Surety Fraud in the Time of COVID-19

In this unprecedented period of social distancing, disinfecting protocols, questions about force majeure clauses, essential infrastructure projects, panic over toilet paper availability, coronatinis, cocktail parties on Zoom, self-quarantining, massive distance learning, myriad cancelled events, normalization of teleworking, COVID-19 guidances, copious governmental orders and mandates, and rapidly enacted legislation, surety professionals and their contractors should be mindful of one of the eternal verities:  during times of significant national stress, such as the Coronavirus pandemic, the criminal element will, with its usual heinous ingenuity and breathtaking amorality, seek to cheat individuals; businesses; and local, state, and federal governments.

By way of example, the first version of the False Claims Act was enacted by Congress during the Civil War, when fraudsters sold to the unsuspecting Union, among other things, half-dead mules for transporting and rotten grain and spoiled meat to feed the army soldiers. Such practices were so widespread that the Congress intervened with the False Claims Act to punish the wrongdoers. Indeed, in this time of COVID-19 pandemic, certain governments have already enacted emergency laws to protect individuals from schemers who would bilk the public in various and creative ways.

There is, unfortunately, a long and ugly history of surety bond fraud in the United States—even in relatively unstressed times. NASBP is already starting to hear of new enterprises seeking to “do [fraudulent] surety business” and to make a dishonest buck during this time of COVID-19 crisis. Our collective due diligence is necessary to avoid becoming victims of fraud and to protect the positive public perception of the surety product.

Several years ago NASBP issued a one-page resource to address the critical need to educate contractors, subcontractors, suppliers, and owners on how to verify the authenticity of bonds before acceptance. Always Verify Your Bond! explains, in simple terms, how bonds can be verified through a two-step process, which confirms that (1) the surety is licensed in the jurisdiction of the project, and (2) the bond has been authorized by that surety.  Briefly, the two-step process involves the following:

1. Checking the authority of the surety to issue the surety bond:
   1. Contact the state insurance department to determine if the surety is licensed in the jurisdiction of the project. The National Association of Insurance Commissioners provides a map with links to all state insurance departments.
   2. Consult the Treasury List, Circular 570, to determine if a surety possesses the mandated certificate of authority to provide surety bonds on federal construction projects. The Treasury List includes the business address and phone number of each listed surety and each state in which the surety is licensed to do business.
2. Verifying that the surety actually authorized the issuance of the surety bond. Contact the surety directly to verify that the surety bond has been duly authorized. All sureties listed in the Treasury List identify a specific contact phone number.  In addition, the Surety & Fidelity Association of America publishes the SFAA Bond Obligee Guide, which contains surety contact information for surety companies that agree to receive inquiries to verify the authenticity of surety bonds.

Conducting this two-step due diligence will help contractors, subcontractors, suppliers, and owners avoid the significant harm caused by bonds that are unauthorized.  For more information, access Always Verify Your Bond! Please share with your contractors and advise them on this important matter.

Prudent construction risk management mandates that industry stakeholders take such practical steps—to verify the authority of a surety to issue a bond and to verify the surety authorized issuance of the bond—to protect their businesses, livelihood, and reputations from nefarious surety scammers, whose long-term business plan is to issue bonds with illusory protections, cheat the government, and ruin the businesses and livelihood of hard-working folks.

During this extraordinary time, you can be sure that surety fraudsters are planning to implement new—and tried and true—scams to attempt to cheat us all. As you are vigilant in protecting yourself and your loved ones from COVID-19 infection, please also be vigilant in protecting your businesses and the reputation of your industry by vigilance in ensuring the authenticity of bonds and the proper licensure of sureties.

I would like to remind you that NASBP has created a robust Coronavirus resources and information site. There you will find NASBP Blogs, NASBP Virtual Seminars, articles, NASBP outreach efforts, and NASBP SmartBriefs with very informative content on the various aspects of how the Coronavirus pandemic is impacting the surety and construction industries—and our lives at large.