Officials of the federal government have been focused on doling out aid to earthquake victims for the past two months. Now there is growing attention to some of the fraud and abuse that have accompanied this whole disaster.
Most of the fraud is happening where the Jan. 17 earthquake hit hardest--in the San Fernando Valley.
A special fraud hot line has been receiving 40 to 60 calls daily naming individuals and businesses that may be taking advantage of the various quake aid programs by either asking more than they are entitled to or making outright false statements in applications for aid from the Federal Emergency Management Agency, Department of Housing and Urban Development, Small Business Administration and others, government officials said.
"We have hundreds of reports in the Valley and other parts of Los Angeles that we are investigating," said George B. Newhouse Jr., deputy chief of the government fraud section of the U. S. attorney's office in downtown Los Angeles. "We have reason to believe there are a substantial number of fraud cases. We are swimming in a mountain of paperwork."
Newhouse is part of the Federal Earthquake Fraud Task Force that now includes FEMA, HUD, SBA, Department of Commerce, U. S. Army, Department of Transportation, FBI, Secret Service, U. S. attorney's office, Department of Agriculture and U. S. Postal Service. All the investigating has only yielded a handful of arrests so far, Newhouse conceded. And the vast majority of fraud cases will never be prosecuted.
"We're only interested in the most egregious cases," Newhouse said. "If there is any justification for a claim, or if the aid applicant was just stretching the truth, those are not the cases we are going after--we would be overwhelmed."
In some cases, defendants can plea bargain, pay penalties or be put on probation. Few people will ever serve any actual jail time, Newhouse said. "We can't possibly do something about it all."
In early March, three people were arrested by federal agents for claiming FEMA disaster assistance benefits by falsely stating that they lived at the Northridge Meadows Apartments where 16 people died. In fact, the trio did not live there, officials said.
A businessman was arrested in connection with submitting a $1.5-million loan application to the SBA. He allegedly submitted false financial documents to greatly inflate his income and ability to repay the loan.
There seems to be a lot more fraud than these few cases would suggest, however.
A friend of mine in Woodland Hills said that when a contractor came to give an estimate on repairs to his house, which is riddled with earthquake cracks, the contractor first asked if he wanted an inflated estimate for his insurance company or "a real" work estimate.
"People have been saying all sorts of things to get more money," said Carol, a Reseda resident who prefers that her last name not be used. "Everyone is trying to do everything to get as much out of the earthquake as possible. I believe there was a lot of exaggeration."
Carol said she knows of people who claimed that they lost antiques when all they lost was some old junk. "People are getting (inflated) receipts for more money than they are actually spending," she said. "The result is that people aren't just fixing their homes, they are improving their homes with government money."
"It would be very difficult to determine if people actually are making repairs with money they get from the government," said Nora M. Manella, a U. S. attorney in Los Angeles. "It is going to be impossible to weed out every fraud claim."
There will be more arrests in the future, Manella said. If convicted, a person can be sentenced to five years in federal prison for making false statements in applying for federal aid--even if the government never disburses any funds to the defendant. "FEMA's motto is that they are offering help to the needy, not the greedy," Manella said. "The U. S. attorney's office is here for the greedy."
Not only small businesses but individuals who have suffered earthquake damage can apply for Small Business Administration loans.
In cases of SBA loan fraud, "many of the prosecutions won't come up until there has been a default on a loan one or two years from now," said Deborah Jones, special agent in charge of the SBA's office of inspector general in Glendale. The agency has only now begun to cross-check some of its loan applications with tax returns filed with the Internal Revenue Service. There is no way to catch all the misstatements that are sure to be part of the overwhelming 100,000 applications for disaster assistance from residents, plus another 20,000 from businesses that have been filed in the first two months after the quake.
The SBA is investigating 11 earthquake-related fraud cases for possible prosecution, Jones said. "Some people are claiming damage that never occurred," she said. But, those cases "on a smaller scale, we wouldn't be interested in prosecuting it."
"When you are providing disaster assistance, there will always be people who will take advantage of the situation," said Frank Curran, FEMA's acting assistant inspector general for investigations in Washington. Curran repeated what other federal officials have been saying: "We're interested in the most egregious cases of wrongdoing."
If it's a non-egregious case, but still one where somebody has "lied" about their financial needs, the case could be referred to a government agency for review, possibly to recoup the funds or just to stop any money being paid out to that individual.
The policy of going after the worst cases may be sensible. But plenty of small-scale fraud--adding up to millions, and maybe billions, of dollars--will go unchecked. The phone number to call and report fraud and abuse related to applications for federal and state aid is (800) 323-8603.