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Testimony before House Ways & Means Committee
CHILD CARE FRAUD - July 17, 2003
(with follow-up)

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Statement of Michael G. Rice, President, United Council on Welfare Fraud
"Fraud and Abuse in Government Child Care Assistance Programs"

Chairman Thomas, Congressman Rangel, members of the committee: On behalf of the United Council on Welfare Fraud, I wish to express my gratitude for the invitation to provide written and oral testimony for you today and for your concerns on the topic of welfare fraud and abuse, particularly in the area of child care assistance.

About the United Council on Welfare Fraud and the information provided today:
For 32 years the major goal of the United Council on Welfare Fraud (UCOWF) has been to provide maximum effort towards the prevention, detection, elimination and prosecution of welfare fraud in its many forms and to effect recovery of taxpayer monies lost through waste, fraud and abuse in government programs designed to aid the needy. UCOWF�s membership currently consists of welfare investigators, administrators, and recovery specialists, as well as fraud prosecutors from 47 states, the District of Columbia and 7 Canadian provinces, establishing a network from Hawaii to Newfoundland.

A primary purpose of our organization has always been the promotion of effective and efficient administration of public welfare. As the direction and manner of providing assistance to the needy have changed over the years, our members have consistently been the first to encounter and address the program integrity aspects inherent in those changes; for despite how well-intentioned and generous a program may be in aiding people truly in need, there will always be those who will try to capitalize on opportunities and cheat the system.

The information I provide to you today has been compiled from a survey of state welfare fraud directors across United States recently conducted by the United Council on Welfare Fraud and from the submission of anecdotal case experiences and observations by investigators, prosecutors and administrators who have been dealing directly with the problem of child care fraud. I do not presume to speak for any governmental agency, federal, state or local, I am merely relaying information provided by our members and other interested people who have dealt with this burgeoning problem.

Summary of the problem:
The passage of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 established block grants to the states for "Temporary Assistance to Needy Families," popularly known as "TANF", aimed in large part at promoting job preparation and work among needy families and providing assistance to those families so that children could be cared for in their own homes or in the homes of relatives. It was thus clearly recognized that child care was a significant factor behind the "welfare to work" concept underlying the legislation. Additionally, steps were taken to address program integrity issues such as public and nutritional assistance to fugitive felons and parole violators, individuals convicted of drug-related felonies and sanctions were established for intentional violators of means-tested public and nutritional assistance programs. Incentives were provided to encourage the states to pursue delinquent child support payments.

Although recognizing child care as essential to TANF and creating therewith Title VI, the Child Care and Development Block Grants Amendment of 1996, Congress also restricted the use of any TANF block grants to carry out state programs pursuant to Title XX and the Child Care and Development Block Grant Act of 1990. A limitation of 15 percent of the TANF grant to a state was placed on administrative costs. Administrative costs include the expense of detecting and investigating fraud and abuse. Further, while the Child Care and Development Block Grants Amendment of 1996 appropriated monies to be used to establish and fund child care programs, it limited the amount available for administrative purposes to 5 percent of a state�s grant and the only penalties created were those to be imposed on the states for improper utilization of the funds allotted to them.

The emphasis on child care accompanying TANF resulted in an increase in the amount of monies expended by welfare agencies to child care providers of many forms. Not all child care providers are state-licensed day-care centers. A large portion consists of licensed in-home providers and a larger percentage is "informal providers." In Minnesota, for example, "legal non-licensed" providers represented nearly 37 percent of child care providers in 2002, compared to 32.8 percent for licensed centers and 27.6 percent for licensed home providers.

Staff reductions caused by economic conditions and grant restrictions have resulted in insufficient screening of applications to receive and to provide child care services by many social services agencies. Further, the investigation of child care fraud is more time consuming and labor intensive than that of other types of welfare fraud, such as TANF and Food Stamp fraud cases. Local agencies are reimbursed their fraud unit costs from federal administrative funds and their state share of fraud and non-fraud overpayment collections but they are not permitted to credit child care fraud overpayment recoveries to their fraud funds. As a result, child care fraud programs are given a lower priority than those that provide a monetary incentive.

The UCOWF Child Care Fraud Survey:
The cost of providing child care is significant, to say the least, (Virginia�s Child Care Program budget for FY 2003 is $115,000,000), and the potential for fraud is high. From my own experience as a welfare fraud prosecutor, I can assure you that a case of child care fraud can result in a substantial loss of taxpayer monies in a very short period of time. The extent of the problem nationwide, while recognized generally, is still being evaluated, but many states have not kept statistics. The United Council on Welfare Fraud, in an effort to reach a better understanding of the extent, nature and impact of child care fraud across the nation, conducted a survey in 2002.

