News of the looming scandal has caused panic among Lloyd's and other brokers who have placed insurance business with the company. Industry sources believe the company, Provident Capital Indemnity (PCI), would not be able to pay out claims, leaving shipowners and insurance brokers in London, Europe and the United States to pick up the pieces.
Brokers, including some at Lloyd's, were enticed by PCI's financial reports, which show dollars 75m ( pounds 44m) of assets in a Hong Kong bank and claim that its auditors are Coopers & Lybrand. But an investigation has revealed that the bank does not exist and that Coopers & Lybrand have never been PCI's auditors.
These revelations come two weeks after the Independent on Sunday revealed how the Department of Trade and Industry failed to prevent the crisis at Municipal Mutual Insurance, Britain's largest local government insurer, and have prompted calls for greater regulation.
Labour's front-bench City spokesman, Alistair Darling, accused the Government of encouraging DTI officials to 'turn a blind eye' to City scandals. 'For far too long the DTI's political bosses have encouraged it to look the other way,' he said.
City of London detectives have been called in to investigate allegations of fraud and it is understood they will begin interviewing alleged victims tomorrow.
The company insures US and European shipping fleets, acts as an insurance broker throughout Europe and has insured a large percentage of the 1994 World Cup. It is registered in the Commonwealth of Dominica in the West Indies, though its head office is in Delray Beach, Florida.
According to the DTI it is not authorised to write insurance business in Britain, but had used a loophole and established a London 'contact office' under the name PCI Management Ltd to generate business.
PCI's attorney, Jack Utter, insisted this week that the company has dollars 75m in three certificates of deposit in the Mercantile Trustco Banking Company in Hong Kong.
But a spokesman for Hong Kong's Commissioner for Banking said yesterday: 'This bank does not exist in Hong Kong. We sent someone down there to look at the place. It was not there. If there is such a bank, it is illegal.'
A spokesman for Coopers & Lybrand's Dominica branch said PCI had rejected the auditors because it could not accept their strict procedures, which include checking assets. 'I'm very disturbed that they have claimed Coopers & Lybrand were their auditors and that they had paid us. That is a serious misrepresentation.'
PCI dumped many of its risks on to Lloyd's syndicates by reinsuring their unpopular marine policies. By paying part of their premium income to Lloyd's, they reduced their own liability.
One underwriter said he was approached by Sedgwick's brokers to take part of PCI's cargo insurance policies. 'This is rather delicate. Lloyd's are involved. I only wrote a portion of the risk and it was written throughout the market. Other people have got them on their books.'
John Day, a director of PCI Management Ltd, said he had no formal connection with Provident Capital Indemnity. 'This is absolutely shattering news and should be looked into. It looks like the assets purported to be in Hong Kong are not there. They refused to disclose to us where the assets were kept.'
Mr Utter refused to give details of the company's 'Hong Kong bankers'. He said: 'Write any shit you want. It is not important. We don't give a goddamn about your English newspapers.'