Statement by August D'Aureli, Supervising Investigator, Insurance Frauds Bureau, New York State Insurance Department, before the Senate Standing Committee on Insurance about the Widespread Problem of No-Fault Fraud and its Repercussions on Insurers, Regulators and Consumers of Automobile Insurance
February 9, 2004
Good morning. I would like to thank you, Senator Seward, and the other members of the Committee for the opportunity to testify at this hearing.
My name is August DAureli and I am a Supervising Investigator in the Insurance Frauds Bureau of the Department. Prior to joining the Department in 1992, I retired as a detective from the New York City Police Department after 20 years of service. I currently supervise the Bureaus Auto Insurance Unit that is responsible for investigating auto insurance fraud, including no-fault fraud.
During 2003, the Frauds Bureau received 29,705 reports of suspected fraud, of which, 17,253 pertained to no-fault fraud.
I appear before you today to discuss the widespread problem of no-fault fraud and its repercussions on insurers, regulators and consumers of automobile insurance. There is no question that no-fault fraud costs law-abiding citizens in New York State hundreds of millions of dollars each year. Further, as I will demonstrate later in my testimony, the actors in no-fault fraud have evolved from opportunists simply taking advantage of the system to hardened career criminals. No-fault fraud has now escalated from being a paper crime to territorial warfare including violence and homicides. Today, I will walk you through a completed no-fault fraud investigation that will demonstrate all the elements involved in a typical case. I will also attempt to dispel some of the widely held and largely inaccurate perceptions that "runners." individuals who orchestrate, and recruit victims for, staged accidents, are innocent participants in this scheme. They are, in fact, an integral player of a scam that is getting more organized, complex, resourceful and violent, day-by-day. The sophistication of the criminals involved in these fraud rings and the elaborate schemes they now engage in prove that these criminals are well aware of how to manipulate the current no-fault law and steal a great deal of money in the process.
The Frauds Bureau has been on the frontline in the war against no-fault fraud. Recently, for example, the Bureau, working in conjunction with federal, State and local law enforcement agencies, cracked down on many separate automobile insurance fraud rings resulting in hundreds of arrests and dozens of indictments. The Bureau and law enforcement agencies are doing everything within their power, under current law, to take these criminals off the street. An increase in staff resources in the Bureau, in connection with redeployment of assets to "task force" type operations in several counties, has fostered coordination of activities among investigative and prosecutorial agencies.
On the regulatory side, the Department prevailed in its promulgation of the revised timeframes under Regulation 68. The regulation provides our fraud and abuse prevention and detection activities with a powerful tool necessary to match the creativity, guile and industriousness of the organized, sophisticated perpetrators of fraud schemes, scams and rings. It is not to overstate the case to say the upholding of Regulation 68 was a major victory in the fight against no-fault fraud.
One additional tool that my Bureau could definitely use to effectively fight no-fault fraud is a felony runners bill. It would help our fight against criminals that steal tens of millions of dollars from the automobile insurance system.
II. Operation Gateway to Fraud
Operation Gateway (Operation) was a large scale, long-term investigation that targeted every element in a no-fault scam. The Operation involved "accident victims" or "jump-ins," people recruited by runners to occupy vehicles involved in staged accidents, who claimed injuries in "accidents" that never occurred. While in this particular case the accidents never took place, in other typical cases that I have been involved in, the accidents do occur, but they are staged. This Operation also involved runners, an important link in no-fault fraud, who coordinated the fictitious accidents and then directed the jump-ins to medical clinics where they were treated by unscrupulous medical professionals. The Operation penetrated into a complex criminal organization and implicated dishonest businesspersons who boast multi-million dollar yearly salaries. This Operation is recognized as one of the largest and most successful no-fault insurance fraud investigations.
The case involved a Brooklyn-based organization known as Parallel Management Group (Parallel). It is alleged that Parallel served as the focal point for the fraudulent insurance activities and was the center for the laundering of illegally obtained no-fault money. Parallel illegally established several medical corporations using the names and medical licenses of physicians who sold their privilege for a fee. Medical professional corporations established in this manner are illegal because they violate New York State Law requiring such corporations be owned and controlled exclusively by physicians.
