The “Third Rail” in Aviation Accident Litigation

Practitioners in the field of aviation law are used to seeing civil actions arise as the result of an aviation accident. In fact, the proceedings are inevitable, as are the statutorily mandated investigations by the National Transportation Safety Board (NTSB)1 into the causes of accidents. The NTSB proceedings may prove quite helpful to the practitioner handling the civil case arising from an accident. At least the factual portions of the NTSB report are generally held to be admissible into evidence at trial2 and the laboring oar is often taken by the NTSB in the conduct of their investigation with respect to the interviewing of witnesses, narrowing the issues in the civil litigation and ruling out possible causes for an accident.

However, the newest wrinkle, or the “third rail” in aviation accidents litigation, so-called because it can at best shock the practitioner or at worse bring a death sentence to the corporation, is the criminalization of negligence arising from aviation accidents. This issue of the Condon & Forsyth LLP Newsletter LLP was the subject of a seminar presented last month by Michael Holland in Pensacola, Florida.3

While the criminal prosecution of transportation companies arising from accidents goes back almost one hundred years, New York Central & Hudson Railroad Co. v. U.S., 212 U.S. 481 (1909), the next three quarters of a century saw very little criminal prosecution of corporations involved in transportation accidents.

The trend toward criminal prosecution of corporations began in 1991, with the indictment of supervisory personnel at Eastern Airlines for so-called “pencil whipping” and falsifying maintenance records. While the indictments were ultimately dismissed due to violations of the federal Speedy Trial Act,4 the prosecution of one of the (at that time) leading airlines in the United States set off a red flag of warning that perhaps, in addition to FAA penalties for falsifying records,5 the persons guilty of such actions could face criminal prosecution. The red flag became a full-blown warning sign following the crash of ValueJet Flight 592 in the Florida Everglades on May 11, 1996.

The facts of the ValueJet case are well-known to anyone practicing in the field of aviation law: the crash of the plane, which killed all one hundred and ten passengers and crew aboard, was traced to oxygen generators which had been removed from service and improperly secured and loaded into the cargo hold of a ValueJet MD-80 aircraft bound for Atlanta from Miami. Shortly after takeoff, an uncontrollable fire started in the aircraft and it crashed in a remote area of the Everglades.

The NTSB investigators soon found themselves working along side criminal investigators searching for relevant evidence. The FBI executed a search warrant at the maintenance company who had put the generators on the aircraft, SabreTech, and grand jury subpoenas were served on SabreTech, ValueJet and numerous of their employees. The investigation went so far that law enforcement authorities contacted SabreTech employees when they left their employment for the day. SabreTech and several of its employees were ultimately charged by Federal authorities in a wide ranging indictment charging conspiracy to falsify records,6 violation of hazardous material regulations,7 and, incredibly, placing a destructive device on board an aircraft.8

In view of the developments since the horrific incident of September 11, 2001, the charging of SabreTech with placing a destructive device on board an aircraft may seem to be prosecutorial overcharging. Although SabreTech was ultimately acquitted of the federal charges based on its wilful mishandling of the oxygen generators, it was nevertheless convicted for reckless mishandling of the same.

Perhaps even more significantly, the conviction on federal charges did not end SabreTech’s troubles: SabreTech was indicted in the Florida state courts for 110 counts of third degree murder and 110 counts of manslaughter, one count for each of the fatalities aboard the subject flight. The criminal charges have now been dropped in exchange for a donation of $500,000 by SabreTech’s corporate parent, The Sabreliner Corp. to aviation safety causes.

What has been accomplished by the SabreTech indictment? Clearly, it resulted in the bankruptcy of SabreTech, the loss of jobs for hundreds of employees, and the destruction of the company, leaving it with a negative net loss of over $21 million. Debates on whether criminalization of negligence is the proper route to pursue abound. Ken Quinn, who represented SabreTech, has testified, lectured and written on the topic many times. His position is that the criminalization of aviation accident is an ominous development for the aviation industry since it impedes cooperation by mechanics, flight crews, manufacturers and others with the NTSB investigatory process.

