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Tobacco Country’s Dirtiest Open Secret

Capitalism, corruption and exploitation created the broken system of ‘insurance farming’ — and the biggest loser is the American taxpayer

It doesn’t take much to unravel the worst-kept secret in the heart of tobacco country. If you ever find yourself driving on a dirt road amid the leafy fields of green in Kentucky or North Carolina, all you have to do, according to Hampton Henton, a tobacco farmer and former USDA employee, is pull over and ask someone if they know a farmer scamming the government. “And they’ll say, ‘Well, yes, of course. The guy down the road does it all the time,’” Henton tells me. “‘He’s farming the crop insurance system.’”

In the South, they’re known as insurance farmers. The “classic way of doing it,” explains Henton, is to report to the insurance company that you planted 10 or even 100 acres of tobacco (and it is, most often, tobacco). “The trick is to do a pretty bad job of farming,” says Henton. “So you don’t incur very many costs — you put in half the seed, you put in half the fertilizer. You can even just throw some seeds onto the hillside with half a stand.” Then, sometime in the summer, you’re going to report that the weather was bad. You tell the insurance company that there was a hailstorm or the climate was too dry, or too wet, or the field was too flooded, and the crops were destroyed. 

If you don’t have a hailstorm, well, then you make one up, like Robert and Viki Warren, who between the years of 1997 and 2003, swindled the government and insurance companies out of more than $9 million in bogus insurance claims — all it took was a bag of cocktail ice and a disposable camera. “The way we did it, we was down taking pictures, out this row, and then we just stood behind it and throwed the ice over the top,” Bobby Chambers, a former manager for Warren Farms, told NPR in 2005. “To me, it looked like a hailstorm.” But just for good measure, according to Chambers, they then had another employee use a wooden tomato stake to beat the shit out of 16,000 tomato plants. 

If the disaster is confirmed by the insurance adjuster — which, according to Henton, it almost always is, since the insurance adjuster is likely in on the scheme — the crop insurance company sends the farmer a check. It’s no sweat off the back of the insurance companies, since the indemnity payout comes directly from government funds, i.e., tax dollars.

“The [insurance] company says, ‘Well, what do we care? It’s not our money,’” Henton tells me. As such, there is little stopping the farmer, the insurance agent and the adjuster from running the same scheme the following year. “When I go to buy insurance next year, who am I going to choose?” asks Henton. “The guy that paid off like an ATM machine.”

To be clear, there are a number of ostensibly self-correcting mechanisms in the program. For example, if you claim a loss, that reduces the amount that you can get in payments in future years. But all it takes, says Hampton, is changing one initial in your name and you’re a new farmer. “The agencies all know it,” Henton tells me. “But there are no real strong repercussions. They go after the farmer, but the agents are complicit in this. You’ll find that that shows up in some of the stories, that people selling the insurance knew this was happening in a major way.”

People like 63-year-old crop insurance agent Debra Muse, who in 2018 was sentenced to five years in prison and ordered to pay $1.6 million in restitution for crop insurance fraud. Muse, who doubled as an employee of Clay’s Tobacco Warehouse — where a number of insurance farmers hid away their yield — admitted that she created multiple false documents, including Clay’s Tobacco Warehouse sale bills and shipping reports to help farmers hide their crop production from their insurance adjusters and falsify the quality of the tobacco. These false claims led to $5,917,515 in crop insurance indemnity payments, split up between the farmers, insurance agents and adjusters in on the scheme — all backed by the federal government, of course. 

Some of the payments also went to Roger Wilson, the former owner of the since defunct tobacco warehouse, along with farmers John D. and Kevin C. Watkins. In March, all three men were indicted as part of the same conspiracy. In part, because the scam became so facile, the conspirators got lazy: According to the indictment, Watkins allegedly used matching photos of damaged tobacco in separate claims.

These crimes, according to Bill Estep, a reporter for the Lexington Herald Leader, who’s reported on 20 different cases of crop insurance fraud in the last three years alone, has been particularly “pervasive” and “widespread” in Kentucky. He tells me that anywhere there’s crop insurance, there’s potential for crop insurance fraud. “A lot of these cases that they’re citing in Central Kentucky go back to the 2012, 2013 timeframe, so I think it took [the USDA] a while to catch on, and then they started indicting them four or five years after that,” says Estep.

