SPEAKERS CONTENTS INSERTS Tables
Page 1 TOP OF DOCWASTE AND ABUSE IN THE ADMINISTRATION OF THE FOOD STAMP PROGRAM
THURSDAY, OCTOBER 30, 1997
House of Representatives,
Subcommittee on Department Operations,
Nutrition, and Foreign Agriculture,
Committee on Agriculture,
The committee met, pursuant to notice, at 10:20 a.m., in room 1300, Longworth House Office Building, Hon. Bob Goodlatte, (chairman of the subcommittee) presiding.
Present: Representatives Ewing, Canady, Thune, Clayton, Berry, and Bishop.
Staff present: Lynn Gallagher, Kevin Kramp, Brain Hard, Callista Bisek, Julia Paradis, and Wanda Worsham, clerk.
OPENING STATEMENT OF HON. BOB GOODLATTE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VIRGINIA
Mr. GOODLATTE. This hearing of the Subcommittee on Department Operations, Nutrition, and Foreign Agriculture to review waste and abuse in the administration of the Food Stamp Program will now come to order.
I want to thank all of you for coming today. I apologize for starting late. We now have two members required to start a hearing, and I'll start off with my opening statement. And if Mrs. Clayton comes here before we start taking testimony of the witnesses, we'll get her opening statement. If not, we'll get it later on.
The purpose of this hearing is to receive testimony and written statements concerning waste and abuse in the administration of the Food Stamp Program. Past hearings and last year's welfare reform bill focused on the criminal abuses of the Food Stamp Program. While I certainly want to hear about further discoveries, advancements, and setbacks in the battle against food stamp waste, fraud, and abuse, today's hearing focuses on the administration of the program. Is the USDA doing all they can do to ensure that only those eligible are receiving food stamp benefits?
Page 2 PREV PAGE TOP OF DOC It should be no surprise to anyone that I have particular interest in improving the integrity of the Food Stamp Program. During last year's welfare reform markup, I offered two amendments aimed at improving the security of the program. Both were accepted and are now law.
First, anyone that is convicted of defrauding the Food Stamp Program for a dollar value greater than $500 is permanently disqualified from the program. My second amendment, a provision for which I hope to hear about its effects today, encourages the USDA or their designee to visit retailers that are applying to be an eligible food stamp redeemer. We have all heard the unbelievable stories of empty lots, closed stores, or trunks of cars being approved as eligible redeemers of food stamps.
I anticipate some proud words from our witnesses about the lowest overpayment error rates ever achieved by the program. While I will accept that there has been a slight decline in error rates over the last few years, I certainly will not celebrate it. Overpayment errors are still costing the taxpayers over $1.5 billion a year. That is almost 7 percent of the total food stamp budget. It may be a case where observers and stakeholders have become calloused to administrative errors or have even come to expect them. If we expect failure, we will get failure.
As chairman of the subcommittee with jurisdiction of the Food Stamp Program, I will not tolerate administrative errors, waste, or abuse. I owe, and this committee owes, it to the taxpayers to make sure that the Food Stamp Program is run as efficiently and as effectively as humanly possible. To achieve that goal, I am willing to explore any route or turn any stone which would lead to a more effective, cost-efficient, and distinguished program for benefactors and beneficiaries alike.
I look forward to hearing the witnesses' testimony today. We have assembled uniquely-qualified witnesses that will provide insight into the administration of the Food Stamp Program.
Page 3 PREV PAGE TOP OF DOC And I'd now like to recognize that ranking member of the subcommittee, Mrs. Clayton from North Carolina.
OPENING STATEMENT OF HON. EVA M. CLAYTON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH CAROLINA
Mrs. CLAYTON. Thank you, Mr. Chairman.
I also look forward to the witnesses' testimony, and to further hear what the administration is doing, and also to hear what the State and other agencies are doing.
I make the assumption that no one wants to see fraud and abuse, but I also make the assumption we will not find it unless we actually have systems and safeguards and controls to protect the process, so that we cannot only weed out, but prevent that fraud and abuse.
I don't make the assumption that people are evil or that there is a lot. But I do make the assumption that we have to have control in the system and it is the administration's responsibility to put those there. It is our responsibility to have oversight.
This should not be an effort to ''I got you; therefore, we want to hold you up to ridicule,'' but it is where we collectively share the responsibility in oversight, and those of you who have administration, those of you who have investigatory, or in auditing, will share those responsibilities. I looked at the testimony to see that there is an increase in the shared amount of resources going both into investigation, as well as to auditing. Hopefully, those resources have been used well.
I've also looked at the number of complaints you've made, and the number of arrests, and the percentage that now have been paying restitution. A substantial amount of money has been reclaimed, and I gather that there is even a substantial amount of money that's not reclaimed because we haven't found the perpetrators of those fraud.
Page 4 PREV PAGE TOP OF DOC Progress, indeed, has been made and we can even do better. And hopefully, what we will hear, we'll see that we're moving in the right direction.
Thank you, Mr. Chairman.
Mr. GOODLATTE. Thank you, Mrs. Clayton.
Does the gentleman from Arkansas have a statement he'd like to make?
Mr. BERRY. Mr. Chairman, thank you.
I can tell you that the time I spent with the Department of Agriculture, I know the intense aggressiveness that the Office of Inspector General has applied to this whole issue, and was very impressed in the years I spent there, that the reports that we got and see the hard work and effort that they put into it, and I appreciate that.
Mr. GOODLATTE. Thank you, Mr. Berry.
We'd like to invite our first panel to the table, and I see they're already there, so we'll introduce them.
We're pleased to have with us Mr. Craig Beauchamp, Assistant Inspector General for Investigations in the Office of the Inspector General of the U.S. Department of Agriculture. Accompanying Mr. Beauchamp is Mr. James Ebbitt, Assistant Inspector General for Audit at the USDA.
Thank you both for taking the time to share your thoughts with us this morning. Mr. Beauchamp, you may start when you're ready.
STATEMENT OF CRAIG BEAUCHAMP, ASSISTANT INSPECTOR GENERAL
FOR INVESTIGATIONS, OFFICE OF INSPECTOR GENERAL, U.S. DEPARTMENT OF AGRICULTURE
Mr. BEAUCHAMP. Thank you, Mr. Chairman and members of the committee. We are pleased to provide testimony about our agency's efforts to address fraud and abuse in the Food Stamp Program and the electronic benefits transfer system of benefit delivery.
Page 5 PREV PAGE TOP OF DOC The Food Stamp Program is our Nation's primary nutritional safety net for those in need. Program expenditures in fiscal year 1997 were about $21.5 billion with benefits provided to about 23 million recipients monthly. Currently, about 75 percent of food stamp benefits are issued using food stamp paper coupons. However, States are rapidly moving to implement EBT systems and under welfare reform, it is mandated by 2002. Because of the huge size of the program and its vulnerability to fraud and abuse, OIG devotes a significant portion of its total resources to work in the Food Stamp Program.
Our audit work focuses on the adequacy of controls and systems used to manage program areas, such as issuance operations, wage-matching requirements, bank and retail store monitoring, and quality control procedures. Our audit staff is also working closely with the Food and Consumer Service, other Federal agencies, and the States, monitoring and reviewing EBT systems as they expand in use.
Our investigative emphasis is on food stamp trafficking, which is the illegal exchange of food stamp coupons or EBT benefits for cash or for other non-food items. For fiscal years 1993 through 1997, OIG has conducted over 3,400 investigations of food stamp fraud which have resulted in over 3,200 convictions of individuals and businesses and $66 million in monetary results such as fines and court-ordered restitutions.
Trafficking in food stamps has been a problem since the program has been in existence. While we believe most food stamps are properly issued to eligible recipients and are used as they were intended, a significant amount of trafficking continues and remains a problem to this day.
Since the FCS-authorized retailer is the key to the eventual redemption of illegally-obtained food stamps, OIG's primary focus is on identifying and investigating those retailers who purchase food stamps or who are trafficking. During 1997, 326 retail stores were disqualified by the Food and Consumer Service based upon OIG investigations. Those stores had annual redemptions of about $65 million. Over the past 3 years, our investigations have led to about 1,400 store disqualifications and those stores had annual redemptions of over $266 million.
Page 6 PREV PAGE TOP OF DOC Because of our continuing concerns about the legitimacy and eligibility of authorized retailers, we have initiated other efforts in addition to our investigations to attack this problem. One very successful approach was our sweep of suspected authorized retailers in 1995. We visited 5,162 retailers in seven metropolitan areas throughout the country during our sweep and found that 1,308 were either ineligible or we questioned their eligibility. Based on our sweeps, the Food and Consumer Service took action to terminate the authorizations of 794 retailers. FCS has also begun conducting their own sweeps at other metropolitan areas around the country with similar results.
We believe that onsite review of stores is key to assessing whether retailers should be permitted to participate in the program, and we applaud the chairman's efforts in that area under welfare reform.