Indeed, former Chairman Jim Hall has already said that the fallout from the ValueJet case is that potential criminal defendants in other transportation accidents have refused to cooperate in investigations. In the case of a pipeline rupture and fire case in Bellingham, Washington in June of 1999, the NTSB sought to interview potential witnesses, many of whom invoked their Fifth Amendment rights against self-incrimination. In October of 1999, Chairman Hall addressed those issues at a committee meeting in the House of Representatives, stating as follows:

The NTSB wants the answers to all of these questions, and we need to know them as soon as feasible. But, my investigators have been stymied by the prospect of criminal prosecutions . . . A number of our investigative activities has been suspended because most of the central players will not talk to us. And, prosecutors have asked that we not test the valve of the pipeline until their concerns regarding evidence preservation can be allayed. We are hopeful that steps can be taken to clear up the concerns of needed witnesses and the U.S. Attorney’s office. But, for now, we do not know all we need to know about the pipeline’s operations and its level of safety.10

Likewise, in the Alaskan Airlines case in the year 2000,11 where an Alaskan Airlines flight crashed off the coast of California, allegedly due to a problem with the jack screw, Alaskan Airlines’ employees have been reluctant to talk to NTSB investigators. The problem in the Alaskan Airlines case is exacerbated by the fact that, even before the accident, the U.S. Attorney’s office had commenced a separate investigation against Alaskan Airlines to determine whether a pattern of violation of maintenance regulations had taken place.

The governmental decision to pursue criminal charges in connection with the ValueJet case appears to be the bell weather of a change in the criminalization of what had been previously viewed as negligent acts. The United States Attorney in Miami has been particularly active in pursuing criminal investigations. In his testimony before the Subcommittee on the Aviation, Committee on Transportation of Infrastructure, United States House of Representatives, concerning aircraft accidents and criminal investigations, Guy Lewis, the United States Attorney for the Southern District of Florida testified on July 27, 2000 as to the various criminal prosecutions undertaken by his office.12 Mr. Lewis emphasized that in deciding whether to proceed with a criminal prosecution, his office took a reasonable and principled approach. Having applied that criteria, the United States Attorney’s office in Miami has brought criminally related prosecutions in the area of passenger aircraft, freight forwarders, cargo aircraft, airport personnel, repair facilities, parts suppliers and air rage.

For example, the United States Attorney’s office obtained a conviction of Aviation Safeguards, a contract security company providing services at Miami International Airport. Its general manager and the corporation were convicted of falsely certifying that background employment verifications had been performed on prospective employees seeking to enter secure areas at MIA Airport. As part of the penalty phase of the conviction, Aviation Safeguards was required to institute a compliance program which involved comprehensive employment training and auditing by outside consultants.

Actions have also been brought against participants in the alleged counterfeit parts market. Arrow Air has pled guilty to falsifying records on engine parts not certified for airworthiness by the FAA, resulting in a $5 million fine and a comprehensive compliance program. Following the accident involving a Fine Air aircraft on takeoff from Miami in August of 1999, the airline was charged with obstruction of justice and false statements regarding the weighing of cargo pallets and payloads. The company pled guilty to two charges, unrelated to the crash, including making a false statement concerning maintenance matters and obstructing the government’s investigation by destroying, disposing of or altering evidence.

Neither have the larger air carriers been immune to criminal prosecution by the U.S. Attorney’s office in the Southern District of Florida. An investigation into the transportation of hazardous materials by American Airlines resulted in a felony conviction, an $8 million fine and a restitution payment of $2 million to local authorities by American Airlines. Its parent corporation, AMR, pled guilty to federal charges that it illegally stored hazardous waste materials at Miami International Airport and that it had failed to follow Federal Aviation Regulations that strictly controlled the transportation of hazardous material on passenger planes.

What are the various statutes that an airline, fixed based operator, or maintenance company must be concerned with in a potential criminal prosecution?

