Vesttoo investigation reveals $4 billion fraud involving fake letters of credit. 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.
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.
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 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 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.
The company 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.
Vesttoo has developed a digital platform for assessing risk in insurance investments, which allows insurance companies to obtain reinsurance coverage through the capital market.
However, following an initial inspection conducted over the weekend, it was allegedly revealed that the collateral presented by investors to the insured in transactions involving the company were fake. In other words, according to estimates, essentially all the collateral presented by the company did not exist.
The company told 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
Yaniv Bertele, Vesttoo CEO
In its most recent funding round in October 2022, Vesttoo raised $80 mn at a $1 bn valuation. The Series C financing round was co-led by Mouro Capital and a private equity fund. A U.S.-based bulge-bracket investment bank, Gramercy Ventures, Black River Ventures, and Hanaco Ventures also participated in the round.
The Series C came less than a year after Mouro Capital led Vesttoo’s Series B round with participation from MS&AD Holdings. Hanaco Ventures led the Series A round in August 2021.
The company was established in 2018 by Yaniv Bertele, Ben Zickel and Alon Lifshitz. Vesttoo’s technology utilizes historical information from insurance companies to create probabilistic risk and loss models for each investment.
Bertele had previously told that Vesttoo was set to end 2023 with a profit after already doing so in 2022.
Earlier this year, the firm said it had entered into a $1 bn reinsurance agreement with Clear Blue.
Last year, Vesttoo announced a $15m Series B equity investment from Mouro Capital and MS&AD Ventures, the corporate venture capital fund of Japan-based MS&AD Insurance Group Holdings.
The Series B round, which came just three months after Hanaco Ventures led the company’s Series A round, was announced as being used to expand Vesttoo’s Insurance-Linked Program (ILP).
Vesttoo will be offering a security-based investment portfolio, as well as a fully digital marketplace for insurance-based risk transfer and investments.
The Vesttoo Marketplace will allow investors to access a variety of reinsurance products and monitor their performance with transparent and data-driven analytics, while also modelling risk portfolios, providing premium quotes for related reinsurance coverage, and expediting the placement of ceded risks to the market.
