Premium Fraud and Tax Evasion

Premium Fraud and Tax Evasion AASCIF Super Conference ~ San Diego CA Bonnie M. Dumanis District Attorney By DOMINIC I. DUGO Chief, Insurance Fraud Division dominic.dugo@sdcda.org (619) 685-6534 October 4, 2012 - AASCIF

USA Insurance Fraud $80-$90 Billion a Year USA

USA Tax Evasion #1 Economic Crime followed by Insurance Fraud USA

Insurance Fraud $15 Billion a Year. Tax of $500 per Person CALIFORNIA

Insurance Fraud # 1 Economic Crime followed by Tax Evasion CALIFORNIA

Income Tax Evasion $6.5 Billion (FTB) CALIFORNIA

Underground Economy $100 Billion Annually $5 Billion of Payroll Tax Loss CALIFORNIA

What to do?

OUTLINE I. California Grant Funding II. San Diego Insurance Fraud Division III. Prevention Plan IV. Premium Fraud V. Payroll Tax Evasion

I. Insurance Fraud Grant Funds $100 Million District Attorneys $50 Million Dept of Insurance $50 Million CALIFORNIA

Grant Programs Workers Comp Auto Insurance Disability/Healthcare/Life $50 million $45 million $5 million CALIFORNIA

Source of Grant Funds Workers Comp Employers Pay Auto Insurance Drivers pay $1.80 per Insured Vehicle CALIFORNIA

II. San Diego Insurance Fraud Division Grant Funded Units Workers Compensation Fraud Auto Theft Auto Insurance Fraud Disability, Healthcare Fraud Life Insurance Fraud Staff 16 Attorneys 15 Investigators 6 Paralegals 10 Support Staff 1 Legal Nurse Consultant

III. San Diego s Prevention Program Brochures Billboards Posters Chamber of Commerce Movie Ads Ethnic Newspapers

Brochures, 2008-2011 Business Mailer- 180,000 Journal Inserts- 16,000

Billboard Ads, 2009 16 Billboards 4 to 6 Weeks 1 Million People a Day

Billboard

Billboard

Billboard

Billboard

Billboard

Billboard

Anti-Fraud Posters, 2009-2012 200,000 English/Spanish/Chinese Numerous Employers

Workers Comp Poster

Workers Comp Poster

Workers Comp Poster 26

Movie Theater Ads, 2010 340 Movie Screens 1 Month 1 Million People

Workers Comp Movie Ad

Auto Insurance Movie Ad

Ethnic Newspapers, Anti-Fraud Ads, 2012 Spanish Chinese Vietnamese Filipino Arabic African American Korean

Chinese Newspaper Ads San Diego Los Angeles San Francisco Epoch Times San Diego New Times

Vietnamese Newspaper Ads San Diego Thuong Mai The Freeviet News

Hispanic Newspaper Ads El Latino Frontera Star News The Californian

TV Media - 2012

Radio Media - 2012 KLQV 102.9 FM KLNV 106.5 FM

IV. What is Premium Fraud False statement Intent to reduce proper rate or cost of workers comp insurance

Is Premium Fraud a Crime? YES; Felony Insurance Code 11880a, 11760a Penalty: 2-3-5 years prison CALIFORNIA

Insurance Companies Billions $ WC Premium Fraud

Premium Fraud 2007 California Study If you ain t cheatin, you ain t tryin. Fraud 19% to 23% (2002) $3.2 to $3.8 Billion 2007 New York Study Fraud 15% to 20% $500 million to $1Billion

Premium Fraud

Workers Compensation Required of Employers Coverage Premium defined CALIFORNIA

Payroll x Class Rate x Exp. Mod = WC Premium $300,000 x 10% ($10 per $100) x 1 = $30,000 Landscaper

Payroll x Class Rate x Exp. Mod = WC Premium $100,000 x 10% ($10 per $100) x 1 = $10,000 Landscaper $300,000 x 10% ($10 per $100) x 1 = $30,000

Payroll x Class Rate x Exp. Mod = WC Premium $300,000 x 40% ($40 per $100) x 1 = $120,000 Tree trimmer $300,000 x 10% ($10 per $100) x 1 = $30,000 Landscaper

Payroll x Class Rate x Exp. Mod = WC Premium $300,000 x 10% ($10 per $100) x 2 = $60,000 Landscaper $300,000 x 10% ($10 per $100) x 1 = $30,000

How is Premium Fraud Committed? 1. Underreported payroll 2. Misclassify employees 3. Experience modification evasion

Premium Fraud 1. Underreport payroll 2. Misclassify employees 3. Experience modification evasion PAYROLL x CLASS RATE x EXP. MOD

Consequences of Premium Fraud Unfair Competition Theft to Insurance Carrier

Who Uncovers Premium Fraud? Competitors Employees Tax auditors Insurance company auditors

3 Year History WC File Payroll Tax Returns Income Tax Returns

Collect and Review Entire File Underwriting Audit Claims

Underwriting File Application Policy Period Risk Evaluation Questionnaire Who signed documents?

Audit File Who conducted audit? Interview auditors. Who provided the audit information? Payroll Reports.

WC Injury Files Types of injuries. Job descriptions. Wage information. How long worker employed? Who signed injury reports?

Suspect(s) Owners Corporate Officers Bookkeepers & Accountants Foreman Family Members

Search Warrant

Identify Location(s) Business office Suspects residence Bookkeeper or accountant office Banks

San Diego Premium Fraud Task Force Summer 1996

Task Force Members San Diego District Attorney Department of Insurance Franchise Tax Board Labor Commissioner Contractors Licensing Board Employment Development Department

V. Payroll Tax Evasion Crime often committed with premium fraud

Payroll Taxes Employer - 1 Employee and Payroll Over $100 in Calendar Quarter Employer - Files Quarterly Payroll Tax Returns (DE6) CALIFORNIA

Payroll Taxes Out of Employer s Pocket 1. Unemployment Tax 2. Training Tax Withheld From Employee s Wages 3. Personal Tax Income 4. Disability Insurance Tax CALIFORNIA

Payroll Tax Evasion 1. Underreport Employee Wages 2. Failure to Report Employee Wages 3. Employer Withholds/ Pockets Employee s Taxes

Consequences of Tax Evasion 1. Labor Major Cost of Business 2. Reduce Overhead by Pocketing Employees Taxes 3. Reduce Costs

Is Payroll Tax Evasion a Crime? YES; Felony Unemployment Insurance Code, 2117.5 & 2118.5 Penalty: 16-2-3 years prison CALIFORNIA

Formula For Success Law Enforcement + Insurance Industry Public Awareness