Whistleblower Accuses AIG of Defrauding U.S. Government, Money Laundering

  • Jun 2, 2014
  • Louis Marlin
  • Insurance

Earlier this month, a federal court in New York City released documents showing that a former high-level employee of beleaguered insurance giant AIG has filed a whistleblower lawsuit alleging that the company defrauded the federal government of hundreds of millions of dollars and helped clients in Hong Kong launder money.

Mr. Cody revealed that he was instructed to budget over $300 million for bonuses for Financial Products Division employees.

Alex Grabcheski, the Worldwide Director of Human Resources and Operations for AIG’s Group Management Division of AIG’s Global Life Companies made the shocking allegations in a lawsuit he filed two years ago. His attorneys filed the whistleblower suit “under seal,” meaning all documents in the case (as well as the existence of the lawsuit itself) were kept secret to allow the United States Department of Justice to investigate the allegations. The lawsuit and related documents were made public this month after the Department of Justice declined to intervene in the case.

AIG’s Financial Products Division Bankrupted the Company, Then Received Millions in Bonus Payments

The whistleblower lawsuit alleges that “AIG secretly paid approximately $332 million, and possibly up to $644 million, in what were purportedly retention or incentive payments to employees of its Financial Services Division.” According to the lawsuit, the $332 million was divided up among the 375 employees of AIG’s Financial Products Division.

The business activities of the Financial Products Division caused the financial collapse of the company. As was widely reported in the financial press and described in detail in the whistleblower lawsuit, the Financial Products Division entered into credit default swaps that insured the value of bonds comprised of subprime mortgages that proved to be worthless. In September 2008, AIG experienced a “spectacular liquidity crisis” as the financial community realized that the insurance company did not have anywhere near enough assets to cover insurance claims on the imploding subprime bond market.

“Can You Imagine If the Taxpayers Knew”

In September 2008, the United States Government, acting through the Federal Reserve Bank, gave AIG an $85 billion bailout in exchange for a 79.9% ownership interest in the company. While negotiating the terms of the bailout, the government required AIG to disclose its compensation and bonus arrangements. The government also required AIG to guarantee that none of the bailout money would be used to reward the executives whose activities bankrupted the company, other than the amount that AIG was contractually obligated to pay these employees.

Starting in October 2008, Mr. Grabcheski recorded conversations he had with various AIG executives, including Dennis Cody, the Comptroller of AIG’s Financial Products Group, and Ken Walma, Chief Counsel and Compliance Officer of the Group Products Division of the life insurance unit of AIG.

In the secretly taped conversations, Mr. Cody revealed that he was instructed to budget more than $300 million for bonuses for Financial Products Division employees. When describing the $332 million in bonus payments to be paid to executives and employees within AIG’s Financial Products Division, Mr. Cody stated:

“If I called up CNBC and I said 'Look, I work at AIG, and I can tell you, you guys right now, that there are only 375 employees at FP. And I just put in my budget over $300 million to be paid out in January and another over $300 million in January of '10! This place would – it would be – can you imagine if the taxpayers knew that?”

The lawsuit states that the bonus payments “were never disclosed publicly and were hidden by various accounting and financial devices."

Suitcases Full of Cash

In another secretly recorded conversation, Ken Walma, Chief Counsel and Compliance Officer, described how AIG would help launder money for clients in Hong Kong.

Mr. Grabcheski recorded a conversation in which Mr. Walma described how AIG helped launder $500,000 cash for a client in Hong Kong. The client would pay for an insurance policy with a suitcase full of $500,000 in cash. A month later, the client would cancel the policy and then receive a $500,00 check from AIG. In describing the money-laundering scheme, Mr. Walma stated in a recorded conversation:

“AIA [AIG’s life insurance division] writes a check for the returned premium because the policy was not taken out but the check is a good check because it is coming from AIG, so they have laundered the money.”

Mr. Walma also described a plot involving helping Chinese communist party officials cheat on the their taxes by selling them life insurance policies in November or December. The party official would pay a “huge” premium, claim the amount of the premium as a tax deduction, and then cancel the policy in January or February of the following year. This arrangement benefited both AIG and the corrupt communist party official because AIG would book the premium as revenue and the communist party official would get a valuable tax deduction. In a recorded conversation, Mr. Walma described how the scam worked:

“You go to the local party official or the local city government official would apply for a policy in November or December and under Chinese tax law they could take a tax deduction for insurance premiums so they would put huge amounts of money into, say, a universal life policy, apply for it in November or December. The agent would submit the business as a monthly premium. They would annualize the monthly premium. He would get his commission based on an annualized premium of say – he might come with $100,000. So the $1.2 million [would be the annual premium].”

“In January or February, they either don’t take out the policy or they just launder it. They got the tax benefit from the prior year. The agent got the commission plus all the bonuses, sales awards and conventions. Got letters from Greenberg [Maurice Greenberg, AIG’s former Chief Executive Officer] and Edmund [Edmund Tse, Director of AIG’s life insurance business] praising them for their creativity and all that sort of thing.”

Filed under the False Claims Act, a federal law that allows individuals with knowledge of fraud against the government to receive a financial award for blowing the whistle, the lawsuit alleges that AIG defrauded the United States government of at least $332 million, and possibly as much as $664 million.

If the case is successful and the court finds that AIG did indeed engage in fraud, Mr. Grabcheski stands to receive 25 to 30 percent of any money that is recovered by the federal government.

Author Bio: Louis Marlin is a founding partner of Marlin & Saltzman. Mr. Marlin has served as the lead attorney in numerous class actions filed against some of America’s largest corporations, including Wal-Mart, State Farm Insurance, Allstate Insurance and H&R Block. In recognition of his many victories in the courtroom, Los Angeles Magazine has named Mr. Marlin a “Super Lawyer.”

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