Based on his reporting over the last few years, there’s reason to believe that we’re likely to see more insurance farmers prosecuted in the coming years. “I think the hope is that by busting 20 people and sending them to prison, that other people get the message,” says Estep.

Prior to the last few years, however, per a reporter for AgWeb who requested to remain anonymous, the USDA didn’t want people to know the full scale of the crop insurance fraud in this country. For example, he tells me that when he’s doing a crop insurance fraud story and he asks the USDA certain questions, “they’re basically going to tell you almost nothing.” “Every once in a while, you can get somebody to talk, an investigator to talk on a case that’s done,” he says. “Otherwise, they claim the payouts are fair.” Because to admit otherwise, he explains, would “be very embarrassing.”

Crop insurance, to the uninitiated, is a fairly complicated criminal enterprise. It differs by crop and there are varying levels of coverage. But like any other bureaucratic web that links back to the government, it lends itself to a strata of organized criminal agents. At the most astute level, it typically begins prior to the farming season, whereby a farmer insures their crops. “Let’s say it’s a 1,000 pounds guarantee per acre and the price the farmer gets is $2 per pound,” says Henton. “For every pound the farmer loses short of 1,000 pounds, the insurance agency will pay $2 per pound.” 

For example, a farmer might grow 1,500 pounds of tobacco per acre (the average is closer to 2,300 pounds), but only report 500 pounds per acre. That leaves the farmer 1,000 pounds per acre short multiplied by a factor of $2. Therefore, according to a legitimate crop insurance policy, the farmer is owed $2,000 per acre of tobacco. Since the average farm size in Kentucky is 177 acres, that means the insurance company owes that farmer $354,000 in indemnity payments. 

Henton tells me that he has “outstanding yields,” and therefore, he benefits from actually raising the crop. “We make more money raising the crop than with insurance,” he says. But he concedes that not every farmer is in his position. “If you’re on the lower end of the scale, there’s some necessity for this,” he admits. 

What some farmers — even the most successful ones — also do is sell their tobacco at a warehouse like Clay’s for X amount, or hide it in a barn or tuck it away out of sight, while also turning in an insurance claim on that same crop of tobacco. “So they’re essentially double-dipping,” says Estep.

In an AgWeb article detailing how federal agents busted a record-breaking $100 million crop insurance fraud ring in North Carolina, Don Doles, the lead investigator of the case, said that despite his record-breaking case, he and his fellow agents “touched about a tenth of those truly participating at some level,” adding that “the scope of what happened is so much bigger than what could ever be included in a story.” To that end, it’s possible that crop insurance fraud costs taxpayers somewhere in the ballpark of a billion dollars a year.

For Doles, the most frustrating aspect of the case was just how involved the big tobacco companies were in the fraud scheme. “The person acting as dealer hauls off the unaccounted [for] tobacco, bought at half price and sells it to a big tobacco company that snaps up great tobacco for $1.75, even though they know it’s shady,” Doles explained to AgWeb.  

But it’s not just Big Tobacco who’s complicit: According to Patrick Westhoff, director of the Food and Agricultural Policy Research Institute at the University of Missouri, the USDA is also an unwitting accomplice. “The premium subsidy basically reduces the cost to the farmer buying the insurance, so the farmer only pays, on average, about 38 percent of the full cost of the policies that they’re buying,” says Westhoff. “The other 62 percent, on average, is covered by taxpayers.” 

As for the crop insurance companies, Westhoff says, they make money too. “The basic notion is they can retain some of those policies for themselves, so that if there’s not a loss experienced by farmers, they get to keep revenue in excess of any of the payments they have to pay out,” he says.

In other words, when it comes to agricultural subsidies, some of which are allocated toward insuring crops, the government has a long history of placating struggling farmers and their communities with cash. Such was the case for the Warrens, who were paid more than $2 million by the USDA to help them insure their tomatoes in the first place. Richard Edwards, the federal prosecutor in the Warren case who blew the whistle on the farmers, the agent and the adjuster, compared the entire crop insurance business to a bank robbery, with the government being the ones offering the getaway car. 

