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.
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.
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.
Regular readers of this blog know that we often focus our comments on the fraud and abuses in government subsidy programs. Our intent is almost always to point out solutions that can make these programs more effective, rather than to question the existence of the programs altogether. In fact, most Pondera employees worked for government agencies in the past and recognize the good that many programs deliver.
The recent fires in California provide an example of government programs helping Americans in need. The fires, which tore through California’s wine country, including Napa and Sonoma, claimed over 40 lives and 7,000 structures, and displaced nearly 100,000 people. Entire neighborhoods were destroyed leaving families scrambling for shelter and food.
A number of government agencies sprang into action to help those affected by the disaster. While most Americans are somewhat familiar with, for example, how FEMA responds to disasters, other efforts are less obvious but very important.
For example, I took note of the combined efforts of the United States Department of Agriculture (USDA) and the California Department of Social Services (CDSS) to provide emergency food assistance to local residents. Using the Disaster Supplemental Nutrition Assistance Program (D-SNAP), CDSS offered a month of food benefits to those who qualify. This is in addition to other waivers such as allowing existing SNAP beneficiaries to purchase hot foods (many lost their homes and by extension their ability to prepare foods).
Events like the fires in California, while heartbreaking, also provide us with a reminder of the important work done by federal and state government agencies. This is also a time to remember the important work that agencies do throughout the year to support Americans who truly need our assistance. We believe our job at Pondera is to help governments deliver better services by driving fraud, waste, and abuse out of their programs.
I once worked for a manager that operated under what he called his “Bucket Theory”. His theory went like this: hire successful people, throw them in a “bucket”, and see who can climb their way out. Those that did, he explained, were the type that could succeed at this particular tech company. Those that couldn’t climb out were soon shown the exit. Pretty Spartan of him.
When I founded Pondera, I thought it might be interesting to make modified use of the “Bucket Theory”. Here’s how my theory goes: hire skilled and dedicated people with diverse backgrounds and experiences, broadly define the problem that needs to be solved, then throw them in a “bucket” and ask them to come up with a solution for the problem. The only guidelines: treat each other with respect, expect mistakes, share in success, and “think outside the bucket”.
Turns out that this modified bucket theory works pretty well. I’m constantly amazed by the innovations made by Pondera’s employees. And walking around the office, it’s not unusual to see a former FBI agent working with a PHD in Learning and Mind Sciences, an Unemployment Insurance investigator collaborating with the former founder of a Silicon Valley drone company, or a data scientist talking with a Certified Fraud Examiner.
Since founding Pondera, I’ve read a number of articles about the importance of hiring staff from “adjacent” markets. For example, one article detailed how some skateboarders were able to help improve construction site safety equipment. And I think we’ve all seen images of football players in training sessions with ballet instructors. I imagine that the conversations between these two groups were equally as entertaining as the ones among Pondera’s employees.
So why don’t more companies take this approach? I think there are two main reasons for this. First, many companies start with or develop the belief (sometimes arrogance) that their way is the only way. Like the proverbial hammer, they subsequently see every problem like a nail. The second reason: it can be very difficult to maintain a healthy company culture across such varied career experiences. Success depends on a clear and transparent vision combined with world class human beings. I personally feel very fortunate to work side-by-side with such people in the Pondera Bucket.
Earlier this week, I was surfing one of Pondera’s internal messaging boards when I came across a photo of some painted rocks depicting flying pigs with multi-colored unicorn horns. It seems that one of our investigators is also a part-time artist. I must admit that I was confused by the subject matter. This is the response that I received to my question about the rocks:
Within Pondera’s Special Investigations Unit, you have to earn the flying pig rock by accomplishing something that others might consider implausible, so that they’d say “that’ll happen when pigs fly”… but more than that, you also have to do it like only a beautiful, magical unicorn could do it.
This is absolutely one of the most unexpected and satisfying things I’ve discovered in all my years in business. This tradition explains so much about Pondera’s success. We have a team of incredibly successful and dedicated people that continue to work on doing what many previously thought impossible. They do it themselves with only broad guidelines from the management team (hence my not knowing about the “pigacorn”). And they have fun while doing their work, taking pride in knowing how truly important it is.
