JohnDoe, as a former fulbrighter let me just say first, it is one of the best experiences ever! Oversight varies depending on the country but I would say it is limited oversight over all. The program admin in that country is there to help and support you, not watch over every little thing you do. The most important thing they care about is your safety.
With regards to switching your project, it is definitely not considered defrauding the government. Most fulbrighters end up changing their project to some degree because you will not know exactly what research is feasible until you get to the country. IIE wants to make sure you are making a positive contribution to the country your visiting. Remember, the whole purpose of Fulbright is to enhance mutual understanding between countries.
I have never heard of anyone getting caught for doing work on the side but I also did not know anyone who did that either. Obviously I would advise against it.
If you have questions pm me.