Concerning electronic benefit transfer, it has an impressive impact on identifying individuals and retailers who are committing fraud in the program. While trafficking of benefits has not been eliminated by EBT, we believe the number of individuals involved in trafficking has been reduced through EBT. Under EBT, benefits are less negotiable on the street and, thus, less likely to be used as a second currency.
Information under EBT is now available and is used to identify and prosecute those who engage in illegal transactions. While paper food coupons are generally traceable to individual recipients, under EBT, details of all transactions are recorded. This information is used to identify and prosecute both the retailers and recipients involved in trafficking.
FCS has also used EBT data to disqualify violating retailers, and State authorities are using information obtained from EBT records to disqualify recipients who have sold their benefits. This has been occurring on a large scale in the State of Maryland. For the past 3 years, we have provided transaction information and lists of recipients who use their EBT benefits in retail grocery stores which we have found to be buying benefits. We've provided this information to the Maryland Department of Human Resources, Baltimore City Food Stamp Trafficking Unit. This information was compiled from data developed from OIG investigations of 14 stores in Baltimore City.
Page 7 PREV PAGE TOP OF DOC As an unfortunate indication of the extent of food stamp fraud and abuse, to date, over 4,600 heads of households in Baltimore have been disqualified from the Food Stamp Program based upon this EBT data, and another 7,188 Baltimore households are in various stages of administrative action and review.
This chart to my right better puts this problem into perspective. At the top pie chart, it shows that in Baltimore City there are about 1,300 authorized stores. We looked or we've investigated for the purposes of this demonstration 14 stores, which is 1 percent of the total stores in Baltimore City, but as you can see in the lower pie chart, that 1 percent of stores has led to almost 20 percent of suspected household traffickers in Baltimore.
Not only has OIG been supportive of EBT from a criminal investigative perspective, we have also taken an active role in monitoring and reviewing EBT systems. In this respect, we view our role as providing assurance to program managers that the systems are operating as intended; we are reporting the problems that need to be addressed, so the systems operate properly.
In August 1995, under the President's Council on Integrity and Efficiency, we consolidated reported findings and currently identified concerns of the inspector community, governmentwide with implementation of EBT. Major cross-program issues which needed to be addressed included making EBT processor records available to Federal and State auditors and investigators, increasing security measures over employees' access to EBT systems, limiting the number of unsuccessful attempts to access benefits, reducing the length of time EBT cards are valid, securing EBT cards returned as undeliverable, and prohibiting the selection of personal identification numbers during non-business hours.
We also issued in September 1996 a nationwide report entitled, ''Monitoring EBT System Development and Implementation,'' based on work we did at the FCS national office and in the States of Maryland, New Jersey, South Carolina, and Texas.
Page 8 PREV PAGE TOP OF DOC We continued to be the lead agency for the President's Council on Integrity and Efficiency on EBT activities for State-administered programs and our plan is to continue monitoring EBT systems as they are implemented.
Mr. Chairman, this concludes the oral portion of my testimony.
[The prepared statement of Mr. Beauchamp appears at the conclusion of the hearing.]
Mr. BEAUCHAMP. We have a brief video which probably better describes than I can orally one of our EBT cases and how the EBT system helps us in our investigations. If you wish, we could do that now, put that off, or not do it all.
Mr. GOODLATTE. Let's go ahead and take a look at it, and how long is it?
Mr. BEAUCHAMP. Probably 3 to 5 minutes.
Mr. GOODLATTE. Let's go ahead and see if we can get through it.
Mr. BEAUCHAMP. Before we start the videotape, I have a chart here that identifies three different stores: stores A, B, and C.
Store B is the major store that is mentioned on page 7 of my written statement, and this involved eight individuals who operated five or six stores throughout Baltimore, and in a 3- or 4-year period trafficked $2.4 million worth of food stamps. That's shown as store B.
What we did is, using the EBT data, we identified recipients that trafficked at store B and its associated stores, and tracked where they went, to identify other stores that might also be trafficking. And based on that data, we found the store that I'm going to show the video tape on. It was using the EBT data, tracking recipients to locate other stores.
Page 9 PREV PAGE TOP OF DOC Now in addition to that, we also obtained information that this store might be violating program regulations from informants and other law enforcement agencies. Also the Food and Consumer Service had information that this store might be violating program regulations. So based on that information, we initiated an investigation on this store. It's called McKeon and Westwood Grocery.
One of the methods of our investigation was to set up a surveillance outside the store to monitor activity at the store.
Mr. GOODLATTE. Maybe it would a good idea for us to go vote then, and we'll see the video as soon as we get back. Since it's going to take 3 to 5 minutes, that might cut into our amount of time to vote. So we'll pick up with that video just as soon as we return and the committee will be in recess.
Mr. BEAUCHAMP. Thank you.
Mr. GOODLATTE. The meeting will be back in order. When we recessed, we were working on getting a video ready and are we ready now, Mr. Beauchamp.
Mr. BEAUCHAMP. We're ready.
Mr. GOODLATTE. Great. All right. Let's roll 'em.
Mr. BEAUCHAMP. If we can turn on the video, it will show the outside of a very small grocery store in the city of Baltimore, McKeon and Westwood Grocery.
We set up the surveillance of the store across the street from it, after we had obtained information from tracking of the recipients at other stores, where we thought they could also be trafficking in this store, and after we received information from the Food and Consumer Service in their store-monitoring activities, that they thought this was a suspect store also.
So we set up the surveillance and we have the camera now, and it shows the door of the store on the left of the screen, and a group of recipients lining up at about 9:15 on the morning of November 10. Now, they aren't going into the store because the owner has not shown up yet, and what happens is, the owner has to come into the store with a bunch of cash.
Page 10 PREV PAGE TOP OF DOC Usually this is the opposite of how most grocery stores work. They have a little cash to start off the day, but they usually leave the store at the end of the day with a bunch of cash, which they've obtained with their food sales. In case of EBT trafficking, a store owner has to bring the cash in first thing in the morning to actually pay out to the recipients in exchange for their EBT benefits.
So, recipients here are standing in line, waiting for the store owner to drive up and come in.
Actually, our machine is a time-lapse camera, which we use for court presentations and evidence. It's not really set up towe don't video these for congressional hearings, so it's a little bit difficult to operate in this environment.
Here's the store owner. It was very quick. He went right through. With this equipment up here, we're having a little trouble showing theour slow motion equipment. But the store owner just went into the store with his cash.
And it's getting close for the recipients to now go into the store. Here they're lining up. There's one going in. They need to queue up.
Mr. GOODLATTE. Do any of them come out with any groceries?
Mr. BEAUCHAMP. If you can see, and there are some coming out. The most they have is soda in a bag.
I'll show you later what the store looks like inside when we did a search warrant and there aren't many groceries to get in the store.
Now, this is interesting. You can see a woman come out of the store, and what she's telling individuals in line is to break up; don't have a line. It looks a little suspicious that you have a line of people getting ready to go into a grocery store to buy groceries. Basically, she's saying, you know, spread around.
In the next minute or 2 or we can go the whole day; we have individual recipients going in, doing something in that storeobviously we're outside; we can't see exactly what they're doingand then leaving the store with either nothing visible in the sense of groceries, or just a paper bag, which we later found out has a bottle of soda or something like that in it.
Page 11 PREV PAGE TOP OF DOC What we do with information, then, on that video is we obtain EBT documents from the State, do some analysis of them, and we build up a chart of what actually went on in that store at the period we had the surveillance.
Now this chart here shows the date on the lefthand side, the actual time that an EBT transaction occurred, and the dollar amount of the EBT transaction. Now, we also show the identification number of the recipient, so we can track a transaction with a particular recipient. For purposes of this, we'll just as soon have that covered up because not every recipient was prosecuted or we haven't yet taken all action.
What this shows, and it clicks with our surveillance camera, the first transaction in this store was at 9:17 in the morning and it was a transaction for $123.89. Then, approximately 1 minute later, we had another transaction of $123.89, and you can track those all through the day.
I havea little difficult for you to seebut I have two dots starting on the first transaction, then the bottom transaction. That's a 20-minute period, and in that 20-minute period at that store we had 19 transactions. The transactions had a low of $43.58 to a high of $203 and a total in that 20 minutes was $1,951 worth of EBT transactions in that store.
What this store owner did is he gave 50 cents on the dollar. So that store owner gave out $951 in cash to those recipients for that $1,951 worth of their EBT benefits, and the store owner in that 20 minutes made about $1,011 in profit.
Mr. GOODLATTE. What is the significance of the $123.89 figure? Why are there so many of those?
Mr. BEAUCHAMP. Well, when we first began doing EBT casesthe first case was actually in 1992, in Reading, PAwe set up models on what a trafficker would do. And in our first cases, based on our Reading experience, and also our cases in Maryland, most traffickers dealt in even dollar amounts. They would do $50 for $25, $60 for $30, or $120, let's say, for $60. So, I think it probably got around in the community, ''Hey, the Government, they're looking at even dollar numbers.''
