A dangerous fraud scheme has infiltrated the construction industry in Florida over the last several years. Usually involving residential home building, it started in South Florida but has swept northward to encompass most major cities in the state. The scheme revolves around “shell companies,” which on the surface look legitimate and have proper workers comp coverage, but in reality are operating a giant pool of off-the-books labor and are hiding millions of dollars of unreported payroll.

The fraud starts when a labor broker, also called a facilitator, induces a (sometimes) innocent third party—often a foreign national with family to support in his or her home country—to set up a company with the state Division of Corporations that has a very generic name that may reference construction. The company’s name has to be generic, because different crews will be (a) working on many different job sites and (b) often performing all types of construction work. Often the words “Construction Services” or “Services Corp” are in the name. A series of three initials like “ABC Construction” is also common.

The owner then approaches an insurance agent to secure workers’ compensation coverage and reports just enough payroll in a construction class to look legitimate and to not arouse suspicion from the insurance carrier. Most often, the class code is one that typically uses unskilled labor, such as drywall, framing or concrete.

After the workers’ comp coverage is in place, the business owner takes his certificate of insurance (COI) listing the company’s workers’ comp coverage and then rents that COI out for a fee to dozens of different construction crews doing work on many different job sites.

When the general contractor pays the crew for work performed, the labor broker takes that check to a check-cashing store, gets the cash, takes his (substantial) cut, gives the check cashing store its cut, and gives what’s left to the crew leader to pay his crew for doing the work. The labor broker can have dozens of crews using hundreds of workers on different jobs sites at any one time, which means he is cashing millions of dollars in payroll checks in any given policy period.

The victims

None of this payroll is reported to the company’s insurance agent or workers’ comp carrier. Neither the carrier nor the agent know the true exposure associated with the policy for the shell company. For example, what is supposed to be a company with $50,000 in framing payroll that is paying $8,500 in annual premium could in reality be a company with $5 million in framing, drywall and concrete payroll that should be paying $850,000 annually.

This results in hundreds of thousands of dollars of unpaid premium that the insurance carrier never receives. If claims are made on the policy, they usually are from workers the insurance carrier never knew they were covering and for which they never received a penny. Of course, the shell game also reduces the commission the insurance agent should have received.

Other victims of this scheme are the undocumented workers who are injured working for one of these companies. They are the ones doing the hard work, and if they are hurt on the job, they have no idea what to do. Usually the only name they know is their crew leader; they don’t know the name of the shell company and they don’t know the name of the shell company’s insurance carrier. This complicated structure means injured workers can be left on their own to try and find medical help for injuries.

Warning signs

Shell companies often have several common characteristics. Individually, these signs might be legitimate, but taken together, they usually add up to fraud:

  1. Generic company name like “ABC Construction” or “XYZ Services Corp.” These generic names allow the shell company to perform a wide range of construction jobs.
  2. Class code on the policy is one that does not require a license and can use unskilled workers, like framing, carpentry, concrete, masonry, wallboard or painting.
  3. Company address is not a legitimate business address. Often, shell companies use a P.O. Box or a UPS store as their business address. They will even work out of a small house or condo.
  4. Down payment for the policy is made using a money order or starter check where the company name is hand written.
  5. Company is located in a part of the state that is far away from their insurance agent. Often shell companies will use an agent in a different part of the state to avoid scrutiny.
  6. Company wants to make changes to their workers comp policy shortly after binding, such as adding or changing class codes.
  7. Company does not comply with audit requests from the insurance company.
  8. Company requests a large number of COIs not in line with the estimated payroll for their policy, requests certificates listing generic descriptions of operations, or wants class codes listed on the COI that are not on the policy.

Shell companies do their best to look legitimate on the surface, but there are some things agents can do to avoid doing business with them:

  1. Meet clients in person. Make sure the person you are dealing with is the company owner or officer, and not an unrelated third party. Make sure the company owner or officer has a valid Florida driver’s license.
  2. Require original signatures on all documents.
  3. Google the company’s business address to make sure it is legitimate.
  4. Make sure the company has a legitimate company bank account.
  5. Ask if the company will be paying state and federal unemployment taxes on its employees.
  6. Check the Proof of Coverage database maintained by the state Division of Workers’ Compensation to see if the company has had prior coverage and if that coverage was cancelled.
  7. Know which subcontractors your client uses.

Most importantly, agents should immediately report any suspected fraud or unusual activity to the insurance carrier. Agents are an insurance company’s eyes and ears in the field and the best weapon to help stop fraud before it starts.

The author

Karen Phillips has been the General Counsel for Florida United Businesses  Association (FUBA) since 1991.  FUBA is a statewide business trade association representing small businesses throughout Florida.  Ms. Phillips provides advice to small businesses on a broad range of state regulatory issues, sales taxes, and  employment law.  Ms. Phillips also serves as General Counsel to FUBA Workers Comp, the sponsored workers’ compensation insurance services provider for eligible FUBA members. 

[‘The Shell Game’ was originally published in Rough Notes Magazine, June 2016.]