Audit: Fraud in Minnesota's child care program not $100 million but still troubling

A much-anticipated audit of Minnesota's child care assistance program has found no evidence to substantiate a former employee's allegation that $100 million was lost to fraud, or that some of the money was funneled to terrorist organizations in Somalia.

But the review by the state's Legislative Auditor also found that fraud in the Child Care Assistance Program is likely higher than the $5 million or $6 million that has been documented by prosecutors.

The report, released Wednesday morning, also found a "serious rift" among officials overseeing the program's integrity at the state Department of Human Services (DHS).

Lawmakers called for the audit after an incendiary 2018 Fox 9 report alleged that as much as $100 million annually was lost to fraud — nearly half the program's entire budget — with money possibly diverted by child-care providers to terrorist groups in east Africa.

Auditors said Wednesday that they "could not substantiate the allegation that individuals in Minnesota sent [child care] money to a foreign country where a terrorist organization obtained and used the money."

Finally, the report questions the credibility of the former government worker who made the allegations, Scott Stillman.

In response to the original allegations, DHS hired an independent consulting firm to analyze the program and evaluate the operations of its fraud unit. The firm estimated that since 2013 "approximately 7 percent" of payments went to centers that used fraudulent billing practices. All told, the fraudulent payments amounted to about $72 million over five years, according to the report, which was released Wednesday.

The original media accounts and Wednesday's audit have been politically charged. Republicans frequently cited the fraud and terrorism allegations during the 2018 election campaign as evidence of state government run amok, while Democrats usually offered a muted response. Both sides attempted to claim vindication from the audit.

Several Republican lawmakers called Wednesday for the resignation of Carolyn Ham, the DHS inspector general. Sen. Mark Koran, R-North Branch, said the audit "details gross incompetence and mismanagement of the very agency responsible for rooting out fraud."

Sen. Jim Abeler, R-Anoka, chairman of the Human Services Reform Finance and Policy Committee, took a more nuanced view. He said he was "relieved to hear that there are no suitcases of cash going to Somalia."

At the same time, Abeler said the estimate that 7 percent of payments were received fraudulently points to a need for stronger oversight and a reorganization of state agency functions. Abeler has called for the creation of a separate agency to hold DHS and other state departments accountable.

"It appears that [DHS] has grown lax in their oversight of both fraud and quality," Abeler said. "The remedy is to restructure — to separate the oversight from the delivery of services and to create an independent office of the Inspector General."

In an interview Wednesday, Human Services Commissioner Tony Lourey did not dispute that fraud in the program is a serious problem, calling the 7 percent estimate "totally unacceptable."

"While the [review] found no credible evidence to support allegations of fraud in excess of $100 million annually, or that CCAP funds are going overseas to support terrorist activities, any misuse of taxpayer dollars will not be tolerated," he said in a statement.

Lourey added that his department is developing a more "data-driven" approach to monitoring the program so that "investigations are based on valid and objective data.''

Gov. Tim Walz's budget proposal, released this month, includes several proposals to improve oversight of state child care subsidies. They include a requirement that child-care providers produce electronic records immediately when a licensing inspector or investigator shows up. They now are allowed to produce these records later, which makes it easier to engage in fraudulent billing.

The original allegations cast a cloud over minority-owned day cares across the state, which had already been the target of several high-profile criminal investigations. Primarily by using secret cameras, investigators had found incidents in which Somali-owned day care owners were billing for services on days when children were absent. Regulators also found cases in which providers would submit fake claims and give cash kickbacks to their friends and family members to become clients.

Still, the allegation that taxpayer money was going overseas to terrorist networks was "incredibly damaging" to the community of Somali-owned day care owners, said Isaak Geedi, founder of the Minnesota Minority Childcare Association.

"We were labeled, once again, as criminals or terrorists for political reasons," he said. "Those who produced this fake report should apologize."

Officials at Fox 9 in Eden Prairie did not respond to phone calls Wednesday, and a spokeswoman did not respond directly to questions via e-mail.

In testimony Wednesday morning, Legislative Auditor James Nobles recommended that the DHS Office of Inspector General be made a separate, independent office under state law. Nobles also recommended stronger internal controls for the child-care program, including electronic attendance records and other techniques for ensuring integrity.

Nobles' report appended findings submitted in August 2018 by the manager of the program's investigations unit, Jay Swanson, who called fraud in the program "pervasive" and pegged the level in the $100 million range.

Swanson based his estimate on concerns that investigators raised about 100 child-care centers that appeared to have excess billings and substandard child care, including poor supervision of children. Swanson argued that all money paid to those centers — approximately $108 million in 2017 — should be counted as fraud.

Because other officials at DHS doubted Swanson's estimate, the department hired an outside consulting firm to evaluate the operations of the fraud unit. The independent firm found that the unit lacked data-mining and other analytical tools to identify and prevent fraud. Instead, the investigative unit was largely reactive, relying on outside tips from members of the public.

"There are promising strategies to more proactively combat fraud — simply waiting for tips, leads and referrals and investigating them is not enough," the consulting firm, Public Financial Management Inc., wrote in its report.

Chris Serres • 612-673-4308 • @chrisserres