Page 12 PREV PAGE TOP OF DOC So what this guy didhe thought he was going to be smart, he added $3.88 or $.89 to every transaction. [Laughter.]
Of course, that in itself is a pattern and it goes through the whole day. So that's not a way to hide your illegal activity, but that was his attempt.
Mr. GOODLATTE. So I take it what you're saying is that EBT doesn't eliminate fraud, but it makes it easier to uncover. Is that right?
Mr. BEAUCHAMP. It helps us detect it in violating stores. It helps us identify the recipient who is trafficking. Under the paper coupon system, we could never do that.
Mr. GOODLATTE. Did these figures come into the Maryland agency that handles the Food Stamp Program in such a way that they could run a computer program that would search though the reports and identify patterns of redemption like this, just based on the dollar amounts that would put up a flag and say this ought to be looked into?
Mr. BEAUCHAMP. Yes. We're working with States. Based on our first experience under EBT in Reading, PAwe had a small steak shop there, John's Steaks and ShakesOIG developed these models, and we've worked with the Food and Consumer Service, which has developed that into their systems, and we're working with the States also, so that they can develop these fraud detection systems in their State programs. That's to detect the violating retailer, but also now to detect the violating recipient.
Mr. GOODLATTE. We'll do a second round of questions. At this point, I recognize the gentlewoman from North Carolina, Mrs. Clayton.
Mrs. CLAYTON. Do you now see that your efforts and increasing, in turn, investigation as well as auditing, has been sufficient to make some prediction as to what the decrease should be in fraud and abuse?
Mr. BEAUCHAMP. I don't think there's a statistical way to measure what the decrease would be. Basically, we don't know the base level of the dollar amount of fraud. There's so much guesswork that goes into that because we're talking of a secretive transaction, and I've heard fraud figures from $1 billion to $3 billion or so. So, it would be difficult to say the dollar amount or the percentage amount of decrease under EBT.
Page 13 PREV PAGE TOP OF DOC I thinkand I have talked to our investigators and the people in the States, the welfare fraud investigatorsthat the street trafficking problems with food stamps for drugs, or food stamps buying cars, and things like that, have decreased significantly under an EBT environment.
Percentagewise, I can't say, I don't know.
Mrs. CLAYTON. In other words, the type of fraud has been decreased?
Mr. BEAUCHAMP. Certainly, the type of fraud has changed, where it's not open on the street under an EBT environment. It's at the retailer, and I think we have a better chance of identifying it and controlling it in that context.
Mrs. CLAYTON. In your testimony, you had something relative to legislative. But I was just wondering, rather than what you have here, given your efforts today, what recommendations for different controls and systems are you making to the various States and agencies so that they can either detect or prevent the fraud and abuse in the first sense?
Mr. BEAUCHAMP. Well, we're working very closely with the Food and Consumer Service and also with the States, particularly as they come online on EBT, to build into their EBT systems, these controls that will identify and do the same thing that we're doing here in OIG. Basically, the States are out there. They've got hundreds more people than we do, so we want them to develop these systems. I'll ask my colleague, Jim Ebbitt, on the audit side because that part of OIG is really intimately involved in working with the States.
Mr. EBBITT. Well, primarily, Mrs. Clayton, what we want to do is be there at startup time of any State that is beginning to come online with an EBT contractor. We want to be there during the early testing phases, along with FCS, to make sure that the controls in fact, built into the computer system for the protection that's necessary.
Page 14 PREV PAGE TOP OF DOC The other thing, of course, is EBT is a partnership of the Federal Government, the State Government, and also the private sector. We have a number of private sector contractors that are instrumental in the actual delivery of EBT benefits.
And what we are doing is working with the private sector to make sure that their computer systems and their computer operations also have necessary controls built into place, to make sure that we hopefully prevent problems before they occur.
And essentially, what we've been finding in the States as they come up, are what I would term routine kinds of issues and problems in any startup of a system like this, that certainly need to be addressed, and I think they are being addressed. We're bringing them to the attention of FCS, and they, in turn, are bringing them to the attention of the States that are working with contractors.
And I'm talking primarily about system controls: Who has access to the computer? In some States we found where we felt that too many people had access to the computer, and we've recommended to bring that number down to a much more reasonable and controllable level.
But I think the bottom line is in the States we've visited, we've generally found the startup systems to be working as intended. Controls are in place and they seem to be controlling EBT operations as you would hope.
Mrs. CLAYTON. Along the same lines, in the paper coupon, are the States taking an aggressive role, likewise, in trying to investigate and weed out fraud?
Mr. EBBITT. In where we have
Mrs. CLAYTON. Well, the coupons, where you don't have the electronic and the paper trail.
Mr. EBBITT. Well, again, we have consistently said that EBT is a much better system than paper. It gives you so much more control than you have with paper coupon systems, and that's why it's been our recommendation to move quickly to EBT operations.
Page 15 PREV PAGE TOP OF DOC And, on the coupon side, as far as controls with stores, you can't do this kind of computer monitoring activity, but we have other investigations underway on the coupon side.
Mr. BEAUCHAMP. Yes, most of the State work over the years under coupon fraudand also it'll be the same thing under EBT fraudis looking at fraud by recipients at the time they make application for benefits, that they overstate income or assets. That's a very serious problem.
And the investigations of those types of matters are almost entirely up to the States because they're handling the certification of recipients. States across the country have very active welfare fraud units that investigate that. I think the last time I looked at the statistics for 1996, States were doing over 800,000 investigations of that type of welfare fraud and that's a very important effort they're putting forward.
Mrs. CLAYTON. Just a final comment: Did you work the fraud and abuse as an integrated system, meaning that the Federal level has certain responsibilities, and the State has, and then the county? How does that work?
I remember the prosecutions from cases at the local level. My husband is an attorney, so I remember having some social workers at the local level being, I think, investigated by the county, rather than by the State. So, is there an integrated system where there is the Federal Government, the State, all trying to enforce the same laws, but it's happening in different jurisdictions along the way?
Mr. BEAUCHAMP. Well, we have a very coordinated system nationwide on how we're going to attack welfare, and specifically, food stamp fraud.
Certainly, OIG, our agency, has the statutory authority that we can investigate any violation if it involves food stamps. But we have a small staff. We have 200 investigators nationwide and we're not only doing just food stamp investigations; we're doing other types of things.
Page 16 PREV PAGE TOP OF DOC So, at the Federal level, the Federal enforcement effort is largely against retailers and these very high-dollar amounts of fraud. The States or the counties are largely responsible for investigations of the other traditional welfare fraud.
Now we work very closely together, cooperatively together. As I mentioned in the testimony and as this case shows, where OIGwe worked on the store; we also shared our data with the State welfare department, for them to take administrative action against the recipients. We also share and work with local prosecutors. On your next panel, you'll have a prosecutor that we work very closely with in their activities.
So there's a coordination, there's a sharing of information, but largely, at the Federal level, we try to focus on the retailers, and the recipients are the focus of the States and counties.
Mr. CLAYTON. Thank you, Mr. Beauchamp.
Mr. GOODLATTE. Thank you. The gentleman from Illinois, Mr. Ewing.
Mr. EWING. What is your estimate of the amount of fraud in the system now?
Mr. BEAUCHAMP. That's a very difficult question. I've been asked that for 8 or 9, 10 years and I've always tried to skirt around it because I really
Mr. EWING. I noticed. I noticed. [Laughter.]
Mr. BEAUCHAMP. I don't know.
Mr. EWING. But it's high?
Mr. BEAUCHAMP. It's significant. There are different types of frauds. If you include the recipient making a fraudulent application, that's $500 to a billion dollars. If you include the trafficking in retail stores, that wasFCS did an estimate a couple of years ago of about $900 million. So that would be added onto that. That didn't really include the street trafficking, which would be a significant amount. So in years past, I would say, up to $3 billion probably.
Page 17 PREV PAGE TOP OF DOC Now, in the last couple of years, the amount of food stamps issued have gone down. The participation has gone down. I would think, well, maybe the percentage of fraud might not have gone down, but maybe the total dollar amount has. But it's significant.
Mr. EWING. Do you think that the enforcement procedures in investigations and all have had a positive effect on reducing fraud?
Mr. BEAUCHAMP. Well, I would hope so. Otherwise, I would feel pretty
Mr. EWING. I mean, you don't have any ongoing estimates that you keep showing that the amount, the percentage or the estimated amount, is about the same as a percentage of the dollars being used for the program?
Mr. BEAUCHAMP. No, not really. We have our nonscientific view of the types of allegation we get and what's going on in the street, and, as I said, under EBT systems, we believe there's less fraud.
We believe as we attack and use EBT, if ultimately we can have the resources to be able to use the data, it will increase fraud. It will reduce the effectiveness of our oversight, too.
Mr. EWING. In the welfare reform legislation, as I remember it, there were provisions for, penalties for fraud.
Mr. BEAUCHAMP. Yes.
Mr. EWING. Increased penalties. When are those effective?
