oversight

before the Task Force on Education, Committee on the Budget, US House of Representatives, on the Financial Management at the Department of Education on May 24, 2000 PDF

Published by the Department of Education, Office of Inspector General on 2000-05-24.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

           Statement of Lorraine Lewis
                 Inspector General
           U.S. Department of Education


                    Before the

             Task Force on Education
             Committee on the Budget
           U.S. House of Representatives

                        On

Financial Management at the Department of Education




                  May 24, 2000
         Statement of Lorraine Lewis, Inspector General, U.S. Department of Education
                                          Before the
                                  Task Force on Education
                                  Committee on the Budget
                                U.S. House of Representatives
                                              On
                    Financial Management at the Department of Education


                                          May 24, 2000


Good morning, Mr. Chairman and members of the Task Force. I appreciate the opportunity to

present testimony to you today. I will address our work in identifying waste, fraud and abuse at

the Department of Education. Specifically, I will discuss the recent guilty plea of a Bell Atlantic

employee working under a service agreement with the Department of Education, Pell grant fraud

and improper student loan forgiveness. I will also talk about the need for an environment with

strong internal controls, which are necessary to maintain the integrity of our Education programs.



Inventory Control Case

We are conducting an investigation of individuals who, for approximately three years, made

equipment purchases with federal funds for non-business related purposes, billed the Department

for hours not worked, and received goods for personal use. At present, two individuals have pled

guilty to their involvement in the case. The first, Joseph Dennis Morgan, pled guilty to one

count of receiving stolen property. Mr. Morgan illegally received approximately $14,000 in

electronic equipment since 1998. The second individual, Robert J. Sweeney, pled guilty to one

count of conspiracy and one count of theft of government property. Much of the following

information was reported by the U.S. Attorney’s Office for the District of Columbia, as part of

the plea agreement for Mr. Sweeney.




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Mr. Sweeney was an employee of Bell Atlantic who had been assigned full-time to the

Department to install telephone lines and telephones. Mr. Sweeney and a second Bell Atlantic

technician reported to a Telecommunications Specialist in the Department’s Office of the Chief

Information Officer. Approximately three years ago, the Department's Telecommunications

Specialist began asking Mr. Sweeney to order materials under the Bell Atlantic service

agreement that were unrelated to official Department business. These items began with

additional telephones and answering machines. Mr. Sweeney would deliver the items, which

were paid for by the Department, to the Telecommunications Specialist, who would then

distribute them to co-workers and family members for personal use.



Over time, the Telecommunications Specialist’s requests escalated and began to include more

expensive items. For example, a 61-inch television was ordered under the Bell Atlantic service

agreement and delivered by Mr. Sweeney and another Department employee to the

Telecommunications Specialist’s son’s house. Additionally, eight Gateway computers ordered

from Bell Atlantic were picked up by Mr. Sweeney and delivered to the Telecommunications

Specialist’s house or to locations that she designated.



Overall, from 1997 through 1999, the Telecommunications Specialist requested numerous items

from Bell Atlantic that were unrelated to the service agreement, including computers, printers,

computer software, scanners, cordless telephones, a 61-inch television, Palm Pilots, walkie-

talkies, compact disc players, and many other items. The total cost of these items to the

Department was over $300,000.




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Mr. Sweeney also performed numerous personal tasks for the Telecommunications Specialist.

In exchange for Mr. Sweeney’s assistance with the Telecommunications Specialist’s personal

requests, Mr. Sweeney was permitted to falsely claim overtime hours. For example, Mr.

Sweeney was permitted to turn in time sheets while he was on vacation showing that he had

worked his regular schedule as well as overtime hours. It is estimated that, between January 1,

1997 and November 30, 1999, approximately $634,000 in unworked hours was fraudulently

charged to the Department by Mr. Sweeney and the other Bell Atlantic technician.



Our contractors, Ernst & Young, identified numerous Department internal control deficiencies in

their “Report on Internal Control” for the fiscal year 1999 financial statement audit. A sound

internal control environment provides management with reasonable, but not absolute, assurance

that assets are safeguarded against loss from unauthorized use or disposition. The lack of a

sound internal control environment heightens the risk that the Department will not be able to

safeguard its assets and accurately record, process and summarize financial data.



Federal Pell Grant Program Fraud

OIG investigations and audits have disclosed patterns of fraud against the Pell grant program.

