Tips for Detecting and Preventing Federal Grant Fraud
In early 2022, a massive federal grant fraud scheme was uncovered in Minneapolis. To ensure children did not go hungry during the pandemic, the federal government provided millions of dollars in funding to organizations that promised to feed thousands of children a day. Instead of providing these critically needed meals, organizations and individuals were revealed to have used the money for personal gain, taking advantage of lax supervision and loopholes in the grant process.
As stewards of public dollars, federal agencies are responsible for ensuring that grant funding is used as intended. Grantees are responsible for taking fraud prevention and detection measures within their own organizations and when issuing subawards. They are also liable for any fraud issues tied to their subrecipients; however, federal agencies are ultimately responsible for the stewardship of funds. Read on for tips that will help you monitor your grantees as you work to prevent fraud.
Conduct risk assessments and utilize the results
Awarding agencies are responsible for conducting a pre-award risk assessment. This includes assessing financial stability, management systems and standards, history of performance, and audit reports and findings. Risk assessments can identify points of weakness, allowing you to revise requirements or implement additional checks and balances. Risk assessments are not just a compliance exercise to put in a file and forget about. The results should be used throughout the life of the grant. Areas of concern identified in the risk assessment should become focus areas as you monitor the program and work with the grantee.
Stress the importance of strong internal controls
Internal controls are critical to the functioning of any organization, especially one receiving federal grant funding. To comply with the grant terms and conditions, recipients must be able to account for how and when grant dollars are spent. The Standards for Internal Control in the Federal Government, commonly referred to as the “Green Book,” provides a roadmap against which you can monitor your grant recipient’s internal controls. In addition, if internal control weaknesses are identified during the risk assessment process, you should provide your grantees with proper training and technical assistance so they can strengthen their internal control program. Some agencies provide webinars for grantees that provide guidance on these topics. Being open and available for discussion can encourage your grant recipients to come to you with questions and concerns regarding internal control. This may result in you preventing a potential problem before it becomes a serious issue.
Educate yourself and your grantees about the mindset of fraudsters
Understanding what drives people to commit fraud allows you to identify red flags and intelligently create effective anti-fraud measures. Lori Richards, the former director of the Office of Compliance Inspections and Examinations at the Securities and Exchange Commission, identified five types of fraudsters: the “Grifter,” the “Borrower,” the “Opportunist,” the “Crowd-Follower,” and the “Minimizer.” Grifters set out to commit fraud, believing they could outsmart the government. Borrowers rationalize theft with the belief they will pay back the money. Opportunists may not set out to commit fraud but take advantage of perceived loopholes they identify down the road. Crowd-followers believe they are just going with the flow, following the actions of others. Minimizers justify their actions by telling themselves no one is getting hurt. Knowing the types of fraudsters you are up against allows you to get ahead of these types of actions.
Use a variety of fraud detection tools
Once funding has been released to grantees, utilize various fraud detection methods to combat fraud on multiple levels. These include techniques such as site visits, desk reviews, audits, financial reconciliations, and data analytics. In an example from the Minneapolis fraud scheme, a site visit revealed that the address the fraudsters had listed as a feeding site for 5,000 children a day was actually a two-bedroom apartment with no association to a nonprofit and that neighbors reported never seeing even small numbers of children there. Combined with other investigative measures, the full scope of the scheme had been revealed. Because not all grant recipient sites can be visited every year, you may need to utilize technology to gain similar insights (e.g., using Google Maps or Google Street View to validate an address).
Act on and report suspected or detected fraud immediately
Act quickly on tips from grantee staff and members of the public who report fraud through whistleblower programs. There are several web resources you can use to report fraud, including Oversight.gov, IGNet’s Report Fraud Directory, and the Pandemic Response Accountability Committee’s Fraud Hotline. Strong fraud prevention and detection measures safeguard federal dollars and help ensure the money is used as intended, for the public good.