Mr. BEAUCHAMP. Well, the penalties generally are effectivethe penalties are effective today. We had the increased fraud penalties as they related to recipients, where we doubled the penalties on recipient fraud. We have permanent disqualifications, as the chairman mentioned earlier, on recipients trafficking at $500 or more. We have forfeiture against retailers who engage in felony-level transactions. These are important.
Page 18 PREV PAGE TOP OF DOC Also, welfare reform put in certain authorities that the Food and Consumer Service can use in their authorization of grocery stores, which we thought was very important. It specifically required visits in most cases.
Mr. EWING. Well, I probably should have asked this last question first becausebut just listening to and watching your tape, it's very frustrating, as I'm sure it is to your department, to see this much fraud and see it going on in a program that's set up to help people, and all the fraud takes away from those people who really need the help.
But do you believe that the Congress has given you enough tools to fight fraud and really bring that percentage down from what I consider to be very high and unacceptable levels?
Mr. BEAUCHAMP. I think, truly, if you look at the penalties for fraud, and the new controls and the powers that Food and Consumer Service has for authorizing stores and monitoring stores, I think they're there. I can't really imagine more or stronger penalties for criminal violations. I have in my written statement a request for the committee to consider a minor technical change that would help us, but I think, legislatively, the Department has what it needs to operate the program. Now, I haven't talked about that with FCS and they might have a different view, but I think, generally, the tools are there.
One of the problems I can say is the resources devoted to these issuesthe Food and Consumer Service is a much smaller agency than it was 20 years ago, when we had a much smaller program. For our office, OIG, we have less people in OIG now than we did when we were formed in 1962, before we even had a Food Stamp Program to look at. So that's a problem that's never really been addressed. But the overall framework of how the program is structured, and the penalties, and the responsibilities and statutes, I think they're there.
Mr. EWING. Thank you, Mr. Chairman.
Page 19 PREV PAGE TOP OF DOC Mr. GOODLATTE. Thank you, Mr. Ewing. The gentleman from Georgia, Mr. Bishop.
Mr. BISHOP. Thank you very much, Mr. Chairman, and thank you for appearing, Mr. Ebbitt and Mr. Beauchamp.
As you are aware, in 1994, Congress enacted the Food Stamp Improvement Act in which, among other things, we changed the criteria which an establishment has to meet in order to qualify for participation in the Food Stamp Program. That legislation obligated Food and Consumer Service to issue regulations to implement our amendments to the act. Moreover, the committee made clear that retailers are to be contacted periodically and provided with materials describing the authorization criteria.
The issue of concern to me is I hear reports that various field officers of FCS are applying different criteria to their review of the retail outlets that are imposing on retailers requirements of participation in the program that vary from office to office, and that not only may have no basis in the law that we passed, but also of which the community, the regulated community, doesn't have any prior notice. For example, some of the field offices disqualify retailer establishments from participation because that establishment does not have ''ample variety of products within a particular category of staple foods.'' The statute requires only continuous offering of a variety of foods and not ''ample variety.''
To the best of my knowledge, FCS has not issued any regulations which the statute requires, much less provided retailers with information regarding the authorization criteria.
And, of course, in your testimony you indicated that during your sweeps, you've identified stores which were found to have no staple food items to offer for sale or had minimal quantities of staple food items.
What is your understanding of the regulations on which you're basing the criteria for enforcement which has, according to your testimony, ultimately resulted in the deauthorizations of some 450 retailers?
Page 20 PREV PAGE TOP OF DOC Mr. EBBITT. Mr. Bishop, if I could, I'll try and address that. At the time we did the sweeps, FCS had not implemented a change impacting on retailers that we were looking at during that sweeps process. We went out and we were trying to do a couple things: Find out, first of all, is the store there at all? And if it was there, what was inside the store?
And we found some pretty appalling situations of what kinds of stores were out there and what they had on the shelves. So we were making, bringing back to FCS observations of what we saw going through the store, and what was on the shelves. We saw instances of cans that had, you know, so much dust on them, obviously they hadn't been touched in some years, and they were rusty, and so on, and those are the kinds of observations we were making.
FCS at that time was in the process of revamping what was required to be on the shelves at stores, and I cannot tell you today exactly where they're at on that particular issue. I think FCS really needs to address that as far as what their requirement is.
Mr. BISHOP. Now, one thing now, we don't have anyone from FCS here today, and so I guess I was trying to establish, through questioning you and Mr. Beauchamp, whether or not you were aware of any regulations that had been promulgatedI assume through the Administrative Procedures Act or otherwise.
Mr. EBBITT. I'm sorry, Mr. Bishop, I do not know the status of where they're at on that this morning.
Mr. BISHOP. So the sweeps that were conducted and the deauthorizations of not having an ample variety and those were not pursuant to any criteria sort forth by the regulations because there are no regulations?
Mr. EBBITT. They were made pursuant to the regulations that FCS had in place at that time. But again FCS was in the process of deciding, is that the right regulation or not, or how to implement a new policy to react to the 1994 legislation.
Page 21 PREV PAGE TOP OF DOC What's important now is, particularly as EBT comes up, this is an opportunity again to visit stores since the EBT equipment has to be put into the stores. It's another opportunity to view these stores and I think various States experience
Mr. BISHOP. I don't mean to interrupt you. My time is about to expire, but visiting the store is not going to be instructive to the retailer unless there's some criteria of which the retailer has prior notice, against which you will measure whether or not they're in compliance.
Mr. EBBITT. I agree with you 100 percent on that, and I think, if FCS were here, I think they could probably address your question. They could at least tell you what the criteria is that they expect to have retailers follow presently.
Mr. BISHOP. And it is your understanding that the law does require that they make clear to retailers and they contact them periodically to let them know what the criteria are?
Mr. EBBITT. Absolutely.
Mr. GOODLATTE. Thank you. The gentleman from South Dakota, Mr. Thune.
Mr. THUNE. Thank you, Mr. Chairman. I appreciate the opportunity to participate in this important subject this morning.
It's one that I think I'm glad to hear we're making some significant progress in this area, and in our State of South Dakota, we've had what I would characterize as, I think, good success in administration of this program with a very low error rate. I think ours is one of the lowest in the country and, in many respects, attributable, I suspect, to the honesty of the people who are using the program, as well as the hard work and dedication of the staff that administers the program.
But one of the areas that is not, I don't think, is covered as thoroughly in our State, and that has to do with respect to reservations; that's an area over which State and local governments have no control. I think it's your office probably that has sole jurisdiction on that.
Page 22 PREV PAGE TOP OF DOC I'm wondering if you might be able to respond to what efforts are being made and/or can be made in the area of addressing the question of fraud, waste, and abuse in areas over which State and locals don't have jurisdiction.
Mr. BEAUCHAMP. I'm not particularly up-to-date on what work we've done in those types of circumstances as it would relate to the traditional welfare fraud on a reservation.
If the State does not have the jurisdiction on that and it goes to the Federal Government, then what we do is coordinate with the U.S Attorney that covers that. What happens next will depend on what the U.S. Attorney has as their prosecutive guidelines, the dollar amount of fraud that they will consider for prosecution.
In a lot of cases and in most of the traditional welfare fraud by recipients, the Federal Government's prosecutive guidelines are much higher than that dollar amount of welfare fraud. So it will not be a criminal investigation.
Mr. THUNE. One of the things that I think that probably adds to the problem out there is the fact there isn't theUSDA I don't think has the staff sufficient to do that, and I'm wondering in what ways the State, local governments might be able to assist USDA in their efforts in that regard, if there are any things that you could think of that we might be able to do to assist in investigating that sort of thing?
Mr. EBBITT. Well, certainly when South Dakota comes online with an EBT systemand I'm not aware if they have it yetthat in itself will be basically a State-run system, so there will be added controls that the States will have and help monitor the activity on that system.
Mr. THUNE. One of the things in that brings up another question which I was sort of interested in, too. I mean, the EBT system, as near as I can tell, is certainly a vast improvement over their current delivery system and I think you've probably seen some success with that. But I guess I'm wondering about, are there drawbacks that you see in the EBT system and is there a way in which it can be used, not only to find things out after the fact, but in a preventive area that might make the system even more efficient?
Page 23 PREV PAGE TOP OF DOC Mr. EBBITT. Well, Congressman, the nationwide alert systemthe acronym is ALERTwhich is essentially a system to review EBT transactions, is designed to identify retailers and recipients who may be violating the program. Now that is, in fact, after the fact.
But Craig was mentioning earlier that we're working with States to encourage them to design similar systems that they can see online as these transactions are occurring and, hopefully, the idea would be to catch them or identify them much quicker, and be able to do something about them.
I like to liken it to a situation with your Sprint or your AT&T phone card. They have systems in place that, if the card is being misused, they will call you within 3 or 4 hours if they see a pattern of abuse, a pattern of use that's not normal for the individual. That's the same kind of thing, this kind of data, this kind of system, will allow States and Federal Government to activate. We're not as far along in that regard as I think we need to be, but the potential is there, and that's where we have to continue to make improvements to use the information like that.