A surprisingly large number of federal statutes have been utilized by the federal government to prosecute corporate conduct relating to accidents. Some of these statutes include the False Statement Act,13 the Mail Fraud and Wire Fraud statute,14 the Obstruction of Justice Statute,15 the Hazardous Materials Act16 and state homicide statutes.

Under the current standard of corporate liability, a corporation can be held criminally liable for the unlawful acts of its officers, employees or agents, where the acts were performed within the scope of the employee’s authority and where that conduct provides a benefit to the corporation. Indeed, corporate liability has even been found when employee violations are contrary to a specific corporate policy.17

Interestingly, in deciding whether or not to cooperate with a criminal investigation, the company lawyer needs to look at a rather remarkable document published in 1999 by the Criminal Division of the Department of Justice, which promulgated its “Principles of Federal Prosecution” as a guide to prosecutors in determining whether to bring charges.

Some of the indicators as to whether prosecution should be brought include the seriousness of the offense, a history of similar conduct, the willingness of the corporation to cooperate with the government’s investigation, the corporation’s willingness to identify wrongdoers and make their witnesses available for interviews, and the cooperation of the corporation in waiving either the attorney/client privilege or the work product privilege. These are all criteria which, while they aid the prosecutor’s office, tend to penalize those corporations whose employees exercise individual privileges or rights guaranteed by the United States Constitution.18

Conclusion

The prospect of a criminal investigation is daunting to the practitioner. While insurers typically oversee the defense of the corporation in civil proceedings, and specialized counsel, even in-house counsel, customarily work with the NTSB on behalf of the corporation in dealing with administrative proceedings arising from an aircraft accident, the possibility of a criminal investigation arising from an aviation accident is one that cannot be overlooked by conscientious counsel.

Some of the many issues which arise include work product, scope of representation, joint cooperation agreements, and the not insignificant issue of who will pay for the defense of criminal investigations. The attorney representing a defendant in an aviation accident related matter must not only be a good civil litigator; he must have a working knowledge of the criminal law and the various statutes which may be used to implicate the corporation, its officers and employees.

Endnotes

1 49 U.S.C. § 1131.

2 49 U.S.C. § 1154(b); (I>but see In Re Air Crash at Charlotte, N.C. on July 2, 1994, 982 F. Supp. 1071 (D.S.C. 1996); Contra, Chiron Corp. v. Nat. Transp. Safety Bd., 198 F.3d 935 (D.D.C. 1999).

3 The Florida Bar Continuing Legal Education Committee, Trial Lawyers Section and Aviation Law Committee and NTSB Bar Association sponsored the program entitled Meet the Blues — Current Aviation Law Developments, which was held on November 8-10, 2001.

4 18 U.S.C. § 3161 et seq.

5 49 U.S.C. § 46310.

6 49 U.S.C. § 47126; 49 U.S.C. § 46310.

7 49 U.S.C. § 46312.

8 18 U.S.C. § 32.

9 Testimony of Kenneth P. Quinn before the Aviation Subcommittee of the Committee on Transportation and Infrastructure, U.S.H.R., July 27, 2000.

10 Testimony of Jim Hall, Chairman, National Transportation Safety Board, before the Committee on Transportation and Infrastructure, Subcommittee on Economic Development, Public Buildings, Hazardous Materials and Pipeline Transportation, House of Representatives, regarding the June 10, 1999 Pipeline Rupture and Fire in Bellingham, Washington, October 27, 1999.

11 In Re Air Crash off Point Magu on January 30, 2000, MDL 00-1343 (N.D. Cal.).

12 Testimony of Guy A. Lewis before the Aviation Subcommittee of the Committee on Transportation and Infrastructure, U.S.H.R., July 27, 2000.

13 18 U.S.C. § 1001.

14 18 U.S.C. §§ 1341, 1343.

15 18 U.S.C. §§ 1501-1518.

16 49 U.S.C. §§ 5101-5127.

