Improper Payments

SUMMER 2014 VOL. 63, NO. 2

By: Ray Kalustyan

to Improper Payments

Taking a

PROACTIVE APPROACH

48 JOURNAL OF GOVERNMENT FINANCIAL MANAGEMENT SUMMER 2014

No organization — public or private — is immune from fraud and mismanagement, and govern-ment agencies’ vast budgets and large number of payees make them particularly attractive targets. Agen-cies are working to reduce improper payments, defined as payments that should not have been made or were made for incorrect amounts. The good news is that since fiscal year (FY) 2009, the government-wide improper payment rate has fallen by one-third, according to Office of Management and Budget (OMB) figures.1 Many attribute this drop to the use of analytics and enhanced oversight.

Government agencies perform a difficult balancing act. They must make timely payments to citizens while ensuring that all information is accurate, authenticated and verified before funds are released. To meet these objectives, agencies increasingly enlist the assistance of practical and pragmatic solutions to help identify and prevent improper payments that facilitate their core mission of providing effective, responsive and efficient service.

IMPROVING PAYMENT ACCURACYAs part of the effort to combat

improper payments, government agencies are turning to service providers to contribute diagnostic expertise and innovative technology. Outsourced solutions can provide agencies with world-class data accu-racy and fraud prevention programs; and also enable access to the latest payments industry knowledge of threats, best practices and techno-logical advancements. Agencies, especially those faced with spending cuts, can benefit from an outsourced turnkey fraud detection and preven-tion program that avoids the cost of capital investments, additional staff and ongoing maintenance of new solutions.

Government agencies are increas-ingly leveraging service providers to complete diagnostic assessments and comprehensive analyses in order to

help reduce and accurately measure improper payments. Comprehensive assessments help government agen-cies optimize existing processes, ensure the most effective use of limited resources and provide predict-ability for future process reviews. Most importantly, agencies that use advanced diagnostic tools enhance their ability to detect and mitigate potentially high-profile incidents.

To ensure the integrity of internal systems, agencies must first identify points of failure and risk in payment processing. Comprehensive process and data analysis helps find and eliminate process variation, waste and opportunities for error that may lead to inaccuracies in the payment process. By forming consultative part-nerships with industry-leading service providers, agencies can uncover the root causes of improper payments.

Once the root causes and scope of the issues are known, a solution can be implemented that provides the people, processes and technology to detect and prevent improper payments as referenced in H.R. 4053, ‘Improper Payments Elimination and Recovery Improvement Act of 2012,’ and Executive Order 13420.

IDENTIFYING PROCESS GAPSAn innovative service provider can

work with government agencies to find weak spots and gaps in processes through advanced analysis of trans-actional data. Using ‘Lean Six Sigma’ techniques can expose and elimi-nate waste and optimize processes by detecting patterns that indicate points of failure within an agency or its payment processes. Once weaknesses are detected, it is possible to pinpoint

SUMMER 2014 JOURNAL OF GOVERNMENT FINANCIAL MANAGEMENT 49

root causes for loss and determine specific events in the payment cycle where improper payments can be detected, mitigated and prevented.

This process includes discovery sessions, interviews, hands-on process observation, mapping, data collection and analysis, leading to an actionable roadmap that identifies:

• What to change and how: people, policy, process and technology;

• What to watch and when: key performance indicator dash-boards and reports; and

• Where to invest and why: busi-ness case development.

Once key process gaps have been identified, a service provider consults with agencies, developing best prac-tices and implementing safeguards and tools to overcome the issues that are leading to improper payments. By selecting new systems and services that are best-suited to its needs, an agency can optimize the policy, process or technology solutions needed to address these gaps. Agen-cies can also rely on service providers

for ongoing oversight of new processes and technology, as well as manage-ment of the new environment using internal resources. Such partnerships often result in the most effective and cost-efficient solutions for the agencies.

