Press release from FBI
A Kentucky tobacco warehouse owner, several insurance agents and adjusters, and more than a dozen tobacco farmers have pleaded guilty to criminal charges in a widespread, multimillion-dollar scheme to defraud both federal and private crop insurance programs. In total, 23 people have been criminally charged, while another 17 people have agreed to pay civil fines or penalties.
FBI Forensic Accountant Tressa Whittington has been working this case with agents from our Louisville Field Office, the IRS, and the U.S. Department of Agriculture’s (USDA) Office of Inspector General (OIG) and Risk Management Agency (RMA) since a 2014 tip to the OIG hotline reported suspected fraud at Clay’s Tobacco Warehouse in Mount Sterling, Kentucky. From that tip, the investigation rippled through farming communities in Central Kentucky. Whittington said some of the defendants cheated the program out of less than $10,000. Others admitted guilt in multimillion-dollar frauds.
“Whether the theft was of a few thousand dollars or millions, these individuals took advantage of the program,” Whittington said. “They were stealing money from taxpayers and stealing money from the honest farmers who now pay a higher premium.”
How the Fraud Worked
Whittington said the individuals involved used a number of different schemes to defraud the programs, but the most common one was carried out like this: A farmer would raise a crop of tobacco. The crop would be of good quality, but the farmer would conspire with insurance agents and adjusters to attest to the fact that the crop had been damaged by storms or pests. For this service, the insurance agents and adjusters were getting kickbacks, according to investigators.
With the report of a ruined crop, the farmer would file an insurance claim and be paid insurance money.
In the meantime, the farmer would still sell the good crop to a tobacco company. Many of the farmers had contracts with large companies to deliver regular tobacco crops. These were valuable contracts that the farmers wanted to maintain.
But because the farmer had reported a ruined crop to the insurance providers, it took additional sleight of hand and additional fraud to make the transaction with the tobacco company look legitimate. The farmers had to show that they “purchased” the tobacco they sold to the tobacco company while selling off the supposedly poor-quality tobacco they had grown.
“Whether the theft was of a few thousand dollars or millions, these individuals took advantage of the program. They were stealing money from taxpayers and stealing money from the honest farmers who now pay a higher premium.”
Tressa Whittington, forensic accountant, FBI Louisville
Charging papers show the farmers were able to pull off such scams with help from employees at Clay’s Tobacco Warehouse, including Debra Muse, who worked at the warehouse. She also happened to be a crop insurance agent.
Muse helped the farmers get fake paperwork to show they had purchased their quality tobacco from Clay’s. “More importantly,” said Whittington, “when the farmers would take their tobacco to the warehouse to have it graded, they would need a NoG rating or a not salable rating. Muse would provide that documentation.” Whittington said the warehouse would reuse the same bad bales of tobacco when the crop graders would come by, rotating out the tickets used to label them.
Whittington said Muse’s case was the first related to this investigation to reach the courts. She admitted to urging and assisting farmers to file false tobacco insurance claims and was sentenced in September 2018 to five years in prison.
It was another three years before Roger Wilson, the owner of Clay’s Tobacco Warehouse, was sentenced to 12 months in federal prison for his part. The longest sentence in the case went to Michael McNew, who was sentenced to 86 months. By misusing his role as a crop insurance adjuster, and at a different period as a crop insurance agent, McNew admitted to causing losses in excess of $23 million.
“The individuals who participated in this scheme caused the United States government and insurance carriers to sustain over $40 million in losses,” said Special Agent in Charge Jason Williams of the USDA-OIG. “The outstanding work of the USDA-OIG agents, USDA staff, and our FBI partners who investigated this case along with the prosecutors of the U.S. attorney’s office made it possible to bring these fraudsters to justice. Farmers in this industry deserve an honest marketplace that is free from fraud due to false claims.”
In addition, the RMA, which is part of the USDA, changed its nationwide policy on NoG-graded tobacco based on this case. If the tobacco is graded “unsalable,” the farmer is required to destroy the crop with an insurance adjuster as a witness. This shift is designed to prevent farmers from reusing damaged crops in future insurance claims. The USDA is also assessing related program vulnerabilities in an effort to curb future fraud attempts.