A questionnaire was sent to the state fraud directors of each of the states and the District of Columbia seeking information on whether, in their view, child care fraud was a state problem, the types of child care fraud experienced in the state, if statistics were kept, prosecution was pursued, recoveries made and penalties imposed in cases of child care fraud. Forty-two states responded. The document containing the full list of questions, eleven in all, and the responses is too large to include with my written testimony, however it may be viewed on the organization�s website, ucowf.org.

Forty of the 42 state fraud directors polled were of the opinion that child care fraud posed a problem in their states and of the two answering in the negative, one still provided examples of the types of child care fraud that has occurred within its boundaries.

Eighteen states had not been keeping statistics on child care fraud, but of them, several responded that the local county agencies administering the services did maintained fraud databases. In those states that did maintain detailed statistics, fraud was discovered in upwards of 69 percent of the investigations conducted with total annual discovered fraud amounts ranging from $10,000 to over $1 million.

All but three states referred fraud cases for criminal prosecution, with 17 having specific state laws regarding child care assistance fraud. Twenty-three relied on other state statutes to address criminal activity. Thirty-three states pursued administrative recovery of overpayments of child care assistance to recipients, although some could only collect through voluntary repayments, and four were capable of recovering from providers through a reduction in subsequent payments.

Eighteen states administratively penalized program-violating recipients by disqualification or other sanctions; seven undertook disqualification or de-licensing action against violating providers; one state penalized only providers but not recipients and the remainder had no penalty provisions or relied on criminal or civil restitution procedures.

An analysis of the results of this survey leads me to the conclusion that there is little uniformity in the manner in which child care fraud is addressed by the states, apart from the utilization of the criminal system. Where TANF mandates disqualification of program violators, there is no such provision in the area of child care assistance, particularly with respect to violating providers. A non-licensed, or informal, child care provider convicted of receiving fraudulent child care monies, in many states, is still eligible to provide child care services and receive government payments without regard to his or her previous fraud.

The types of fraud observed in the states were evenly divided between recipient (client) fraud and provider fraud, recognizing instances where there was collusion between both parties to defraud the system.

Types of Child Care Assistance Fraud and Various States� experiences:
Child Care Assistance fraud can be committed by both recipients and providers individually or in collusion with each other.

A recipient may understate income to the household, rendering the household eligible for services. This can be done by underreporting the amount of hours worked or wages earned by the client, failing to report the presence of a responsible wage earner in the household, falsely claiming residence in the county or falsely claiming a child care expense when none exists. Failing to report a loss of employment or claiming non-existent employment, rendering a client ineligible for child care services also constitutes a fraud on the system.

In one recent Colorado case a client forged her pay stubs reducing the claimed amount of income to her household. As a result she received over $12,000 in child care assistance over 14 months to which she was not entitled.

Two Virginia women failed to report that their husbands were employed and residing in their homes resulting in losses of $16, 482.00 and $15, 962.00, respectively.

A Minnesota woman falsely reported living alone when her able-bodied husband was, in fact, in the household and collected more than $91,000 in child care assistance over four years.

In another Colorado case, a client claimed residence in one county while residing in another. A recovery of $33,553.00 was established for a two year period.

A Rochester, New York woman, whom I prosecuted, claimed that her brother was caring for her 11 children. Payments were sent in her brother�s name to her mother�s address. The brother, in fact, had been incarcerated for over 10 years on a rape conviction and her husband was, in fact residing in the household and caring for the children. The loss amount was limited to $77,000 because agency records failed to cover the entire period of the fraud. The illegally obtained money made the client ineligible for the food stamps the family received and the Section 8 housing in which they resided.

Another Rochester woman stole an acquaintance�s social security card, established a vendor account using the acquaintance�s social security number and her own mother�s address. Twenty-seven thousand dollars in child care payments were sent to her mother who signed the checks and gave them to the recipient over a two year period. Free care for five children was provided by the client�s mother and her 85 year old grandmother.

In Wyoming, two sisters claimed a third was providing day care for their children when, in fact, the third sister was fully employed and they were not. This resulted in a loss of  $6,700 over a period of 14 months.

