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The cartel connection: Linking insurance fraud, drug cartels and terrorism

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Insurance fraud is a growing global phenomenon.

In the United States alone, it is estimated that insurance fraud is an $80 billion dollar industry, second only to narcotics trafficking. Not surprisingly the two are often connected.

According to the Coalition Against Insurance Fraud, there has been an increase in organized transnational crime rings using insurance fraud as a vehicle to fund illegal activities. Compounding matters, it appears that terrorists are also capitalizing on these crimes to make a quick profit. 

According to the coalition, growing symbiotic connections among cartels trafficking drugs, terrorists, cyber thieves, mob syndicates and organized insurance fraud are using one another’s skill sets to profit in the belly of the underworld.

These syndicates often base their operations in Third World nations with broken laws and corrupt officials where they can have unfettered access to a lawless environment. Insurance fraud, even in developed countries, provides a relatively easy, low-risk and highly profitable means by which international drug cartels and terrorist organizations can make money to fund other enterprises.

Related: A strategic approach to insurance fraud


An article in Fraud Magazine stated, “There is a significant link between insurance fraud and terrorist activities. The threat of terrorism has become the principal security concern in the United States since 9/11. Some might perceive that fraud isn’t linked to terrorism because white-collar crime issues are more the province of organized crime, but that perception is misguided. Terrorists derive funding from a variety of criminal activities ranging in scale and sophistication — from low-level crime to organized narcotics smuggling and fraud.”

The thriller, Swoop & Squat, provides a firsthand look at the impact of fraud on society because it is based upon real life claims experiences. In a recent investigative article, the Florida Times-Union used the book as a backdrop to expose the very real problem of insurance fraud in the Sunshine State. The reality is that fraud is not a fictional topic and comes in all shapes and sizes, from credit card and wire fraud to identity theft and insurance scams.

During a recent meeting, a global claims leader asked just how these frauds are perpetrated. While there are a number of ways, here is the basic process for pulling off a scam and laundering funds in a post-9/11 world.  


The cost of terrorism

The first thing to recognize is that criminal enterprises have expenses. The National Commission on Terrorist Attacks Upon the United States has estimated that the 2005 London bombings cost about $15,600. The 2000 bombing of the USS Cole is estimated to have cost between $5,000 and $10,000. Al-Qaida’s entire 9/11 operation cost between $400,000 and $500,000.

Both drug cartels and terrorist organizations require significant funds to create and maintain an infrastructure of organizational support. To give the appearance of legitimate activities, these criminal syndicates will often set up shell companies in order to launder proceeds.  

The key to gaining the upper hand is to recognize how these frauds are perpetrated. A simple example of a fraud may be a vehicle owner giving up a vehicle and then claiming it was stolen. In this scenario, the person receiving the vehicle may either chop it up for parts or send it overseas with an altered vehicle identification number. These types of claims are hard to prove and insurers often end up paying the policyholder the value of the vehicle. On the other end of the deal, the buyer could range from an unsuspecting customer purchasing a car for less than retail to someone who has more sinister intentions.   


In more complicated schemes, there may be rings of associates who perpetrate staged accidents. In these scenarios, there is often a capper involved. The capper is the person who orchestrates the accidents, provides the cast of low-paid participants to play accident victims with scripts, and then brokers the claims to unscrupulous lawyers and medical providers.  

Related: The staged insurance loss

In a simple scenario, two cars are brought together in a vacant parking lot or alley. They may be run into one another, or they may have previous damage. There will be one person who will play the role of the insured. This individual will have a policy, which is usually new and often an assigned risk. The other car will then have three or four occupants who will all claim injury. Each person is given a script of what to say to the insurance company.  

The occupants who feign injury are paid a paltry sum for their cooperation. The capper gets a larger sum, and the unscrupulous attorney can retain what is left over. Some or all of these funds may find their way into bank accounts that funnel money to more sinister operations involving narcotics, terrorism or both.  


The drug cartel-terrorism connection

The connection between drugs and insurance fraud has long been established. Now there is a growing body of evidence adding terrorism to this criminal trifecta. 

According to Judicial Watch, Mexican drug cartels are smuggling foreigners, including members of ISIS, from countries with terrorist links into a small, rural Texas town near El Paso, and they’re using remote farm roads — rather than interstates — to elude the Border Patrol and other law enforcement barriers according to sources on both sides of the borders, including the Texas Department of Public Safety.  

