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What we learned from the audit of Minnesota’s Child Care Assistance Program: no suitcases full of cash, but plenty of baggage

Legislative Auditor Jim Nobles and legal counsel Elizabeth Stawicki
MinnPost photo by Peter Callaghan
Legislative Auditor Jim Nobles and legal counsel Elizabeth Stawicki speaking Wednesday about the report.

Minnesota’s legislative auditor released on Wednesday a long-awaited investigation into a subsidy that helps low-income parents afford child care. And it was a doozy.

Fraud, fighting among state workers, failed policies and subpoenas all made their way into the report’s 64 pages. Naturally, state lawmakers from the two major parties used it to draw completely separate conclusions on a program that became a 2018 campaign issue when a sensational television story tied fraud in child care centers to terrorist organizations in Somalia.

The audit found no actual evidence of a connection between the state’s Child Care Assistance Program (CCAP) and al-Shabab or other terrorists. But the report did paint a complicated picture of CCAP and the agency that administers it, the state Department of Human Services. And two things became clear with the release of the document: What is supposed to be a critical safety net for children and parents has been dragged down by all sorts of problems — and legislators have a long debate ahead on how to solve them.

Here’s what we learned from the audit report:

A claim that the state was defrauded of $100 million could not be proven. The same goes for payments to terrorists.

Last May, Fox 9 ran an investigation that claimed fraud in the child care program was rampant, and perhaps even as high as $100 million a year. For context, the subsidy doled out $254 million last year, funded about half and half by the state and federal government.

The Legislative Auditor’s report said the CCAP program was susceptible to fraud in different ways, including providers pretending they are serving more children than they actually are, or lying about the hours spent watching the kids.

The report notes that prosecutors have proven cases of fraud, though those cases only account for between $5 million and $6 million over the last several years.

But those figures also don’t tell the full story. Fraud is often difficult to prosecute, and the auditor’s office believes the amount of fraud is higher. But as high as $100 million? The audit said there wasn’t enough evidence to substantiate that number, and top DHS officials have disputed the $100 million figure as well.

Auditors did interview investigators at DHS tasked with rooting out CCAP fraud. Those investigators gave a range of estimates, some in the range of $100 million and some less.

Jay Swanson, the manager of the CCAP investigators, said he believed $100 million was roughly accurate. But he also had an expansive view of fraud that goes beyond what is typically prosecuted in criminal proceedings. His attention focused on roughly 100 child care centers and he assumed lax supervision by employees was fraud, as well as overbilling. “Therefore, in Swanson’s opinion, all of the CCAP money paid to those centers in 2017 — approximately $108 million — should be counted as fraud,” the report says.

The Fox 9 story also homed in on Minnesota’s Somali community and reported that “mysterious suitcases filled with cash” were flying back to Africa and the Middle East, money that totaled more than $100 million in 2017. The TV report intimated that fraudulent child care money could be mixed in and then line the pockets of terrorists in those regions — either on purpose, or because of extortion.

It was a startling possibility: that taxpayers were directly bankrolling terrorists. But also one that could not be confirmed by the auditor’s office. The report also put some context around the notion.

Money is commonly, and legally, sent to Somalia or other countries by immigrants in Minnesota to help pay for their families’ expenses. In the past, people could wire money through banks in the U.S. to hawalas, a money-transferring service used in Muslim communities. But American banks stopped dealing with hawalas after two Somali-American women were convicted in 2010 of using the system to send money to al-Shabab fighters.

Now, hawalas do fly bags of cash out of the U.S. But there is no mystery to the practice. In fact, we know exactly how much of it is going through MSP because the couriers for the hawala companies have to fill out forms and notify security officials at the airport of exactly how much they are carrying and where it’s going. Even so, because that money is sent to regions with terrorist groups, it also means terrorist groups like al-Shabab could possibly take a cut by theft or extortion once the money reaches its destination.

With that in mind, the legislative auditor’s report said it’s possible, in theory, that “CCAP fraud money” has been sent overseas and benefited terrorists either on purpose or because cash was taken. But the report also says any link is speculative. They found no evidence or specific cases that “substantiate a connection between CCAP fraud money and support for a terrorist group.”

Fraud cases involving the child care assistance program are tough to prevent, and too tough to prosecute.

While prosecutors have charged “at least a dozen” people or child care centers in Minnesota in the last five years with CCAP-related fraud, not all were successful. They’re difficult cases, according to the audit, because prosecutors must show that a provider intended to break the law and didn’t simply make mistakes in accounting or administrative work.

Law enforcement usually needs to compare surveillance video with billing and attendance records. “It is extremely labor intensive, particularly given that investigators must watch weeks, if not months, of video recordings,” the report says.

State investigators at DHS told the auditors they need “tighter controls” over the licensing of child care centers and the billing process. “Investigators believe that current internal controls and statutes are not stringent enough to make reasonable progress in reducing the level of fraud in this program,” Swanson, the manager of the investigative unit, wrote to the auditors. “Investigators regularly see fraudulent child care centers open faster than they can close the existing ones down.”