TAKING A CUE FROM PRIVATE INDUSTRY

Mindful of the increasing pressure from taxpayers and public officials to address the issue of improper payments, government agencies are taking a cue from private industry and are beginning to implement the necessary technology and tools to validate data, enhance accountability, and identify, track and stop suspi-cious transactions. Effective fraud detection systems uncover the threat of fraud and help agencies prevent misuse and criminal activity before it happens, rather than simply ‘paying and chasing’ cash that has already been distributed.

Every day, government agencies make billions of dollars in payments to a staggering number of vendors and citizens, and unfortunately, some of those are payments that shouldn’t have been made. The federal govern-ment is stepping up measures to ensure payments are made to the right entities and for the right amounts, while reducing wasteful spending. Whether due to administrative or vali-dation errors — or outright fraud — achieving a reduction in improper payments is a formidable task, consid-ering the volume of payments made by the federal government.

FIGHTING FRAUD AGAINST GOVERNMENT AGENCIES

Government agencies are often the target of fraudulent activity, which leads to additional staff time and effort. Although the vast majority of the estimated $106 billion in improper payments reported to OMB by federal agencies in FY 20132 are due to unin-tentional errors, an untold number of overpayments represent an inten-tional misuse of funds.

It sometimes seems as if there are as many schemes to defraud the government as there are criminals. Identity theft — when a person’s iden-tifying information is used without permission to commit fraud or other crimes — is a common ploy. To divert payments from a legitimate recipient, criminals often manipulate informa-tion about the payment, the payment destination, or the process which trig-gers the payment to be issued.

Since 2013, most federal govern-ment payments have been distributed via direct deposit or with government-issued prepaid cards rather than checks. Compared to paper checks, prepaid cards are less expensive to process and are generally less-susceptible to fraud. Government-issued cards have several mandated safeguards, including expanded consumer protections for lost or stolen cards. The use of fraud management solutions can monitor prepaid card accounts and automatically send alerts to appropriate staff when suspicious activity occurs, such as unusual account activity or a change of address request after a lost or stolen card is reported. Citizens receive text messages with automated transaction and balance alerts, which also help to mitigate fraud.

In the same way, anti-money-laundering technology can effec-tively identify money laundering and terrorist financing activities across multiple agencies, product lines and channels. Anti-money-laundering solutions monitor financial transac-tions and compare transactions with

50 JOURNAL OF GOVERNMENT FINANCIAL MANAGEMENT SUMMER 2014

government watch lists to ensure that no funds are transferred into or out of blocked accounts.

Although using government websites is a convenient way to access information and services, the practice is threatened by the potential for fraud and abuse. Federal agencies are using technology to monitor account profile changes and other activities in real time to identify possible fraud, while automated transaction and balance alerts help keep citizens aware of account activity.

AN ENTERPRISE-WIDE, INTEGRATED SOLUTION

Government agencies are increas-ingly turning to web-based fraud detection technology, which can signal, report and stop potential misuse and fraud; whether from government-issued credit cards, internal fraud and mismanagement, or external threats. Once used almost exclusively by the banking sector, this technology can validate data, enhance

accountability, and identify, track and stop suspicious transactions.

Stemming the tide of improper payments is most effective when an enterprise-wide approach to fraud detection is deployed that makes use of a common platform. Integrated data analysis throughout one government agency or across multiple agencies uses a common platform for detec-tion. Alert intelligence, along with case management and reporting, integrates fraud and compliance tools that break down siloed views of potential issues to create a holistic view of financial crime risk.

Agencies may want to consider a common platform that can analyze multimillion-line logs generated by a given website’s servers, using prede-termined rules that identify a broad range of potential attacks and ques-tionable behaviors. Agencies can also elect to flag a broad range of activi-ties and behaviors for further inves-tigation, and can set rules regarding transaction limits, categories to block, and purchases made at suspect loca-tions or odd times.

When bits and bytes of seemingly unrelated files, transactions and activities across the enterprise are subject to analysis, a bigger story often emerges. For example, when the Social Security number of someone who is receiving unemployment bene-fits shows up on both a benefits claim and an employer’s payroll, the claim is automatically flagged for review.

By manipulating identifying infor-mation, criminals may try to redirect payments intended for their rightful recipients. Agencies can use technology to identify and correct inconsistent, missing and inaccurate information, which can streamline eligibility deter-minations and prevent delayed pay-ments to the right people.