Mr. THUNE. Well, I, again, appreciate your joining us this morning and the efforts you are making to step up the and to see that this program works as well as it possibly can. I think we all have a concern in ensuring that we make the use possible of tax dollars, and certainly there have been some reforms that I know you're going through the throes of trying to implement, but to the extent that, I guess, we can help with those effort, we certainly want be able to do that.
And one of the areas, as I mentioned, that is a unique area of concern in my State, is that there isn't the jurisdiction on the reservations and to the extent that our State already has a high accuracy rate, you know, we obviously are always looking for areas in which we can improve upon that, and I would think that our State and local officials would more than happy to help you in your efforts in the areas over which they don't have jurisdiction.
Page 24 PREV PAGE TOP OF DOC So I thank you and I thank the Chair.
Mr. GOODLATTE. Thank you.
Mr. Beauchamp, what have you calculated to be the amount of money that the IG's office has saved taxpayers by shutting down some of the waste and fraud in this Food Stamp Program that you've outlined here today?
Mr. BEAUCHAMP. Well, if you look at the figures on the stores that we've caught that were trafficking, that was over a 3-year period, $260 million or so. I would consider a large portion of that as savings to the taxpayer.
Certainly, intangible work is our work on audits, when we're helping the States and FCS design controls for the program on how to handle retailers and recipients, and that's hundreds of millions dollars also.
Mr. GOODLATTE. And where does that money go?
Mr. BEAUCHAMP. Well, if there's a criminal penalty, that goes into the Treasury of the United States. Generally, if there's a savings in program dollars, that goes back to the program.
Mr. GOODLATTE. So it helps people who are legitimate user of food stamps get food stamps?
Mr. BEAUCHAMP. Exactly.
Mr. GOODLATTE. And what's the annual budget of Department's Inspector General Office?
Mr. BEAUCHAMP. Approximately $66 million.
Mr. GOODLATTE. Sixty-six million dollars per year?
Mr. BEAUCHAMP. Yes.
Mr. GOODLATTE. That's your Inspector General's office budget?
Mr. BEAUCHAMP. Yes. That's our total budget covering all our investigative and audit activities for all of the programs of the Department.
Page 25 PREV PAGE TOP OF DOC Mr. GOODLATTE. How much more work could be done in term of investigating food stamp fraud and abuse if the Department's budget, if the Inspector General's budget were greater?
Mr. BEAUCHAMP. Well, we believe there's a lot more fraud, certainly at the retailer level that we investigate, that is going uninvestigated and undetected.
Mr. GOODLATTE. You've really looked only in a few communities, is that right, in many of the types of investigations you're conducting?
Mr. BEAUCHAMP. Yes, well, as I said, we're a small outfit. We have maybe 200 agents nationwide. That's a couple per State. We now expend almost 50 percent of our time doing food stamp work, so maybe that's 100 agents nationwide. That's only two agents a State, so we are spread very thin.
Mr. GOODLATTE. Sure, sure.
In your testimony today and in almost every issue of the semi-annual report to the Congress that your office has published in the last 5 years, there are accounts of retailer fraudretailers that are ineligible to redeem food stamps or whose eligibility is questioned for one reason or another but still do redeem food stamp benefits. I think you displayed one of those on the television screen here earlier.
Why has this problem gone without the attention of the Department in a proactive manner for so long?
Mr. BEAUCHAMP. Well, I think the Department has given it attention. Both OIG and the Food and Consumer Service agency is attempting to do things. I think we can all do them better. OIG can do things better on the investigative phase, on the audit phase, and the Food and Consumer Service can do things better. I think, generally, the Department is moving forward in this area.
Page 26 PREV PAGE TOP OF DOC Mr. GOODLATTE. You think that the resources of your office are, again, a hindrance to doing that?
Mr. BEAUCHAMP. Well, certainly the resources for OIG, or the lack of resources, is a hindrance to us. If we had more resources, we could identify more problems, we could do more audits, and make more recommendations, and I think they would be important in addressing the problem.
Resources, as I mentioned earlier, is also a problem with the Food and Consumer Service. They have less resources now than they ever had and they're operating billion-dollar programs too.
Mr. GOODLATTE. Just in the videotape you offered, that was one example of one small grocery in the city of Baltimore obviously engaged in the perpetration of fraud. I think in your chartnot the one that is showing right now, but the earlier onethe indications were that just in Baltimore, there were a number of suspected locations, I mean, in the hundreds of locations, where this type of activity is going on. Is that an accurate statement?
Mr. BEAUCHAMP. That's correct, yes.
Mr. GOODLATTE. And how much time did it take to do just this one investigation?
Mr. BEAUCHAMP. Well, investigations are time-consuming. This investigation, from the initiation of it until the final judicial action, took almost a year.
Mr. GOODLATTE. And yet this fellow, in this one example in the one 20-minute time span that you showed us, had ripped off the taxpayers by about $2,000 in 20 minutes.
Mr. BEAUCHAMP. That's correct. In fact, his, I think his greatest day of EBT activity, of which we believe 90 percent or more was fraudulent, was $17,000 in one day. For a month, his largest month of EBT activity was $100,000.
Page 27 PREV PAGE TOP OF DOC Mr. GOODLATTE. You mentioned in your testimony that I was a sponsor of an amendment to last year's welfare reform bill regarding visits to retailers as a requirement for eligibility in the Food Stamp Program, largely because of the results of your 1995 sweep that you also testified about. And you told us that we've identified and disqualified about 20,000 stores that were defrauding the Food Stamp Program.
Do you have any figures as to how much these store visits have saved the taxpayers thus far?
Mr. BEAUCHAMP. I think we have some documentation on the stores that were disqualified through this sweep.
Mr. GOODLATTE. Don't know what those figures are?
Mr. BEAUCHAMP. I can get that figure for you, sir, but that was quite a few millions of dollars.
Mr. GOODLATTE. Do you have an estimate of what is saved by the average store being disqualified from the program?
Mr. BEAUCHAMP. I don't have it at the top of my head. I can probably do some mathematics and give you that, but stores vary. This store, a small store, certainly not the biggest store we've investigated, that was over $700,000 worth of fraud in an 18-month period.
Mr. GOODLATTE. Well, if you have 20,000 stores and the average fraud is $700,000, we're talking about an enormous figure.
Mr. BEAUCHAMP. Yes, I'm not sure. I wouldn't say the average fraud on the stores is $700,000. It would be less than that.
Mr. GOODLATTE. Five hundred thousand dollars?
Mr. BEAUCHAMP. That's still a pretty big number. It would be less than that, but I'm a little bit hesitant to work math out in my head. I have enough problems doing it with a calculator.
Page 28 PREV PAGE TOP OF DOC Mr. GOODLATTE. I'm trying to do it in my head, too. If it were $100,000 times 20,000 stores, that's still in the billions of dollars.
Mr. BEAUCHAMP. I have an accountant here next to me. [Laughter.]
What we have
Mr. GOODLATTE. Mr. Ebbitt, do you have anything you can contribute to this?
Mr. EBBITT. Mr. Chairman, I was looking back at our report we issued on our sweeps activity. We have 794 stores that FCS removed from the program. Let's see, well, I can't find the figure, Mr. Chairman.
The 5,000 stores we looked at redeemed approximately $42 million in a year's period. Now of those, we questioned around 1,300; 794 were eventually removed.
The figure I'm looking for is how much activity occurred at the 794. I think I have it here. It may take me a minute to find it.
Mr. BEAUCHAMP. I think my staff might be coming up with a figure on our 3-year number of stores that were disqualified, which was, I think, was about 1,400, based on our investigations and the $266 million that they did in annual redemptions.
Mr. GOODLATTE. Where do I get the 20,000 figure of stores identified and disqualified?
Mr. BEAUCHAMP. I think that might be 2,000.
Mr. GOODLATTE. Two thousand stores?
Mr. BEAUCHAMP. Two thousand, if it's based on our investigations, yes.
Mr. GOODLATTE. All right, and Mr.
Mr. BEAUCHAMP. That's not includingI can also say, the Food and Consumer Service has their own compliance branch that goes out and does compliance reviews, and they also identify stores that are violating program regulations.
Page 29 PREV PAGE TOP OF DOC If they find trafficking, they refer them to OIG for criminal investigation, but they, in their reviews, they also find an awful lot of stores. They actually end up disqualifying more stores than we do, so that would be thrown in the mix, too.
Mr. GOODLATTE. Do we have a figure per store?
Mr. BEAUCHAMP. Approximately $185,000 per store.
Mr. GOODLATTE. And if there are 2,000 stores, all right, here's where we're getting our 20,000 figure from. In your testimony, Mr. Beauchamp, on page 5, you refer to ''the impact of these efforts can be seen by comparing the number of authorized retailers, 208,000 when we did our sweeps in 1995, to 188,000 now,'' which would be a 20,000-store reduction.
