Understanding fraud schemes in government programs

Law enforcement officials estimate that fraudsters stole between $87 billion to $400 billion of the $900 billion Pandemic Unemployment Assistance (PUA) program alone, with nearly half of that amount going to foreign crime syndicates.

To give a sense of the scale, $400 billion is more than the gross domestic products of all but the top 30 world economies, including Denmark ($397.1 billion), Singapore ($396.9 billion) and the Philippines ($394 billion). (See “‘Easy Money’: How international scam artists pulled off an epic theft of Covid benefits,

Ten years ago, stealing identities or creating fake ones was expensive and rare; techniques were out of reach for most fraudsters. But now, following scores of large data breaches, and with the introduction of untraceable cryptocurrencies and the explosion of darknet marketplaces, criminals can purchase valid Social Security numbers online for as little as $2 per number.

Let's understand fraud schemes in government programs.

Eligibility Misrepresentation Scheme

Eligibility misrepresentation is common among benefits programs. Sometimes, local government agencies even seek to fraudulently qualify for federal benefits. For example, in February 2019, the New York City Department of Transportation fraudulently obtained more than $5.3 million in federal reconstruction dollars by falsely claiming that numerous vehicles were damaged during Hurricane Sandy.?Eligibility misrepresentation schemes can also manifest with federal contracts and grants that are set aside for small businesses, such as businesses owned by minorities, women and veterans

For example, in August 2018, a Kansas City businessman, Jeffrey Wilson, fraudulently obtained $13.7 million in federal construction contracts using a “rent-a-vet” scheme. On paper, Wilson, who isn’t a veteran, shared ownership of his construction company, Patriot Co. Inc., with Paul Slavitch, a service-disabled veteran. But in practice, Wilson owned and operated the company alone — Slavitch worked full time at a government facility more than 40 miles away — and Wilson paid Slavitch a small salary in exchange?for using his name to fraudulently apply for federal contracts reserved for veteran-owned small businesses.

How to fight against Eligibility Misrepresentation

Agencies can fight eligibility misrepresentation by validating applications using publicly available data. For example, the Department of Commerce’s Bureau of Economic Analysis publishes information about per capita income and purchasing power that could be useful in validating community need for infrastructure investment. Securities and Exchange filings can also be useful for verifying names and salaries of high-ranking executive officers of public companies. Even a search of online U.S. Postal Service records can provide an agency with valuable intelligence on whether a person resides at the address they listed on their benefit application. See “Former Company Owner Sentenced for $13.7 Million ‘Rent-A-Vet’ Scheme,

Ghost Beneficiaries Scheme

This type of ghost beneficiary scheme — where the fraudster enrolls bogus beneficiaries or recycles the identities of beneficiaries who previously qualified for a program but have since aged out — is all too common in federal benefits programs. Unlike a fraud scheme where a single beneficiary misrepresents their own eligibility to enroll in a program, ghost beneficiary schemes typically involve service providers or their sales agents fraudulently enrolling people en masse.

In 2021, the FCC preapproved internet service providers (ISP) to enroll any student participating in the U.S. Department of Agriculture National School Lunch Program’s Community Eligibility Provision (CEP) into the Emergency Broadband Benefit (EBB) program (the precursor to the ACP). The EBB was meant to provide a $50 per month subsidy for eligible low-income families to pay for home broadband service used during the pandemic for online schooling; the FCC paid the ISPs directly rather than the families themselves. However, as the FCC Office of Inspector General later found, the CEP was “commonly abused by providers and their sales agents as an entry point for fraud in the [EBB] program,” and “a number of CEB schools are grossly overrepresented in EBB household enrollments when compared to the actual student enrollment at those schools.

See - Advisory Regarding Fraudulent EBB Enrollments Based On USDA National School Lunch Program Community Eligibility Provision

In one particularly egregious example, an ISP claimed 1,884 CEP-eligible households at a single Florida school, even though there were only 200 students enrolled, which works out to more than seven families per enrolled student. The FCC Office of Inspector General found similarly obvious instances of CEP-eligible families exceeding enrolled students in Alaska, Arizona, California, Colorado and New York. In many cases, the ISP failed to provide the name of the family’s child who was supposedly participating in the CEP, gave retail addresses as the purported home addresses for eligible families or provided unlikely home addresses indicating families who lived more than 50 miles away from their schools. (See “Advisory Regarding Fraudulent EBB Enrollments Based On USDA National School Lunch Program Community Eligibility Provision.”)

