AIG also came clean about a number of offshore entities with which it has done business over the past decade, most notably Union Excess Reinsurance Co. and Richmond Insurance Co. Again, the issue is the use of favorable reinsurance accounting afforded transactions in which one insurer sells liabilities to another with the putative goal of diluting risk. Investigators suspect AIG exerted undue influence on a handful of smaller, mostly Caribbean-based companies to cut such deals simply to lighten its reserve balance. The key issues are economic risk-transfer to the reinsurer and negotiation, two elements that must be present for the favorable accounting -- and which presumably wouldn't be if AIG controlled the counterparty. (For a story about what probably piqued investigators' interest in the offshore companies by TSC's Matt Goldstein, click here .) "AIG has no direct equity interest in Union Excess," the company said. "However, based upon AIG's review to date, including consideration of previously undisclosed facts, AIG now believes that a significant portion of the ownership interests of Union Excess shareholders are protected under financial arrangements with Starr International Company, a private holding company, which owns approximately 12% of AIG's outstanding common stock and whose board of directors consists of current and former members of AIG management." AIG said that if Union Excess is required to be treated as a consolidated entity by AIG, it would result in a maximum reduction of approximately $1.1 billion in AIG's consolidated shareholders' equity as of Dec. 31, 2004. Regarding Richmond Insurance Co., AIG said: "Although AIG owns only a minority ownership interest in Richmond, the review of the operations of the Richmond subsidiaries has shown significant previously undisclosed evidence of AIG control." AIG will treat Richmond as a consolidated entity on its financial statements, a move that will result in a small increase in consolidated assets with a similar increase in consolidated liabilities and a minimal impact on AIG's consolidated shareholders' equity as of Dec. 31, 2004. In cutting its credit rating, S&P said Wednesday's disclosures raise questions about the company and its culture. "The number and scope of inappropriate financial transactions -- some characteristic of aggressive financial management -- have diminished our assessment of management and its internal controls, corporate governance, and aggressive culture," S&P said. "In addition, the potential breadth of management involvement in these transactions raises broader enterprise risk-management concerns."