Fraud Government Entities: The Perpetrators and the Types of Fraud

CPDE DIC. 2021

Fraud in Government Entities: The Perpetrator and the Types of Fraud

Por: Doris Cotto Rodríguez | Educadora Seniors | CDPE

Why is fraud becoming such a significant problem and what are the reasons people commit fraud?

Research has shown that individuals commit fraud when a combination of three factors exist: perceived pressure, perceived opportunity to commit and conceal, and a way to rationalize the behavior as acceptable. These three factors combine to create what is called the "fraud triangle”.

Fraud against the government may consist of fraud in connection with federal and local government contracting and fraud in connection with federal and/or federally funded entitlement programs, including public housing, agricultural programs, defense procurement fraud, educational programs, and corporate frauds. As it relates to federal and local government contracting, investigations often involve bribery in contracts or procurement, collusion among contractors, false or double billing, false certification of the quality of parts or of test results, and substitution of fake or otherwise inferior parts.

WHAT'S INSIDE THIS: Government employees are not immune to the pressures that lead to fraud and a drain on the community's cash and assets.

Managers who are aware of the kinds of fraud most prevalent in government offices can create a proactive prevention and detection environment.

Suspected fraudulent activities include, but are not limited to:1 • • • • • • • • • •

Falsifying information on contract proposals Using federal funds to purchase items that are not for government use Billing more than one contract for the same work Billing for expenses not incurred as part of the contract Billing for work that was never performed Falsifying data Substituting approved materials with unauthorized products Misrepresenting a project's status to continue receiving government funds Charging higher rates than those stated or negotiated for in the bid or contract Influencing government employees to award a grant or contract to a particular company, family member, or friend

According to the 2018 Report to the Nations

Corruption occurs when employees misuse their

released by the Association of Certified Fraud

influence in business transactions in ways that violate

Examiners (ACFE), occupational fraud is the

their duty to the employer for direct or indirect

largest

benefit.

and

most

organizations

may

prevalent face.

fraud

Businesses

threat and

Corrupt acts include things like bribery,

conflicts of interest, kickbacks, and extortion.

government organizations across the world are vulnerable to fraud committed from within by

Financial statement fraud occurs when employees

their own employees.

intentionally cause a misstatement or omission of information in an organization’s financial reports.

Occupational fraud is fraud committed against an

Financial statement fraud can include overstatements

organization by its own officers, directors, or

and understatements of income or revenues,

employees. It can be classified into one of three

improper disclosures, improper asset valuations and

categories: asset misappropriation, corruption,

more.

and financial statement fraud.

Among the primary weaknesses that contributed to Asset misappropriation occurs when an employee

most of the occupational fraud cases found in the

steals or misuses an organization’s resources. This

study were a lack of internal controls, an override of

could include theft of cash and non-cash assets

existing controls and a lack of any sort of

inflated expense reports, false billing schemes,

management review.

payroll schemes and more.

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Office of Inspector General

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The ACFE 2018 Report to the Nations provides several interesting findings, including:2 •

• • • • • • • •

•

Asset misappropriations (when an employee steals or misuses the employing organization’s resources) were the most common form of occupational fraud, occurring in 89 percent of cases with a median loss of $114,000 The median duration of fraud schemes was 16 months and, the longer a scheme lasts, the more it costs the organization The leading methods of detection of occupational fraud were tips (40 percent), internal audit (15 percent) and management reviews (13 percent) Internal control weaknesses accounted for nearly half of all fraud cases Organizations that implemented anti-fraud controls realized lower fraud losses Smaller organizations (those with less than 100 employees) experienced both the greatest percentage of fraud cases and suffered the largest loss Government is one of the most common industries impacted by occupational fraud Organizations employing active fraud detection methods suffered from a lower median loss from fraud Some of the most common behavioral red flags of people who commit fraud include living beyond their means, exhibiting financial difficulties and a lack of willingness to share duties Data monitoring/analysis and surprise audits were correlated with the largest reduction in fraud loss

Government organizations accounted for 16

For smaller municipalities or organizations with limited

percent of all fraud cases in this study, the third

resources, these losses can be particularly devastating.

most for any industry with a median loss of

Since smaller organizations typically have fewer anti-

$125,000. Corruption and noncash (stealing or

fraud controls in place due to limited resources, they

borrowing supplies, tools, equipment, etc.) asset

are more susceptible to fraud.

misappropriation were the most common types of fraud schemes identified as impacting

The federal government spends hundreds of billions

government and other public administration

of dollars each year on subsidy programs, from the

entities.

massive Medicare to hundreds of more unknown programs that most people have never heard of.

