How ‘ghost’ subcontractors are defrauding US insurers

For a while, for Guillermo Inamagua, a 57-year-old construction services supplier from Davenport in Florida, it must have seemed like easy money.

In 2010, Inamagua registered a company named First Construction with the Florida Department of State and completed the paperwork to set up the small company which claimed to supply construction services and workers to contractors and subcontractors.

But, although Inamagua claimed that First Construction employed six workers and had an annual payroll of US$90,000, in reality the firm was part of an elaborate scam used to avoid US$4.6m in payroll taxes and US$1.4m in insurance premiums in what is becoming a growing concern for law enforcement agencies in the US and around the world.

Photo: Adobe Stock

The ruse was easy enough: Inamagua bought basic workers’ compensation coverage to insure his supposed small number of staff against work-related injuries (a requirement for nearly all businesses under Florida law).

He then made secret arrangements with contractors and subcontractors agreeing to use his shell company to pose as the employer of scores of construction workers who were often working illegally to build luxury condos in the Lakeland-Winter Haven area.

As far as clients were concerned, the mostly Latino labourers who came to work at cut price rates in the Florida sun all had the correct insurance documents in place when in fact they were working without adequate cover.

Then, all Inamagua had to do was wait until payday when his company would receive payroll cheques for all the work done. Inamagua received a generous cut for himself, while the undocumented construction workers were paid out in cash.

In total, Inamagua, who was sentenced to three years and ten months in federal prison in 2022 for conspiracy to defraud the United States and the Internal Revenue Service, received and cashed more than $19 million in cheques from various construction contractors before his arrest.

According to court documents, the scam defrauded insurers out of more than $1.46m in unpaid premiums while avoiding payroll taxes of more than $4.67m.

But there was more to come out. An investigation into Inamagua’s then girlfriend, Marya Velasquez, from Apopka, Florida, found that she had committed a similar fraud, cashing more than $7m in cheques from various construction contractors made out to her shell companies and avoiding taxes of more than $1.77m.

A subsequent investigation into Inamagua’s daughter, 29-year-old Gabriela Inamagua, from Davenport, Florida, found that she had received and cashed more than $34m in cheques from construction contractors in exchange for low-balling insurance cover for ghost sub-contractor companies, avoiding taxes worth $8.9m.

A “Concerning Increase”

“The construction industry as a whole suffers when fraudsters exploit the system by creating fictitious shell companies to illegally pay workers off the books in order to scam insurance companies and avoid employment taxes,” said IRS-CI Acting Special Agent in charge, Tara K. Reed at Inamagua Jnr’s sentencing hearing. “Today’s sentencing is a reminder that all businesses and employees are responsible for their fair share of taxes. IRS-CI and our law enforcement partners will continue building cases with these schemes and bringing those responsible to justice.”

And, the IRS says that these are far from isolated cases. It says that it has seen a “concerning increase” in this particular type of fraud, with cases recently prosecuted in Portland Oragon, Boston Massachusetts and Minneapolis-Saint Paul, Minnesota.

In Minnesota in December 2023, Nelson Lopez Giron, the owner of wood-framing company Giron Construction was sentenced to 20 days of home monitoring and two years of probation after he pleaded guilty for lying about the number of workers he employed in order to reduce the cost of his insurance premiums.

The case only came to light after one of his employees, Juan Carlos Escalante Serrano, was struck in the eye with a nail causing permanent vision damage. But when he came forward to claim workers’ compensation with the assistance of workers’ association CTUL, Lopez Giron claimed that he was a subcontractor of a subcontractor and that he had no employees on site the day of the injury – a claim rejected by Escalante Serrano who said he was one of around 15 workers employed by Lopez Giron on site that day.

“This is not a one-off incident, but the tip of the iceberg,” Carlos Garcia, an organizer with CTUL told the court. “Unfortunately, cases like this often do not come to public attention. When they do, it is imperative that we make it clear to workers, labour brokers and developers that this type of abuse is not acceptable.”

How illicit actors use shell companies to commit fraud

In August 2023, the US Financial Crimes Enforcement Network in coordination with IRS Criminal Investigation issued a notice to financial institutions calling attention to a recent increase in these types of cases which it said are costing state and federal tax authorities hundreds of millions of dollars a year.

“FinCEN is committed to combatting fraud by shedding light on how illicit actors within the construction industry are using shell companies and other tactics to commit workers’ compensation fraud and avoid payroll taxes,” said FinCEN acting director Himamauli Das. “Tax and insurance fraud has plagued the construction industry and undermines law-abiding construction firms.”

In its notice, FinCEN warns financial institutions to be on the look out for small, recently established construction companies with a minimal online presence and whose recently-acquired workers compensation insurance policy only covers a small number of employees while a high volume of transactions can be observed in the company’s bank accounts.

However, criminologists studying the prevalence of ghost companies in the construction industry say that detecting it can be extremely difficult.

“Schemes like this are often an easy way to make money and can be very hard for clients or the police to discover,” says Professor Mark Button, director for the Centre for Cybercrime and Economic Crime at the University of Portsmouth and the author of the 2021 report Fraud and Corruption in the Construction Sector.

Professor Mark Button, director for the Centre for Cybercrime and Economic Crime at the University of Portsmouth. Photo: University of Portsmouth

“Obviously it’s impossible to say exactly how widespread this particular fraud is, in the USA or elsewhere in the world. However, what we can say is that this particular practice fits into a wider culture of fraud and corruption in the construction industry which we have seen occurring at all levels and which is estimated to account for between around 2% to 30% of global annual construction costs.”

Button says that the uniqueness of each construction project and the complex supply chains involved, as well as the concealed nature of much of the work completed and the scale of the costs, leaves the industry particularly exposed – especially in the global south where governance levels may be less developed.

He points to the Transparency International Bribe Payers Index, which found that of the 19 sectors listed, ‘construction and public works contracts’ was rated as the most corrupt. A report published by PwC found that of all sectors experiencing economic crime, engineering and construction had the highest rate of bribery and construction.

Button says that illicitly creating ‘ghost companies’ to defraud clients is one of the nine major types of fraud and corruption commonly used around the world in the construction industry identified in his report.

Similar practices also used by fraudsters also include adding ‘ghost employees’ to the payroll and then getting their wages paid into their own bank accounts or putting more employees on the payroll than there are identifiable jobs to be done.

Although he says law enforcement agencies play a large role in bringing corruption and fraud cases to justice, Button argues that many investigations are time consuming, costly and prone to failure.

Other tools being used to detect fraud cases of this kind include AI-powered fraud detection systems which analyse data in real time to identify patterns and anomalies as well as financial monitoring or integrity monitoring in which clients hire a risk advisory firm to scrutinize particular projects.

Nonetheless, he says, both the culture and the complex nature of construction make it extremely difficult to catch the fraudsters.

“On a construction site there are people all over the place coming and going for quite legitimate reasons,” he says. “Contractors often bring in specialist sub-contractors to undertake specific jobs so it can be extremely difficult to keep track of who is supposed to be on site and when. The whole structure provides huge opportunity for fraud and corruption.”

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