War Stories

A troubling trend of construction firms illegally hiding workers in shell companies to avoid paying state-required workers-compensation coverage began emerging in Florida in the early 2000's.

Historically, dishonest contractors low-balled large amounts of their payroll, undetected. The goal was to under-report employees and salaries, and lie that employees worked safer jobs than they really did.

Fewer employees, lower payroll and safe jobs reduced workers-compensation premiums. Dishonest construction firms can illegally shave hundreds of thousands of dollars in premiums a year. They can also save up to 30 percent or more on contractor labor costs. 

The shell-company schemes allow this deception and illicit savings on a much larger scale. Those Florida shell companies were a visible warning of a national trend in workers compensation premium fraud. Exact fraud losses are in short supply, yet shell-related schemes likely steal billions of workers-compensation insurance dollars a year, skew honest market competition and contribute to higher workers-compensation premiums.

Shell schemes often were discovered only when employees started making claims for often-tragic work injuries such as falls from scaffolding. Hidden in shell companies, insurers had no idea of the number of employees creating potential injury exposures.

The result: Workers-compensation insurers in Florida collectively were liable for millions of dollars in benefits, payable to injured employees they knew nothing about until receiving claims for work injuries.

Shell networks expanding

The trend today: Shell schemes in construction have risen to new levels of scope and sophistication in the last 10 years. Networks of dishonest specialty contractors, labor brokers, facilitators, paid straw shell owners and check-cashing stores can avoid far more workers-comp premiums and taxes than the traditional premium scams. Shell schemes also have spread to other states, especially states with large construction activity.

Shell schemes generally have these illicit goals:

• Remove and hide payroll to avoid workers compensation premiums, state and federal payroll taxes, and overtime pay;
• Covertly allow cheap cash-paid labor onto work sites;
• Create a fraudulent layer of insurance coverage between the employer and injured workers; andAllow construction contractors and sub-contractors to under-bid honest competitors.

Construction projects are managed by owners or general contractors. Gone are the days when general contractors’ own employee built housing subdivisions, office complexes and other buildings. Specialty subcontractors now are typically hired to do work such as excavation, plumbing, electrical work, concrete work, framing and drywall.

“Shell owners usually create false identities for themselves using bogus yet official-looking government identification ...”

Specialty subcontractors, also looking to reduce their payroll burden, hire labor brokers. They oversee a large, transient and uninsured workforce. The brokers supply the labor for the construction work to be performed. The brokers are not “companies” per say, rather they act more like company foremen or field supervisors. They also may be someone simply with phone numbers of dozens to hundreds of workers to place on a job site while supervised by the specialty subcontractor. Labor brokers are key cogs in sophisticated shell scams.

Then there are “facilitators.” They know construction and statutory requirements for insurance coverage and recruit someone as straw owner of the shell company, where workers will be hidden. Shell owners usually create false identities for themselves using bogus yet official-looking government identification. In Florida, for example, the ID might be a fraudulent Florida driver license.

Shell owners use fake identities

False identities allow the shell-company owners and facilitators to simply walk away from or “burn” a shell company if an employee is injured, or if regulators or law enforcement start investigating. Investigators have nobody to contact about the activities, and subsequent worker injuries, involving the shell company. Even if the facilitators are identified, they can easily deflect attention to the straw shell owner as the supposed culprit, except the “owner” now is untraceable. In fact, the shell’s address usually is just a post-office box or rental apartment.

Working together, the facilitator and shell company owner create a corporation, generically named something like XYZ General Services, Inc. A vague name lets the shell work in multiple construction trades, thus increasing usability and profits. Many states also let persons easily create corporations online, without meeting or verifying identification in person.

The shell owner has an insurance agent provide a minimal workers-compensation policy for the new shell company. The facilitator usually accompanies the “owner” to the agent meeting, and is identified as a “friend helping set up the business.” The shell owner usually is described as being new to construction, and often new to the U.S. The facilitator thus requests and receives approval to call the agent and request insurance certificates for labor brokers.

Some insurance agents are involved in the scheme, while others are duped by the facilitator. Either way, a shell owner buys a minimal workers-comp policy, falsely describing the business as a small, two to four-person company doing work such as drywall installation, concrete, brick paving or carpentry.

The insurer sets the premium without realizing the deception. A small premium down payment lets the facilitator embed the shell company into the scheme.

The labor brokers are complicit in the scheme. They need to prove their labor force is covered by workers-compensation in order to perform the work with the specialty contractors as if they are legitimate subcontractors.

“Specialty contractors usually are aware of the scheme, though are insulated from civil or criminal liability most of the time ...”