Similarly, two Virginia clients, employed by the same company, claimed each provided services for the other when, in fact, they worked the same hours. A claim of $36,474.00was established.

Another Virginia woman failed to report that she had lost her job on three separate occasions, yet continued to send her children to child care each time. The overpayments totaled nearly $4000.

Providers can commit fraud by claiming children who aren�t being watched, by misrepresenting the number of hours that services were provided or by charging more to care for government funded children than private pay children. They also engage in collusion with recipients and split payments to which they are not entitled.

A Wyoming provider got $41,600 over 1 � years claiming services for children who were not there and padding the hours for those that were there.

A Colorado provider billed $6,685 for children who had not been in his care for 4 months.

Another Wyoming provider filed claims for children who were not in attendance at a rate higher than that charged to non-child care assistance covered children; a claim was established for $112,800.for a three year period of fraud.

A Minnesota couple is under investigation for taking kickbacks from a child care center that billed the system for over $41,000 from November 2001 through December 2002 under the pretense of caring for the couple�s five children.

A California client sent her children to a free child care center and claimed that the services were provided by a family member. The two split $15,900 in illegal child care payments.

Cheats can take both forms. In a particularly egregious case, a Minnesota woman applied for child care assistance, claiming to support four children on an income of $3,100 a month. In another county, however, she operated an in-home day care center and was paid $854,000 over six years. She pleaded guilty to receiving more than $134,000 in fraudulently received child care reimbursements.

Recommendations:
The above is but a smattering of "horror stories" I have compiled from around the nation; I have omitted dozens more. They add up to a tremendous loss of taxpayer monies set aside for legitimate child care purposes and point out the need for adequate checks and balances in the system.

The United Council on Welfare Fraud recommends that, due to the substantial increase in child care funding made available to the state and the growing number of instances of fraud in the Child Care Assistance, Congress should demonstrate its commitment to Child Care program integrity by requiring all states to prepare a child care fraud control plan which, while allowing flexibility to address state-specific needs, requires, at a minimum:

  • Procedures for recovery of child care overpayments.
  • Federal tax intercepts for child care overpayments.
  • Disqualification penalties for child care recipients and providers who have committed an intentional program violation.

These penalties would be modeled after and be similar to those formerly in place in the AFDC program (45 CFR 235.112) and currently in place in the Food Stamp program (7 CFR 273.16 [b]).

  • Establishment of an incentive to promote anti-child care fraud activities by crediting child care fraud overpayment recoveries to the fraud funds of the individual states.
  • UCOWF gladly offers its assistance in drafting these changes to existing legislation and regulatory provisions.

    Conclusion:
    Child Care Assistance has been described by one of our member investigators as "the new pot of gold" in welfare fraud. It must be acknowledged, pursued and prevented. Efforts must be made by both the states and the federal government to insure that uniform and reasonable criteria are established to provide and receive child care assistance, that applications for assistance and vendor status are properly evaluated, that funds are available to ensure thorough investigation of suspected cases of fraud and penalties imposed on intentional violators of the program, and that procedures and vehicles are in place for recovery of child care program overpayments.

    Again, ladies and gentlemen, on behalf of the United Council on Welfare Fraud, I thank you for the opportunity and honor of addressing you on this subject


    FOLLOW-UP WAYS & MEANS COMMITTEE QUESTIONS - July 23, 2003

    Dear Mr. Rice:

    As Chairman of the Human Resources Subcommittee, I appreciate your testimony before the July 17, 2003 Committee on Ways and Means hearing on Waste, Fraud, and Abuse. As we proceed with next steps and continue to explore these problems, I hope you don�t mind answering the following questions related to programs within the jurisdiction of my Subcommittee:

    1. In general, once a child care fraud case results in an overpayment and is successfully prosecuted, what percentage of the overpayment is recovered? Are any child care fraud cases rectified without court action or prosecution? For the cases you have prosecuted, do you think the penalties available were strong enough?

    2. Based on the examples cited in your testimony, there are individuals out there devising and implementing schemes to, in effect, take child care money from needy families to line their own pockets. With $11 billion used for child care in fiscal year 2001, even a small percentage of abuse could really add up. Just how widespread do you think fraud is in the child care system? How many dollars are being taken out of the system each year? What is the best way to stop it?

    3. Would you please briefly review the general process an individual goes through to get child care assistance and outline the types of documentation about income, work schedule, number of children, etc. that they might be required to show? In your experience, do you find that most people are truthful? Please also review for us how child care providers become eligible to provide services and be paid with taxpayer dollars.

