Fraudsters set to pounce on massive infrastructure money

Fraudsters stand to siphon off $120 billion or more of the federal infrastructure money flowing to states and local governments for roads, bridges, broadband and other projects over the next five years, some experts predict.

At least 10% of the total $1.2 trillion in infrastructure funding could be used fraudulently, estimates Stephen Street, president of the Association of Inspectors General, a nonprofit membership group.

“Our experience has always been when you have a large amount of money—and this is pretty gargantuan—there will be an element of fraud built in,” said Street, who also is Louisiana’s inspector general. “It will take many forms: false documentation, being reimbursed for monies never spent, phony records.”

While federal agencies ultimately are responsible for how the money gets spent, it will fall to states, cities and counties awarding contracts to oversee everything from the bidding process to the quality of the work, say auditors and watchdog groups.

Some watchdogs criticize Congress for failing to include sufficient oversight provisions in the legislation that created the program. And some state and local agencies as well as auditors and inspectors general across the country may lack the staff or resources to oversee the flood of money, the experts say.

“There are going to be very few agencies that are going to be equipped to do that,” Street said. “This funding needs oversight. There are limited resources to do it. That’s going to potentially make it very difficult to catch all the fraud.”

Legislators in at least one state, Connecticut, are considering requiring quarterly reports and hearings on infrastructure spending, and in another, Washington, the state auditor’s office has asked for oversight funding.

In Louisiana, the inspector general’s office has law enforcement power and can investigate and make criminal cases.

“Monitoring is critical. You have to have somebody looking,” Street said. “Once you award a contract for a transportation project, is it being honored? Is there fraud in the area of specs, materials, inspections? Is the company real?”

Judy Randall, Minnesota’s legislative auditor, said her office also plans to monitor infrastructure spending.

“We’re worried about the whole life cycle of the funds,” she said. “How are they awarded once Minnesota gets them? How do they decide which contractors get that money? Is there adequate oversight during the life of that project? Are contractors doing the work properly and on time?”

Randall said there can be weaknesses at any point in that cycle. “This is something we’ll definitely be paying attention to.”

Washington state likewise will be on the lookout; officials there say they need more resources.  

“Any time we see a large amount of federal money coming to a state, it’s just ripe for fraud,” said Sadie Armijo, director of audit and special investigations at the Washington State Auditor’s Office. “Fraudsters are super creative. They’re always trying to find a way to get in.”

Her state will be getting $8.6 billion in infrastructure money, more than half of which will be used for state and local highways, she said. A big chunk will also go to counties, cities, port districts and water districts.

“Those agencies are going to have to carefully watch bidding and make sure it’s going right,” she said. “The most important message is: Keep all the documentation to make sure how this money is being spent.”

The Washington state auditor’s office last month asked the legislature for $1.6 million more because of its increased workload auditing all the federal programs related to pandemic funding, as well as the new infrastructure law. Armijo said the office would require 10 additional auditors in the next two years just to keep up.

Infrastructure fraud and abuse can range from bid rigging to phony invoices to kickbacks or even contractors using substandard materials, experts say.

In June 2021, for example, an Ohio engineering firm pleaded guilty in a federal criminal case to conspiring to rig bids and defraud the North Carolina Department of Transportation to get contracts for infrastructure projects. The company agreed to pay a $7 million criminal fine and $1.5 million in restitution to the state agency.

In the massive $15 billion Boston highway and public works project dubbed the Big Dig and completed in 2006, former managers of a contractor were convicted on conspiracy and fraud charges for delivering substandard concrete; the company agreed to pay a $50 million settlement.

Some state lawmakers say they want to make sure that both COVID-19 relief dollars and infrastructure funding are being closely watched in state capitols.

In Connecticut, Senate Republicans last month demanded more transparency and oversight of the billions of federal dollars flowing into the state, including infrastructure money. They announced they would submit legislation that would require quarterly reports and quarterly public hearings before legislative committees.

Watchdog groups say that kind of oversight is important.

Deborah Collier, a vice president at Citizens Against Government Waste, a nonprofit government watchdog group based in Washington, D.C., said both Congress and state legislatures should hold hearings.

“They need to find out where the money has been spent and if there is any fraud going on,” she said. “Is the funding being wasted and could it be better used elsewhere?”

The federal infrastructure law does include some oversight requirements: Grants are to be awarded on a competitive basis, federal agencies must give Congress reports on how programs are implemented, and a small percentage of money goes to federal agencies' inspector general offices. But Congress should have demanded stronger oversight measures and zeroed in on fraud and abuse, some watchdog groups say.

“There really were no provisions in the bill, as far as governance and monitoring of waste, fraud or abuse,” Collier said.

Nor did the legislation deal much with transparency about spending at the federal, state and local level, she added. “This is a major flaw. The public should be able to see how their taxpayer dollars are being spent.”

But Collier said she didn’t necessarily think Congress was deliberately trying to impede oversight.

“They were in such a hurry to get something done quickly that they didn’t take the time necessary to think, ‘Oh, my gosh. We’re spending $1 trillion on infrastructure. What kind of oversight should be built into the legislation?’” she said.

Shruti Shah, CEO of the Coalition for Integrity, a nonprofit, Washington, D.C.-based group that promotes government transparency and accountability, agreed that when Congress passed the infrastructure measure, the focus was on economic recovery and speed.

“That muzzled some of the conversation on oversight,” Shah said. “But if money is not well spent, there will be even more of a backlash. The minute there is fraud in a project, you can bet it’s going to be on the front page of The Wall Street Journal.”

Shah said corruption in infrastructure projects undermines the delivery of promised services.

“It also lowers the quality and safety of infrastructure,” she said. “And it may add costs to the project, which ultimately taxpayers have to pay for.”

A September report by her group examined the infrastructure legislation and cautioned that federal, state and local officials need to ensure there is clear and robust oversight, transparency and enforcement.

Shah, who is a certified public accountant and a forensic accountant, said state and local governments need to proactively monitor the process and not wait to conduct audits after the fact to identify risks. They also should communicate their findings early on, she added.

U.S. Sen. Chuck Grassley, an Iowa Republican, co-sponsored a bipartisan amendment to the infrastructure bill that would have strengthened antifraud provisions and protected whistleblowers, but it didn’t make it into the final version.

“This amendment provides long-needed improvements to combat fraud perpetrated against the federal government,” Grassley said during an August Senate session. He noted that “business interests” were opposing it. Grassley’s office did not respond to requests for comment.

Not including the amendment was a failure because giving incentives and protecting whistleblowers is a key to rooting out fraud and abuse and serving as a deterrent, said Jetson Leder-Luis, an economist and assistant professor at the Questrom School of Business at Boston University who studies fraud in government spending. Relying on auditing alone isn’t enough, he added.

“Bribes are hard to find. They don’t show up in any ledger books,” he said. “Kickbacks don’t show up in audits.”

This article was first posted on Stateline, an initiative of The Pew Charitable Trusts.