ntt@dciem.UUCP (Mark Brader) (01/23/84)
pyuxbb!drew (R. Drew Davis) asks:
I recall a great fraud case in the reinsurance business that came
to light a few years back: an insurance company was selling off
trumped up policies to reinsurers. Thanks to the clever use of computers,
the company was able to keep up payments & make a few claims to get
some money back, but not enough to raise anybody's suspicions.
...
Anybody remember a few more details about that case?
This was the Equity Funding scandal. My information about it comes from
Thomas Whiteside's book "Computer Capers" (1978). The object of the fraud
was to raise the price of Equity's stock by creating a false impression
about the company's profitability. The use of the computer was not really
particularly sophisticated; the bankruptcy trustee described it as a securities
fraud rather than a computer fraud. In fact, at first the computer was not
used at all. Auditors and reinsurers would require original documentation for
the policies, and this was produced at "fraud parties" in the evenings at the
company headquarters. The fake policies were based on real ones with
minor modifications. Also at the "fraud parties", some of the nonexistent
policyholders would be declared to have died, and when the reinsurers paid the
claims, this money would go to the company as earnings. The total of these
claims was $1,175,000. In a "computer fraud within a computer fraud", $144,000
was embezzled directly by some of the conspirators without knowledge of their
leaders!
Now, as I said, the main objective of the scheme was not these false claims
but to make the company seem profitable. The reinsurance company was entitled
to receive premiums paid by the policyholders after the first year. To get
this money, Equity Funding simply increased the number of false policies that
they sold to reinsurers each year: a pyramid scheme.
In 1971 the fraud had been operating for a couple of years, and they
estimated that they would require 20,000 to 50,000 false policies that year,
which was really too many to produce manually. So at this point the computer
began to be used for this. Whiteside does not make clear to what extent the
computer helped in generating the false data. Where it was helpful was in
audits: when the auditors asked for supporting documents on random policies,
the computer would flag the fake ones, and the files would be "currently
being used" until the necessary documents could be synthesized by the fraud
staff.
The scandal finally broke in 1973, by which time there were 64,000 false
policies as against only 33,000 real ones; $185,000,000 of reported assets
were nonexistent. And how were they caught? A former employee told the story.
Later there was also a tipoff from the inside that enabled the authorities to
take charge of the computer center before the tapes could be erased.
One thing that bothers me is that I never heard of any programmers getting
charged in that case. It sure sounds to me like the executives who ran
the insurance company would have needed some technical support. Its
hard for me to see how the programmers could have worked in ignorance
of what was going on. ("I was only following orders."?)
Whiteside says that the chairman of the board and several other officers
were convicted, and doesn't mention others. It's an interesting point.
Since the computer side was relatively simple, they probably didn't need
too much support, but they did need some. State's evidence?
Mark Braderchuqui@nsc.UUCP (Chuq Von Rospach) (01/25/84)
My (soon to be ex) wife worked for the accounting firm in charge of working
with the court in clearing up the accounts and paying off everybody
involved. As of 1982, they were still working on this with no end in site.
As far as programmers getting convicted, some were. Its just that the
bigwigs get the press. There was involvement at every level of the company,
although not everyone in the firm was involved (a good percentage was
though). The normal sequence of events was that you were hired. If they
thought you were trustworthy, they brought you in. If not, they figured out
some way of getting rid of you. The original tipoff came when they
approached someone who balked and went to the police.
As was pointed out, the place where the computer helped most was in the
audits. Every policy had a flag on it. If that flag was set, then the
policy was a fake and never showed up on the 'random' samplings the
auditors used to check up on things, so they never found a thing. At that
point, nobody thought to check whether or not the computer was lying since
everyone assumed that computers never lie (well, they don't, but their
users can in their name). As a matter of fact, most accounting firms are
still VERY lax about auditing EDP systems, mainly because most accountants
seem to dislike computers and therefore try to ignore them.
--
From the house at Pooh Corner: Chuq (a Silly Old Bear)
{fortune,menlo70}!nsc!chuqui
have you hugged your Pooh today?
The difficult we gave up on yesterday, the impossible we are giving up on now.