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REVIEW THE ENFORCEMENT OF ANTI-FRAUD PROVISIONS OF THE FOOD STAMP ACT

THURSDAY, FEBRUARY 5, 1998
House of Representatives,
Subcommittee on Department Operations,
Nutrition, and Foreign Agriculture
Committee on Agriculture,
Washington, DC.

    The subcommittee met, pursuant to call, at 10:05 a.m., in room 1300, Longworth House Office Building, Hon. Bob Goodlatte (chairman of the subcommittee) presiding.
    Present: Representatives Canady, Thune, Clayton, and Berry.
    Staff present: Lynn Gallagher, senior professional staff; Kevin Kramp, subcommittee staff director; Brian Hard, Wanda Worsham, clerk; Callista Bisek, Russell Middleton, and Danelle Farmer.
OPENING STATEMENT OF HON. BOB GOODLATTE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VIRGINIA
    Mr. GOODLATTE. Good morning. The hearing of the Department Operations, Nutrition and Foreign Agriculture Subcommittee to review the enforcement of antifraud provisions of the Food Stamp Act will come to order.
    We are expecting the ranking member to join us shortly, and while we are waiting for her I am going to go ahead and give my opening statement.
    The purpose of this hearing is to receive testimony and written statements reviewing the antifraud provisions of the Food Stamp Act. Since I assumed the chairmanship of this subcommittee, reducing, if not eliminating, waste, fraud, and abuse in the Food Stamp Program has been a top priority.
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    Last year, we dedicated a great deal of time and attention to oversight of the Food Stamp Program. We discovered how the administration identifies, fights, and attempts to prevent waste, fraud, and abuse. I still question if enough is being done, and we will continue to monitor the administration's efforts. But it is time to take the next step.
    Today we examine what happens after food stamp waste, fraud, and abuse has been identified and investigated: What happens when traffickers are identified, what happens when retailers are caught laundering food stamps.
    Continued monitoring and oversight of the over $20 billion Food Stamp Program is vitally important. Congress and the American taxpayers must be assured that this program runs well to provide needed food for poor families. Congress and the American taxpayers must also be assured that abuses of the Food Stamp Program are uncovered and appropriate action taken.
    Confidence in the officials running a program, such as the Food Stamp Program, is essential for continued support. This confidence can only occur if wrongdoing in the Food Stamp Program, when identified, is prosecuted to the fullest extent possible. Money wasted or fraudulently spent means that poor families are not receiving food benefits and that criminals are benefiting from money authorized for food or poor families.
    However, the identification of waste, fraud, and abuse in the Food Stamp Program is not enough. Federal, State, and local administrators and law enforcement personnel must pursue these cases to their appropriate conclusion. An editorial in the Washington Post addressed this issue when discussing food stamp abuse in Washington, DC. The questions raised in the Post should be answered, not only for Washington, DC, but for all cities and States administering the Food Stamp Program.
    I would like to enter the editorial into the record, and here is a quote that sums it up: ''What about the honest workers and food stamp recipients who don't take the city for a ride but see thieves draining the system with impunity? And when the corrupt are allowed to be unpunished, what does that say to those on the sidelines with larceny in their hearts? Left unchecked, a little fraud and corruption soon become rampant wrongdoing.''
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    I hope the Inspector General and our other witnesses will tell us whether, in their judgment, there is rampant wrongdoing in the Food Stamp Program and what they are doing about it. I look forward to hearing the witnesses' testimony today. We have assembled uniquely qualified witnesses that will provide insight into the prosecution of food stamp waste, fraud, and abuse.
    If there are any statements that members have, they may be included at this point in the record.
    [The prepared statements of Chairman Smith and Mr. Brown follow:]
    Offset folios 1 to 3 Insert Here
    Mr. GOODLATTE. We are pleased to have with us Mr. Roger Viadero, Inspector General of the U.S. Department of Agriculture. Accompanying Mr. Viadero is Mr. John Novak, Acting Assistant Inspector General for Investigations with the Office of the Inspector General at USDA; and Mr. James R. Ebbitt, Assistant Inspector General for Audit with the Office of Inspector General at USDA.
    We are also pleased to have with us Ms. Yvette S. Jackson, Administrator of the Food and Nutrition Service at the U.S. Department of Agriculture. Accompanying Ms. Jackson is Ms. Susan Carr Gossman, the new Deputy Administrator for the Food Stamp Program, Food and Nutrition Service, at USDA.
    We welcome you, Ms. Gossman, and we look forward to working with you as the subcommittee continues its work on this important issue.
    We also would like to welcome to this first panel, in a slight change from our original agenda, Mr. James DeAtley, U.S. Attorney for the Southern District of Texas. Mr. DeAtley will speak with this panel, and when we get to the second panel, Mr. Chris Tolia will have that all to himself.
    So at this point in time, we thank you all for taking the time to share your thoughts with us this morning. And, Mr. Viadero, you may begin. Welcome.
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STATEMENT OF ROGER C. VIADERO, INSPECTOR GENERAL, U.S. DEPARTMENT OF AGRICULTURE
    Mr. VIADERO. Good morning, Mr. Chairman, and thank you.
    Mr. Chairman, we would like to thank you and members of the committee. I am Roger C. Viadero, the Inspector General of the U.S. Department of Agriculture. As you stated, with me today is Mr. Jon Novak, Acting Assistant Inspector General for Investigations; and Mr. James Ebbitt, Assistant Inspector General for Audit.
    As you recall, on October 30, 1997, Mr. Ebbitt and Mr. Craig Beauchamp, the former Assistant Inspector General for Investigations, whom we spoke with this week, who is happily retired—he retired at the end of last year—testified before this committee concerning the efforts to address fraud and abuse in the Food Stamp Program and the Electronic Benefits Transfer, EBT, system, of benefit delivery. We are pleased to return to this committee to discuss these important issues.
    The Food Stamp Program is our Nation's primary nutritional safety net. Program expenditures in fiscal year 1997 were approximately $21,500,000,000 and benefits provided to about 23 million recipients. Seventy-five percent of food stamp benefits were issued using food stamp paper coupons during fiscal 1997.
    However, States are rapidly moving to implement EBT systems, and they are mandated to have those systems by the year 2002, as mandated by the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, which you folks passed up here on the Hill, commonly referred to as welfare reform.
    During fiscal year 1997, we devoted approximately 46 percent of our investigative resources and 8 percent of audit resources to the Food Stamp Program. The Department estimates that over $50 million a year in food stamps go illegally to fugitive felons and prison inmates.
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    As a result of the tools provided by welfare reform, we initiated Operation Talon, a law enforcement initiative, led by the Office of Inspector General and carried out in conjunction with other law enforcement agencies and State social service agencies across this great country; as depicted here in the image of our Talon—it is a large poster—it is a big bird.
    Each of you has been provided a copy of our recent Operation Talon report. Under this initiative, social service agencies match their food stamp recipients with law enforcement fugitive records.
    It is very important to note that the food stamp recipients' records are not compromised for confidentiality at all. This is a match of the outstanding fugitive warrants against the recipients. The information on fugitives is then shared with the Office of Inspector General and other law enforcement officials who use it to locate and apprehend the fugitives.
    As of January 13, 1998, Operation Talon has resulted in 2,235 arrests of fugitive felons in some 24 metropolitan areas nationwide.
    I have a map which identifies the 24 locations where we conducted our pilot investigative work under Operation Talon. These fugitives included numerous violent and dangerous felons who were wanted for murder, child molestation, rape, and kidnapping.
    On December 18, 1997, Vice President Gore publicly announced Operation Talon during a press conference held at the White House. This picture demonstrates the weaponry one individual we arrested was carrying: 8 knives, 11 assorted lengths of steel pipe, 2 screwdrivers, 1 wrench, and material such as glass containers, wicking material and candles needed to make Molotov cocktails.
    This office has devoted considerable resources to this phase of Operation Talon, with 116 special agents expending nearly 2,500 staff days. We believe our efforts were worth it because of the positive results, and as Operation Talon is replicated across America, we believe the American people will once again see a demonstration of a Government that works better. We look forward to continuing this type of work.
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    Now, trafficking in food stamp benefits, whether paper coupon or EBT, has been a problem since the program has been in existence. Since the Food and Nutrition Service—FNS—authorized retailer is the key to the eventual redemption of illegally obtained food stamp benefits, OIG's primary investigative focus is on identifying and investigating those retailers who purchase them.
    During fiscal year 1997, about 80 percent of our food stamp investigations involved FNS-authorized stores. During the year, 326 retail stores were disqualified by FNS, based upon our investigations. These stores had annual food stamp benefit redemptions of $65 million.
    One of the intended results of Office of Inspector General food stamp fraud investigations is to criminally prosecute those guilty of a crime. Since the Food Stamp Program is a Federal program, we first seek prosecution through the cognizant U.S. Attorney's Office. The Department of Justice gives each U.S. Attorney discretion to determine what Federal crimes or severity of crimes will be prosecuted in his or her district. These individual district guidelines are influenced by circumstances within that district, such as violent crimes, gang, serious drug problems, or other issues which create a heavy demand on a prosecutor's time.
    When we are unsuccessful in obtaining Federal prosecution, we often turn to various States for prosecution. Regrettably, Mr. Chairman, the District of Columbia does not have a local statute with which to charge food stamp trafficking.
    Now I would like to spend just a few moments discussing EBT, a concept once considered to be a good idea for the future. Now, all of a sudden, the future is here right now in the present. Fifteen years ago, EBT was an idea on a drawing board. Today, approximately 26 States have operational EBT systems, with eight of the States operating statewide systems. Many of the remaining States have selected EBT vendors and are at various stages of awarding contracts.
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    While our investigative and audit work has shown that EBT does not totally eliminate fraud, it is certainly a powerful weapon which aids in the detection and prosecution of fraud. For this reason, we continue to support the expansion of EBT and the expansion of properly designed and implemented EBT systems. EBT has an impressive impact in identifying individuals and retailers who are committing fraud in the Food Stamp Program.
    While trafficking of these benefits has not been entirely eliminated by EBT, we truly believe the number of individuals involved in street trafficking has been reduced. EBT benefits are less negotiable on the street and, thus, less likely to be used as a secondary currency.
    Unlike the trafficking of food stamp coupons, we have not found any significant direct exchange of EBT benefits for illegal drugs. Instead, the EBT recipients are generally exchanging their benefits for cash and nonfood items with retailers or their employees.
    We can now use this very important information available under EBT to identify and prosecute those who engage in illegal transactions. While paper coupons are generally not traceable to individual recipients, the EBT system records the date, time, amount, the recipient, and the store involved in all benefit transactions. This information is being used to identify and prosecute both retailers and recipients involved in illegal trafficking. FNS is also using EBT data to disqualify violating retailers, and State authorities are using information obtained from EBT records to disqualify recipients who have sold their benefits.
    I have a chart here which shows results from recent work in Baltimore, MD. This is an updated chart, Mr. Chairman. It is updated from our last presentation.
    For the past 3 years, we have provided EBT transaction information compiled during OIG investigations of 14 stores in Baltimore. That totals only about 1.3 percent of the stores in Baltimore currently authorized to redeem food stamp benefits, to the Maryland Department of Human Resources, the Baltimore City Food Stamp Trafficking Unit.
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    Based on this information, the Maryland Department of Human Resources has to date administratively disqualified in excess of 5,200 heads of household, or 8 3/10 percent of all Baltimore households currently receiving benefits, because they defrauded the program by selling their food stamp benefits. In excess of 11,600 more, or an additional 18 2/10 percent, of total households currently receiving benefits in Baltimore are in various stages of administrative action.
    This is just one more positive example of how EBT works for all of us, by providing more information than we ever had before. Prior to EBT, the food stamp trafficking transactions for which these people were disqualified would probably have gone unnoticed and unpunished.
    Not only has the Office of Inspector General been supportive of EBT from an investigative perspective, we have taken an active role in monitoring and reviewing currently operating EBT systems. By being on the front end of the implementation of these very important systems, we can identify and report on problems that need to be addressed early. This OIG review provides program managers throughout the Department and the States with the assurance that the systems are operating as intended.
    We have reviewed security policies and control processes in several of the operational EBT States and have identified not only areas that needed improvement but some issues that might impact upon future EBT systems.
    One of the issues we brought to the forefront was a need for tighter EBT card security. We believe the specification would generally and greatly enhance the security of the individual cards and, therefore, the entire system. However, some inexpensive security features, such as fine line printing and holograms, are not currently required on EBT cards. FNS is proposing regulations which include nationwide upgrading of security specifications for EBT cards. We applaud their move in this area and give our total support.
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    Another area we emphasize is the monitoring of those EBT systems that deliver multiple program benefits. Under an agreement with the President's Council on Integrity and Efficiency, this office was selected and remains the lead agency to review EBT systems that will deliver nearly $114 billion in multiple State-administered programs.
    Mr. Chairman, we must stay on top of this, and I am here today to tell you that, given the proper resources, we are going to do just that.
    As you recall, in 1995 we conducted a sweep of more than 5,000 stores in 7 different metropolitan areas. During the sweep, we found 858 retailers which were ineligible to participate in the program and another 450 which were questionable. Rather than go through the details, I have taken the liberty of providing each member a copy of our sweep report. We believe that participation as an FNS-authorized retailer should be regarded as a privilege and not a right.
    Three years ago, on February 19, 1995, during my testimony before the Committee on Agriculture concerning enforcement of the Food Stamp Act—we are going to call it the act—I proposed a 10-point package of legislative and regulatory changes to enhance the integrity of the Food Stamp Program. Since that time, we have seen many of our proposals come to fruition. A few of them, though, have not been enacted, although we understand FNS is seeking regulatory change in some of these areas.
    One of my proposals now allows FNS to require tax information to be submitted with store applications. As a brief example of how successful this can be, I provided each member with a prototype tax return to show how it contains evidence of food stamp trafficking.
    I will be happy to go into detail with that tax return upon conclusion of my statement. You will note, though, on the schedule C that the individual claimed $318,000 as total receipts. What he failed to say was that he had redeemed in excess of 30 percent more than that in food stamp benefits alone. This is pretty convincing evidence that this individual was involved in food stamp trafficking.
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    As part of this office's continuing efforts to increase our effectiveness in all areas of USDA, we have identified a special law enforcement initiative designed to provide intensified Office of Inspector General enforcement efforts in several key areas of the Department. I have provided each member with a copy of our initiative package.
    As you will note, we have focused on three specific areas. We have identified that the Food Stamp Program and other nutrition programs, the Rural Rental Housing Programs, and, most importantly, matters affecting the health and safety of our Nation's citizens which are so critical that we believe stepped-up enforcement by OIG is absolutely necessary to identify and eliminate fraud and abuse in these critical areas. This initiative will be a major undertaking for my agency, and I ask for your support in this critical endeavor.
    Mr. Chairman, this concludes my statement. I thank you, again, for the opportunity to address the committee, and I would be pleased to answer any questions you or other committee members might have.
    [The prepared statement of Mr. Viadero appears at the conclusion of the hearing.]
    Mr. GOODLATTE. Thank you, Mr. Viadero.
    We are joined now by the ranking member of the committee. At this time, I would like to recognize her for any statement that she might like to give.
    Mrs. Clayton from North Carolina.
    Mrs. CLAYTON. Thank you, Mr. Chairman. Thank you for having this hearing.
    I want to welcome all the witnesses and to acknowledge Ms. Gossman, who is a North Carolinian and is appearing before this subcommittee for the first time. I want to welcome you and the rest of the witnesses who have appeared.
    The Inspector General's testimony, I think, is both encouraging and also has some insight for us as we go looking at how we go to the full electronic ticketing of these resources for not only food stamps but also for the multiple uses that they may have in the future.
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    I will conclude my general remarks, but I do have some questions when you allow me to do that.
    Mr. GOODLATTE. Thank you, Mrs. Clayton.
    At this time, we will turn to Ms. Jackson for her testimony.
    Welcome. We are glad to have you back again today.
STATEMENT OF YVETTE S. JACKSON ADMINISTRATOR, FOOD AND NUTRITION SERVICE, U.S. DEPARTMENT OF AGRICULTURE
    Ms. JACKSON. Thank you.
