Fraud and Abuse of Federal Grant Funds

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Fraud and Abuse of Federal Grant Funds
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Agenda

• ED/OIG Organization and Mission
• Awareness and Prevention To define fraud in the
  context of grant administration.
• Reporting Fraud To provide guidance about
  reporting potentially fraudulent behavior.

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Inspector General Act of 1978
to prevent and detect fraud, waste and abuse and
improve the economy, efficiency and effectiveness
of Education Department programs and operations.
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OIG Mission Statement

• To promote the efficiency, effectiveness, and
  integrity of the Department's programs and
  operations, we conduct independent and objective
  audits, investigations, inspections, and other
  activities.

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ORGANIZATIONAL CHART
Part of the Department BUT Independent
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What is Fraud?

• Legal Definition
• - An intentional distortion of the truth in an
  attempt to obtain something of value. Does not
  have to result in monetary loss.
• Laymans Definition
• - Lying, cheating and/or stealing.

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Who Commits FraudInvolving Education Funds?

• School Employees, Officials, Owners, Financial
  Managers, and Instructors
• Lenders and lender servicers
• Guarantee Agencies
• Award Recipients
• Grantees and Contractors
• ED Employees
• Others

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What is Fraud?

• Two types
• Civil Fraud
• Criminal Fraud

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CIVIL FRAUD

• False Claims Act - 31 U.S.C. 3729
• Provides incentives to citizens to bring actions
  with reward of of recovered .
• Standard of proof is preponderance of the
  evidence, or 51, not beyond a reasonable
  doubt.
• States and Local Governments can and have been
  prosecuted for fraud under the False Claims Act.

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False Claims Act

• Sec. 3729. Any person who knowingly
• presents a false claim for government payment
• makes a false record or statement to support a
  false claim
• conspires to get a false claim paid
• makes a false record or statement to decrease an
  obligation to pay money or property to the
  Government (known as a reverse false claim).

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Examples

• Grant application with false information
• Performance report with false data
• Breach of a promise to comply in participation
  agreement
• Award panel with falsified bids
• Expenditure report that falsely indicates federal
  funds have been expended

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Examples

• Application for Federal Assistance SF-424

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Examples

• Payment Request G5

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Examples

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False Claims Act

• Knowing and Knowingly Defined.A person
• (1) has actual knowledge of the information or
• (2) acts in deliberate ignorance of the truth or
  falsity of the information or
• (3) acts in reckless disregard of the truth or
  falsity of the information, and no proof of
  specific intent to defraud is required

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Vulnerabilities

• Example 1
• As a result of an ED/OIG investigation, Bowie
  State University agreed to repay to the
  Department 31,292 that a Bowie employee
  embezzled from a Preparing Tomorrows Teachers to
  Use Technology grant.

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Vulnerabilities

• Example 2.
• As a result of an ED/OIG investigation the
  District of Columbia Public Schools system (DCPS)
  agreed to a 1.75 million civil fraud settlement
  resolving allegations that it misused Migrant
  Education Program (MEP) funds. DCPS falsely
  certified its eligibility to receive federal
  funds under the MEP and that it had eligible
  migratory children residing in the District, when
  in fact there were no such children.

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False Claims Act

• Is liable to the United States Government for a
  civil penalty of not less than 5,000 and not
  more than 10,000, plus 3 times the amount of
  damages which the Government sustains because of
  the act of that person.

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Vulnerabilities

• Example 3.
• As a result of an ED/OIG investigation, the
  Puerto Rico Department of Education agreed to a
  19 million civil fraud settlement for submitting
  false child counts between 2002 and 2005 that
  were based upon falsified student eligibility
  documents for the Migrant Education Program.

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False Claims Act

• Damages are statutorily lowered to double damages
  if the entity self-discloses or makes a voluntary
  disclosure to the government.

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Criminal Fraud

• Education program frauds generally involve a lie
  or some concealment.
• Sometimes the cover-up generates more crimes than
  the underlying fraud itself, and can be the basis
  for prosecution.

