the consumer
protection laws, and the Postal Inspection Service has successfully used it
for over 100 years. Of the more than 1,900 Postal Inspectors across the nation,
approximately 300 are assigned to mail fraud investigations.
During Fiscal Year 2001, Postal Inspectors conducted 3,475 fraud investigations,
and Inspection Service analysts responded to approximately 66,000 mail fraud
complaints. By year's end, Postal Inspectors had arrested 1,691 mail fraud
offenders, and 1,477 were convicted as a result.
To achieve our goal of ensuring customers' confidence in the mail, the Postal
Inspection Service works cooperatively with other law enforcement and consumer
groups to educate the public about fraud involving the mail. To increase our
efficiency in investigating suspected mail fraud, Postal Inspectors lead and
participate in several joint law enforcement and consumer group initiatives
aimed at safeguarding the public's confidence in the U.S. Mail.
My assignment includes determining investigative priorities, based on complaints
from postal customers, members of the business community, and referrals from
other law enforcement and consumer organizations. Mail fraud investigations
are often broad in scope, and typically involve members of the American public
as the victims. One such fraud I have become very involved with is viatical
settlement fraud.
Viatical Settlement Defined
A viatical settlement is defined as the discounted, pre-death sale of an
existing life insurance policy on the life of a person known to have a terminal
condition.
Viatical settlements started to become popular in the 1980s.
The parties to a viatical settlement may include the insured party, insurance
agent/broker, insurance company, viatical settlement company, viatical broker
and an investor(s). For example, in a legitimate viatical transaction, an individual
purchases a life insurance policy from an insurance company through an insurance
agent. After issuance of the policy, the insured party acquires a terminal
illness. The insured party then, either through an insurance agent/broker,
viatical broker or directly, enters into a contract with a viatical settlement
company. The viatical settlement company buys the policy from the insured party
and pays the insured party a percentage of the face value of the policy. The
viatical company finds an investor(s) who pays a percentage of the value of
the policy to acquire the beneficiary rights of the policy. When the insured
party succumbs to the illness, the investor receives the insurance benefits
in full, as provided by the terms of the policy.
Viatical Settlement Fraud
The victims of viatical settlement fraud include the public, who are investors,
and the insurance industry.
Viatical settlement fraud occurs when misrepresentations are made on the insurance
policy applications, in effect, hiding the fact that the party applying for
a policy has already been diagnosed with a terminal condition, a practice known
as "clean sheeting". The type of policy usually affected is known
as a "jet issue" policy; a policy not requiring blood work or a physical
examination to obtain. These policies generally do not exceed $100,000.
The investor becomes a victim of fraud when misrepresentations are made by
the viatical settlement companies about life expectancies of insured parties
and guaranteed rates of return.
The elements of the fraud often include a combination of the following:
- Submission of life insurance applications with material
- Misrepresentations
(clean sheeting)
- Obtaining multiple policies with various carriers
- Conspiracy between insured
party and insurance agent
- Conspiracy between insurance agent and viatical
company
- Conspiracy between insured party and viatical company
- Misrepresentations to investors by viatical companies
U.S. Postal Inspection Service
response to Viatical Settlement Fraud
In May of 1999, members of the Postal Inspection Service's, Indianapolis
Field Office, Fraud Team, were made aware of a growing problem of fraud related
to viatical settlements. Based upon discussions with the insurance community,
law enforcement and state regulatory agencies it became apparent there
was
a need to address this issue. A working group of eight Postal Inspectors
was established. This working group met in Indianapolis on August 3, 1999,
to develop a plan for the Inspection Service's Viatical Fraud Initiative.
In August of 1999, the U.S. Postal Inspection Service established a national
task force responsible for developing a strategy for the successful identification,
investigation, and prosecution of individuals involved in this fraud. The task
force worked from the Indianapolis Field Office and was named Operation "Clean
Sheet" (OCS). In November of 1999, the task force became a joint investigative
effort with the FBI, and also worked closely with other state law enforcement
and regulatory agencies.
Through analysis of the intelligence gathered, the OCS Task Force was able
to identify many of the major offenders and assist law enforcement in identifying
targets. The OCS Task Force was responsible for initiating, coordinating, and
supporting these field investigations.
On May 19, 2000, eight simultaneous search warrants were executed at various
locations throughout the United States. Each search warrant was the result
of investigations relative to viatical settlement fraud. This effort involved
more than 200 federal, state, and local law enforcement officers.
The OCS task force was very successful in forging a cooperative effort among
regulatory agencies and state and federal law enforcement nationwide. There
are approximately 40 known investigations nationwide. To date, there have been
approximately 100 arrests and 75 convictions made relative to viatical settlement
fraud. The majority of these investigations are still ongoing.
The Liberte Capital Group investigation in Ohio is a good example of the cooperative
effort among state and federal agencies. Agencies participating in this investigation
include the U.S. Postal Inspection Service, Ohio Department of Insurance, Federal
Bureau of Investigation, Internal Revenue Service and the Department of Justice.
On January 18, 2002, seventeen persons associated with the Liberte Capitol
Group were indicted on 160 counts of conspiracy to commit mail fraud regarding
viatical settlements. Liberte specialized in viatical settlements, in which
investors buy the rights to collect future insurance death benefits of senior
citizens and people with fatal illnesses. The indictment alleges that nearly
3000 investors were defrauded of over $100 million as a result of the scheme.
