The smell of fraud is in the air – from fraud fires burning in many states! Fortunately, the prevailing winds in South Dakota are from the west, or we would have been smoked out by Minnesota fraud fires in a manner similar to the Kuwaiti and Iraqi oil well fires that blackened the sun after Operation Desert Storm.
The question is, what incentivized all of the fraud in the first place? What can be done about it? And what does that mean for South Dakota?
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My last post explored the potential for fraud in South Dakota, as well as some of the broader factors that could have led to the fraud. This post drills down into why the system itself appears to promote fraud and what measures and actions can be taken to disincentivize and minimize fraud activities in South Dakota (and, by extension, other states).
Let’s get started.
WHY THE SYSTEM PROMOTES FRAUD
From the perspective of program administrators in state-administered federal programs, such as those in South Dakota (or anywhere, for that matter), human incentives for fraud often stem from a mix of professional pressures, rationalizations, and opportunities for personal or institutional gain. Administrators, including state agency managers and oversight staff, may engage in or overlook fraudulent activities due to the intense demand to rapidly disburse funds, particularly during crises like the COVID-19 pandemic, where the priority shifts to “getting money out the door” to meet statutory requirements or emergency needs.
This creates a disincentive to rigorously scrutinize applications or claims, as delaying aid could lead to political backlash, performance penalties, or failure to fulfill program goals. For instance, in reimbursement-based programs like child nutrition or Medicaid, administrators might approve questionable submissions to avoid disrupting services for vulnerable populations, rationalizing that the greater good outweighs potential minor abuses.
Personal incentives can include career advancement tied to high disbursement volumes, which signal successful program expansion, or even indirect benefits like avoiding confrontations with influential community sponsors or nonprofits.
In some cases, administrators fail to act on early red flags—such as rapid growth in claims or complaints about kickbacks—possibly due to understaffing, fear of legal challenges from denying participation, or a belief that issues were isolated rather than systemic. Rationalizations among administrators might mirror those of fraudsters, such as viewing oversights as “borrowing” time or resources that will be corrected later, or minimizing harm by assuming most funds reach intended recipients.
In rural or reservation-heavy states like South Dakota, these incentives are amplified by logistical challenges, where limited staff must cover vast areas, leading to reliance on self-reported data without thorough verification.
The system itself promotes or excuses fraudulent activities through structural flaws that diffuse accountability, prioritize speed over scrutiny, and create misaligned incentives across federal-state partnerships. Federal aid programs often involve third-party reimbursements and centralized administration without market-based checks, fostering an environment where fraud is a “predictable outcome” due to lax verification and shared responsibility that no single entity fully owns.
States administer funds but face little fiscal risk since the money is federal, encouraging hasty spending without robust audits, as seen in pandemic-era waivers that suspended eligibility checks and site visits to expedite relief.
This “spend first, ask questions later” approach, combined with complex regulations and overlapping jurisdictions (e.g., on reservations), creates vulnerabilities that excuse inaction—administrators may defer tough decisions, assuming federal oversight will catch issues later.
Broader systemic excuses include conflating improper payments (often due to documentation errors) with fraud, which downplays the need for reform, and resource constraints that leave programs under-guarded against motivated offenders.
Ultimately, the federal-state divide reduces incentives for states to invest in prevention, as evidenced by chronic understaffing and deferred deficiencies, perpetuating a cycle where fraud is enabled by design rather than deterred.
POLICIES AND PROCEDURES TO COUNTERACT THE INCENTIVES
To counteract the incentives for fraud among program administrators – such as pressures to disburse funds quickly, career rewards tied to high-volume processing, rationalizations that prioritize aid delivery over scrutiny, and understaffing – and to address systemic issues like diffuse accountability, lax verification, and a federal-state divide that reduces state investment in prevention, several evidence-based policies and procedures can be implemented. These draw from federal guidelines, post-scandal audits, and best practices in programs like Medicaid and child nutrition, focusing on strengthening oversight without unduly delaying legitimate aid.
First, establish formal fraud prevention plans at both state and sponsor levels, mandating dedicated compliance officers, internal controls, and regular risk assessments. For instance, South Dakota could require annual fraud and abuse plans that outline goals, responsibilities, and milestones, including employee training on ethical reporting and red flags like rapid claim growth.
This directly minimizes rationalizations/incentives by embedding accountability into job roles, shifting career incentives toward integrity metrics (e.g., audit compliance rates) rather than disbursement speed, and addressing understaffing by prioritizing resource allocation for high-risk areas. In Medicaid managed care, such plans could include procedures for suspending payments on credible fraud allegations, deterring hasty approvals. Federal funding should be tied to these plans’ implementation, ensuring the state invests in prevention since there would be no direct fiscal risk otherwise.