    4. Are certain States using more aggressive techniques to deter and penalize individuals participating in child care fraud? If so, which States are they and what are they doing? What is the best way for us to encourage States to be more proactive in finding and stopping child care fraud?

    Please submit answers to these questions in writing to Matt Weidinger, Staff Director of the Human Resources Subcommittee, by Thursday, July 31, 2003.

    Thanks again for your assistance and excellent testimony.

    Wally Herger Chairman


    UCOWF PRESIDENT'S RESPONSE TO FOLLOW-UP QUESTIONS - July 2003

    Hon. Wally Herger
    U. S. House of Representatives
    Committee on Ways and Means
    1102 Longworth House Office Building
    Washington, DC 20515-6348

    Dear Congressman Herger:

    Thank you for your letter of July 23rd. I submitted your questions to the UCOWF Board of Directors in order to get a sense of how the various states were addressing the issues you posed. As the greater portion of social services across the country are locally, rather than state, administered, it is difficult to get statewide statistics, however, I will try to give you the best information based on the responses I received and my own experience.

    At this time most states have not maintained statistics on the percentage of recovery as the local agencies, usually county-administered, are responsible for providing care and payments. Administrative recovery depends on whether the recipient is in receipt of public assistance which can be reduced to recoup the loss. A recoupment, usually anywhere from 10% to 20% of the public assistance grant, is the primary means of recovering overpayments of assistance, either fraud or non-fraud related. Some states, such as Maryland, recover fraud losses at a higher recoupment percentage than non-fraud losses. If the recipient is working, however, the base assistance grant would not be very high and, therefore, the recovery amount would be low and full repayment would take a long time.

    If the recipient of the child care is not on assistance, or disqualified from receiving assistance because of the fraud, administrative recovery becomes impossible until such time as they begin receiving assistance again. Counties have resorted to civil judgments and collections and criminal court-ordered restitution, but again, the percentages vary nationwide. Monroe County, New York DSS estimates less than 50% of the fraud losses recovered, while Roanoke City, Virginia claims to obtain full recovery, although that is primarily done through the criminal justice system. Those cases that Roanoke pursues civilly may take years, however. Fraudulent providers are generally not subject to administrative recovery, although Colorado and Wyoming do recover from subsequent payments to the provider. Again, most states do not disqualify providers who have committed an intentional program violation.

    Whether a case is pursued criminally or administratively depends on the arrangement the agency may have with the local prosecutor. Cases are generally accepted for prosecution based upon the dollar amount of the loss and strength of the proof. While I was prosecuting welfare fraud, my threshold amount went from $5000 down to $1000 over a six year period. Child care fraud is an area where the dollar amount of the loss can rise rapidly, so thresholds are met easily. However, from the responses I received from the Board members, the preferred response is administrative action which may be coupled with criminal action. Some states implement disqualification procedures similar to those for Food Stamps and TANF, but not all.

    For the cases that I prosecuted, the available penalties were certainly strong enough; the difficulty was in convincing the judges to utilize them. The general judicial feeling in the metropolitan areas in New York State is against incarceration of welfare frauds, generally, and very few of the hundred of defendants I prosecuted were incarcerated. Mostly, the sentence was to probation and restitution. The woman who stole $77,000 through child care fraud over a nine-year period was sentenced to prison for 1 1/3 to 4 years, but that was primarily because the amount of the fraud was so great that the judge felt compelled to send her to prison. Cases involving lesser amounts would not result in jail time. This situation is usually different in rural counties and in other parts of the country, however.

    As I stated in my testimony, 40 of the 42 states responding to the UCOWF survey stated that Child care fraud was a problem. The fraud is widespread. One worker from Virginia told me that 40% to 50% of her child care cases involved some sort of fraud. This percentage was echoed by workers in Minnesota. Other states reported lower percentages of overpayments in general, but upwards of 60% of those overpayments were fraud-related. The consensus at the State Fraud Directors� meeting last March was that 50% of child care cases involved fraud. These figures, though, are just estimates. In my opinion, when the 1996 legislation provided for child care monies to be available, no one thought about the possibility of fraud in the system and the states weren�t ready for it. It wasn�t thought to start keeping statistics on child care fraud until it was suddenly realized that it was happening. A dollar amount can�t be placed on the losses because of this. A safe educated guess would place the losses in the vicinity of at least one-third of the $11 billion you refer to.