Facilitators thus provide (rent) the name and paperwork of the new shell company for the labor broker to use. This protects them if state regulators inquire or the insurer audits the specialty contractor. Specialty contractors usually are aware of the scheme. Yet they are insulated from civil or criminal liability most of the time, unless they begin performing shell company functions such as payroll. 

The small workers-compensation policy gives the labor broker the “golden ticket” for a work crew to do construction work, what appears to be a valid certificate of insurance. However, they use many more workers than were reported at the time of application. The straw shell owner likely will disappear, or maybe hired to “own” other shells.

The shell owners collect $500-$1000 per week merely for allowing their name to be used as owner. The shell now is ready to funnel large amounts of undeclared payroll to cash-paid workers.

Shell names rented out

The facilitators effectively rent out their shell company’s name. More important, the facilitators rent their valuable certificate of insurance to uninsured labor crews who work as if they are affiliated with the shell. In fact, they are independent and uninsured, though may believe in good faith they are covered.

General and specialty subcontractors can be directly involved. When contractors request an insurance certificate from uninsured labor brokers looking for work for their crew, they are directed to the facilitator. The facilitator contacts the agent and has the insurance certificate in the name of the shell company falsely presented as the uninsured labor broker’s company. The number of employees covered under a workers-compensation policy are almost never listed on the insurance certificate, so the massive deception is not evident at this point.

State-required proof of insurance is met, minimally. The contractor contracts with the shell owner so the uninsured labor crew can go to the work site. The labor broker bills the contractor, who pays for the work from their operating account. That usually is by one check each week, payable in the name of the shell company.

The checks are taken to a local check-cashing store. A prearranged deal was made with the proprietor, who is complicit. All checks made payable to the shell company are cashed, no matter who presents them. The check-cashing store and facilitator split a 5-10 percent fee for each check. The balance goes to the uninsured construction crew for wages. The 5-10 percent cut is much cheaper than buying workers-comp coverage and paying taxes.

Because the facilitator rents the policy to numerous labor brokers who may work on many projects, the large number of insurance certificates issued by the insurance agent are lopsided compared to the small declared payroll and staff size. 

Insurers and agents normally do not track insurance certificates. Thus they often discover schemes only when employees have a serious injury and a workers-compensation claim is made by an employee who was never reported to the insurer. Insurer audits occasionally uncover shell cons as well.

The facilitator instructs the shell owner to write a check from the shell company account, to be cashed at the check-cashing store. In some cases, the owners simply withdraw the cash and deliver it to the facilitator, who hands over the check casher’s cut. Electronic transfers are a relatively new payment nuance.

The shell’s bank account was created under the same false identification used to set up the shell. Currency transactions at the check-cashing store are falsified for checks of at least $10,000. The transactions also are documented to appear the shell owner made the transactions, even though the person cashing the checks represents dozens of uninsured labor brokers using the shell-company name and insurance certificate to obtain work.

“The shell’s bank account was created under the same false identification used to set up the shell.”

Six suspects in the Tallahassee area were arrested in 2015 for allegedly creating multiple shell companies to hide workers and payroll. Ringleaders provided fake business cards to work crews. They were told to present the cards to state investigators who showed up onsite to inspect for proper workers-compensation coverage.

Millions of dollars in wages can be quickly funneled through a shell company. No year-end workers-compensation premium audit will be conducted because the shell company owner will be untraceable. Nor does the shell pay any payroll taxes. The facilitator also routinely burns the shell and forms a new one once or twice a year to throw off investigators. The shell may be burned sooner if an employee has a catastrophic injury.

Workers-compensation insurers collectively lose billions of dollars in premiums annually by some estimates. Just 10 labor brokers negotiated $1 billion of checks in less than three years in Florida. Phantom workers-comp injuries also add to the fraudulent losses, and potential damage to the commercial general liability industry.

Insurer searches of the Insurance Services Office claims database now are locating duplicate injury claims for the same date of loss. The related impact: Injured workers involved in shell schemes are suing insurers under commercial general liability policies that aren’t intended for what should be workers-compensation claims — hence, duplicate claims . The losses incurred by these schemes are tangentially imposing a cost burden on general liability insurers.

Because such large amounts of cash are involved, premium scams attract organized crime syndicates that use the same shells to launder other criminal proceeds.

Corrupt contractors with lower labor costs also can illicitly take over entire markets by low-balling competitors for contracts. This is happening in Florida, Georgia, Tennessee, Colorado and other states. Honest contractors may go out of business, lay off employees, or start cheating just to survive.

