FBI investigating LOC fraud allegations linked to Vesttoo collateral

As the audit and investigation into the discovery of fraudulent or forged letters of credit (LOCs) linked to collateralized reinsurance transactions facilitated by Vesttoo moves towards its third week, we now understand the FBI has begun its own investigation into the matter.

A criminal investigation was always likely, given the far-reaching implications of what appears to be a sophisticated fraud involving letters of credit (LOCs) from a major international bank.

As a recap, a still ongoing audit at insurtech Vesttoo found that multiple letters of credit (LOCs) are potentially fraudulent, all of which appear to be issued by the same bank, while a later statement from Vesttoo said that its “procedures were circumvented.”

The allegations suggest that the fraud was instigated through the use of forged letters of credit (LOCs) issued by the China Construction Bank (CCB).

The bank in question was once the second largest bank in the world, by market cap, and the sixth largest company in the world, so it’s no surprise allegations of fraud would result in an international criminal investigation and it shows the seriousness of the matter.

We still don’t know where any fraudulent actions actually lie, with rumours ranging from the insurtech, to the bank itself, to the investors backing the collateral, or a mix of the three. But there are no facts as yet to identify any fraudulent activity and tie it to a specific party, it seems.

Read all of our coverage of the alleged fraudulent or forged letter-of-credit (LOC) collateral linked to Vesttoo deals.

Now, in a market update sent to business partners by specialty collateralized reinsurance firm Corinthian, that we’ve seen, it’s made clear that FBI involvement is digging into the issues to try and identify the cause and source of any fraud that has occurred.

Corinthian is one of the reinsurance firms affected, as it had transacted via Vesttoo, to source collateralized capacity to support a number of programs its companies had underwritten.

As we reported this morning, Corinthian is making good progress on replacing collateral to support affected programs, that have a link to Vesttoo sources LOCs, with terms agreed on a new $200 million capital injection to help the firm navigate the challenges the fraud has created and provide certainty to cedents and partners.

Corinthian said that it, “continues to aggressively pursue the investigation into what occurred and what party(ies) are responsible for this alleged fraud.”

Alongside this, the reinsurance firm said, “In conjunction with our investigation, we have been in constant communication with the FBI Financial Crimes team who is conducting their own investigation into the alleged fraudulent activity.

“The Corinthian team is committed to providing any and all relevant information to the FBI to assist with their investigation and we are confident that their involvement will provide answers to many of the unanswered questions that exist.”

With investigations now known to also be underway in Bermuda, it stands to reason the international fall-out from this LOC fraud issue could spread more widely.

There is the potential for regulators and authorities to kick off criminal and regulatory investigations also in other countries where the fraud has affected those involved in transactions.

One big question that remains, no matter where the source of any fraud lies, is what happened to the assets that were thought to be underpinning the LOCs in question, or did any assets really ever exist to support their issue?

It will likely take a criminal investigation to find the answers to that and other questions, as well as to identify which parties, if any, broke the laws in the multiple countries these arrangements touched on.

Also read:

August 1st – Vesttoo to lay off large portion of global workforce.

August 1st – Corinthian agrees investor terms to replace Vesttoo LOC-linked collateral.

July 31st – Aon facing client & counterparty action over Vesttoo linked letters of credit.

July 28th – No comment from Aon on collateral issues, but LOCs seen as important.

July 28th – Corinthian operating under assumption all Vesttoo-sourced LOCs are fraudulent.

July 28th – Clear Blue: Over 50% of Vesttoo-linked reinsurance already replaced.

July 27th – Everest can lean in if opportunities emerge from Vesttoo collateral issue: Williamson.

July 27th – Vesttoo issue shows importance of sound counterparty risk practices: DBRS.

July 27th – Beazley CEO on Vesttoo: We would look to replace cover & recover premium.

July 26th – Clear Blue rating under review with negative implications on Vesttoo issues.

July 25th – Vesttoo: Updated statement says appears “procedures were circumvented”.

July 25th – AM Best to review fronting collateral in light of Vesttoo news.

July 25th – Fronting company Obsidian says Vesttoo exposure “de minimus”.

July 24th – Clear Blue: No material rating impact from Vesttoo issue. Reinsurance may be required.

July 21st – Vesttoo: Multiple LOCs from one bank in focus. Failure of security controls or KYC?

July 20th – MS Transverse: Any exposure to Vesttoo LOC collateral issues “immaterial”.

July 20th – Vesttoo: Collateral damage.

July 19th – Vesttoo: New report claims significant amount of forged LOCs. The question is how?

July 18th – Vesttoo faces fraudulent collateral claim. Confirms investigation, exit of some leaders.