17 United States v. 20th Century Fox Film Corp., 882 F.2d 656 (2d Cir. 1989).

18 Corporations do not have a right against self-incrimination, Branswell v. United States, 487 U.S. 99 (1988) but corporate officers and directors have the right to invoke protections afforded by the Fifth Amendment. George Campbell Painting Corp. v. Reid, 392 U.S. 286 (1968).

Millionaire had the means and motivation to pursue a mystery that led to murder charges.

By LARRY WELBORN
The Orange County Register

Little Michelle, a big-eyed, chubby-cheeked towhead, burst into her big brother’s bedroom one hot summer night and pleaded, “Hide me. Please hide me!”

Then the 3-year-old crawled under the covers.

“She sounded real scared,” said Richard Pulsifer Jr., who was only 6 on that July night in 1969. “And then my mom came into the room and got her.

“I never saw her again.”

The mystery of what happened to Michelle has tormented him ever since.

Now, because of the intervention of a multimillionaire Coronado woman who once was married to Michelle’s uncle, authorities believe they know what happened.

Little Michelle was murdered by her mother and her mother’s boyfriend, prosecutors say, and the killing was covered up for more than 35 years.

Ann Friedman, 57, a wealthy investor and former golf professional, spent tens of thousands of dollars on private investigators to find Michelle.

And when one of those private eyes felt certain after an exhaustive paper chase that Michelle died that night in 1969, he turned his file over to the Orange County District Attorney’s Office.

After a year of follow-up work, DA investigator Ed Berakovich was convinced.

On Friday, he took Donna Pulsifer Kent Prentice, 57, into custody at her home in La Crosse, Wis., on an arrest warrant charging her with the 1969 murder of her daughter.

Two days earlier, Berakovich arrested Michael Kent, the 62-year-old former boyfriend, after he appeared in an Illinois court room for a traffic ticket.

Both are charged with the murder of Michelle Kelly Pulsifer.

The quest to find out what happened to Michelle was triggered by her disappearance from her home on Tigerfish Circle in Huntington Beach that warm day in 1969.

Big brother Richard had just experienced the first-time thrill of riding his bike with no hands on the handlebars a few days before. It is his only vivid memory of Michelle.

But Richard also remembers walking into the tract home’s garage the next day and catching a glimpse of a large cardboard box that had not been there before. A blanket covered the contents.

His mother sternly ordered him to get out of the garage – and stay out.

“They told me it was a motorcycle seat,” said Richard, now 41. “But when I think about that, I wonder why would anyone put a blanket over a motorcycle seat?”

A day or two later, Kent suddenly decided to move the family from Huntington Beach to a suburb of Chicago.

Donna Pulsifer had won full custody of her two children when she divorced Richard “Dicky” Pulsifer Sr., her high-school sweetheart, in early 1969. But she allowed him weekend visits when he could make it north from his home in El Cajon.

On an unannounced visit to Huntington Beach in mid-July 1969, Dicky – as he was known in the family – was startled to discover that his ex-wife and her new boyfriend were gone, along with his two kids.

“I didn’t think they could just move like that without telling me,” he said. “When I tried to complain, I was told that because Donna had full legal custody, she could take them wherever she wanted.”

Dicky soon learned that she and Kent were raising his son in Illinois, but the whereabouts of his daughter were unknown.

He said he tried to file a missing-person report with police agencies but was met with reluctance because his ex-wife had legal custody and she insisted – in telephone interviews – that Michelle was fine.

In Huntington Beach, Michelle had been a part of the family. But she never showed up in Chicago.

Nobody ever told Richard Jr. what happened to his little sister.

But then in 2001, Ann Friedman became reacquainted with the Pulsifer family.

Her first love had been Nelson Frederick Pulsifer Jr., known as Freddy. He was a tall, handsome man, the oldest brother of four siblings.

“He was the most beautiful man in the world, and I loved him with all my heart,” Friedman said. They had one daughter together, Mary Ann.

But Freddy was sent to Vietnam in the early stages of the war. On Nov. 14, 1966 – his brother Dicky’s birthday – Freddy was killed by a sniper.