That indignity is magnified when workers-compensation insurers pass fraud losses onto business clients in higher premiums. The upshot is a steady erosion of law-abiding contractors who pay true premiums.

Sue for workers-comp benefits

Significant tax revenue also is denied to municipalities, states, the federal government, Social Security, Medicare and unemployment insurers.

Injured workers also get inadequate medical care. They must sue for workers-compensation benefits, and are trapped in litigation to get bills paid by workers-comp or general-liability policies. The unpaid bills and shattered lives are passed along to everyone in higher medical costs, and increased burdens on safety nets such as Social Security disability. Among the needed reforms:

• Law enforcement needs adequate funding 

• State laws must keep pace with shell conspirators so crooked facilitators and contractors are held accountable  

• Insurers and agents must look tighten their application, underwriting and auditing to spot the signals of shell cons 

“Corrupt construction companies know the limitations and practices of law enforcement and the insurance industry,” says Matthew Capece, an attorney with the United Brotherhood of Carpenters, which has tracked construction fraud since 1989. “Swindlers exploit those weaknesses for large profits and hundreds of millions in premium-fraud losses to insurers.”

Urgent action is needed to reverse the spread of shell schemes, protect the integrity of the construction industry, and stem draining losses for workers-compensation insurers.

It is a game almost older than dirt, a “table stakes” game. Every contractor or sub has been tempted to play the game at one time or another to win a project. It is commonly known as “the grey bag,” or “this is the way it is played here,” or “I know that you are not the lowest, but…” or “if you will hire this consultant on the project, I will guarantee that you will get it,” or “if you will hire my cousin’s company as a sub on this project or that one, then I will help you get the project.”

The legal profession knows it as “bribery” and even though it continues on projects around the country, the downside risk if you play is considerable.

Two recent examples caught our eye. The first was reported in the Houston Chronicle. It involves a former Houston Independent School Board member and Chairman who, along with his co-defendants, were convicted of “tortious interference in a business relationship, bribery, conspiracy and a violation of the RICO statutes." The game involved collusion among the trustee, a contractor and a “consultant” to block the plaintiff’s attempts to get work from the school district. The game was that in order to get work, the bidder had to hire the consultant and pay fees. A major portion of the fees paid were funneled back to the Trustee who ensured that the plaintiff was blocked from the award and ensured that the contractor co-defendant was the winner. The jury in Federal court found the defendants guilty and awarded around $4 million to the plaintiff.

The second example is on-going in Atlanta where, according to a post by Kim Slowery in Construction Dive, the owner of a large minority construction firm has been arraigned for allegedly bribing an individual $1 million with the intent of that money being distributed to several other City officials to procure City of Atlanta contracts for the minority firm.

As reported in the Atlanta Journal Constitution:

According to a statement from the Department of Justice, Mitchell (the contractor) believed some of that money would be paid to city officials who “exercised influence over the contracting process.” The scheme, which also involved another person in the construction industry, allegedly took place between 2010 and 2015.

“Mitchell brazenly sought to buy government contracts,” said U.S. Attorney John A. Horn. “Contractors who bribe their way into public work undermine the integrity of the system and ultimately cost taxpayers more money to get important projects done.”

The plaintiff in this case is reportedly expected to plead guilty to those charges later this month.

These are Federal violations and under the new Trump Administration, the penalties for playing the bribery game will likely become more punitive since the President has probably been invited to play the game more than once on his developments around the globe.

There is a joke that goes back to the 1970s: A construction crew leaves the shop in the morning to drive to their worksite. A half hour later, the crew leader calls the supervisor back at his office to say, "Hey, boss. We forgot our shovels." The supervisor responds, "OK, I'll throw them in the back of my truck and bring them out to you. In the meantime, you can lean on each other."

The definition of time theft was once largely limited to employees having coworkers clock in for them before they actually arrived at work, or having coworkers clock out for them after they had already left. Technology is helping employers address this problem, however. For example, biometric time and attendance systems (which recognize fingerprints or eye retinas) require the actual employee to clock him- or herself in and out. Other options include badge readers and bar code scanners.

Such technology only scratches the surface of the real problem with time theft, though. Today, many employees are "stealing time" from employers by taking longer-than-scheduled meal and coffee breaks, engaging in personal phone calls and e-mails, engaging in personal conversations with coworkers, playing games or daydreaming and/or surfing the Internet for personal reasons. Some employees even steal full days by taking unwarranted sick days.

How much does this cost you? If you operate a company with 100 employees who earn $15 an hour, and each employee wastes an average of only 30 minutes a day ($7.50), your daily bill is $750. Your annual bill (250 workdays) is $187,500. Is that any less of a problem than if the employees raided the petty cash box (or an on-premise cash register) each year to the tune of $187,500?