This case began when the Bureau received information in the fall of 2002. A confidential source, who had been developed, provided corroborated evidence of insurance fraud and related crimes and identified a target runner and his organization. The target runner recruited insured vehicles and jump-ins solely for the purposes of orchestrating fake accidents. The recruited jump-ins were then sent to one of seven predetermined clinics for treatment of nonexistent injuries. The target runner, like runners in other cases, was paid a substantial fee for each person that he sent to one of the predetermined clinics. The target runner submitted fictitious accident reports using information previously obtained on the recruited jump-ins and insured vehicles. As stated before, these accidents never actually occurred. Our investigation of this case followed the fictitious accidents through the seven clinics, which were in effect, medical mills involving large-scale medical fraud. As the investigation progressed, it led to the identification and targeting of Parallel, a multimillion-dollar management corporation operated by alleged Russian crime figures, and which has controlling interest in the aforementioned seven clinics. This Operation began by targeting no-fault fraud offenders at the street level including "runners" and "jump-ins," progressed to surveillance of unscrupulous medical mills and a management corporation, and culminated with the arrest of members of organized no-fault crime rings. The Operation involved several phases that were conducted cooperatively by many agencies including the Frauds Bureau, New York City Police Department (NYPD), and the Kings County District Attorneys Office. I will now describe each phase of the Operation as reported by the NYPD.
Phase I. Development and use of initial informant
During this phase, an initial informant was developed and used to coordinate several fictitious accidents. Numerous operations involving the use of undercover officers to create fictitious accidents and to receive treatment at medical clinics were deployed. The medical billing was then analyzed, identifying clinic level fraud. Phase I established the cause to secure eavesdropping warrants on targets and search warrants on the medical clinics and Parallel.
Phase II. Execution of eavesdropping warrants
Four wiretap investigations were initiated over a three-month period. During this phase, over 150 new subjects of the investigation were identified. They included doctors, other medical professionals, runners, jump-ins, and persons otherwise involved by acting as drivers or owners of vehicles involved in the fictitious accidents.
Phase III. Execution of search warrants
Search warrants were executed at several runner locations, as well as at four medical clinics and the office of Parallel. Evidence recovered at the clinics implicated several more medical professionals. Evidence recovered at the runners locations included several weapons, ammunition and cash. Records recovered at Parallel are still being analyzed and we expect that our analysis will uncover additional evidence that will strengthen this case against the alleged Russian organized crime figures.
Phase IV. Jump-in takedown
Probable cause to arrest existed for 62 subjects and they were arrested during a mass arrest over a weekend. The first part of this takedown was scheduled for a Saturday. Many of the subjects responded to a "ruse location" under the pretense that they were receiving a settlement in their accident case. The ruse facilitated the apprehension process while confirming the subjects involvement in the fraud. On the following day, law enforcement arrest teams arrested the unapprehended subjects.
The ruse worked as follows: On the Wednesday and Thursday preceding the Saturday takedown, subjects were called via telephone and informed that a large sum of money from an accident claim settlement awaited their arrival. All calls were recorded for evidence. A non-police facility in an office building in Queens had been located and served as an ideal location for this operation.
NYPD provided five phone lines for a fictitious company called Gateway Claims and Settlement Service, Inc. Female investigators, reading from a prepared script, made the phone calls to the subjects. Female investigators were chosen to make these phone calls because they would appear less intimidating to the subjects. Investigators informed the subjects that they represented a company called Gateway Claims and Settlement Service, and that insurers contracted with Gateway because the State mandated an independent record be made verifying that accident victims have been contacted regarding their settlement. Subjects were further informed that the settlement must be made by noon Saturday or the insurance company would be forced by law to litigate the claim in courts. The facts were verified over the phone and the subjects were told that they must appear in person no later than noon, Saturday to collect their checks. Subjects were also told to bring two forms of identification (in order to discourage subjects from sending in a proxy or courier), and that Saturday was the deadline for over 1,600 insurance settlements in New York City (to help explain why so many people known to the subject will be present at the facility), so claims processing time could be up to two-to-three hours (to discourage subjects from bringing in children or pets since subjects were going to be arrested). At the ruse location, subjects were asked to present identification and to sign a form.
Phase V. Forfeiture and civil restitution
The NYPDs Fraudulent Accident Investigation Squad (FAIS) is currently working with the victimized insurance companies to identify past accidents so that pending fraudulent claims can be denied. FAIS is also working with the NYPDs and the Kings County District Attorneys Asset Forfeiture Units to identify and target assets associated with this case for forfeiture. They are also assisting various insurers with the information necessary to establish a civil restitution case.