Of those fraud cases detected within government

There are more than 1,800 federal subsidy programs.

organizations, 26 percent of frauds were found at

With such multiple benefits, the federal budget has

the state/provincial level with a median loss of

become victim to large-scale fraud and abuse. That is,

$110,000 and 31 percent were found at the local

people taking government benefits to which they are

government level with a median loss of $92,000.

not entitled.

Just about every subsidy program

suffers from fraud and abuse.

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Association of Certified Fraud Examiners. https://www.acfe.com/

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Three ways abuse Federal Government’s programs3 Medicare and Medicaid: Fraud in the two main federal health programs is huge, imposing costs at least in the tens of billions of dollars each year. As broad-based government programs, the massive size of Medicare and Medicaid makes them very difficult to police. Medicare, for example, processes 1.2 billion claims each year by computer, generally without human eyes checking them for accuracy.

The Government Accountability Office estimates that there are about $17 billion of improper Medicare payments each year, including fraudulent and erroneous overpayments to health care providers. That figure does not include the huge prescription drug benefit, which is thought to be highly susceptible to abuse.

Other estimates of improper Medicare payments are higher. Malcolm Sparrow/4 of Harvard University, a top specialist in health care fraud, argues that estimates by federal auditors do not measure all types of fraud. He believes that as much as 20 percent of federal health program budgets are consumed by fraud and abuse, which would be about $85 billion a year for Medicare.

Sparrow says that criminals can rip off federal health care programs simply by carefully filling out and submitting the proper forms, and then the "claims will be paid in full and on time, without a hiccup, by a computer, and with no human involvement at all." He argues that the abuses do not just stem from occasional overbillings by doctors but involves organized looting of health care programs by criminals.

A perfect example of what Sparrow is talking about was reported by the Washington Post some years ago when a high-school dropout with a laptop computer was able to single-handedly cheat Medicare out of $105 million by electronically submitting 140,000 fraudulent claims over four years for equipment and services.

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US Government Accountability Office Malcolm Sparrow, "Criminal Prosecution as a Deterrent to Health Care Fraud," Testimony to the Senate Committee on the Judiciary, Subcommittee on Crime and Drugs.

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There are many ways that Medicare gets ripped off: billing by health care providers for services not rendered, billing for products not delivered, misrepresenting services, unbundling services, billing for medically unnecessary services, duplicate billing, increasing units of service which are subject to a payment rate, falsifying cost reports resulting in increased payment to the health care provider, kickbacks, and on and on.

The Medicaid program also has a giant fraud and abuse problem. The GAO puts the cost of improper Medicaid payments at $33 billion, or about 10.5 percent of the program's total spending. But if improper payments are 20 percent of the program's cost, as Malcolm Sparrow thinks might be the case, that would be a $63 billion annual loss to federal government.

Medicaid's subsidies for handicapped transportation are widely abused. The program pays $50 per trip for handicapped persons to go to doctor's appointments, but investigators found that many people using the service were not handicapped and that many transportation companies were rigging the system to earn unjustified profits.

Another area of fraud is Medicaid's long-term care benefits, which cover the costs of nursing homes and home care for the elderly poor. Medicaid pays about half of the costs of all long-term care in the nation. The program has complex rules for eligibility related to one's income and financial assets. But nursing homes are expensive, and so the program creates incentives for middle- and higher-income families to try and qualify for it.

Indeed, an industry of financial consultants helps seniors hide their income and assets so that they become eligible.

Housing Subsidies: The Department of Housing and Urban Development (HUD) provides a huge range of subsidies to state and local governments, real estate businesses, financial institutions, and nonprofit groups.

The largest share of HUD's budget goes toward rental subsidies for low-income tenants. There are about $1 billion in erroneous and fraudulent overpayments of these subsidies each year. Tenants make false claims to gain eligibility for rental subsidies, and local public housing authorities have often abused these federal monies.