Two years later, Ann married Harold Lucerne Zug, her brother’s Marine Corps drill instructor, before he, too, shipped out to Vietnam. She had two daughters with Zug.

Zug was killed by a mortar blast in Vietnam, sending Ann into a two-year depression from which she thought she would never emerge.

But she did.

While she said she was always well-off financially, she became enormously wealthy in September 2001, when she became the fifth wife of Leonard Friedman, an investor 32 years her senior who was part owner of the Hotel del Coronado.

Shortly after that wedding, and quite by happenstance, she was dragged along by daughter Mary Ann to a Pulsifer family reunion at Griffin Park in La Mesa.

As the kids in the group romped on the playground and relatives grilled hot dogs, Ann encouraged Dicky Pulsifer, who had been her first husband’s closest brother, to sit down for a chat.

Dicky told her that he had gone through an amicable divorce from his first wife, Donna, but that she had disappeared with her new boyfriend and both children.

Years later, Dicky told her, he was able to get in touch with his son, Richard Jr. But he lamented that he was never able to find his daughter, Michelle.

“Well, when Dicky mentioned that, my blood boiled,” Ann said. ” ‘Let’s find her,’ I said. And from that point on, I could not sleep, I could not eat. I had to find out what happened to her.”

She said she felt she was the only one who could jump-start the search for Michelle. Cost was no object.

“I loved Freddy so much. Michelle was Dicky’s daughter and Dicky was Freddy’s brother,” Ann said. “That is all it takes. It doesn’t matter that we’re not blood relatives.”

She hired a private investigator out of the Yellow Pages and paid him $15,000 to find Michelle.

“He was pretty much a bust,” she said.

Then her attorney recommended Paul Chamberlain, who spent 20 years in the FBI and was a specialist in tracking down long-lost people.

“I figured we would find her alive living with someone else in no time,” Chamberlain said. “But the more we searched, the less we found.”

Chamberlain said detectives from his Los Angeles agency chased clues to Canada, Wisconsin, Illinois, Florida and elsewhere.

After two years, Chamberlain determined that there wasn’t one public record about Michelle after 1969. No school records, Social Security data, marriage, court cases, driver’s license. Nothing.

“It became apparent to me that the girl was just gone,” Chamberlain said. “She didn’t exist anymore anyplace in this world.”

At some point, he said, “we just became engrossed with finding what happened to Michelle, and this became our quest as well as Ann’s quest.”

Chamberlain said Ann paid his agency a lot of money to find Michelle, perhaps as much as $50,000. But eventually, the agency stopped taking her money and continued to work the investigation at no charge.

In August 2003, they turned their information over to the Orange County District Attorney’s Office.

Berakovich, a cold-case specialist with 17 years as a homicide investigator, said the case intrigued him from the beginning.

One of Berakovich’s first steps was to track down Donna Pulsifer Kent, who was living in Florida with her third husband, Nobel Prentice.

In a chatty interview in January across the kitchen table of her home in Lehigh Acres, Fla., Donna told Berakovich that she and Mike Kent gave Michelle to Kent’s mother to care for when they relocated to Illinois. The plan was to retrieve Michelle after they settled in, according to Donna.

“But we quickly learned that Mike’s mother was an alcoholic who was suffering from cancer and who could barely take care of herself, much less a 4-year-old girl,” Berakovich said.

When Kent’s mother died a few years later, neither Donna nor Kent made any effort to find out about Michelle, Berakovich said.

When he asked Donna why she didn’t go back for Michelle, she just shrugged, Berakovich remembered.

“What mother has no idea of where her little girl is?” Berakovich asked.

Soon, Berakovich felt he had enough evidence to convince veteran trial prosecutor Larry Yellin to file murder charges against Kent and Donna.

“There is no way that we would not seek justice for an innocent 3-year-old-girl,” Yellin said.

Ann, who sent detectives on the trail of Kent and Donna, lives with her 89-year-old third husband in the penthouse of the Coronado Shores Condominiums overlooking miles of beachfront.

She wants to send the two defendants a message.

“Tell them that I did this,” she said in an interview last month.

