2 weeks ago
9
You would be forgiven for thinking the industry had moved on from the debacle that was the Vesttoo reinsurance letter of credit (LOC) fraud, but legal action continues and the latest case to be filed sees fronting specialist Clear Blue Insurance suing China Construction Bank for damages.
Recall that, China Construction Bank was the financial entity that purportedly issued billions of dollars of letters of credit (LOC) that were used to collalteralize reinsurance agreements in transactions involving Israeli insurtech Vesttoo.
More traditional reinsurance than ILS, these agreements turned out to be supported by thin air, as the letters of credit (LOCs) turned out to be forged and as the bankruptcy of Vesttoo moved forward, details emerged of a relatively unsophisticated web of fraud, with international tentacles reaching to the Chinese state supported bank.
Fronting specialist Clear Blue was caught up as the provider of fronting paper to numerous deals where Vesttoo had sourced and posted the collateral, which turned out to be fake LOCs, resulting in financial losses for the company.
The company has been involved in Vesttoo’s bankruptcy as a creditor, but recoveries through that avenue are expected to have been minimal and Clear Blue has also launched a lawsuit against broking giant Aon.
Clear Blue’s focus has now turned to the bank that was deeply linked to the fraud that occurred.
Recall that, in total, almost $3.36 billion of standby letters of credit (LOC) are presumed to have been fraudulently created under the Vesttoo scheme and of that amount, figures Artemis had seen towards the end of 2023 suggested that at least $2.81 billion of these were linked to China Construction Bank.
In addition, emails that emerged during Vesttoo’s bankruptcy case showed that a China Construction Bank (CCB) employee, Chun-Yin Lam, used an official bank email address to communicate with some of the Vesttoo employees that had been accused of perpetrating the fraud.
While this CCB employee, Lam, was also said to have identified the Chinese investor implicated in the fraud, Yu Po Holdings, as a client of the bank. Yu Po Holdings was the name of the primary investor in reinsurance transactions involving fraudulent LOCs issued by CCB for Vesttoo reinsurance deals. Questions remain over whether Yu Po actually exists as an investor, or was merely a shell used for the fraud. Most believe the latter is the more likely.
So Clear Blue has turned its attention to China Construction Bank as it seeks to recover some of the damages it has suffered through the Vesttoo debacle.
In a New York lawsuit filed this week, Clear Blue, through its underwriting entities, demands a jury trial hearing for its complaint.
Clear Blue’s complaint states, “CCB, operating through its authorized agents, participated in and allowed a multi-billion-dollar fraud to be perpetrated upon an entire segment of the reinsurance industry in the United States by fraudulently refusing to honor dozens of letters of credit issued by CCB as collateral for reinsurance transactions. These letters of credit were issued on CCB’s letterheads, bore CCB’s SWIFT codes, signatures and official seals and were provided by CCB’s authorized employees with valid CCB credentials, who were using CCB’s offices, CCB’s emails and CCB’s telephone numbers to negotiate, issue, deliver and confirm these letters of credit. They were also vetted by some of the biggest reinsurance brokers in the world and were repeatedly confirmed by CCB’s employees.”
Clear Blue states that CCB participated in the reinsurance deals “as part of its targeted expansion in the
United States,” citing $890 million of LOCs from CCB that were supposed to have backed reinsurance deals.
The fact CCB refused to acknowledge having issued the LOCs, when the plaintiff tried to present one for payment to support claims, Clear Blue’s complaint states, “This is a complete ruse by CCB and an attempt to fabricate an excuse for its blatant breach of the LOCs, which were negotiated and issued by its authorized agents who had full authority to contractually bind CCB.”
CCB’s actions caused “shockwaves throughout the entire insurance and reinsurance industry in the United States and
resulting in billions of dollars in actual and reputational damages.”
Clear Blue also states that CCB’s New York, Asia and parent corporation were all acting in concert, so are jointly liable and summons have been issued for each to respond to the court complaint that has been filed this week.
China Construction Bank has also been sued by numerous other insurance and reinsurance market entities, including broker Aon, as well as Porch Group’s Homeowners of America Insurance Company (HOA), and also Incline P&C Group.
The lawsuit filed by Clear Blue goes into a lot of detail about how the implicated CCB employee (LAM) responded to an attempted claim, delaying payments by saying CCB was new to provision of reinsurance LOCs, but eventually Vesttoo fronted a payment to cover the funds itself.
Which appears to be one way the insurtech was covering up the fraud, by facilitating payments when necessary by using other funds, rather than having the forged LOCs called on.
But Clear Blue then sought confirmation that LOCs were valid and still in-force, only to be told by an employee of CCB’s New York branch that the LOC in question had never been issued by the bank.
After that, Clear Blue was told all the LOCs purportedly issued by CCB were fraudulent.
Clear Blue claims that either, CCB is bound by the LOCs, or CCB participated in the scheme to defraud the company.
With this additional lawsuit, the pressure on China Construction Bank continues to build. However, there are no guarantees the action makes progress at any pace, as we’ve seen with the other legal action related to the Vesttoo fraud.
Clear Blue is doing its best to recover some of the damages it has faced due to being caught up by the fraud scheme, having resulted in significant costs for the company as it was forced to respond and take action to protect its business.
Read all of our coverage of the fraudulent or forged letter-of-credit (LOC) collateral linked to Vesttoo deals.
English (US) ·