While I continue to take pride in the success that Pondera is having fighting fraud alongside our clients, my recent discovery serves as yet another reminder of what makes this company go (dare I say fly?). I often say that everyone at Pondera left something great to join our team and align behind our mission. With people like that, I expect a lot more flying pigs and a lot less fraud.
A recent spate of high profile arrests of dentists is drawing attention to an often-overlooked segment of Medicaid fraud. Some unscrupulous dentists are exploiting gaps between what private insurers reimburse versus what Medicaid will pay for. Others are just brazenly breaking the law to rip off state Medicaid programs.
Consider these recent charges brought against dentists:
An Anchorage, AK dentist was charged with 10 felonies. His “care” included performing a tooth extraction while videotaping himself on a hoverboard. Naturally, he had to text the video to friends. He is also accused of giving expensive, and unnecessary, IV sedations to Medicaid patients and then performing unneeded procedures on his passed-out patients. Since private insurance rarely pays for IV sedation, he only performed this fraud scheme on his Medicaid patients.
A Fairfield, CT dentist who saw mostly elderly and indigent patients is accused of ripping off more than $900,000 from Medicaid by billing for services that he never performed. One hint that he may have not been acting honestly: he billed for both a cavity filling and denture procedure on the same tooth!
An Atlanta dentist was sentenced to 18 months in prison earlier this year for defrauding nearly $1,000,000 from Medicaid. Her unique talent included the ability to perform dental procedures in Atlanta while she was traveling out of the country.
Unfortunately, these cases simply support our premise that fraud will exist anywhere substantial amounts of money are exchanged in complex billing and regulatory environments. These, and other similar cases, serve as a warning that we must monitor literally every medical specialty reimbursed by Medicaid.
As the residents of Houston and surrounding areas continue to struggle with the devastation caused by Hurricane Harvey, history shows us that problems will continue long after the homes and businesses have been repaired. Every large natural disaster in this country follows the same pattern: destruction brought on by the disaster, followed by looting and price gouging, followed by huge amounts of fraud committed in the chase for assistance money.
In Texas, all three seem to be occurring at once. We’ve all seen the heartbreaking images and videos of families who have lost everything, unfortunately including those who lost their lives. We’ve also seen the inspiring stories of ordinary people that risk their lives to help a neighbor, a stranger, or a lost family pet.
Now, of course, the looting stories are beginning to circulate. In this case, it appears that law enforcement is doing all that it can to protect life and property, including announcing mandatory jail time for all thieves and burglars. However, the scammers are wasting no time setting up Facebook pages and sending out tweets with links to “relief organizations” that are actually designed to steal money from those who want to help.
I have no doubt that this fraud activity will only increase. Consider these examples following previous disasters:
- Dozens of people were convicted of using fraudulent psychiatric claims following 9/11 to steal up to $50,000 per year in Social Security disability payments.
- A New Jersey man was one of hundreds to receive relief funding (in his case $171,099) after falsely claiming his primary residence was a home damaged by Hurricane Sandy.
- An Alabama woman filed 28 claims for disaster assistance in 5 states following Hurricane Katrina.
Unfortunately, fraud thrives at the intersection of vulnerable populations and large amounts of money. And Hurricane Harvey creates this intersection by displacing so many families, by invoking a government response, and by tapping into the giving spirit of caring Americans.
Even more unfortunate is the fact that most of the fraud will go undetected and unprosecuted. Consider that the vast majority of the 22,000 cases of potential fraud passed to the government's Katrina task force were never prosecuted. And it is likely that FEMA collected less than 5% of the estimated billion dollars of fraud following the Hurricane. Only by increased enforcement and stricter sentencing will we be able to break this heinous pattern. And, to me at least, this is a pattern worth breaking.
The United States government and several states recently announced that they had settled a $465 million lawsuit against Mylan Inc., the maker of the EpiPen. The Department of Justice stated that Mylan had “knowingly” misidentified the EpiPens as generic to reduce the number of rebates it owed to state Medicaid programs. All drug manufacturers, including Mylan, must agree to the rebate program to be eligible to supply drugs through Medicaid.
Those of you that follow these types of stories may recall that Mylan was accused of price gouging last year when they increased the price for a 2-pack of EpiPens to $600—a 400% increase over 6 years. In addition to the price gouging accusations, Mylan was also forced to settle a separate Medicaid billing complaint in 2009.
