DISASTER FRAUD PREVENTION
"Caveat emptor" (Let the buyer beware)
Disaster fraud comes in a variety of forms, most of which capitalize upon communications and information failures. In a disaster, safety nets collapse and precious commodities are in short supply, opening the door to price gouging of items like food, water, and fuel. After a disaster, even the victims become motivated to engage in scams, claiming illnesses they don't really have. Years after the 9/11 disaster, officials in New York City were still fighting in federal court to settle some 10,800 claims arising from bystanders breathing toxic dust from the debris of the World Trade Center, and some 30% of these claims don't even mention a specific injury, only symptoms such as a runny nose or sleep problems. Also insidious are the vendors and contractors who march into a disaster scene like an invading army of con men. Millions and billions of dollars are involved. Let's take a close look at two incidents: 9/11 and Hurricane Katrina.
The Frauds of 9/11 and Hurricane Katrina
|9/11: Allianz Group was the insurance company that paid 3 billion dollars to Larry Silverstein, lease holder of the World Trade Center that fell on 9/11. Just weeks before the attack, Silverstein bought the towers for 10% down on $124 million. His lender, GMAC Commercial Mortgage Corporation accused Silverstein of misallocating insurance awarded him to pay lobbyists in Washington and Albany to limit his liability to the victims. Conspiracy theorists regard it as one of the largest insurance scams on record, among other speculations. Attorney Kenneth Feinberg was appointed, and worked pro bono on the 9/11 Victim Compensation Fund, to dole out $7 billion to 1,600 families of the 9/11 attacks, the average payout being $1.8 million per family. Many of these families were high-income families who thought the payout was too low, this problem and Feinberg's defense for being so "cruel" to other victim claims is documented in his book (Feinberg 2006). Feinberg appears to have become America's "pay czar" as he later worked on the Virginia Tech massacre fund of 2007, the Corporate Bailout Fund of 2009, and the BP oil spill fund of 2010 (the latter for which he was paid $1.25 million a month). After 9/11, United Way of NYC disbursed $528 million in grants to anyone claiming mental illness or psychological trauma. FEMA funded an entity called the World Trade Center Captive Insurance Company to payout $1 billion in medical claims, but 90% of the money went to legal fees.|
|Katrina: FEMA was more directly involved after Katrina, setting up an expedited, toll-free phone number and e-application for anyone with a disaster address to apply for a $2000 disbursement. There was no shortage of crooks. Hundreds of pseudo-survivors used multiple IDs and fake addresses to get free money, but authorities only caught up with about 30 hardcore offenders, including 14 people in Los Angeles who never set foot in Louisiana and one guy entraped in a GAO sting for making multiple applications using vacant lots as addresses. Altogether, GAO estimated that more than $1.5 billion in fraudulent disbursements were made, mostly because FEMA never bothered to validate identities. Hurricane Rita (also in 2005) was handled the same way, as was humanitarian aid in Afghanistan after the 2002 U.S. invasion. Some 300,000 Afghans falsified their identities and returned for a second helping of aid, which meant extra helpings of wheat, plastic sheets, soap, and cash grants.|
Clearly, there are people who try to unscrupulously profit from disasters, both man-made and natural. This is a vulnerable time for most victims of a disaster since the tendency is for most victims to seek out and take advantage of the nearest and most immediate help available. Disasters attract a lot of con-artists, and the frauds they "sell" can take place before, during, and after a disaster. An example of fraud BEFORE a disaster is price gouging, where suppliers raise the prices of products that consumers might need, like food, water, batteries, and/or reinforcement material for buildings. Examples of fraud AFTER a disaster are many, and include such things as ID theft, telephone fraud, home repair fraud, insurance fraud, and financial fraud. Some of these may occur DURING a disaster, but the most common example in this case is charitable fraud where the seller is requesting aid or relief donations for a non-existent aid or relief organization. These examples by no means exhaust all the possibilities as con-artists are always coming up with new ways to do things. For instance, a typical Internet scam is an offer of help from a bogus company to find and/or help get in touch with missing relatives. Online hoaxes about assorted dangers (of certain products or services) also tend to accompany disasters. With terrorist attacks, a typical scam often involves some bogus terrorist-hunter who (for a fee) promises to find and bring to justice the terrorists responsible for the disaster.
There are really no good ways to categorize, classify, or analyze the variety of disaster scams. Scams are even more diverse when one looks at the international level with disasters overseas. The pattern of fraud depends heavily upon the cultural context of a nation or region. For example, the Australian website, Tsunami Scam Watch, list over 20 different and highly unusual scams which typically occur in the Asian region. In parts of the United States, it may be said that there is much more freedom to engage in disaster fraud, or at least that some of it is to be expected in the name of free enterprise. In support of this perception, take note, for instance, of the fact that various free market economists like Thomas Sowell (2006), among others, have argued that in a purely capitalist system, there should be nothing wrong with the liberty to raise prices in anticipation of a disaster. Nonetheless, this argument hasn't stopped states in the U.S. (e.g., places like Virginia and North Carolina) from passing Anti-Price Gouging laws. Most federal initiatives within the U.S., however, have been limited, focused on specific versions of the problem like charity fraud, relegated to enforcement by temporary federal task forces, and/or conducting congressional investigations.
