Grant Fraud Prevention

U.S. Department of Justice
Office of the Inspector General
Fraud Detection Office
Grant Fraud Prevention
National Grants
Management Association
January 18, 2012
Senior Special Agent
Ken Dieffenbach
What is
Grant Fraud?
Federal Outlays for grants to state and local governments (in billions)
Source: GAO Report 11-773T, June 23, 2011
Fraud Assumptions
It Happens / It’s Not Good
Prevent / Detect it Early
Fraud Consequences
Organizational Reputation /
Survival / Program Impairment
Overview of the Federal Grant Process
Application / Proposal
Certified Assurances
Eligibility Certification
Accept Grant Conditions
Formal Award
Grantee Performance
Financial Certifications
Claims for Reimbursement
Narrative Progress Reports
Grantor Monitoring / Audits
Grantor Agency Policies
Code of Federal Regulations Title 2
Parts 215, 220, 225, 230
Common Grant Fraud Risks
Conflicts of Interest /
Procurement Process
“Lying”/ Failing to Support
Conflicts of Interest /
Procurement Process Issues
 Grantees are required to use federal funds in the best interest of their
program and these decisions must be free of undisclosed personal or
organizational conflicts of interest– both in appearance and fact.
The typical issues in this area include:
 Less than Arms-Length Transactions: purchasing goods or services
or hiring an individual from a related party such as a family member or
a business associated with an employee of a grantee.
 Sub grant award decisions and vendor selections must be
accomplished using a fair and transparent process free of undue
influence. Most procurements require full & open competition.
 Consultants can play an important role in programs, however, their
use requires a fair selection process, reasonable pay rates, and
specific verifiable work product.
Former Member of Virginia House of Delegates
Sentenced to 114 Months in Prison for Bribery
and Extortion
Philip A. Hamilton was elected to the Virginia House of Delegates in 1988
In January 2007, he introduced a budget amendment to appropriate $1 million
for a “Center for Teacher Quality and Educational leadership” at Old Dominion
Prior to, and after, offering this amendment, Hamilton negotiated with ODU for a
$40,000 per year position as the Director of the new program.
ODU advertised the new position, received three applicants, interviewed none
and hired Hamilton for the position which he held for two years.
Source: Excerpted from August 12, 2011 Press Release, U.S. Attorney’s Office for
the Eastern District of Virginia
“Lying” or Failing to
Properly Support
A grant agreement is essentially a legally binding contract and grantees are
obligated to use their grant funds as outlined in the agreement and to act with
integrity when applying for and reporting their actual use of funds. Grantees are
also obligated to properly track the use of funds and maintain adequate
supporting documentation.
The typical issues in this area include:
 Unilaterally redirecting the use of funds in a manner different than outlined in
the grant agreement.
 Failing to adequately account for, track or support transactions such as
personnel costs, contracts, indirect cost rates, matching funds, program
income, or other sources of revenue.
 Grantee’s must accurately represent their eligibility for funding and cannot
provide false or misleading information in their application or subsequent
narrative progress or financial status reports.
From August 2000 through February 2007, MSI entered into cooperative
agreements with the government to provide certain school districts with aerosolbased drug detection kits to combat student drug use.
During a financial audit, the government found that MSI had billed the
government for overhead costs that were not approved as part of the cooperative
agreements thereby inflating the cost of the drug detection kits.
MSI agreed to pay $458,000 to settle allegations under the False Claims Act that
it mischarged the government for unapproved overhead costs in connection with
two government-funded grants.
Source: Excerpted from September 30, 2011 Press Release, U.S. Attorney’s Office
for the District of Maryland
 Theft is the most common issue in almost all organizations–
including those that receive federal grant funding.
 People that embezzle funds can be extremely creative and appear
very trustworthy– precisely why they can do so much damage to an
organization and remain undetected for extended periods of time.
 Poor or no internal controls equals virtually inevitable theft. A lack of
appropriate separation of duties is one of the most common
 Checks routinely written to employees as “reimbursement” of
expenses and the use of ATM / Debit / Gift / Credit Cards must be
carefully controlled and require robust oversight.
Between January 2009 and March 31, 2011, Mayor Keith Conway of Kinloch,
Missouri, stole, diverted and embezzled city funds to pay for several personal
Bahamas vacation cruises, airline tickets to Las Vegas and Ft. Lauderdale for
himself and friends, the down payment and loan payments on a time share
condominium in South Florida, personal credit card bills, personal federal income
taxes, as well as Ameren electric bills for a city owned residence where he was
living rent free.
Conway was originally indicted on the fraud charges in May, 2011 and was
charged in a superseding indictment June 2, 2011 with the additional witness
tampering charge related to his efforts to persuade the Board of Alderman to
provide false information to federal law enforcement about the criminal charges
pending against him.
Conway was sentenced to 21 months in prison, and ordered to pay restitution of
Source: Excerpted from November 18, 2011 Press Release, US Attorney’s Office for the
Eastern District of Missouri
Risk Mitigation
1. Read & Understand the Grant Agreement; Know the rules: Agency
Guidance; CFR’s; Mandatory Disclosure, etc…
2. Examine your programs to identify fraud vulnerabilities: time & effort
records; indirect and G&A rates; consultants; control of “cash”
3. Consider developing a compliance plan.
4. Implement specific fraud prevention strategies including educating
others about the risks– the more people are aware of the issues, the
more they can help prevent problems or detect them as early as
5. Maintain a well designed and tested system of internal controls.
Risk Mitigation
6. Ensure all financial or other certifications and progress reports are
adequately supported with appropriate documentation and
7. Identify any potential conflicts of interest issues and disclose them
to the appropriate officials for specific guidance and advice.
Ensure everyone involved in the grant process understands the
conflict of interest prohibitions.
8. Ensure there is a fair, transparent and fully-documented
procurement process especially when utilizing consultants.
Ensure the rate of pay is reasonable and justifiable and that the
work product is well-defined and documented.
Ken Dieffenbach