The most common fraud scheme involved ineligible or non-existent applicants who falsified Free

Applications for Federal Student Aid (FAFSAs) and other documents to obtain Pell grants for

which they or their institutions were not entitled. For example:

 §   In October 1999, four New York men were sentenced for their roles in a Pell grant fraud
     scheme. The defendants were convicted on an indictment charging conspiracy, program
     fraud, false statements, wire fraud, mail fraud and tax fraud in connection with
     postsecondary programs that they falsely claimed to be administering. Judge Barbara Jones
     noted that the serious and sophisticated long-term fraud committed against the Department
     warranted substantial periods of incarceration and also ordered the men to make restitution



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    of $11 million to the Department. Judge Jones stated that the $11 million loss to the
    Department’s Pell grant program was a very conservative estimate since it related to losses
    associated with only one of the fraudulent educational programs administered by the
    defendants. The defendants were also charged with and convicted of defrauding the Small
    Business Administration and the “Section 8” rental subsidy program of the Department of
    Housing and Urban Development.

§   On February 28, 2000, the Director of the Orange, California, branch campus of Travel and
    Trade Career Institute was sentenced to five months in jail, five months confinement in a
    community halfway house, $83,000 restitution, $50 special assessment, and three years
    supervised release. The Director conducted a scheme in which he drew down
    approximately $83,000 in federal Pell grants on behalf of students that did not exist. He
    used the money for his own personal gain and miscellaneous school expenses.

§   On April 18, 2000, a federal Grand Jury in the Northern District of Illinois returned
    indictments against three former school officials of the now defunct American Career
    Training school in Chicago, Illinois. The three individuals were indicted on conspiracy and
    financial aid fraud for falsifying student eligibility documents that made ineligible students
    appear to be eligible to receive Pell grant funds during 1993 through 1996. They received
    in excess of $250,000 in Pell grant funds. The school officials created GED certificates,
    falsified Ability-to-Benefit test results, created Internal Revenue Service documents and
    created fraudulent letters from lenders and the U.S. Department of Education’s Debt
    Collection Service.

§   On April 26, 2000, the Director of the PSC School for Careers was arrested based upon
    allegations that she engaged in the submission of false claims for Pell grants and New York
    State Tuition Assistance Program grants. The criminal complaint alleges that the Director
    instructed school employees to create fictitious attendance records.

§   On May 1, 2000, a former school owner, the school owner’s daughter and a former
    instructor pled guilty to conspiring to steal and misapply more than $1.4 million in federal
    Pell grant funds. The funds were fraudulently obtained by forging and creating false
    documents and submitting fraudulent grant applications to the Department of Education for
    non-existent or non-eligible students. The three defendants used some of the funds for
    student operations and converted the rest to their own personal use, including the purchase
    of jewelry, real estate, furniture and an automobile.

§   On July 15, 1998, a self-employed financial aid consultant was sentenced on one count of
    fraud against the Department, was ordered to serve 21 months in federal prison and then
    placed on two years of supervised release. He was also ordered to pay restitution in the
    amount of $5,000 plus an assessment of $50. The consultant offered a fee to assist parents
    and students with their applications for Title IV funds to attend postsecondary institutions.
    The investigation was initiated based on information from a confidential informant who
    alleged that the consultant falsified various federal financial aid documents, including tax
    returns, to assist parents and students in obtaining Title IV funds. A preliminary review of
    1,200 seized customer files revealed that the consultant had approximately 700



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     parent/student files covering a period of five years. His account ledgers for 1995 reflected
     an income of $51,188 based on 228 separate customer entries. Included in the seized
     customer files were completed Free Applications for Federal Student Aid, Student Aid
     Reports, tax forms and fraudulent tax forms prepared in the name of the consultant’s
     clients. A preliminary review of several files revealed that clients’ incomes were lowered
     on numerous FAFSAs and tax forms. These alterations had the effect of increasing the
     students’ chances of receiving federal financial aid. Another finding of the file review
     revealed that numerous student files reflected that some students were listed as orphans or
     wards of the court. This caused the students to be considered independent, which
     substantially increased their chance of receiving financial aid. The consultant usually
     charged a fee of 10% of a Pell grant, or approximately $230, for his services.

 §   On November 30, 1999, a student at Mid-State College was sentenced for her role in
     defrauding the Pell grant and Federal Family Education Loan programs. She was
     sentenced to six months incarceration to be followed by a 3-year period of supervised
     probation, ordered to make $6,062 in restitution to the Department and pay a $900 fine.
     The student made multiple false statements regarding her marital status and her husband’s
     income on her Free Application for Federal Student Aid.

 §   On March 15, 2000, a student at Pacific Lutheran University was indicted for allegedly
     falsifying financial aid applications to receive Pell grants. She also allegedly falsified
     information on Social Security applications to receive Supplemental Security Income (SSI)
     benefits. Her scheme involved falsifying her marital status as “separated” to avoid having
     to report her spouse’s income on the applications. Our investigation found evidence that
     she was living with her spouse during the entire period she received SSI benefits and
     student financial aid benefits. The total amount of fraud was $68,475.