THE SCOPE AND NATURE OF THE PROBLEM
If congressional investigations are any guide, the consensus is that with Hurricanes Katrina and Rita, FEMA holds the record for allowing the most fraud by bogus billing to recoup expenses. Some unusual fraudulent expenses included season tickets to football games, Caribbean vacations, and a sex change operation. The private insurance industry isn't revealing any numbers, but anecdotal reports indicate the false claims after Katrina were just staggering. Congress hasn't responded well. U.S. legislators didn't really think much about the root causes of a phenomenon, and simply propose more stringent penalties (e.g., million dollar fines, thirty years in prison) or upgrades to existing wire fraud statutes. Far more needs to be done to better understand disaster fraud so that effective policies can be put in place.
A good place to begin is by examining disaster mythology. These involve various types of rumors spread by peers but also unfortunately picked up and perpetuated by the media. There has been some research on this topic (Quarantelli 1985; Wenger & Friedman 1986), and the general consensus of that research has shown that the most common myths include the following:
anti-social behavior (looting, crime)
panic flight (mass evacuation, mass sheltering)
disaster shock (catatonic psychological reactions)
unfounded fears (of epidemics from dead bodies)
The above are myths. The truth is that most disaster victims exhibit altruistic, not anti-social behaviors. Most disaster victims do not panic in any sort of mass hysteria mode, but instead, many people exhibit strong degrees of self-control. A widely-held belief is that crime rates increase after a disaster, but there are many examples of crime rates actually dropping following a disaster. For example, after Hurricane Betsy in 1965, crime rates dropped more than 25% from the same period the prior year. Additionally, authorities often find no shortage of volunteers for search and rescue operations after a disaster. While isolated cases of antisocial behavior may arise, the vast majority of people respond spontaneously and generously. Most survivors of disasters owe their lives to helpful neighbors and friends rather than official first responders.
In the international context, there is often some mythology associated with the culture and customs of a people who have experienced a disaster. One of these myths is the notion that locals are incompetent and desperate in need of outside assistance. Western medical teams often rush in to a foreign disaster site, carrying with them the attitude that local medical help is not only insufficient but backward. The survivors of a disaster in a foreign country may not want Western medicine or Western ideas about better living; they may only want to get their houses rebuilt and go on with their lives. Attaching strings or red tape to assistance money is often taken as offensive in the international context.
During the 2009 H1N1 flu epidemic, an unique form of pharmaceutical fraud was discovered by the FDA. Apparently, some people were selling "fake" Tamiflu vaccine which consisted simply of talc and tylenol. Starting around 2011, survivalists discovered that a good thing to stockpile was "aquatic ciprofloxacin" intended for fish (and unsafe for human consumption), but the problem is that to buy the stuff, you need to trust Chinese sellers on eBay.
STEPS TOWARD PREVENTION
The first, and best, piece of advice is to "take one's time." Disaster fraud usually operates, as most fraud does, in a "hurry up and decide" environment where a quick fix or quick solution is offered. Both material and psychological recovery are going to take time, and most disaster survivors come to this rational realization eventually. Secondly, it is important to rely upon one's neighbors and friends. Attorneys and insurance agents probably won't be around for a consult, so people one knows and trusts are the safest sources of information and assistance. Consideration could probably be given to forming a community volunteer group of fraud prevention specialists who do everything possible to lead authorities to the fraudsters and con men for maximum deterrent effect. What is not needed are vigilante groups taking the law into their own hands. Fraud often follows disaster, but by carefully avoiding the mistakes of seeking a quick fix and attempting to be self-reliant, disaster fraud can be avoided and there is no need for survivors to be victimized twice.
GAO Report on Disaster Fraud (pdf)
Internet Scams Related to Disasters
National Fraud Information Center
National White Collar Crime Center
Wikipedia Entry on Price Gouging
Bates, K. & Swan, R. (2010). Through the eye of Katrina. Durham: Carolina Academic Press.
Birch, E. & Wachter, S. (2006). Rebuilding urban places after disaster. Philadelphia: Univ. of PA Press.
Cooper, C. & Block, R. (2006). Disaster: Hurricane Katrina and the failure of homeland security. NY: Times Books.
Dyson, M. (2006). Come hell or high water: Hurricane Katrina and the color of disaster. NY: Basic.
Feinberg, K. (2006). What is life worth? The Inside Story of the 9/11 Fund. NY: PublicAffairs.
Harper, D. & Frailing, K. (Eds.) (2010). Crime and criminal justice in disaster. Durham: Carolina Academic Press.
Mitchell, J., Thomas, D., Hill, A. & Cutter, S. (2000). "Catastrophe in reel life versus real life." International Journal of Mass Emergencies and Disasters 18:383-402.
Quarantelli, E. (1985). "Realities and mythologies in disaster films." Communications 11:31-44.
Sowell, T. (2006). On classic economics. New Haven: Yale Univ. Press.
Wenger, D. & Friedman, B. (1986). "Local and national media coverage of disaster." International Journal of Mass Emergencies and Disasters 4:27-50.
Last updated: June 27, 2012
Not an official webpage of APSU, copyright restrictions apply, see Megalinks in Criminal Justice
O'Connor, T. (2012). "Disaster Fraud," MegaLinks in Criminal Justice. Retrieved from http://www.drtomoconnor.com/3430/3430lect06b.htm.