How clueless intermediaries and sales trainers go straight to jail
On 5 November 2014, the Central Criminal Investigation Service in Lüneburg arrested two insurance brokers for commercial fraud. The intermediaries had induced their clients to terminate existing annuity and life insurance policies in order to subsequently take out new policies that were allegedly more profitable. Clients were untruthfully led to believe that the premiums of their existing policies would rise and that the premiums paid to date would not be lost but would continue to serve their retirement provision. After being brought before a magistrate, the insurance brokers were remanded in custody, facing the prospect of up to ten years to reflect on their conduct.
Insurance mediation as commercial fraud
The brokerage of investments is often based on liquidating existing cash and capital investments in order to earn commissions of up to 15% and more on the sale of new financial products. This follows the motto: “today you have the money and we have the experience – tomorrow it will be the other way round.” Or, as one lawyer reassured his client the other day: “No, no, your money isn’t gone; someone else just has it now.”
Mediation and advice under false pretences
Insurance mediation under false pretences can amount to commercial fraud and, for the first time, lead to pre-trial detention. In this case, it was the assertion that the premiums were not lost upon termination of a life insurance or annuity policy, but would continue to be available (in addition to the modest surrender value) for retirement provision.
Concealment of private health insurance facts as deception
A similar issue arises with the claim that the client loses no ageing reserve when terminating a private health insurance policy (PKV – private health insurance) taken out before 2009. The argument runs that this reserve is collective, that one cannot lose anything that does not belong to one individually, and that one immediately participates in the much higher collective ageing reserve held by the new insurer. This inaccurate claim is precisely how some genuine PKV professionals have been trained at broker events.
Systematic false claims as a fraudulent trade
That an intermediary can commit commercial fraud by making such largely systematic false claims is perhaps rarely appreciated by intermediaries themselves. Courts will hardly believe an alleged lack of knowledge after the fact, since the intermediary is, after all, a professional.
Even those who provide incorrect training – such as broker advisors and sales training managers – are personally exposed. Faulty training may ultimately be assessed as aiding and abetting, incitement, or indirect perpetration – the latter where the trained person confidently believes everything and then implements it with the client. Much like the car thief who sends an unsuspecting person off with the duplicate key to collect his car for him, whether as a favour or for a fee.
Deceptions about return and risk
British insurers, for example, have used software to encourage their intermediaries to hold out to prospective policyholders the prospect of ongoing returns of more than 12% p.a. This led to a number of new products being launched on the market. Many a client then lost house and home because he financed this investment largely by bank loan. The intermediaries should have known that, at the same time, the actual annual increases in value of contracts already in force with other clients were only minimal.
Fraudulent in their impression are often the guarantees that exist only in the advertising. If, on the other hand, you read the small print, you will find the risk hidden there – up to and including total loss. A typical example are guarantee certificates or funds bearing names such as “absolute return”, as if you could be sure of getting at least 100% of your money back. In fact, these products, often brokered by banks, may turn out to be hedge funds. Likewise, a good portion of the “sub-prime” assets were allegedly purchased because the investor understood the word as “Supreme”.
Good faith protects not even agents from punishment
Even negligent breaches of the requirement to hold a necessary licence can result in up to three years’ imprisonment. Skilful initiators offer no guarantee of impunity to the naive helper. Insurance brokers (Versicherungsmakler) and insurance agents (Versicherungsvertreter) may equally be among those affected. An increasingly common variant is deception by omission – for instance, where the insurance broker or agent advertises a net policy without pointing out that his fee remains payable in full even if the brokered product is terminated early. This disclosure duty affects fee-based intermediaries as well as fee-based advisors, for example when arranging insurance policies (BGH (Federal Court of Justice), ruling of 12 December 2013, ref. III ZR 124/13), because the remuneration is not tied to the fate of the premium payments.
Criminal complaints often used as leverage
Many investors use the option of a criminal complaint for fraud to put additional pressure on intermediaries accused of giving false advice. There may also be the hope that the public prosecutor’s office will uncover something in its investigations that can then be deployed in the civil courts. Some complainants then learn that the public prosecutor has discontinued the investigation because the accused is already being investigated in several other, more serious cases, and no additional increase in sentence is to be expected from the further matter.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
