Criminal investigators suspect hundreds of United States Army soldiers exploited a recruitment programme to receive kickbacks worth more than US$29 million.
The scale of the potential fraud was "astounding" and ranks as one of the largest criminal probes in the army's history, said Senator Claire McCaskill, who held a hearing on the scandal on Tuesday.
An army audit found that more than 1,200 recruiters had received payments that were potentially fraudulent, defence officials said.
"We now know that thousands of service members, their families and friends, may have participated in schemes to defraud the government they served and the taxpayers," McCaskill said.
The kickbacks grew out of a 2005 project launched at a time when the United States Army and National Guard were struggling to secure new recruits amid heavy casualties in the wars in Iraq and Afghanistan.
The National Guard programme, which was eventually extended to the active-duty army, essentially paid troops for referrals of recruits.
These "recruiting assistants", who included National Guard soldiers and civilians, were allowed to earn between US$2,000 to US$7,500 for each person they persuaded to enlist.
Defence officials confirmed the allegations that were first reported by USA Today.
Officials at the firm hired to run the programme, Docupak, first reported a few cases of fraud in 2007. Over the years, officials grew more suspicious and in 2011, the army launched a formal audit of the programme, which was scrapped in February 2012.
"This criminal fraud investigation is one of the largest that the army has ever conducted, both in terms of sheer volume of fraud and the number of participants," said McCaskill, chairwoman of the Senate's Subcommittee on Financial and Contracting Oversight.
She cited a criminal case in Texas, in which a former National Guard member was recently sentenced to four years and nine months in prison for leading a conspiracy to obtain US$244,000 in fraudulent recruiting bonuses.
The army expressed anger at the fraud and vowed to get to the bottom of it. "No one is more outraged about this than the leadership of the United States Army," said a spokesman.
After an internal probe identified fraud, army leaders immediately terminated the recruiting programmes and ordered a criminal investigation, he said.
Those found to have abused the programme would be held accountable in military and civilian courts, he said.