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Surety Fraud

In light of recent news stories about fraudulent surety bonds, questions about the legitimacy of a surety bond demonstrates how important it is to verify the authenticity of the surety bond, a process that takes minutes but could prevent thousands of dollars in losses later.

The Fake Chubb Bonds

Small contractors and subcontractors are especially vulnerable. As reported in Engineering New-Record (ENR) on Aug. 8, 2013, in More Small Contractors Lose Premiums on Fake Chubb Bonds, a network of companies and brokers cost contractors around $230,000 in premium when the bonds they thought they had purchased from Chubb turned out to be fake.

By Nov. 3, 2013, ENR reported losses of $3 million in New Forged Chubb Bonds Discovered with Mounting Losses, ENR stated in an editorial, When Surety Fraud Goes Unpunished, Small Contractors Suffer,  “The forged Chubb bonds … provide evidence that the laws allowing individual sureties help criminals steal from the very companies individual surety is supposed to benefit: small and minority-owned contractors. More than 20 contractors have been defrauded of about $3 million by these bonds over an 18-month period.”

The intriguing story of how the fraudulent bonds were discovered is covered in ENR’s November 5, 2013 story How Tennessee Contractors, Armed with Tougher Surety Law, Caught Forged Bonds.

Individual Sureties

In July 2013, ENR reported that a controversial individual surety refused to back its bonded subcontractor. Corporate sureties may deny a claim as well. But the man linked to the individual surety had fraud-related convictions and criminal record.

The US House of Representatives passed Security in Bonding Act of 2013 (H.R. 3534), which would have required individual sureties providing bonds on federal projects to use assets that can easily be placed control of the federal government. It was reintroduced as H.R. 776 in February 2013 but never passed by Senate. The bill was supported by the National Association of Surety Bond Producers (NASBP), The Surety and Fidelity Association of America (SFAA), American Subcontractors Association (ASA) and other contractor groups.

What is Being Done

Three years ago, Insurance and Financial Advisor reported that the Virginia State Corporation Commission Bureau shut down insurance agency Genesis Business Group Inc. for issuing bogus surety bonds.

In August 2011, George D. Black, Sr., Infinity Surety, plead guilty to mail fraud charges in U.S. District Court in Texas and was sentenced to 30 months in prison. He had been selling fraudulent surety bonds with insufficient backing.

In July 2013, following his arrest in Southern California, the U.S. Department of Justice federal grand jury returned a 23-count indictment charging Abel Martin Carreon with mail fraud, wire fraud, major fraud against the United States, aggravated identity theft and money laundering. Carreon had submitted bonds to government agencies that listed fictitious securities and pledged non-existent collateral.

 Authenticate the Bond

It’s relatively easy to authenticate a bid, performance, or payment bond. Douglas L. Rieder offered 10 tips to Spot and Avoid Bogus Surety Bonds in Risk Management Nov. 7, 2013. Additional tips and information are offered in Avoid Fraudulent Bonds, published June 3, 2013 in Risk Management.

The SFAA says the most reliable way to authenticate a surety bond is to contact the issuing surety company directly. SFAA also offers a Bond Obligee Guide that construction project owners can use to authenticate a bond.

The federal government’s Department of Treasury’s Listing of Approved Sureties (Circular 570)  lists surety companies authorized to write surety bonds on federal projects.

 

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