    Good morning, Mr. Chairman and members of the subcommittee. I am Yvette Jackson, Administrator of the U.S. Department of Agriculture's Food and Nutrition Service. Accompanying me this morning is FNS's new Deputy Administrator for the Food Stamp Program, Susan Carr Gossman, who just joined us last week.
    A crucial part of the President's and Secretary Glickman's commitment to delivering nutrition assistance to needy Americans is ensuring that the integrity of the Food Stamp Program is protected from those who would abuse the program. It is our Nation's most important nutrition program, and we give protecting its integrity our highest priority.
    I would like to thank the members of this subcommittee for their assistance and support of the Food Stamp Program retailer provisions that were included in the welfare reform bill. That legislation provided the Department with much sought-after authority to strengthen enforcement of program integrity and eliminate fraud by ensuring that only legitimate stores participate in the program, by improving the agency's ability to monitor authorized firms, and by strengthening penalties against firms that violate program rules.
    The Department now has authority to suspend retailers immediately for the most egregious of program offenses; that is, trafficking in program benefits. This has provided us with an important deterrent as well as a critical tool in the fight against fraud and abuse in the program.
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    Yet more needs to be done to root out recipient and store fraud and maintain the public's confidence in this vital program.
    FNS focuses on prevention, barring those who would abuse food stamps from getting an opportunity to do so. The agency discourages and prevents misuse of food stamps up front, but when deterrents fail, the agency aggressively pursues claims and penalties against wrongdoers.
    We work with the States to prevent fraud and abuse by having eligibility workers gather and maintain detailed information on each food stamp household to make sure that the household is, in fact, eligible and receives the correct amount of benefits.
    Unreported income is a leading cause of ineligible households receiving benefits or eligible households receiving more benefits than they should. FNS works closely with the States to reduce instances of overpayments and payments to ineligible households, and I am pleased to report that, nationally, we have seen a dramatic improvement in payment accuracy.
    The overpayment error rate for fiscal year 1996 was 6.92 percent, a big improvement over just a few years ago. Each year since fiscal year 1993, the overpayment error rate has declined, saving approximately $660 million.
    In cases when households inadvertently or deliberately provide inaccurate information, FNS supports a variety of methods for detecting overpayments and for taking action to recover overpayments and penalize fraud.
    Automated matching of food stamp rolls with other databases with information about recipients is a particularly useful antifraud method. Use of Social Security Administration information, wages, motor vehicle data, are commonly matched by States. Finger imaging and prison matches are among new fraud detection tools that States are now testing, in cooperation with the Office of the Inspector General.
    Once fraud is found, recipients must return overpayments and are subject to criminal or administrative penalties. Recipients can repay claims in cash or coupons, or, if they are still participating, they are subject to recoupment from their current benefits.
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    Thanks to the Federal Tax Refund Offset Program, recipient overpayments have greatly increased in recent years. States collected a total of $186 million in recipient claims in fiscal year 1997. This is nearly double the pre-offset collections of 1991.
    Of the $186 million collected, fraud claims represented $60 million; claims for inadvertent household errors represented $104 million; and claims for State agency mistakes, $22 million. Of the total, $60 million represents either Federal offsets or voluntary payments triggered by the threat of these offsets.
    When the Department of Treasury completes implementation of the Debt Collection Improvement Act of 1996, we will also be able to collect recipient claims from other Federal payments.
    We have increased recipient fraud disqualifications. They are up 12 percent from a little over 94,000 in fiscal year 1996 to almost 106,000 in fiscal year 1997. New EBT systems have been especially useful. Maryland, New Jersey, New Mexico, South Carolina, and Texas have all used EBT data to identify recipient trafficking. EBT helps us identify trafficking patterns that previously may have gone undetected, because it enables us to identify suspicious patterns for both investigation and prosecution.
    The redemption process is another critical area in our fight against fraud in the Food Stamp Program. Retailer oversight is a Federal responsibility and is critical to the integrity of the Food Stamp Program. Stores that accept food stamps from their customers must apply to FNS for authorization. Although food vendors are essential partners in the Food Stamp Program, we want to reinforce that store authorization to participate is a privilege and not a right.
    Currently, there are 186,700 authorized retailers participating in the Food Stamp Program nationwide. To participate, store owners apply directly to one of our field offices, providing that office with information on the store's sales, food stock, the owners' Social Security numbers, and now business tax returns and other business information.
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    To the extent possible and that our resources allow, FNS field staff conduct store visits prior to authorizing a store, to make sure the store is, in fact, a real store and not a liquor store or a dry cleaners or some empty storefront devoted to illegal activities.
    Last year, we hired contract staff to perform pre- and post-authorization visits to stores to gather information for us about the nature of these businesses. This year, there will be approximately 35,000 pre- and post-authorization store visits that we have contracted for, and we expect this effort to improve overall retailer integrity significantly.
    Still, in spite of our screening efforts, we do end up authorizing some store owners and their employees who break program rules. We have a staff of 48 investigators specifically dedicated to uncovering abuse by authorized retailers. This group, the FNS Compliance Branch, works under specific delegated authority from the Department's Office of Inspector General.
    During the last 5 years, the Compliance Branch has investigated over 23,000 stores nationwide suspected of violations and found evidence of actual violations in 45 percent of the investigations. In over 7,000 of the cases, evidence gathered was enough to disqualify the stores or demand a civil money penalty in lieu of the disqualification. These violating stores together redeemed over $900 million in food stamp benefits annually. The Compliance Branch investigators uncovered trafficking, as opposed to just the sale of ineligible items, in over 4,000 of these stores.
    FNS's Compliance Branch has also been actively pursuing, with the U.S. Department of Justice, Federal civil prosecution under the False Claims Act against stores found trafficking, which we estimated in 1993 to be $815 million annually. Since this initiative began in 1992, there have been 566 negotiated settlements or judgments on FNS Compliance Branch cases, with settlements or judgments totaling over $5.8 million.
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    EBT continues to be the most promising means of combating food stamp trafficking. At the end of December 1997, a total of 27 States had implemented food stamp EBT systems, and they are growing rapidly and so quickly that now we are up to 16 that are actually statewide. Today, about 35 percent of all the benefits are issued electronically, and, by the end of the year, that figure will rise to 50 percent. All States, of course, are mandated to issue food stamp benefits electronically by the year 2002.
    Mr. Chairman, I believe in the package there are two charts that we have provided. One chart is a map of the United States showing the activity ranging from early planning to full operation of EBT, and you will note that every single State in the Nation is now involved in some phase of EBT, either in the early planning stage or fully operational.
    There is a second chart that also shows a growth in the percentage of food stamp benefits issued electronically. As I said, we anticipate by the end of this year that will rise to about 50 percent.
    FNS successfully deployed an automated EBT antifraud system known as ALERT. The ALERT system analyzes individual EBT transactions for patterns of violations both for investigation selection and for taking direct administrative sanction action against retailers.
    Two years ago, FNS began aggressive efforts to sanction stores based on the pattern of individual EBT transactions, resulting in over 125 stores being disqualified from the program. And that was without doing follow-up investigations, just based on the transaction information from the ALERT system.
    In closing, I would like to acknowledge the strong working partnership FNS has with the Department's Office of Inspector General in fighting food stamp fraud and abuse. Their help and commitment has been and continues to be invaluable to our work protecting the program's integrity.
    Mr. Chairman, this concludes my prepared remarks, and I would be happy to answer any questions that you have at this time.
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    [The prepared statement of Ms. Jackson appears at the conclusion of the hearing.]
    Mr. GOODLATTE. Thank you, Ms. Jackson.
    Now, we are also joined, as indicated earlier—a slight change in the alignment of the panels—by Mr. James DeAtley.
    Mr. DeAtley, we are glad to have you.
STATEMENT OF JAMES H. DeATLEY, INTERIM U.S. ATTORNEY FOR THE SOUTHERN DISTRICT OF TEXAS
    Mr. DEATLEY. Mr. Chairman, members of the subcommittee, thank you for the opportunity to appear before you to comment on the ongoing efforts of the U.S. Attorneys' Offices and the U.S. Department of Agriculture's Food and Consumer Service and the Office of Inspector General in combating fraud.
    I have been an Assistant U.S. Attorney since 1982 and am currently serving as the interim U.S. Attorney for the Southern District of Texas, based in Houston, the same position I previously held for 3 years in the Western District of Texas.
    As part of the Department of Justice's program to combat Federal benefit program fraud, a number of U.S. Attorneys' offices around the country are actively investigating food stamp fraud matters.
    The U.S. Attorneys' Offices, working with Federal, State, and local authorities, bring civil and criminal penalties against retailers who engage in unlawful food stamp trafficking. Trafficking occurs when a retailer exchanges Food Stamp Program benefits for cash at less than face value. The fraudulent retailer then redeems the benefits for full value and pockets the difference.
    Nationally, the Food Stamp Program is moving from a coupon- to an electronic-based system. With this system, U.S. Attorneys will be better able to identify and prove food stamp fraud allegations by having electronic records of transactions more readily available.
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    On the civil side, the primary enforcement tool used to combat food stamp fraud is the False Claims Act. On the criminal side, while many food stamp cases are prosecuted at the State level, we also pursue these cases at the Federal level. Criminal prosecution is available under title VII, United States Code, section 2024, as well as a variety of other statutory provisions addressing money laundering, theft of public funds, and conspiracy. These cases include a number of complex, large-scale investigations.
    Additionally, U.S. Attorneys' offices also prosecute some smaller cases for the deterrent value and to help ensure the integrity of the Food Stamp Program.
    The Department of Justice believes an aggressive civil fraud stance, coupled with criminal prosecutions, is the most effective and productive use of our available resources. In fiscal year 1997, U.S. Attorneys' offices handled 388 civil food stamp fraud matters, including filing complaints in 85 cases against 96 defendants. During that year, the U.S. Attorneys' offices also filed 157 criminal cases against 232 defendants under title VII of the Criminal Code, with 163 guilty pleas and another 8 convictions at trial.
    In my own district, the Southern District of Texas, we currently have more than 95 civil food stamp fraud matters pending. We are also aggressively pursuing criminal cases. For example, tomorrow, a defendant in my district is scheduled to be sentenced in a case involving his operation of a sham meat and seafood market. In this case, we identified food stamp redemptions of multiple hundreds of thousands of dollars by this one defendant over a period of several years.
    Our investigation of the defendant's bank records revealed that almost all of these redemptions were withdrawn from the bank in cash, with little or no expenditures for food. This evidence, combined with undercover transactions where the defendant engaged in food stamp trafficking, led to a subsequent indictment and conviction.
    Our office also currently has eight separate indicted cases in which defendants have pleaded guilty and are now awaiting sentencing.
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    Examples of significant cases handled by other U.S. Attorneys' offices within the last year include:
    In the Northern District of Ohio, in February of 1997, an attorney and his law firm agreed to pay $275,000 in settlement for his role in a major food stamp fraud ring. While representing clients who had been indicted in a $24 million food stamp conspiracy, the attorney submitted applications for food stamp licenses to the Food and Consumer Service listing nominee store owners rather than the true owners, whose stores had been disqualified from the Food Stamp Program. The use of nominee owners enabled the true owners to continue their food stamp fraud.
    In October, in the Eastern District of Louisiana, a grocery store owner and five codefendants pleaded guilty to charges of conspiracy, food stamp fraud, and money laundering. The owner used middlemen to buy food stamps from individuals in front of a food stamp issuing office. Two codefendants worked at the grocery and purchased food stamps from customers in the store. The owner redeemed the food stamps by depositing them into his grocery store bank account.
    Over a 2-year period, he deposited more than $1.3 million in food stamps he claimed were received for legal food purchases. The investigation was conducted by the Secret Service and Department of Agriculture. The defendants in that case face penalties ranging between 10 and 70 years in prison and fines up to $1.7 million.
    Last September in the Eastern District of Pennsylvania, a fish store owner was sentenced to 6 months in prison for purchasing food stamps for cash from an undercover USDA operative on more than one occasion.
    Proper training is vital to ensure that all U.S. Attorneys' offices have the know-how to further our efforts in combating food stamp fraud. Assistant U.S. Attorneys have participated in USDA-sponsored courses and have received training from the Executive Office of the U.S. Attorneys. Through its Office of Legal Education, the EOUSA has offered several Affirmative Civil Enforcement training courses that address food stamp fraud. In fact, the next such conference will occur this April.
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    Furthermore, a handbook describing the ''best practices'' for handling civil and criminal food stamp fraud prosecutions is near completion. This training manual will provide an overview of the Food Stamp Program, guidance on how referrals of such cases are made, suggested litigative approaches, and sample pleadings for these cases. It will be distributed to Assistant U.S. Attorneys throughout the country.
    Finally, each U.S. Attorney has designated an Assistant U.S. Attorney as the office's ACE coordinator. This effort enables the Department to address all fraud against the Government, including food stamp fraud.
    Given our many areas of law enforcement responsibility, we believe the program I have outlined for you makes maximum use of the U.S. Attorneys' capabilities and the resources you have given to us for these purposes. I will be happy to answer any questions.
    Mr. GOODLATTE. Thank you, Mr. DeAtley.
    Ms. Jackson, I want to commend you on your efforts to lower the error rate with food stamps. I do want to clarify something, however, and that is, you referred to in your testimony the overpayment error rate for fiscal year 1996 being 6.92 percent. There is another error rate that is actually reported, though, is there not? I noticed that there is a food stamp error rate, that may include other things other than overpayments, that indicates for 1996 a 9.22 percent.
    Ms. JACKSON. Yes. The 9.22 percent error rate included both overissuances as well as underissuances. In my testimony, I specifically highlighted the overissuance rate, which results in an actual loss of Federal dollars, but our overall error rate that is reported includes both the amounts that are overissued as well as the amounts that are underissued.
    Mr. GOODLATTE. Are there any other—for example, if somebody is receiving food stamps and they are not overpaid but they simply shouldn't be on the program altogether, is that counted in the higher percentage as well?
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    Ms. JACKSON. That is considered an overpayment.
    Mr. GOODLATTE. That is an overpayment?
    Ms. JACKSON. If you receive benefits either that you are not entitled to at all or you received more than you are entitled to, that would be included in our overpayment rate.
    Mr. GOODLATTE. And the larger percentage is down. I want to make sure you get credit for that. It is 9.72 to 9.22.
    Ms. JACKSON. That is correct. Our overall error rate is also down significantly from previous years, yes.
    Mr. GOODLATTE. Mr. Viadero, 3 years ago, in fact, very close to this date, February 1, 1995, you testified before the committee that the level of fraud, waste, and abuse in the Food Stamp Program was $3 billion. I wonder if you can quantify current levels of waste, fraud, and abuse in the program today.
    Mr. VIADERO. Since that date, we have not done another sweep audit, so we will stick to those figures. However, we assume—that is a dangerous thing to do, I know, but we assume that they are coming down proportionately as the decrease in the program dollars are occurring and the number of participants are coming off the rolls. So we will stick with between $2 and $3 billion.
    Mr. GOODLATTE. You think it is headed down but you can't quantify it at this point?
    Mr. VIADERO. Yes, sir.
    Mr. GOODLATTE. Very good. I am informed that about 35 percent of food stamp benefits are now provided through electronic benefit transfer programs and the remaining 65 percent provided through food coupons. Identifying and prosecuting fraud can differ based on the food stamp delivery system, and I wonder if both you and Ms. Jackson would comment on how you make sure, under both delivery systems, that money misspent due to fraud and waste is identified and violations are prosecuted?
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    Mr. VIADERO. Well, we had the first State to come on-line with EBT was the State of Maryland. Again, I have to give special commendation to both the director of the Maryland Department of Human Resources and the vendor, which is Deluxe Corporation, that operates EBT for the State. We have a very excellent working relationship between my office, the State, and the vendor, to the end that if one of the three of us discovers a new fraud pattern we discuss it with the other two fairly immediately.
    What we were able to do with EBT, for the first time, is identify the individuals that are perpetrating this serious crime against this very good program. We have concluded, and again we didn't bring the tape because the tape is sort of aging now itself, but we will restate what happened in the city of Baltimore.
    In one city market there were three stalls that handled 10 percent of the food stamp business for the entire city of Baltimore. This resulted in identifying approximately 7,500 recipients going to these three stalls, all owned by one vendor. We have video where people would stand in queue just to exchange benefits strictly for cash, and we have that on tape.