The DHS’ inspector general unit is in disarray.

DHS, the state agency that administers CCAP, has an Inspector General tasked with overseeing fraud and abuse investigations in its programs. The legislative audit found “significant distrust” between that inspector, Carolyn Ham, and the team of investigators for CCAP.

Investigators accused Ham of ignoring them when passing by in the hallway and trying to discredit their work. DHS hired an independent consulting firm for $90,000 to assess a memo that Swanson, the chief investigator, had written for the legislative audit.

Ham was asked by a state legislator in December whether she trusted her investigators. She replied after a long pause: “I trust their investigations.”

Nobles said he interviewed the investigators under oath and said all reported a change in work relations after previous inspector general Jerry Kerber was replaced by Ham. “She did not meet with them, that she met with other units within the OIG and that there is a sense of alienation or distrust that they feel within the office of inspector general and that is a remarkable change from the previous inspector general,” Nobles said.

With the fraud problems and the tense relationships described at DHS in the report, some lawmakers are now calling for Ham’s resignation.

The report didn’t seem to change many minds.

The report confirmed everything we suspected: That was the message from Democrats, Republicans and members of the Somali community — even if they all suspected different things.

For many DFLers and leaders in local Somali and Muslim communities, the legislative audit definitively quashed the notion that there is some link between terrorism and child care dollars. They expressed outrage at Republicans who amplified those claims on the 2018 campaign trail.

One of those Republicans was former Gov. Tim Pawlenty, who ran unsuccessfully in the GOP primary for governor last year. After the Fox 9 story, he released a statement claiming it showed “more than $100 million in taxpayer funds are being diverted from Minnesota childcare programs to overseas terrorists,” even though the story did not, in fact, make that specific claim.

On Wednesday, Mohamed Omar, executive director of the Dar Al-Farooq Islamic Center in Bloomington, told reporters he hopes the “unfounded racist and Islamophobic false allegation that child care assistance program fraud funded terrorism will end today.” He accused Republicans of perpetuating a rumor that put Somali Americans at risk of harassment and attacks. The Dar Al-Farooq center was bombed in 2017. “I hope the dangerous political games are over,” he said.

Mohamed Omar, exec director of Dar Al-Farooq Center
MinnPost photo by Peter Callaghan
On Wednesday, Mohamed Omar, executive director of the Dar Al-Farooq Islamic Center in Bloomington, told reporters he hopes the “unfounded racist and Islamophobic false allegation that child care assistance program fraud funded terrorism will end today.”
On the other hand, Rep. Nick Zerwas, an Elk River Republican who has vehemently criticized the CCAP program, said the report confirmed “widespread child care assistance program fraud” and he didn’t rule out CCAP money going to terrorists. He said there’s “no dispute” that CCAP fraud is happening, that families do send money through hawalas and that cash being transferred in that fashion can be “siphoned off” by terrorists.

“What the report says is they’re unable to confirm this dollar went from this fraud to this suitcase,” Zerwas told reporters. “But they’re not saying that because it’s not happening. They’re saying that because they can’t prove it. I think what that report very clearly laid out is that connection is unbelievably challenging to prevent.”

The child care report seemed to change the thinking of at least one lawmaker. At a Senate hearing Wednesday, Sen. Jim Abeler, R-Anoka, expressed regret at hosting a key source in the Fox 9 story at a high-profile public hearing in the Human Services Reform Finance and Policy Committee last year. That source was Scott Stillman, a former CCAP investigator for DHS who was once forced to apologize for making false statements about a local independent fraud investigator as part of a legal settlement; he was the one who retold his story of how those in his unit estimated up to $100 million in fraud was happening each year.

“I’m glad there were no suitcases full of cash going to day care centers, though I was never convinced there was,” Abeler said in a committee hearing Wednesday.

Tony Lourey, the new commissioner of DHS and who was at the hearing, chided Abeler, saying “you brought an individual here to bring forward allegations that you didn’t believe.”

“You didn’t even allow for questions to be asked of this individual,” Lourey said. “That created a set of tensions here that are greater than they needed to be.”

Tony Lourey
MinnPost photo by Peter Callaghan
Tony Lourey, the new commissioner of DHS and who was at the hearing, chided Sen. Jim Abeler, saying “you brought an individual here to bring forward allegations that you didn’t believe.” Deputy Commissioner Chuck Johnson is at right.
Abeler, who is the chairman of the committee, responded he would like to rebuild trust on the issue: “I admit to being an imperfect chair. We do the best we can.”

Lawmakers from both main political parties have introduce a wide range of bills to reform CCAP and its investigations to prevent fraud.

MinnPost reporter Peter Callaghan contributed to this report.

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Comments (6)

  1. Submitted by James Nicholie on 03/14/2019 - 02:26 pm.

    Below market rates paid through child care assistance increased the % of fraud.

