By Dennis Toomey, Director of Insurance Fraud and Financial Crimes Practice, PwC | July 2, 2024
Transnational organized crime and its impact on the insurance industry
If mentioning international vehicle crime calls to mind a highly detailed video game instead of the insurance industry, you’d be forgiven. Yet, insurance and organized transnational vehicle crime are intricately intertwined, and it’s time the insurance industry addresses the threat head-on.
To do this, insurance professionals should contend with these criminal activities, the strategy behind them and their impact on the insurance sector beyond rising insurance costs and straining customer service. The rise of vehicular crime and its effect on insurance, in particular, is especially problematic. If we want these trends to stop, we should first understand them.
Understanding transnational organized crime groups
First, throw out any notions about small-time automobile theft involving a person or three. Transnational organized criminal networks function more like a traditional business with a hierarchy of individuals with different skill sets motivated by different factors. For example, some lower-level operatives, who often work as enforcers, may have turned to criminal enterprises as a means of survival or upward mobility due to limited economic opportunity. Poverty, unemployment, and lack of education can create vulnerable populations susceptible to recruitment by criminal networks, especially in less-developed nations.
But these operations also need white-collar professionals. Lawyers, accountants, and IT professionals provide specialized services to enable and conceal illegal activities. By and large, these individuals are driven by a desire to acquire wealth that feels out of reach through traditional means.
Additionally, transnational organized crime is less localized than small-time theft and has a wide-reaching cross-border scope. These criminal groups operate in multiple countries, so they can capitalize on regional differences in laws and lose law enforcement practices to evade detection and prosecution. Drug cartels are especially adept at this, producing drugs in one country, transporting them to another with lenient border controls and then distributing them in a destination country with a high demand.
Transnational organized criminal networks exploit porous borders and weak governance systems to conduct their illicit operations. Their flexibility allows them to adapt their operations based on market demands, risk and opportunities, just like other profit-driven businesses, legitimate or not.
Transnational organized crime and insurance fraud
While transnational organized crime groups are typically associated with acts such as arms smuggling, money laundering, and drug and human trafficking — in no small part thanks to entertainment such as “Breaking Bad,” “Traffic” and “Taken” — crime networks have become increasingly involved in insurance fraud over time. Like any good business, criminal organizations weigh risk against potential profit. Arms smuggling, for example, comes with a higher level of scrutiny and greater potential consequences. On the other hand, insurance fraud is a lower risk and can still yield substantial gains. Plus, isn’t it always wise to diversify your portfolio?
Nearly any money-making operation can be simple or complex, and insurance fraud is no different. The most basic version of insurance fraud is to file a false claim. A more complex version is to stage an accident to make that false claim. An especially elaborate insurance scam came from former money manager Martin Frankel in the 1980s-90s. He leveraged a team of lawyers, accountants and others to assist him in fabricating accidents, moving funds across borders and concealing his illicit activities. His fraud spanned the US, Switzerland, Germany and the Czech Republic, ultimately defrauding insurance companies of more than $200 million.
Fraudulent activities such as Frankel’s and others’ strain insurance companies’ resources, leading to significant financial repercussions. Insurance payouts covering false claims deplete the financial reserves of companies, affecting their ability to cover legitimate claims and operate efficiently. Additionally, Frankel’s and others’ actions prompt investigation and legal actions, which come with their own price tags. And the damage isn’t only monetary. High-profile fraud cases lead to reputational damage for insurers that can result in loss of customer trust.
The consumer is also affected by these crimes. Insurance carriers often increase policyholder premiums to maintain profitability. According to the Coalition Against Insurance Fraud, insurance fraud costs American consumers $308.6 billion annually. When organizations successfully defraud insurance companies, insurance carriers and the public lose out.
The role of organized criminal networks in vehicle theft and trafficking
Vehicle crimes, including theft and trafficking, where automobiles are illegally transported across national or international borders, are a growing concern. The National Insurance Crime Bureau (NICB) reports that vehicle thefts increased from 1,008,756 in 2022 to 1,020,729 in 2023 in the US alone. Transnational organized crime networks play a significant role in vehicle crimes in the US and internationally. This might include:
- Vehicle theft: Stealing vehicles for various purposes, such as stripping them of valuable parts or selling them. Carjacking, where vehicles are forcefully taken from owners, is one type of theft.