While this Operation has resulted in dozens of arrests, the investigation is still continuing. In addition, this operation has led to three of the victimized insurers filing a civil RICO (Racketeer Influenced and Corrupt Organizations Act) action in the Supreme Court of New York against Parallel. The insurers are seeking to recover more than $100 million in compensatory and treble damages for the thousands of no-fault claims paid as a result of the fraudulent actions of Parallel.
III. The Evolution of No-Fault Fraud and its Players
There has been a proliferation of no-fault fraud over the last decade. Reports of suspected no-fault fraud to the Frauds Bureau has increased dramatically over this period of time. For example, in 1993, the Bureau received a total of 10,648 reports, of which 1,364, or 12.8%, pertained to no-fault fraud. This percentage has steadily increased each year peaking in 2002 at 60.4%. These numbers indicate almost a five-fold increase in no-fault fraud reports during this period. It would appear that the involvement of organized crime in the area of no-fault fraud has led to this increase. Governor Pataki and the Department, recognizing the severity of this problem, made fighting no-fault insurance fraud a priority. Steps taken by the Department to combat fraud have begun to bear fruit. In 2003, the Department set a record for insurance fraud arrests, topping the previous years arrests by 15%. Further, the arrest rate is up 108% over the past five years. Also, for the first time in the last decade, the percentage of no-fault fraud reports to the Department has decreased.
Notwithstanding the seriousness of the growing incidence of no-fault fraud, a more critical concern is the growing violence. A hardened criminal element has entered the insurance fraud arena. Violent felons, who have previous arrests for homicides, rapes, illegal gun possession, robberies, burglaries and drugs are showing up in our cases. We have several documented shootings and homicides between runners, who have become territorial and will use violence to eliminate competition. Additionally, the violence is not limited to the criminal element. Innocent drivers, bystanders and citizens have been caught up in this violence. For example, there was a homicide in Queens last year where an elderly woman died as a result of a caused accident. Although one arrest was made, we anticipate other arrests will be made. Last year in Brooklyn, at the scene of a motor vehicle accident, multiple shots were fired resulting in the death of one person and the injury of another. Police believe that this violence was related to insurance fraud turf war.
Historically, insurance fraud, in general, has been viewed as a "white- collar" crime. While this statement is still true for most kinds of insurance crimes, it is not valid today for no-fault crimes. In the past, the typical person who committed no-fault fraud was an individual, not connected to any organized criminal enterprise, who manipulated the system for personal financial gain. Career criminals initially saw the no-fault system as a chance to make easy money illegally without any competition or fear of retribution from other criminal enterprises. The ease with which the no-fault system could be abused, and the lack of meaningful penalties for this crime, attracted more players to this arena resulting in clashes and turf wars that now culminate in assaults, shooting and homicides. The no-fault crime perpetrators today are hardened criminals or thugs who have moved from dangerous activities such as drug dealing or illegal firearms trafficking to automobile insurance fraud. For example, my investigators took a sample of 50 suspects arrested in several recent Frauds Bureau no-fault sweeps and checked their arrest histories. The results were as expected. Of these 50 suspects, 31 had prior arrests, many of them more than one. These 31 had accumulated a total of 143 arrests in addition to their arrests for insurance fraud. The arrests included 1 murder, 16 gun possessions, 31 narcotics violations, 17 robberies, 18 burglaries, 9 assaults, 5 sexual offenses which included 4 forcible rapes, and 46 other crimes. Three of the rapes were committed by one individual.
The most serious charge was murder. However, the worst offender in terms of numbers had a total of 22 prior arrests. He was arrested twice for gun possession, three times for narcotics violations, once for sexual assault, once for robbery, once for burglary, and 14 times on various other charges. This offender was followed closely by another career criminal who netted a total of 17 prior arrests, including gun possession, drugs, robbery, burglary, assault and miscellaneous other crimes.
Make no mistake, many perpetrators of no-fault fraud today are violent career criminals who have changed the focus of their crimes. No-fault fraud has provided these thugs with a veritable safe-haven in that they can continue their illegal activities without fear of any significant reprisals. Increased penalties for no-fault fraud will help stop a "revolving door" process where no-fault criminals, despite apprehensions and arrests, are back on the streets of New York arranging more staged-accidents, cheating insurers and society-at-large out of hundreds of millions of dollars, and killing each other as well as innocent citizens in the process, because prosecutors do not have all the tools necessary to keep these criminals behind bars.
IV. Anti-fraud Initiatives
All measures and available resources are being utilized to detect, prevent and deter no-fault fraud. The Department has pursued a multi-pronged approach to tackle the elaborate organized crime rings that involve runners, such as in Operation Gateway.
