What if I told you that “Old McDonald” did NOT have a farm and was NOT a farmer? e.i.e.i.o…
In my former profession I was employed as a Senior Special Agent with the U.S. Department of Agriculture (USDA), Office of Inspector General (OIG), Investigations. A majority of the cases I investigated involved farm program payment limitation fraud. Each “eligible” farmer could participate in USDA programs BUT there was a limitation on the amount of program payments that an eligible farmer could receive from each program. Therefore, if there was a limit on program payments “some” “real” farmers would create “fake” farmers to circumvent the payment limitations.
Are you a “Real” or a “Fake” farmer?
A “real” farmer owns and operates a business. They have something at “risk” such as capital (a loan), land, or equipment (that they either own or lease). They actively take part in day-to-day operations of the farm and make management decisions and perform labor.
A “fake” farmer is a silent partner or investor that allows the “real” farmer to use their name to qualify for farm program payments. They have no equipment or land. They also do not make any management decisions. Sometimes they are being paid by the “real” farmer to perform labor but they are not at risk. They might have a loan (capital) but it is not at risk because the “real” farmer guarantees the operation loan for the “fake” farmer. Many times the “fake” farmer rents farm equipment from the “real” farmer (on paper only). Many times the “fake” farmers are merely a hired hand or family member that allowed someone else to “use” their name. These are considered sham farm operators.
How to identify a “fake” farmer through accounting records?
- Real “separate and distinct” farmers keep totally separate books. If two or more farmers are using the same accountant to “straighten” out the books at the end of each year then you might have a “fake” farmer. If the farming operations were “really” separate and distinct why would the accountant have to adjust income and expenses between unrelated farming operations at the end of the year?
- Usually the “real” farmer has power of attorney over the “fake” farmer and signs all if not most of the farm related documents (checks, contracts, etc…).
- I saw this in several cases. The accountant issued one accounting bill for their work for several “different” farming operations. The “real” farmer paid one check from their farm account to cover the bill. If the farming operations were “really” separate would one farmer pay the other farmer’s accounting bills? No
- Crop sales in one farmer’s name are being deposited into the “other” farmer’s account or applied on the other farmer’s operating loan.
- There are separate check books for each farming operation BUT the expenses are being paid from the wrong account. The farmer appears to show a reckless disregard for whose money he is spending. Note: It is all his or her money that is why no-one complains when the wrong checkbook is being used.
- Memo sections on checks do not match the actual expense shown on the tax returns and accounting forms. This usually happens after the books are cooked when they know they are being investigated.
Why does this matter?
- As an accountant these should be red flags that your client might be engaging in major USDA program fraud. If you are complicit you might also be liable in a civil or criminal case.
- As a loan officer that provides a farm operating loan these should also be red flags. I found that the running record in a loan file often shows “truthful” statements. Many times loan officers know exactly what is going on and they allow the fraud to perpetuate. If you are complicit you might also be liable in a civil or criminal case.
Beware of the “fake” farmer. In my former position I saw them everywhere.