Cryptocurrencies, White Collar Crime, Health Care Fraud, You Name It. Why Heavier Regulatory Risk Is Upon Us

SEC enforcement activity generally is trending upward. The agency reported that it filed 434 new enforcement actions in fiscal year 2021, representing a seven percent increase over the prior year.

By: Nina Luckman | December 9, 2021

The Biden administration is cracking down on white collar crime.

In his first year, the president and new attorney general have announced a series of policy changes that aim to toughen up the federal response to white-collar crime.

Among their top concerns include increasing transparency around corporate misconduct, address COVID-related fraud and increased regulation.

Other federal and state agencies are likely to follow their lead, with new regulatory actions and substantial a double-down on enforcement efforts into next year.

COVID Scams Abound

From cyber scams to the business of selling fake vaccine cards, COVID-related crime is surging.

Michael B. Himmel, chair of Lowenstein Sandler’s white collar criminal defense practice and partner in the securities litigation practice, notes the rainbow of fraudulent activity surrounding COVID relief programs, and more recently, vaccine attestation as new risks to be contended with.

“As a consequence of the CARES Act, five different types of fraud emerged that I know the government has been looking at,” he explained.

Michael B. Himmel, chair, white collar criminal defense, Lowenstein Sandler

He laid out the following examples:

“One is price gouging; the second is misrepresentation of individuals seeking reimbursement from the government; the third is the use of stolen identity in which individuals are applying for unemployment insurance claiming they lost their jobs due to COVID,” he said.

“[Another] is cyber fraud, which is for example when an entity or individual emails another entity or individual about seeking an SBA loan but they’re actually phishing, and then last but not least, is the sale of phony vax cards. That last one is happening more than ever before.”

As recently as October 25th, 2021, the Department of Justice underscored Himmel’s point with a bulletin urging Americans to be on high alert for COVID-related scams.

One of the main COVID scams Himmel is seeing relates to the CARES program. Cyber criminals are sending out phishing attacks that claim to come from the U.S. government.

“Law enforcement has seen fraud schemes using smartphone apps or websites that claim to be a government office associated with CARES Act programs. These fake sites are requesting PII, including banking information, to deposit stimulus payments. Perpetrators then will use this information to debit money from the consumers’ bank accounts.”

The bulletin further lists among scams attempts at phishing by asking for stimulus fund balances to be returned and unsolicited calls from agencies like the IRS.

Expanding SEC Oversight

Aside from COVID, Himmel also has his eye on new priorities from the U.S. Securities and Exchange Commission (SEC).

In particular, those related to diversity, equity, and inclusion and how investment firms are selling these values as part of a larger investment strategy.

“The SEC recently has said that they’re going to take a look at funds that are getting investors to invest based upon certain entities where they promote diversity, equity and inclusion,” Himmel explained.

“What we’re going to start seeing is the SEC looking at some of these entities that these funds are investing in to really see if, in fact, they are promoting DEI. In particular I’m talking about funds – hedge funds, whatever the funds might be – that are suggesting to investors that they are investing in entities that promote this. The SEC is going to take a peek and see what’s really happening.”

What this new aspect looks like in terms of enforcement is not yet clear, however. SEC enforcement activity generally is trending upward. The agency reported that it filed 434 new enforcement actions in fiscal year 2021, representing a 7% increase over the prior year.

In the same press release, the SEC also touted “judgments and orders for nearly $2.4 billion in disgorgement and more than $1.4 billion in penalties, which represented a respective 33% decrease and 33% increase over amounts ordered in the prior fiscal year in these categories.”

Cryptocurrency, already a priority for the IRS, has its own section in the SEC enforcement action report, and Himmel sees that as another area to watch.

“The IRS takes the position that cryptocurrency is an asset, and I’m not suggesting they’re wrong,” he said.

“What they’ve tried to do in viewing it as an asset is developing what I’ll call money laundering cases. I’m not sure how successful they have been in the past, but what the Department of Justice and the U.S. Attorney’s office have been looking at has been several things —scams where initial coin offerings are fabricated, Ponzi schemes, market manipulation schemes where they’re trying to enhance the value of the coin when it really shouldn’t be.”

“And most recently, the U.S. Attorney’s office in California seized $56 million that they believe was fraudulently obtained by an individual.”

Michael B. Himmel, partner, securities litigation, Lowenstein Sandler

In that case, against BitConnect, the defendant pleaded guilty on September 1 to defrauding investors. The DOJ is still actively seeking victims of this scam.

Regulatory Trends in 2022

As we approach a brand-new enforcement year, Himmel says he’s following the trends coming out of the U.S. Attorney’s Office very closely. “Our clients in the business space are concerned,” he said, noting the track records and public statements of both Attorney General Merrick Garland and new Deputy Attorney General Lisa Monaco.

“Lisa has spoken on a few occasions about prosecuting cases from consumer protections to the environment. And it’s been years, and years, and years since we’ve heard about criminal cases involving the environment,” Himmel said.

“I think that’s real and it’s going to come back.”

In terms of general advice, Himmel opined that the financial services sector should expect firm but fair oversight.

“I would say as a consequence of Garland and Monaco and Gary Gensler [current head of the SEC] they’re going to be vigilant. They’re going to be looking at Wall Street; they’re going to be looking at the banks.”

“And I think compliance officers — including compliance officers I’ve spoken to — are going to be on the lookout. Unlike in the past, DOJ and SEC have said that the financial space is going to be a priority.”&

Nina Luckman is a business journalist based in New Orleans, focusing primarily on the workers' compensation industry. Over the last several years, Nina has served as Editor of Louisiana Comp Blog, a news site she started in 2014 under the auspices of a group self-insurance fund. She can be reached at [email protected].

