Conmen and Development Grants: A Case Study

At the 35th Annual ACFE Global Fraud Conference, Daniel Porter, CFE, a speaker and investigative fraud consultant at D. Porter Solutions, presented a captivating session titled “Two Conmen + One Development Grant = $3M Fraud”. His presentation detailed a complex case of grant fraud involving two cunning individuals and a mismanaged development grant that resulted in a $3 million loss.

Porter began his session by drawing an analogy to the Discovery Channel, comparing the process of working with federal authorities to a lion doing all the work to catch its prey, only to have hyenas swoop in and claim the prize. In this case, the lion represented the state investigators who laid the groundwork, while federal agencies awaited the opportunity to take over once a fraud was proven. The investigation began with three members from the comptroller’s office: Nathan, Michael and Porter himself, who compared their dynamic to The Three Musketeers.

The crux of the fraud involved a $3 million grant meant for a textile company that promised to create 995 full-time jobs. Porter and his team started by reviewing the grant application, which consisted of an 18-page document. The company claimed to be a subsidiary of Al Rahim Textiles in Karachi, a connection that later proved to be false. Initial attempts to verify this connection with the alleged parent company revealed that the two individuals had a history of fraudulent activities and owed money to Al Rahim Textiles.

As the investigation progressed, it became clear that the company misrepresented its financial stability. It claimed to have $27 million available for the project but failed to provide the required bank letter. Instead, audited financial statements were submitted, which were later found to be falsified.

Three Investigation Phases

Porter emphasized the importance of breaking down the investigation into manageable phases, akin to “eating an elephant one bite at a time.” The first phase involved scrutinizing the grant application and the approval process, revealing severe incompetence and possible misconduct among the state officials responsible for reviewing the application. Despite glaring red flags, including typos and discrepancies in the financial documents, the grant was approved.

The second phase focused on the disbursement of funds. Michael, one of the team members, discovered that the company had submitted fraudulent invoices and wire transfer documents. These documents were so poorly constructed that a simple verification with the bank could have exposed the fraud. Nonetheless, $1.4 million was disbursed based on these fake invoices.

The third phase examined the actual use of the grant money. Nathan meticulously tracked the funds, uncovering that a significant portion had been diverted to personal expenses, including groceries, private school tuition and even a Ford pickup truck. The company had also invested in a failed tarp deal with the U.S. Federal Emergency Management Agency (FEMA), further demonstrating its misuse of the funds.

Confessions and Lessons

The investigation led to a planned interview with the suspected fraudsters at their facility. Porter described the setup involving various law enforcement agencies ready to act if necessary. During the interview, the individuals admitted to fabricating invoices and misusing the grant money. Despite a moment where Porter nearly secured a full confession, the primary objective was achieved: the fraud was exposed.

Throughout the session, Porter highlighted the importance of thorough and methodical investigation in fraud cases. He criticized the eagerness of grant officials to disburse funds without adequate verification and stressed the need for aligning performance metrics with disbursement criteria. Ultimately, the two individuals involved in this fraud were convicted in both federal and state courts.

Porter’s presentation served as a reminder of the complexities and challenges in uncovering fraud, emphasizing the critical role of persistence, attention to detail and cross-agency collaboration in bringing fraudsters to justice.