Are you saying that some of those stores are eliminated for other reasons and the decline is accountable for something other than the sweep program? Because your testimony seems to be suggesting that there's a 20,000-store reduction because of the sweeps.
Mr. BEAUCHAMP. Well, with the sweeps and the FCS doing their own sweeps, and the tightening of reviews that was in the welfare reform law, you have a reduction of stores.
Mr. EBBITT. I think there's no doubt about that. I mean, this reduction occurred because of the emphasis, the renewed emphasis, the increased emphasis given to retailer activity that began with the sweeps program. So I mean, the 20,000 didn't fall out because of the sweeps directly, but as the emphasis continued and as States EBT went to put the EBT equipment in stores and they found these problem stores, that's when you saw a big number begin to drop out.
Mr. GOODLATTE. All right, and how can we ensure that visits happen on a regular basis to stores to assure that they are indeed engaged in the sales of groceries and not in the trafficking of food stamps?
Page 30 PREV PAGE TOP OF DOC Mr. EBBITT. Visits are, we believe, Mr. Chairman, absolutely essential to the program, and I understand that FCSagain, Craig has talked about resource issuesI understand they're working with a contract. Their goal is toI'm not sure of the exact time frame, but they want to visit 35,000 stores to do exactly that, to assure retailer integrity.
Mr. GOODLATTE. And who are they contracting with to do that?
Mr. EBBITT. I don't know that, sir.
Mr. GOODLATTE. Can you get us that information?
Mr. EBBITT. Sure.
[The information follows:]
According to the Food and Consumer Service, the following firms have been contracted to perform store visits: First Venture JV, West Palm Beach, FL; Dynamic Science, Inc., Phoenix AZ; Correlation Corp., Golden, CO; Greet America, Dallas, TX; and Nationwide Credit Research, Los Angeles, CA.
Mr. GOODLATTE. And are you satisfied that they're doing all they can to ensure that only eligible stores are authorized or are there improvements needed in their inspection program?
Mr. EBBITT. Well, we recommended and the IG, when he testified, recommended a visit to every store before it began business. That's presently not a requirement.
The legislation brought in some new things that are very helpful in screening retailers as applications come in, but that initial visit, or at some point a visit is absolutely critical to the integrity of the store process.
Now, again, I said every store. We've always said that we've a lot of confidence in the big supermarket chainsSafeways and Giantsin those kinds of operations. That's not been where the problems have been. But, I mean, visiting stores is critical to this program.
Page 31 PREV PAGE TOP OF DOC Mr. GOODLATTE. You mentioned that the FCS continues to have many retailers in its database of authorized retailers that are ineligible or questionable. Who identifies them as ineligible or questionable? How is that done?
Mr. EBBITT. Again, that would be through either the store processI'm sorry, the visits to stores, or, as we mentioned earlier, since we did the initial sweeps, FCS has done some sweeps activity of their own. The process has continued.
We have been working with FCS in selected major urban areas around the country to continue to go out and visit stores, and that's where every time you make some sweeps, you're going to find some that need to be moved out of the system.
Mr. GOODLATTE. And what do you do once you identify them as such?
Mr. EBBITT. Once they've been identified, FCS has to make the determination. Are they, in fact, operating in accordance with the rules and regulations that are out there? If, in fact, they do not have the food requirements in the store, FCS can take action to get them out of the system and to revoke their authorization. And that's the process that they go through.
Mr. GOODLATTE. And is there an appeal or what is the procedural avenue that is followed to disqualify retailers?
Mr. EBBITT. Retailers do have a right to appeal. That's an administrative hearing process that can bring evidence to show that they do, in fact, qualify, and once there is a hearing, FCS will make their determination. If they're removed, then the retailerthe next course of action would be in the Federal court system.
Mr. GOODLATTE. And what is an out-of-project store?
Mr. EBBITT. Out-of-project store relates directly to EBT operations and the industry, the retail industry, wants to have all of their stores be able to accept an EBT card.
Page 32 PREV PAGE TOP OF DOC That's one of the ideas behind EBT. You have universal acceptance no matter where you're at in the United States. That is more or less a goal of the program. For example, if in Virginia, Safeway has all of their stores authorized, and you go out to West Virginia and they're not up with the program yet, Safeway wants to have their stores with their ATM equipment in place authorized to accept that EBT card. With appropriate authorizations, technically this could be done. What's important, of course, is that the reconciliation controls are in place to make sure that the benefits are accounted for, and the accounting process occurs correctly, and that the controls are there to control that.
Mr. GOODLATTE. Thank you. Mrs. Clayton, do you have additional questions?
Mrs. CLAYTON. Yes I do. Let me visit the same set of information.
You start with the assumption that the larger stores are pretty good, so your effort isn't to look at the big stores, right?
Mr. EBBITT. That's essentially what history has shown. That's correct.
Mrs. CLAYTON. So then you go and what's the size of your stores? These are small Moms-and-Pops or whatever they are?
Mr. EBBITT. A good portion of them, yes.
Mrs. CLAYTON. A good portion. The 888 retailers that were ineligible, what would be the size of those stores, you say?
Mr. EBBITT. A good portion of those, Mrs. Clayton, were the smaller Mom-and-Pop kinds of operations. In many instances you'd go in there and there wasn't a hundred dollars' worth of grocery items in the store.
Mrs. CLAYTON. Here's what I was wondering: Of those that were ineligible, you didn't find 450 retailers that were considered questionable since they had unlimited quantity of food. Would those be because of fraud or because they didn't qualify as a grocery store?
Page 33 PREV PAGE TOP OF DOC Mr. EBBITT. We were questioning whether they qualified as a grocery store based on our observation of what they had on the shelf.
Mrs. CLAYTON. So if you take that, if we takeshould I add that to the 858 or subtract it?
Mr. EBBITT. Add it.
Mrs. CLAYTON. So we now have
Mr. EBBITT. It's about 1,352 as I recall, 1,308.
Mrs. CLAYTON. OK, 1,508 small retailer stores in the country. And of that, 450 just didn't qualify for grocery stores?
Mr. EBBITT. Well, actually the 858 didn't qualify. The additional 450 were stores that we thought were questionable but we couldn't make the determination. We gave that information to FCS to make the final judgment on that.
Mrs. CLAYTON. I guess here's where I'm coming at: I don't want people adding up today, as I'm attempting to do, something your investigation should have done over a period of years, and kind of a smart answer as to what the fraud is. So you help me understand, how do I decipher this as to how many of these stores were dismissed because you found them actual guilty of fraud and how many were ineligible for other reasons?
Mr. EBBITT. Actually, 794 were found to be not to qualify as a retail store under the FCS program rules.
Mrs. CLAYTON. As a result of fraud?
Mr. EBBITT. As a result of not qualifying as a retail outlet.
Mrs. CLAYTON. OK, I accept that. Retail outlet meaning having sufficient amount of food?
Mr. EBBITT. That's correct.
Mrs. CLAYTON. Of the 794, what percentage did you determine, or was that part of your distinction of your clarification that you were looking for people committing fraud, or are you looking for people who just didn't follow rules or were ineligible?
Page 34 PREV PAGE TOP OF DOC Mr. EBBITT. Well, during that sweep activity, the primary objective was to identify stores that didn't qualify as a retailer and shouldn't have had a license to accept food stamps.
Mrs. CLAYTON. Shouldn't have been there in the first place?
Mr. EBBITT. That's correct.
Mrs. CLAYTON. So, when we get back to the impact of your efforts, you actually authorize retailers in Americain 1995, it was 208,000?
Mr. EBBITT. Right.
Mrs. CLAYTON. And again, we're not counting the big guys. We're talking about the little guys?
Mr. EBBITT. Oh, no, the 208,000 would include all the authorized retail outlets.
Mrs. CLAYTON. Oh, OK. So when we get back to the 188,000, we're now talking about what's left in the system to participate, right?
Mr. EBBITT. That's correct.
Mrs. CLAYTON. And that's how this 20,000 is
Mr. EBBITT. Yes.
Mrs. CLAYTON. Now, is there a way for you to determinelet me put it this way: How do you now determine who is eligible for a store? Where is the eligibility? How has it changed since we had the new law in the welfare reform system in the eligibility of a store? What happens now?
Mr. EBBITT. Well, again, FCS needs to make that determination.
The FCS set the policy of who is eligible to be an authorized food stamp retail outlet. They do that based on information and application data coming in from the retailer. The retailer has to make an application to FCS. There are some training requirements where FCS has to provide training to the retailers on what their responsibilities are. Hopefully, you'd have a visit, but the visit doesn't always occur, again, primarily because of resource issues. So, much of the determination is based on a paper application process that comes in to FCS. And FCS will make that determination and issue the authorization.
Page 35 PREV PAGE TOP OF DOC Mrs. CLAYTON. I'm in North Carolina. I'm in a rural community, say, Henderson. And I've opened up a grocery store or whatever, and I think I should be eligible. Do I send it to Washington or I send somewhere in my State?
