Skip class and collect the cash

Federal financial aid can help college students' dreams come true. It can also line fraudsters' pockets with undeserved, unearned "aid," which costs taxpayers' money and steals deserving students' futures. The author outlines how ringleaders are committing this fraud and what universities and the general public can do to combat it.

In 2009, University of Phoenix fraud reports pinpointed 12 student records that all included the address of an Atwater, Calif., apartment complex — seven with the same apartment number (and presumably not the penthouse). Several months later, a university employee reported receiving a suspicious call from one of these students who appeared to be well-versed in school procedural information not normally known by first-time college applicants. The employee also noticed that the student's phone number matched numbers listed on student accounts that were in or nearing collection status. The situation continued to grow in size and suspicion as more students, with matching demographic information, made blunders such as accidentally contacting school advisors using the email accounts of other scheme members rather than their own.

Joe Agins, CFE, ACFE Regent, director of compliance investigations at Apollo Education Group Inc. (parent company of the University of Phoenix), and his fraud team later referred the information to the U.S. Department of Education Office of the Inspector General (ED-OIG), who then initiated an investigation along with the U.S. Postal Inspection Service.

In July 2013, Agins entered federal court to testify in this scheme. He had been involved in many aspects of the university's financial aid fraud detection and prevention process but was normally accustomed to "letting go" of cases once they passed from his hands to law enforcement. As he watched the defendant enter the courtroom it occurred to him that after years of interacting with thousands of suspected fraudsters via paper and a computer screen, this was the first time he had ever seen one face-to-face. The charges: conspiracy to commit mail fraud, mail fraud and aggravated identity theft.

Several days later, the verdict was in. Guilty! Other members of the scheme rushed to the prosecutor's office to ask for plea deals. Earlier in the month, the defendant's two sisters and another associate had already pleaded guilty on charges stemming from the same investigation. Now everyone could pack up and go home, move on to other things and forget about federal student aid (FSA) fraud for a while. Right? Wrong.

While much of the general public still seems to be largely unaware of their existence, FSA fraud schemes have been plaguing higher education for years and have been growing in notoriety. The ED-OIG, which issued an "urgent call to action" in its 2011 "Investigative Program Advisory Report: Distance Education Fraud Rings," referencing a dramatic increase in "fraud ring" activity within federal student loan programs.

In a May 2013 report to Congress, the OIG determined that the population of SFA recipients potentially participating in fraud rings had increased 82 percent from 2009 to 2012 (to approximately 34,000) causing an estimated probable fraud loss during that time of $187 million. (See ED-OIG "Semiannual Report to Congress," No. 66, May 2013.)

And the U.S. isn't alone in this plight. The U.K.'s Student Loan Company (SLC) reported in mid-2013 that £6.5 million of taxpayers' money had been paid out on fraudulent student loan applications in the current financial year, up from less than £1 million in the previous year. Similar student loan fraud ring cases have also been publicized in New Zealand (see "Home detention for student loan fraud," Otago Daily Times, June 6, 2013) and in China (see "Four jailed over student loan fraud," by Austin Chiu, South China Morning Post, Nov. 27, 2010).

What is a student financial aid fraud scheme?

While private loan programs also have been hit in the U.S., the typical target for scheme perpetrators is federal student aid made possible under Title IV of the Higher Education Act of 1965, including grants and loans. To put things in perspective: The Education Department awarded $509.9 billion in FSA funds to 53.8 million recipients from award year 2009 through award year 2012, according to the Jan. 17, 2013, DOE-OIG "Management Information Report: Student Aid Fraud Ring Assessment." The Education Department Office of Federal Student Aid in its  2013 annual report stated that outstanding federal student loan debt crossed the $1 trillion threshold last year.

According to the November 2013 "Quarterly Report on Household Debt and Credit," published by the Federal Bank of New York, student loan debt is the second-largest consumer debt category, and it's among the fastest-growing.

People have historically abused FSA programs in various ways. For example:

• Applicants can score larger award amounts by underreporting their income or misrepresenting their filing status on the federal application for student financial aid (FAFSA).
• Individuals who never earned a high school diploma or GED (one or the other is required for financial aid eligibility) may fabricate their prior education status.
• Students may squander their financial aid on luxury items, such as boats, vacations and other forms of waste unrelated to student learning. 