However, even these costs are low estimates: To determine costs more accurately, take the total number of hours each employee is scheduled during the year, then subtract holidays, vacation days, sick and personal days, unproductive time spent in meetings, etc., to get the total number of "real" hours the employee is expected to work each year. Then, take the hourly pay rate and add payroll taxes, benefits package cost and other expenses.

What you will find is that the hourly rate you end up paying employees is significantly greater than what is written on paper, making time theft an even more expensive proposition.

Diane C.O. Gilson, president of Info Plus Accounting specializes in this type of computation for employers. According to Gilson, if you pay an employee $17 an hour, the actual pay rate in most cases ends up being about $29 per hour. "On average, your workers end up costing you 50% to 100% more than their hourly rate," she says.

It all adds up. An article in the June 21, 2006 issue of the Toronto's Globe & Mail newspaper noted that a British employment law expert estimated the cost of lost productivity from employees in his country watching the World Cup soccer matches in the workplace this summer to be $8.25 billion.

The impetus for employers beginning to look at the costs of time theft actually began in 1983, when Robert Half International published a report estimating that the average employee steals four hours and 15 minutes per week, which translates into over five full work weeks per year. The report also estimated the total time theft nationwide per year to be $137 billion. The company has continued to study time theft trends over the years. A 2005 report, published by the company's Accountemps division, polled executives on employees' Internet usage. On average, executives estimated that employees spend almost an hour per day surfing the web or sending/receiving e-mails that are not related to work.

Before you can begin to tackle the problems and costs associated with time theft, though, it is important to identify the causes. On the surface, it may seem like a no-brainer: Employees are purposely "stealing time," because they are lazy and/or dishonest.

PORTLAND, Ore.—U.S. Attorney Billy J. Williams announced today that a Beaverton, Oregon man has been charged for his role in one of the largest tax evasion schemes ever prosecuted in the District of Oregon. In this multiyear scheme, contracting companies, subcontracting companies, and their employees evaded more than $65 million in employment and income taxes owed to the IRS.

Victor Hugo Lopez-Diaz, 38, was charged by criminal information with one count of conspiring to commit tax evasion and two counts of filing false tax returns.

“Evading the payment of Medicare, Social Security, and income taxes harms every citizen,” said Billy J. Williams, U.S. Attorney for the District of Oregon. “All business owners and their employees must file accurate tax returns with the IRS and pay all taxes required by law. Those who fail to do so will face significant consequences, including criminal prosecution, prison, and monetary penalties.”

“Employers that willfully concoct elaborate schemes to evade paying employment taxes will be held accountable by the Internal Revenue Service,” said IRS-Criminal Investigation Special Agent in Charge Justin Campbell. “This type of fraud does not go unnoticed by our investigators. Fraud of this variety not only impacts honest taxpayers, but significantly impacts honest competitors who follow the rules. Businesses that seek an unfair competitive advantage by cheating the Treasury of payroll taxes will always be a high priority for IRS-Criminal Investigation.”

According to court documents, from at least 2014 through February 2018, Lopez-Diaz and his conspirators are alleged to have successfully evaded their personal and employment tax obligations by cashing approximately $185 million in payroll checks at a co-conspirator’s check cashing business; using the cash to pay construction workers under the table; and filing false corporation, payroll, and individual tax returns.

Lopez-Diaz and some of his co-conspirators established subcontracting companies to facilitate their tax evasion conspiracy. Along with the owners and operators of local contracting companies, they knowingly hired unlicensed work crews, paid them cash under the table, and evaded payroll taxes by not putting the workers on their regular payroll systems.

Throughout the conspiracy, Lopez-Diaz also functioned as a payroll check casher for other companies. He used an alias, Miguel Lopez, to cash payroll checks and conceal his identity and gave the cash received to the leaders of off-the-books work crews and to contractors who used the cash to pay other employees surreptitiously.

Lopez-Diaz’s first appearance in federal court is scheduled for April 21, 2020.

If convicted, Lopez-Diaz faces a maximum sentence of 11 years in federal prison, three years’ supervised release, and $750,000 in fines.

A criminal information is only an accusation of a crime, and a defendant is presumed innocent unless and until proven guilty.

This case is being investigated by IRS-Criminal Investigation and prosecuted by Seth D. Uram and Gavin W. Bruce, Assistant U.S. Attorneys for the District of Oregon.

The year 2020 marks the 150th anniversary of the Department of Justice.  Learn more about the history of our agency at www.Justice.gov/Celebrating150Years.