North Korea Suspected of Collecting Millions in Reinsurance Fraud
Fox News
12/04/06
NEW YORK — The cash-strapped regime of North Korea, which has a worldwide reputation for its criminal dealings in weapons sales, drugs and near-perfect counterfeit U.S. $100 bills, may have found a new illicit source of hard foreign currency: international reinsurance fraud.

A growing number of major underwriters around the world strongly suspect that communist dictator Kim Jong-Il's regime is running an elaborate major insurance and reinsurance scam on them, to the tune of tens of millions of dollars or more.

The alleged fraud involves a wide variety of North Korean industrial and personal calamities where insurers have been presented with perfect government-controlled documentation of accidents, including deaths, along with carefully gathered photographic evidence, all compiled in a startlingly brief time.

That paperwork is coupled with a resistance to letting foreign insurance adjusters examine some of the most crucial physical evidence, except after long delays and under a watchful eye, if at all.

The growing concern in the reinsurance industry is that the property damage being claimed is vastly overstated, and the circumstances of some alleged accidents may have been altered, or that deaths for which insurance payment is claimed may have had nothing to do with the accidents.

Death is hardly a rare thing in North Korea, where millions are estimated to have expired from famine, flood and government repression in the past decade — but the number of apparently ordinary people in the dictatorship who have suddenly been found to have foreign-backed life insurance is raising insurers' eyebrows.

The chief concern is that only the Kim Jong-Il regime — a government that is known to be brutal, unscrupulous and desperately short of foreign currency — controls the information required to trigger the payments.

According to Michael Payton, a lawyer who represents several of the major insurers, the full extent of the reinsurance claims may involve more than $150 million. U.K. insurers facing these claims have only just begun to talk to each other about the potential scale of their North Korean losses.

North Korean insurance risk is also handled in a wide variety of other Western European markets, and as far away as Russia, India and Indonesia.

So far, there is little attempt to begin discussing the fraud possibilities across those national boundaries.

"I've never seen anything like it before," said Payton, senior partner in the London-based international law firm of Clyde & Co., which specializes in insurance law. "The apparent involvement of the state in every detail of these claims, coupled with the impossibility of obtaining the usual corroborative facts independent of the state, makes these claims unique, in my experience."

The suspected scam involves the huge international market for reinsurance, in which insurers reduce their risk on every kind of accident, from environmental catastrophes and crop failure to airline and auto crashes, by reselling much of their policy exposure to other syndicates of insurers outside their own countries. Huge sums are routinely covered in reinsurance; globally, the reinsurance market last year was valued at some $1.5 trillion.

One of the world's most important reinsurance markets is Lloyd's of London, some of whose syndicates are represented by Clyde & Co. But a number of major players in the global reinsurance market have exposure to North Korean claims.

The reinsurance industry has been badly staggered in recent years by huge claims from storms like Hurricane Katrina and terrorist disasters like the Sept. 11 attacks. In such a huge pool of often-complicated risk deals, North Korean reinsurance claims still represent only a drop in the bucket.

Nonetheless, it is a deeply troubling drop, because even though statistics are difficult if not impossible to come by, reinsurance industry sources believe there has been a recent sharp increase in claims coming out of North Korea.

The central focus of concern is the absolute control of ownership and information in North Korea by Kim Jong-Il and his regime. All North Korean insurance is controlled by one state-owned firm, the Korea National Insurance Corporation (KNIC), formerly known as the Korea Foreign Insurance Company, which in turn purchases reinsurance coverage abroad for risks that it has assumed in its domestic market.

Normally, most domestic insurers will use one, or at most two firms of brokers to obtain reinsurance. KNIC may use many, according to industry sources, and the brokers may well have no idea what business their colleagues are doing, or in what reinsurance markets.

"The North Koreans are extremely clever at spotting the gaps in the market," an industry source says. "There is no transparency."

Suspicions in London began to gel in July 2005, when North Korea reported that a medical rescue helicopter had crashed into a government-owned warehouse that authorities said was crammed with disaster relief supplies.

The entire contents of the warehouse, which ran to hundreds of thousands of items, were destroyed, KNIC said, submitting within 10 days a list compiled by the relief center of every single commodity that it said had been lost.

Along with the lengthy list came a reinsurance claim for more than 40 million euros, or almost $50 million at then-current rates, for 95 percent of the damages. The reinsurance was placed through London, but the risk was spread among reinsurers worldwide.

"They provided details including tens of thousands of children's gloves, handkerchiefs, leather gloves, toilet soap and washing soap, within 10 days," Payton said. "In the chaos which follows an accident of this kind, that is unheard of.

"A similar loss report in Britain might take months to compile."

The North Koreans also supplied photos of the devastation, which insurers turned over to leading experts at photographic estimates of fire damage. The experts concluded that the volume of debris remaining within the warehouse, as assessed from the photographs, did not support the high volumes of relief supplies that were claimed to be there before the fire.

"The North Korean claims are supported by meticulous paperwork, something at which the North Koreans excel," Payton said.

"For example, where death certificates and hospital reports are required, the regime's attitude is 'tell us what you want, we'll give it to you.'"

In the case of a ferry accident that allegedly took place last April, near the coastal city of Wonsan, North Korean authorities declared that 129 people had died aboard the vessel after it struck a rock about 1,000 yards off the Korean coast, and only about 100 yards from an island. All of them, the Koreans claim, had been automatically covered with life insurance when they bought their ferry ticket, and that insurance risk had been passed on to the London market through a common reinsurance product known as "excess loss personal accident reinsurance." Here the claims from reinsurers totaled about 5 million euros, or roughly $6 million.

The North Koreans claimed that most of the victims had died of hypothermia in the freezing water. Industry sources say that when insurance investigators discovered that weather conditions were warmer than claimed at that time, the North Koreans responded that severe winds were blowing from Siberia in the spring, making the water unusually frigid.

When insurers asked for permission to send an independent diver to inspect the ferry wreck, they were refused.

To get North Korea's side of the story, FOX News approached the regime's official insurance representative in London, Song Ryon Ko, at his home. Song refused to discuss the issue and hastily closed his door.

Britain's Foreign Office says the lack of firm proof of fraud is why it hasn't taken action on the reinsurance issue, although British diplomats say they are aware of it. But as the British government is trying to put limits on Kim Jong-Il's nuclear weapons program, the lack of an official British reaction could also be an attempt not to rock the boat, as well as to protect its diplomatic presence in Pyongyang.

Other experts on North Korea who are unaffiliated with the British or U.S. governments are much more willing to take the reinsurance industry's concerns at face value.

"Anything that might be called white-collar financial crime might be an easy target for the regime," said Alexander Neill, head of the Asia-Pacific security program at the Royal United Services Institute for Defence and Security Studies in London.

"If you look at the Kim family regime or the North Korean regime much more as a criminal organization, but on a state level, I think that's a better way to look at it. There's a whole dark underworld of operations which can be undertaken with criminals who are apolitical."

David Asher, a former senior adviser on East Asian affairs at the U.S. State Department, and coordinator of the Bush administration's North Korea Working Group, agrees.

While unfamiliar with the current fraud allegations, Asher said he is aware of previous North Korean forgery of insurance policies for its shipping, including fake Lloyd's of London coverage. "The country will do anything to raise funds," he said. "They're not a nation-state, they're a criminal state."

Kim Jong-Il's regime depends on hard currency to maintain its privileged lifestyle and its internal solidarity. Criminal activity is "deep rooted, at every level of government," Asher said.

The question is whether, and how much, that activity might be spreading through the world of international reinsurance.