Ways and Means Looking to Curb Pandemic Related Fraud

Federal agencies did not strategically manage fraud risks and were not adequately prepared to prevent fraud tied to COVID-19 relief funds, according to a recent report by Government Accountability Office (GAO).

Most COVID-19 relief funds went to the intended recipients in the intended amounts. In other instances, significant funds went to those who engaged in fraud schemes, the report maintains.

House Ways and Means Oversight Subcommittee Chairman David Schweikert, Republican of Arizona addressed the problem in an October 19 hearing on pandemic fraud and how to prevent it.

“It is my hope that today we can dive deeper into how this fraud was carried out and examine the tactics used to steal government benefits,” said Schweikert in his opening statement.

Rebecca Shea, Director, Forensic Audits and Investigative Service United States, at the GAO told members that federal fraud schemes consist of five key elements: the affected program, participants, types of fraud activities, mechanisms to execute fraudulent activities, and impacts. “These elements represent the highest-level components in GAO’s Conceptual Fraud Model,” she said.

She noted that federal agencies did not strategically manage fraud risks and were not adequately prepared to prevent fraud when the pandemic began.

A variety of COVID-19 relief programs were targets in fraud schemes, with some schemes involving multiple programs, stated Shea. The majority of the 1,399 individuals or entities found guilty or liable had charges related to the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) or COVID-19 Economic Injury Disaster Loan (COVID-19 EIDL) program or the Department of Labor’s (DOL) unemployment insurance (UI) programs.

“The unprecedented demand for benefits and the need to quickly implement or expand programs increased the risk of fraud during the pandemic,” said Shea. “Managing fraud risk is the responsibility of federal program managers and includes assessing the potential for fraud and implementing strategies to appropriately mitigate related risks.”

Linda Miller, CEO of a boutique consultancy specializing in fraud risk management, told lawmakers that the nearly $5 trillion in government relief spending during the COVID-19 pandemic — much of which was disbursed as direct payments to citizens — created the perfect storm for fraud.

“A combination of inadequate oversight and internal controls, large-scale organized fraud rings, and antiquated data and information systems contributed to the massive, widespread fraud we saw during the pandemic,” said Miller. “Agencies were unprepared for the fraud they encountered largely due to a lack of attention on fraud risks.

GAO issued its Framework for Managing Fraud Risks in Federal Programs in 2015, but regrettably little attention was paid to establishing the preventative controls GAO called for to manage fraud risks,” stated Miller.

Miller said there were definite steps Congress can take to help ensure history doesn’t repeat itself: 1) Create a dedicated antifraud office; 2) explore ways to enhance data-driven fraud prevention; 3) revise improper payment laws to focus on high-risk programs; 4) incentivize fraud prevention; and 5) earmark fraud prevention funding in large spending bills.

“The coronavirus pandemic tested the nation’s unemployment benefits system more than any prior recession,” said Amy Simon, a principal at Simon Advisory LLC. Not only did far more individuals file claims for weekly benefits than ever before, but lockdowns and mass layoffs concentrated those record claims starting in March 2020, creating an unprecedented surge in demand for benefits that quickly rose to an apparent 33 million claims by June 2020, she said.

“Benefit timeliness for eligible claimants is often most possible when fraud attacks are identified and prevented,” said Simon. “Eligible claimants and taxpayers pay a steep price when policymakers do not take fraud prevention, detection, investigation and/or prosecution as seriously as the circumstances warrant.”