Our feature article a fortnight back dealing with “Stealth Rebates” has drawn an unusual and serious response. From anonymous communications – which we do not credit very highly— to the calls “off the record”, it is as if we identified a third rail few are eager to venture near. The response has persuaded us to add a second installment in a next Crackdown feature dealing with insurance fraud, including the Rebate subject. We have prevailed upon two attorneys, a writer specializing in Life and the people at Paladin Resolution (“PRC”) who are right on top of this topic to continue to assist us in distinguishing real wrongdoing from what might be careless or accidental missteps that do occur in commercial life.
At the “core” of these stealth arrangements is unlawful (in virtually every state) and unethical behavior in and of itself. As it is universally acknowledged that one cannot direct premium or commission monies to a life insurance purchaser or to promise to do so, it is equally illegal to do this indirectly. Over the past few years, this has meant the arranging of loans at prices that would not be available from the marketplace absent the unlawful transfer of compensation payments. These payments from the insurers’ to their brokerage systems for distribution to the lenders that have been, in turn, facilitating the purchases of insurance through the generous loan accommodations financed by the insurers’ themselves completes the circle of irony.
And round and round it goes. The list of tax implications is daunting. There exist: (1) taxability to the generally “senior” insureds/borrowers, (2) the deductibility of the interest on all borrowed funds throughout the lending system; (3) reporting obligations (4) the deductibility of commission payments for the insurance carriers involved and (5) the commission levels taxed to the agents which could equal 100% of the compensation paid to all brokers despite the fact that the agent only received a minority portion of the commissions. Lastly, (6) the immediate reporting obligations will be incumbent upon accountants, lawyers and market participants. The balance is thus held for bankers who had no right to them in the first place. The tax implications, in short, seem substantial.
The entire subject of “purchase for sale” financed life insurance has been one of the most disputatious areas of the active divide between carriers’ and their distribution arms. We are weighing reports of corruption involving insurers’ executives. These include the writing of warning letters to the general agent population, while welcoming the very business which they protest from agencies in which they may have inappropriate interest.
We need to research this info more deeply, but, if it is so, it’s pretty serious and actionable on more than one level. We are not speaking of trivial sums here – billions of dollars have been placed at risk. New York just issued its Circular No. 9 (2009) declaring its intention to police this area of rebate abuse. New York is far from the only state in the nation looking into the matter. Georgia, Minnesota, North Carolina, Nevada, and California have horses in this race.
We will follow this matter, weighing very carefully sound information versus speculation, to identify the games and the players and then we will report the results.