Don't Say the "F" Word
Why government leaders are afraid to say "fraud"
The 2005 hurricane season was record-breaking. More than 1,500 people were killed by 7 major hurricanes, with millions more displaced. The storms caused more than $200 billion in damage in the United States. Two of these hurricanes—Katrina and Rita—brought the most damage. Hurricane Katrina made landfall in coastal Louisiana in August of 2005 and caused profound destruction, flooding 80 percent of New Orleans and displacing millions. Less than one month later, Hurricane Rita struck the Louisiana-Texas border, exacerbating an already dire situation. Millions of homes were destroyed, and electricity, water and sanitation services were cut off for over a month.
These storms also brought an enormous price tag to help residents recover and rebuild. Congress approved four bills totaling $88 billion for the recovery effort. All that money, coupled with few controls, attracted a massive number of opportunistic and organized fraud actors.
All in all, fraud actors ended up stealing about 16 percent — or $1 billion— of FEMA individual disaster assistance in the aftermath of Hurricanes Katrina and Rita, according to the Government Accountability Office’s (GAO) analysis— an estimate that is likely low because the analysis only included a subset of fraud schemes.
One example: FEMA paid millions of dollars for assistance to over 1,000 people who used names and social security numbers that belonged to state and federal prisoners. In one case, a convicted felon registered for Katrina assistance by phone and then made a claim using a post office box in Louisiana as the address of his damaged property to qualify for three types of FEMA disaster assistance— expedited assistance, rental assistance, and personal property replacement assistance.
In its concluding statement, GAO said that, “FEMA must build the American taxpayers’ confidence that federal disaster assistance only goes to those in need, and that adequate safeguards exist to prevent assistance from going to those who submit improper and potentially fraudulent registrations.” GAO stressed the importance of developing and strengthening controls to validate information provided by applicants.
But FEMA officials spent much of the next 15 years denying that fraud was a real problem rather than seriously addressing the weaknesses in controls that the storms laid bare. When the COVID-19 pandemic arrived, fraud actors took plays from the playbooks of their predecessors, including using prisoner identities to steal recovery funds. Agencies across government experienced many of the same fraud schemes during the pandemic that FEMA experienced in the aftermath of Hurricanes Katrina and Rita. The lessons were not learned.
The lessons of Hurricanes Katrina and Rita were not learned in large part because there are few incentives for agency leaders to address fraud proactively. Two underlying forces are at work: One, looking for and finding fraud makes everyone look bad; and two, prevented fraud is invisible, making it difficult if not impossible to justify stopping fraud before it happens. As a result, agency leaders have little incentive to put in place the preventative tools and controls that crises like Hurricanes Kathrina and Rita (and the COVID-19 pandemic) demonstrate are badly needed. Instead, they pretend they have no fraud and pursue a “pay and chase” strategy that eschews prevention in favor of enforcement after the fact, if the fraud is uncovered at all.
Consider the core truth about fraud: it is deceptive. Fraud actors only succeed if they conceal their actions. To stop fraud, you need to go find it, but as a government leader, uncovering fraud is akin to admitting you’ve been failing at your job, so agencies will obfuscate, manipulate and otherwise hide the extent of fraud they may have in their programs. For example, the Social Security Administration (SSA) maintains that its Old Age, Survivors, and Disability Insurance program has a payment accuracy rate of 99.7 percent, and the agency publicly reports that it has a fraud rate of less than one percent overall. This number is not inaccurate, but it is misleading. The one percent figure SSA promotes is the amount of “confirmed fraud” that has been identified, which is limited to fraud cases confirmed by a court. Because such a small proportion of fraud is detected and successfully prosecuted, the total confirmed fraud is indeed very low.
The fact that fraud is deceptive is actually a convenient fact for government leaders, because if they don’t look for it, they won’t find it, and if they don’t find it, they won’t report it. So, to you and me, it appears that the government leaders are doing a great job at preventing fraud. This makes the White House happy, since the administration appears to be safeguarding tax dollars effectively. It makes Congress happy, because elected representatives can assure their constituents that things are well in hand when it comes to stewardship of their tax dollars. And it makes the fraud actors happy because, well, they can keep stealing the money without getting caught. Not looking for fraud and then saying there is none since you haven’t found any is a secret everyone in Washington is happy to keep.
