May 13, 2014
 

THE PERILS OF GRANT FRAUD

Two University of Houston professors, Abdelhak Bensaoula and David Starikov, surrendered to U.S. federal authorities in April after being indicted on fraud charges, the Houston Business Journal reports. According to the Department of Justice, the two sent fraudulent letters about their facility operations to the Small Business Innovation Research Program. In turn, Integrated Micro Sensors Inc., the business they cofounded, received US $1.3 million in grants from NASA, the U.S. National Science Foundation, the Department of Energy, and the U.S. Air Force over a 13-year period. The two professors face charges of conspiracy, wire fraud, and making false statements. 

Lessons Learned

Grant fraud encompasses a wide range of activities, including the theft of grant funds, inappropriate related-party transactions or conflicts of interest, the use of funds for unapproved or unallowable purposes, and failure to follow grant conditions and requirements. Grant fraud also may include failure to provide required matching contributions and maintain adequate supporting documentation, as well as making material misstatement. This case provides an opportunity to discuss effective grant fraud indicators for program managers, auditors, and regulators. Here are four broad indicator areas and red flags to consider:

1. Structure of Recipient Organization and Grant Program

  • Grant program managers and administrators should closely examine recipients’ organizational design, policies and procedures, and staff. Grant application narratives, budgets, project proposals, and progress reports may give insight into issues.
  • The design of a grant project may make it difficult to track and assess its objectives, metrics, progress, and associated costs. This may indicate that a recipient is attempting to disguise the failure of a fraudulent program. A program that has no performance metrics, or includes objectives that already have been completed at the time of application, represents an inappropriate design. Applications that present excessively ambitious goals may be considered high risk.
  • The lack of appropriate internal controls, such as segregation of duties or unsupervised use of checking accounts, cash, debit, or credit cards, may indicate a heightened risk for grant fund misuse.
  • A recipient with questionable financial viability, such as a high percentage of assets funded by debt or insufficient cash flow, may indicate a higher risk.
  • Grant managers should check for information on personnel responsible for grant administration using public sources, such as local and federal criminal and civil court information, court judgments, and the Excluded Parties List System. Signs of conflict of interest,, including transactions with friends and relatives, gifts from contractors, and transactions with organizations that have several related employees or board members, should be scrutinized.
  • A failing grant program may indicate that grant funds were not applied appropriately to the program and instead, were misused.

2. Payment Requests or Drawdown of Grant Funds

  • Issues relating to the frequency and nature of recipients’ drawdown or grant fund payment requests — particularly the rules and regulations governing the grant project — should be scrutinized. A recipient that draws all or most of the grant funds shortly after the grant is awarded may be at higher risk, unless that is allowed by the grant program. Many grant programs are structured as reimbursements, which require expenditures to be incurred before drawing the funds. Similarly, a draw of grant funds using numbers rounded to the nearest hundredth, thousandth, or greater may indicate that funds are not being drawn on a reimbursement basis.
  • Insufficient justification or documentation for each drawdown request, such as scant expenditure data and estimates for allowable advances, indicates a heightened risk.
  • Drawdown requests made well after the award periods and final date of the drawdown have ended may indicate that recipients are drawing funds for unallowable expenditures.
  • Any drawdown made from one grant to cover the costs of another grant program may be unallowable and should be reviewed closely.
  • Payment requests that exceed expenditures recorded for the same period in the accounting system need closer examination. These types of requests may be for unallowable purposes, or they may indicate that internal controls governing accounting entries and financial reports need improvement.

3. Monitoring Reports and Activities

  • A recipient that does not respond to requests for additional information or documentation may be trying to conceal something. Inconsistent or illogical explanations about the use of grant funds or the program’s status may indicate misuse.  
  • Unusual financial trends may indicate that suspicious transactions, including fraud, are taking place. These transactions will vary depending on the nature of the grant recipient and other factors, but grant administrators reviewing financial trends for fraud should be familiar with trends that may identify fraudulent transactions.
  • Salary or other compensation for personal services that exceed agency-approved amounts or exceed compensation for comparable services that are not grant-funded may indicate fraud.
  • Excessive, illogical, or unmonitored high-risk transactions are often involved in fraud and may include cash and credit/debit cards, unjustified purchase or use of gift cards, and unmonitored bank accounts. Unusual transactions immediately preceding the end of a grant award period may indicate that fraudsters waited until the end of the project to draw down grant funds to cover unallowable costs.
  • Grant projects funded by more than one grant may indicate fraud, particularly if the funds come from more than one federal or state jurisdiction. This is risky if the recipient did not disclose the use of multiple grants on its application. Recipients and grant managers monitoring multiple grants should ensure the same expenditures are not being charged to more than one grant and that one grant is not being used to cover the costs of another. 
  • Forgery of signature, receipts, timesheets, and payroll information, and alteration of invoices may indicate fraud. Recipients should not fraudulently reconstruct documents in an effort to support costs.
  • Unclear, unsupportable, or inconsistent cost rates should be examined closely. Rates must be appropriately calculated, approved, supported, adjusted, and applied.

4. Contractors and Consultants

  • Grant fund recipients with deficiencies in their procurement systems, such as policies that do not require adequate oversight and approvals to ensure appropriate segregation of duties, should be monitored closely. In addition, several high-dollar transactions with a single vendor may present a heightened risk.
  • Recipients that expend funds on unapproved purchases and sole-source or no-bid contracts may indicate fraud.
  • The use of generic, nonspecific, or nebulous consultants may present a heightened risk. 

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