By Lucy Komisar
Inter Press Service (IPS) Dec 19, 2008

American International Group (AIG) operated a captive insurance scam that involved fraudulent use of offshore tax havens. Currently, the US government has invested over $40 billion in AIG, with the U.S. getting nearly 80 percent of its stock.

New York – The U.S. will invest 40 billion dollars in American International Group (AIG), and will provide credit lines that could bring federal funding up to 144 billion dollars. It’s the largest subsidy that a U.S. corporation has ever received.

In exchange, the U.S. gets nearly 80 percent of AIG stock.

This puts the U.S. in a unique position to investigate the internal operations of a giant corporation with a reputation for using the offshore system for tax evasion.

What accountants could learn would help U.S. President-elect Barack Obama — who has denounced offshore tax evasion — stop scams run by AIG and draft laws to prevent other insurance companies from doing the same.

U.S. authorities could begin their investigations with a look into a very curious practice that was revealed 15 years ago in a case that was never exposed by the mainstream press and which insurance insiders say is endemic.

In 1993, Terry Mills, who worked for a large insurance agency in Wilmington, Delaware, was tasked to get to the bottom of a messy insurance problem. The NVF Corporation, a Delaware holding company which owned a vulcanised fibre factory, was being reorganised after a federal court order stripped control of the company from its owner Victor Posner, a notorious crook.

Posner was a U.S. “corporate raider,” famed for engineering hostile takeovers of companies, looting them and firing workers.

He had been charged by the U.S. Securities and Exchange Commission (SEC) in 1988 for participating in a fraudulent takeover scheme concocted with Wall Street crooks Michael Milken and Ivan Boesky. The SEC banned him from serving as officer or director of any publicly-held company.

It wasn’t the first time he’d broken the law. In 1977, the SEC had filed a complaint against Posner and his companies for overstating earnings and treating assets of public corporations as private property, charging the companies for houses, servants, vacations and even groceries.

In 1987, he had been fined 7 million dollars for evading more than 1.2 million dollars in taxes. A year later, he was a defendant in an SEC complaint about a “stock parking” scheme to gain control of a corporation, that cheated investors of about 4 million dollars.

So Posner was notorious. Even so, Mills was astonished when he examined the insurance books. He discovered that NVF had been paying National Union Fire of Pittsburgh, a subsidiary of the insurance giant AIG, substantially over market for workmen’s compensation insurance.

Mills told the director of the Delaware Insurance Department’s bureau of examination that when he went to buy a policy for NVG from another insurance firm, he found the price was only half what the company had paid the year before.

Mills told IPS, “The fronting company was AIG. And the broker on the deal was Alexander and Alexander… one of the biggest brokers in the world.” He said, “The senior management really didn’t have a handle on what the costs were.” Posner, who died in 2002, had ordered the deal, and the managers went along.

This is how the scam worked. Insurance companies normally insure themselves by laying off part of their risk to reinsurance companies, so if a claim comes in above a certain amount, the reinsurance company will pay it.

AIG had reinsured the NVF policy through Chesapeake Insurance, a reinsurance company Posner owned in Bermuda — an offshore tax and secrecy haven whose books were safe from the eyes of U.S. regulators and tax authorities.

AIG would keep a portion of the inflated NVF premium and send the rest to Chesapeake. AIG would have a higher commission. Posner would write off the entire amount as a business expense and enjoy the extra cash in Bermuda, tax free.

A former insurance regulator told IPS, “Say the normal premium was 1 million dollars.(If I ran the company,) AIG could charge me 2 million dollars and then send a premium of 900,000 dollars over to a reinsurance company that it has set up for me in Bermuda. I never have to pay any claims, so I get to keep the 900,000 dollars tax-free offshore.”

The company and bank records are private, so there is no way for outsiders to know how much tax money was actually diverted.

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Part II: AIG’s Offshore Strategies Hide a Scam

The company getting the biggest U.S. bailout operated a scam to help clients cheat on U.S. taxes, regulators say. It is AIG, American International Group, the world’s largest insurance conglomerate. AIG was run by Maurice “Hank” Greenberg. He was ousted as CEO in 2005 by the board of directors after the New York Attorney General charged him with fraudulent business practices, securities fraud, and other violations.

These charges did not mention a captive insurance scam that Greenberg, famous as a hands-on manager, would have been involved in approving. AIG took inflated fees from customers, set up reinsurance companies for them in Bermuda, and bought reinsurance from them, effectively giving their clients tax-free cash in that offshore island.

Would Greenberg have known that his company was writing such a tax-evading policy for the likes of Victor Posner, a notorious crook who was banned from public companies by the Securities and Exchange Commission (SEC) in 1988? Very likely.

