No one wants to think the “unthinkable” could happen at their organization. But waste, fraud, and abuse of grant funds happen daily across the over $1+ trillion in federal grants awarded annually.
So how can you avoid becoming a victim of grant fraud?
The first step is being aware of the warning signs.
Fraud: Watch for Deception
Effective grants management includes an awareness of the facts and conditions that often indicate fraud is taking place.
We expect threats from the outside.
We protect ourselves from outside threats with security systems and insurance.
Unfortunately, it’s too common to ignore the threats inside our buildings.
Do you know what the warning signs are?
Grant fraud awareness starts with knowing the two types of deceptions to watch out for:
What is Direct Fraud?
Direct fraud is when an individual misuses or misrepresents the use of funds for personal gain.
This fraud includes direct theft of funds and misappropriation of grant resources for personal use.
We’ve all seen these types of news stories:
- Employee charges cruises and electronics to a local government credit card
- An employee embezzles funds from nonprofit
Direct fraud is often perpetrated not by “career criminals” but by trusted staff without a criminal history – including no history of theft.
What is Indirect Fraud?
Indirect fraud is when the organization misuses or misrepresents the use of funds to sustain an individual project or the organization at large.
Similar to direct fraud, indirect fraud can be committed by organizations and individuals of high standing that have no history of unethical use of funds.
So how can you avoid these types of fraud where the people involved may not have a history of these types of acts?
14 Warning Signs: Conditions are “Ripe” for Grant Fraud
Fraud occurs when there is a “perfect storm” of motive, rationalization, and opportunity.
Let’s look at four common motives for direct fraud and ten more complex motivators for indirect fraud.
Personal Gain-4 Motivators for Fraud
The Price Waterhouse Coopers LLC’s Global Economic Crime and Fraud Survey report the main perpetrators of the most severe or disruptive frauds are 43% external, such as hackers, and 31% internal participants.
An additional 26% involve collusion between internal and external perpetrators.
There are a few common motivators for direct fraud perpetrated by individuals which include:
#1) Disgruntled or unhappy employees
For example, employees who feel they have not received adequate compensation or recognition may rationalize their behavior.
A 1983 study of over 10,000 employees by Hollinger and Clark cited employee dissatisfaction as the most common motivator for frauds.
#2) Personal issues
Issues that impact the individual financially, such as gambling, alcohol, or drugs, as well as personal financial debt, are strong motivators.
#3) Unrealistic Lifestyle
The desire to live beyond one’s means, such as taking expensive trips and driving expensive cars, can also lead to the rationalization of fraud.
#4) Job Stress
The individual’s perception of high pressure to perform or competition within the organization or research field can affect their choices.
How Your Employee Assistance Plan is a Fraud Deterrent
You may not have thought of “soft skills” benefits like an employee assistance plan being a fraud deterrent.
But times have changed.
Helping employees deal with life stresses productively is increasingly seen by fraud examiners as one of the tools to decrease the risk of direct fraud.
Organizational Fraud: 10 Motives for “Stretching the Truth”
Motivators for indirect fraud within an organization are a bit more complex and numerous.
Therefore, good grants management includes being observant of situations and circumstances that could lend themselves to fraud if the opportunity exists.
It should be noted that just because these situations and circumstances occur does not necessarily mean grant fraud is happening.
Still, they can be potential “warning signs” for organizational fraud.
#5) Financial Difficulties
Is the organization experiencing financial difficulties?
#6) Grant Management Stress
Is there an atmosphere of high pressure due to looming deadlines, competition, results, expansion, “use or lose” funds, grant renewal, or extension concerns?
#7) Outside Review
Is there nervousness about an upcoming site visit or audit?
#8) Dysfunctional or Combative Program Management
Are there internal disagreements or contentious relationships within the organization regarding management and finances?
Poor communication is not just damaging to relationships; it is an internal control risk!
#9) History of Problems
Have there been previous organizational failures, such as disallowed costs or audit findings?
#10) Changing Environment
Has the organization recently been impacted by changing conditions, such as a new regulatory, economic, or institutional environment?
#11) Management Instability
Has the organization recently experienced negative situations due to leadership changes or management errors?
#12) “Musical Chairs” Funding Shifts
Is there a desire to divert funding to other projects, cost share, or partner relationships?
#13) Absolute Power
Does one individual dominate the project or organization?
#14) Sudden Moves
Have there been abrupt changes in organizational procedures or practices (i.e., a different process for submitting reports or new ways to measure milestones.)
Don’t Ignore the Warning Signs
The crime of fraud requires motive, rationalization, and opportunity.
Consider what you can do to help your organization avoid a fraud disaster.
Organizations have the most control over opportunity.
Putting strong internal controls and procedures in place significantly reduces the opportunity for fraud to occur.
Best practices include internal control systems that both prevent fraud and consistent monitoring to detect fraud.
But grant managers should not ignore the warning signs of motive and rationalization regarding to the potential for fraud.
An awareness of all these factors is required to minimize the chance of fraud occurring.
Ready to Deepen Your Understanding of Federal Funding?
Would you like to be a better grant writer or manager?
Deepen your understanding of procurement and the single audit for federal grants?
We have another grant training seminar coming soon.
Click here to get all the details!
Hope to see you there!
Rachel Werner, MPA, GPC, PMP
MyFedTrainer Principal, Compliance Champion
