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Pondera FraudCast

Welcome to the Pondera FraudCast, a weekly blog where we post information on fraud trends, lessons learned from client engagements, and observations from our investigators in the field. We hope you’ll check back often to stay current with our efforts to combat fraud, waste, and abuse in large government programs.

The Booming Armored Car Industry

The Booming Armored Car Industry

At a time when people are replacing credit cards and ATMs with their smart phones, it seems that California is recommending increased use of armored cars. The reason? On January 1st, recreational marijuana will be legal in California but still illegal at the federal level requiring marijuana business to pay their sales taxes in cash.

The issue is that banks are still unsure of how to handle marijuana businesses’ money without being subject to prosecution for issues like money laundering. The Justice Department has issued “guidelines” to banks on how to avoid prosecution but most banks don’t consider guidelines as legal protection. And not surprisingly, the guidelines are confusing and incomplete. This leads to a cash-based business, which in turn creates the potential for fraud, money laundering, underreporting taxes, and a whole host of other issues.

In California, the marijuana industry is expected to grow to as much as $7 billion a year in revenues. In anticipation of this, State Treasurer John Chiang formed a task force to figure out how to collect and transport the funds. Their recommendation, among others, was armored cars. Ugh. But who can blame them? Colorado tried to set up a credit union specifically for the marijuana industry but it was denied by the Federal Reserve in 2015. So, there’s not a lot of great options out there.

I, for one, will be closely watching the rollout of legal recreational marijuana. With a healthy tax of around 15%, a University of California Agricultural Issues study claims that 29% of marijuana users may choose to buy the drug illegally. Those sales likely won’t be reported, won’t be taxed, and won’t end up in armored cars.
Student Loan Fraud

Student Loan Fraud

Anyone who has recently attended college or has a family member in college likely has some familiarity with student loans. In fact, 40 million Americans currently have student loans totaling an astounding $1.2 trillion dollars. Many of those who have applied for loans have been victimized by methods such as “advanced fee scams” that promise the best rate for an upfront service fee, or the ever-present loan elimination scams.

With easy access to stolen identities, fraudsters are now targeting the more lucrative loans themselves. Using stolen IDs, they enroll in classes which they, of course, never attend. Loans are made by the government, payments are not, and the unsuspecting “owner” of the loan goes into default when the fraudsters don’t make their payments.

In Grand Rapids, Michigan, a man was indicted last month for this exact scheme. He faces up to 20 years in prison for allegedly using stolen IDs to steal $150,000 in loans and grant aid. A quick check of the government’s paymentaccuracy.org website shows that he is not alone. Between the William D. Ford Federal Direct Loan Program and the Federal Pell Grant Program, $6.1 billion was improperly paid in 2016 alone.

While many of the improper payments are made to people who simply do not qualify based on income, an increasing number of loans are being made to outright fraudsters. Some estimates place the number of known fraud ring participants as high as 85,000 people. This victimizes the taxpayer, of course, but even more directly the person whose identity is stolen. It can take months or even years to clean up your credit. That’s one lesson I hope I never need to learn.
Ebola Relief Fraud

Ebola Relief Fraud

As a country, we have become accustomed to reading stories about fraud in healthcare, financial services, and government programs. It doesn’t make it right, but it’s certainly not new. Now though, news comes from the American Red Cross that $5 million of Ebola relief funds were fraudulently disbursed on overpriced supplies, fake customs bills, and even non-existent aid workers. These scams will be familiar to regular readers of this blog as they are similar to scams run against domestic subsidy programs. But Ebola relief efforts?

Between 2014 and 2016, Ebola raged through parts of Africa, claiming over 10,000 lives in Liberia, Sierra Leone, and Guinea. In response, the Red Cross collected and distributed over $100 million in aid, while doctors, nurses, and other volunteers risked their lives to save those suffering or at risk from the disease. Into this tragedy, naturally, came the fraudsters who recognized an ideal opportunity given the large amounts of aid money and the necessarily lax controls over disbursements.

Now the Red Cross finds itself having to apologize to donors who realize that 5% of their contributions were stolen. While I don’t know all the details about the Red Cross’s financial controls, I can only imagine how difficult a task it was to make sure money was distributed quickly to only well-intentioned people and organizations.

If anything, I believe this is one more reason for strong enforcement of criminal fraud after it has been committed. Trying to prevent fraud by adding bureaucracy and controls to the funds distribution process would likely add to delays during an emergency. Rigorous investigations and strong prosecutions, on the other hand, could act as a deterrent to future fraud. If not, at least it would prevent these fraudsters from plying their “trade” during other disasters.

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Pondera leverages advanced prediction algorithms and the power of cloud computing to combat fraud, waste, and abuse in government programs.



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