    I also listened to the report of the OLA on Fraud in the Child Care Assistance Program (CCAP). The Senators and Representatives should be looking into fraud and how to prevent it. They also should look at how their own actions have contributed to this problem. I believe that below market rates paid through child care assistance have worked to increase the % of fraud.

    Prior to 2003 maximum rates had been set at the 75th percentile of the most recent rate survey. During this time child care centers and homes could operate, if only marginally, and enroll children and families receiving CCAP funding. In 2003 the Legislature decided that rates should not be market driven and should be frozen and set in statute by the legislature.

    Current (2018) rates paid to child care centers and homes for CCAP funded children are set by the legislature as not more than the 25 Percentile of the 2011 market rates. Since 2003 there has been a reduction in child care programs. In general, there is a lower % of Child Care Centers operated by community based non-profit organizations. In Minneapolis Community based programs dropping child care include Pillsbury Neighborhood Services, Indian Women’s Resource Center and Children’s Home Society. These organizations have dropped their child care operations because they could not sustain high quality care, serve large numbers of low income children. They could not fund raise the large sums of money needed to supplement the inadequate voucher payment on the part of the State CCAP system.

    In the vacuum left behind many “for profit” centers opened and provided service to CCAP eligible families. These centers can operate financially because their teaching staff is undercompensated, There is less concern about high quality care,and occasionally because they use fraudulent business practices such as billing for children who do not attend.

    Parents are looking for high quality care for their children. When provided with options, this is what they will choose. The legislature, through it’s maximum rate setting, bears some responsibility for reducing quality options for families and the higher incidence of poor quality centers and fraud in the CCAP system.

  2. Submitted by lisa miller on 03/14/2019 - 07:47 pm.

    I think this is a good case study in the dysfunction of government, on the state and county levels. Again we see more tax payer funded studies that tell us what we usually already know and that seem to appear frequently. Add to it, well intentioned programs that become a bit too loose and managers focused on wanting to look good. On one hand I see the need for family based child care, on the other hand, I think having the state/counties fund community based centers may be more fraud proof. I agree quality is needed, but that costs money and having an associates vs having years of experience is not always the answer. Either way, I would hope state and county do a better manage of cutting back on endless upper management and studies and focus on the front line work such as enough staff to investigate and license.

  3. Submitted by Usha Abramovitz on 03/14/2019 - 09:06 pm.

    “In the past, people could wire money through banks in the U.S. to hawalas, a money-transferring service used in Muslim communities.” (MinnPost).


    1. ‘Hawala is an alternative or parallel remittance system. It exists and operates outside of, or parallel to traditional banking or financial channels. It was developed in India, before the introduction of Western banking practices, and is currently a major remittance system used around the world. It is but one of several such systems; another well known example is the chop, chit, or flying money system indigenous to China, and also, used around the world. These systems are often referred to as underground banking; this term is not always correct, as they often operate in the open with complete legitimacy, and these services are often heavily and effectively advertised.

    The components of hawala that distinguish it from other remittance systems are trust and the extensive use of connections such as family relationships or regional affiliations. Unlike traditional banking or even the chop system, hawala makes minimal (often no) use of any sort of negotiable instrument. Transfers of money take place based on communications between members of a network of hawaladars, or hawala dealers.’

    (Prepared by the Financial Crimes Enforcement Network
    in cooperation with INTERPOL/FOPAC…/fincen-hawala-rpt.pdf)

    2. ‘Hawala as Underground Banking

    The very features that make hawala an attractive avenue for legitimate patrons also make it attractive for illegitimate uses. Thus, hawala is frequently referred to as underground banking. This is because money launderers and terrorists take advantage of this system to transfer funds from one location to another. Hawala provides anonymity in its transactions, as official records are not kept and the source of money that is transferred cannot be traced. In addition, corrupt politicians and the wealthy who would prefer to evade taxes use hawala to anonymize their wealth and activities.

    Since hawala transfers are not routed through banks and, hence, not regulated by governmental and financial bodies, many countries have been led to re-examine their regulatory policies in regard to hawala. Some countries have made hawala illegal due to the absence of bureaucracy in the system. For example, in India, the Foreign Exchange Management Act (FEMA) and the Prevention of Money Laundering Act (PMLA) are the two major legislative systems that deter the use of hawala in the country.’


  4. Submitted by joe smith on 03/16/2019 - 08:29 am.

    So is a lesser amount of fraud is ok? Tax dollars are being wasted, doesn’t that bother anybody? Who is getting prosecuted? The investigation found fraud and the DFL, along with Mohamed Omar, are claiming some form of victory. Wow,!

  5. Submitted by Jim Bernstein on 03/16/2019 - 01:01 pm.

    Jim Abeler is a state senator; he is no longer a state representative.

  6. Submitted by Dana Dickson on 03/19/2019 - 11:50 am.

    For me the highlight of the hearing was the Republican audience response to Senator Hayden’s observation that the quarter million dollar fraud by a white psychiatrist did not result in allegations that the money was used to fund the KKK. Republicans are very sensitive about being called out for the white supremacist company they keep.

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