Vermont’s Future Is Golden

Challenging market conditions are driving insureds to captives. Vermont offers a reliable domicile.

By: State of Vermont | November 21, 2024

Hard markets in commercial insurance lines have been a problem for years now. Many lines don’t show signs of softening, though some, like cyber, have ebbed over the past few years.

High claims volumes and costs have caused carriers to tighten terms and conditions, introduce new exclusions and increase premiums. A variety of different risks are included in this market tightening, and it’s affecting both public and private companies.

As Sandy Bigglestone, deputy commissioner for the State of Vermont’s captive insurance division, explained, schools, churches and other nonprofits are contending carriers are “excluding sexual abuse and molestation from coverage for a lot of these types of entities. These organizations understand the risk and the public needs to have confidence the organizations are addressing the risks, so they must have the coverage.”

Though many commercial lines are affected, property has perhaps been hit the hardest. Increased claims, inaccurate property valuations and other challenges have caused insurers to tighten their books in recent years. 2024’s spate of hurricanes will likely make matters worse.

“There continues to be challenges in the commercial market,” Bigglestone said. “Some companies are coming to us with risks that they say they’ve been self-insuring on their balance sheet, and why not transfer that to a captive to receive greater benefits?”

Consistency and Stability

Sandy Bigglestone, Deputy Commissioner for the State of Vermont’s Captive Insurance Division

With the commercial insurance market so unstable, companies are turning to captives to house their exposures. Vermont, a long-time domicile, is getting increased attention because of their strong reputation and their leadership as the top domicile worldwide.

“All stakeholders enjoy the stable political and regulatory environment Vermont has to offer to operate in,” Bigglestone said.

Of course, a lot of consideration goes into deciding whether or not a captive is the right choice for a particular company. Businesses need to assess their exposures and their books to make sure they can adequately operate a captive.

There are significant advantages, however. “For low frequency, high severity risks, captives can access the reinsurance markets directly, so it’s very attractive for businesses to put a captive in place,” Bigglestone said.

And carriers are more accepting of captives as part of a broader insurance program.

“Captives are changing the relationship businesses have with commercial carriers,” Bigglestone said. “Commercial carriers are wanting to see companies with skin in the game; therefore, the relationships have evolved to be less transactional and more strategic.”

Balancing Bureaucracy

With 76 global domiciles, companies have a lot of options when it comes to selecting a captive partner. “Captive insurance domiciles compete globally for the business,” Bigglestone said. “If you were to put all 7,000-plus captive insurance companies around the world, all in New York, it wouldn’t have the same economic impact as 700 captives in Vermont does. The captive insurance industry is very important to our state and we will continue to support it in any way we can.”

Businesses should look for domiciles that balance a need for quality regulations with a process that isn’t overly bureaucratic and is seamless for business owners to navigate.

“Companies are attracted to an environment with quality regulatory standards and a stable regulatory environment,” Bigglestone said. “Vermont sets the regulatory standard in terms of financial analysis and examinations.”

In addition to quality regulations, firms will want to seek out a domicile that is agile enough to license captive insurance companies that fit their unique needs. It is important that a domicile have firm but fair regulation and the experience to consider new ideas and implement them. Companies must consider a variety of factors when choosing a domicile and not everyone will be the right fit for every company.

“You have to consider the captive owner and the industry sector that that owner operates in, as well as the insurance risks that are going into the captive program,” Bigglestone said. “Captive laws and regulations have to have a reasonable degree of flexibility to accommodate all the varying needs of owners and then impose rules based on the merits of each captive program.”

She added that creativity is a critical part of the process: “The ability to vet concepts and ideas with trusted individuals is key to having quality standards,” Bigglestone said. “And it can make captives appealing to insureds who are tired of commercial carriers not meeting the needs of the business, and who desire more control over their insurance programs.”

“When you think about the commercial marketplace, commercial insurers are supposed to operate in each jurisdiction in a competitive manner. Commercial carriers often look the same. They sell auto coverage to anyone with a driver’s license. The rules and regulations imposed upon commercial insurance companies are designed to be more formulaic for that reason,” Bigglestone said.

“Uniform regulatory standards apply to commercial carriers for the protection of the policyholders. These are standards all insurance regulators focus on, and standards captive insurance regulators need to understand, but with a specialized focus.”

A Quality Domicile Built for the Future

A combination of experience, regulatory standards and talent make Vermont a top domicile for companies looking to form a captive. The longevity of licensing captive insurance companies for over forty years is a testament to the quality work they’ve provided in the past and will continue to provide for many years to come.

Vermont’s reputation has helped the state attract and retain top captive talent, ensuring the businesses it serves are in good hands. The state has 32 employees dedicated to captives, and their average employee retention is 15 years. The Vermont Captive Insurance Association, the largest captive insurance trade organization, also helps companies connect with professional services needed to make their captive successful.

“There’s a whole host of service providers with proven expertise right here in Vermont,” Bigglestone said.

Taken together, Vermont’s resources, expertise and talent make it a prime domicile. They’ve been on a growth trajectory over the last few years and that’s unlikely to change anytime soon. Companies can trust their captive will be in good hands when they choose Vermont.

“Vermont has always competed on quality,” Bigglestone said. “We do have a mission and that hasn’t changed in over 40 years. It’s to maintain a system, or domicile that attracts quality business to Vermont, to promote our reputation in the industry, and to uphold a regulatory framework to protect the solvency of the companies that choose to place their business here.”

To learn more, visit: www.vermontcaptive.com

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with State of Vermont. The editorial staff of Risk & Insurance had no role in its preparation.

The State of Vermont, known as the “Gold Standard” of captive domiciles, is the leading onshore captive insurance domicile, with over 1,200 licensed captive insurance companies, including 48 of the Fortune 100 and 18 of the companies that make up the Dow 30.