Fraud prevention techniques for infrastructure programs
With an increase in infrastructure spending brought on by the $550 billion in new funding allocated in the Infrastructure Investment Job Act (IIJA), there will be plenty of scrutiny with regard to the stewardship of significant taxpayer dollars. As President Biden stated in his 2023 State of the Union Address: “For every dollar we put into fighting fraud, taxpayers get back at least ten times as much.” Therefore, it’s imperative for all projects to implement the proper measures to combat fraud. In this article, CohnReznick’s infrastructure professionals provide advice on how to mitigate fraud in infrastructure projects.
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.
“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.
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.
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.