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Criminal Fraud

• Fraud schemes include
• Embezzlement
• Bribery
• Contract-related fraud
• Kickbacks
• Extortion (acting under color of official right)
• Obstruction of justice
• Obstruction of Federal audit
• Destruction of records

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Criminal Fraud

• Fraud Statutes
• 18 U.S.C. 286/287 False Claims
• 18 U.S.C. 371 Conspiracy
• 18 U.S.C. 641 Theft of Public Funds
• 18 U.S.C. 666 Theft/Bribery
• 18 U.S.C. 1001 False Statements
• 18 U.S.C. 1341/43 Mail Wire Fraud
• 18 U.S.C. 1516 Obstruction of Audit
• 18 U.S.C. 1519 Alteration of Records
• 18 U.S.C. 1951 Extortion

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Criminal Fraud

• Failure to report fraud can be a crime.
• 18 U.S.C. 4, Misprision of Felony
• Whoever , having knowledge of the actual
  commission of a felony cognizable by a court of
  the United States, conceals and does not as soon
  as possible make known the same to some judge or
  other person in civil or military authority under
  the United States, shall be fined under this
  title or imprisoned not more than three years, or
  both.

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Criminal Fraud

• 18 U.S.C. 1516. Obstruction of Federal audit
• Influencing, obstructing, or impeding a Federal
  auditor in performance of official duties
  relating to a person, entity, or program
  receiving in excess of 100,000, directly or
  indirectly, from the U.S. in any 1 year
  periodshall be fined or imprisoned not more than
  5 years, or both.

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Criminal Fraud

• 18 U.S.C. 1519. Destruction, alteration, or
  falsification of records
• -- alter, destroy, mutilate, conceal, cover
  up, falsify, or make a false entry in any record,
  document, or tangible object with the intent to
  impede, obstruct, or influence the investigation
  or proper administration of any matter within the
  jurisdiction of any department or agency of the
  United States or in relation to or contemplation
  of any such matter .

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OMB Circulars

• OMB Circular 21 Cost Principles for Educational
  Institutions
• OMB Circular 87 Cost Principles for State,
  Local and Tribal Governments
• OMB Circular 102 Grants and Cooperative
  Agreements with State and Local Governments
• OMB Circular 122 Cost Principles for Non-Profit
  Organizations
• OMB Circular 133 Audits of States, Local
  Governments, and Non-Profit Organizations

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OMB Circulars

• These circulars set forth how Federal funds can
  be spent.
• If an entity fails to adhere to these
  regulations, there may be False Claims Act
  implications and potential criminal fraud.

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OMB Circular 122

• To be allowable under an award, costs must meet
  the following general criteria
• Be reasonable for the performance of the award
  and be allocable to the award

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OMB Circular 122

• Conform to any limitations or exclusions as to
  types or amount of cost items.
• Be consistent with policies and procedures that
  apply to both Federally financed and other
  activities of the organization.
• Be accorded consistent treatment.

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OMB Circular 122

• Be determined in accordance with generally
  accepted accounting principles (GAAP).
• Not be included as a cost or used to meet cost
  sharing or matching requirements of any other
  federally financed program in either the current
  or a prior period.
• Be adequately documented.

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OMB Circular 122

• Reasonable costs. A cost is reasonable if, in
  its nature or amount, it does not exceed that
  which would be incurred by a prudent person under
  the circumstances prevailing at the time the
  decision was made to incur the costs.

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OMB Circular 122

• In determining the reasonableness of a given
  cost, consideration shall be given to
• Whether the cost is of a type generally
  recognized as ordinary and necessary for the
  operation of the organization or the performance
  of the award.
• Significant deviations from the established
  practices of the organization which may
  unjustifiably increase the award costs.

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OMB Circular 122

• Examples of Unallowable Costs
• Alcoholic beverages
• Bad debts
• Includes losses arising from uncollectable
  accounts and other claims, and related collection
  and legal costs
• Donations and contributions
• Entertainment costs
• tickets to shows or sports events, meals,
  lodging, rentals, transportation, gratuities
• Fines and penalties.
• unallowable except when incurred as a result of
  compliance with specific provisions of an award
  or instructions in writing from the awarding
  agency

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OMB Circular 122

• Memberships, subscriptions, and professional
  activity costs
• Costs of membership in civic or community
  organization are allowable with prior approval by
  Federal agency
• Selling and marketing
• allowable as direct costs with prior approval by
  awarding agencies when necessary for performance
  of Federal programs
• Goods or services for personal use
• regardless of whether cost is reported as taxable
  income to employees
• Housing and personal living expenses
• allowable as direct costs when necessary for
  performance of award and approved by awarding
  agency

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OMB Circular 122

• Were the costs approved by ED in advance, and was
  that adequately documented in the grant file?