Next, enhance pre-payment verification and eligibility checks through risk-based monitoring and data analytics tools. Policies could mandate automated cross-checks of claims against databases for anomalies (e.g., inflated meal counts or duplicate beneficiaries) before reimbursement, using AI-driven systems to flag high-risk submissions for manual review. This counters the “spend first” incentive by building delays only for suspicious cases, while rewarding efficient, accurate processing.
For child nutrition programs like CACFP, South Dakota should verify sponsor applications more rigorously, including site visits or third-party audits for high-risk applicants, and establish statutory criteria for approvals (e.g., financial stability or past compliance).
Lessons from Minnesota’s audit highlight how failing to act on early warnings enabled fraud; thus, procedures for mandatory follow-up reviews on serious findings would enforce accountability, reducing diffuse responsibility by requiring documented resolutions.
Coordination and enforcement should be strengthened through centralized fraud units and partnerships. South Dakota could create/expand Medicaid Fraud Control Units (MFCUs) and similar bodies for nutrition programs, with authority to investigate, recover funds, and impose penalties like increased fines for theft or kickbacks.
This minimizes excuses rooted in jurisdictional overlaps by clarifying roles—e.g., the state handles initial oversight, federals provide support via contractors—and incentivizes proactive detection through shared data platforms.
Federal alerts, like the Dept of Treasury’s FinCEN’s notifications on child nutrition fraud, can train administrators and law enforcement on red flags, fostering a culture where ignoring issues risks personal liability.
Education and whistleblower incentives and protections should be implemented alongside performance audits. Mandatory training for administrators on fraud indicators and ethical decision-making can reframe incentives, emphasizing long-term program sustainability over short-term outputs.
Policies protecting anonymous reporting (e.g., hotlines) reduce fear of retaliation, while tying federal reimbursements to audit compliance – such as GAO-recommended systematic monitoring – addresses the federal-state divide by making the state accountable for lax practices. Whistleblowers should be incentivized to receive a percentage of the fraud exposed and dollars saved to promote more vigilance and reporting.
Lastly, during crises like pandemics, risk-based oversight need to be maintained even under waivers, prioritizing integrity in high-vulnerability areas like reservations or rural sites.
WHAT HAS SOUTH DAKOTA IMPLEMENTED?
South Dakota has implemented several of the suggested fraud prevention measures in response to a series of state employee scandals in 2024, though coverage remains uneven across programs and lacks some advanced elements like data analytics. These steps primarily address internal controls, training, and whistleblower protections, with stronger emphasis on Medicaid and general state operations than on child nutrition or SNAP. Below, implementation status is broken down based on recent developments as of February 2026.
Implemented measures include:
Education and Whistleblower Protections: Governor Kristi Noem signed Executive Order 2024-07 in November 2024, mandating annual training for all state employees and supervisors on public trust, duty to act, internal controls, conflicts of interest, and ethical service. This was developed by the Bureau of Human Resources and Administration and directly counters rationalizations by embedding integrity into performance expectations. In April 2025, Governor Larry Rhoden signed an executive order creating a secure web portal for anonymous whistleblower reports, routing them to the state auditor and attorney general. Agencies like the Department of Social Services (DSS) have also established anonymous tip lines and hotlines for reporting benefit fraud in programs like Medicaid and SNAP. These align with recommendations for mandatory training on fraud indicators and protections against retaliation.
Centralized Fraud Units and Partnerships: The state’s Medicaid Fraud Control Unit (MFCU) was expanded in May 2024 by merging with the Elder Abuse Unit to form the Medicaid Fraud, Abuse, and Neglect Services (MFANS) unit under the Attorney General’s Office. In 2024, MFANS reviewed 1,102 incidents, opened 130 cases, recovered over $1 million, and secured 8 convictions, leveraging federal funding (about 75% of its budget). This unit has authority to investigate provider fraud, patient abuse, and drug diversion, with partnerships to federal entities like HHS-OIG. For unemployment insurance, the Department of Labor and Regulation (DLR) is modernizing its reemployment assistance system using ARPA funds (allocated $5.5 million), aiming to reduce fraudulent claims through better data processing and policy implementation—several phases were completed by mid-2024, including API conversions and enhanced claimant portals. The State Board of Internal Control, tasked with detecting financial fraud, has been bolstered with additional staff and procedural enhancements.
