IFSC firm Cologne Re Dublin had support from the highest level of its US parent General Re Corporation when taking a prime role in three "improper" deals in Australia, according to a new report for Australian regulators.
The report by a special inspector said a division of the IFSC operation was the driving force behind the Australian transactions but added that the office used the dedicated resources of officials in the US, London and Cologne. Owned by the investment vehicle of billionaire Warren Buffett, the firm stopped taking new business in 2005 after it became embroiled in accounting scandals in Australia and the US.
The inspector's report for the Australian Prudential Regulation Authority identifies a previously unreported deal between General Re Australia and New Cap Reinsurance as "improper". This is in addition to deals with FAI Insurance and Zurich Australia.
Contracts with these companies enabled them to falsely state their profits or their solvency position. "General Re Australia knew that the intended purpose of these transactions was improper, and did nothing to prevent or discourage the improper use," the inspector said.
"General Re Australia's behaviour during this period was driven by the alternative solutions unit (whose focal point was Cologne Re Dublin)."
The unit had a mandate from 1997 to seek opportunities globally and there was little indication until 2002 "of any oversight of or restrictions placed on the activities of this unit".
The "questionable behaviour" included:
• promoting products that could be used for improper use and failing to give warnings about improper use;
• actively refining products to make improper use easier to achieve and failing to provide relevant information to auditors;
• turning a blind eye to improper use of reinsurance by some parties entering into deals that could be used for deceptive purposes by not spelling out full details in contracts and keeping relevant details secret.
Australian regulators barred former Cologne Re Dublin chief executive John Houldsworth and former marketer Tore Ellingsen in 2004. Mr Houldsworth has pleaded guilty to a criminal charge in the US in a case involving insurance giant AIG.