    What we are able to do, though, with EBT is clearly identify the who, the what, the where and the when. Now, on the prosecutive side, that case was prosecuted by the State's Attorney for Baltimore who appeared before this committee this past October. What we were able to define at that time was, we downloaded 7,500 recipients onto the State's Attorney's caseload, of which approximately between 30 or 40 of the more egregious ones have been prosecuted. The State Department of Human Resources is getting a better handle and they are looking at administrative action on the remaining roughly 7,500 recipients. That was a first major case.
    Let me tell you what is going on, though, so far as new items that come on-line. We just had a case up in New Jersey. New Jersey just came on-line with three counties in New Jersey, one county in the south, two counties in the north. Early on, we took a case out in trafficking, approximately $10 million worth of benefits out of seven very small stores. That is a major, major impact in that area.
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    We have I guess what you want to call the informal feedback from the local police that have worked with us, that basically since EBT has come into those counties, all the takeout restaurants, all the takeout businesses, have ceased to exist. They just closed up. So EBT is a deterrent.
    The only sad part about this was, and the press went out and interviewed people while this case was ongoing, that as soon as the benefits were posted to the card the woman on the next block knew it because she stated at 6:30 in the morning the line went around the corner. This was a very small fish store.
    We went down and took a trip, a little day trip, in New York. I had all of the Special Agents in Charge from across the country, and we just walked through a neighborhood and in that neighborhood we noticed something. We saw eight food stores, very small stores, neighborhood stores, all on one block. So somebody said, ''Ha, I wonder how much trafficking is going on here?'' Good question.
    We pulled the records. Each one of those eight local stores did in excess of $1 million worth of food stamps; each one of those stores. We had in excess of $8 million on one block in the city of New York. This really defies consciousness.
    As a matter of fact, this week, I believe it was this Monday in the Washington Post had how much money stores in the Greater Washington Metro Area do in food sales, and the largest one, as I recall, was Safeway. They do $2 million a year. Those stores are much larger than the neighborhood store. So a large store is only doing $2 million in total food sales. How can this mom and pop store do a million dollars out of a store that is roughly 15 by 20 feet? It really boggles the mind.
    This EBT will translate from those eight stores, when New York City comes on-line, will be better able to target these stores and get them out of the system, because it is very important. The only people that are getting hurt here are the kids and the elderly, because somebody is taking the benefits from them, and that is what we hope to get restored.
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    Mr. GOODLATTE. Thank you.
    Ms. Jackson.
    Ms. JACKSON. Mr. Chairman, I agree that EBT gives us a tremendous tool to fight fraud and abuse, but as you pointed out today, the vast majority of food stamps are still being issued under the old coupon system. So while we are aggressively pursuing fraud, using EBT as a new detection tool, we are continuing our efforts to fight food stamp trafficking fraud also within the coupon system.
    We have been successful and will continue to do investigatory sweeps in both EBT and non-EBT areas. We are using our Compliance Branch staff. We have been able to concentrate on specific areas of the country, picking out specific cities with large numbers of retailers; go in and do investigatory sweeps.
    And we have been successful in investigating large numbers of retailers, identifying a high percentage of fraud because we are going specifically to those retailers, as Mr. Viadero pointed out, where we suspect, based on their redemption activity, they are more likely to be committing fraud. We have been successful in permanently disqualifying large numbers of retailers, including those who were still redeeming coupons as opposed to EBT.
    In 1995, our disqualification actions against stores totaled 1,109. That was 410 nonpermanent disqualifications and 699 permanent disqualifications.
    In fiscal year 1997, the number of nonpermanent disqualifications had increased to 628 and the number of permanent disqualifications, and that is primarily for trafficking fraud, had gone up to 933, for a total of 1,561 disqualification actions against retailers in 1997.
    As an example, one of our sweeps was conducted from October through November in the city of Philadelphia, just this past year. We had a 60 percent positive rate. We went in and investigated 152 suspect retailers, and this is retailers still using coupons. Program violations occured in 55 percent of those stores. We found 75 stores guilty of trafficking. This was a 3-week effort, spread out over a month where we pooled our resources and had a large number of investigators going into those stores, doing undercover buys with coupons. So we think that these kinds of sweeps will continue, both in EBT and non-EBT locations.
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    Mr. GOODLATTE. Thank you. My time has expired. We will come back for another round of questions.
    Mrs. Clayton.
    Mrs. CLAYTON. Thank you. First, I think it should be noted that apparently great progress is being made and, as the chairman said, that the error rate is being detected and is going down in certain areas, and obviously the effort to weed out fraud has certainly been fruitful in the sense of having the statute there and your implementation of it. There is much still to be done.
    But I want first to commend all of you who are involved in that, for the very reason that the food stamps should go to those people legally eligible for it, and there is so much of a need out there. It is, indeed, criminal to take it away and use it for—by people who are not eligible when there is such a great need for people to be fed who are hungry. So when you get people on fraud and abuse, you are really creating resources for people who need it and you are also punishing, hopefully, the people who are guilty of that.
    Let me just understand the process, having said you have been successful. I gather that the Inspector General's office has been instrumental in investigating and identifying and, therefore, reporting to the appropriate authorities, either for criminal procedures or for civil restitution procedures. Would I be correct in that?
    Mr. VIADERO. Yes, ma'am.
    Mrs. CLAYTON. And you provide your information both to the Federal Government and to the State Government in the criminal courts, is that how that works? Or are you obligated only to give it to the U.S. Department of Justice?
    Mr. VIADERO. Our order of priority is first present the case to the individual U.S. Attorney in a district wherein the violation occurred. If it doesn't meet the prosecutive minimum, for lack of a better term, in other words they have certain standards where you have to make a base level amount, which brings up Mr. Goodlatte's question in the opening statement about what happened in the District here in the Washington Post editorial, if it is declined at the Federal level, 43 States also have specific food stamp violations on their State criminal procedure code.
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     We then turn to the State, and the States will bring it up, which brings up what happened here in the District. The District, of course, is one of those States, if you will, that does not have a separate statute on the book for food stamp trafficking, since it is always under the Federal code and it is the Federal District.
    The general prosecutive guideline or minimum is $10,000 to have a case prosecuted here in the District. So if you took——
    Mrs. CLAYTON. Is that concurrent with the Federal guidelines? I thought they were 20.
    Mr. VIADERO. Well, each district, and I am sure counsel at the end of the table, he has a different prosecutive minimum for his district. That goes across the board, district-by-district, across this great country. This brings up a problem because we could get an individual, let's say, with $7,000 worth of stamps on him and it is not going to be prosecuted because of the de minimis amount, and we don't have any alternative. We don't have a State agency to turn to.
    Mrs. CLAYTON. Well, I guess I was trying to understand the procedure. In your judgment, there is nothing wrong with the procedure. There may be a difference in the standards under which Federal prosecutors can take a case, but you have been successful in either having the Federal prosecutors or the State in at least 43 States pursuing both the civil restitution of the funds required or the criminal prosecution of it?
    Mr. VIADERO. Yes, ma'am.
    Mrs. CLAYTON. So when we say there has not been an aggressive criminal prosecution, where would you suggest we could improve it, knowing we still have work to be done? Is it the minimum amount which the Federal Government can—is it a threshold? Is it capacity in those agencies? Apparently there is no problem in the procedure, in the willingness to accept a case. So where would you say that there is some resistance or some barriers to having full prosecution of these cases?
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    Mr. VIADERO. I think, again, Mrs. Clayton, if we look at it on a district-by-district basis, and the types of cases that are being prosecuted in those districts—for instance, I visited both with the U.S. Attorney and the district attorney in Dade County, FL for the Southern District of Florida and for Dade County.
    What we found there was, the Federal prosecution there is so backed up, if you will, with major drug cartels, food stamps are looked upon sort of as just food stamps. That is a secondary currency.
    Mrs. CLAYTON. That was my point.
    Mr. VIADERO. However, at the State level they prosecute every case for us, although we end up generally with civil remedies or a suspended sentence because the Dade County jails, and the Florida county jails in general, are over flowed with, if you will, with capital offenses. Food stamps just don't rank with a capital offense, but we do get them prosecuted one way or the other down there.
    Mrs. CLAYTON. I guess I was trying to get you to that point. We are in a whole judicial process that says the severity of the crime, and since the crime is up and the variety of crime, whether we like it or not, this is low on the totem pole. So in some instances you must stand behind those who commit murder and those who commit rape, those who commit other egregious crimes against body and person as they also steal from those in the government.
    So I think part of the question, I think, is recognizing there is a capacity question and a priority question, as we go along. Not that I think that this is not important, but I did not want the conclusion to be that no one was actually aggressively pursuing this; that they were doing it, given the priority they have for all the other crimes.
    Having said that, I also see my time is almost over. I have competing committees occurring, so I may not be able to pursue this very long because I have a Budget Committee hearing that I am already late to. But, Mr. Chairman, the bell just rang. What does that mean?
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    Mr. GOODLATTE. We are checking.
    Mrs. CLAYTON. I guess I ought to honor the light, but I do have some questions in another round for Ms. Jackson.
    Mr. GOODLATTE. Thank you, Mrs. Clayton.
    The gentleman from South Dakota, Mr. Thune.
    Mr. THUNE. Thank you, Mr. Chairman. Our particular State of South Dakota, we have a remarkably, I think, good record, relatively speaking at least, with this program, and I think that is a tribute to the hard work of our food stamp staff and probably says a lot, too, about the honesty of South Dakota's food stamp recipients.
    However, I might add that I think all of us want to see this program work better, and when you read some of the stories like we have seen in the past, the December story in the Washington Post, those are things that we would like to see obviously improved upon and make sure that this program works like it is supposed to. And I think it goes back, again, to the welfare reform laws as they were changed a couple of years ago, and I think that was something that was a very positive development for a lot of these programs.
    But at the same time, as was mentioned earlier by Mrs. Clayton, we want to make sure the people who are supposed to get the benefit of these programs do, and it is not being abused and trafficked in.
    One of the things that I am encouraged by is what you are sharing in terms of stepped up enforcement and also the fact that we are moving more and more towards the EBT system. It seems to me that will hopefully, as it is implemented on a broader basis, address a lot of these issues.
    Just a couple of questions. Mr. Viadero, you said that with respect to the whole trafficking issue, reducing the number of authorized retailers would help limit the focus of your investigations and reduce both the incidents of fraud and waste and also the costs. Would charging a license fee, as has been proposed, have a major impact, in your view, on the number of stores that are participating in the program today?
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    Mr. VIADERO. Yes, sir. We feel that way. We feel that when somebody sees the sticker on a door that says authorized food stamp or food benefit retailer, that should mean something. That should mean that that retailer has demonstrated his trustworthiness, his proficiency and his ability to do business with this program.
    That is why, in addition to that, to get to that point, we recommended that a surety bond, for lack of a better term, such as we have in other USDA programs, is posted. And, again, which brings us back to this tax return, that we get certain information from the individual vendor.
    Again, we don't—this is a real case, by the way. I did this myself. We just changed the name on the tax return. This is an ongoing investigation. We just said to this person, where is your tax return? He gave us a tax return. Fortunately, we just wanted the schedule C. We didn't want the whole return, but he was more than nice and gave us the whole return.
    If you go back to the third page, which is the schedule C, that is all we are looking for, we want to see what the individual reported as gross sales. This individual reported some approximately $320,000. Interesting, because for a similar period we noticed that this individual is claiming about 35 percent greater food stamps redeemed than gross sales. That is pretty good business if you can get it. So, again, this is an EBT issue but this is how we discovered the guy.
    The chutzpah that some of these people have, if you will, he ended up with a net profit of some $14,800. If you follow it on the second page, he even got an earned income tax credit of $3,267; never paid a dime in income tax to the Government, yet received a $1,200 tax refund based upon his earned income tax. I think that takes a great deal of chutzpah. Life is good, I guess.
    Actually, I am eligible to retire in 3 months. I am tempted just to go and open a store myself.
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    Mr. THUNE. Hopefully, we will make the necessary changes so that that won't be an option.
    Right now, and I don't—in terms of reauthorizing, is there—does a retailer ever have to apply for an FCS authorized status? Is that something that currently—I mean, I understand that you can revoke the authorization when you choose to. Is there any periodic time in which they have to go through the process again of doing that?
    Ms. JACKSON. One of the changes that was made in welfare reform was giving USDA the authority to set limited authorization periods for certain types of stores. We are going right now through the regulatory process. We hope to have proposed regulations out for review shortly.
    In the past, an authorization was rather open-ended. We do conduct periodic reauthorization reviews, but there is no set time limit for how long a store is actually authorized.
    So one of the authorities that we now have is the ability for certain types of stores, and it would be those stores that are—we would consider more likely to be high risk, stores that are not large supermarkets, for example, or publicly owned, to set time limited authorizations which would require them to be reauthorized in order for them to continue.
    The other thing that we are doing, as I indicated in my testimony, is that we are using contracted staff, because of our own limited resources, to conduct both pre- and post-authorization store visits, so that we will increase our capacity to actually have people go out into a store, look at the nature of the business, compare the stock that they have with what they have described to us on an application form, and basically provide us with enough information to determine whether or not the store should either be authorized or should be allowed to continue in the program.
    Contracted staff was something else that the committee supported giving us the additional resources so that we could ensure that these are legitimate stores participating in the program.
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    Mr. THUNE. One of the problems—and back to Mr. Viadero on this, and I would urge you to continue to step up your efforts on it—we have a unique situation, not unique to South Dakota but in some respects, because of jurisdictional issues, the reservations, I think you, as I understand, have one OIG rep in South Dakota. And our State, obviously, is unable to do the sort of enforcement that is necessary there, and that is something that I think in our previous hearings that we have had on this subject, we have addressed.
    But let me ask just one last question: In rural areas where you have got smaller supermarkets or what have you, are there ways in which the EBT system—I mean, are there efforts, attempts being made to see that small communities, small stores, that sort of thing, are able to implement that technology?
    Mr. VIADERO. Yes, sir. I think as the States—I am speaking for both of us.
    Mr. THUNE. Well, that might be Ms. Jackson. I am sorry.
    Mr. VIADERO. I think as we see the States come on-line, it covers all of the communities. It is also—you might be interested to note that both North and South Dakota are two of those seven States that do not have food stamp specific statutes on their books and records.
    Again, where we find the bulk of the issues, needless to say, are in the more urban areas where there is a greater amount of population. EBT, although we still—we realize, we are very cognizant that 75 percent of the benefit goes out in coupons, we see, until 2002, and with the legislation that you folks passed, it is mandated that these benefits be out there on EBT nationwide by 2002, and we just think it is the smart way to go.
    And I will tell you one thing, if we let EBT get away from us for as much really as a week, we are going to be behind the curve. We have—we had some other pictures I would be happy to share with you afterward, for instance, in the——
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    Mr. GOODLATTE. Let me interrupt here, because we do have a vote and we are down to about 6 or 7 minutes. We are going to stand in recess. We have at least two votes and then we will come back and start with the gentleman from South Dakota, if he wants to followup on that question. If not, we will start with the gentleman from Arkansas. Thank you all.
    Mr. VIADERO. Thank you.
    Mr. GOODLATTE. The subcommittee stands in recess.
    [Recess.]
    Mr. GOODLATTE. The subcommittee will reconvene. When we recessed, Mr. Thune had a question in midsentence, and Mr. Viadero, I apologize for cutting you off in midsentence, but go ahead and finish that thought, if you care to.
    Mr. VIADERO. Yes, sir. It is interesting to note, as Mr. Thune asked me about user fees or getting a permit, so to speak, to operate an authorized food stamp store, we would also like to recommend those fees, if accepted and legislatively passed, be passed on in support of FNS's ability to go out and contract more people to check the stores, so just make it a user fee and pass it right on.
    This way, we will ensure that at least a store exists. And again, based upon our 1995 sweep, we found vacant lots that were listed as stores. So if we take those fees and dedicate those fees to FNS's compliance section, whether through hiring permanent personnel or on a contract, we greatly support that.
    Mr. GOODLATTE. Very good. Well, one of the advantages of votes is that it kind of clears the decks, and I have got a few more questions so I am going to recognize myself.