Mr. EBBITT. You would send it toit would be a regional center, and I'm not sure exactly where that is.
Mrs. CLAYTON. Probably Atlanta?
Mr. EBBITT. For North Carolina, it could be Atlanta.
Mr. BEAUCHAMP. I think Atlanta is the regional office, but probably the local field office in North Carolina is where the application
Mrs. CLAYTON. So there is a local field office in each State?
Mr.BEAUCHAMP. Well, I won't say it's in each State, but certainly every major city.
Mrs.CLAYTON. I'm just trying to see the capacity to do the monitoring of the eligibility of prior to determining. So, the paper goes somewhere, right?
Mr. BEAUCHAMP. Right.
Mrs. CLAYTON. To a office that may be multistate or it may be
Mr. EBBITT. It could be, yes.
Mrs. CLAYTON. It could be. And so based on the submitted application, some determination is made whether these proprietors need to be trained?
Mr. EBBITT. Well, no. A training is an essential element for any store.
Mrs. CLAYTON. For everybody?
Mr. EBBITT. That's correct.
Mrs. CLAYTON. Where does that occur? Does someone go to the store or he comes, she goes somewhere?
Page 36 PREV PAGE TOP OF DOC Mr. EBBITT. Frequently it's done by FCS calling together a number of new retailers. It may occur at the local library, a local auditorium, someplace where they can get a number of retailers together, and training is provided jointly at that time.
Mrs. CLAYTON. What's the evidence that you require on the application, or FCS requires on the application to determine that they are a legitimate store?
Mr. EBBITT. Well, they
Mrs. CLAYTON. Financial records?
Mr. EBBITT. I'm sorry?
Mrs. CLAYTON. Would they include financial records, certifications of corporations, or
Mr. EBBITT. Yes. The new, in fact, the new legislation authorized FCS to get sales information.
It requires licensing, State licensing papers for the store. I don't have the entire list in front of me, but, essentially, it would include the State license for the retail outlet and sales date if it's available. If it's a brand-new store, of course, that won't be available.
It requires projections on what do you intend to sell, what do you think you're going to sell, the kinds of products that you're going to sell at your store, all those kinds of things. And then FCS will get that and make their determination.
Mrs. CLAYTON. Final question: Since your emphasis is on the retailers, do you have any comparison between percentage of fraud at the retail level and percentage level of fraud at the recipient level?
Mr. EBBITT. Well, at the recipient level, FCS, has a very good quality control system to measure fraud on the recipient side, either caused by recipients or if it's an administrative error on the part of the administering agency.
Page 37 PREV PAGE TOP OF DOC And right now, the latest report on the national error rate, it's, actually FCS and States have made some improvements. The combined payment error rate, both over and underpayments, the latest reporting, completed reporting cycle is fiscal year 1995, shows the error rate at about 9.71 percent. That's on a nationwide basis, and that error rate has been coming down.
Now that translates into, well, 9.71 percent of the $22 billion program, so you're looking at close to $2 billion in overpayments to recipients, or some underpayments are in that figure as well.
And, as Craig was mentioning earlier on the fraud side of the House, it's a little more difficult. FCS has estimated on trafficking $900 million was their estimate. There have been a number of estimates made. That's a very difficult estimate to try and get a hold of.
Mrs. CLAYTON. Thank you.
Mr. GOODLATTE. Thank you, Mrs. Clayton and thank you, gentlemen, for your participation today.
I would encourage you to see if you can't hone those figures on what these elimination of retailers who are engaged in illegal trafficking in food stamps and other fraudulent activities is saving the taxpayers.
And the reason I suggest it to you is that I think a lot more can be done in that area and in other areas of food stamp fraud if you have, as an office, the resources to do it, and I think you're saving the taxpayers a tremendous amount of money, and you ought to toot your horn a little bit by talking, in a realistic way, with figures we can deal with.
Obviously, if you eliminate a retailer, it doesn't necessarily eliminate the fraud because they may go down the street to somebody else engaging in fraud, but overall, this activity has got to have a positive impact on reducing food stamp fraud. And if we can develop those figures a little better, I think that would help to justify more resources for you to continue your efforts.
Page 38 PREV PAGE TOP OF DOC Mr. EBBITT. Thank you.
Mr. BEAUCHAMP. Thank you, Mr. Chairman.
Mr. GOODLATTE. And thank you both. We would like to invite our second panel to the table.
Joining us today are Mr. Robert Robinson, Director of the Food and Agricultural Issues, Resources, Community, and Economic Development Division at the General Accounting Office; Mr. Haven Kodeck, Deputy State Attorney for the City of Baltimore. Accompanying Mr. Kodeck is Elizabeth Ritter, Chief, Economics Crimes Unit of the Baltimore City State Attorney's Office, and Mr. Tom Schatz, President of Citizens Against Government Waste.
I want to welcome all of you, and Mr. Robinson, you may proceed first when you're ready.
STATEMENT OF ROBERT A. ROBINSON, DIRECTOR, FOOD AND AGRICULTURE ISSUES, RESOURCES, COMMUNITY, AND ECONOMIC DEVELOPMENT DIVISION, GENERAL ACCOUNTING OFFICE
Mr. ROBINSON. Thank you. It's good to be back before you again.
Mr. GOODLATTE. We've had you many times and we're welcome you back.
Mr. ROBINSON. With me today is Leigh White who's done a lot of our detailed audit work on this issue.
Now I know it's several hours into the hearing, but when discussing fraud, waste, and abuse in the Food Stamp Program, I really think it's important to define the two basic components of the problem. First, there are inappropriate payments; that is providing food stamps to individuals not eligible to receive them at all or providing more benefits than they're eligible to receive. Second, there's the problem of trafficking that has received the bulk of the discussion here this morning.
Page 39 PREV PAGE TOP OF DOC Concerning the first component, in 1996so this is a little more updated data from what you've heard just a moment agoUSDA paid individuals about $1.5 billion in food stamp payments that they weren't eligible to receive. These overpayments represented about 7 percent of the $22 billion in benefits provided that year. Based on 1996 Food and Consumer Service data, most overpayments are due to errors made by recipients in making their benefit claims, including a significant numberabout 21 percentdeemed by FCS to be intentional mistakes. About 40 percent of the overpayments are due to errors made by the State caseworkers.
As you may recall, in March of this year, we reported on one example of overpayments. By matching automated food stamp and prison records in four big food stamp StatesCalifornia, Florida, New York, and Texaswe identified over 12,000 inmates who were included in households receiving food stamps in fiscal year 1995. These households improperly collected about $3.5 million in food stamp benefits. There was an added salutary result of our audit work. In the course of our work we identified a couple of escaped prisoners who, after escaping from prison, got food stamps and were able to be tracked down in that fashion.
I know, Mr. Chairman, you were pretty aggressive in pursuing a resolution of this problem and the Balanced Budget Act enacted measures aimed at correcting this problem. I might also add that currently for the Senate Agriculture Committee we are conducting computer matching work on other ineligible populations to see if the same situation is prevailing.
I won't spend a lot of time on trafficking because you've really had a lot of discussion on that, but I do think it's important to recognize that food stamps are and have become a second currency exchanged by recipients for cash or non-food. Trafficked food stamps may change several times but all food stamps must eventually flow through an authorized dealer because only such a dealer can redeem food stamps for payment by the Government.
How big is the problem? You know, there is obviously no sure way to know the complete answer unless you put a tail on everybody that gets benefits. I guess that would be the only conclusive way to establish the extent of the problem. The most detailed available estimate was prepared in 1995 by FCS. They suggest that up to $815 million or about 4 percent of the food stamps issued were exchanged for cash by retailers. Now again, this doesn't count situations where say I receive my food stamp benefits and give Leigh $10 worth in exchange for $10 in cash so I can buy cigarettes with the money and she can redeem the coupons at the food store for $10 worth of food. Obviously that kind of situation is not going to be incorporated in this kind of data.
Page 40 PREV PAGE TOP OF DOC I think an important statistic needs to be brought to bear when you're considering solutions here. Trafficking rates vary widely by the types of stores involved, ranging from less than one-tenth of 1 percent for the big chain supermarkets to over 15 percent by small private food stores and the convenience marts.
In 1995 we reported on efforts to reduce trafficking and found numerous weaknesses in FCS's processes. Of most importance, and you heard a lot about this earlier, FCS was not pursuing the most effective deterrent against trafficking, and that is onsite visits to store locations before they're authorized to accept and redeem food stamp coupons. Since our report, FCS has initiated several actions to reduce trafficking, in particular, FCS has contracted with, I believe, seven different companies to make 35,000 to 40,000 store visits by the end of fiscal year 1998.
Let me conclude with a few observations on the potential of EBT to address the waste and abuse problem. Currently, about 20 percent, maybe a little more, of all food stamp benefits are delivered by EBT. Eleven States are delivering food stamp benefits by EBT statewide and an additional 16 are using EBT in some locations. Of those, eight States are delivering food stamps along with other Federal program benefits on the same EBT card.
