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    An important thing to add to this answer, I think, is that if you decide not to report the fraudulent activity now but that it somehow does get discovered in the future the consequences for you could end up being even more negative than they are now. Sorry to add more complexity to the consideration. Commented Aug 11, 2015 at 13:47
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    How did you get "willingly"? As I understand the OP, he has only learned of the misuse "a long time after he started": "Of course I had no idea that the grant money is being mishandled". I don't really think that the OP is in any very concrete danger of being tagged as an accessory to this fraud. Commented Aug 11, 2015 at 13:53
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    @xLeitix Once you make a statement which you now is false, to gain something (continued grant funding in this case) you are willingly commiting fraud, unless you prove you had no other option - which does not seem to be the case. It would be hard to argue (legally) that being forced to quit a PhD is such a dire consequence. I am referring to this part: "We ended up making ridiculous statements about our accommodation, work hours, health insurance" Commented Aug 11, 2015 at 13:58
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    @MartinČerný. To add to your arguments, the OP could resign anytime from the grant without leaving his PhD. The PhD is between him and the host institution and he could just continue without receiving funding. Commented Aug 11, 2015 at 14:23
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    @Alexandros We still don't know EU or US, but from my German POV continuing the PhD without the advisor or the funding is unrealistic. PhDs are usually bound to their advisor from day one and switching to a different advisor usually means starting over. College loans aren't as established here, especially not for PhD. Moreover, his visa might depend on having a job (PhD counts as a job because it usually is). So yes he could resign any time but what might that mean for him? He might be able to plead that he had a relationship of dependence on the advisor, which might get him a lighter charge. Commented Aug 12, 2015 at 7:44