    Mr. DeAtley, you testified that each U.S. Attorney has a fraud coordinator, a person or persons dedicated to pursuing fraud, including food stamp fraud. Does this mean that the competition for the attention of the time of the U.S. attorney is among various fraud cases and not among fraud and murder or other types of cases? Is that person dedicated to that effort, and is that in each office?
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    Mr. DEATLEY. ACE refers to Affirmative Civil Enforcement, so that would be a civil attorney dedicated to addressing—bringing lawsuits on behalf of the United States, affirmatively suing.
    In this case we would be bringing the actions against the various food stamp violators in a civil context using the civil fraud penalty.
    The U.S. Attorneys' offices, as this committee is well aware, have some extraordinary responsibilities and in dealing with those priorities, the U.S. Attorneys have to set priorities to try to address all of the various competing interests. We have extraordinary crime problems that are facing this Nation, not the least of which in the Southern District of Texas, which is part of the Southwest Border Initiative, our primary focus, as it should be and must be, is on drugs and immigration.
    We are also fully engaged in the health care fraud area and numerous other fraud areas. But each of these involves the U.S. Attorneys' best judgment as to how to address these priorities. In the Southern District of Texas we are committed to supporting the fraud effort, as evidenced by the number of prosecutions and civil enforcement efforts we have made in, for instance, the food stamp fraud area. But the reality is that we deal with some extraordinary challenges in that district.
    Each district, has its own set of unique geography issues, population issues. In the Southern District of Texas, we are no doubt one of the fastest growing population based districts in the Nation. We have got three of the top 10 cities in the Nation in terms of population growth on the border itself. Despite the immigration and drug challenges in McAllen, TX, and the McAllen Division of the Southern District of Texas, we have brought eight felony prosecutions in food stamp fraud within the last year.
    I think that the determination on the prosecution effort is multifold. It is a matter of investigative resources in some of the districts. It is a matter of the unique priorities, the crime issues facing that district, such as drugs in southern Florida or drugs on the Southwest border. And it is a reality of just what the judiciary response will be.
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    Clearly, to some extent, the gravity of a crime is judged by the consequences of the crime. Clearly, where the Congress has spoken in a drug context, where a penalty of a mandatory minimum of 10 years in prison is mandatorily going to be imposed if a defendant is guilty, to me that is a statement that the Congress views it as an extraordinarily serious offense which must be aggressively prosecuted.
    In the food stamp context, looking at the sentencing guideline calculation, in large part it is a dollar-based issue in determining the ultimate sentencing result, and most of the—and I believe the Inspector General would confirm this. Most of the undercover effort in developing a criminal prosecution is typically involving a very few undercover sales. It establishes the knowing violation and the circumstances surrounding that purchase/sale of the food stamps.
    Again, though, typically the dollar value involved in those multiple transactions is going to be relatively small. So the investigative effort has to be significant to go back, pull those investigative records, pull the computer printouts of those transactions in the store and attempt to establish this continuing series of illegal transactions. It is a very difficult thing to do. So that is why typically many of your criminal prosecutions are limited to a few transactions involving the undercover prosecution.
    Again, the dollar value is going to be relatively limited. That is why it works so well, combining in partnership with the State and local law enforcement efforts. Some of those prosecutions are being done by the State and they are getting a very desirable result, and we use that as a collateral estoppel basis to then pursue the civil enforcement effort using the civil fraud penalties. And they are collaterally estopped from contesting the illegal nature of their conduct.
    Mr. GOODLATTE. Very good.
    Mr. Viadero, can you tell us how much of the food stamp fund that is spent incorrectly, as a result of waste, fraud and abuse, is actually repaid to the U.S. Treasury?
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    Mr. VIADERO. A de minimis amount at best, Mr. Chairman. I would like to bring up, as discussed yesterday before Chairman Skeen in his committee, the entire Agriculture Committee has supported this office's effort to get asset forfeiture and petitions for remission and mitigation, and that legislation passed on October 21, 1995.
    To date, we are still negotiating with Justice as to where the money is. We have put in more than $11 million worth of assets seized and we have approximately 30 petitions for remission and mitigation outstanding, which brings up a separate issue, such as, under petition for remission and mitigation, the money as legislated would come back to the Department of Agriculture, the Office of Inspector General would recoup its investigative costs and then the money would be passed on to the program. This is another way of saving benefits or recapturing benefits that were spent or disbursed illegally and bringing them back and putting them where they belong, to the people that deserve them: those children, primarily, and the senior members of our society.
    So we would like to urge that the Department of Justice agree and just come up and say, OK, that is the law and we are going to follow it with you all and it will proceed that way.
    But we have absolutely—we take no exception with the U.S. Attorney's point of view, so far as cooperation between us. We understand that. We support that position. We go to the State and locals when we can. And, again, depending—in his district, he is impacted, we happen to know, by drugs and immigration. That is the priority issue. And, again, food stamps aren't—it is tough to take a personal crime and compare it to a property crime, and we have personal crimes in that case.
    But I tell you what, if we—compared to where we were, and I am in this job now 3 1/2 years, if I compare where I was 3 1/2 years ago with our ability to work with FNS, we brought forth in our initiative package, we had a memo jointly signed by myself and Under Secretary, Shirley Watkins of the Food and Nutrition Service, that basically said we have a problem in our area and we want you all to come in and look at it and we support it. And that memo went forth to the Secretary, who sent it up to the White House and the President declared it a presidential initiative.
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    The basic issue, for us, we will get back to, we lost 135 people out of the Office of Inspector General over the last two budget cycles, and that is fundamentally what that extra appropriation or the increase in the budget that we submitted yesterday was for. We have to replace those folks. I think we are putting forth the dollar-for-dollar return. This Operation Talon has demonstrated that we have gotten 2,235 really bad guys off the street. I am very proud of the work that we did, especially getting 10 child molesters off the street.
    As a result of that operation, we have one individual that is a serial killer and we just apprehended him a few weeks ago as part of Talon, and he is going to be shipped out to another State because he is wanted in the other State for several more homicides, including the homicide of a police officer. And that is the kind of benefit we get out of this Operation Talon.
    What we were able to do, and again I can't commend anybody any higher than you folks up here for passing that welfare reform, because prior to that the States were estopped, they were prevented from sharing information with us. So what we found was the fugitives out there, they weren't giving their legitimate name and address and birth date to the people that were prosecuting them. Boy, go figure.
    However, they were giving it to the people with the money. And as a result of that, we ran sting operations. We sent letters out inviting them in and basically said, ''We at USDA cheated you. You are owed more benefits.'' At one site in Chicago we got 117 fugitives that came forward and said, ''I need my benefits. You cheated me. I want them.'' They showed up at the door. They responded.
    Now, what we did do with the very serious offenders, we had an enhanced 911, so to speak, on a caller ID, which even gave us the apartment number, et cetera, et cetera. On the real heavy people, the very substantial violators, we kept them on the phone the best we could, and members of the Cook County Sheriff's office, Chicago PD, and my agents went out and picked these folks up at the time.
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    Mr. GOODLATTE. Are these stings going to continue?
    Mr. VIADERO. With funding, they will.
    Mr. GOODLATTE. I tell you what, this leads me to my next question, which is: What is the administration's budget request for FY 1999?
    Mr. VIADERO. The administration's budget request for this office is $88 million.
    Mr. GOODLATTE. How does that compare to the previous year?
    Mr. VIADERO. That is up $25 million. The administration put forth an initiative to support Office of Inspector General in dealing with specific areas: this Operation Talon, a continuation of that, the work in the Child and Adult Care Feeding Program; work in the section 515 Rural Rental Housing Program; and our ability to respond immediately and without hesitation to health and safety issues, such as we did this time last year in San Diego, with our strawberries, we had 190 school kids with hepatitis; and, again, the Hudson Meat, where we had about 16 people out there on the recall.
    Mr. GOODLATTE. Let me ask you about the 2,000-plus fugitives that were arrested in Talon.
    Mr. VIADERO. Yes, sir.
    Mr. GOODLATTE. Can you give us a status report on how many of them have been prosecuted?
    Mr. VIADERO. Well, a lot of them are still in the intake stage. Approximately 600 of them have been prosecuted. Understand, these people were already wanted so there were charges already pending. They had been arraigned. The issue here was, all the warrants were signed off by a superior or a State Supreme Court Justice for their apprehension.
    The stats that we brought forward, Mr. Chairman, are on page 5 of our report, and the 24 locations are on page 4, with the results.
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    Mr. GOODLATTE. Let me ask you, how many of them have been prosecuted for food stamp fraud?
    Mr. VIADERO. Not many, because they weren't all arrested on food stamp fraud. The food stamp fraud issue, with the legislation that passed, it is illegal for a prison inmate or a fugitive to receive food stamps.
    Mr. GOODLATTE. All right. That was in the legislation.
    Mr. VIADERO. Right. That was passed in welfare reform. Also in welfare reform, it gave us for the first time a really great investigative tool. We were able to take from the individual county records the fugitives, the outstanding fugitive felons—and again, we only looked at felons. As an example, in New York City, we are very happy to report, because of computer matching we got 64 that were also on food stamps or related rolls.
    Mr. GOODLATTE. Let me ask you this: Vice President Gore put out a press release in December that indicated that more than 2,000 fugitive felons, quote, most of whom were illegally receiving food stamps, end quote, have been arrested through a nationwide sting operation. Is that an inaccurate statement on the part of this release?
    Mr. VIADERO. No, I don't think so. Let me explain how we developed this. We got the outstanding warrants and we compared them against the food stamp rolls. The information that was supplied, again, that was just at the end of the sweep, and that was back in December.
    We have later discovered that most of these people, yes, were receiving food stamps or had recently been on food stamps, but due again to welfare reform and the period that people can remain on food stamps, had just come off the benefit and the State hadn't caught up to that.
    I don't know the statistical data, Mr. Chairman, I will be happy to get back with you on.
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    Mr. GOODLATTE. OK.
    [The Department responded for the record:]
    As of this date, about 80 percent of the 2,235 fugitives arrested were either active or former food stamp recipients.
    Mr. VIADERO. The big point is, without the ability that you folks passed up here for us to compare the criminal record against the recipient record, these 2,200 people would still be on the street.
    Mr. GOODLATTE. Very good. My time has expired. We will recognize the gentlewoman from North Carolina again.
    Mrs. CLAYTON. Just to pursue the announcement about the relationship of the food stamp fraud limitation and other crimes, my interpretation of this is, because of the legislation you were able to apparently apprehend these people who were also wanted for these other offenses, whether a murder or other things, because you had now the ability to do the sweep. Is that what I am understanding?
    Mr. VIADERO. No, ma'am. We had the ability to compare the criminal record, the warrants, the outstanding warrants, against the food stamp recipient rolls, because, again, what we found out, that the bad guys didn't give the law enforcement entity their correct address but they more than have a tendency to give their correct address and information to the people that are handing out the dollars. Therefore, we did a six-way match, and we went out and we located these people and apprehended them in conjunction with State and local authorities.
    Mrs. CLAYTON. Well, on your—I guess it is your testimony. It says on January 13, 1998, Operation Talon resulted in 2,235 arrests of fugitive felons. And I am just wondering, it seems like you used that information and authority to arrest these people who were guilty of other felonies. Am I misinterpreting, sir? Am I missing something?
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    Mr. VIADERO. They had been outstanding. The predicate for us was that these people were fugitive felons, and that is all we did, was compare between the local outstanding warrants against the food stamp recipients.
    Mrs. CLAYTON. Would you say it was incidental, the authority that you got in the welfare reform, or this legislation prohibited felons from having food stamps was the cause of the arrests? Is it purely coincidence or was it this was a part of the initiative that caused us to be rid of all of these felons?
    Mr. VIADERO. I have to say it was part of the initiative to get rid of them.
    Mrs. CLAYTON. It was part of the initiative?
    Mr. VIADERO. Yes, ma'am.
    Mrs. CLAYTON. I thought that was what was meant, and so I just wanted the record to suggest that.
    Ms. Jackson, as I said earlier, part of the reason we want to make sure that we apprehend and punish and collect money is because we want to make sure those monies, indeed, are available to people who are eligible because there is a great need out there. In your testimony, you mention that thanks to the Federal tax return offset program, recipients' repayments have greatly increased in recent years, and you give what the State has, and other areas, $186 million in receipt claims.
    Now, what happens to that? Is that money now available for the program-eligible recipients in the States? How do we use that $186 million?
    Ms. JACKSON. Well, the money comes back to the general treasury for the United States——
    Mrs. CLAYTON. Does it come back in food stamps?
    Ms. JACKSON. It does not specifically come back to the Food Stamp Program, no.
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    Mrs. CLAYTON. So the food stamp is losing access to those resources although the Federal Government is recouping the money.
    Ms. JACKSON. That is true. One of the other things that we are able to do, in addition to increasing the amount of money coming back to the taxpayer in general—that is the way we are looking at it, the money is coming back to taxpayers—is that as we are successful, we are not only going after recipient claims, we are also increasing the number of people who are being disqualified from participating in the program. And disqualification also results in a direct savings to actual food stamp outlays, because once recipients are disqualified, we not only establish claims against them but we basically prevent them from continuing to participate in the program. And that means that we are not continuing to lose funds out of the Food Stamp Program and the funds can be better targeted to those in need.
    Mrs. CLAYTON. I think that is a significant point. You have now identified these fraudulent participants, and they are now prohibited from participating, and therefore saving dollars in the Food Stamp Program for those who are eligible.
    Ms. JACKSON. That is correct.
    Mrs. CLAYTON. But I can't be somewhat distressed when I see your success, and I think it is indeed commendable, and it should indeed be for the taxpayers, if we get those monies back.
    But, again, when we are continually budgeting for Food Stamps, to be denied the opportunity to claim those dollars back seems a missed opportunity to make sure we have sufficient resources to provide food stamp services for people who are eligible, because we always have a budget crunch. The reality is, we always have a budget crunch.
    So if we recoup the money for the general treasury, it would seem we ought to have those resources, at least earmarked for food stamps, or for nutrition, that would reduce this program having to get more monies.
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    It just seems like in the Medicaid, for instance. There is a fraud and abuse provision in Medicaid, and that has had some precedence, in fact, in the tobacco settlements that are now being discussed. In all the States who won millions of dollars, part of the legal remedy in that is to reimburse Medicaid and at least the Federal part of that medical Medicaid reimbursement is reclaimed for the purpose of health or Medicaid, and those States are generally making that claim, that the monies we got at least ought to be involved in that sort of thing.
    I know that is the discussion going on in Mississippi and other parts. Rather, we can take the dollars and put them to roads or do other things, and the States are making the claims that we have spent so much money on Medicaid and, because of this, we ought to be able to at least recoup this in the State part as well as the Federal. But here, I understand, with food stamps, that is not the case.
    Ms. JACKSON. Well, there were some provisions, Congresswoman Clayton, in welfare reform that were intended to try to pump more resources back into the program, I think the Inspector General can speak more directly to this.
    Mr. VIADERO. This is the time to reiterate what we stated before on a petition for mitigation, that the funds, when we filed them, we filed those petitions as the injured party, the Department of Agriculture, the processing order would be any of the funds.
    Once the petitions are processed, the money comes back to the Department of Agriculture, the Office of Inspector General recovers its investigative costs, that helps, basically, get funds to continue that operation, and any remaining monies are given to Food and Nutrition Services for that particular program.
    Mrs. CLAYTON. How much money have you collected?
    Mr. VIADERO. Approximately $40,000 from petitions. And that law has been on the books since October 21, 1995, and we continue—we don't understand what the tie-up is, but I understand the Judiciary Committee is looking at the problem between Justice and Agriculture in signing the proper paperwork to get the monies.
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    Mrs. CLAYTON. Well, this committee ought to go on record as trying to help the Justice Department see the validity of following the law.
    Mr. VIADERO. I had conversations this week with the deputy attorney general, and he gives me his personal assurance that he was going to look into it. We received one petition, and that petition was approximately $40,000. Let's say it is $100,000, to be exact, we got 40 percent of 60, and under petitions, we are supposed to get 100 percent, which, needless to say, would help, if somebody else got 60.
