Fraud prevention techniques for infrastructure programs

Jack Callahan, partner and leader of CohnReznick’s Construction practice, noted that the ideal time to implement a system to prevent fraud, waste, and abuse is at the beginning of a project. This lets all stakeholders know that, from design and feasibility to procurement and through construction, big brother is watching. Too often we see construction audits being done near the completion of a project. At that time in the process, it is too late to deter fraud. Fraud, waste, and abuse also becomes more prevalent by:

• Designing work in a way that limits completion
• Setting an uneven procurement process that discourages honest competition
• Limiting bidding parties

When these characteristics are present, they create unnecessary costs and project impacts. Early implementation of oversight practices is critical.

Callahan also noted that the start of a project is the time to adopt a Code of Ethics, and ethical behavior starts at the top. A robust Code of Ethics must be adopted, and all employees, subcontractors, and suppliers must be educated on their organization’s stance on ethical behavior. The inception of a project is the best time to implement a policy of fiscal and integrity monitoring. Contracts need to reference the adopted Code of Ethics, and audit and monitoring provisions must clearly advise all parties on their responsibility to prevent fraud, waste, and abuse. By educating and empowering your workforce and construction partners you deputize everyone involved in the project to help ensure the project does not fall victim to fraudsters.

“Due to an increase in compliance requirements, too often we in the construction industry hear of owners overly relying on their general contractor or construction manager to ‘take care of all that’,” Stephen Little, senior manager in CohnReznick’s Construction practice, stated. Time and time again we review policies and procedures that have been represented to be all encompassing, but when we begin to test their controls, we identify glaring gaps in areas such as procurement, change orders, safety, D/M/W/BE compliance, etc. Little shared that recently a major airport was promised by their contractor that they had a sufficient DBE program in place to satisfy federal requirements. After further investigation, the FAA found the airport had “significant compliance deficiencies” for both diversity and civil rights requirements which were conditions of the federal grant’s funding. Minimal investment upfront on fiscal integrity monitoring to verify that the proper controls in place are working as intended can save a project millions of dollars on the back end.

“When federal funding is available for construction projects, there can be a strong temptation to stretch the limits of the ‘eligible uses’ of that federal funding,” Roman Castillo, director in CohnReznick’s Government and Public Sector Advisory practice and a key player in the firm’s infrastructure initiatives, said. “Submitting false claims, or misrepresenting the eligibility of certain repair costs, is fraud and a clear misuse of taxpayer dollars.” For example, in November 2021, the Department of Justice (DOJ) announced that a religious institution agreed to a $1 million settlement for violating the False Claims Act. In this instance, the institution knowingly signed certifications containing false repair estimates for a large facility. Interestingly, this fraud occurrence was reported by a whistleblower. Whistleblowers are crucial to fraud prevention and detection efforts. Not only are whistleblowers able to file suits on behalf of the government under the False Claims Act, whistleblowers who file suits may also receive a portion of the U.S. government’s recovery of misused funding. Having an established whistleblower program or an independent fraud hotline supports the efforts in fighting fraud.

Gerard Frech, a veteran integrity monitoring professional and director in CohnReznick’s Government and Public Sector Advisory practice, advised that it’s important to be skeptical and never accept a document at face value when anyone with a corrupt motive, a smart phone, and a printer can fabricate genuine-looking contracts, invoices, bonds, insurance certificates, material certifications, permits, and approvals. In many cases, a hard copy is unnecessary and a digital image will suffice, making the forgery even easier. Always independently verify authenticity by checking with the alleged issuing authority before accepting the document as legitimate or require digital authentication by a reputable company.

Chris Livingstone, partner in CohnReznick’s Project Finance and Consulting/Value360 team, recommended, “establishing clear requirements during the contractual development phase, and while in negotiation with contractors, to require specific documentation to be provided.” He noted that it is much easier to do this during the contracting phase than post-contract as the contract may be justified in not providing the information or may charge more to provide it. Be clear about exactly what you want and why. This may come in the form of specific upstream funding compliance requirements, or to help ensure compliance with the goals and targets that the project has set. Be clear about the format and regularity of reporting.

Do your comparative analyses and, if something seems too good to be true, then it probably is. This advice comes from Arthur Simonson, managing director in CohnReznick’s Project Finance and Consulting/Value360 team. Simonson further noted that, “the construction industry is highly competitive, but due to well established procurement and sunshine laws, information on all-in construction costs is usually widely available.” There are industry metrics for the cost to build a road (dollars/mile), renewable energy projects (dollars/kw), airport terminals (dollars/square feet), etc. If a contract price deviates significantly from the average, then investigate why. There may be valid reasons for the differences, but this information provides contracting parties with areas to investigate, test, and monitor.

Katie Wilson, a senior manager in CohnReznick’s Government and Public Sector Advisory practice and lead of the practice’s compliance, monitoring, and oversight business line, suggested that project management consider a separation of duties within the design of a project’s reporting procedures. The necessity to adhere to a multitude of federal, state, and local guidelines, and quality/safety requirements that come with infrastructure programs, the ability to find the right resources to perform all these job tasks can be a challenge. Too often this may cause project managers to appoint multiple responsibilities to one individual which opens the door for errors or, worse, fraudulent activities such as collusion. For example, the person overseeing vendor records should not be the same person who is approving vendor invoices and payroll records or signing the checks to those vendors for services they provided. A separation of responsibilities creates a stopgap to eliminate the opportunity to create fake vendors using their own banking information, approve project hours for services that were not performed, and/or set up an EFT or write a check depositing to a fake vendor account. Hiring additional resources or consulting with outside vendors to take on those responsibilities while establishing set segregation of duties in a program mitigates these risks of errors, collusion, or behaviors resulting in fraud, waste, and abuse.

Nicholas Atiee, a senior manager in CohnReznick’s Government and Public Sector Advisory practice, noted the importance for an organization to identify and track the specific risks of a project or program to combat fraud, waste, and abuse. This assessment is an attempt to identify risks specific to funding types, policies, compliance requirements procedures, or delivery methods of a project or program. 

Without assessing specific risks and their characteristics, an organization will not be able to effectively prevent and detect fraud, waste, and abuse. Once an organization identifies specific risks and develops a profile of their characteristics, policies and procedures can be developed to mitigate those risks and capture the data necessary to detect those risks. Fraud, waste, and abuse cannot be detected and monitored effectively and efficiently without the data and the ability to properly assess the data associated with specific risks. 

Vigilance around detecting and mitigating fraud should occur throughout the lifetime of the project and begin at the start of the project. These are just a few tips to help mitigate fraud and help ensure compliance during your infrastructure project. For more information, contact one of our professionals.