Some enroll in school for a short period and acquire aid with no intention of actually getting an education. Even if schools are able to identify these solitary fraudsters — commonly referred to as "Pell chasers" or "Pell runners" — these cases are tough to pursue criminally due to difficulty with proving intent. (The nicknames reference Federal Pell grants, which unlike loans, don't have to be repaid and usually are awarded only to undergraduate students.) It's a different story, however, when fraud examiners can trace individuals back to organized networks — aka FSA fraud schemes or rings.

Financial aid fraud rings

The organizing force behind the scheme is a ringleader or team of ringleaders/recruiters collecting identities and using them to create "straw student" accounts. The ringleader completes the applications to enroll the straws in school and then meets attendance requirements (e.g. submits assignments, posts responses to online discussion questions, etc.) for the minimum number of days required for FSA funds to be disbursed to the student accounts.

Although fraudsters can commit these crimes in physical "brick and mortar" classroom settings, it's obviously easier for them to pull off fraud in online programs, where they falsely believe they can better avoid detection. After tuition and other school fees have been deducted, the ringleader elects to have any credit balance on the account issued to each straw as a "refund" of excess funds, which is intended for education-related expenses, such as room and board, a computer, etc.

This refund is the aim. They apply for the maximum amount of both grants and loans to maximize return. The amount of the excess refund available to each straw is then directly dependent on the cost of the institution, which is why lower-cost programs at institutions with open admission are juicier targets. Once the refund is received, the "student" typically drops out from class and is never heard from again.

Many schemes involve the ringleader recruiting participants by promising them a share of the financial aid proceeds in exchange for the use of their personally identifiable information (PII). Often, the ringleader will present the opportunity as "free money," and many recruits have no idea that accumulated loans will end up in default and damage their credit scores. Ringleaders prey on vulnerable populations. They exploit economic need and lack of financial education. Many scheme participants are completely illiterate. OIG investigators report that some participants have been unable to write a statement or read a summary of the verbal statement they provided.

Another approach ringleaders take is to simply steal identities for the straw accounts. This is obviously the more lucrative option because they can keep 100 percent of the proceeds.

Here are some specific examples of such identity theft schemes in which justice was delivered on behalf of taxpayers:

• A Wisconsin husband-and-wife team stole the identities of individuals who were enrolled in a welfare-to-work program where the wife was employed. (See ED-IG "Semiannual Report to Congress, No. 66," May 2013.)
• A California scheme preyed on the identities of people with disabilities. (See ED-OIG "Semiannual Report to Congress, No. 65," November 2012.)
• A ring involved more than 50 stolen prison inmate identities and $300,000 of fraudulently obtained FSA funds. (See ED-OIG "Investigative program advisory report: Distance education fraud rings," Sept. 26, 2011.)

In another variation of the inmate-as-victim scenario, inmates willingly provide their identities and work with co-conspirators on the outside to fraudulently obtain financial aid.

Some ringleaders have proven to be very good at what they do — often hitting multiple schools before examiners discovered them. One OIG investigation involved straws that had been enrolled in at least six schools over consecutive years. There's no doubt that ringleaders are manipulative crooks. Some are even dangerous. FSA fraud rings often are linked to organized street gangs or individuals with extensive criminal records.

The leader of one massive FSA fraud scheme involving stolen identities confessed in an interview: "My basic thrust has been identity theft most of my life … most of my criminal life anyway … so when I got an opportunity to pick up a birth date or a Social Security number, I did." (Excerpted from the ED-OIG DVD, "FSA Identity Theft: We Need Your Help.") Another scheme's ringleader admitted, "I can't help myself; I have larceny in my heart." (Excerpted from the 2007 ED-OIG DVD, "Identity Theft: It's Not Worth It.")

How to find them

The most easily detectable indicator is shared demographic information. Because ringleaders need to funnel all school- and FSA-related communications and activity for each straw their way, it's easiest to provide their own addresses, phone numbers and email addresses on each student account.

Similarly, ringleaders need to collect excess funds so they can keep a tight rein on them. So, when they elect payment via direct deposit, they often use the same bank or prepaid card account for all the straws. When ringleaders select paper checks, they typically route them to the same address or set of addresses. But when receiving mail isn't important for the scheme, often the address(es) the fraudsters enter on the straw student records are completely fictitious and can be traced back to empty warehouses, vacant lots, model homes, etc.