These fraud rings manipulated the timeframes under the former Regulation 68 to maximize their profit, typically waiting until the 90th day after the staged accident (the last day to file a notice of claim) to notify the insurer of the claim and withholding all the medical bills generated from the medical mills until just before the expiration of the 180-day period for submitting proof of loss (the last day to submit proof of loss for medical treatment). These lengthy time periods prevented an insurer from performing any meaningful independent investigation to determine the validity of the medical services rendered. Coupled with the fact that an insurer had only 30 days to either pay or deny the claim, many insurers would pay the claims in order to avoid any penalties for failure to pay on a timely basis.
In order to reduce opportunities for this rampant fraud and abuse, the Department amended Regulation 68 in September 2001. After a series of hard fought court battles in defense of the amendment, the Court of Appeals recently upheld the regulation. The revised regulation reduces the time limit for filing a notice of claim from 90 to 30 days, for submitting proof of loss due to medical treatment from 180 to 45 days, and provides that proof of work loss must be submitted within 90 days. The revised regulation also provides for a more flexible standard for accepting late filings, replacing the previous rule that late filings were permitted only when written proof showed that compliance with a deadline was "impossible." The new standard allows for a late filing when there is a "clear and reasonable justification" for the delay.
These new timeframes allow insurers to receive notice of an accident sooner and permit insurers to better investigate the claim closer to the time medical services were rendered without compromising the claimants legitimate right to benefits.
In addition to closing the opportunities for fraud and abuse through regulatory action, the Department has also taken an extremely proactive role on the law enforcement side of the equation. The Department has partnered with all law enforcement agencies to combat insurance fraud and abuse. For example, we are working with the Attorney General, who was appointed statewide Special Prosecutor of auto fraud in 2001 by the Governors Executive Order No. 109. The Department also works closely with the local district attorneys, Federal Bureau of Investigation, State Police, NYPD, other local police departments, Division of Criminal Justice Services (DCJS), and Department of Motor Vehicles. Working with the Department of Motor Vehicles, the Insurance Information and Enforcement System (IIES) initiative was successfully implemented providing New Yorks law enforcement agencies and the insurance community with a state-of-the-art insurance data program, and other states with the standards by which they will be measured.
The Department is also a member of automobile insurance task forces such as the DCJS working group/task force and the New York State Auto/Arson Task Force between New York Citys Bureau of Fire Investigation and the Departments Arson Unit. In addition, we have assigned fraud investigators to District Attorneys offices and the Departments Frauds Bureau works closely with the Special Investigations Units (SIUs) of insurance companies on IFBs submitted, open cases and resources for sting operations, such as pretext policies and undercover vehicles.
The Frauds Bureau has also hired additional investigators to fight no-fault fraud and has combined the auto and no-fault units into one unit for a comprehensive approach to investigating automobile insurance fraud. In addition, this unit was recently relocated to Brooklyn where no-fault fraud is rampant.
Investigators assigned to the Frauds Bureau have and will continue to reach out to community groups throughout the State to educate them on insurance fraud, including ways to identify and prevent fraud. Education and the support of the community in reporting suspected fraud is critical. No law enforcement effort can be sustained without the support of the community. Everyone has to participate in this fight.
The NYPD and local police departments across the State are continuing to expand resources into this area, creating new units, such as the NYPD's Fraudulent Accident Investigation Squad and the No-Fault Task Force of the Attorney General's Office. An enormous effort is underway to address insurance fraud and the result of this effort is evident in the increased arrests and convictions for insurance fraud. It looks as though we are finally getting an upper hand in our fight against fraud.
The most recent enhancement in our ability to fight fraud is our participation at the High Intensity Drug Trafficking Area (HIDTA), which is a task force consisting of federal, State and local law enforcement agencies. The advantages of participating in HIDTA are the ability to exchange information with other agencies and have access to sophisticated crime databases.
A recent Fortune Magazine article rhetorically questioned why anyone would want to rob a bank these days. A more lucrative endeavor, with less risk of physical injury, would be for the person to open up a no-fault facility. Further, if caught and convicted, the reprisals are limited. Diligent investigations, vigorous prosecutions, and jail time for those convicted of insurance fraud should effectively strip this crime of its appeal. While progress has been made, we need to continue working together as the fight against no-fault fraud is far from over.
Thank you and I will be happy to take any questions.