Due to the ongoing nature of this investigation, I must refrain from sharing
additional particulars with regard to the status of the Liberte matter.
Due to the complexity of this fraud, a single case often involves an insured
party, insurance agent, insurance company, viatical settlement company, viatical
broker and investors all living in different parts of the country. Therefore,
various state and federal jurisdictional boundaries are affected by these investigations.
Due to this dispersion, coordination with the Department of Justice and state
prosecutorial authorities has been very instrumental in the successful prosecution
of these cases.
Victims: Viatical Settlement Fraud
As stated earlier, the victims of viatical settlement fraud include members
of the public, typically investors, and the insurance industry.
I. Public
As with most fraud schemes, senior citizens are often targeted by fraudsters
and unfortunately end up as victims. Viatical settlement fraud is particularly
insidious, as it frequently entices its victims into investing their life
savings.
I believe there are several reasons why so many investors have become victims
of this fraud. The life insurance industry is one of the oldest and most trusted
industries in our nation. For generations, people have trusted in life insurance
and faithfully paid their premiums, only to receive what was due upon the death
of the insured. Most investors recognize the risk associated with speculative
investments. However, when you discuss life insurance most people think of
it as a safe secure investment. The distinction between the insurance industry
and the viatical settlement industry may not be fully appreciated or understood
by most investors.
The investment in viatical settlements also appeals to the humanitarian side
of the investor. They perceive themselves as helping a terminally ill person
pay for the medical attention needed and to live as comfortably as possible
in their final days.
Finally, because of the nature of the fraud, and the obvious need to keep
information about the insured private, there is reluctance by investors to
follow-up or ask a lot of questions about their investment. When the investment
does not pay off due to the death of the insured, they are most often reluctant
to complain because in effect they are complaining that the insured did not
die as projected.
II. Insurance Industry
The insurance companies are the other victims of this fraud. Insurance companies
become victims when individuals, often conspiring with insurance agents
or brokers, fill out insurance applications which contain false statements.
These false statements typically hide information about the insured's medical
history, which if otherwise known, would prevent insurance companies from
issuing policies. Once these policies are in force for a twenty-four month
period, they cannot be rescinded, even if fraud is discovered.
Fraud Prevention
The prevention efforts of the task force focused primarily on identification
and investigation, and also included outreach to consumer protection groups,
the insurance and business community, and oversight and regulatory agencies.
Although our efforts have had a significant impact in reducing the fraud
in this industry, the Postal Inspection Service emphasizes the importance
of consumer awareness and prevention as the best protection for consumers.
States have taken different approaches to regulation; some have regulated
through the Department of Insurance and others through the State Securities
Departments. The National Association of Insurance Commissioners has developed
a model Viatical Settlement Law that has been adopted in whole or in part by
many states. To date, much legislation has focused on protecting the viator
and/or regulating the viatical companies, and has not focused on protecting
investors.
There are many challenges facing law enforcement, regulatory agencies, and
the insurance companies as they continue to combat and prevent fraud from occurring
in the viatical settlement industry. In working as a task force leader, I have
had the opportunity to talk with many individuals from the insurance industry,
state regulatory agencies, prosecutors and law enforcement. There are certain
concerns/issues that surface during each conversation. These issues are as
follows:
Life Expectancy Projections - Life expectancy projections are a key component
in determining the pricing and selling of viaticated policies. However, some
common unregulated practices within the industry make this type of insurance
ripe for fraudulent activity. For instance, in many cases, those performing
the projections are employees of the viatical companies, where there exists
a strong incentive to project the most aggressive mortality rates possible.
Additionally, the lack of uniformity among medical evaluations offers increased
opportunities for fraud. These projections are seldom questioned, thus making
them highly susceptible to fraud.
Life Settlements - Our investigations to date have focused primarily on the "Clean
Sheeting" and Ponzi scheme type related frauds in the viatical settlement
industry. The life expectancies for the insured person on these policies are
usually three years or less. However, many industry experts believe the viatical
companies are now moving towards a new type of viaticated policies known as
life settlements. In these settlements the viator is typically made up of the
affluent or elderly investor. The life expectancy for these insureds may be
five or more years. Many believe this market will see extraordinary growth,
and in the absence of uniform regulations, these settlements have the same
potential for fraud.
Insurable Interest - The emergence of the viatical settlement industry has
raised the question of the definition of insurable interest. Some question
whether policies purchased for the sole purpose of selling to an investor violate
the insurable interest principal which requires a close personal relationship
or substantial economic interest in the person being insured. With the growth
of viatical settlements, the number of people who benefit from the death of
insureds will increase. The future impact of this is presently unknown, but
of some concern to the law enforcement and the insurance industry.
So, as you can see there are a number of issues that need to be addressed
to ensure protection for all parties involved in a viatical transaction. Also,
legislative proposals such as H.R. 1408, Financial Services Antifraud Network
Act of 2001, should be helpful to the law enforcement community, if enacted.
The Inspection Service fully supports this legislation and believes it will
be of great assistance based on its ability to facilitate information sharing
and the leveraging of resources among local, state and federal law enforcement
agencies. If this bill becomes law, it will no doubt go a long way in fighting
viatical settlement fraud.
Thank you for bringing this important issue to the forefront and taking swift
action to protect the American public.
Madam Chairwoman and Members of the Subcommittee, this concludes my remarks,
and I would be glad to answer any questions at this time.
