Florida cracks down on check-cashing workers compensation scam

Florida officials are cracking down on a scheme that uses check-cashing businesses as part of a plan to avoid paying workers compensation insurance premiums.

The Florida Workers' Compensation Fraud Task Force arrested eight people last month in a check-cashing ring that included $70 million in unreported payroll from construction contractors. The arrests were made in Broward, Miami-Dade, Palm Beach and Polk counties.

The task force, formed last year, includes representatives from the Florida Department of Financial Services' Division of Insurance Fraud and the Broward County Sheriff's Office.

Check-cashing is one of the most prevalent schemes to defraud the workers comp system in Florida and could be diverting up to $1 billion a year from the state's economy, said Maj. Geoffrey Branch, chief of the Florida Bureau of Workers' Compensation Fraud in West Palm Beach, Fla.

The fraud is leaving other Florida businesses to pay higher workers comp rates as the state copes with uninsured injured workers, Maj. Branch said.

“The claims don't stop coming in, but the premiums aren't being collected to offset that,” he said.

Insurers are concerned that similar plots could be used by contractors in other areas of the country, said Trey Gillespie, Austin, Texas-based senior workers compensation director for the Property Casualty Insurers Assn. of America.

“The one thing that we always find with regard to workers comp fraud is what starts in one state spreads to another,” Mr. Gillespie said. “It's not going to be surprising if something similar is detected and prosecuted in other states.”

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In check-cashing schemes, a “facilitator” often uses a fake identity to register a shell company that has no employees or operations. Many times, these businesses are billed as performing drywall work or other construction tasks that have relatively low injury risk, according to a report last year by the Florida Workers' Compensation Fraud Work Group.

The group, convened by Florida Chief Financial Officer Jeff Atwater, included state insurance and financial regulators, the Florida attorney general's office, insurers, representatives of the construction and check-cashing industries and other stakeholders.

The facilitator buys a basic workers comp policy for the shell company to cover a small number of employees. The shell company's workers comp certificate then is rented to subcontractors, which pose as the shell company and use the certification to qualify for contracts.

Workers comp certificates often are rented out dozens or hundreds of times weekly by a shell company, according to the work group's report.

Because subcontractors involved in the scam are not buying workers comp coverage for their employees, they are able to secure contracts by underbidding competitors by as much as 30%, said Matthew Capece, representative of the general president for the Washington-based United Brotherhood of Carpenters and Joiners of America.

“It skews the playing field and makes it near impossible for law-abiding construction companies to compete in the industry,” said Mr. Capece, who participated in last year's work group.

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When the subcontractor is paid, the check is taken to a money-services business for cashing. The subcontractor pays for the check-cashing fee as well as a fee to the facilitator that bought the workers comp policy.

The fees for such schemes are relatively cheap for subcontractors, Maj. Branch said. Businesses paid about 10% to 12% of their payroll for check-cashing schemes several years ago, he said. But the down economy and increased competition among participants in the schemes has lowered total fees to about 3% to 5%.

Check-cashing businesses involved in such scams are usually complicit in the crime rather than being unwitting participants, said Corey Mathews, CEO of Financial Service Centers of Florida, a Tallahassee, Fla.-based trade association for money-services businesses.

“It reflects badly on the overall perception of an industry,” said Mr. Mathews, who participated in the workers comp fraud work group.

Despite low costs for subcontractors, check-cashing schemes are big business for participants. The Florida Workers' Compensation Fraud Task Force said its investigations since last August have taken down 12 shell companies that conducted more than $140 million in fraudulent transactions.

Mr. Capece and Maj. Branch said check-cashing schemes to defraud workers comp insurers can be found throughout the Southeast.

Florida enacted legislation in July that aims to cut down on check-cashing schemes through increased regulations for money-services businesses.

The new law increases penalties for check cashiers that possess fake identification materials to commit fraud, and allows authorities to investigate check-cashing businesses without advance notice if fraud is suspected, among other rules.

The Florida Chamber of Commerce in Tallahassee thinks the legislation will reduce check-cashing schemes and help lower workers comp costs in the state, a chamber spokeswoman said.

Maj. Branch said the state's fraud task force so far has focused on check-cashing schemes in Broward County. The department hopes to expand the program statewide.

“There are many, many more people...that are running these exact same schemes,” he said.