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Vesttoo: Collateral LOC issues weren’t spotted by multiple parties involved


As the story surrounding the discovery of fraudulent or forged letters of credit (LOCs) linked to collateralized reinsurance transactions facilitated by Vesttoo continues to develop, it’s become increasingly clear that any fraud that has occurred was particularly sophisticated, as numerous parties have not spotted any issues with the collateral in question.

vesttoo-collateral-loc-fraudRemember, this whole issue began when a cedent approached a bank to try and cash in a letter of credit (LOC) related to a Vesttoo facilitated reinsurance transaction, only to find that the branch of the bank in question, the China Construction Bank (CCB), denied all knowledge of the LOC being valid.

Since then, it’s become clear that numerous letters of credit (LOCs) are involved, perhaps all of those issued by the bank in question to support Vesttoo facilitated reinsurance transactions, while it’s uncertain whether the issue extends any further at this time.

As we reported yesterday, unsurprisingly the FBI has begun its own investigation into the collateral fraud related issues and we expect similar investigations may be launched by regulators in a number of international jurisdictions.

One reason for the growing criminal side of the investigation, is surely the fact that, with numerous letters of credit (LOCs) implicated and multiple parties in the risk transfer chain for these transactions (cedents, brokers, fronting companies, transformers, insurance managers, banks, etc), it raises the question of how so many parties failed to identify the collateral’s integrity in these cases.

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

We’ve had a number of parties now tell us that the Vesttoo linked LOCs went through their typical processes without throwing up any concerns or causes to investigate them further.

Which suggests a particularly sophisticated forgery of the LOCs in question.

There were a number of counterparties involved, a number of brokers, other service providers that may also have has a chance to see and assess the validity of the LOCs, so either the industry’s counterparty security processes fell apart, or the fraud was so sophisticated it managed to circumvent the checks and balances that the industry utilises.

As a reminder, this is not an insurance-linked securities (ILS) issue, as had these been true ILS transactions they would most likely have had cash or similar liquid and secure assets held in trust.

Yes, the capital seems to have been sourced from investors, but the mechanisms used, of an LOC, have more akin with traditional reinsurance than ILS (although some large ILS investors have been known to put up large LOCs to back risk allocations).

More in question here are, either those very checks and balances and whether they were adequate, or the mechanism of fraud itself and if it was that sophisticated that parties in the reinsurance industry failed to see it, then there could be ramifications for other sectors as LOC fraud could have been directed elsewhere as well, depending on where the bad actors involved were actually located (which remains uncertain at this time).

Collateralized reinsurer Corinthian has so far been the most transparent party involved in Vesttoo transactions and this week it explained that while it is aware that the bank in question, CCB, had indicated that there were inconsistencies with the LOCs, “These purported inconsistencies certainly were not obvious to Corinthian or any of the parties who saw, received or otherwise were the beneficiaries of the LOCs, as that would have resulted in the alleged fraud being detected immediately.”

“Corinthian conducted the necessary and appropriate background and anti-money laundering checks on all of the parties involved in the procurement and issuance of the LOCs, with no issues identified,” the company further explained.

Also adding that, “Corinthian representatives and/or its service providers or auditors voice and email confirmed the LOCs with a representative of CCB who had a domain-correct email address and otherwise possessed what by all accounts appears to be valid credentials.”

Finally saying on this, “As part of their respective standard procedures, Corinthian expects that its carrier and producer partners also conducted their own due diligence on Corinthian, its vehicles and the LOCs. Presumably these checks resulted in the same conclusion as Corinthian that there was no basis to expect the LOCs were problematic until news of the alleged fraud arose.”

The fact Corinthian and likely others went through the process to validate the LOCs and ultimately the collateral for the reinsurance transactions and found no issues that concerned them at the time, suggests this is a particularly sophisticated fraud, with perhaps more than just forged documents involved if there was also someone posing as a representative of the bank. It also raises the prospect someone could have posed as a representative of more than one bank, should the investigation widen.

Given these facts, it seems likely this will run until the method of fraud and those behind it are uncovered and as a result the industry should expect its processes around validation of the integrity of collateral, in particular where LOCs are concerned, to come under scrutiny from a number of angles.

Also read:

August 1st – FBI investigating LOC fraud allegations linked to Vesttoo collateral.

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.

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