While there are defense mechanisms, such the Office of Foreign Asset Control, in place to flag potential terrorists and drug lords, the high-profile persons who might get flagged often use lower-level associates for whom there are no records.  


Department of Justice report stated that a number of steps have been taken at the federal level since 9/11 to combat fraud through the enactment and modification of laws and rules, such as the USA PATRIOT Act, the Border Security and Visa Entry Reform Act, and several federal fraud statutes. All of these legal vehicles deal with crimes that have been traditionally referred to as white-collar crimes, including money laundering, identity theft, credit card fraud, insurance fraud, immigration fraud, illegal use of intellectual property and tax evasion. The reasons behind this approach to counter-terrorism include the belief that terrorist activities require funding, not only for weaponry, but also for training, travel and living expenses.   

These activities require various acts of deception, such as the creation and use of false identifications.

Even though the nexus between fraud and terrorism is undisputed, there’s concern at the state and local levels that law enforcement professionals lack specialized knowledge on how to detect the fraud-terror link because they are more apt to investigate and prosecute violent crimes. This is also a potential challenge for claims professionals tasked with investigating insurance fraud. 


Hard and soft fraud

Fraud comes in two types: Hard and soft. Hard fraud is an outright and orchestrated fraud. It may be a staged accident, an owner giving up a vehicle or a faked death. This type of outright fraud accounts for about 10% of all claims in the United States.

Soft fraud involves legitimate claims that are exaggerated and affects an even larger percentage of claims. On the personal injury side, this type of fraud costs insurers an estimated $4.8 billion to 6.8 billion annually. This often includes inflated medical bills, charges for services not rendered and deceptive billing practices such as upcoding, unbundling or modifier abuse. These claims can be very difficult to identify and even more difficult to prosecute. 

How does the typical soft fraud work? An unscrupulous attorney will refer a patient to a corrupt provider who will perform a significant amount of medically unnecessary procedures, up to and including surgery. The insurance carrier is then billed for substantial medicals, and often accepts the bills as incurred when settling personal injury claims.  

Given the propensity of hard and soft fraud, and the challenges in prosecuting such claims, what is an insurer to do?

A good first step would be for the industry to collectively demand that lawmakers take critical steps to reign in fraud. There need to be serious penalties for committing insurance fraud, and law enforcement and insurers need to be given the teeth to take a bite out of this crime.


There should also be an educational outreach to the public, who are generally unaware of the vast network of criminal syndicates behind organized insurance fraud rings. If the public were fully aware of how much of their hard-earned money is spent on illegitimate claims, there would be outrage. These expenses go well beyond just premiums, as there is an embedded tax on goods and services as a result of rising costs associated with fraud against merchants. This doesn’t even include the hidden litigation tax that consumers are hit with to pay for the cost of frivolous litigation.  

In most jurisdictions, insurance fraud is a crime prosecuted by the state. In some states it is classified as a felony, in others a misdemeanor. There are some circumstances when it can rise to a federal crime under federal mail or wire-transfer statutes. A good first step would be to increase the severity of insurance fraud to a felony across the board and then provide significant fines, penalties and forfeiture laws. 


Given the interstate dealings of many insurers, increased use of the Internet, and the transfer of funds, perhaps more cases should be pushed to the federal court system with investigating agencies such as the Department of Justice, Treasury Department, Federal Bureau of Investigation and Immigration and Customs Enforcement given wider latitude in investigating and prosecuting these fraudsters.

With insurance fraud on the rise, it is essential that more focus be put on this epidemic. It will take a collective effort between the insurance industry, consumer groups, elected officials and federal, state and local law enforcement to effectively bring about meaningful change. While some states have taken initial steps to stem this problem, far more needs to be done. The time is now to work together to bring about meaningful tort and legal reforms.

Christopher Tidball is a claims consultant and author of multiple books including “Swoop & Squat” and “Re-Adjusted: 20 Essential Rules to Take Your Claims Organization From Ordinary to Extraordinary.” His career has spanned more than 25 years in adjusting, management and executive roles for multiple top 10P&C carriers. To learn more, please visit


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