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Where Crimes Converge Investigations Merge

Fraud is an issue for every company, but insurance companies must be concerned not only with typical types of employee fraud but also with fraudulent claims filed by customers who hold their policies. Sometimes the two roads to fraud intersect. In many insurance organizations the special investigation unit (SIU) concentrates on fraudulent claims made by customers, and the internal investigative group is concerned with fraudulent acts committed by employees. Other enterprises use the services of the audit function to detect fraud and provide guidance on which controls should be in place to mitigate the fraud exposure. When investigating false claims, however, it is often in the best interest of the company to encourage cooperation between the SIU and the internal investigative group to uncover cases where employees choose to abuse the system or conspire with the insured to defraud the company. Gaps in knowledge or lack of information sharing can impair the company’s ability to effectively respond to threats of fraud.

For example, an insurance sales representative working for one company applied for upscale automobile insurance with his employer. There was nothing unusual about his insurance application, and the company granted the employee coverage.

Then, the employee submitted an insurance claim, maintaining that the car was stolen and later recovered with damage. The insurer/employer asked its SIU to investigate. When the SIU inspected the vehicle, the only signs of the alleged theft were superficial scratches on the door lock and steering column. There was no evi­dence of tampering with the ignition system.

Because the claimant was also an employee at the company, the SIU involved the internal investigation unit. After the SIU completed its investigation, that information was given to the internal investigators who interviewed the employee and his wife.

As the interview progressed, the investigator noticed the couple becoming more and more apprehensive. They claimed that they had the vehicle’s keys in their possession when the car was stolen. But the investigator was able to explain that the SIU investigation had not turned up any evidence of the ignition system being defeated and that it was unlikely that a thief could have stolen the car without having a key or compromising the ignition.

Faced with this evidence, the couple admitted to lying. They admitted that the damage had been caused when the wife had driven the car in city traffic and had sideswiped a parked car. The wife became upset and fled the scene of the accident. When she informed her husband of her actions, he decided to cover up the incident by pretending the car had been stolen.

Because of his experience as an insurance salesman, the husband knew the repairs to his vehicle would be covered if he said the car had been stolen. He used a screwdriver to scratch the door latch and the area around the key slot to make it appear that someone had forced entry, and he assumed that no one would look beyond the superficial damage.

With his wife and baby following in another car, he then drove the “stolen” car to a remote location and abandoned it. The wife drove them back home, and her husband then reported the theft to his insurance company/employer the next day. As a result of the investigations, the insurance claim was denied, and the employee was fired for attempting to defraud the company.

This example illustrates the benefits of creating and maintaining an open relationship between the two fraud units. If the internal investigator had not been made aware of the SIU investigator’s findings, he would not have known to challenge the couple’s story, and it is likely that the couple would have never confessed to the fraud.

Support. In addition to enhancing investigations by providing previously unknown information, cooperation between SIUs and internal investigation units can offer opportunities for logistical support as well. Internal investigation units are typically much smaller than SIUs and are often only at company headquarters. By contrast, insurance companies usually have many more SIU investigators in part because there is a greater demand for investigation of claims compared to investigation of internal fraud cases. Another reason is that some states mandate that insurance companies have a certain number of SIUs. Also, because the primary duties of SIUs reside outside the company, the units are located away from company headquarters, and the closest unit can be deployed to an incident.

In one instance in which the author was involved, an allegation was made that a sales agent had backdated insurance applications to help claimants, who were uninsured during the time of the accident, to submit claims. The insurance company would then cover the claims, believing that a legitimately insured party had made them.

The agent and the claimants were located in a state far away from the company headquarters, and to prove the extent of the fraud, investigators had to conduct extensive research and interview claimants. The company’s SIU, which was much larger than the internal investigative unit, asked an investigator located in the same state in which the fraud took place to conduct the claimant interviews while the internal staff continued examining data in the home office.

It was later proved that over a five-year period, the insurance agent had submitted more than $750,000 in backdated claims. Interviews with claimants conducted by the SIU confirmed that the agent was known as the source for insurance in the area. The SIU also discovered that the agent frequently received kickbacks for his assistance once the claims were settled. Furthermore, by writing this fraudulent coverage, he also maintained his production quotas and received commissions on his sales.

Cooperation between the two investigative groups maximized effectiveness. For example, having the local interviews performed by an investigator in the area avoided travel expenses and held down investigative costs.

