Vesttoo investigation reveals $4 billion fraud involving fake letters of credit
Vesttoo investigation reveals $4 billion fraud involving fake letters of credit
Most of the allegedly forged letters were from a leading Chinese bank, which appears to have been unaware of the situation
The allegedly fake letters of credit (LOCs) provided by investors to insurers for reinsurance transactions on the Vesttoo platform are believed to total a sum of around $4 billion, Calcalist has learned. Most of the letters, allegedly forged, were from a leading Chinese bank, which appears to have been unaware of the situation. Vesttoo claims it cannot comment on the extent of the alleged fraud since the matter is still under investigation.
The fraud came to light when one of the LOCs was found to be fake, leading to a comprehensive review of all letters of credit issued by the company.
Vesttoo was founded in 2018 by Yaniv Bertele, Ben Zickel and Alon Lifshitz, each of whom owns about 24% of the company’s shares. The idea behind the company's insurance-linked securities (ILS) platform is to connect insurance companies with institutional investors in the capital market who are interested in acting as reinsurers, in exchange for payment for the risk they will assume.
This is an old model in the insurance world, under which the insurer sells part of its obligations to a body with deep pockets, and both share the costs of paying the insured in the event of an insurance event. The old model was adapted to the technological age, and the platforms that were developed - such as Vesttoo's - have become part of the insurtech sector.
The insurance world operates through several hubs. The insurance companies sell insurance to customers, who become their insureds, and to ensure their ability to meet the payment in the event of the policy being activated, the companies are required to commit capital, the scope of which is determined according to regulatory requirements. In order to raise capital for themselves, which will allow them to invest in recruiting new customers and selling additional policies, and in order to reduce the risk, the insurance companies operate in two ways. One is the channel through which they purchase reinsurance from other insurance companies, usually giants such as Swiss Re and Munich Re. The other channel is the sale of part of the risk to external financial investors. These investors - usually investment houses, hedge funds and other insurance companies - purchase a product called an "insurance basket" - and receive an interest payment of sorts. However, in order to purchase the risk from the insurance companies, these financial investors must present collateral, which they receive from banks.
Vesttoo developed a platform that mediates between the insurance companies and these financial investors, and is also supposed to make sure that the transactions between the parties are conducted properly. This means, among other things, making sure that the buyer of the insurance risk has the appropriate collateral, commonly referred to as a letter of credit (LOC).
The suspicion surrounding Vesttoo is that investors using the platform were able to purchase insurance risk from insurance companies by presenting fake collateral that Vesttoo's system did not detect. These alleged forgeries may have involved cooperation with employees of various banks, primarily in China. Vesttoo, which may have benefited from commissions on these transactions that are estimated to have reached billions of dollars, also suspects that some of its executives were aware of the possibility to complete these transactions through the platform with fake LOCs.
Vesttoo's technology involves a risk calculator algorithm that evaluates transaction risks based on various parameters. The company also claims to optimize the financial structure of transactions, considering accounting, legal, operational, and economic aspects to generate maximum value for all parties. However, it is not clear whether this optimization includes verification of the validity and accuracy of LOCs.
If the fraud suspicions are proven true, the main victims will be the insurance companies that used Vesttoo's platform and the insured themselves, since in the event of an insurance event, such as an earthquake or floods, they will discover that their insurance policies - which were actually sold to a third party - do not meet the required conditions and that they have no coverage.
The recent revelations have raised questions about the legality of Vesttoo's operations. According to people close to the company, an independent law firm previously checked all the territories where the company operates: Israel, the United States, Bermuda and Europe, and found that it is not exposed to regulatory offenses in any of them. Calcalist learned that the firm representing the company was the Meitar law firm.
Vesttoo claims it only serves as a tool for transactions and is not a party to them. According to sources close to the company, the responsibility for checking the collateral rests with the insurer. Sources said that the company is still investigating what it could have done to prevent such events from happening, and did not rule out the possibility that someone in the company was involved in the process.
It is believed that CEO Yaniv Bertele isn’t intending to retire following the scandal, and the board of directors is not considering placing him on leave or firing him.
However, four senior executives, including Chief Commercial Officer Julia Henderson, have already resigned following the revelations.
The company told Calcalist in response: "The Vesttoo team discovered inconsistencies between an investor and a cedent in transactions that Vesttoo modeled the risk for. We take the integrity of our business very seriously and are conducting a comprehensive third party audit to ensure our due diligence processes continue to be robust."
Vesttoo was valued at $20 million during its first funding round in 2021, but quickly achieved unicorn status with a valuation of $1 billion in October 2022. The company claimed earlier this year that it had plans for another fundraising round at a $1.5-2 billion valuation, but has since decided to freeze those plans for obvious reasons.
Investors in Vesttoo include major names such as Goldman Sachs, Mouro Capital, backed by Banco Santander, and MS&AD Ventures. The Series C financing round last October was co-led by Mouro Capital. Gramercy Ventures, Black River Ventures, and Hanaco Ventures also participated in the round.