- Vehicle trafficking: Moving stolen vehicles across borders for illicit sale
- Theft-for-order schemes: Stealing automobiles to fulfill a third-party order
- Vehicle fraud: Falsifying vehicle documents or manipulating vehicle identification numbers (VINs) to conceal stolen or damaged vehicles
- Vehicle cloning: A type of vehicle fraud, where counterfeit VINs and license plates are used to create a new automobile “identity,” allowing it to be sold as legitimate merchandise on the market
- Money laundering: Making illicit proceeds appear legitimate to further fund criminal operations.
The involvement of transnational organized crime networks in these vehicle crimes heightens the problem and the need for holistic efforts to combat them.
Global impact of criminal networks
Stolen vehicles, which offer both mobility and anonymity, can fuel other criminal activities too. They might be used as robbery getaway cars because they’re difficult to trace. Or they can be dismantled and sold for parts on the black market, further encouraging an underground market for stolen vehicle parts. Plus, vehicle theft can lead to identity theft, as personal information and documents are regularly kept in vehicles. This information can then, in turn, be used to commit fraud.
Insurance fraud has a ripple effect that can be felt globally. If a crime group is profiting from vehicle theft and insurance schemes, then they have more money to put back into a potentially diversified business. For example, gains from insurance fraud could fuel terrorist operations, which could then contribute to regional instability and hamper economic growth. Indirect costs can also crop up, such as decreased foreign investment and reputational damage to countries associated with criminal networks.
However, the global impact of transnational organized crime is not just financial. These networks pose a direct threat to the fabric of governance and law enforcement. Their presence can impede the efforts of law enforcement agencies, like such global institutions as the International Criminal Police Organization (INTERPOL) and the United Nations Office on Drugs and Crime (UNODC), and appear to weaken the rule of law. Sometimes these groups even infiltrate and influence political systems, exploiting gaps in governance and corrupt officials to further their illegal activities and eroding governance effectiveness and trust.
When criminals continue to operate without consequences, whether permitted by government officials or not, it creates a climate of impunity that encourages criminal behavior, ultimately compromising the integrity and stability of legal frameworks. We see this in views toward Mexico’s law enforcement. On the Corruption Perceptions Index, a leading global indicator of public sector corruption, Mexico scored a 31, ranking it 126 out of 180 countries scored in 2023, according to anti-corruption nonprofit Transparency International. Multinational criminal groups, on the other hand, are poised to disrupt more than one country’s legal system.
Efforts to combat vehicle crime
As crime organizations and their tactics have evolved so have law enforcement efforts. For example, the US established the National Automobile Theft Bureau (NATB) in 1912 to combat the relatively new problem at the time of automobile theft. Due to the interconnected nature of insurance crimes, the NATB eventually became the National Insurance Crime Bureau (NICB), expanding its focus beyond automobile theft to encompass various types of insurance-related crimes, including vehicle theft, fraud, and other property crimes. The NICB collaborates with insurance companies, law enforcement agencies and other partners to investigate and prevent vehicle theft, promote awareness, and provide support to law enforcement in combating vehicle-related crimes.
International organizations are also key to combating vehicle crime. INTERPOL plays an especially critical role, acting as a central hub for international cooperation to strengthen the collective response against transnational crime. Their 1992 establishment of the Stolen Motor Vehicles (SMV) database allows law enforcement agencies from different nations to share and access data related to stolen vehicles, aiding in the identification, recovery and investigation of international vehicle theft cases. In fact, police departments around the world use INTERPOL’s various databases more than 20 million times a day, or roughly 250 searches per second, according to Voice of America, which is part of the U.S. Agency for Global Media. Clearly, INTERPOL is already essential to cross-country collaboration.
But the industry shouldn’t rely on mechanisms already in place to combat vehicle crime. Multipronged organized crime should have a multipronged organized response. To that end, here are additional approaches to champion:
- Coordinated responses: Effective international cooperation is essential for identifying, investigating, and prosecuting individuals and groups involved in insurance fraud. Integrated action and information sharing among different jurisdictions is crucial to disrupting criminal networks.