How to fight against Ghost Beneficiaries Scheme

One easy way for government programs to prevent ghost beneficiary schemes is to require beneficiaries to work with their providers when going through the enrollment process. Instead of allowing providers to enroll anyone who appears eligible, the government should require an affirmative act of a possible beneficiary to identify themselves and assert their desire to participate in a program. Something as simple as submitting a signed affirmation, Social Security number or photocopy of a driver’s license to show their interest in being part of a benefit program would limit the number of providers who are enrolling customers in programs not for the good of the beneficiary but for the good of the provider. This might slow down delivery of an ACP benefit, but it would also create a helpful gatekeeping check on providers and agents. The government could also integrate data analytics checks to identify potential red flags — for example, by automatically cross-referencing a beneficiary’s listed home address against property records and using Google maps to identify when fictitious or business addresses are used. Program officials could supplement this analysis using manual checks of statistical samples.

Cost Mischarging Scheme

In this common scheme, a grantee charges the government for costs that aren’t allowable, reasonable, or allocated directly or indirectly to the grant. For example, in March 2022, Project Concern International settled with the U.S. for $537,500 to resolve allegations that it knowingly submitted false claims to the USAID during its performance of grants from 2014 to 2016 to provide agricultural and other aid to developing countries.

Based on information from a whistleblower, U.S. investigators determined that the nonprofit improperly shifted costs between projects and sometimes used U.S. grant funds to cover privately funded projects.

In at least one case, the nonprofit’s supervisors instructed their staff to bill time or other costs to separate and unrelated USAID grant projects that had money remaining in their accounts even though those employees didn’t work on those projects. Project Concern International then falsely certified to USAID that it used the grant funds only as allowed under each project. (See “Project Concern International, a Global Health Non-Profit Organization, Agrees to Pay $537,500 to Resolve False Claims Act Action,” DOJ, press release, March 10, 2022.)

How to fight against Cost Mischarging

Cost mischarging often involves fraudulent salary payments and misuse of staff time. Agencies can fight against this kind of fraud by monitoring time and attendance records for suspicious activities and requiring grantees and subgrantees to post signage that advertises whistleblower hotlines.

Complex fraud schemes

Unlike the opening case, which just one person perpetrated, complex fraud schemes often involve a conspiracy of actors both within and outside the government. For instance, in 2018, Kelli R. Davis and Denon Hopkins pleaded guilty to engaging in a conspiracy to commit honest services wire fraud and theft of public money. The former was a federal grants officer responsible for administering the U.S. State Department’s Sports Visitors Program through a grant with George Mason University, and the latter was a subcontractor who provided transportation services for the program. Davis and Hopkins colluded to falsify vendor-related invoices and make fraudulent checks payable to Hopkins. Hopkins paid Davis kickbacks as part of the scheme; in exchange, Davis ensured that Hopkins continued to receive contracts with George Mason University. Together, the two stole thousands of dollars meant to support foreign exchange students and coaches. Davis was sentenced to 13 months in prison and Hopkins sentenced to 14 months for their parts in this crime. Like the Sickle case, Davis and Hopkins’ scheme involved diversion, contract steering and document falsification, as well as bribery and invoicing manipulation. (See “State Department Official Sentenced to Prison for Engaging in Honest Services Wire Fraud and Theft of Federal Funds,

How to fight Complex fraud schemes

NTIA, FCC and the Department of Commerce might find social network analytics to be a useful tool in identifying conspiracies and fake identities underpinning complex-fraud schemes like these. For example, agency investigators could examine the social distance between the grants officer, grantee executives and key staff, and subcontract executives and key staff to uncover hidden relationships or dummy social media accounts.

Agencies could also trace the internet protocol address of a suspicious email account to see if the geolocation matches the physical address on record for a grantee or subcontractor.

Fraud Risk Assessment

Developing an awareness of potential fraud risks is just the first step in the fraud risk assessment process. From there, agencies will want to prioritize a smaller number of risks for in-depth analysis. They might use surveys among their managers and staffs to help identify the most likely or highest-impact fraud risks and then use targeted interviews with senior leaders and subject-matter experts for more detailed feedback. Also, workshops among cross-functional groups can help break down silos and discover how fraud risk responses should bridge across multiple internal actors who don’t normally work together. Armed with this understanding of the risk, agencies can put in place mitigating controls, such as proactive data checks, prior to approving payments. U.S. Government Accountability Office (GAO) issued “A Framework for Managing Fraud Risks in Federal Government” in 2015. The framework provides a template for conducting fraud risk assessments to generate insights about fraud threats that entities could face, the key risk factors driving those threats and the fraud controls that agencies can use to guard against fraud. GAO recommends that agencies conduct fraud risk assessments whenever there are changes to its programming or operating environment, and unquestionably an infusion of billions of new dollars during a global pandemic qualifies as such a case.

The U.S. government needs to move with haste to systematically identify fraud risks that threaten its new benefit programs. If these agencies don’t take proactive steps to prevent fraud now — choosing instead to let law enforcement entities chase after fraudsters only after they’ve stolen program funds — the U.S. government stands to lose several billion more in taxpayer dollars, with dubious prospects for recovery.