    Mrs. CLAYTON. Let me conclude my questioning by asking, would that law help identify any of the $186 million that has been an overpayment here, the monies that Ms. Jackson has said, the money that was provided by the States themselves, would any of that be reclaimed on that statute?
    Mr. VIADERO. No, ma'am, because the bulk of that money comes from recipients.
    Mrs. CLAYTON. I beg your pardon?
    Mr. VIADERO. That is recipient money, not store money.
    Mrs. CLAYTON. Yours is only limited to the retailers.
    Mr. VIADERO. Yes, ma'am, that is all we do, because of the number of recipients, we refer the recipients to FNS and the individual State Department or human resources or social services.
    Mrs. CLAYTON. I guess I am begging the question to the wrong group, but how is it Medicaid payments are allowed to go back designated to them and not food stamps? Is there a distinction I am missing? They are all benefits designated for specific purposes.
    Ms. JACKSON. In the claims process, States actually do get to keep a certain portion of the monies they collect. Of the $186 million that I referenced that were collected, States actually got to keep, themselves, $41 million.
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    There is a retention rate for States in their claims collection activity that they get to keep 20 percent of most claims that they collect, or 35 percent if it is related to fraud. So States are able to retain a certain portion of their collections. Very often it goes back into the State general funds, but some States do reinvest the money to support their antifraud and their claims collections activities; it is not universally so. It is really up to the State as to how those monies are utilized.
    Mrs. CLAYTON. Twenty percent of it, theoretically, the States have a right to maintain.
    Ms. JACKSON. Either 20 percent or 35 percent if it is related to fraud.
    Mrs. CLAYTON. And I gather this was—well, no.
    Ms. JACKSON. Some was. States got to keep about $41 million of the $186 million. Again, some of it went simply into their general funds, or some of the States actually do reinvested by the States to support antifraud and claims collections activities.
    Mrs. CLAYTON. I see. But the remainder of it goes to the general do I understand that correctly? It is not designated for food stamps.
    Ms. JACKSON. That is correct.
    Mrs. CLAYTON. Is there anything, in your judgment, that would prohibit the Federal Government now from making that available from the budget cycle to Food Stamp Program or the Food and Nutrition Service?
    Ms. JACKSON. I think we are governed by the general Federal Debt Collection Act.
    Mrs. CLAYTON. And the Federal Debt Collection Act means from any agency, goes into general fund.
    Ms. JACKSON. Goes into treasury.
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    Mrs. CLAYTON. It goes into a reserve to be available for general appropriation, for any agency, come the next time.
    Ms. JACKSON. That is correct.
    Mrs. CLAYTON. Thank you, Mr. Chairman.
    Mr. GOODLATTE. I have a few more questions.
    First let me say, Mr. Viadero, we will write to the Justice Department and ask them what is holding up their issuance of regulations to deal with the civil asset forfeiture of changes that were made over 2 years ago and what is holding up your ability to get your share of those funds, because we would like to see you have that.
    Mr. VIADERO. Thank you, Mr. Chairman. That is also a criminal asset forfeiture as well. This committee granted us both.
    Mr. GOODLATTE. Ms. Jackson, how do you know whether the appropriate level of oversight is applied to the Food Stamp Program?
    Ms. JACKSON. In terms of Federal oversight, are you referring to retailer oversight?
    Mr. GOODLATTE. Are the States doing their jobs?
    Ms. JACKSON. States are responsible for the eligibility process, in terms of determining eligibility for food stamps and benefit issuance. Overall, I would say yes, they are doing a good job.
    We have been concentrating over the last few years very heavily on working with States to reduce payment errors and, as I indicated in my testimony, we have been very successful over the last 3 years in getting the overpayment rate and the underpayment rate down, resulting in a savings to the Federal Government of $660 million over the losses that were occurring before.
    We expect that trend to continue, although I will be honest that we do know that States right now are struggling with the implementation of welfare reform. We have been told by States they think that might have some temporary impact on their error rates, but overall we are satisfied that States are paying far more attention to payment accuracy, and our efforts over the last 4 years are definitely paying off.
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    Mr. GOODLATTE. But it varies widely among the States, doesn't it?
    Ms. JACKSON. It varies widely among the States.
    Mr. GOODLATTE. Let me ask you about one particular case, a State that has been, in effect, attempting to erode some of the food stamp reforms we put in place 2 years ago. That is the State of New York, where 9.3 percent of all food stamp cases in the country exist.
    In 1997 they disqualified 3,467 persons for fraud activities, through either prosecutions or fraud hearings. Now Michigan, with 3.9 percent of all food stamp cases, considerably less than half the number that New York had, disqualified 11,881 persons, or more than three times as many people. That is probably a 7 to 1 disparity in the ratio of fraud cases relative to the percent of food stamps received. Can you explain that difference?
    Ms. JACKSON. All I can say is, clearly, as you pointed out, there is a tremendous difference from State to State and in the amount of resources and emphasis placed on recipient fraud.
    I will tell you that for those States that are county administered, I think there is an added challenge. New York, for example—we work very closely with the New York State agency; however, we also find that we also have to very often work closely with the county structures as well because it is a county-administered program in New York.
    But as you pointed out, there is a huge variation, and, as you indicated, some States are doing more than others. Some States need to do a lot more, and we are targeting our efforts and working with those States. Whether we are talking about those States that are above the national average, in terms of their error rates, or those States that are below the national average, in terms of their claims collections, we are working closely with those States to improve their performance.
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    Mr. GOODLATTE. I would also be interested in knowing if you feel that any of the States are—that the reason for this disparity is due to the fact that some of the States have a different policy attitude with regard to food stamp recipients and who should be receiving them, than other States.
    In other words, is it possible that a State that feels more people should be receiving food stamps who aren't covered under the changes in the law is being more lax in their enforcement of the crackdown on the waste, fraud, and abuse in the program?
    Ms. JACKSON. It has not been our experience that States have varying philosophies about who should be receiving benefits, or that this has anything to do with the error rates.
    What we generally find is that we need top-level attention, top-level commitment, at the State level and a willingness to hold everyone accountable. Where that happens, we see a dramatic improvement.
    We have been working a great deal with New York, for example, to improve their performance. On the issue of recipient fraud disqualifications, there actually has been a 34 percent increase in the number of recipients who were disqualified from 1996 to 1997. So, we do think we have New york's attention, and they are moving in the right direction.
    New York also happens to be a State that generally has fared fairly well when it comes to payment accuracy. They have not been subject to sanctions. They have been able to maintain acceptable error rates that have, for such a large State, made them one of the leading States in terms of keeping error rates relatively low. And, as I said, we are working closely with them to try to improve the top-level commitment to improve the overall management of the program, and we think that they indeed are doing just that.
    Mr. GOODLATTE. Thank you.
    Mr. Viadero, would you explain the results of the latest financial audit of the Food and Nutrition Service? I think it was a 1996 audit, and I understand the Office of Inspector General's conclusion was a qualified judgment, meaning improvements are necessary, especially in the area of uncollected overpayments to recipients.
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    Mr. VIADERO. I am going to ask Mr. Ebbitt to join me in this answer, but let me give you the thumbnail on it.
    The year before we issued a disclaimer of opinion for 1995, this was a great improvement over the disclaimer opinion, the qualified opinion, and so far as finding fault with who is at fault here, this is a shared responsibility, partly on the part of FNS but, more importantly, on the part of the individual States.
    FNS is sort of between a rock and a hard place, as far as what they can do, because of the States. This is really a State problem. It is passed on to FNS through the books and records.
    And, Mr. Ebbitt, if you would, please.
    Mr. EBBITT. Mr. Chairman, this gets right to the issue of the $186 million we were talking about a short while ago and how much of that is collected.
    In order to be able to collect a claim, of course, first of all, you have to understand you have one and you have to record it on your books and records, and FNS is dependent on States to take that action. So when they find an error that perhaps they have caused to happen, or a recipient who has incorrectly reported income that has been discovered, the State first has to set up the claim, and what we have found is that States don't—in some instances have not been as aggressive in doing that as they should, and, for that reason, we aren't sure exactly what the accounts receivable should be on the books and records at the Federal level.
    Again, FNS is dependent on States to do that, so what they are doing and what we are doing is pushing States harder to get these claims established and so they can report them correctly to Food and Nutrition Service.
    It is really critical because, as Ms. Jackson pointed out, the best way to collect the monies back is through the income tax offset process, through treasury offset, but if you don't have them established on your books and records, that is not going to happen.
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    Mr. GOODLATTE. Very good.
    Ms. Jackson, since we are discussing your office again, do you want to say anything about that?
    Ms. JACKSON. The only thing I would say is that as part of the budget process this year, we do plan on coming forward with a proposal to address recipient claims. We would like to shift the responsibility of the debt from the Federal Government to the State in a way that really puts the accountability and responsibility together at the State level. So you will be seeing a proposal coming from us later on this year to address the whole issue of recipient claims.
    Again, we want to make it a State debt rather than a Federal debt and put the responsibility at the level where we believe that activity should be. We want to do this in a way that does not cost the Federal Government any money but provides a better incentive for States, we believe, to more aggressively pursue recipient claims by making the debt their full responsibility.
    Mr. GOODLATTE. Thank you.
    Mr. DeAtley, how is it decided who will prosecute a food stamp waste, fraud, and abuse case as between the States and the Federal Government? Does the Federal Government have a dollar threshold? Does it give the States first choice? Is it on a case-by-case basis? How does that work?
    Mr. DEATLEY. Speaking for the Southern District of Texas, I can tell you, prosecutors work closely with the Office of Inspector General. They bring the cases to us, and we review them on a case-by-case basis, and if we have some aggravating facts to go with the various undercover sales, then we will seriously consider pursuing a Federal prosecution, even though the dollar amounts may not be so high that it will automatically merit the likelihood of a jail sentence.
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    As I discussed briefly before, the prosecutorial decisions will vary from district to district on what their available prosecutorial resources are and how well they can handle cases. But, again, speaking of my district, we have been fortunate in having a great relationship with various State prosecution authorities and my office, and I believe many times what we have found is that the State can very successfully bring a prosecution and get a very comparable result to the Federal prosecution, and then we will, in turn, pick up through our civil enforcement efforts on the civil fraud side and get a total result that is very beneficial and effective and consistent with the desires of the Office of the Inspector General.
    Mr. GOODLATTE. Thank you.
    Those are all the questions I have for this panel. I thank you all for your participation and contribution today, and I am pleased we are making some progress. And I think there is a lot more progress to be gained, but I definitely think it is a positive trend.
    Mr. DeAtley, some of the questions I will ask Mr. Tolia on the next panel were also reserved for you, so if you wish to remain or if you are able to, we might get more information from you.
    The rest of you, we thank you for your contribution today, and we will move on to the second panel.
    Mr. GOODLATTE. We are also joined today by Christo M. Tolia, director of the Division of Public Assistance Fraud, with the Auditor General's Office in the State of Florida.
    Mr. Tolia, we want to welcome you here today. We appreciate you coming to Washington, and you may proceed whenever you are ready.
STATEMENT OF CHRISTO M. TOLIA, DIRECTOR, DIVISION OF PUBLIC ASSISTANCE FRAUD, AUDITOR GENERAL'S OFFICE, STATE OF FLORIDA
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    Mr. TOLIA. Mr. Chairman, members of the committee, thank you for the opportunity to address this subcommittee.
    As president of the United Council on Welfare Fraud and director of the Division of Public Assistance Fraud in the State of Florida, Auditor General's Office, I have been asked to direct my comments to food stamp recipient fraud and the enforcement of antifraud provisions of the Food Stamp Act.
    Food stamp recipient fraud primarily occurs in two separate areas. The first area involves the eligibility and determination process. As in all public assistance programs, an applicant for food stamp benefits must meet a series of eligibility factors. These factors include income, assets, resources, citizenship status, or household composition factors.
    Most food stamp recipient fraud involves the failure to report income, whether earned or non earned, and issues dealing with household composition. Household composition cases primarily involve the inclusion of members in a household who, in fact, do not reside in the household or failing to declare the presence of an income-receiving member in the household. This type of fraud requires that the recipient failed to disclose a material fact that would be used to determine their eligibility during the application process or failed to report a change in their circumstances within 10 days after its occurrence, if between the eligibility review processes.
    The second area of food stamp fraud involves the sale of food stamp benefits for cash or the use of food stamp benefits for nonfood items. As you know, food stamp benefits are intended for use as a means of purchasing staple food items. In reality, food stamp coupons have been used to purchase liquor and cigarettes, pay house and rental payments, purchase drugs, and used in a variety of other unintended ways.
    Visibility of this type of activity has been limited in the past because food stamp coupons could not be tracked in most instances. However, with the advent of the Electronic Benefit Transfer Program, the usage of food stamp benefits by recipients is primarily restricted to an authorized food stamp redeemer. Additionally, the EBT system provides visibility as to how and where food stamp benefits were used by the recipient.
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    As EBT is implemented nationwide, the number of recipient fraud cases involving the misuse of food stamp benefits will increase dramatically. This area is becoming an issue for the States since trafficking in food stamp benefits by recipients does not incur an overpayment of benefits and therefore food stamp retention rates do not apply. I will discuss the issue of retention rates later in my presentation.
    In Florida's fiscal year 1996–97, 18,716 food stamp recipient cases were reviewed by the Division of Public Assistance Fraud, resulting in 4,038 cases being referred for prosecution or an administrative disqualification hearing. These cases represent food stamp overissuances of $4,268,726.
    An additional 1,510 food stamp recipient cases were reviewed by the Division as part of fraud prevention efforts, resulting in program savings of $2,752,403.
    All prosecutions in the State of Florida for recipient fraud are prosecuted under State statues. It is my understanding that in most jurisdictions around the country prosecutions for recipient fraud are handled by the local authorities. Federal thresholds for prosecution are far in excess of most recipient fraud cases. One exception to this is the prosecution of Native American Indians on reservations.
    The Division is also involved with computer matching Florida's public assistance rolls, including the Food Stamp Program and the public assistance rolls of other States, to ascertain the incidence of duplicate receipt of benefits simultaneously in both States. On a recurring basis, matches are done with the States of New York, Pennsylvania, and Massachusetts, and on a nonrecurring basis with the other seven southeastern States.
    Additionally, monthly matches are made between Florida's public assistance rolls and the inmate population of the Florida Department of Corrections and local detention facilities. Information on approximately 165,000 inmates in Florida detention facilities is provided monthly to the Social Security Administration and Florida's Social Service Agency, the Department of Children and Families.
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    Funding for fraud investigations and initiatives has become a nationwide issue. In most instances, funding is a combination of State or local money and Federal funds. To encourage recipient fraud investigative activities, the U.S. Department of Agriculture provides 50 percent matching funding. This funding provides most States or counties with the ability to maintain a fraud investigation presence.
    There are exceptions, however, to this process. Primarily these exceptions occur in county welfare departments, where funding is exclusively local, or a combination of local and State funds. In these instances, fraud investigation efforts are usually very limited.
    Prior to October 1, 1994, USDA provided enhanced funding to 75 percent. The loss of the enhanced funding caused a reduction in staff in many investigative units around the country. Fortunately, in Florida, the State legislature agreed to replace the lost 25 percent funding with general revenue funds and the fraud investigation efforts were not diminished.
    It is not in my written presentation, but I learned yesterday the proposed Federal budget for next fiscal year calls for a further reduction in this funding from 50 percent to 47 percent.
    Another area of funding that has an impact on the States is the retention rate established by USDA. The retention rate is the percentage of the collected food stamp overissuance a State may retain. Currently, these rates are set at 35 percent for an intentional program violation and 20 percent for an inadvertent household error. The remainder of the collected overissuance reverts back to USDA.
    As with the enhanced funding, retention rates have been reduced from previous levels. Previously, the retention rates were 50 percent for fraud cases and 25 percent for nonfraud cases. Since many States use this retention money as a funding source for the investigative effort, any reduction in funds has a negative impact on recipient food stamp fraud investigation.
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    Combined with the loss of enhanced funding, States have taken a double funding loss. Additionally, the process used to complete an inadvertent household error claim usually does not involve a full-scale investigation, as does a fraud or an intentional program violation claim. As such, administrators have been forced to decide whether the additional 15 percent obtained in an intentional program violation claim justifies the effort. At issue is providing the States a meaningful incentive to conduct full-scale fraud investigations versus the less time consuming nonfraud claim.
