When fraud occurs, what liability exists for the recipient distributing the funds, for example, fraud relating to unemployment insurance payments?

Consequences of fraud and non-compliance with the Uniform Guidance could include, among other things, fines, debarment from receiving future funding, administrative recoveries of funds, civil lawsuits and criminal prosecution, or a combination of all or some of these remedies. While funds for beneficiaries and subrecipients are tracked differently, pass-through entities of award funds may ultimately be held liable for fraudulent activities.

Recipients and subrecipients are the first line of defense for ensuring the Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) are not used for ineligible purposes and there is no fraud, waste, abuse, or mismanagement associated with their CSLFRF award.[1] According to the Government Accounting Office (“GAO”), “fraud is attempting to obtain something of value through willful misrepresentation.”[2] Pass-through entities, or “non-Federal entities that provide a subaward to a subrecipient to carry out part of a Federal program” are responsible for ensuring protection against fraud and that federal awards are used properly.[3]

Federal fund distribution is susceptible to fraud which can occur in many ways. Some of the most common fraud scenarios include:

• Charging personal expenses as business expenses to the award;
• Charging for costs that have not been incurred or are not attributable to the award;
• Charging for inflated labor costs or hours, or categories of labor that have not been incurred (for example, fictitious employees, contractors, or consultants);
• Falsifying information in grant applications or contract proposals;
• Billing more than one grant or contract for the same work;
• Falsifying test results or other data;
• Substituting approved materials with unauthorized products;
• Misrepresenting a project's status to continue receiving government funds;
• Charging higher rates than those stated or negotiated for in the bid or contract; and
• Influencing government employees to award a grant or contract to a particular company, family member, or friend.[4]

Pass-through entities of award funds should develop and implement preventative measures and processes to decrease the risks of fraud. Treasury’s Reporting and Compliance Guidance provides internal controls recommendations with descriptions and examples. Examples include:

• Enhance eligibility review of subrecipient with imperfect performance history; and
• Higher degree of monitoring for projects that have a higher risk of fraud, given program characteristics.[5]

Good Practices for Reducing the Risk of Fraud

Listed below are various other non-exhaustive good practices local governments and rural communities can use to foster success and reduce any potential of fraud regarding CSLFRF awards:

• Examine existing operations and internal controls to identify if they are vulnerable to fraud, such as: 
• Lack of separation of duties,
• Unclear authorization for transactions,
• Outdated or ineffective accounting systems,
• Improperly collected and stored documentation, and,
• Incomplete, unclear, or not implemented conflict of interest policies. 
• Implement fraud prevention measures and have regular trainings to educate staff and/or volunteers on risks;
• Review and test internal control systems regularly for vulnerabilities and areas of improvement;
• Verify that all financial and progress reports are sufficiently supported with the required documentation;
• Develop and implement procurement processes that are reasonable, fair, and transparent; and,
• Conduct monthly bank reconciliations to identify errors or irregularities in bank statements and detect fraud.[6]

Ultimately, a good strategy to prevent fraud and ensure funds are used properly is to regularly review internal controls for areas of vulnerability and improvement to ensure adequate safeguards of CSLFRF funds.[7]

Additional Resources

For more information pertaining to fraud allegations, reach out to the awarding agency’s Office of Inspector General (“OIG”). Allegations of fraud can and should be made directly to your awarding agency's OIG or a designated hotline office within many of the OIG offices for further investigation.[8

Last Updated: March 6, 2023