One advantage of the online modality is that it gives fraud examiners opportunities to track IP addresses used for school-related activity. Ringleaders who use the same computer or set of computers to e-sign paperwork and submit assignments for all their straws unknowingly provide schools with invaluable information trails (and also evidence for ED-OIG investigations and ultimate prosecutions). As they access school websites and applications, web servers or other networking equipment can store IP addresses and other student identifiers. Schools can then create reports that mine this IP information and identify groups of students sharing computers.

Juggling multiple identities can get tricky. When ringleaders become more ambitious, the increased scope and size of their schemes inevitably increases their workload and the volume of information they have to keep track of. Ringleaders are human. They get lazy and frazzled. They often simplify operations by reusing the same information. For example, student logins and passwords often all fit the exact same format (e.g. FirstName_LastName_33).

Ringleaders also recycle schoolwork and paperwork. Many schools use robust web-based database tools, such as Turnitin.com, to spot plagiarism in electronically submitted coursework. Fraud examiners can use these tools to help uncover schemes in which the ringleader — unable or unwilling to create original work for each straw — posts the same (or very similar) responses to online discussion questions or submits matching homework. In one scheme the University of Phoenix fraud team uncovered, the ringleader apparently forgot he had registered his Microsoft Word in his name and unknowingly submitted assignments for multiple straws that all showed him as the author in the document properties.

Typically, scheme members never completed high school or earned a GED, and ringleaders fraudulently self-certify prior education information on the FAFSAs. If schools later ask them to provide proof of education, residence, income, etc., for identity verification (which schools should do for all students suspected of FSA fraud), ringleaders will often provide the same or slightly altered fraudulent documents for each straw.

The amount of effort ringleaders put into this process varies. Fraud examiners must closely scrutinize documents for alterations. Some documents are blatantly bogus, with whiteout marks clearly visible, misspelled words or off-center headings.

We'd hope ringleaders in a U.K. case made a decent effort since they charged an extra £1,000 document fee in addition to a cut of the loan money for providing fake exam certificates for applicants to enroll in university courses and obtain student loans. This scheme brought in £368,000, and the leaders were sentenced to a total of seven years of prison time. (See "Pair Jailed for £368,000 Student Loan Fraud," The Voice, May 21, 2013.)

As hard as they try to keep everything straight, some rings clearly experience some organizational issues. When university representatives ask "students" to verify PII on calls for security purposes, "students" are often unable to quickly recall birth dates and Social Security numbers and then can be heard fumbling for the answers and/or shuffling through papers. Often, a counselor can clearly hear a "coach" in the background feeding the caller answers.

These frontline staff who work with multiple students may begin to detect voice patterns suggesting an apparent gender/name mismatch or notice that the same person repeatedly calls but identifies him or herself as a different student each time. Because of their exposure to these kinds of "suspicious behaviors," school employees provide a layer of fraud detection that would be difficult to achieve with any kind of computer-generated fraud reports.

FSA fraud scheme investigations

Institutions that participate in federal student aid programs have a responsibility to report any suspected fraud, waste or abuse of FSA funds to the OIG, where cases are evaluated and then assigned to a special agent if accepted for investigation. The OIG may partner with other entities such as local police, the U.S. Postal Inspection Service, FBI, U.S. Secret Service and the Social Security Administration as they investigate. Later, if a case goes to trial, they work to engage federal or state prosecutors, although many defendants will plead out before it gets to that point.

As with many law enforcement entities, the sheer volume of referrals coming in coupled with finite resources means the OIG can't investigate every scheme. Cases with more investigative potential and that are more likely to be prosecuted might include schemes that feature:

• An especially large amount of students.
• High-dollar losses.
• School employees.
• Already identified potential ringleaders.

Additionally, neither the OIG nor the DOJ has the resources to pursue every scheme participant, so they often narrow their focus to those who had a hand in the administration of the scheme — the ringleaders and recruiters.

The OIG is certainly keeping very busy. The agency reported in its December 2013 "Semi-Annual Report to Congress" that as of Sept. 30, 2013, it had opened 127 fraud ring investigations, secured more than 450 indictments of fraud ring participants and recovered nearly $13 million.

