To root out fraud in government, apply Warren Buffett’s wit and wisdom

As a CEO, I’ve read more books about Warren Buffett than I can count. One parable of his and Charlie Munger’s that has profoundly shaped how I think about business — and government for that matter — is this: “Show me the incentive, and I’ll show you the outcome.”

Buffett has steered countless businesses to sustainable long-term success by designing incentive systems that produce desired outcomes. Right now, in my position helping government agencies combat fraud, I have come to believe that fraud and improper payments are one of the most critical national security threats we face. They’re now one of the largest line-items in our federal budget.

With a budget deficit of $1.69 trillion in fiscal 2024 alone, a total debt of $34 trillion, and interest payments surpassing $659 billion annually, we as a nation are in dire financial straits. But before even discussing hard budget cuts, it’s time we talk about an easy win — the one line-item every American should support cutting: taxpayer dollars going to criminals.

Which led me to posit a question: How would Warren Buffett eradicate this problem? Buffett allows virtually $0 in improper payments in his own companies.

I have spent 16 years trying to convince government officials that fraud is both rampant and preventable. I have shown them proof that their agencies are not getting money into the hands of their proper recipients, the specific tactics criminals are using, the scale of the crimes, and photo and video evidence that criminals are bragging about their ill-gotten gains. 

My arguments fall on deaf ears, and I have finally realized why. Not only does our government lack the proper incentives to root out improper payments across our core agencies and entitlement programs, but a reverse incentive is driving a lot of this, and it’s costing taxpayers trillions of dollars.

The current system of budget allocation for government programs incentivizes spending rather than efficiency or effectiveness. If a department or program doesn’t fully utilize its allocated budget within a given fiscal year, it risks facing a reduced budget in the following year. This creates a “use it or lose it” mentality, where the primary goal becomes spending the allocated funds rather than ensuring that they are spent in the most effective manner.

The USDA’s Supplemental Nutrition Assistance Program (SNAP) is one of the most expensive social safety nets in this country, with $111.2 billion in spending in 2023. It serves as the last line between poverty and hunger for millions of families. Assistance is given to families each month to pay for food, and this money is dispensed on electronic benefit transfer (EBT) cards which can then be used at grocery stores.

Visa, Mastercard and every credit card company on Earth realized over a decade ago that, without identifying users accurately and adding “chips” in credit cards, criminals could steal people’s accounts and defraud them. This is why every credit card company has a thorough know-your-customer requirement, and every card in your wallet has a chip in it. They cost a few cents per card, and they save credit card companies billions per year in fraud.

Yet the USDA doesn’t require know-your customer or asset verification, nor does it even put chips into EBT cards, even though they serve as a crucial nutritional lifeline for over 40 million Americans.

Why would such obvious identification and prevention mechanisms not be in place? Because there is no incentive to ensure that money gets into the right hands. As a result, even though SNAP’s budget has ballooned from $60 billion in 2018 to $111 billion in 2023, more people go hungry in America today and the amount going to criminals has only increased.

As a result of poor incentives, improper payments and fraud are now soaring as a percentage of the federal budget. No one is tallying wasted money as a single line item, but if we did, it would be one of America’s top national expenditures.

To address this issue, Congress and President Biden need a radical overhaul of the incentive and evaluation system across all federal and state agencies.

On numerous occasions, Buffett has offered a ‘five minute” plan to fix the deficit. He proposes a law that would make current members of Congress ineligible for reelection if the deficit exceeded 3 percent of GDP. This idea, which has since resurfaced on social media, is more relevant than ever in today’s economic climate dominated by inflation and debt. 

It’s time we take a Buffett-like approach and design an incentive system within government agencies that leads to the eradication of fraud and improper payments.

Here’s how that could look in practice: agency leaders and employees who get money into the right hands and stop fraud should participate in a whistleblower type program and take a cut of the money they save. Imagine how little fraud there would be if agency employees received annual uncapped bonuses, based on how much money they prevent from going to fraudsters?

And imagine how many more needy Americans would automatically receive their needed benefits? 

Incorporating whistleblower reward programs into social services could significantly enhance the stewardship of tax money. By offering financial incentives for exposing fraud or mismanagement, these programs have proven effective in other sectors. Whistleblowers have received substantial payments, sometimes in the millions, for exposing fraud under laws such as the False Claims Act. One of the most notable examples is from the Securities and Exchange Commission, which awarded a record payout of nearly $50 million to a single whistleblower in 2020. Regarding improper payments, the U.S. Government Accountability Office has identified trillions in  erroneous payments across various government programs in the past few decades.

Agencies should be rewarded for efficiency and effectiveness — measuring their program against clearly defined outcomes — not the amount of money spent. 

The problem in government is creating the right types of incentives so that responsible stewardship is rewarded. Until we address the underlying incentive structures that support our government agencies, we will continue to see the rampant misuse of taxpayer dollars and a thriving culture of fraud. It’s time for a change, not just in policy but in the very ethos of how the government operates. 

Haywood Talcove is the CEO of LexisNexis Risk Solutions’ Government group.