To help combat one of these patterns of Pell grant fraud, the Higher Education Act (HEA)

Amendments of 1998 (P.L. 105-244) included a provision authorizing the Department, in

cooperation with the Treasury Department, to confirm with the Internal Revenue Service (IRS)

key pieces of information on the federal income tax returns of applicants and their parents.

Without specific authorization in the Internal Revenue Code, however, the IRS indicates that it

must obtain written taxpayer consent before individual income information may be released to

the Department. We recommend that the Congress enact any necessary additional legislation to

address this matter.




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In the interim, the Department just completed the first of two planned test-match studies with the

IRS. The Department will use the statistical information from the test match to identify the types

of students who are most likely to under-report their income. The Department also intends to use

the IRS information to better evaluate the extent of income under-reporting and to support its

desire to conduct a full-scale data match with the IRS.



Improper Student Loan Forgiveness

OIG audit and investigative work has also identified concerns with the discharge of loans due to

disability or death. Since October 1999, OIG investigative work on fraudulent disability

discharges resulted in more than $1,000,000 in loans being reinstated by the holders of the loans,

which is either the Department or a guaranty agency. For example:

 §   On January 13, 2000, an individual was sentenced to six months home detention, five years
     probation and was ordered to pay $37,743 in restitution. The individual had submitted a
     fraudulent disability form to the Department of Education stating that he suffered from
     chronic paranoid schizophrenia and that he had a poor prognosis to be gainfully employed.
     As a result, he was relieved of his obligation to repay five student loans.

§    On May 8, 2000, a doctor pled guilty to charges of student loan fraud and health care fraud.
     The next day, his brother, who is also a doctor, pled guilty to charges of misprision of the
     felonies of student loan fraud and health care fraud. Both doctors agreed to make restitution
     for the total amount obtained through their fraud schemes. The doctors mailed fraudulent
     total and permanent disability claims to several federal student loan guaranty agencies and
     lenders to have their medical student loan obligations discharged. One doctor had two
     student loans discharged, totaling $32,548, including $4,366 refunded directly to him. The
     other doctor had two student loans discharged totaling $11,992, including $4,098 refunded
     directly to him. A third loan discharge for the second doctor in the amount of
     approximately $15,000 was prevented as a result of this investigation. Our investigation
     revealed that the first brother submitted false disability claims stating that he and his brother
     were house confined and/or wheelchair-bound. However, OIG agents observed the brothers
     riding bicycles and swimming at a beach. Our investigation also revealed that the disability
     claims were certified by a non-existent physician and were often accompanied by letters
     from a non-existent attorney.




                                                  6
In our June 1999 audit entitled Improving the Process for Forgiving Student Loans, which was

requested by the Department, we recommended that several steps be taken to enhance the current

discharge determination procedures. These include revising the disability form to include, at a

minimum, the doctor’s professional license number and office telephone number, and requiring

certified copies of death certificates. The Department modified its disability form to incorporate

our recommendations and OMB approved the form. Also, the Department now requires that a

death discharge be based only on an original or certified copy of the death certificate.



Our office continues to pursue this matter. In order to identify fraudulent death discharges, we

conducted a data match with the Social Security Administration’s Death Index to identify

persons who received loan discharges based upon death, but who do not appear in the Social

Security Death Index. Working with a sample of these data and with information filed by those

who obtained substantial discharges from Sallie Mae and a number of guaranty agencies, our

investigators are pursuing leads generated by the match. In the area of disability discharge fraud,

we are working with the guaranty agencies to identify potential fraud cases and following up on

leads developed from the data.



Internal Controls

A key factor in improving accountability and minimizing operational problems within the

Department is the implementation of appropriate internal controls. Recently, the General

Accounting Office (GAO) updated its standards for internal control in government. The

standards provide a framework for establishing and maintaining internal control and for

identifying and addressing management challenges and areas susceptible to fraud, waste and




                                                 7
abuse. The GAO standards address the areas of control environment, risk assessment, control

activities, communication and monitoring.



Currently, we are reviewing existing internal controls over the procurement of goods and

services. Our review is based on the GAO standards. We are conducting interviews with

procurement personnel and senior managers in each principal office within the Department and

performing transaction testing to verify the Department’s internal control procedures. To date,

we have found internal control deficiencies in the Department’s use of the government purchase

card and third party checks. At the completion of our review, we will have delivered an

individual report to each principal office and a report containing summary recommendations to

the Department.



Conclusion

Ultimately, the design and implementation of any internal control must be based on an analysis

of costs and benefits. Even well designed and implemented internal controls cannot provide

absolute assurance against fraud, waste and abuse. There always will be factors such as human

mistakes and acts of collusion that will be outside the control or influence of management. That

is why we need to remain vigilant and maintain a credible deterrence through, among other

things, a regular program of management reviews, an active hotline function, and vigorous audit

and investigative operations.



This concludes my prepared testimony. I am happy to answer any questions you or other

members of the Task Force may have on these issues.




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