Another area of ongoing abuse is the Federal Housing Administration's mortgage loan insurance system. Buyers abuse the system by obtaining loans under false pretenses, and lenders abuse the system by issuing loans for more than properties are worth.

Student Loans: Federal student-aid programs have long been subject to fraud and abuse. The three main culprits are students and their families, educational institutions, and lending companies. It is difficult to stop the cheating in student loan programs because they "are large, complex, and inherently risky," according to the Inspector General of the Department of Education. Federal student loan programs involve more than 6,000 postsecondary institutions and more than 3,000 lenders.

Students and their families cheat aid programs by falsely reporting their income level and other items to garner larger benefits. With the Pell college grant program, for example, this type of fraud costs hundreds of millions

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of dollars per year. Another abuse is that many students simply decide not to pay back their federal student loans. In 2001, the GAO found that there were more than $20 billion of student loans in default.

Educational institutions often appropriate money meant for students. Under most student loan and grant programs, federal aid is sent to thousands of educational institutions, which are supposed to distribute it to eligible students. However, that distribution system has attracted swarms of shady schools and administrators over the decades that pocket the federal money at the expense of students and taxpayers.

A string of scandals in the early 1990s made clear the magnitude of the problem. One scandal regarded the trade school American Career Training Corporation in Florida. The school recruited new "students" at housing projects and helped them take out loans.

The school owners received tens of millions of dollars in federally guaranteed student loans, and simply pocketed it. Another scheme involved 21 Jewish schools in New York State that used millions of dollars in Pell grants to line their pockets while spending little on education. Yet another scandal at the time involved owners of Advanced Business College in Puerto Rico, who used Pell grants to buy $3 million worth of sports cars and real estate for themselves.

Farm Subsidies: The U.S. Department of Agriculture distributes more than $15 billion in cash subsidies to farmers and owners of farmland each year. More than 800,000 farmers and landowners receive subsidies each year, but the payments are heavily tilted toward the largest producers. Indeed, the largest 10 percent of recipients typically receive about 72 percent of all subsidy payments.

Other Federal Programs5 Many other federal programs suffer from substantial fraud and abuse. The data cited in the following bullets are from GAO reports on improper payments, unless otherwise noted: Food Stamps: This welfare program is a target for fraud because it is so large and complex. The government must keep track of millions of individuals to accurately document their eligibility while keeping tabs on the 160,000 retailers who deal in food stamps to look for illegal trafficking. In the past, the program spawned a huge black market as recipients exchanged their food stamps for cash on the street. Today, food stamps are issued on electronic cards, and fraud levels have been reduced. Nonetheless, the program's improper payment rate is still about 6 percent, costing about $1.7 billion annually.

School Lunches: A large share of subsidized school meals are taken by families with incomes above the legal cutoff points. Program audits and statistical data have found that about one quarter of those receiving free and reduced cost lunches are not eligible. Those unjustified benefits cost about $1.4 billion annually.

Supplemental Security Income: This program pays out $4.6 billion in improper and fraudulent benefits annually.

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US Government Accountability Office

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Children's Health Insurance Program: About 15 percent, or more than $800 million annually, of CHIP benefits are improper or fraudulent.

Child Care programs: The federal childcare, foster care, and Head Start programs pay out about $900 million in improper and fraudulent benefits annually.

Temporary Assistance for Needy Families: This program pays out $1.7 billion annually in improper and fraudulent benefits.

Unemployment Insurance: Almost $4 billion of annual UI benefits are improper or fraudulent.

Universal Service Fund: This Federal Communications Commission program pays out almost $1.3 billion annually in improper and fraudulent subsidies.

Earned Income Tax Credit: Almost one-third of EITC payments -$12 billion annually are improper or fraudulent.

Veterans Affairs: This department loses at least $800 million annually on improper and fraudulent payments, but the total is likely higher because losses are not reported for all the department's programs.

Social Security Disability Benefits: The Social Security Administration (SSA) is responsible for the implementation of the Disability Insurance Benefits Program. The SSA provides monetary benefits to workers with severe, long-term disabilities, who have worked in SSA covered employment for a required length of time.

Spouses and dependent children of disabled workers may also be eligible to receive benefits.

