NCPA - National Center for Policy Analysis


January 15, 2010

The Obama Administration -- and state and local governments -- should brace themselves for fraud on an Olympic scale as hundreds of billions of taxpayer dollars continue to pour into job creation efforts, says Daniel J. Castleman, a former chief assistant Manhattan district attorney, and current managing director at FTI Consulting.

Where there are government handouts, fraud waste and abuse are rarely far behind.  The sheer scale of the first and expected second stimulus packages combined with the multitiered distribution channel -- from Washington to the states to community agencies to contractors and finally to workers -- are simply irresistible catnip to con men and thieves, says Castleman.

There are already warning signs:

  • The Department of Energy's inspector general said in a report in December that staffing shortages and other internal weaknesses all but guarantees that at least some of the agency's $37 billion economic-stimulus funds will be misused.
  • A tenfold increase in funding for an obscure federal program that installs insulation in homes has state attorneys general quietly admitting there is little hope of keeping track of the money.

Based on experience, the cost of fraud involving federal government stimulus outlays of more than $850 billion and climbing could easily reach $100 billion.  Who will prevent this?  Probably no one, particularly at the state and local level, says Castleman.

New York, for instance, has an aggressive inspector general's office, with experienced and dedicated professionals.  But, it is already woefully understaffed -- with a head count of only 62 people -- to police the state's already existing agencies and programs.  There is simply no way that office can effectively scrutinize the influx of $31 billion in state stimulus money, says Castleman.

There is a solution however, which is to set aside a small percentage of the money distributed to fund fraud prevention and detection programs.  This will ensure that states and municipalities can protect projects from fraud without tapping already thinly stretched resources, says Castleman:

  • Meaningful fraud prevention, detection and investigation can be funded by setting aside no more than 2 percent of the stimulus money received.
  • For example, if a county is to receive $50 million for an infrastructure project, $1 million should be set aside to fund antifraud efforts; if it costs less, the remainder can be returned to the project's budget.

Source: Daniel J. Castleman, "How to Guard Against Stimulus Fraud," Wall Street Journal, January 14, 2010.

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