- Technological solutions: Advancements in technology beyond vehicle tracking systems, such as encrypted key systems and immobilizers that can help prevent vehicles from starting without the correct key or code. Plus, leveraging state-of-the-art technology as it becomes available, while training employees in it, can keep the industry from falling behind as criminal schemes grow more advanced.
- Legislative measures: Legislation to address vehicle crime, including stricter penalties for offenders, regulations on the sale and registration of vehicles, and measures to enhance vehicle identification systems is important to help address a widespread problem such as this one.
- Raising public awareness: Educational campaigns targeting vehicle owners, dealerships and transportation companies might emphasize the importance of securing your vehicle, conducting background checks and reporting suspicious activities. Additionally, educate consumers on making ethical choices that don’t fuel organized crime.
By taking proactive measures and promoting a culture of vigilance, governments, businesses, civil society, international organizations and individuals worldwide can play a significant role to mitigate the impact of transnational vehicle crime. Uniting together in opposition of transnational organized crime networks can help limit the damage they can do.
What insurance groups can address now
There’s one relatively simple step insurance companies can take to head off insurance fraud fueled by car theft: conduct a formal risk assessment. If a carrier hasn’t run an assessment in the past three years, they’re at higher risk of being exploited by transnational organized criminals.
Insurance companies can further lessen risk by enhancing the risk assessment practices they do have in place. Investing in advanced fraud-detection technology can help organizations identify potential fraudulent claims, better understand the landscape with the help of robust data analytics, and enable early detection of suspicious patterns and behaviors via machine-learning algorithms.
Additionally, formal forums can help the cause, such as the Global Insurance Fraud Summit, which began in 2019 to combat global insurance fraud. The summit facilitates stronger communications among world anti-fraud leaders to improve detection and prevention of transnational organized crime. This is an opportunity to interact with peers, so groups can better recognize criminal patterns, understand evolving methods of fraud and identify criminal networks specifically targeting the insurance industry.
In closing
Criminal networks exploit the ease of movement across borders, so international cooperation and countermeasures are essential. By banding together, insurance professionals can help disrupt criminal networks, dismantle illicit supply chains, and enhance the stability and integrity of legal frameworks. The result is a global insurance industry that effectively offers the well-being and security of people and their assets.
References
Coalition Against Insurance Fraud. “Fraud Stats.” 2022. https://insurancefraud.org/fraud-stats/
Global Insurance Fraud Summit. https://globalinsurancefraudsummit.org/
Government Accountability Office. “Briefing Slides on Martin Frankel’s Alleged $200 Million Insurance Scam.” August 2, 2001. https://www.gao.gov/products/gao-01-990r
International Association of Insurance Supervisors. “Issues Paper on the Use of Digital Technology in Inclusive Insurance.” January 19, 2018 https://www.iaisweb.org/page/supervisory-material/consultations/issues-paper-on-the-use-of-digital-technology-in-inclusive-insurance
National Insurance Crime Bureau. “Vehicle Thefts Continue to Increase to Near-Record Highs in 2023.” October 11, 2023. https://www.nicb.org/news/news-releases/vehicle-thefts-continue-increase-near-record-highs-2023
OECD (2024). “Anti-Corruption and Integrity Outlook 2024.” OECD Publishing. Paris. https://doi.org/10.1787/968587cd-en.
Transparency International. “Our Work in Mexico.” 2023. Transparency International is licensed under CC-BY-ND 4.0. https://www.transparency.org/en/countries/mexico
Voice of America. “As Interpol Turns 100, Criticism Persists Over Abuse of Its Red Notice System.” May 23, 2023. https://www.voanews.com/a/as-interpol-turns-100-criticism-persists-over-abuse-of-its-red-notice-system/7105037.html
About the author:
Dennis Toomey is a Director within the Insurance Fraud and Financial Crimes Practice at PwC. He is an international subject matter expert in counter-fraud, with deep domain knowledge across the Financial Services Industry, including the property casualty, life, and disability insurance markets. He has been working with customers across the globe for more than 3 decades implementing and operationalizing counter-fraud and compliance technology, analytics, and processes. Dennis is the Founder and President of the Global Insurance Fraud Summit; He co-chairs the Associate Members Committee. He is a Certified Fraud Examiner, Certified Scrum Master and Certified Metaverse Expert. He has published several white papers and thought leadership articles relating to the Evolution of Fraud and Analytics and Transnational Organized Crime.