Safeguarding Your Organization Against Grant Fraud

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Robert Hogan, CFE, is the owner of fraud examination and forensic accounting firm Hogan Forensics. During his session at the 36th Annual ACFE Global Fraud Conference, Hogan shared his invaluable insights on grant fraud, informed by his extensive field experience and profound understanding of compliance and risk management.

Attendees walked away with a practical toolkit for protecting the integrity of grant processes and tactics to spot red flags and vulnerabilities exploited by fraudsters. They also gained a greater appreciation of the unique nature of grand fraud.

“The trust that is put into organizations that receive these grants is a very sacred trust, and for those of you who have been in the nonprofit or the government world for a while, you'll understand that betrayal of that trust can have serious ramifications,” Hogan said.

Vulnerable to Fraud

Hogan has spent 15 years as a contract government auditor. During that time, he’s seen “a lot of fraud,” including these common schemes:

  • Falsification of applications.

  • Misuse of funds.

  • Overcharging or inflating costs.

  • Subrecipient fraud (conducted by a nonfederal entity [subrecipient] receiving funds through a pass-through entity [prime recipient] from a federal grant or award).

  • Conflicts of interest.

  • Kickbacks and bribery.

  • Duplication of funding.

  • Falsification of program reports.

Hogan explained that procedural and behavioral vulnerabilities within organizations make them susceptible to grant fraud. Procedural vulnerabilities include:

  • Weak internal controls.

  • Inadequate oversight.

  • Lack of transparency.

  • Absence of fraud prevention training.

  • Limited use of technology.

  • Conflicts of interest.

  • Failure to conduct audits.

  • Vague grant criteria.

Behavioral vulnerabilities include:

  • Lack of integrity.

  • Collusion.

  • Rationalization of fraud.

  • Pressure to perform.

  • Overconfidence in avoiding detection.

  • Negligence or apathy.

Negligence, Hogan said, is one of the primary reasons for grant fraud. “Organizations go out and they get a grant, but they don’t fully understand what they’re required to do with that grant. They don’t know what all their compliance requirements are, how they can use the funds,” he explained. “They don’t educate themselves to know what they're supposed to do, and so they commit fraud without even knowing it.”

Kickback Case Study

In an example of a kickback scheme, Hogan cited the 2002 case of Russell John Mullins, former director of engineering for the Mojave Water Agency. Mullins had complete responsibility for all the grant funds awarded to the water authority for the purpose of implementing key infrastructure projects. That gave Mullins authority to make all decisions, including awarding contracts.

He used the established procurement process to award contracts, but the same two firms consistently won all bids. Those businesses subcontracted a majority of that work to Mullins’ side business. Through the kickback scheme, Mullins funneled procurement contracts directly to himself and his family's companies to the tune of more than $1 million in Environmental Protection Agency funding. Hogan identified weak internal controls, inadequate oversight, conflict of interest, lack of integrity, collusion and overconfidence in avoiding detection as vulnerabilities in the case.

Raising Red Flags

When facing an allegation of grant fraud, organizations typically provide one common response, according to Hogan. “The justification and rationalization that we get is, ‘This is free money. The government gave me this money. I can spend it however I want to.’ There's no sense of responsibility there,” he said. He added that a lack of accountability often shows up in the red flags that are commonly present in grant fraud, including:

  • Lack of supporting documentation.

  • Irregular financial records.

  • Budget request changes.

  • Missing information on board members or executives.

  • Vague or ambiguous cost descriptions.

  • Lack of progress.

  • Suspicious subrecipient or contractor activity.

Grants management faces constant fraud risks that demand vigilant oversight and flexible strategies. Armed with awareness of common grant fraud indicators and an understanding of the organizational vulnerabilities that fraudsters take advantage of better positions fraud examiners to safeguard their grant processes.