Who’s watching the watchdogs?

Three true stories of how government fraud costs taxpayers

Veteran fraud fighter and former US Secret Service agent Earl Devaney looked directly at the Congressional Oversight Panel and delivered the stark news: Expect to see $40 billion to $55 billion in taxpayer money evaporate.1

Devaney, the hard-nosed Inspector General of the Department of the Interior, was speaking of fraudulent and wasteful distribution of funds from the American Recovery and Reinvestment Act of 2009.

Devaney had been selected Chairman of the Recovery Accountability and Transparency Board – the new super-watchdog created to guard over the distribution of taxpayer funds appropriated during the near-collapse of the US financial system in late 2008 and early 2009. This $587 billion federal economic stimulus package, which later grew to almost $800 billion, would be distributed through 28 federal agencies as grants, government contracts and social programs.

In an unusual moment of candor and clarity, Devaney laid bare the harsh realities of government procurement and acquisition. He explained that there's a complex system of endless laws and regulations governing literally thousands of government programs, involving hundreds of agencies with oversight from only a handful of watchdogs whose own siloed data, austere budgets and manual processes inhibit systematic means of detecting and preventing fraudulent behavior.2 He believed taxpayers would be better served with a focus on proactive, prevention-oriented approaches that harness the incredible power of data analytics.

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CASE #1
Human weakness at play

But the high rate of fraud, waste and abuse are only partly the result of an unwieldy system. Greed, opportunism, collusion and outright corruption have led experts to estimate that 5 percent to 7 percent of all taxpayer-funded projects will be lost to fraud, theft and abuse. Unfortunately, government procurement is ruled by an honor system that can be easily exploited, leaving taxpayers to pick up the tab for the staggering losses – from bid rigging, illegal kickbacks and bribery, to abuse of official charge cards.

Massive agencies such as the Department of Defense, Homeland Security and the General Services Administration are under such pressure to deliver on their critical missions that contracting activities run well ahead of anti-fraud measures, resulting in procurement systems that are ripe for abuse.3

A March 2008 GAO report reported that 41 percent of government purchase card transactions were not properly authorized, leading to abuses such as a Forest Service employee who wrote convenience checks to her boyfriend, resulting in the embezzlement of $642,000 over six years. The money "was used for personal expenditures, such as gambling, car loan and mortgage payments, and other retail purchases," according to the report. Other federal government employees spent millions of taxpayer dollars to pay for questionable items such as Internet dating services, Brooks Brothers suits, expensive steak dinners, personalized iPods® and computers.

CASE #2
Broken fences

In theory, there are multiple layers of safeguards built into the government acquisition system. The first line of defense is trained and certified contracting officers, their supervisors and compliance officers. The second line consists of internal auditors who are looking for notable deviations from standard practices. And third, each agency has an inspector general who audits programs and investigates allegations of fraud, waste and abuse.

These defenses rely on cumbersome manual processes; inadequate, siloed data; and audits, tips and whistleblowers to uncover fraud. In other words, they learn about it after the fact.

Agencies rarely analyze rich data available from public and government sources such as criminal convictions, lawsuits, tax liens, bankruptcies, risky financial deals, and suspension and disbarment proceedings; this data can be mined for early indications of fraud, waste or abuse.

Unfortunately, there is no single database of all contractors who have engaged in misconduct involving federal contracts – but the individual lists could be mined and compared with other relevant data to uncover potential risk.

Consider the case of John R. Brock, a budget analyst with the DOD's Armed Forces Institute of Pathology. Brock admitted to submitting 99 false travel vouchers from 2008 through 2011.

Although his scheme was relatively unsophisticated, he made away with almost $500,000 by creating false travel vouchers that set up payments (in the name of a former employee) to bank accounts owned by his sister and others. He even had payments made to his own accounts, which were also receiving his government salary.

Shockingly, it was not learned until his sentencing that he had been fired from NATO for the same conduct in 2003 and deported from the United Kingdom.

CASE #3
A failure to connect the dots

In 2002, Eduardo Blanchet and Daniel Guillan, owners of B.I.B. Consultants, were awarded a five-year, $50 million contract with the Special Operations Command (SOCOM) to provide foreign language instruction. As a result, B.I.B. Consultants grew into a large business, and neither B.I.B. Consultants nor any of its affiliated companies were eligible to bid on subsequent small business contracts with the military.

So, Blanchet and Guillan formed MiLanguages Corporation and recruited a sham owner for the company. MiLanguages fraudulently bid on, and was subsequently awarded, a five-year, $100 million small business set-aside contract in 2007 to teach foreign languages to the military.

Despite the fact that Blanchet and Guillan maintained themselves as signatories on MiLanguages' bank accounts – establishing a clear common link between the two companies – the scheme was not detected until a bid protest was filed.

These cases show that those who exploit agencies that provide everything from government loans and subsidized housing to food stamps know that investigators struggle to connect the dots. The answer is hybrid analytics that empowers law enforcement to go on the offensive with fraud operators – and do so without disrupting the efficient and timely delivery of services.
 
1 Devaney was assuming a fraud rate of 5 percent to 7 percent based on a 2009 study conducted by the International Association of Certified Fraud Examiners.
2 Since 2009, the US Department of Justice (DOJ) has recovered more than $8 billion from False Claims Act cases.
3 The GSA Inspector General's office, with a staff of only 300 employees, oversees an agency that last year helped agencies buy at least $39 billion in products and services through the multiple-award schedules; it also ran contracts for governmentwide purchases.

 

Bio: Jon Lemon is a SAS Solutions Specialist.

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To maximize the effectiveness of any fraud detection and elimination workflow, the SAS Fraud Framework can be customized to meet the needs of different government agencies. These tailored solutions, which take advantage of what SAS has already done for different industries, address fraud in the following areas:

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