A Few Rotten Apples Could Bring Crop Insurance Woes

03:02AM Apr 27, 2013
A Few Bad Apples
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By Ed Clark and Nate Birt

Biggest crop insurance scheme in history could spoil the program

For several years running, North Carolina farmer Harry Dean Canady found the lure of padding his income was too much to resist. His revenue stream involved illegal paper transactions and deliberate twisting of production information to collect a crop insurance check. He wasn’t the only one, however.

The $100 million North Carolina crop insurance corruption ring has been likened by federal prosecutors to a drug cartel. Canady is just one of 41 farmers, agents, adjusters, warehouse workers and grain merchants involved in the chain of participants necessary for the ruse to succeed undetected for years, according to officials. This is the largest crop insurance fraud in the history of the federal program dating back to 1938.

Those prosecuted in North Carolina raked in millions for years without detection until 2005, when USDA audi­tors realized numbers weren’t adding up. While the U.S. Attorney’s Office in North Carolina has been issuing news releases about the fraud cases for years, the scheme went viral in March after The Associated Press did a major story on the issue and other news organizations followed suit.

Canady has pleaded guilty to charges and agreed to voluntary exclusion from the program in accordance with plea agreements. His sentencing is scheduled for late May. Others in­volved in the cases have been sentenced to as many as nine years in prison, plus fines. A number have been debarred from selling federal crop insurance. (See "How the Fraud Unfolded in North Carolina" on page 26.)

Farmers are harmed through higher premiums to the extent that fraud increases indemnity claims

In perspective. Although the North Carolina fraud ring has been highly publicized, crop insurance fraud is rare. An analysis of claims made in 2011 by USDA’s Risk Management Agency (RMA) found that 4% of payouts were improper, slightly less than 2008 to 2010, although the figure does not distinguish fraud from other types of improper payments.

"This is a great example that the checks and balances system works and should send a positive message to Congress, not a negative one," says Brandon Willis, RMA administrator. "While 4% is low, we have plans to reduce it."

With the farm bill back at square one, many farmers wonder whether the conspiracy will be the impetus for sweeping changes in the crop insurance program or in future enforcement efforts that could change how producers do business.

Willis says RMA is not contem­plating changes in the crop insurance program or investigation and enforcement procedures because of the North Carolina case. That said, the agency is always tweaking programs and looking for new ways to reduce fraud, abuse and waste, he adds.

Lawmakers on the Senate and House Agriculture Committees are staunch supporters of the crop insurance program, notes Bruce Babcock, ag economist at Iowa State University.

"It’s highly unlikely that the [North Carolina] case will propel Congress into making crop insurance program changes," Babcock says.

The good apples. Taxpayers and farmers alike are hurt by fraud. "For farmers nationwide, fraud increases indemnity claims paid out and premiums," Willis notes.

"It’s just very unfortunate because it puts a bad light on the whole program," says Curt Sindergard, who farms near Rolfe, Iowa, and spent three years on RMA’s Federal Crop Insurance Corporation board of directors. "It’s possible the North Carolina fraud case might lead RMA to conduct more farm audits in the future, even on operations playing by the rules."

Also unfortunate, notes Jay Boyette, commodities director for the North Carolina Farm Bureau Federation, is that the negative publicity paints all farmers with a broad brush. "Farmers who don’t abuse the system are nonetheless competitors of those who do, putting them at a disadvantage," he says.

The Government Accountability Office, the investigative arm of Congress, frequently calls on RMA to help reduce fraud, abuse and waste. RMA has cracked down on fraud largely through data mining. Using sophisticated computer technology, the agency can more easily discover abnormalities in claims and repeated payments to farmers in areas with not many claims and other red flags. Data mining is how the North Carolina cases were discovered, before the investigation by USDA, RMA and the Internal Revenue Service was turned over to the Department of Justice for prosecution, Willis says.

In recent years, RMA has also used satellite images to verify claims. For example, when a Texas farmer claimed crop losses, satellite imagery revealed there wasn’t a crop growing in that field, only cows, says Art Barnaby, ag economist at Kansas State University. In a Colorado case, satellite imagery showed that on a supposedly irrigated field that suffered a loss, the farmer never applied water, Barnaby adds.

To further curb cases of fraud, Keith Coble, ag economist at Mississippi State University, says data between RMA and USDA’s Farm Service Agency needs to be more compatible, making it easier to spot discrepancies in crop production records.

"It is my sincere hope that these prosecutions send a clear message that crop insurance fraud will not be tolerated," says U.S. attorney Thomas Walker, lead prosecutor in the cases. "The conviction rate is proof that these matters are taken seriously, and punishment can be severe."

It is unfair to implicate North Carolina as being the only place where fraud and abuse have taken place, although for the past five years that region has been the epicenter of several major cases. Fraud cases have been prose-cuted in Iowa, California, Michigan, South Dakota and Texas.

In light of the North Carolina bust, it is true that fraud does exist—but it is infrequent. "The vast majority of farmers play by the rules," Walker says. "Unfortunately, the honest farmers get penalized by those who don’t."

How the Fraud Unfolded in North Carolina

The North Carolina crop insurance conspiracy played out during the course of eight years and involved farmers, agents, adjusters, warehouse workers and grain buyers. According to federal court documents, Harry Dean Canady and others filed phony crop insurance claims, hid production by selling it under other names and shifted yields by falsely reporting small production quantities on some farms/entities and larger production elsewhere.

Canady hired someone to create a farm corporation called MC Farms so he could obtain a "new producer" guarantee, but he placed part of his land in the corporation. He also created people to be paid crop insurance revenue, as well as entities in the names of his grandchildren, according to charges.

Farmer and crop insurance agent William Larry Rogers of Mebane, N.C., co-conspired with other farmers to manipulate their crop production records to reflect a loss. Rogers was sentenced to nine years in prison and ordered to pay restitution of nearly $8.4 million.

In addition to the double sales scheme, Rogers instructed one farmer to lie to federal investigators, according to charges.

Crop insurance agent Robert Carl Stokes of Wilson, N.C., recruited additional farmers by promising a profitable insurance claim, regardless of whether they suffered a crop loss. He worked with the farmers to make false insurance claims and to hide some or all of their production by selling it under other names or for cash to co-conspiring warehousemen. He received farmer payoffs for these inflated adjustments.

Convicted adjuster Jimmy Thomas Sasser threatened to cause bodily harm to a cooperating defendant, according to court documents. He pled guilty to several charges and was sentenced to four years in prison and restitution of more than $21 million.

For continued coverage of the North Carolina crop insurance fraud ring, visit www.FarmJournal.com/insurance_fraud

You can e-mail Ed Clark at [email protected].