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OMB Circulars

• OMB Circulars 21, 87 and 122 are similar in their
  definitions of unallowable costs and cost
  principles
• School officials should monitor grant
  expenditures to ensure that unallowable expenses
  are not charged to the government either through
  direct or indirect cost

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Vulnerabilities

• Example 4.
• As a result of an ED/OIG investigation, five
  officials of the Metro Technical Institute (MTI),
  including the owner, admissions director, and
  registrar, were convicted for their roles in a
  student financial assistance fraud scheme. The
  schools owner directed staff to falsify
  eligibility, attendance, and grade records to
  illegally obtain student financial assistance
  funds and to obstruct a scheduled Department
  program review. All officials involved were
  ordered to pay over 557,000 in restitution.
  Sentences ranged from 12 months and one day in
  prison for the former owner, to community service
  and/or probation for the other officials.

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Vulnerabilities

• Example 5.
• An ED/OIG audit of Valencia Community College
  (VCC) determined that VCC did not administer the
  matching requirement for its GEAR-UP grant in
  accordance with statutory, regulatory and
  administrative requirements. 6 of 7 partnerships
  did not contribute 1.6 million of the required
  non-federal match, and VCC claimed 4.1 million
  in unallowable matching costs by using commercial
  rental rates instead of actual depreciation costs
  or use allowance as required by Federal cost
  principles (OMB Circular).

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Vulnerabilities

• Example 6.
• As a result of an ED/OIG investigation, three
  officials of the Harrison Career Institute pled
  guilty to one count of conspiracy to destroy,
  alter, or falsify records in Federal
  investigations. We determined that the former
  President, along with the schools Director of
  Internal Audit and Director of Financial Aid,
  fraudulently altered student financial aid
  records to appear compliant with federal
  regulations. This was an ongoing conspiracy to
  prevent the schools independent auditor and the
  Departments Program Reviewers from detecting
  widespread deficiencies in the schools
  processing of federal student aid.

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Vulnerabilities

• Example 7.
• As a result of an ED/OIG investigation ,a former
  Dallas Independent School District (DISD)
  secretary was convicted for theft for using DISD
  credit cards issued to her for numerous personal
  purchases totaling approximately 56,000 over a
  two period for clothing, cosmetics, house wares
  and groceries. Another DISD secretary also pled
  guilty to theft for charging over 100,000 in
  personal purchases to DISD.

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Vulnerabilities

• Example 8.
• As a result of an ED/OIG investigation, the
  former Executive Director for the District of
  Columbias Office of Charter School Oversight was
  sentenced for paying herself and steering no-bid
  contracts to family members and friends totaling
  649,000.00 in federal and local DC funds
  belonging to the Office of Charter School
  Oversight.

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Additional Materials

• Improving the Grant Management Process (DOJ-OIG,
  2/09)
• http//www.justice.gov/oig/special/s0903/final.pdf
  
• A Guide to Grant Oversight and Best Practices for
  Combating Grant Fraud (DOJ-OIG, 2/09)
• http//www.justice.gov/oig/special/s0902a/index.ht
  m

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Who is Responsible for Reporting Fraud?

• Everyone who deals with the DoED funding has a
  responsibility to help control fraud.

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Why Report Fraud?

• Ethical responsibility
• To deter others from committing fraud and abuse
• To protect the integrity of the Federal, State
  and Local programs
• To avoid being part of the fraudulent/criminal
  activities
• To reduce financial exposure under the False
  Claims Act

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Report Fraud

• Contact the OIG Special Agent in Charge in your
  geographic area as shown at the following link
  http//www2.ed.gov/about/offices/list/oig/oigaddre
  ss.html.
• Or, you can contact the OIG Hotline

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OFFICE OF INSPECTOR GENERAL HOTLINE

• 1-800-MISUSED
• E-MAIL OIG.HOTLINE_at_ED.GOV
• FAX [phone]