EpiPens, for those of you unfamiliar with them, are self-injectable medical devices used to offset often life-threatening allergic reactions to bee stings, foods, and medications. As a parent of two EpiPen-carrying children, I can certainly attest to the importance of the device. I suppose that’s part of the reason Mylan felt comfortable increasing their prices so dramatically.
What really bothers me about this case is the fact that the settlement represents only 134% of the total amount of damages incurred. This 34% “penalty”, on top of what was already owed, isn’t much of a deterrent against improper billings, as evidenced by the fact that Mylan has been busted twice in just eight years. Consider that this is a company with over $11 billion of revenue in 2016. Also consider that Mylan’s stock price increased 1% on the news of the settlement, no doubt reflecting the fact that investors expected a larger settlement.
In my opinion, this settlement sends the wrong message to unscrupulous businesses. They may look at these numbers and figure that "intelligent cheating" could be quite profitable, encouraging them to simply write off lawsuits as a cost of doing business. This is despite the fact that they would be violating the federal False Claims Act which addresses contractors who defraud the government.
It has been an interesting few weeks for the Supplemental Nutrition Assistance Program (SNAP), formerly known as the Food Stamp program, with two high profile busts. Both cases illustrate common schemes used to defraud the SNAP program, which distributed over $70 billion in food-purchasing assistance last year to 44 million Americans.
In Georgia, two convenience store owners used stolen identities to apply for SNAP benefits which were then loaded onto EBT cards (similar to credit cards) and mailed to addresses they controlled. Once received, they swiped the cards at their own convenience stores and pocketed over $800,000 before being caught. The U.S. Attorney assigned to the case said, “They used the SNAP system as an ATM for their personal gain, diverting critical benefits that help those who need assistance in our communities.”
Then, in Delaware, seven case workers at the Department of Health and Social Services were indicted for creating 100 fake accounts and cashing $959,000 in benefits. After creating the accounts, the case workers had the EBT cards mailed to state service centers where they simply intercepted them and used the cards themselves. Their scheme was detected when a supervisor noticed incomplete application data for one of the cards.
The Georgia case illustrates just how easy it can be (at least for a time) to use stolen identities to defraud government programs. Even if the suspects hadn't owned the convenience stores, it would not have been difficult for them to find one that would pay them a discounted price in cash for their cards.
The Delaware case is one we commonly see across states and programs where unscrupulous employees use their knowledge of the system to defraud their own government agency. Large amounts of money, combined with loose supervision, often prove too tempting for those with questionable morals.
A quick check of the government’s fraud reporting website, paymentaccuracy.gov, reveals that improper payment rates for SNAP are still not posted because of reporting problems. I look forward to updated numbers when they are available because even a small number like the 3.2% reported rate for 2014 translates to over $2.2 billion per year in improper payments.
While I don’t often review books on this blog, I feel compelled to share my thoughts on American Kingpin by Nick Bilton, which chronicles the history of the Silk Road. For those who don’t know, the Silk Road was a market on the dark web that sold drugs, weapons, poisons, and even human body parts. By the time it was shut down in 2013, the site was selling over $1 billion per year.
The book offers fascinating insights into the dark web, the libertarian creator of the site, the investigators who worked to shut it down, and the political schisms that often make it possible to run sites like the Silk Road. And of course, the book has great relevance to the fraud detection business because fraudsters often acquire identities on the dark web to create fictitious businesses, file for tax refunds, and make fake unemployment insurance claims.
While American Kingpin ended with the shutdown of the Silk Road and the prosecutions of the major actors behind the market, it is important to note that similar sites continue to operate on the dark web. In fact, just days after I finished reading the book, Attorney General Jeff Sessions announced that the FBI had shut down a similar site 10 times the size of the Silk Road. At the time this site was shut down last month, it contained 369,000 listings for drugs, weapons, malware, chemicals, counterfeit items, and more.
This is a sobering reminder of the challenges facing law enforcement when dealing with anonymous browsers like TOR, the Bitcoin cryptocurrency, and international crime rings. The dark web is not going away. Neither is the demand for illicit items. It will be interesting to see how this “cat and mouse” games plays out over the coming years.