Dicky Pulsifer, 57, Michelle’s father, lives in Las Vegas now, where he runs a karate dojo and works as a security officer for the Luxor Hotel and Casino.

He said he still hopes Michelle will walk up and knock on his door.

“I know that’s unlikely,” he said. “No one knows anything about her for 35 years, except that she just disappeared, and that’s not good.”

But he says he prefers to think that she’s alive someplace, living her life. “I just leave it at that,” he said. “I hope she is doing well.”

Richard Pulsifer Jr., who lives in a 700-square-foot house in Vista, said that over the years he’s told his friends that he once had a sister.

“Sometimes I have this image of walking past some lady on the street,” Richard said, “and thinking, ‘Hey, that could be my sister.’ ”

He said his life with his mother and Kent in Illinois after the move from Huntington Beach in 1969 was difficult.

“Mike didn’t treat me too well,” Richard said. “He hit me a lot, but he wouldn’t leave any marks you could see.”

One time, Richard remembers, Kent beat him with a belt over something minor.

“Every time he hit me, he asked me how many that was,” Richard said. “The number 11 sticks in my mind.”

Richard said Kent hit his mother, too. Often. After about 10 years of a tumultuous life in Illinois, Donna had enough and moved to Wisconsin.

“She asked me once when I was about 15, ‘Don’t you want to know what happened to Michelle?’ ” Richard said. “And I said yes, sure, tell me.”

But his mother changed the subject and clammed up.

Years later, when he was 26 and living back near his dad in California, Richard called his mother out of the blue and asked, “Don’t you think I have the right to know where Michelle is?’

Again she refused to talk about it.

These days, Richard doesn’t speak to his mother.

“I called her seven years ago and told her she was going to be a grandma,” he said. “She never called back. Don’t you think a grandma would call and find out what kind of a grandchild she has?”

After 35 years, Richard still wonders about his little sister.

“I don’t know what happened to Michelle,” he said. “I hope she’s alive. That would be great. Then I would have a sister.

“But if she’s dead, someone needs to pay,” he added, “even if it is my mother.”

from Entrepreneur.com

By David Worrell

It was just before Christmas 2006. Danny Nielson* was sitting across the table from a friend. They were talking about raising money for Nielson’s growing business. Nielson described the contact he’d recently had with a potential investor. “I’m just not sure he’s for real,” Nielson told the friend. “He’s asking for a deposit, so we’re checking him out.”

First Contact

Several weeks earlier, Nielson had posted his company’s business plan on one of the many websites that purport to connect entrepreneurs with angel investors and venture capitalists. Nielson, 37, knew the drill. He had worked with investors and investment bankers before — he had even invested in other people’s businesses — so he was not going to get too excited about anything before he checked it out.

Based on the website posting, Nielson received three legitimate offers to purchase the business outright, which he declined. Those kinds of inquiries were genuine and easy to authenticate. Equally easy to spot, he says, were the many inquiries that were not from genuine investors: “That was by far the vast majority.” The obvious frauds usually promised a large, immediate investment based solely on the business plan: Just send a transaction fee, and they’d send the money, no questions asked. Many of those were from outside the U.S.

“Then we got a call from a group in DC,” says Nielson. “I returned [the] message, but then [didn't] hear from him for another month.” When the two finally spoke, the man said he’d been on an extended business trip abroad, and that he remained interested in learning more about the business. The man said he managed a large venture fund and wanted to discuss an investment of more than $1 million.

Over the ensuing weeks, Nielson exchanged several e-mails with the self-described investor, his secretary, a vice president and others within the organization. They all asked lots of questions. They even sent a lengthy, formal request for due diligence information and asked for professional references from Nielson. “Everything seemed very legit,” he says, “until we got the contract.”

Although it was lengthy and looked official, the contract included a request for an upfront “earnest money deposit” of $10,000. Warning bells went off in Nielson’s head, but, he says, even this request was made to seem justifiable. “Along with the contract, they sent an entire page explaining why they do the earnest deposit.” The explanation seemed particularly reasonable since, over the years, Nielson had encountered many investment bankers, loan brokers and others who all required an upfront fee. Still, Nielson harbored doubts, so he intensified his research on the purported investor and his venture fund.