    As mentioned previously in an EBT environment, recipient trafficking in food stamp benefits does not create an overpayment; therefore, retention rates do not apply. As these type cases become more numerous, there is a disincentive for States to become involved in investigating recipient food stamp trafficking.
    These comments are a very brief summary of some of the issues involved in the investigation of food stamp recipient fraud, and I thank you again for the opportunity of addressing this subcommittee.
    [The prepared statement of Mr. Tolia appears at the conclusion of the hearing.]
    Mr. GOODLATTE. Thank you.
    You stated the Division is also involved with computer matching of Florida's public assistance rolls, including the Food Stamp Program and the public assistance rolls of other States, to ascertain the incidence of duplicate receipt of benefits simultaneously in a partnering State. Could you tell us more about that?
    Mr. TOLIA. About 2 years ago, we matched with the State of New York to see how many duplicate recipients we might have between the two States, and we found at the time we had 2,310 raw hits of people whose name, date of birth, and Social Security number matched in both States simultaneously. As we whittled this down and weeded out the errors, we actually had about 330 actual fraud cases of people in both the State of New York and in the State of Florida who were receiving duplicate benefits simultaneously.
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    Mr. GOODLATTE. Who were the other 2,000?
    Mr. TOLIA. They were mostly error type cases where they were kept on for a period of time—they were kept on the eligibility rolls although they were not actually receiving benefits, so they did match but they were not actually receiving duplicate benefits.
    Mr. GOODLATTE. How long has the State been doing that?
    Mr. TOLIA. We have been doing computer matching for a number of years. In matching with other States, this particular type of matching, we have done—with the other seven southeastern States, we have done approximately four times over the past 7 or 8 years, and we currently match with Pennsylvania, New York, and Massachusetts every quarter of every year.
    Mr. GOODLATTE. How do you pick those States? Are those particularly high incidents of coming up with matches, or are they just States that are willing to cooperate and the others are not?
    Mr. TOLIA. For the most part, it is those States that have the records computerized that we can match with. A lot of States are done on a county basis and they are not computerized Statewide to where you can do computer matching of any reliability factors.
    The States of New York and Pennsylvania and Massachusetts, primarily, are States that Florida seems to have migratory trends with, that people from the Northeast tend to come to Florida, so we specifically targeted those particular States.
    And, coincidentally, you would think the border States with Florida, like Georgia or Alabama, we would have more duplicate participation, but, in reality, we have more with New York and Pennsylvania than Georgia or Alabama.
    Mr. GOODLATTE. Do you have agreements with those States as well to do those computer matches?
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    Mr. TOLIA. We don't have agreements, per se, on a recurring basis. We do them with the concurrence of the Department of Agriculture every couple of years.
    Mr. GOODLATTE. When you find a common record, what do you do with it?
    Mr. TOLIA. Well, it is verified in both States at the same time to make sure both States' information is correct.
    As I said, there are numerous errors in the data entry of the information initially, so you can't really use the raw data that you get out initially, that it does have to be reviewed and further refined to make sure there actually was duplicate receipt.
    Once we find there has been duplicate receipt, we look at whatever State the individual is actually residing in, and that individual then would be eligible in that State and not eligible in the other State. So it depends upon which States involved is where the jurisdiction for the prosecution would be.
    Mr. GOODLATTE. Do you have any feel for how much this would save the taxpayers, this computer matching program?
    Mr. TOLIA. In the computer matching we did with New York, where we had 330 people that we actually prosecuted in Florida, we saved—the amount of money that was deemed for prosecution was in excess of $350,000. Also, those individuals were taken off the rolls, so there was a further reduction in benefits for the people not receiving assistance anymore in both States.
    New York approached it differently. Their main concern was getting people off the rolls who were ineligible, and the prosecution part was a secondary benefit for them.
    Mr. GOODLATTE. Is there no Federal administrative match for county or local government agencies investigating waste, fraud, and abuse, or does the State get a 50 percent match but doesn't funnel it down to the county or local level?
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    Mr. TOLIA. It is my understanding there is no Federal match done, it is left up to the States to do this, if the States have the means and the desire to do so. We have found that a lot of States do not feel that they have the resources to do this type of match.
    Even when we did the seven southeastern States with Florida, there were a couple of States that really only preliminarily were involved in the process simply because they didn't have the staff to process the amount of matches that came in. And those States, primarily, are the ones that have county welfare departments, as opposed to State systems.
    Mr. GOODLATTE. You stated, until 1994, USDA provided enhanced funding for fraud investigations, and when that funding dipped to a 50 percent match, the State of Florida's legislature agreed to replace the lost 25 percent funding with general revenue funds. As a result, investigations of food stamp fraud were not diminished.
    Do you have any figures that would help the committee realize the return on the tax dollar that the citizens of Florida enjoy from that? In other words, is it cost justified to do that?
    Mr. TOLIA. We certainly think so. This past Florida fiscal year, this Division combined dollars that we either sent for prosecution or administrative disqualification, or dollars that were associated with front end fraud prevention, accounted to about $15 million. And the budget for our Division is about $6 million, so there is a cost benefit for the citizens of the State of Florida of that amount of difference.
    Mr. GOODLATTE. Would you both comment on the kind of coordination that occurs between State and Federal officials for food stamp waste, fraud, and abuse investigations.
    Mr. DeAtley, if you want to take it first.
    Mr. DEATLEY. Well, again, speaking from my own personal experiences in the Southern District of Texas, when the State prosecutes cases to begin with, the Office of Inspector General is going to be involved, it is going to be their report that is probably the basis for any prosecution, and the moment the State successfully concludes the prosecution, they are going to be talking to the Affirmative Civil Enforcement Unit about additional follow-on alternatives the Federal Government can pursue, such as the civil fraud penalties, and attempt to pursue those civil remedies.
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    Additionally, when we are dealing with the storefront operations, typically the Department of Agriculture is going to pursue the disciplinary sanction of debarment. Occasionally these individuals will attempt to contest that debarment when that type of action is ensuing. Assuming the fact is justified, as part of our affirmative civil effort, we will, in turn, counterclaim and bring those civil fraud penalties. And I think that is one of the key interplays between the State and the Federal law enforcement effort. We can very effectively pursue the civil fraud portion and extract significant penalties.
    One of the problems we face in many of the cases, to be honest with you, is in many of these so-called small storefront operations, the individuals have no identifiable assets when push comes to shove, and we end up with having to settle with payouts that may involve multiple-year settlement types of things. But the store is basically put out of business unless we get into the fraud scenario again of nominee players stepping in to take over the store, in reality the same individual maintaining its operation.
    But, again, the experience in the Southern District of Texas and I think also in the Western District of Texas is that the State—the various district attorneys in the great State of Texas are aggressively pursuing these cases and they know that the Federal Government is there to take responsibility in some of the more significant, complex fraud—food stamp fraud cases, and we are there to support in the civil arena.
    Mr. GOODLATTE. Mr. Tolia.
    Mr. TOLIA. One program that the States do work very cooperatively with the U.S. Department of Agriculture on is called the State Law Enforcement Bureau Program, or the SLEBP program, where the States have the opportunity to have food stamp coupons or, in an EBT environment, an EBT card that we can give out to other law enforcement agencies around the State to assist the Inspector General's Office of USDA in investigating food stamp trafficking in a retailer environment.
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    In the State of Florida, we currently have about 19 contracts out with various local law enforcement agencies, either sheriffs' offices or local police departments who are also investigating food stamp trafficking on a retailers scale. These are in addition to whatever the Inspector General's Office is doing through this SLEBP program.
    Not all States are participating in the program, but Florida is at this point in time. Again, we get 50 percent funding to do this. As I said, we have 19 contracts out right now with local sheriffs' offices to investigate food stamp trafficking.
    Mr. GOODLATTE. Who does a better job?
    Mr. TOLIA. I wouldn't say there is a better job by either. They are both quality investigators.
    Mr. GOODLATTE. Is there any discernible difference in who gets a better return on the monies recovered or the disqualifications?
    Mr. TOLIA. I think both do. For the local law enforcement folks, they have an opportunity to close down a store that is probably involved in a lot of other criminal activity, other than just trafficking and food stamps, so they gain that benefit. Certainly they also claim the benefit from any forfeitures or things of that nature that are done during the course of their investigation. So they gain monetarily from that also.
    From the Department of Agriculture standpoint, again, it is another store that has been removed from the rolls of being a redeemer for food stamp benefits. It supplements the Inspector General's investigators so that they are not spread quite as thin as they currently are.
    And I think those are the major benefits of that program.
    Mr. GOODLATTE. Mr. DeAtley, do you want to add anything to that?
    Mr. DEATLEY. I think that covers it.
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    Mr. GOODLATTE. Well, I think that is a summation of the hearing. We thank you both for your participation today, and I have a closing statement that I am going to read into the record.
    It should be no surprise to anyone that eliminating waste, fraud, and abuse in the Food Stamp Program is a top priority for this subcommittee. The need to inject dignity back into the program and our jobs as stewards of our taxpayers money demands nothing less. According to our witnesses, more resources are needed to get the job done.
    Since any revenues to the Federal Treasury from the pending tobacco settlement seem to be already spoken for, we will have to find another way. I look forward to working with today's witnesses to find a way that works with current budget pressures, respects the needs of the needy in our communities, and prosecutes those that defraud the Government to the fullest extent of the law.
    I am willing to entertain ideas, including legislation dedicating a portion of fines and other civil money penalties against perpetrators of fraud in the Food Stamp Program, towards investigation and prosecution of these criminals. We must send a message that all intentional waste, fraud, and abuse in, against, or of the Food Stamp Program will not be tolerated.
    With that, I want to thank and dismiss our witnesses.
    The Chair would seek unanimous consent to allow the record of today's hearing to remain open for 10 days to receive additional material and supplementary written responses from witnesses to any question posed by a member of the panel, and I think I have that unanimous consent. Without objection, it is so ordered.
     And with that, and with the beeper going off, this hearing of the Department Operations, Nutrition and Foreign Agriculture Subcommittee is adjourned.
    Thank you very much.
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    [Whereupon, at 12:30 p.m., the subcommittee was adjourned, subject to the call of the Chair.]
    [Material submitted for inclusion in the record follows:]
Testimony of Roger C. Viadero
    Thank you, Mr. Chairman and members of the committee. I am Roger C. Viadero, Inspector General, U.S. Department of Agriculture. With me today is Jon E. Novak, Acting Assistant Inspector General for Investigations and James R. Ebbitt, Assistant Inspector General for Audit. As you recall, on October 30, 1997, Mr. Ebbitt and Craig Beauchamp, my former Assistant Inspector General for Investigations, who retired at the end of the year, testified before this Committee concerning our efforts to address fraud and abuse in the Food Stamp Program and the Electronic Benefits Transfer system of benefit delivery. We are pleased to return to this Committee to discuss this important issue. Some of the information I will present today will be a reiteration of their prior testimony; however, I believe it is imperative for us to provide an overall picture of what actions are being taken by my office with respect to identifying, prosecuting, and perhaps most important, preventing fraud in the Food Stamp Program.
    The Food Stamp Program is our nation's primary nutritional ''safety net.'' Statistics provided by USDA's Food and Nutrition Service (FNS), the agency which administers this program, show that program expenditures in fiscal year (FY) 1997 were about $21.5 billion, with benefits provided to about 23 million recipients. We understand that these numbers are expected to be somewhat lower during the current fiscal year. Seventy-five percent of food stamp benefits were issued using food stamp paper coupons during FY 1997. However, States are rapidly moving to implement Electronic Benefits Transfer (EBT) systems by the year 2002, as mandated by the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, also known as Welfare Reform. About 187,000 retail grocery and other stores are authorized by FNS to accept food coupons or EBT benefits from recipients.
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    Because of the huge size of this program and its vulnerability to fraud and abuse, the Office of Inspector General (OIG) devotes a significant portion of its total resources to audit and investigative work in the Food Stamp Program. During FY 1997, we devoted approximately 46 percent of our investigative resources and 8 percent of our audit resources to Food Stamp Program work. During the year, we conducted 598 food stamp fraud investigations resulting in 540 criminal convictions of individuals and businesses and over $17 million in fines, restitutions, and other monetary penalties. For the fiscal years of 1995 through 1997, OIG has conducted over 1,900 investigations of food stamp fraud, which have resulted in over 1,800 convictions and $49 million in monetary results. During FY 1997 we also issued
19 audit reports relating to the Food Stamp Program in which we made
112 recommendations to address problems and weaknesses in the program. Management decisions have been reached on 75 of those recommendations. At the time these audit reports were issued, they addressed questioned or unsupported costs of over $75 million and identified over $23 million in funds to be put to better use.
    Operation Talon
    The Department estimates that over $50 million a year in food stamps go illegally to convicted felons and prison inmates. Prior to the passage of Welfare Reform, the exchange of information between law enforcement and State social service agencies was not allowed. Welfare Reform provided many useful tools to the law enforcement community, such as making fugitives and people who are violating conditions of probation and parole ineligible for food stamps. Additionally, this legislation made it possible for State social service agencies to provide law enforcement authorities certain identifying information from their files pertaining to fugitives.
    As a result of the tools provided by Welfare Reform, we initiated Operation Talon, a law enforcement initiative led by OIG and carried out in conjunction with other law enforcement agencies and State social service agencies across the country. Each of you has been provided with a copy of our recent Operation Talon report. Under this initiative, social service agencies match their food stamp recipient records with law enforcement agencies' fugitive records. Information on fugitives is then shared with OIG and other law enforcement officials, who use it to locate and apprehend the fugitives. As of January 13, 1998, Operation Talon has resulted in 2,235 arrests of fugitive felons in 24 metropolitan areas nationwide, the vast majority of whom were food stamp recipients or former recipients. These fugitives included numerous violent and dangerous felons who were wanted for murder, child molestation, rape, and kidnapping.
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    An example of the type of individual we arrested was a fugitive who was wanted for selling a large quantity of marijuana. He was arrested at a sting site in Chicago, Illinois. The individual came to the sting site believing he had an appointment to discuss his food stamp benefits. When he was confronted by a Cook County Sheriff's deputy, the fugitive attempted to flee, running down a small corridor where an OIG special agent and local police officer tackled and subdued him. This fugitive later threatened to burn down the Cook County detention facility and kill the police officers and special agents. On his person and in a bag he was carrying were 8 knives, 11-assorted lengths of steel pipe, 2 screwdrivers, 1 wrench, and materials such as glass containers, wicking material, and candles needed to make
Molotov cocktails.
    Operation Talon is a success story. I say this not only for OIG, but also for the State and local law enforcement agencies we helped to locate and arrest fugitive felons. Even more important, Operation Talon is a success for the American people in those communities where it operated, who can know that their communities are safer now that these people who were wanted for murder, rape, drug dealing, and other violent and dangerous crimes have been taken off their streets.
    On December 18, 1997, Vice President Gore publicly announced Operation Talon during a press announcement at the White House. Also present were 10 members of State and local law enforcement agencies with whom we worked during this operation. These participants included the Sheriff of Cook County, Illinois, where Operation Talon ''bagged'' 470 fugitives. Two deputies with the Pierce County, Washington Sheriff's office, the entire fugitive squad for that office, traveled all the way across country to participate and to express their appreciation for our efforts, which they characterized to us as the ''best thing that has happened.'' They could not get over the fact that, with this new information, 90 percent of the doors they knocked on produced their fugitives. This kind of positive feedback exceeded even what we had expected.
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    Also during the White House announcement, the Vice President announced Phase II of Operation Talon. As a result, OIG and FNS have signed a joint letter to all State social service agency heads, informing them of the need to begin similar types of matching in their respective States. We are happy to report that many States have responded positively to this new challenge and additional Talon operations are under way. My office will continue to work closely with all State agencies and the law enforcement community to ensure this important provision is properly enforced.
    OIG devoted considerable resources to this phase of Operation Talon, with 116 special agents expending nearly 2,500 staff days. We believe our efforts were worth it because of the positive results, and as Operation Talon is replicated across America we believe the American people will once again see a demonstration of a government that works better. We look forward to continuing this type of work.