Year after year, then, a bundle of farmers — some new and some old — scam the government. And every year that it continues, the folks in and around the farming industry are less surprised. That’s because the system, per Joseph Glauber, a senior research fellow at the International Food Policy Research Institute, is effectively designed to be corrupted. “When you sign up for insurance, they give you a price that they’re going to pay for your crop, and you can imagine if the price for that crop drops a lot during the growing season and you go into the harvest time, you’re going to get paid a lot more on every bushel you lose relative to the one you harvest,” he says. “Well, there’s some incentive to claim losses. You may even just decide that it looked better as a total loss.”

You would expect that something so obvious as checking to make sure insurance claims are legit should have some level of government oversight, particularly when it’s costing hundreds of millions of dollars a year, and you’d be right. But Glauber tells me that “it’s hard when you have people in Washington, D.C., monitoring some farm in a little hollow and holler in Kentucky, rolling tobacco.”

Sweetening up the deal further for any and all who are willing to take the risk, is the fact that although the loss adjusters are supposed to maintain some level of independence from the insurance companies, according to Glauber, that’s hardly ever the reality. “A lot of them live in the same county with the insurance agent as well as the farmer,” he says of the adjuster. “And so they’re old buddies.”

Or in one recent case of crop insurance fraud, they’re husband and wife. In October, Michael McNew, who started out as an adjuster before becoming an agent selling these policies, pled guilty to helping farmers growing tobacco, corn and soybeans to file applications for hail-damage policies that had false information — including the amount of acreage involved and who owned the crop. McNew and his wife, who operated as the insurance adjuster, helped certify three different losses on tobacco crops that were never even planted. In a different case, McNew filed a claim for one farmer using a photo of someone else’s field. In total, the scheme caused $23 million in fraudulent losses to the insurance company, which again, is backed by the federal government.

The question then becomes, why does the government continue to supply billions of dollars in subsidies to farmers without at least keeping a close eye on where and how the money is funneled? 

That, explains Westhoff, is largely a political question. He tells me that while Republicans have dominated the farm vote for quite some time, it’s become even more pronounced recently. “The current administration was definitely trying to provide support to a major constituency in making some of the payments they’ve made this year, no question about that,” he says. 

To his point, in March, HuffPost reported that three farm operations accused of violating federal farm subsidy rules still went on to receive more than $300,000 in payments from the $28 billion agriculture bailout Trump launched in 2018. While it’s true that for decades, per the same report, the USDA has possessed “broad authority to throw money at farmers,” in more recent years, the rules for payments have become even less strict, which is precisely the opposite of a deterrent. 

In defense of the farmers who receive these payouts, Henton tells me that “there’s some farmers who fall in the middle who aren’t scoundrels.” For them, Henton views these payouts as a necessity. “I’m selling tobacco last week for the same price that I sold it for seven, eight years ago,” he says. “I don’t mean adjusted for inflation, I mean, the same nominal price. I’m getting $2 a pack of my tobacco.” He’s not interested in making this “too much of a martyr story,” but he also reminds me that while Philip Morris USA and British American Tobacco continue to make enormous profits, “the labor costs are going up.” If you’re in that “middle zone” as a farmer, some years the indemnity payments can be the difference between staying in business or not. “So one can argue that, what do you expect them to do?” says Henton. “Not feed their family?”

For those reasons, it’s Henton’s belief that the responsibility isn’t with any individual component of the crop insurance scam, but rather a symptom of the whole machine. “The entire thing needs to be shaken to the core,” he says. “There’s lots of players in this thing. And when you get to pointing — whose fault is it, who’s going to fix it? — you find yourself pointing in 15 different directions at once.” 

The result in that sense is one similar to the Rashomon effect. If you ask the insurance agents, says Henton, it’s the fault of “scoundrel” farmers. If you ask the farmers, it’s the insurance agents. Both groups would say it’s a result of how the system has been designed and is administered by the USDA. “It’s the [tobacco] companies who are standing back and grinning because their farmers are staying in business, supplying them with tobacco at 10-year-old prices,” says Henton. 

The greater point is just how immaculately this criminal enterprise is designed. As the system currently stands, it works in favor of almost every actor involved: Sure, the “good guy” farmers occasionally stand by and watch as their premiums go up, but the only real loser here is the American taxpayer, for whom agricultural integrity — or lack thereof, at least for the time being — remains far enough out of sight to remain out of mind as well.

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