The scam was discovered by Terry Mills who worked for a large insurance company in Delaware and was tasked to investigate the insurance of Posner’s NVF Corporation in 1993. Mills found that the premiums were double the going rate. He said, “We were able to find them coverage in the standard market.”

However, the Delaware Insurance Department did not make the scam public or take any action against AIG, which was so powerful that it intimidated government regulators. (The Delaware regulator who talked to IPS said AIG sent a private investigator to harass him.)

Provided the details of what AIG did, company spokesman Andrew Silver replied, “We don’t have any comment on that.”

That is because the captive insurance scam was systemic. “This was not an isolated case … AIG did that a lot,” a former insurance regulator said, speaking under condition of anonymity. “AIG helped companies set up offshore captive reinsurance companies. AIG would then overcharge on insurance and pay reinsurance premiums to the captives, giving the captive owners tax-free offshore income.”

AIG declares on its website, “We pioneered the formation of captives almost 60 years ago,” and it offers management facilities to run the captives in offshore Barbados, Bermuda, Cayman Islands, Gibraltar, Guernsey, Isle of Man, and Luxembourg — where corporate and accounting records are secret and taxes minimal or nonexistent.

It was all in the family. Jeffrey Greenberg, the AIG CEO Greenberg’s son, ran the Marsh Captive Management Group to help corporate customers set up reinsurance companies in offshore Barbados. Jeffrey was fired after his company was discovered rigging bids.

Doug McLeod, editor of the trade publication Business Insurance, said there were captives that hardly ever paid any claims. McLeod explained that he saw from the reinsurance records of one of the AIG companies that it had a captive. It reported a pretty large amount of premiums sent to that captive, but very little in claims payments coming back.

He said, “That is unusual. Why would a captive of a large company collect that amount of premium and not pay any claims? They could have gone through a loss-free year, but it doesn’t seem likely.”

David Schiff, editor of Schiff’s Insurance Observer, told IPS: “There are more captive insurance companies in Bermuda than any place else. The whole purpose is that it’s not regulated by the U.S.”

He said, “How do they tell us Microsoft is paying too much for workers comp (compensation)? There’s no way for a regulator to know that.” He said, “Fraud is hard to find unless you get tipped off.”

An insurance broker and risk management consultant who did not want to be identified, said, “It’s common; that’s the way it’s done.” He noted, “The oil companies all have offshore captives.”

McLeod pointed out that several oil companies were joint shareholders of the Oil Insurance Ltd, an oil company group captive. There are more than 1,800 captive insurance companies based in Bermuda with over 60 percent owned by American interests.

McLeod said, “A majority of fortune 500 companies have captives.” He pulled out a copy of the Tillinghas Captive Directory and ticked off U.S. companies with Bermuda captives: Levi Strauss: Majestic Insurance International, Caterpillar Tractor: Caterpillar Insurance Co. Ltd., FMC Corp (tractors): Financial Reassurance Co and Transcon Insurance, Carnival Corp.: Trident Insurance, all managed by Marsh.

Other big firms with captives were Schlumberger (oil field services): Harrington Sound Insurance and Castle Harbour Insurance, managed by JLT, and United Van Lines: Vanliner Reinsurance managed by Codan Management.

The insurance broker who did not want his identity disclosed, said, “Reinsurance has always been a traditional way of moving money. You can do a “rent-a-captive” where you don’t even have to set up your own captive, you just run the funds through a bookkeeping system: it’s even cheaper. The question is whether the IRS (U.S. Internal Revenue Service) lets you get away with it.”

In 2002, the IRS and the Treasury required transactions with captives to trigger disclosure, list-maintenance, and registration requirements “based on information that many of these arrangements were being used to shift income improperly to PORCs (Producer-Owned Reinsurance Companies) for purposes of avoiding income tax.”

However, in September 2004, the George W. Bush administration abolished that rule. The IRS commissioner said that, “Based on disclosures by taxpayers and examination of tax returns, we have determined problems associated with these transactions are not as prevalent as initially believed.”

Of course, fraudulent use of offshore captives is hardly likely to be disclosed by taxpayers or noted on tax returns. Spokesmen at Treasury and the IRS declined to discuss the issue.

It would be unthinkable for the U.S. to allow a business it has on life support to evade taxes or help others to evade them.

The multi-billion dollar bailout of AIG by the U.S. could trigger extensive examinations by accountants to make detailed analyses of the company’s offshore strategies. What they learn could stop illicit practices by AIG and lead to laws to prevent other insurance companies from doing the same.

Part 1 on IPS site

Part 2 on IPS site

Articles on truthout site