    Food Stamp Trafficking
    Trafficking in food stamp benefits, whether paper coupon or EBT, has been a problem since the program has been in existence. However, I want to state here that we are 100 percent in favor of the EBT system of benefit delivery. We strongly believe that, with the proper controls in place, it will reduce the amount of program fraud as well as aid us in our investigations of the fraud that does occur. While most benefits are properly issued to eligible recipients and are used as they were intended, which is to buy food in FNS-authorized stores, a significant amount of illegal trafficking continues and remains a problem to this day.
    Street trafficking involves persons who buy or barter food stamp benefits for cash or other nonfood items. Street traffickers often obtain benefits from recipients at a substantial discount of their face value, generally in exchange for cash, drugs, or other nonfood items.
Retailer trafficking involves FNS-authorized store owners and their employees who purchase food stamp benefits for cash at a discount of their face value and then redeem them at their banks for full face value. Retailers traffic with both individual recipients and with street traffickers.
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    Since the FNS-authorized retailer is the key to the eventual redemption of illegally obtained food stamp benefits, OIG's primary investigative focus is on identifying and investigating those retailers who purchase them. During FY 1997, about 80 percent of our food stamp investigations involved FNS-authorized stores. During the year, 326 retail stores were disqualified by FNS based upon OIG investigations. Those stores had annual food stamp benefit redemptions of $65 million. Over the past 3 fiscal years, 1,474 retail stores, with annual redemptions totaling over $266 million, have been disqualified as a result of OIG investigations.
    Criminal Prosecutions
    One of the intended results of OIG food stamp fraud investigations is to criminally prosecute those guilty of a crime. Since the Food Stamp Program is a Federal program, we first seek prosecution through the cognizant U.S. Attorney's Office. The Department of Justice gives each U.S. Attorney discretion to determine what Federal crimes, or severity of crimes, will be prosecuted in his/her district. Prosecutive guidelines are developed in each district and are influenced by circumstances within that district, such as violent crimes, gangs, serious drug problems, or other issues which create a heavy demand on a prosecutor's time. However, not all U.S. Attorneys have established specific guidelines concerning food stamp trafficking. As an example, the U.S. Attorneys in the two districts in Arkansas have advised us that we should bring the results of all of our cases to them for individual evaluation.
    We have an excellent working relationship with most U.S. Attorney's Offices around the country, and most of our cases which meet the established prosecutive guidelines are, in fact, prosecuted. However, these guidelines can, at times, be burdensome as well. For example, in the Central District of California (Los Angeles), we have been advised that food stamp trafficking cases in which food stamps were fraudulently redeemed on at least 3 occasions with an established dollar loss of at least $10,000 will warrant a review by their office and should be referred for prosecutive consideration; however, any losses below that amount will probably not be considered and should not normally be referred. Generally, in instances where we have been unsuccessful in conducting our own food stamp trafficking transactions at the store, this District will only pursue civil prosecution in Affirmative Civil Enforcement (ACE) proceedings involving violations of the False Claims Act. This lack of criminal prosecution is especially troublesome in our high- redeemer cases, which are stores identified as having redeemed food stamps in excess of 100 percent of their reported food sales. Although we have recorded documentation that extensive fraud is being perpetrated, these are considered to be ''paper cases,'' and, with no actual hand-to-hand transactions, will generally not be criminally prosecuted in that district.
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    One example of civil, rather than criminal, prosecution occurred in a different district. Federal criminal prosecution was declined in this case after our investigation, in which we were unable to conduct actual trafficking transactions, of an EBT store revealed $400,000 in Food Stamp Program fraud. Our case was then accepted for civil False Claims Act prosecution under ACE. The chief of the ACE unit actually referred the case back to the criminal division a second time, and, much to her amazement, it was declined again. The Government ''prevailed'' in this case, to a point. A $1.2 million judgment (treble damages) was awarded. However, to date, NO recoveries have been realized, and since criminal prosecution was declined, no criminal penalties could be assessed.
    In instances where an OIG investigation does not identify fraud in an amount which warrants a Federal prosecution in a specific area, we often turn to the State for prosecution. Some States have their own food stamp trafficking statutes with much lower prosecutive thresholds. For example, the State of Texas has enacted a strong food stamp trafficking statute, and we have been very successful obtaining prosecutions at that level. On the other side of this coin, the District of Columbia does not currently have a law on its books to address this crime. As a result, all food stamp trafficking cases in D.C. must be prosecuted through the already overworked Federal District court by the U.S. Attorney's Office. The Federal prosecutive guidelines for food stamp trafficking in D.C. require at least $10,000 in monetary loss to warrant prosecution, rather than in D.C. Superior Court where prosecutive thresholds would probably be much lower. For this reason, Federal food stamp prosecution in D.C. has been limited. However, for the past 2 years we have increased our presence in D.C. by assigning a special agent full time to work food stamp trafficking cases in the city. We are also cooperating with the D.C. Office of the Corporation Counsel in their attempt to legislate a local statute which would allow for criminal prosecution of this crime at the local level. I would like to go on record here with my full support for this initiative.
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    Electronic Benefits Transfer
    Fifteen years ago, EBT was an idea on a drawing board. Today, 28 States have operational EBT systems, with 8 of the States operating statewide. Many of the remaining States have selected EBT vendors and are at various stages of awarding contracts. Again, all States must be EBT-operational by the year 2002. While our investigative and audit work has shown that EBT does not totally eliminate fraud, it is certainly a powerful weapon which aids in the detection and prosecution of fraud. For this reason we continue to support the expansion of properly designed and implemented EBT systems.
    In September 1993, the ''Report of the National Performance Review, From Red Tape to Results,'' issued by Vice President Gore, called for the rapid development of a nationwide system to deliver a variety of Government benefits electronically. The U.S. Department of Agriculture has been at the forefront of EBT development for several years.
    EBT has had an impressive impact in identifying individuals and retailers who are committing fraud in the Food Stamp Program. While trafficking of benefits has not been entirely eliminated by EBT, we believe the number of individuals involved in street trafficking has been reduced. EBT benefits are less negotiable ''on the street'' and thus less likely to be used as a ''second currency.'' Unlike in the trafficking of food stamp coupons, we have not found any significant direct exchange of EBT benefits for illegal drugs. Instead, the EBT recipients are generally exchanging their benefits for cash and nonfood items with retailers or their employees.
    We can now use information available under EBT to identify and prosecute those who engage in illegal transactions. While paper food coupons are generally not traceable to individual recipients, the EBT system records the date, time, amount, recipient, and store involved in all benefit transactions. This information is being used to identify and prosecute both retailers and recipients involved in illegal trafficking. FNS is also using EBT data to disqualify violating retailers, and State authorities are using information obtained from EBT records to disqualify large numbers of recipients who have sold their benefits.
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    During our first EBT investigation in Reading, Pennsylvania, in 1991, we developed a program which used the computerized EBT electronic data as an investigative tool to identify possible trafficking activity by authorized retailers and food stamp recipients. We recommended that FNS develop a similar method to use this data to better identify stores and recipients who violate the program. As a result, our EBT data analysis system was used as a model by FNS in the development of a nationwide computer system which detects potential fraudulent EBT activity. This new system, known as the Anti-Fraud Locator Using EBT Retailer Transactions, or ALERT, is now on-line and available in all FNS and OIG regions.
    An example of a significant EBT criminal investigation was completed recently in Baltimore, Maryland. In this case, eight people pled guilty in Federal court to a variety of money laundering, conspiracy, and food stamp trafficking charges for their roles in a conspiracy that defrauded the program of $2.4 million.
    The group used eight stores, both authorized and unauthorized, to purchase and redeem EBT benefits. In the unauthorized stores, ring members obtained the account and personal identifier number (PIN) from willing recipients and relayed the information over the telephone to members in authorized stores. The authorized stores had EBT machines which were used to access recipients' accounts and remove the benefits. The recipients were then paid a reduced amount of cash. In addition, other ring members ''purchased'' benefits ''on the street'' and used mobile telephones to call in recipient information.
    The ring leader in this case was sentenced to 48 months in Federal prison, while five others received prison terms ranging from 4 to 21-months. Sentencing for three ring members is pending. Additional subjects are pending prosecution and sentencing.
    The circumstances in the case I just described identified a weakness in EBT which we believe must be addressed. The ease with which the perpetrators manually entered data into the system, circumvented the built-in security devices requiring that the card be swiped in a card reader, and a PIN entered on site. Manual data entry allows EBT benefits to be trafficked on the street, and the illegal redemption of the benefits to be spread among numerous store locations, merely by using a telephone to call in the information. While we understand that this function may be necessary to enable legitimate recipients to use their benefits if their cards are damaged or a store's card reader is inoperative, unrestricted use of this manual entry procedure defeats one of the most important security features of EBT and will promote street trafficking. EBT benefit trafficking is directly tied to authorized retailers and differs from traditional street trafficking. However, if manual data entry is not curtailed, EBT benefits will continue to be bought and sold on the street, just as paper coupons are now. This case proves that the EBT card can be abused, and, in fact, has already allowed at least $2.4 million of Food Stamp Program funds to to fall into the hands of criminals.
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    Fortunately, this case is also useful in demonstrating how EBT data can identify traffickers. During analysis of EBT data during another trafficking investigation in Baltimore, our agents identified the above-mentioned conspiracy. We used the system to follow recipients with suspicious transactions to the second group of stores. We also followed recipients from the second set of stores to yet another trafficking operation in Baltimore. Members of all three trafficking operations were prosecuted.
    As mentioned earlier, EBT data has also been used very effectively by State authorities to disqualify recipients who have sold their benefits. This has been occurring on a large scale in Maryland. For the past 3 years we have provided EBT transaction information, compiled from data developed during OIG investigations of 14 stores, to the Maryland Department of Human Resources (MDHR), Baltimore City Food Stamp Trafficking Unit. This information, which includes lists of all recipients who have been using their EBT cards in the suspect stores, is analyzed by MDHR. Suspected program violators are identified, and appropriate administrative action is taken.
    In Baltimore to date, MDHR has administratively disqualified over 5,200-heads of household, or 8.3-percent of all Baltimore households receiving benefits, because they defrauded the program by selling their EBT benefits. These disqualifications have resulted in a savings of over $3 million in suspended benefits. Additionally, another 11,604 Baltimore households—18.2 percent of the total households receiving benefits in Baltimore—are in various stages of administrative action by MDHR. This is just one more positive example of EBT and how it provides us with more information than we have ever had before. Prior to EBT, the food stamp trafficking transactions for which these recipients were disqualified, would have probably gone unnoticed, and unpunished.
    During the course of another OIG investigation into suspicious EBT transactions, this time in Essex and Hudson counties in New Jersey, 10-authorized stores were identified as having engaged in food stamp fraud. Those stores redeemed an estimated $9.5 million in food stamp benefits during the period of investigation, and $6 million of that is believed to have been involved in fraudulent transactions. In addition, approximately 1,000-individual food stamp benefit recipients were identified as having engaged in suspect transactions of more than $1,000. Thirteen men and three women who owned and/or operated the 10-stores pled guilty of various charges including conspiracy, food stamp fraud, and fraud in connection with electronic access devices. Seizure warrants netted $75,000 in cash, and asset seizures of real property are pending. We worked on this investigation with the U.S. Secret Service; the Internal Revenue Service; and the East Orange, New Jersey, Police Department. The investigation was initiated after a review by FNS' Compliance Branch identified the stores as potential violators of the Food Stamp Program.
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    Not only has OIG been supportive of EBT from an investigative perspective, we have taken an active role in monitoring and reviewing currently operating EBT systems. By being in on the front end of the implementation of these systems, we can identify and report on problems that need to be addressed early. This provides program managers with the assurance that their systems are operating as intended.
    We have reviewed security policies and control processes in several of the operational EBT States and identified not only areas that needed improvement, but some issues that might impact upon future EBT systems. One of the issues we brought to the forefront was a need for tighter EBT card security specifications. We believe these specifications would greatly enhance the security of the individual cards and, therefore, the entire system. However, some inexpensive security features, such as fine-line printing and holograms, are not currently required on EBT cards. FNS is proposing regulations which include nationwide upgrading of security specifications for EBT cards. We applaud their move in this area and we will throw all of our support into the ring with them.
    Another area we emphasize is the monitoring of those EBT systems that deliver multiple program benefits. Under an agreement with the President's Council on Integrity and Efficiency (PCIE), OIG was selected, and remains, the lead agency to review EBT systems that will deliver nearly $114 billion in multiple State-administered programs. We must stay on top of this, and I am here today to tell you that given proper resources, we will do just that!
    Other Types of Criminal Activity
    While the vast majority of our investigative time spent in the Food Stamp Program involves trafficking, we also conduct investigations of other types of criminal activity in the program, such as large-scale thefts of coupons from issuance offices and multiple issuances to the same person.
    In cooperation with a local Oregon police department, our investigation of an individual who was illegally receiving food stamps led to his January 30, 1998, conviction for two counts of Aggravated Murder. Following the guilty plea, this person was sentenced to two terms of life imprisonment without the possibility of parole. Our investigation determined that the individual, who was suspected of multiple homicides while riding railroad lines throughout the United States, had applied for and received food stamps using false identities in 12 States. Information we obtained from food stamp files around the country not only established a time line which tracked him around the country and helped place him in the locations where the homicides occurred, but it also provided the motive for some of his murders. He admitted using the identities of some of his homicide victims to receive their food stamp benefits.
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    Another recent investigation resulted in guilty pleas from three individuals who broke into food stamp issuance centers in Georgia, Oklahoma, and Alabama and stole nearly $500,000 in food coupons and over $47,000 in cash. The robbers would gain entry to the businesses by cutting holes in the roofs. When employees arrived at work early in the morning, two of the armed robbers—dressed in black ski masks, gloves, and coveralls—would crash through the ceiling and climb down ropes into the business. Two members of this robbery ring have pled guilty to multiple Federal crimes, including food stamp violations, and were sentenced to prison for 151 months and 60 months, respectively, along with restitution totaling over $142,000. The three gunmen were also implicated in nine other armed robberies. The ringleader, who was wanted for numerous armed robberies in several States, was tried in Texas for a similar robbery which did not involve food stamps. He received two consecutive life sentences under the new Federal ''Three Strikes and You're Out'' law.
    Retailer Integrity
    We have initiated other efforts, in addition to our criminal investigations, to address our continuing concerns about the legitimacy and eligibility of FNS-authorized retailers. One very successful approach was our ''sweep'' of suspect authorized retailers in 1995. I have taken the liberty of providing each Member of the Committee with a copy of that sweep report. To test the legitimacy and eligibility of retailers, we identified one metropolitan area in each of our seven regions in which to conduct a survey: Washington, DC; Cook County, IL; city of St. Louis and St. Louis County, MO; New York City, Borough of Manhattan, NY; Dade County, FL; Dallas and Tarrant Counties, TX; and Alameda County, CA. There were 10,555 authorized retailers in these seven areas. Past experience has shown that supermarkets and chain retailers generally meet program eligibility requirements and do not violate program regulations. These retailers were excluded from our sweeps.
    OIG visited 5,162 authorized retailers in the seven areas during our sweep. Retailers were to be deemed ineligible if they were found to have no staple food items to offer for sale, had minimal quantities of staple food items, the stores were out of business, the stores did not exist, or the stores had more than one authorization number. The OIG sweeps found 858 retailers, or 17 percent, which were ineligible. We identified another 450 retailers as questionable since they had limited quantities of staple foods, or their inventory of food did not support their food coupon redemptions.
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    Based on our sweeps, FNS took action to terminate the authorizations of 794 retailers. In total, these retailers had redeemed over $11 million in food coupons during the 1-year period of April 1994 through March 1995. Since then, with our assistance, FNS has conducted additional sweeps around the country, with similar results, and has instituted more critical reviews of retailer applications for food stamp authorization. FNS is also contracting to have 35,000 retailers visited to assess their eligibility. We believe that onsite review of stores, although labor intensive, is critical to assessing whether a retailer should be permitted to participate in the Food Stamp Program. We believe the impact of these onsite reviews can be seen by comparing the number of authorized retailers, 208,000 when we did our sweeps in 1995, to the 187,000 authorized now.