    Because child care fraud takes on many forms, there is no one best way to stop it. Part of the problem is in finding and investigating it. This has become more difficult because of the economic downturn which caused layoffs of the investigators whose job it was to prevent losses. Also, the percentage of the TANF block grants created in 1996 which could be used for administrative purposes was limited to 15% of the grant and the amendment providing money for child care limited to 5% for administrative purposes. These "administrative" purposes included investigation funds and front � end, or eligibility, evaluations. Throwing money at a problem has not been a solution I have endorsed in the past, but allowing the states to maintain a portion of the overpayment monies they recover and permitting recovery from violating recipients and providers through income tax return intercepts would fund the investigators and evaluators who could address the problem of eligibility. Couple that with stricter requirements for establishing recipient eligibility and provider accountability and a major portion of the problem would be addressed.

    Application for child care assistance generally requires the completion of an application outlining the household�s size and income. Most states require independent verification of this information through birth certificates and wage stubs; some, however do not. Most states do not require an in-person interview. Applications and recertifications of eligibility are done over the phone, by mail and, in some states, via the internet. This is the area where the problem exists. Until my large case was discovered, the local DSS agency was not verifying the information provided by the recipient family and no steps were taken to validate the claims of eligibility or the existence of the provider. "Front-end" eligibility determinations were being conducted in TANF and Food Stamp claims, but not in child care. Either through naivety or the existence of an "entitlement mentality" on the parts of the administrators of the program, the concept of fraud in that aspect of the system wasn�t envisioned. Needless to say, when the $77,000 fraud was discovered here in Monroe County all cases were reviewed and several frauds discovered. Also, in-person application procedures were implemented. Not all states are doing that however.

    Most people are truthful, in the opinion of UCOWF�s Board members, but some have found that as much as 50% of their clients have shown themselves to be dishonest..

    Child care providers may be state-licensed day-care center providers who have complied with state regulations regarding safety, diet, number of staff members, etc. These are regularly inspected facilities. Each state has one or more classifications of this type of provider and they are fairly well regulated.

    States vary, however, on what New York calls "informal providers" or friends or family members who are retained to watch a recipient�s child(ren) while the recipient works or goes to school. In Monroe County, the procedure simply required the provider to obtain a "vendor number" from the county and for the recipient to name the provider on the child care application. Monthly attendance records would be sent in and payments made directly to the vendor. No in-person verification was required. Some states, such as South Dakota, are stricter in requiring proof of qualifications to provide care and receive payment, but others, like Iowa, and Ohio, are like New York. This has led to a number of child care cases involving identity theft.

    Some states are being aggressive in their approaches to the problem. Arkansas, Maryland, Minnesota, Nebraska and Ohio are among the states that have implemented Administrative Disqualification procedures similar to those in the Food Stamp program. This addresses the problem of the fraudulent recipient. I do not know of many states that utilize a similar procedure for providers, although to do so would be beneficial as a large percentage of fraud cases involve collusion between recipients and providers and, in many states, a program-violating provider is not sanctioned from being a provider in the future.

    Again, an incentive to prevent and pursue child care fraud in the form of retained recovered child care overpayments would permit agencies to hire more investigators and front-end evaluators. Tax return intercepts would assist in effecting these recoveries, as court-ordered restitutions and civil collections recover only so much of fraud losses.

    As I inartfully attempted to explain to Congressman Cardin on July 17th, while, in 1996, Congress did provide monies to the states to be used as they deemed necessary to implement the programs, there appears to have been no anticipation of fraud in the child care system and no provision made to address it in addition to fraud in TANF and Food Stamps. The limitations on funds available for administrative purposes restricted investigations in the child care area and little was done to address it until it became recognized as a major problem. While welfare case loads diminished, child care cases increased, and accordingly, so did child care fraud cases. Economic conditions reduced the number of agency staff to address child care fraud and the problem became bigger. Efforts are being made to combat child care fraud, but the incentives I mentioned are necessary, along with federally required responses to fraud similar to those required under TANF and in the Food Stamp program.

    Thank you for your interest. We in the United Council on Welfare Fraud are honored and pleased that our input was sought. We are always available to collaborate in finding ways to ensure that those who truly need public assistance are the ones who receive it. I include as attachments to the e-mailed version of this response, the UCOWF Child Care Survey results and the responses of five of our members to your questions.

    Sincerely,

    Michael G. Rice
    President, UCOWF

     


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