Formal Fraud Prevention Plans and Internal Controls: Following 2024 scandals (e.g., $1.78 million allegedly stolen from child protection services), the state added an internal control officer to the executive branch and implemented multi-person payment approvals, click-by-click audit trails, and revised procedures in agencies like DSS and the Department of Revenue. Attorney General Marty Jackley proposed and advanced legislation in 2025 to strengthen fraud protections, including mandatory reporting of wrongdoing by state employees. DSS maintains a “Recoveries and Fraud” section with investigation protocols for benefits programs, though it’s more reactive than comprehensive planning at sponsor levels. Performance audits are ongoing, with the state auditor pledging revisions and facing legislative scrutiny.
Pre-Payment Verification and Risk-Based Monitoring: Partial implementation exists in high-risk areas. For child care assistance (related to nutrition/child programs), federal partners required increased verifications in late 2025 due to national fraud concerns (stemming from Minnesota), including attestations of controls and fund usage—South Dakota was deemed compliant with no local impact. Overall, implementations are reactive to 2024 internal theft cases rather than proactive for external fraud in reimbursement programs like child nutrition. South Dakota’s low fraud rate (e.g., compliant in federal reviews) has limited urgency, but rural challenges persist.
UNIMPLEMENTED OR INCOMPLETE MEASURES
There are additional measures that could potentially reduce fraud in South Dakota state programs. For gaps – such as sponsor-level fraud plans in nutrition programs, AI/data analytics for pre-payment checks, and expanded risk assessments across all programs – the best approach emphasizes a multi-pronged strategy leveraging South Dakota’s small government structure, bipartisan history on fiscal issues, and federal partnerships. This maximizes buy-in, minimizes resistance, and ensures sustainability. The steps include:
- Legislative Action as the Core Vehicle: Introduce comprehensive bills in the 2026 legislative session (convening January 2026), building on Jackley’s 2025 proposals and Noem’s executive orders. For example, mandate formal fraud prevention plans for all state-administered federal programs, requiring sponsors (e.g., nonprofits in CACFP) to submit annual risk assessments and internal controls, with compliance tied to funding. Include provisions for AI tools in high-volume programs like Medicaid and UI. Secure bipartisan sponsorship (e.g., from the Government Operations and Audit Committee, which has probed scandals) to avoid partisan divides; allocate modest state funding ($1-2 million initially) from the general fund or opioid settlements for tech upgrades; and incorporate sunset clauses for review in 2028 to build flexibility. This approach has high success odds due to recent scandals creating political momentum, as seen in 2025’s employee crime legislation.
- Executive Orders for Quick Wins: Governor Rhoden could issue orders expanding existing training to include program-specific fraud indicators (e.g., for child nutrition) and piloting data analytics in one agency like DSS. Pair with federal grants (e.g., USDA’s SNAP Fraud Framework Implementation Grants, which South Dakota could apply for in FY 2026) to fund tools without straining the state budget. This could be framed as extensions of Noem’s “four cornerstones” to maintain continuity and gain quick legislative ratification, reducing implementation delays in a short session (typically 38 days).
- Federal and Stakeholder Partnerships: Collaborate with HHS, USDA, and OIG for technical assistance, as in the MFCU’s federal funding model (75% covered). Engage tribal governments for reservation-focused plans, given jurisdictional overlaps. Form a task force with the AG, auditor, DSS, DOE, and lawmakers for input, ensuring rural needs (e.g., remote verifications) are addressed. Expand to tribal partners if there is interest in the sovereign nations. Public hearings and transparency reports would build trust, countering agency resistance noted in audits. This could be piloted in low-risk areas like SNAP to demonstrate ROI before scaling.
- Monitoring and Incentives for Adoption: Tie measures to performance metrics (e.g., reduced improper payments), with annual reports to the legislature. Offer incentives like bonus funding for compliant sponsors. South Dakota’s lean bureaucracy is made to order for agile rollout, with external audits by private accounting firms to validate effectiveness.
CONCLUDING THOUGHTS
Like all other states, South Dakota-administered federal programs are susceptible to fraud, partly due to the systemic incentives described above. There are measures that could be taken to increase the effectiveness of fraud monitoring actions previously taken by the state.
A combined approach – legislation for permanence, orders for speed, partnerships for resources – offers the best success chances by aligning with South Dakota’s conservative fiscal ethos, recent scandal-driven urgency, and federal support, potentially reducing fraud vulnerabilities by 20-30% based on similar reforms in other states.
Just what the doctor ordered as the legislature continues to fight over reduced budgets.
The end.