New fraud allegations raise same concerns in Minnesota child care program as 2018 warning

Minnesota’s lead investigator for child care provider fraud told the state legislature in 2018 that there was pervasive fraud in the state’s Child Care Assistance Program–years later, daycare facilities that received funding from the program are again under scrutiny.

The Minnesota child care program vaulted to the forefront shortly after the Christmas holiday when a viral video appeared to show empty daycare centers in Minneapolis that were recipients of state grants. The online video, released by conservative independent reporter Nick Shirley, shows in-person visits to several licensed childcare centers in Minneapolis. 

In a visit to one of the facilities that has garnered the most attention, Shirley’s footage shows no children or visible activity at the location, despite records indicating it is supposed to serve nearly 100 children and has received millions of dollars in state support, Just the News reported.

However, concerns about similar kinds of fraud identified in the viral video are not new in Minnesota. According to a report from Minnesota's legislative auditor in 2018, concerns about widespread fraud in the state’s child care program were brought to both the legislature and state officials, with one fraud investigator claiming fraud rates could exceed 50% of all government funding. 

The reporting comes amid heightened scrutiny of Minnesota's government after multiple reports of widespread fraud rings in the Somali immigrant community, especially in and around the city of Minneapolis. For example, as of this year, more than 70 defendants have been charged in a meals program fraud scheme that cost taxpayers $250 million, Just the News previously reported. 

The new scrutiny on Minnesota has prompted the Trump administration to suspend further funding, which it did on December 30.  

Warned in 2018

The Office of Legislative Auditor was alerted to allegations of fraud in the state's child care system in 2018, when a former employee testified about it before the state legislature. As part of its probe into the allegations, Jay Swanson, the manager of the DHS Recipient & Child Care Provider Investigation Unit for the state, confirmed the testimony and said that in 2018 that the fraud rate in the program was likely as high as half the total disbursements. 

“DHS investigators routinely uncover large scale overbilling after receiving information in the form of tips or leads that specifically mention the overbilling taking place, or that mention activities which in their experience is indicative of a provider that is overbilling as well as possibly engaged in additional fraudulent activity,” Swanson wrote to the inspector general of the Minnesota Department of Human Services and the Office of the Legislative Auditor in August 2018. 

You can read Swanson’s letter and the Office of the Legislative Auditor report below: 

Swanson also told the legislative auditor that a large percentage of the highest paid daycare centers in the state raised significant fraud concerns for investigators–as many as 72 of the top 100 recipients of state money bore concerning markers, such as overbilling.  

“In CY2015 investigators had fraud concerns involving 35 of the 50 highest paid centers. In CY2016 there were concerns involving 41of the 50 highest paid centers. In CY2017 there were fraud concerns involving 42 of the 50 highest paid centers,” Swanson wrote. “Taking a broader look at the scope of the problem, in 2017: Investigators have significant concerns regarding 72 of the top 100 highest paid centers.”  

According to the investigators’ estimates, the scale of the potential fraud was staggering. “Investigators, as well as the Supervisor and Manager of this unit believe that the overall fraud rate in [the child care] program is at least 50% of the $217M paid to child care centers in CY2017,” Swanson wrote in the concluding paragraphs of his message to the legislature. 

In 2018, the governor of Michigan was Democrat Mark Dayton, who was followed by Tim Walz, also a Democrat, who won the election that year, and was sworn in on January 7, 2019.    

Daycares offering kickbacks of government money to enrollees

Swanson told the legislature that his investigators have determined that some child care centers recruit mothers eligible under the state’s Child Care Assistance Program (CCAP) by offering kickbacks using government funds. 

“It is very common for center owners to pay kickbacks to the mothers of $200+ per child per month, with the highest kickback investigators have been told about by mothers being $300 per month per child,” Swanson wrote in his report to the state legislature. 

“Providers do this to attract as many parents/children to their center as possible, so that providers can bill CCAP for the largest number of children possible,” he explained. 

Another marker identified by investigators, Swanson said, is that in several instances new child care centers would open on the same property as a previous location shut down after government funding was yanked over fraud concerns or criminal charges. 

“It has become a regular occurrence for DHS Child Care Center Licensing to receive an application for a new center, in the same location as the recently closed center within a few weeks of the other center closing. In time, investigators determined that the newly opened center is also defrauding CCAP,” Swanson wrote. 

Some facilities relied 100% on government money

He also said investigators found that it appeared many daycare centers were opened entirely for the purpose of defrauding CCAP, noting one Office of Inspector General study from 2017 found there “was an excess of 320 child care centers” receiving money from the program in Hennepin County — home to Minneapolis — alone.

Additionally, the investigators found that of the 15 child care facilities to which the state halted payments due to fraud, all operated with “nearly 100% CCAP clients,” meaning the business model was based solely on government funding. 

“This model encourages fraudulent operation, since owners have recruited mothers based on them having CCAP eligible children,” Swanson wrote. 

“Since parents are recruited by offering kickbacks equal to or greater than other centers, as well as being told…their children do not have to attend the center with any degree of regularity, the whole manner of operation is by definition fraudulent,” he added. 

In addition to these markers, Swanson said investigators uncovered fraudulent paperwork, indications of money laundering, and evidence that grant recipients transferred money out of the country to the Middle East and Africa that, in some cases, likely aided designated terrorist organizations. 

The Minnesota DHS pushed back on the estimates from Swanson and the ex-employee in a letter to the Office of the Legislative Auditor, but said in a statement, contained in the legislative auditor's report above, that it recognized there was “great deal of work to do to improve the integrity of CCAP and our investigation processes.” The agency said directly that there was no evidence to support the investigators’ claims that fraud exceeded $100 million a year or that money was sent overseas. 

However, the legislative auditor ultimately concluded in its final report that the evidence that it had gathered pointed to a large fraud problem inside the CCAP program, even if it could not directly substantiate the claims, noting that it would be “extremely difficult” to do so. 

Told in 2019 again that fraud controls were "insufficient"

The office in 2019 released the results of a separate investigation into the Department of Human Services’ fraud controls and found them “insufficient to effectively prevent, detect, and investigate fraud in Minnesota’s Child Care Assistance Program (CCAP).”

The Minnesota DHS moved in 2019 to revamp the office that investigates child care fraud after Swanson’s letter. However, it is unclear what impact those reforms had on investigating and prosecuting fraud. 

The House Oversight Committee in Washington, D.C. announced on Wednesday that it would hold a public hearing in the new year on the allegations of rampant fraud in Minnesota's federally-funded social services programs. The committee was already investigating the claims of fraud in other programs, but has now requested that both Gov. Tim Walz and Minnesota Attorney General Keith Ellison appear for transcribed interviews on February 10. 

“Minnesota Governor Tim Walz and Attorney General Keith Ellison have either been asleep at the wheel or complicit in a massive fraud involving taxpayer dollars in Minnesota’s social services programs. American taxpayers demand and deserve accountability for the theft of their hard-earned money,” committee chairman James Comer said in a statement. 

Gov. Walz responded to Comer's announcement in a statement to Fox News. “We’re always happy to work with Congress, though this committee has a track record of holding circus hearings that have nothing to do with the issue at hand. While the Governor has been working to ensure fraudsters go to prison, the President has been selling pardons to let them out.”