Disaster Recovery: HUD Should Take Additional Action to Assess Community Development Block Grant Fraud Risks

GAO-21-177 Published: May 05, 2021. Publicly Released: May 05, 2021.
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Fast Facts

From 2017-2019, Congress appropriated approximately $39.5 billion in "Community Development Block Grant-Disaster Recovery" funds. These funds may be at risk of fraud from contractors, disaster recovery applicants, and grantees.

The Department of Housing and Urban Development has taken some steps to assess fraud risks agency-wide, but it hasn't conducted a comprehensive fraud risk assessment. In addition, HUD's current approach to evaluating fraud risk hasn't involved stakeholders, like grantees, who are responsible for designing and implementing the program's controls.

Our 2 recommendations to HUD address these issues.

Damage in Florida following Hurricane Michael

A motor boat stranded on dirt surrounded by housing debris

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Highlights

What GAO Found

GAO identified four categories of fraud risks facing the Department of Housing and Urban Development's (HUD) Community Development Block Grant – Disaster Recovery (CDBG-DR) from 2007 to 2020, including risks from contractors, disaster recovery applicants, grantees, and others, as shown below. In total, we identified 78 cases from Department of Justice (DOJ) public announcements and 110 HUD Office of Inspector General (OIG) enforcement cases. For example, in 2012 following Hurricane Sandy, a New Jersey couple applied for disaster assistance and fraudulently received $79,000 in CDBG-DR funds, according to HUD OIG records. The couple was convicted of conspiracy, falsification, and theft and was sentenced to 5 years imprisonment. The funding was for a seaside property they fraudulently claimed was their primary residence, but was later determined to be a summer vacation home that was ineligible for assistance. GAO also found that the CDBG-DR operates in a decentralized risk environment that may make it vulnerable to fraud since CDBG-DR funds flow through a number of entities before reaching their intended beneficiaries. In addition, the risk environment in which CDBG-DR operates may contribute to negative financial impacts, such as improper payments. Fraud can have nonfinancial impacts as well, such as fraudulent contractors obtaining a competitive advantage and preventing other businesses from obtaining contracts.

Fraud Risks of Department of Housing and Urban Development's (HUD) Community Development Block Grant – Disaster Recovery (CDBG-DR)

Fraud Risks of Department of Housing and Urban Development's (HUD) Community Development Block Grant – Disaster Recovery (CDBG-DR)

HUD has taken some steps to assess fraud risks agency-wide. For example, HUD conducts an agency-wide assessment of risks through a Front-End Risk Assessment, which also considers fraud risks. In 2020, HUD redesigned its agency-level approach to evaluate fraud risks through its Fraud Risk Management Maturity Model. While HUD has taken some steps to assess fraud risks agency-wide, GAO found that HUD has not conducted a comprehensive fraud risk assessment of CDBG-DR, as called for in GAO's Fraud Risk Framework. Further, HUD's current fraud risk approach does not involve relevant stakeholders such as grantees. Leading practices include tailoring the fraud risk assessment to the program and also involving relevant stakeholders responsible for the design and implementation of the program's fraud controls in the assessment process. Ensuring that a fraud risk assessment is completed specifically for CDBG-DR may provide greater assurance that HUD addresses CDBG-DR fraud risks, including ones identified in this report.

Why GAO Did This Study

In response to a historic string of natural disasters, Congress appropriated approximately $39.5 billion in CDBG-DR grant funds in 2017 through 2019, with most of the funding designated for Texas, Florida, Puerto Rico, and the U.S. Virgin Islands. However, accompanying this unprecedented amount of funding is an increased vulnerability to fraud given that CDBG-DR involves multiple factors.

GAO was asked to review a range of disaster recovery issues following the 2017 disaster season. This report addresses: (1) the fraud risks and risk environment of CDBG-DR and their impacts; and (2) the steps HUD has taken to assess fraud risk agency-wide, and specifically for CDBG-DR, in alignment with leading practices. GAO reviewed DOJ public announcements and HUD OIG enforcement cases to identify CDBG-DR fraud risks. GAO assessed HUD's procedures against leading practices in the Fraud Risk Framework. GAO interviewed HUD officials responsible for CDBG-DR and fraud risk assessment; and conducted site visits to Florida and Texas, selected partly for the amount of CDBG-DR funds they received, among other factors.

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Recommendations

GAO makes two recommendations, including that HUD comprehensively assess fraud risks to CDBG-DR and involve relevant stakeholders in the assessment. HUD neither agreed nor disagreed with our recommendations, and instead offered a description of mitigating actions. GAO continues to believe the recommendations are warranted.

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of Housing and Urban Development The Assistant Secretary for Community Planning and Development should comprehensively assess fraud risks to CDBG-DR, including identifying inherent fraud risks affecting it, assessing the likelihood and impact of inherent fraud risks, determining fraud risk tolerance, and examining the suitability of existing fraud controls. The assessment should also consider CDBG-DR's risk environment and be informed by the fraud risks identified in this report. (Recommendation 1)
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In January 2022, HUD stated that it had taken initial steps to comprehensively assess fraud risks at CDBG-DR. HUD stated that it plans to develop an updated fraud risk policy, an inventory of fraud schemes by program office, and an inventory of fraud risk mitigation strategies by program office. HUD stated that it also plans to add a fraud risk emphasis to its Front End Risk Assessment (FERA), which assesses individual program offices to elevate and prioritize issues to establish a risk appetite statement. HUD plans to complete some of these fraud risk management initiatives in the mid-February and March 2022. Further, HUD stated that it plans to conduct a fraud risk exposure assessment, which constitutes a holistic approach to fraud risk management agency-wide. The fraud risk exposure assessment is in contrast to the FERA, which examines fraud risks at a more individual program office level. HUD's goal is to complete the fraud risk exposure assessment by December 2023. We will continue to monitor HUD's efforts to implement this recommendation and provide status updates accordingly.
Department of Housing and Urban Development In comprehensively assessing fraud risks to CDBG-DR, the Assistant Secretary for Community Planning and Development should involve relevant stakeholders in the assessment process, including CDBG-DR grantees (states, territories, and local governments) that design and implement fraud controls. (Recommendation 2)
Open
In July 2021, HUD told GAO that it intended to involve relevant stakeholders by instituting several measures. First, HUD stated that it intends to convene listening sessions with CDBG-DR grantees, which will include either a session or survey focused on CDBG-DR fraud risks. HUD will use this forum to engage grantees on how they can comprehensively assess risk, discuss actions they can take to address fraud risks, and share best practices. Second, HUD stated that it would continue to conduct risk-based monitoring of grantee activities to ensure compliance with CDBG-DR requirements. Results of ongoing monitoring provide insight into potential fraud risks and will be used to assess the effectiveness of current internal controls and risk management requirements. Third, HUD stated it would seek input from a sample of CDBG-DR grantees that have taken fraud-related training provided by HUD's Office of Inspector General on the likelihood of potential fraud and ways to improve fraud mitigation. We will continue to monitor HUD's efforts to implement this recommendation and provide status updates accordingly.

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