California Efforts To Reduce Prison Budget Would Hurt Fraud Fighting Efforts

California Gov. Arnold Schwarzenegger has proposed downgrading insurance crimes in California from felonies to misdemeanors to help reduce the prison budget — a move that insurance and fraud experts say would have dire consequences.

In his 2009-10 May Revision General Fund Proposals, the Governor suggested that eliminating the current sentencing options for specifed crimes that may be treated either as felonies or misdemeanors, making them punishable by a jail term rather than state prison could help generate $99.9 million. “This is proposed as a necessary cost savings measure that prioritizes the incarceration and rehabilitation of the most serious offenders,” he said in the proposal.

The proposal as submitted to the Legislature would reclassify 73 property and drug crimes as misdemeanors, with one goal being to reduce the likelihood of prosecutions leading to long sentences that would add to the state prison population. Most crimes are included, according to the Coalition Against Insurance Fraud, National Insurance Crime Bureau, National Health Care Anti-Fraud Association and the International Association of Special Investigation Units.

But Insurance Commissioner Steve Poizner warned Sacramento policymakers that their proposal would have the unintended consequence of severely eroding the state’s efforts to fight insurance fraud and convict criminals.

“Fighting insurance fraud is a complex and time-consuming task,” said Commissioner Poizner. “Luckily, we have hundreds of the most dedicated sworn police officers at the Department of Insurance who fight insurance fraud every day. This proposal would severely limit their ability to go after career criminals, making simple and complex illegal enterprises much harder to prosecute — and in the process let criminals off the hook

Poizner said the change in the classification of crimes will have at least three unintended consequences related to fighting insurance fraud, including:

• Search warrants can only be served in felony cases. If types of insurance fraud are deemed a misdemeanor, search warrants cannot be issued and executed.
• The statute of limitations is much shorter for misdemeanors. For a felony, the statute of limitations is at least three years from the date the crime was discovered. For a misdemeanor, the statute of limitation is one year from the date of the crime – in many cases the crime is not uncovered until years after the act occurred, rendering prosecution impossible.
• There are a number of recent, high-profile cases that could not have been prosecuted under the new proposal.

On April 30, Commissioner Poizner and Orange County District Attorney Rackauckas announced arrests in connection with a $38 million workers’ compensation fraud scheme — the largest in the history of the state. A husband and wife were charged with 106 felony counts including conspiracy to commit a crime, grand theft, insurance fraud, filing a false tax return, willfully failing to file or filing fraudulent tax returns, misrepresenting facts to State Compensation Insurance Fund, making fraudulent statements, making false statements to discourage an injured worker from claiming benefits, misrepresenting facts to a workers’ compensation insurance company, and failing to file a return with the intent to evade tax.

As another example, on April 15, a couple was arrested in a $6.3 million workers’ compensation fraud scheme. Bell Building Maintenance Co. allegedly purposefully misrepresented the number of employees working for the janitorial company in an effort to reduce the proper rate of workers’ compensation insurance premium. The criminal investigation was launched in September of 2006 based upon a referral from State Fund. According to payroll reports allegedly submitted to State Fund by Kim, from 2000 to 2005, the only employees of the company consisted of the owner and his wife. As a result, the company was only required to pay the minimum amount of premium to receive a workers’ compensation insurance policy during this period. However, the investigation revealed that, in reality, Bell Building Maintenance Company was a much larger operation that employed hundreds of janitors servicing numerous private companies and public entities in Los Angeles, Ventura, Orange, San Bernardino and Riverside counties.

Both of these cases began as premium fraud investigations, the Department of Insurance said. From that investigation, additional insurance fraud-related crimes were discovered through the execution of search warrants. If the Governor’s proposal were the law, those two cases may not have been discovered and prosecuted, Poizner said.

“Taking the power out of the hands of the public prosecutor to charge someone with a felony crime will have a serious impact on public safety. Insurance fraud is a serious crime that demands serious consequences,” the Coalition Against Insurance Fraud, National Insurance Crime Bureau, National Health Care Anti-Fraud Association and the International Association of Special Investigation Units said in a joint letter to Schwarzenegger.

Removing the deterrent power of felony charges will discourage prosecutors in the state from trying even serious insurance-fraud cases if they’re only misdemeanors, the groups said. Weaker penalties and the lower threat of prosecution also will embolden organized fraud rings such as staged-accident and health-fraud rings to move into California to try to bilk residents with highly damaging schemes.

“The costs of insurance fraud are ultimately paid for by consumers,” Commissioner Poizner added. “I hope the policymakers carefully consider the unintended consequences of this action and ultimately remove this provision from the budget proposal. California should not send criminals the message that they have a free pass for illegal activity because of the state’s budget woes.”

The specific code sections affected by the change are:
Penal Code Sections:

• 182 (a) penalty pertaining to paragraph (4): Conspiracy to defraud
• 489(b): General grand theft
• 549: False insurance claim
• 550 (c)(2)(A); (c)(3): False claims
• 666.5 (a): Theft with a felony theft prior

Insurance Code:
• 11880 Unlawful statements re: worker’s compensation insurance policy

Vehicle Codes:
• 4463 (a): Forgery or use of counterfeit vehicle registration or license plates
• 10801: Own or operate a chop shop
• 10802: Alteration or counterfeiting of VIN numbers
• 10803 (a) and (b): Possession/sale of motor vehicles/parts with false/absent VIN number
• 10851 (a) and (b): Auto theft

Sources: CDI, CAIF, NICB, IASIU, NHCAA, Governor’s Office