A thought experiment: Imagine you are the head of the IRS. As a good public servant, you decide to go looking for fraud in your programs. Given that your agency collects all the government’s taxes, there is a good chance there is some fraud going on, and you want to protect the money from fraud actors. You start using exploratory data analytics to look for anomalies in the data. Before long you find out that, indeed, people are stealing from the program. It’s actually far worse than you’d even imagined. Now you know this and before long, so will others, including the congressional oversight committees and the people who control your budget. They will want to know what is happening over at the IRS to have so much fraud. There will be outrage. Especially since no other agencies have so much fraud. You guys must really be fucking up, they’ll say.
There will be hearings with angry lawmakers demanding to know why there is so much fraud. Fingers will be pointed, especially when the media picks up the story and Americans read about it in the news. You are now in the hot seat, being punished for trying to find—and finding— fraud. Clearly, as the head of the IRS, you have little incentive to go looking for fraud. It is far better to put your sense of service to the country to use doing things like making it easier for taxpayers to access tax services through your website, making your processes more efficient, minimizing backlogs. These will generate kudos from all sides—the customers the IRS serves and the elected officials who want to demonstrate the good things they are doing for their constituents. Working to improve customer experience is all upside and working to prevent and detect fraud is pretty much all downside.
The game Washington plays regarding fraud is akin to a city removing all its speed cameras, directing its police officers not to enforce speed limits, and then claiming that the city is now free of speeding. The city gets to tell a good news story, and it gets to save money on traffic enforcement. The only losers are the city residents, who are now far less safe on the city’s roads.
Things work differently in the private sector, where CEOs of companies both public and private have an obligation to their shareholders to minimize financial loss due to fraud. Protecting the bottom line is a business imperative. This is why banks and insurance companies have put in place the most cutting-edge tools to prevent fraud rather than chasing it down once it’s occurred. While sometimes inconvenient, we all feel a little peace of mind when we attempt to make an unusual purchase and get an alert from our credit card company asking if it’s a legitimate transaction. Banks use machine learning and other advanced analytics techniques to proactively analyze our spending patterns and quickly flag anomalies before the transaction occurs. Banks also use troves of data to verify our identity and the accuracy of the information we provided when we first applied for a new account, a loan, or a credit card.
Try to imagine a scenario where the CEO of a private sector company could save millions of dollars by obtaining the needed data to verify the accuracy of customer-provided information but simply does not do so. It’s hard to fathom shareholders would accept that. So why is this the case in government? Because we are the shareholders, and we hold government accountable for little other than getting us the benefits we are entitled to or eligible for quickly. Think about the last time you were upset at a government agency. Chances are it had to do with the bureaucracy you encountered—the burdensome process required to apply for something or fix an issue you had. The wait times.
As the old saying goes, the squeaky wheel gets the grease. When taxpayers complain about wait times or complex application processes, agency leaders listen. In recent years, government agencies have prioritized customer experience. In fact, an entire industry focused on user experience is at work across government, making things easier for customers to navigate. And while this is a positive development, you simply do not see a similar focus on minimizing fraud. That wheel is just not squeaking enough.
Public policy scholar John Q. Wilson calls this a “diffused policy problem.” Wilson posits that the “diffusion of effects” inhibits organization, whereas “concentration of effects” fosters it. For example, cuts to Social Security payments are a concentrated policy problem. A defined group of people will be tangibly impacted by cuts to their monthly checks. This is why no politician seriously considers cutting Social Security despite the projections of its unsustainable costs as a larger share of the population reaches retirement age. As Wilson argues, a smaller group that stands to gain or lose will mount a strong organized effort (in support or opposition) to a particular policy, whereas a larger group whose members stand to gain or lose smaller amounts will likely remain passive and unorganized.[1] Fraud in government is broad, occurring in every federal, state and local government program to some extent, and where its truly staggering, as in the pandemic, it does not directly impact individual Americans to such a degree that they feel compelled to organize and demand action be taken.
So what is to be done? Real incentives must be put in place to prevent fraud and catch it earlier. Agency leaders and program managers should be evaluated not just on the basis of how fast they got money out to the door, but on whether they got that money into the right hands. Bonuses should be paid to agency leaders with the largest, demonstrable reduction in fraud or improper payments. Performing due diligence on applicants on the front end should be standard practice, and employees should be rewarded for applying skepticism and flagging applications where identity information looks suspicious.
No problem is solved by pretending it doesn't exist. And in the case of fraud, as the criminals get more brazen and employ more sophisticated tools, pretending it doesn't exist will lead to massive losses in taxpayer dollars in the years to come.
[1] Deborah Stone. Policy Paradox: The Art of Political Decision Making,. W.W.Norton: 2002