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Due Diligence & Fraud Protection

How can a municipality protect against fraud related to ARP funded programs?

Understanding the risks for potential fraud can be critical for municipalities that are developing and administering assistance programs. Commitment to and implementation of an anti-fraud strategy that includes a continuous cycle of preventing, detecting, and responding to fraud may be an effective solution to prevent fraud. 

Protecting Individual Citizens from Fraud:  During the COVID-19 pandemic, there has been a rise in consumer fraud complaints across the country. In October 2020, the Federal Trade Commission (“FTC”) revealed a surge in reports from individuals claiming losses as a result of scams perpetrated via social media, including an increase in complaints in the spring of 2020 as COVID-19 spiked. Data released by the FTC indicates that the number of complaints about scams initiated via social media more than tripled in the last year. Reported losses resulting from this type of fraud totaled more than $117 million during the first six months of 2020, as compared to $134 million in losses during all of 2019.

Scam artists will use varying methods to reach potential victims including, but not limited to, creating fraudulent websites purporting to be government agencies, phishing emails, text messages, and phone calls. The following steps can be effective in reducing this type of consumer fraud:

  • Educating the public about potential schemes and the recommended responsive actions they can take if they believe they have been targeted; and
  • Utilizing community groups and non-profits to assist with messaging.

Protecting Government Agencies from Fraud: Not unlike individual consumers, government agencies can stay up-to-date on the latest trends in consumer fraud schemes. This can be achieved in part through collaboration with local government agencies and prosecutors. Reviewing the guidance put forth by the FTC, the Department of Health and Human Services, the Department of Justice, and other federal agencies mentioned below might also be helpful.

Furthermore, within your municipal government, maintaining an organizational culture and structure that is dedicated to fraud risk management may decrease the incidence of fraud. Regular fraud risk assessments may help municipalities ascertain their fraud risk profiles. Municipalities can design and implement specific control activities to mitigate identified fraud risks and collaborate throughout the organization to ensure the strategy is effectively implemented.

In order to mitigate the risk of fraud and mismanagement of funds, and eliminate waste and abuse, grantees should consider pursuing the following measures: 

  • Review and make suggestions for adequate management systems and policies and procedures (specifically those for prior federal grant awards); 
  • Collect and analyze data;
  • Conduct pre-award risk assessments and discuss monitoring plans to identify areas of weakness;
  • Discuss subrecipient monitoring responsibilities; 
  • Identify key personnel and discuss organizational structure to eliminate conflicts and support an environment that supports fraud risk management;
  • Initiate financial controls; 
  • Review existing internal controls for adequacy; 
  • Develop waste, fraud, and abuse prevention guides specific to the program; 
  • Evaluate outcomes of risk-based monitoring;
  • Train staff and subrecipients on key fraud indicators and encourage them to speak up when they detect suspicious activity; 
  • Establish e-mail accounts or other methods for reporting fraud, waste, and abuse of funds;
  • Document internal process for reviewing cases and making final determinations;
  • When awarding contracts to vendors or suppliers that have previously worked for your municipality, examine records of past purchases and evaluations to ensure the vendor or supplier has the capacity to deliver on the scale required.  If there is a significant discrepancy between past demonstrated capacity and the promised future capacity, municipalities may consider further due diligence to verify that the business has in fact increased capacity and capability to meet the current requirements;
  • Despite the more urgent timelines which may be involved, municipalities should consider taking basic due diligence steps prior to the award of emergency contracts, including, for example, requiring the submission of business incorporation papers, tax statements, bank accounts, and insurance policies. When the emergency subsides, consider revisiting the vetting process, and putting the vendor or supplier through the full scope of normal contract vetting procedures; and
  • Prior to the award of contracts, consider requesting that the awardee company certify that the company is legitimately operating as a business and that it has the capacity to perform the work required under the terms of the contract.

The following non-exhaustive resources may be helpful tools for municipalities to pursue in advance of specific guidance being issued regarding the ARP:

Last Revised: April 14, 2021