The Social Security Administration admits to improper payments totaling $1.3 trillion. Retirement, survivors, disability insurance, and Supplemental Security Income were all involved.

On Aug. 23 and 24, 2018, a Federal Grand Jury in the District of Puerto Rico returned seven separate indictments charging eleven individuals with fraud against the Social Security Administration (SSA) disability insurance benefits in Puerto Rico.

Emergency Response: Subsidies provided in the wake of emergencies are highly susceptible to fraud and abuse because funds are usually pushed out the door quickly with little planning or oversight. Federal recovery aid after Hurricanes Katrina and Rita in 2005 were subject to high levels of waste.

The GAO estimated that about $1 billion of payments by the Federal Emergency Management Agency made in just the first sixth months after the storms were "improper and potentially fraudulent."

Pandemic Unemployment Assistance (PUA): This is a newly developed federal government program, which was part of a $2.2 trillion relief package. The goal was to offer financial benefits to self-employed people,

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independent contractors, those engaged in the gig economy, part-time workers and others who were previously deemed ineligible for unemployment insurance. A large amount of the total unemployment claims, nearly 15 million, have been made through the PUA. About $47 billion in PUA money has been paid out to people, according to the US Labor Department.

PUA is facing a growing problem with fraud. According to the report of the US Department of Labor, PUA “has become the target of scammers who steal people's identities to apply for benefits they are not entitled to”.

These perpetrators are often using stolen identity information from national and global data breaches, as well as exploiting expedited payment efforts in the federal PUA program.

In Puerto Rico, Federal and state authorities investigate nearly 100,000 cases of fraud to the Pandemic Unemployment Assistance (PUA) program, which includes different modalities and schemes of theft, such as the illegal appropriation of another person’s identity or lying when filling out the application. There is an estimate of almost 10,000 PUA applications corresponding preliminarily to public employees, who are not entitled to the benefit for being on the payroll of an agency, regardless of whether they have lost any additional income from their job in the government.

The Police of Puerto Rico have arrested 67 people who were trying to cash PUA checks obtained illegally. With these interventions, the Bank Theft and Fraud Division has recovered $ 414,196. One of these cases was that of a 20-year-old arrested with a false ID while trying to cash a PUA check for $ 11,454.

We hear from many government organizations that fraud is not a concern because they have an annual financial statement audit. However, according to the ACFE report, only 4 percent of fraud cases are initially detected by a financial statement audit. If your organization is relying solely on reactive measures to catch potential fraud red flags, your organization is likely to be at greater risk.

The presence of a robust system of anti-fraud controls can be a powerful deterrent, as well as a proactive prevention and detection mechanism, in the fight against fraud. Preventing fraudulent activity within your organization starts with effective anti-fraud controls. Some of the most effective anti-fraud controls that reduce the duration as well as the loss from fraud include: • Code of Conduct • Proactive data monitoring and analysis • Internal audits and surprise audits • Fraud hotline • Management review • Anti-fraud policy One of the most important actions you can take for your organization is to complete a fraud risk assessment, particularly if you’re new to that office. Any government entity could be subject to risks, and a fraud risk assessment will allow you to identify and understand where fraud risks lie and learn what potential weakness in controls could impact your organization. Once risks are identified, a plan can be developed to mitigate those risks by instituting proper anti-fraud controls and procedures.

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What can government program managers do to fight fraud and limit risk?6 1. Assess and improve current controls. Look for incremental ways to improve performance. Start with detection and recovery, and with insights gained move toward prevention and cost avoidance.

2. Be data driven. Employ data analytics to help accurately identify and assess issues. Use these insights to inform strategic and operational decisions.

3. Implement an enterprise approach and break down data silos.

Using data from multiple programs can help identify issues faster since program eligibility requirements often overlap. Also, providers may serve multiple programs and stealing from one means stealing from all of them.

4. Incorporate advanced analytics. Hybrid analytics using artificial intelligence and machine learning can provide more complete insights faster. Built off an enterprise platform, advanced analytics can be operationalized to ensure business rules are applied correctly. More accurate fraud alerts promote efficiency and faster return on investment.

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Maynard, J. (2019, June 3). 4 ways government program managers can solve the fraud Catch-22.

Government Computers News. http://www.gcn.com

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