In August 2007, the Supreme Court of Florida ordered the empanelment of a statewide grand jury to investigate various criminal offenses, including activities related to check cashers. In 2008, the grand jury issued its report and the state legislature enacted major reforms recommended in the report to provide greater regulatory and enforcement tools of the Office of Financial Regulations (“OFR”), which is responsible for licensing money service businesses (“MSBs”). In 2011, Florida commissioned the Money Service Business Facilitated – Workers’ Compensation Work Group (the “work group”) to study the issue of workers’ compensation premium fraud, as facilitated by check cashers. The work group determined that the problem is most prevalent within Florida’s construction industry. On May 6, Governor Rick Scott signed House Bill 1277 into law to assist in the fight against premium fraud. The bill earlier had passed both houses by unanimous votes.
The Triangular Scheme of Premium Fraud
According to the work group, the premium fraud scheme often involves a triangle of what the work group designates as “facilitators,” contractors and MSBs. Facilitators, often taking advantage of the online services of the Department of State, create a fake shell corporation. The shell corporation then purchases a minimal workers’ compensation policy, usually by describing its operations as a two to four person company. The facilitator then typically contacts an uninsured construction subcontractor looking for work, but who lacks the workers’ compensation policy required to sign construction contracts with many general contractors. The facilitator makes its corporate name and workers’ compensation insurance policy available to the uninsured subcontractor, for a fee. The general contractor, knowingly or unknowingly, uses the uninsured subcontractor to perform the work.
The uninsured subcontractor still has a problem. The work is finished, but the general contractor, following the terms of the subcontract, has made the check payable to the shell corporation, not the uninsured subcontractor that performed the work. If the payee–the shell corporation–endorses the check to the uninsured subcontractor, most banks won’t cash it; they require the check to be first deposited to the payee’s actual bank account. What are the facilitator and the uninsured subcontractor to do?
Enter a complicit MSB, typically a check cashing firm. These firms often allow the cashing of third-party, business-to-business checks by “authorized” persons designated by the payee. These “authorized” persons are often the facilitator and others designated by the facilitator. Usually, these persons have previously been introduced to the employees of the check cashing firm. Often limited powers of attorney are on file with the check cashing firm to establish the bona fides of these designated persons.
When the check made payable to the shell corporation is negotiated at the complicity MSB, two fees are generally deducted: (a) a fee of, say 2%, to the MSB for cashing the check, and (b) a second fee to the facilitator, often as much as 8% of the check, to pay for the use of the shell corporation’s name and workers’ compensation policy. The balance is then paid to the uninsured subcontractor. These funds are not disclosed to the shell corporation’s workers’ compensation carrier as wages, avoiding both the payment of workers’ compensation premiums on the “wages” and applicable payroll taxes. The payments appear to the insurance carrier, if it were to audit the books of the shell corporation, as payments to a legitimate subcontractor.
The facilitator may duplicate the scenario a number of times. If it becomes concerned that the fraud may be detected, it closes down the shell and creates another; it already has all the appropriate forms.
The uninsured subcontractor, particularly if it’s working with a complicit general contractor, passes the cost savings along. Other subcontractors and general contractors who play by the rules finding themselves at a competitive disadvantage. The result of the fraud is an underpayment of workers’ compensation insurance premiums to carriers, underpayment of employment taxes, and usually, underpayment of income taxes.
House Bill 1277
HB 1277, passed unanimously by both houses and signed into law by the Governor on April 6, is designed to help deal with this sort of fraud. The bill incorporates a number of consensus recommendations of the work group to provide increased regulatory oversight of MSBs. Among other things, HB 1277:
- Requires all licensed MSBs (there are currently some 1,065 such businesses within the State of Florida) to maintain and deposit all checks accepted into a bank account in its own name and to report the termination of bank accounts to the state Office of Financial Regulation (OFR) within five business days.
- Prohibits any MSB, its authorized vendor, or affiliated party to possess any fraudulent identification paraphernalia, or for someone other than the person who is presenting the check for payment to provide the customer’s personal identification information to the check casher.
- Authorizes the OFR to issue a cease and desist order; issue a removal order; the denial, suspension, or revocation of a license or any other action permitted by ch. 560, Fla. Stat., for noncompliance with the following: maintaining a federally insured depository account; depositing all checks accepted into its depository account; or submitting transactional information to the office.
- Requires an MSB to suspend its check cashing operations immediately if there is any interruption of its depository relationship and prohibits the resumption of check cashing operations until the licensee has secured a new depository relationship.
Effective July 1, 2012
The law takes effect July 1, 2012. In addition to the changes noted above, the bill also modifies current law with regard to examinations of MSB operations. Under current law, an examination must be conducted by OFR within 6 months of a license being issued, and then at least every five years. Because of the OFR’s workload, after the initial examination, a licensee can assume, with reasonable certainty, that it will not be examined again for several years, and knows that it will also be provided with 15 days advance notice of such examination. The bill eliminates the 15-day notice requirement. While retaining the requirement that each licensee be examined at least once every five years, the bill eliminates the requirement that the OFR conduct an examination of the business within 6 months of licensure. The goal is to be provide greater flexibility to the OFR by permitting use of its resources in a more targeted manner. Both changes also reduce the predictability of when a business will be examined.
The battle against workers’ compensation fraud is far from over. HB 1277 is an important step, however.