Web searches turned up very little. The name of the venture fund was surprisingly similar to other, much larger investment companies. That was all part of the fraud, Nielson now realizes. Con artists often use aliases that sound like other more well-known firms. “If you Google [their name], you get thousands of pages of [the real company],” says Nielson. “It’s hard to find information because they piggyback on these names.”

Much to his surprise and relief, he had better luck with personal references. Three different calls to the group’s landlord seemed to confirm that it had offices and staff (although oddly, no one was ever available to speak on the phone when Nielson called). The investor also happily produced references of previous customers–all of which turned up nothing but glowing reviews of satisfying experiences. Nielson finally asked for a face-to-face with the investor, conveniently scheduled during the man’s “business trip” to Atlanta, where they met at a restaurant. Nielson left Atlanta satisfied that the investor was for real.

Finally, after nearly three months spent checking and double-checking, Nielson held his breath and made a $10,000 wire transfer to the investor’s bank account. That, of course, was the beginning of the end.

The Feds

The kind of business fraud that Nielson encountered is unusual only because it was so well-orchestrated, says Ken Lucas, media and public affairs specialist at the FBI. “Unfortunately, [Nielson] ran into a very smart, well-backstopped scammer.” Much more typical are the personal and business scams that try to score a quick buck off of unsuspecting entrepreneurs.

Unfortunately, there is no sure way to know whether the person you are dealing with is legitimate. Lucas encourages entrepreneurs to be skeptical of any transaction with a new person or group. The best protection, he says, is to call references, check online fraud sites, inquire at the Better Business Bureau and trust your gut. Pay attention to the voice in your head that says, “Something just does not seem right.” “If you’re already thinking that this guy could be a fraud, slow the pace down,” Lucas advises. “A lot of times, your gut check is a pretty good reality check as well.

“Embedded in every money transaction is a level of trust,” Lucas adds. “Once the money leaves your hands, is there a way to check that? I don’t think so. Cash is cash. Once it’s gone, it’s gone.”

Compounding a victim’s frustration, the FBI is often unable to investigate claims made by individuals or entrepreneurs because the agency’s limited jurisdiction and resources make it very difficult to investigate smaller crimes. Lucas says there is no hard and fast rule, but the agency is most concerned about larger frauds perpetrated by organized groups. For crimes netting less than $500,000 or so, a local or state agency will most likely be behind the investigation.

But the FBI does offer some tools. Lucas recommends the Internet Crime Complaint Center which helps victims report fraud to the FBI and other appropriate agencies. Also, LooksTooGoodToBeTrue.com provides a quick reference to the most common scams and how to avoid them.

Moving On

Nielson’s story is far from over, but he doubts he’ll ever see his $10,000 again. Even so, he has reported the crime to the FBI and other agencies. And he put the word out through various websites and blogs so others will not be duped by the same man.

Nielson, meanwhile, puts aside a little time each week for advancing his case against the man, but he believes his chances of seeing justice are slim. And he admits that next time he’s out raising money, he’ll be even more skeptical. Says Nielson, “It’s been a huge learning experience.”

*This is a true story, but the victim’s name has been changed. David Worrell is the author of the e-book Finding Funding.

October 31, 2005

Under two final rules announced today by the Financial Crimes Enforcement Network (FinCEN), certain U.S. insurance companies are required to both establish anti-money laundering programs and file Suspicious Activity Reports. Insurance companies subject to these rules must establish anti-money laundering program and start filing Suspicious Activity Reports 180 days after the date of the publication of the final rules in the Federal Register.

The final rules apply to insurance companies that issue or underwrite certain products that present a high degree of risk for money laundering or the financing of terrorism or other illicit activity. The insurance products subject to these rules include:

• permanent life insurance policies, other than group life insurance policies;
• annuity contracts, other than group annuity contracts
• any other insurance products with features of cash value or investment features.

