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3.20 Grant Fraud, Waste, and Abuse

Common Grant Fraud Schemes

Most misuse of funds falls into one or more of three general categories:

We will examine each of these categories in the sections that follow.

Conflicts of Interest

You are required to use Federal funds in the best interest of your award program. Your decisions related to these funds must be free of undisclosed personal or organizational conflicts of interest, both in fact and in appearance. You are required to disclose in writing any potential conflict of interest to your grant-making component or pass-through entity, as applicable. See 2 C.F.R. ?? 200.112.?? ????

  • Conflict in Fact. In the use of award funds (direct or indirect), a recipient or subrecipient should not participate in any decisions, approval, disapproval, recommendations, investigation decisions, or any other proceeding concerning any of the following people or groups:
  • An immediate family member;
  • A partner;
  • An organization in which they are serving as an officer, director, trustee, partner, or employee;
  • Any person or organization with whom they are negotiating or who has an arrangement concerning prospective employment, has a financial interest, or for other reasons can have less than an unbiased transaction with the recipient or subrecipient.
  • Conflict in Appearance. In the use of award funds, you and your subrecipients should avoid any action which might result in, or create the appearance of:
  • Using your official position for private gain;
  • Giving special treatment to any person;
  • Losing complete independence or objectivity;
  • Making an official decision outside official channels; or
  • Affecting negatively the confidence of the public in the integrity of the Government or the program.

Typical conflict-of-interest issues may include:

  • Less-than-arm???s-length transactions???the act of purchasing goods or services or hiring an individual from a related party such as a family member or a business associate of the recipient.
  • Not using fair and transparent processes for subrecipient decisions and vendor selection. These processes must be free of undue influence, and fair and transparent. Most procurement requires full and open competition.
  • Consultants can play an important role in award programs; however, as a recipient or subrecipient, you must ensure that their work for you conforms to all regulations governing a fair consultant selection process, reasonable pay rates, and specific verifiable work product.
Case Example #1
Background Possible Fraud Indicators Scheme Identified Result
An individual was assigned to purchase equipment using a Federal award. Circumvention of the established procurement process; vendor complaints. Individual stole over $100,000 by directing contracts to bogus companies that he had established. 240-month prison sentence

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Failure to Properly Support the Use of Award Funds

A Federal award agreement creates a legal and binding obligation. As a direct recipient or a subrecipient, it obligates you to:

  • Use your award as outlined in the agreement.
  • Act with integrity when applying for and reporting your actual use of funds.
  • Properly track the use of funds and maintain adequate supporting documentation.

Typical issues involving failure to properly support the use of award funds include:

  • Deliberate redirection of the use of funds in a manner different from the purpose outlined in the award agreement.
  • Failure 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.

information iconFinancial Management Tip

Grant applicants and award recipients must represent their eligibility for funding accurately and cannot provide false or misleading information in their application, subsequent narrative progress reports, or federal financial reports.

Case Example #2
Background Possible Fraud Indicators Scheme Identified Result
A recipient received a Federal award for specific purposes. An inability to provide sufficient and verifiable supporting documentation concerning the actual use of those funds.   Recipient paid the Federal government over $300,000 to settle civil fraud allegations.

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Theft is the most common issue in almost all organizations—including those that receive Federal awards. You are encouraged to keep the following in mind:

  • People who embezzle funds can be extremely creative, while often appearing very trustworthy. These abilities are precisely why they can do so much damage to an organization and remain undetected for extended periods of time.
  • Poor or no internal controls provide an opening for theft. A lack of proper separation of duties is one of the most common weaknesses.

box with checkmarkAction Item

Checks routinely written to employees for the "reimbursement" of expenses, and the routine use of ATM/debit/gift/credit cards for award costs, must be carefully controlled and require strong oversight.

Case Example #3
Background Possible Fraud Indicator Scheme Identified Result
A nonprofit received $2.7 million in Federal award funds to assist underprivileged children. Unsuccessful program, lack of internal controls, unexplained income. Funds had been diverted to pay for a wedding reception, building construction, plasma TV, and personal credit card bills, with an estimated total loss of $450,000. 36- and 66-month prison sentences and full restitution.

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