Paradox: We might be making the fraud problem worse
The paradoxical reality is that we may be making the fraud problem worse in our zeal to eliminate it. That is because we are looking for fraud in the wrong places, and unwittingly enhancing its likelihood in the process.
While reducing wasteful spending is always laudable, the methods in which the DOGE crew are going about it is creating a host of unintended consequences. Changes in the federal workforce and federal funding will reverberate through private sector and state and local government in ways that actually increase the risk of fraud.
Layoffs in government and private sector will have ripple effects in the economy. Tens of thousands of federal government employees have already lost their jobs, with hundreds of thousands more expected to follow. Private sector organizations in the renewable energy space will likely see cuts in federal grants, loans, and contracts leading to layoffs in various industries including construction. The layoffs create a challenging economic environment for those affected and historically create new opportunities for fraud.
Relaxed oversight will also impact fraud risks in a number of industries. All of this is occurring during an unprecedented evolution of Artificial Intelligence (AI) innovation, which will also impact the fraud environment.
Fraud today is being perpetrated by a sophisticated set of actors—in many cases organized criminal enterprises and adversarial nation state actors—using advanced tools. They are watching the chaos, and they are readying themselves for the attack. New applicants for unemployment insurance, more accessible government data due to careless handling, disgruntled employees willing to sell or misuse information are all opportunities for the enterprising fraudster.
Below are a few potential areas of elevated fraud risk as a result of the changes we have already seen or that have been announced.
Mass Layoff Impacts
Unemployment insurance fraud. Increases in unemployment insurance claims, leading to an uptick in fraud schemes for unemployment insurance—
especially through identity theft given the number of federal employees whose personally identifiable information has been exposed in data breaches, such as the OPM data breach.
SNAP fraud. Increases in SNAP program applications leading to an uptick in fraudulent applications.
Housing assistance fraud. Increases in housing assistance (Section 8) applications leading to an uptick in fraudulent applications.
Social security fraud. Increases in social security for elderly/ individuals of age leading to an uptick in fraudulent applications.
Internal fraud
Disgruntled employees could lead to embezzlement, cash larceny, asset misappropriation (stealing, misusing, destroying assets), financial statement fraud, corruption, collusion.
Less staff, especially in accounting, payroll, or procurement could mean less oversight and more opportunities for schemes like ghost employees or inventory fraud schemes.
Loan defaults
Layoffs of federal employees could lead to increases in student loan defaults for private lenders.
Mortgage insurance through HUD could be cut or underfunded, leaving private lenders on the hook for loan defaults from unemployed people.
Mortgage-backed securities through HUD-FHA could be at risk, leaving lenders on the hook for defaulted loans and ultimately securities.
Reduced Oversight Impacts
Financial statement fraud: Companies misrepresenting their financials typically increase in times of economic distress.
Increased scams: Less oversight and investigative support leads to an increase in scams against consumers.
Increased duration of fraud schemes: With fewer government detection and investigation resources, fraud actors will be emboldened and their fraud schemes will go on for longer before being caught, leading to larger losses.
Securities fraud: A weakened SEC could lead to an increase in falsified securities (crypto coins); misrepresented financials could lead to fraudulently inflated stocks; insider trading more likely to go undetected.
Energy and National Security Impacts
Grid vulnerability. Reduced spending on DOE’s grid modernization project would leave the grid unfavorably exposed to infrastructure or cyber-attacks from foreign adversary nation states.
Strategic disadvantage. Loss of funding to private organizations that perform projects on behalf of DOE —such as national laboratories— could leave the U.S. at a strategic disadvantage in the energy sector and exposed to national security risks.
Cybersecurity Impacts
Foreign adversarial nation state actors may increase attacks on U.S. assets in a time of perceived weakness in paused/on hold agencies.
Reduced oversight of AI could lead to nefarious activities by nation state actors more easily exfiltrating federal government data, information, or credentials.
Increased access by private sector organizations to sensitive government information/PII and heightened risk of data leaks or improper use of PII outside of government.
Increased tariffs could mean additional retaliation from foreign adversarial nation state actors including attacks on infrastructure and coercion of disgruntled federal employees to release sensitive information or IP for perceived injustices.
Privatization of federal functions could lead to improper use of sensitive data, information, or IP such as within the intelligence community, defense, or energy sectors; organizations with inadequate cybersecurity exposed to additional or new cyber-attacks.
Private sector organizations accessing federal IT systems who attempt to implement advanced tools, techniques, and methodologies on antiquated government systems could lead to unforeseen delays, crashes, or network errors where the system is then exposed to external threats.
Unauthorized or uncleared individuals use access to U.S. government data and install a private server to collect or use that data, there is a risk of attack from foreign adversaries or fraudulent actors through leaked or exfiltrated data.
Unauthorized or uncleared individuals with access to U.S. data through one federal organization may have access to data at other agencies through data sharing initiatives; meaning any private organizations contracting to the government, or private organizations that partner or subcontract with government contractors are also at risk of data or systems being hacked, phished, or having malware installed on their systems.
Non-cleared staff with access to U.S. data systems could lead to improper disclosure of information, intellectual property, or PII.
Data leaks could be accessed by adversarial nation state actors; insiders could sell data to adversarial nation state actors.
Procurement Fraud Impacts
- Limited federal oversight and reduced procurement staff could result in increases in change order abuse, nonconforming or nonexistent products, goods, or services, invoice manipulation, collusion, bribery, and kickbacks.
Unintended consequences often have the most lasting impact because no one was prepared for them. Fraud fighters everywhere would do well to prepare for 2025.
Photo by Ana Lanza on Unsplash. Article first posted on GovIntegrity.