At minimum, insurance companies subject to the rule requiring an anti-money laundering program must establish a program that comprises four basic elements:

• A compliance officer who is responsible for ensuring that the program is implemented effectively;
• Written policies, procedures, and internal controls reasonably designed to control the risks of money laundering, terrorist financing, and other financial crime associated with its business;
• Ongoing training of appropriate persons concerning their responsibilities under the program; and
• Independent testing to monitor and maintain an adequate program.

“These rules represent key steps in ensuring that the Bank Secrecy Act is applied appropriately to these businesses and in protecting the insurance industry from potential abuse by those seeking to launder money or finance terrorism or other illicit activity, said William J. Fox, Director of the Financial Crimes Enforcement Network. “The rules enhance the protection of the U.S. financial system generally, given that the characteristics of financial products, including certain insurance products, can make those products vulnerable to those seeking to launder money or finance terrorism or other illicit activity.”

Anti-Money Laundering Program Requirement for Certain U.S. Insurance Companies

Insurance agents and brokers are not required to have separate anti-money laundering programs. However, as an integral part of the insurance industry given their direct contact with customers, insurance agents and brokers must be integrated into an insurance company’s anti-money laundering program and monitored for compliance. An insurance company’s anti-money laundering program also must include procedures for obtaining relevant customer-related information for an effective program, either from its agents and brokers, or otherwise.

Importantly, an insurance company that is subject to the requirement to have an anti-money laundering program under another provision of the Bank Secrecy Act is not required to establish a duplicate program under this rule. For example, an insurance company may also be a registered broker-dealer in securities. However, the company should evaluate the extent to which its existing anti-money laundering program should be revised to appropriately address the risks of doing business in insurance products covered by this rule.

Under the USA PATRIOT Act, financial institutions that have an obligation to establish anti-money laundering programs are able to participate in the sharing of information between financial institutions concerning terrorist financing and/or money laundering. Once an insurance company subject to the final insurance company anti-money laundering program rule has established its anti-money laundering program, it may file a certification for purposes of Section 314(b) of the USA PATRIOT Act.

Suspicious Activity Reports Filing Requirement for Certain U.S. Insurance Companies

The requirement to identify and report suspicious transactions applies only to an insurance company, and not its agents or brokers. Insurance companies are required to obtain customer information from all relevant sources, including its agents and brokers, and to report suspicious activity based on such information.

A new Suspicious Activity Report form for insurance companies (FinCEN Form 108 – Suspicious Activity Report by Insurance Companies) will replace the procedure of checking the suspicious transaction box on Form 8300 (Report of Cash Payments Over $10,000 Received in a Trade or Business). Consequently, it may be appropriate for an insurance company to file a Form 8300 as well as file FinCEN Form 108 when circumstances surrounding the receipt of cash are suspicious

Until FinCEN Form 108 is published and effective, insurance companies may use FinCEN Form 101 (Suspicious Activity Report by the Securities and Futures Industries) to report any suspicious transactions. The words “Insurance SAR” should be entered on the first line of the narrative section.

The threshold amount obligating an insurance company to report suspicious transactions that are conducted or attempted by, at, or through the institution is at least $5,000 (whether in an individual transaction or in aggregate) in funds or other assets. This threshold amount is not limited to insurance policies whose premiums meet or exceed $5,000; rather, it includes a policy in which the premium or potential payout meets the threshold. Nevertheless, insurance companies are encouraged to voluntarily file Suspicious Activity Reports, if appropriate. An insurance company that files a Suspicious Activity Report voluntarily is protected from civil liability to the same extent as a company filing a Suspicious Activity Report that is required under this final rule.

FinCEN is also issuing a series of Frequently Asked Questions that are designed to assist insurance companies in establishing their anti-money laundering and suspicious activity reporting programs. FinCEN will continue to issue additional guidance for this industry and will provide outreach and training about these and related issues. Financial institutions may also call the FinCEN Regulatory Helpline at 800-949-2732 for assistance.