Armed with data analysis and interview memoranda, the internal investigation referred the case to law enforcement for prosecution. The agent and the claimants were eventually convicted and required to pay restitution. The salesman was also sentenced to prison.

In addition, this investigation led the company to adopt an online application process that provides computer-generated date stamps to determine the correct date of the application, thus reducing the risk of the same type of fraud happening in the future.

Combining the internal investigative and SIU resources can also help save companies the expense of purchasing redundant equipment and software. For example, data-mining software can be shared by the two groups.

Independent assessment. Another benefit of the interaction between the SIU and internal investigation groups is that perceived conflicts of interest can be avoided, minimizing the perception of a tainted investigation. In one example, an insurance company experienced an explosion of mold-damage claims. While reviewing the claim payments, an SIU supervisor noted that most claims were given to a specific vendor for remediation and property reconstruction. The same insurance adjuster approved the payments to the vendor and handled the claim settlement each time a claim was made.

The SIU supervisor had concerns that not all payments could be supported with the expense documents provided, but since the adjuster who approved the claims was part of the same claims department as the SIU investigator, the SIU supervisor felt it would be a conflict of interest to investigate.

The investigation was turned over to internal investigations, which reviewed the invoices and agreed that some of the payments were inflated or paid for work not performed. Internal investigators discovered invoices listing the vendor in more than one location at the same time and working in excess of twenty-four hours on some days.

When the investigator interviewed the adjuster responsible for reviewing the bills before payment, the adjuster stated that he had not performed a thorough review due to time constraints and his trust in the vendor. Without the initial tip by the SIU, it is unlikely that the problem would have been discovered by internal investigations.

As a result of the investigation, the company provided training specific to these types of claims to assist employees in evaluating the validity of vendor charges and to help them detect signs of irregularities in this type of claim settlement. Additional vendor oversight controls were also instituted and payment procedures were changed.

Privacy. While information sharing between investigative groups can yield many benefits, privacy issues are raised when an employee is under investigation. Information from internal investigations including date of birth, Social Security number, and performance reviews should be limited to authorized personnel, such as HR, and should not be given to SIU investigators.

When investigative groups work together, there is always a danger that confidential information could be compromised. This can occur when one group, like internal investigations, is entrusted with investigating all personnel in the company, and another group, like SIU, is allowed access to internal investigation’s files.

For example, Mary was considered a diligent SIU investigator and was charged with performing evaluations of external fraud suspicions. None of her managers had any cause to believe that she would do anything improper. However, the company’s internal investigation staff received an anonymous tip that Mary had routinely inflated her mile­age and expense reports. The internal investigative staff opened a case on Mary and requested her receipts for review.

If Mary’s coworkers in the SIU were given access to all internal investigation’s files, they could become suspicious of Mary, ultimately affecting her ability to do her job. Whether Mary was committing fraud could not be known at the outset; she deserved to have this case investigated in confidence. In circumstances like this, restricting access to internal investigation files is imperative; a failure to do so can expose the company to a lawsuit.

Competition. Another issue is that various investigative units can often become competitive and try to best each other to show their importance to the company. When this occurs, there is a tendency for the groups to withhold pertinent information from each other in an attempt to sabotage or limit an investigation, often to the det­riment of the company.

Encouraging interaction between the various investigative groups on a regular basis is one way to keep this competition from developing. Management should stress that each investigative unit works with a common goal: preventing fraud from affecting the company.

Organizations can use many tools to promote partnering and information sharing, such as newsletters.

Joint attendance at seminars and training sessions is another positive way to improve cross-departmental communication. Additionally, companies might consider encouraging job rotation between the two departments to help employees gain a more in-depth understanding of the operations and functions of the other department.

While fostering interaction among investigative units, it is also important that management clearly establish which department is the lead group and which department is the support for each investigation. This delineation of duties helps streamline investigations and avoids confusion and duplicative efforts.

With careful planning and investigative unit teamwork, organizations can overcome obstacles and can pro­actively fight both internal and external fraud. When this happens, everyone wins, except the fraudster.

Cynthia Magno, CPP, CFE (Certified Fraud Examiner), a Board Certified Medical Technologist, is director of agency investigations and exclusivity compliance manager for Liberty Mutual. She is a member of ASIS and chairperson of the Insurance Fraud Council.