Inspector General Kathleen Tighe stated in a March 26, 2013, OIG investigation report: "Student aid is not a slush fund for criminals; it provides an opportunity for honest, hard-working students who wish to make their dream of a higher education a reality. My office is committed to fighting student financial aid fraud and we will continue to aggressively pursue those who cheat these vital aid programs."

In a press conference addressing FSA fraud scheme attacks on California community colleges early in 2013, U.S. Attorney Benjamin Wagner asserted that "those who rip off federal aid funds can expect to find themselves in a prison cell instead of a classroom." (See "21 Californians charged in student aid scam," by Nannette Miranda, Sept. 18, 2012, KABC-TV, Los Angeles, Calif.)

Busted fraudsters typically face charges such as mail fraud, wire fraud, identity theft, financial aid or financial institution fraud and are sentenced to prison time and/or probation and ordered restitution. Each of the three ring leaders in the California case at the beginning of the article were sentenced to between two and four years of prison time. (The fourth is still awaiting sentencing.)

In one recently closed case resulting in a particularly hard slap on the wrist, a Florida man was sentenced to nine years in prison and ordered to pay more than $464,000 in restitution. In this scheme, the man and his wife went so far as to actually form a company purportedly meant to help people apply for FSA and use this as a vehicle to recruit people for straw accounts. (See the ED-OIG "Semiannual Report to Congress, No. 66," May 2013.)

What can we do about it?

As with most kinds of fraud, the first step in preventing FSA fraud is awareness. The general public needs to know that these rings are out there stealing taxpayer dollars and taking funds away from those who need and deserve them. As Barbara McQuade, U.S. Attorney for the Eastern District of Michigan, pointed out in a March 26, 2013, investigation report, "Taxpayers fund federal financial assistance programs to permit needy students to obtain a higher education. Stealing these funds robs students of educational opportunities and cheats members of the public from their investment in an educated population."

Be alert for any signs of FSA program abuse and report suspicions to the OIG's hotline. (See the OIG's website for more information.) Protect against identity theft by shredding documents that display PII, choosing more sophisticated passwords and minimizing the exposure of Social Security numbers.

Higher-education institutions, which play an essential role in the early identification of rings, are in a unique position to defend against attacks because they're closest to the fraud by dealing directly with the perpetrators. Here are steps they can take:

• Devote adequate resources to fraud detection and prevention efforts.
• Develop and regularly review reports that identify groups of students sharing demographic, bank account and IP address information. Analyze information and scour for patterns.
• Use online plagiarism checkers.
• Train school employees to spot and report fraud red flag behaviors.
• Promptly refer all identified fraud schemes to the OIG; include as much information and detail as possible.

Of course, each school will design its own unique fraud defense plan. Agins' five-member fraud team, established in 2009, has developed and used the above fraud prevention and management strategies, as well as others, such as establishing a specialized team of advisement counselors to work only with the suspected fraud student population.

Since the team's inception, the university has identified and referred more than a thousand suspected fraud scheme cases to the OIG and has recorded average "catch rates" (the percentage of fraud scheme members identified and shut down prior to financial aid funds being issued) of 75 percent to 80 percent each month.

However, these rings aren't giving up; they're moving on to other schools. It's not enough for each college and university to just protect itself and its students. Each institution should seek solutions to the larger problem. Many schools have already begun to work together. University anti-fraud staff members have been making presentations about FSA fraud schemes at conferences around the country over the past few years. An online Student Financial Aid Fraud Forum has generated discussions among financial aid and compliance staff nationwide.

Also, anti-fraud representatives from numerous institutions, including ours, are also convening to regularly to share trends, pitfalls and best practices. (Please contact me if you'd like to learn more about these meetings.)

These kinds of efforts create a united front for fighting a common enemy. FSA fraud schemes invariably will continue to evolve, and fraudsters will find new ways to strike. Fraud prevention programs need to embrace a never-ending process of learning, adapting and evolving in order to stay one step ahead. Collaborating by sharing tips, experiences, ideas and trends will help create an industry-wide barrier to FSA fraud.

Sarah O'Colmain, CFE, is the compliance analytics manager for Apollo Education Group Inc. in Phoenix, Ariz.

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