Besides helping government agen-cies avoid investing in tedious manual processing of Web server logs, a comprehensive fraud management system includes reporting tools that detail suspicious website activity on a daily basis. After the information is received, step-by-step workflows guide agencies through investigation, case tracking and reporting, while

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Endnotes1. Beth Cobert, “Making Further Prog-

ress on Improper Payments,” Whitehouse.Gov, Office of Budget and Management, December 30, 2013, www.whitehouse.gov/blog/2013/12/20/making-further-progress-improper-payments.

2. “Improper Payments Overview,” Payment Accuracy, accessed April 2, 2014, www.paymentaccuracy.gov/about-improper-payments.

3. U.S. Department of Agriculture, Office of the Inspector General, Review of the Depart-ment’s Travel Card Data, Audit 50024-0003-13, June 2013.

4. Beth Cobert, “Making Further Prog-ress on Improper Payments,” Whitehouse.Gov, Office of Budget and Management, December 30, 2013, www.whitehouse.gov/blog/2013/12/20/making-further-progress-improper-payments.

5. Danny Werfel, “Eliminating Bil-lions in Payment Errors,” Whitehouse.Gov, Office of Budget and Management, November 21, 2012, www.whitehouse.gov/blog/2012/11/21/eliminating-billions-payment-errors.

Ray Kalustyan, Senior Vice President and General Manager of Government Services at Fiserv, is responsible for aligning solutions and services with

federal and state government agencies that address the many complex financial services challenges, while delivering both transparency and payment accuracy. His experience spans more than 25 years in technology and business services including all aspects of consulting, systems integra-tion and outsourcing.

creating audit trails to facilitate regu-latory compliance.

Processes to prepare and send the logs, as well as additional reporting functions, can be customized. In the same way, federal agencies can select to keep operations entirely in-house by installing a fraud detection system within the agency’s own data center.

MAKING HEADWAY IN THE FIGHT AGAINST IMPROPER PAYMENTS

Thanks in large part to the rise of data analytics and innovative diag-nostic tools, federal agencies are making strides in the fight against improper payments, with some programs now reporting fraud and abuse rates of less than one percent. For instance, out of 1.1 million total transactions within the U.S. Forest Service, only 1,131 were found to be potentially inappropriate, according to a June 2013 report of the U.S. Department of Agriculture (USDA) Office of the Inspector General.3 The overall improper payments rate is also dropping — from 5.4 percent in 2009 to 4.4 percent in 2013, according to OMB.4

Improper payments have caught the attention of policymakers, resulting in several new executive orders, laws and programs, which in tandem with data management technology, are helping to reduce waste, fraud and abuse. Designed to help agencies better manage payment practices and reduce the incidence of improper payments, the Improper Payments Elimination and Recovery

Improvement Act of 2012 builds on similar legislation by expanding OMB’s responsibilities and changing how data is shared among govern-ment agencies.

Part of this effort, the ‘Do Not Pay’ initiative amends federal law to enable inter-agency data sharing, while also safeguarding the privacy of individuals. Agencies can now more easily check relevant databases before making payments or awards, using enterprise-wide data analysis in order to identify anomalies and ineligible recipients.

The results of these multiple efforts are impressive. According to OMB, the reduction in improper payments has saved the government more than $47 billion since 2009,5 and clearly this is just the beginning. More and more government agencies will be successful in finding, investigating and reporting improper payments as they begin using comprehensive assess-ments and real-time fraud detection software. While no one expects fraud-ulent activity aimed at federal agencies to go away, a comprehensive approach to financial crime risk management can help agencies mitigate loss.

A robust fraud detection system, sophisticated diagnostic tools and data mining technology can help government agencies proactively stop fraud before it starts, and earn the trust of citizens and policymakers. Although there will always be threats to the integrity of internal systems, a comprehensive fraud detection system provides federal agencies with the necessary tools to enhance secu-rity and reduce improper payments.

52 JOURNAL OF GOVERNMENT FINANCIAL MANAGEMENT SUMMER 2014