    FNS field offices are responsible for authorizing retail food stores to participate in the Food Stamp Program. We have reviewed these activities at 6 FNS field offices by reviewing 214 retailer authorization applications. Thirty-seven did not have support for the authorizations granted. We found weaknesses in three operational areas: (1) field offices did not make the best use of the Store Tracking and Redemption Subsystem (STARS) including determining if authorizations already existed for the address given; (2) FNS' plans for combating retailer trafficking had focused on compliance activities instead of prevention strategies such as pre-authorization visits; and (3) FNS' national and regional offices needed to provide additional direction and oversight. For example, in 1995 only 69 percent of retailer reauthorization goals were met.
    Our audit recommended that eligibility decisions be based on more reliable information, that intensive sweeps be made to detect ineligible retailers, and that the STARS automatically perform database searches during the re-authorization process. FNS received $4.2 million in its FY 1997 budget for contracting out store visits and has let contracts with 5 companies to visit over 39,000 stores in a year's time.
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    Strengthening the Food Stamp Program
    We believe that participation as an FNS-authorized retailer should be regarded as a privilege and not a right. Three years ago, in February 1995, during my testimony to the Committee on Agriculture concerning enforcement of the Food Stamp Act (the Act), I proposed a 10-point package of legislative and regulatory changes to enhance the integrity of the Food Stamp Program. Since that time, we have seen many of our proposals come to fruition, including: (1) the Act was amended to require that USDA, or an official of a State or local government designated by USDA, visit stores to be authorized or reauthorized as part of determining their eligibility; (2) the Act amended the criminal penalty portion of the law to authorize the forfeiture to the Government of property used in felony-level food stamp trafficking transactions; (3) the law now requires the disqualification of authorized stores from the Food Stamp Program who are disqualified from the WIC Program; (4) FNS is now authorized to require stores to submit relevant income and sales tax filing documents and permits regulations to require stores to provide written authorization for USDA to verify relevant tax filings with the appropriate agencies; (5) FNS can now require reauthorization of stores, including submission of updated Federal tax forms, and; (6) FNS can permanently disqualify retailers from the program if they traffic in food stamp benefits.
    I would like to point to a success story with respect to item number 4 above, concerning required submission of income tax information. Although our investigation is ongoing and I am precluded from discussing any specifics, I can say that we have identified a store owner who redeemed 34 percent more in food stamps than he reported as total gross income on his Form 1040, which is an immediate strong indication that this retailer is probably trafficking in food stamps. To compound his actions, this store owner also claimed an Earned Income Credit!
    However, some of our proposals for legislative and regulatory change have not yet been enacted. I would like to take this opportunity to reintroduce to the Committee those original recommendations which have not been implemented. For the sake of all Americans who rely upon the Food Stamp Program, as well as those who do not participate in the program but whose tax dollars support it, I urge this Committee to support these necessary changes.
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     Change the retailer eligibility criteria to reduce the number of stores from participating which have marginal food stocks and/or sales, or whose majority of retail sales are items such as liquor or gasoline.
     Immediately suspend an authorized retailer from participating in the program upon evidence of a serious program violation, such as a criminal indictment for trafficking in food stamp benefits.
     Require stores to be in the retail food business for a minimum of 1 year prior to authorization or, if in business less than 1 year, require the posting of a surety bond before authorization.
     Charge stores a licensing fee to participate in the program.
    We understand that FNS currently is seeking regulatory change for the first two items on this list. Again, we thank them for their support in these enforcement issues.
    Special Law Enforcement Initiative
    As part of OIG's continuing efforts to increase our effectiveness in all areas of USDA, we have identified a special law enforcement initiative designed to provide intensified OIG enforcement efforts in several key areas of the Department. I have provided each of you with a copy of our initiative package. As you will note, we have focused on three specific areas. We have identified that the Food Stamp Program and other nutrition programs, the Rural Rental Housing programs, and most important, matters affecting the health and safety of our Nation's citizens are so critical that we believe stepped-up enforcement by OIG is necessary to identify and eliminate the fraud and abuse that plague these programs. This initiative will be a major undertaking for this agency, and I ask for your support in this critical endeavor.
    This concludes my statement, Mr. Chairman. I thank you again for the opportunity to address the Committee, and I would be pleased to answer any questions you or other members of the committee might have.
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Testimony of Yvette S. Jackson
    Good morning, Mr. Chairman and members of the subcommittee. I am Yvette Jackson, Administrator of the U.S. Department of Agriculture's Food and Nutrition Service (FNS). Accompanying me this morning is FNS' new Deputy Administrator for the Food Stamp Program, Susan Carr Gossman, who joined us just last week.
    A crucial part of the President's and Secretary Glickman's commitment to delivering nutrition assistance to needy Americans is ensuring that the integrity of the Food Stamp Program is protected from those who would abuse the program.
    It is our nation's most important nutrition program, and we give protecting its integrity our highest priority.
    I would like to thank the members of this subcommittee for their assistance and support of the Food Stamp Program retailer provisions included in the welfare reform bill. That legislation provided the Department with much sought after authority to strengthen enforcement of program integrity and eliminate fraud by ensuring that only legitimate stores participate in the program; by improving the Agency's ability to monitor authorized firms; and by strengthening penalties against firms that violate program rules. The Department now has authority to suspend retailers immediately for the most egregious of program offenses—trafficking in program benefits. This has provided us with an important deterrent as well as a critical tool in the fight against fraud and abuse in the program. Yet more needs to be done to root out recipient and store fraud and maintain the public's confidence in this vital program.
    FNS focuses on prevention—barring those who would abuse food stamps from getting an opportunity to do so. The agency discourages and prevents misuse of food stamps up front, but when deterrents fail, the agency aggressively pursues claims and penalties against wrongdoers.
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    We work with the States to prevent fraud and abuse by having eligibility workers gather and maintain detailed information on each food stamp household to make sure that the household is, in fact, eligible and receives the correct amount of benefits.
    Unreported income is a leading cause of ineligible households receiving benefits or eligible households receiving more benefits than they should. FNS works closely with the States to reduce instances of overpayments and payments to ineligible households, and I am pleased to report that, nationally, we have seen a dramatic improvement in payment accuracy. The overpayment error rate for fiscal year 1996 was 6.92 percent, a big improvement over just a few years ago. Each year since fiscal year 1993, the overpayment error rate has declined, saving approximately $660 million.
    In cases when households inadvertently or deliberately provide inaccurate information, FNS supports a variety of methods for detecting overpayments and for taking action to recover overpayments and penalize fraud. Automated matching of food stamp rolls with other data bases with information about recipients is a particularly useful anti-fraud method. Social Security Administration, wages, and motor vehicle data are commonly matched. Finger-imaging and prison matches are among new fraud-detection tools that States are testing.
    Once fraud is found, recipients must return overpayments and are subject to criminal or administrative penalties. Recipients can repay claims in cash or coupons, or if they are still participating, they are subject to recoupment from current benefits. Thanks to the Federal Tax Refund Offset Program, recipient repayments have greatly increased in recent years. States collected a total of $186 million in recipient claims in fiscal year 1997. This is nearly double the pre-offset collections of 1991. Of the $186 million collected, fraud claims represented $60 million; claims for inadvertent household errors represented $104 million; and claims for State agency mistakes $22 million. Of the total, $60 million represent either Federal offsets or voluntary payments triggered by the threat of these offsets. When the Department of Treasury completes implementation of the Debt Collection Improvement Act of 1996, we will also be able to collect recipient claims from other Federal payments.
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    We have increased recipient fraud disqualifications; they are up twelve percent from over 94,124 in fiscal year 1996 to almost 106,000 in fiscal year 1997. New EBT systems have been especially useful. Maryland, New Jersey, New Mexico, South Carolina and Texas have all used EBT data to identify recipient trafficking. EBT helps us identify trafficking patterns that previously may have gone undetected, because it enables us to identify suspicious patterns for investigation and prosecution.
    The redemption process is another critical area in our fight against fraud in the Food Stamp Program. Retailer oversight is a Federal responsibility and critical to the integrity of the Food Stamp Program. Stores that accept food stamps from their customers must apply to FNS for authorization. Although food vendors are essential partners in the Food Stamp Program, store authorization to participate is a privilege, not a right.
    Currently, there are 186,700 authorized retailers participating in the Food Stamp Program nationwide. To participate, a store owner applies directly to one of our field offices, providing that office with information on the store's sales and
food stock, the owners' social security numbers and business tax returns, and other business information.
    To the extent possible and that our resources allow, FNS field staff conduct store visits prior to authorizing a store, to make sure the store is, in fact, a real food store, not a liquor store or a dry cleaners, or an empty storefront devoted to illegal activities. Last year, we hired contract staff to perform pre- and post-authorization visits to stores to gather information for us on the nature of the business. This year, there will be approximately 35,000 pre- and post- authorization store visits that we have contracted for, and we expect this effort to improve overall retailer integrity significantly.
    Still, in spite of our screening efforts, we do end up authorizing some store owners and their employees who break program rules. We have a staff of 48 investigators specifically dedicated to uncovering abuse by authorized retailers. This group, the FNS Compliance Branch, works under specific delegated authority from the Department's Office of Inspector General. During the last five years, the Compliance Branch has investigated over 23,000 stores nationwide suspected of violations, and found evidence of actual violations in 45 percent of the investigations. In over 7,000 of the cases, evidence gathered was enough to disqualify the stores or demand a civil money penalty in lieu of a disqualification. These violating stores together redeemed over $900 million in food stamp benefits annually. The Compliance Branch investigators uncovered trafficking—as opposed to sales of ineligible items—in over 4,000 of these stores.
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    FNS' Compliance Branch has also been actively pursuing with the U.S. Department of Justice Federal civil prosecution under the False Claims Act against stores found trafficking, which we estimated in 1993 at $815 million annually. Since this initiative began in 1992, there have been 566 negotiated settlements or judgments on FNS Compliance Branch cases, with settlements/judgments totaling over $5.8 million.
    EBT continues to be the most promising means of combating food stamp trafficking. At the end of December 1997, 29 States had implemented food stamp EBT systems, and 16 of those are statewide. Today, 35 percent of all benefits are issued electronically, and by the end of this year, that figure will rise to 50 percent. All States are mandated to issue food stamp benefits electronically by the year 2002.
FNS successfully deployed an automated EBT anti-fraud system called ALERT. The ALERT system analyzes individual EBT transactions for patterns of violations both for investigation selection and taking direct administrative sanction action. Two years ago, FNS began aggressive efforts to sanction stores based on the pattern of individual EBT transactions, resulting in over 125 stores being disqualified from the program.
    In closing, I would like to acknowledge the strong working partnership FNS has with the Department's Office of Inspector General in fighting Food Stamp Program fraud and abuse. Their help and commitment has been, and continues to be, invaluable to our work protecting the program's integrity.
    Mr. Chairman, this concludes my prepared remarks. I would be happy to answer any questions you have at this time.
     
Statement of Christo M. Tolia
    Mr. Chairman, members of the committee, thank you for the opportunity to address this subcommittee. As president of the United Council of Welfare Fraud (UCOWF) and director of the Division of Public Assistance Fraud (DPAF) in the State of Florida, Auditor General's Office, I have been asked to direct my comments to food stamp recipient fraud and the enforcement of anti-fraud provisions of the food stamp Act.
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    Food stamp recipient fraud primarily occurs in two separate areas. The first area involves the eligibility determination process. As in all public assistance programs, an applicant for food stamp benefits must meet a series of eligibility factors. These factors include income, assets or resources, citizenship status and household composition factors. Most food stamp recipient fraud involves the failure to report income, whether earned or non-earned, and issues dealing with household composition. Household composition cases primarily involve the inclusion of members in a household who in fact do not reside in that household or failing to declare the presence of an income receiving member in the household. This type of fraud requires that the recipient fail to disclose a material fact that would be used to determine their eligibility during the application process or fail to report a change in their circumstances within ten days after its occurrence if between eligibility review processes.
    The second area of food stamp recipient fraud involves the sale of food stamp benefits for cash or the use of food stamp benefits for non-food items. As you know, food stamp benefits are intended for use as a means of purchasing staple food items. In reality, food stamp coupons have been used to purchase liquor and cigarettes, pay housing rental payments, purchase drugs and used in a variety of other non-intended ways. The visibility of this type of activity has been limited in the past because food stamp coupons could not be tracked in most instances. However, with the advent of the Electronic Benefit Transfer (EBT) program, the usage of food stamp benefits by recipients is primarily restricted to an authorized food stamp redeemer. Additionally, the EBT system provides visibility as to how and where food stamp benefits were used by the recipient. As EBT is implemented nationwide, the number of recipient fraud cases involving the misuse of food stamp benefits will increase dramatically. This area is becoming an issue for the States since trafficking in food stamp benefits by recipients does not incur an overpayment of benefits and therefore food stamp retention rates do not apply. I will discuss the issue of retention rates later in my presentation.
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    During Florida Fiscal Year 1996–97, 18,716 food stamp recipient cases were reviewed by the Division of Public Assistance Fraud resulting in 4,038 cases being referred for prosecution or an Administrative Disqualification Hearing. These cases represent food stamp overissuances of $4,268,726. An additional 1,510 food stamp recipient cases were reviewed by the Division as part of fraud prevention efforts resulting in program savings of $2,752,403. All prosecutions in the State of Florida for recipient fraud are prosecuted under State statutes. It is my understanding that in most jurisdictions around the country, prosecutions for recipient fraud are handled by the local authorities. Federal thresholds for prosecution are far in excess of most recipient fraud cases. One exception to this is the prosecution of Native American Indians on reservations.
    The Division is also involved with computer matching of Florida's public assistance rolls (including the Food Stamp Program) and the public assistance rolls of other states to ascertain the incidence of duplicate receipt of benefits simultaneously in both states. On a recurring basis, matches are done with the states of New York, Pennsylvania and Massachusetts and on a non-recurring basis with the other seven Southeastern states. Additionally, monthly matches are made between Florida's public assistance rolls and the inmate population of the Florida Department of Corrections and local detention facilities. Information on approximately 165,000 inmates in Florida detention facilities is provided monthly to the Social Security Administration and Florida's social service agency, the Department of Children and Families.
    Funding for fraud investigations and initiatives has become a nationwide issue. In most instances, funding is a combination of State or local money and Federal funds. To encourage recipient fraud investigative activities, the U.S. Department of Agriculture provides 50 percent matching funding. This funding provides most states or counties with the ability to maintain a fraud investigation presence. There are exceptions however to this process. Primarily these exceptions occur in County Welfare Departments where funding is exclusively local or a combination of local and State funds. In these instances, fraud investigation efforts are usually very limited. Prior to April 1, 1994, USDA provided enhanced funding to 75 percent . The loss of the enhanced funding caused the reduction of staff in many investigative units around the country. Fortunately in Florida, the State Legislature agreed to replace the lost 25 percent funding with General Revenue funds and the fraud investigation efforts were not diminished.
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    Another area of funding that has an impact on the States is the retention rate established by USDA. The retention rate is the percentage of the collected food stamp overissuance a State may retain. Currently, those rates are set at 35 percent for an Intentional Program Violation and 20 percent for an Inadvertent Household Error. The remainder of the collected overissuance reverts back to USDA. As with the enhanced funding, the retention rates have been reduced from previous levels. Previously, the retention rates were 50 percent for fraud cases and 25 percent for non-fraud cases. Since many States use this retention money as a funding source for the investigative effort, any reduction in funds has a negative impact on recipient food stamp fraud investigation. Combined with the loss of enhanced funding, the States have taken a double funding loss. Additionally, the process used to complete an Inadvertent Household Error claim usually does not involve a full scale investigation as does a fraud or Intentional Program Violation claim. As such, administrators have been forced to decide whether the additional 15 percent obtained in an Intentional Program Violation claim justifies the effort. At issue, is providing the States a meaningful incentive to conduct full scale fraud investigations versus the less time consuming and involved non-fraud claim. As mentioned previously, in an EBT environment, recipient trafficking in food stamp benefits does not create an overpayment therefore retention rates do not apply. As these type cases become more numerous, there is a disincentive for States to become involved in investigating recipient food stamp trafficking.
    These comments are a very brief summary of some of the issues involving the investigation of food stamp recipient fraud.
    Thank you again for the opportunity to address this subcommittee.
    "The Official Committee record contains additional material here."