Jetson Leder-Luis, Boston university
Lawmakers passed the bipartisan US $ 1.2 trillion infrastructure bill on November 5, 2021, with negotiations still ongoing on Democrats’ $ 1.75 trillion plan to extend the safety net social and to fight against climate change.
The $ 3 trillion total proposed spending is not just a big investment, but a serious target for fraud.
Most public spending is meeting its intended goals – such as public transit, clean energy, and broadband internet – but some of the money will undoubtedly be lost to fraud. It’s impossible to predict how much, but I think a reasonable estimate based on spending and past research would put it at around 5%, or $ 150 billion. This is the equivalent of Ukraine’s gross domestic product.
I study the problem of public expenditure fraud and what governments can do to combat it. Research shows that there are measures that can effectively combat fraud in government spending, such as increasing government anti-fraud lawsuits.
The problem is, lawmakers don’t always make fraud prevention a priority.
What is fraud?
At its core, fraud is the use of deception for financial or personal gain. When it comes to government spending, fraud occurs when a person misappropriates money from their intended public purpose.
Common examples of government fraud include companies or bureaucrats who rig the awarding of lucrative government contracts, healthcare companies who tamper with patient data to get higher Medicare or Medicaid payments, and contractors in the United States. Ministry of Defense that inflate the costs of services.
While it is common to hear allegations that individual fraud in programs like the Supplemental Nutritional Assistance Program is rampant, most frauds involve companies paid by the government to provide public services – because it there is so much more money at stake.
About 15% of government spending goes directly to businesses through procurement. Even more flows to Medicare and Medicaid providers, which are often private companies reimbursed for the services they provide.
Part of the problem behind fraud is what economists call information asymmetry. This is what happens when the construction company or the hospital that works for the government has more information on what they charge than the bureaucrats. Scammers can exploit what they know and the government is not doing it to their advantage by charging more than they should.
It is difficult to measure the exact costs of fraud, as those who commit fraud try to cover it up.
A measure of how much the US government loses to fraud is its inappropriate payment rate – a measure of the amount of money the government should not have distributed due, for example, to duplicate payments or payments to non-eligible people. Abusive payments totaled $ 175 billion in 2019, or roughly 4% of all government spending.
Different programs have different inappropriate payment rates. Medicare, for example, has inappropriate payments in the range of 5% to 6%, costing the government tens of billions of dollars a year.
However, irregular payments are not the most accurate measure of fraud. They include money overpaid by accident rather than malice, but they don’t measure fraud that has gone undetected – which can be substantial but is unknown. There is a constant cat-and-mouse game between fraud officials and fraudsters exploiting new opportunities in an ever-changing regulatory landscape.
For example, the Payment Protection Program – which spent $ 792 billion to help small businesses weather the economic effects of the COVID-19 pandemic – may have lost $ 76 billion to fraud, study finds from 2021.
About 15% of PPP loans granted are suspected of fraud. This is based on some red flags, such as filings that include unregistered or newly incorporated businesses, many of the same residential addresses, or implausibly high employee salaries.
Other recent stimulus programs have also drawn attention to fraud, including the Pandemic Unemployment Assistance Program, in which hundreds of thousands of people have had their identities used for fraudulent claims. Ohio alone estimates it has lost $ 330 million because of this type of fraud.
Like other forms of fraud, this problem was largely due not to individual abuse, but rather to criminal organizations exploiting weak government oversight.
Infrastructure fraud is a particularly attractive target
Information asymmetry is one of the reasons why infrastructure programs in particular tend to be the target of fraud.
For example, the quality of construction projects is difficult to verify. This gives contractors and builders the ability to skimp on materials or inflate costs to realize higher profits.
Boston’s Big Dig, a $ 15 billion infrastructure megaproject from the early 1990s, led to the arrest of some contractors for fraudulently supplying substandard materials. A major contractor on the project was sued for delivering adulterated concrete and paid a $ 50 million fine.
Additionally, infrastructure projects are typically awarded to a single firm through a competitive bidding process, which can be subject to rigging. In June 2021, for example, an Ohio-based engineering company was fined $ 8.5 million for rigging several drainage projects in North Carolina.
The United States is sophisticated in its rules on tendering, contracting and auditing, but cases like this still occur with some regularity.
Fight against fraud
The federal government is not powerless to prevent and detect fraud.
Its tools include law enforcement, whistleblowing and civil suits, auditing, increased regulatory spending requirements, and machine learning tools for data mining and forensic analysis.
Research has shown that many anti-fraud efforts can be successful in eradicating fraud. Indeed, the Justice Department found that every $ 1 spent on healthcare fraud in 2020 brought in $ 4.30 – an exceptionally good return on investment.
Whistleblowing has proven to be particularly useful. Under the False Claims Act, people with information about fraud involving government programs can hire their own attorneys and sue on behalf of the government in federal civil court. These whistleblowers get a share of the money they get back for the government.
My research has shown that this can be very effective in deterring fraud. Under the law, the government recently recouped over $ 1 billion a year, and my research shows it saved tens of billions more by preventing fraud in the first place.
But the $ 1.2 trillion package includes very little anti-fraud language. An effort to include stricter whistleblowing provisions in the infrastructure bill has failed.
Other words in the bill call on the government to discourage waste and fraud, but do not specify the penalties or how this will be done. In fact, the word fraud appears only seven times in the 2,000-page bill – and one refers to Congress acting to prevent the Office of the Inspector General of Health and Human Services from stepping up. anti-recoil rules.[Over 115,000 readers rely on The Conversation’s newsletter to understand the world. Sign up today.]
It is clear that in the current rush to spend federal money, not enough attention has been paid to ensure that everything is going to the right places. The other, bigger spending package is still mostly just a plan, with little legislative language behind it.
Lawmakers would be wise, given how much they plan to spend in the years to come, to include more anti-fraud language in the big spending bills. This would help ensure that more of those trillions of dollars go to the people and places they believe need support – not scammers.
Jetson Leder-Luis, Assistant Professor of Markets, Public Policy and Law, Boston university
This article is republished from The Conversation under a Creative Commons license. Read the original article.