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Explosive OLA report on Welfare Fraud: DHS investigators report widespread child care assistance fraud, lack of internal controls and breakdown in relationship with DHS Inspector General

Senator Mary Kiffmeyer, chair of the Legislative Audit Commission Audit Subcommittee, sounded a consistent theme this morning, “Fraud hides. It does not say ‘Here I am.’ ”

The Commission heard testimony this morning from the Office of Legislative Auditor (OLA) and the Department of Human Services (DHS) on the issue of fraud in the Child Care Assistance or “CCAP” program. The CCAP program, according to both the OLA and DHS, has substantial fraud and administrative problems.

In fiscal year 2018, Minnesota paid out $254 million in CCAP subsidies to about 30,000 children in about 13,000 families. The money comes from a combination of county, state and federal taxpayer dollars.

The OLA report was unable to substantiate earlier allegations of fraud, noting that this is “extremely difficult.” But the OLA report pointed to a large-scale fraud problem within CCAP and also an absence of internal controls within the CCAP program. It also documented a breakdown between the investigative units within DHS and the office of Inspector General at DHS, calling it “a serious rift.” The OLA also highlighted that the “DHS Inspector General lacks independence from DHS management.”

The OLA summary suggests that to the extent that CCAP program is being defrauded, it is due to mismanagement by the state:

Based on state, county, and federal investigations, Minnesota prosecutors have charged several individuals in recent years with CCAP fraud. Those cases showed that CCAP fraud schemes are relatively simple, but proving CCAP felony theft “beyond a reasonable doubt” is extremely difficult. Both investigators and prosecutors believe this results largely from the way the state administers the program. (page 5)

The OLA report, which was limited in scope, reported the following:

  • The OLA was unable to substantiate the claim by a former DHS inspector (reported by Fox News) that there was $100 million in CCAP fraud annually. But the OLA did find a credible source of that allegation and the allegation that some of the funds were reaching overseas terror organizations. The source is Jay Swanson, the DHS manager of the investigative unit that oversees CCAP.
  • Jay Swanson prepared an email dated August 24, 2018, in response to questions posed by the OLA. He sent the email to his superiors at DHS for review (more of what was in the email is below). The email is in the OLA report as Appendix B.
  • DHS responded to Swanson’s email by hiring an “independent” investigator (DHS is going to release its own report) and sending the email to the OLA.
  • When DHS found out that the OLA was going to make Swanson’s email public, DHS asked for parts of the email to be redacted based on privacy concerns. The OLA complied with that request.
  • The OLA reported a complete breakdown between the Inspector General at DHS (IG), Carolyn Ham, and CCAP investigators. Jim Nobles, from the OLA, testified this morning that there was “total alienation” between DHS investigators and the IG.

In that August email, Swanson estimated that the top 100 child care providers were paid 54% of the CCAP funds, and the top 150 were paid 67% of the funds. “Investigators in this unit believe that auditors and elected officials should be very concerned about the high number of the highest paid child care centers that display indictors of fraud.”

  • Swanson’s email also noted that the 50 highest paid centers billed over $76 million, with an average payment of $1.5 million, while the remaining 1,043 centers received just over $141 million with an average payment of $135,349.
  • Swanson’s email detailed large scale overbilling, CCAP eligible mothers recruited by providers paying cash kickbacks of $200 to $300 a month or even a payroll check from shell businesses, centers opened at the same location as a previously closed fraudulent centers, and child care centers opened for no other reason than CCAP fraud. (see, pages B-2 to B-4).
  • The investigations of 15 child care centers by DHS found child care centers with 100% CCAP clients, and false attendance documentation. Center owners were found to be involved in money laundering “on a large scale with proceeds from CCAP fraud.” (see, page B-5).
  • The email continues with allegations of illegal activity and attempts to get inside information about DHS plans to combat the fraud by pretending to cooperate with the fraud investigations (see, page B-6).
  • The email continues with details on federal investigations of child care center owners moving fraud proceeds out of the U.S. primarily to the Middle East or Africa. “[I]nvestigators have been advised by federal officials going back to 2015 that it is a near certainly that at least a percentage of the fraud proceeds that go overseas are being siphoned off by one or more Designated Terrorist Organizations…Analysis…shows that some of these child care center owners/controlling individuals have purchased or are in the process of purchasing expensive homes in stable foreign countries.” (Page B-7)
  • And the email and OLA report goes on with more shocking findings of wide-spread fraud and incompetence on the part of DHS and the State of Minnesota to administer CCAP and detect or prove fraud.

DHS officials at the hearing indicated that they were planning to get all the “stakeholders” together to improve the management of the CCAP program, moving for example from paper attendance records that are not required to be submitted with the billing requests from child care providers, to an electronic system. There is a provision in the governor’s budget for an electronic billing system that would require child attendance records to be submitted with billing requests.

Senator Michelle Benson cautioned her colleagues that many legitimate child care providers are very small home-based centers, with one or two CCAP eligible children rather than large centers with many CCAP children, and that a solution should keep those providers in mind.

DHS officials also stressed that they wanted to meet the “diverse” needs of Minnesota families, and indicated they would be hiring an equity coordinator, and others with “cultural competencies” while setting up an “community advisory group.” None of the commissioners asked questions about this response to allegations of fraud, but Rep. Tina Liebling made comments about the allegations of fraud being focused on the Somali immigrant community.

Members of the Somali community protested the OLA report this morning at the Capitol.

DHS officials said they were releasing their own report today. It was unavailable as of 2:00 pm today.

The OLA report can be found here. The OLA is currently reviewing the administration of the CCAP program, and the controls or lack thereof in place at DHS to determine if “DHS’s oversight of CCAP was adequate to safeguard financial resource of the program.” That report is due in April of 2019.





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