While unquestionably a beneficial tool, and now legislatively mandated by October 2002, EBT should not be viewed as the panacea for all the program's ills. EBT systems have the potential and are reducing some aspects of fraud, waste, and abuse but not others. By providing a clear audit trail of all food stamp transactions, EBT systems help reviewers identify trafficking activities and remove and prosecute the offending retailers. EBT cards also help reduce the problems with coupon theft. However, in the States that have converted to EBT, trafficking is still occurring.
More importantly, and this is where I want to come back to the two basic components of the problem, EBT systems are simply another vehicle for distributing benefits. They cannot correct the $1.5 billion fraud, waste, and abuse problems associated with benefit overpayments. As we reported in 1994 and continue to believe today, EBT systems will likely be most cost effective if they are used to deliver food stamps in conjunction with other Federal and State assistance programs.
Page 41 PREV PAGE TOP OF DOC With this, I'll close and let the others begin their statements.
[The prepared statement of Mr. Robinson appears at the conclusion of the hearing.]
Mr. GOODLATTE. Thank you very much, Mr. Robinson. Mr. Kodeck, am I pronouncing your name correctly?
Mr. KODECK. It's like the camera, it's just spelled differently. [Laughter.]
Mr. GOODLATTE. We're glad to have you with us.
STATEMENT OF HAVEN KODECK, DEPUTY STATE'S ATTORNEY, CITY OF BALTIMORE, ACCOMPANIED BY ELIZABETH RITTER, CHIEF, ECONOMIC CRIMES UNIT, BALTIMORE CITY STATE'S ATTORNEY'S OFFICE
Mr. KODECK. Thank you. Mr. Chairman and members of the committee, I'm Haven Kodeck, Deputy State's Attorney for Baltimore City. With me today is Elizabeth Ritter, chief of the Economic Crimes Unit of the Baltimore city State's Attorney's office. We are pleased to provide testimony concerning the prosecution of fraud and food stamp abuse.
Prior to being appointed Deputy State's Attorney, I was in charge of the Economic Crime Unit for Baltimore city. One of the many crimes we investigated and prosecuted was food stamp fraud.
Working with the office of the Inspector General Investigation Division, our unit prosecuted numerous individuals charged with theft, welfare fraud, and conspiracy to commit these acts. Our office found the Investigation Division to be well prepared, extremely efficient, and totally committed to the investigation and prosecution of food stamp fraud.
Initially, we prosecuted individuals who did trafficking in food stamp paper coupons. After the conversion from the paper coupons to the EBT system, we continued to prosecute individuals and stores owners engaged in trafficking.
Page 42 PREV PAGE TOP OF DOC In 199780, Operation FENCERIDER was conducted, which was one of the first major sting operations in Baltimore city involving food stamp trafficking. Baltimore city and Baltimore county police along with agents from the USDA Inspector General's office and the Baltimore State's Attorney's office conducted a sting operation of major fences in the Baltimore city and county areas. This operation consisted of USDA Special Agents selling food stamps for stolen property and firearms. In this operation, stolen diamond rings to tractor trailer loads of tires were purchased with food stamps. Approximately 30 individuals were charged federally for food stamp trafficking and over 100 individuals were charged by the Baltimore city State's Attorney's office for theft of stolen property.
In 198283, another sting operation named Operation STAMPOUT was conducted with the Baltimore city police narcotics unit, DEA, and Special Agents in the OIG's office and the U.S. Attorney's office. One of the major heroin dealers in Baltimore city, along with 12 of his workers, were charged in a Federal court with food stamp and narcotic trafficking and also operating a continuing criminal enterprise. The defendant received a 15-year sentence. Sixteen people were charged by the Baltimore city State's Attorney's office on State narcotics and food stamp violations.
From 1984 to 1991, four other sting operations were conducted by the Baltimore City Police Department, agents from USDA, the U.S. Attorney's office, and the Baltimore city State's Attorney's office involving narcotics and food stamp trafficking. The majority of the individuals who were charged were owners or associates of authorized stores.
Starting in 198990, the State of Maryland converted from paper food stamps to an electronic EBT system, better known as the Maryland Independence Card. Since the use of the EBT cards, the trafficking for narcotics and firearms for food stamp benefits is a rare occasion.
In 1992, an investigation conducted by USDA agents focused on a small corner grocery store which basically had few food items. This store was owned by a father, a daughter, a son-in-law. One defendant was charged in Federal court with food stamp trafficking. The others were prosecuted by the Baltimore city State's Attorney's office and was charged with fraud. This store trafficked in over $200,000 in food stamp benefits in a 1 1/2-year period of time.
Page 43 PREV PAGE TOP OF DOC In 1994, 20 recipients were indicted for theft and welfare fraud for selling food stamp benefits at several stores, all located in Baltimore city. The owners of these three stores were charged in Federal court.
In December 1995, the Baltimore city State's Attorney's office prosecuted 10 food stamp recipients for fraud.
In 1996, the Baltimore city State's Attorney authorized the prosecution of four family members for narcotics distribution, welfare fraud, and conspiracy to obtain public assistance by fraud. During the investigation of the target, a major marijuana distributor in Baltimore city, approximately $100,000 in cash and bonds were found in a safe deposit box. Also, evidence was discovered that showed the family had been receiving food stamp benefits since 1995.
In July 1997, the Baltimore city State's Attorney's office also authorized the prosecution of two Canadian citizens for food stamp trafficking. They were charged with theft and welfare fraud.
We have seen a dramatic reduction in street trafficking; however, fraud of another kind continues to flourish. With this conversion, drug exchange has been reduced but the money exchange and non-food items with recipient continues to exist, though the computerization of EBT has enhanced the ability to identify and prosecute those individuals engaged in illegal transactions.
Additionally, a joint investigation was recently concluded where a computer match was conducted with the Department of Corrections and Baltimore City Detention Center resulting in over 400 potential matches. These matches were shown to indicate that individuals incarcerated were still being considered eligible for food stamp benefits. The Department, through the local Department of Social Services, investigated 391 of these cases and administratively closed or reduced benefits on 225 cases. Another 50 cases had data corrected. The remaining cases were not fraud. The total value of these cases was approximately $400,000$140,000 in overpayment, and $260,000 in cost avoidance.
Page 44 PREV PAGE TOP OF DOC Fifteen individuals were indicted as a result of the match and charged with theft and welfare fraud. Nine persons have already pled guilty with six remaining yet to be apprehended.
This concludes our statement, Mr. Chairman. We thank you again for the opportunity to address the committee and we'd be pleased to answer any questions you or the members of the committee may have.
[The prepared statement of Mr. Kodeck appears at the conclusion of the hearing.]
Mr. GOODLATTE. Thank you, Mr. Kodeck. Mr. Schatz, we're glad to have you with us today.
STATEMENT OF TOM SCHATZ, PRESIDENT, CITIZENS AGAINST GOVERNMENT WASTE
Mr. SCHATZ. Thank you very much, Mr. Chairman, and I congratulate you and the ranking member for conducting a very important hearing on a very important subject.
Clearly, food stamps is a program that deserves to be continued and it is certainly unfair to those who are participating in it fairly. And those families who are receiving stamps because of the fraud, they need to be taken off, and I'm certainly glad to see all these people here addressing this problem today.
Citizens Against Government Waste issued a report in 1996 called ''Food Stamp Fraud: Out of the Mouth of Babes,'' and at the unveiling of that report, the former chairman of this committee, Mr. Roberts, and the former ranking member of the subcommittee, Mr. Condit, joined us in supporting the recommendations, several of which were adopted in the Welfare Reform Act last year. So this has traditionally been a nonpartisan and a bipartisan effort and one which this hearing shows today is continuing on that level because there is no question when you have weaknesses in food stamp delivery, eligibility and benefit determination, illegal trafficking, and other areas that haven't been mentioned so far, counterfeiting, theft and loss, certainly these efforts need to be continued in the future.
Page 45 PREV PAGE TOP OF DOC The changes made in the Welfare Reform Act of 1996 have been addressed by the IG and GAO, and obviously a number of those are ongoing and I think the results will be shown in the future in terms of how many additional penalties are being enforced and the deterrent effect on additional crimes in the food stamp area.
The EBT card is very important. I was pleased to hear that the General Accounting Office supports the idea of all Federal programs, welfare benefit programs, being on one card. A recommendation similar to that was made by the Grace Commission, the idea of issuing a kind of W4 form that identified how much money was being sent out to the recipients. This is certainly a way to keep track and addresses questions about how much is being provided, how much is being wasted, and how these beneficiaries are actually utilizing the benefits they receive.
We recommend, as an addition to current efforts, several that may also reduce fraud. One is to encourage whistleblower participation in exposing corrupt retailers by offering financial rewards for tips that lead to a conviction.
Second, strengthen the background checks and establish a timeframe to update food stamp records and family demographics. One of the things that was recommended by the Grace Commission was to continually update the type of family and the people that were eligible for food stamps, which may also help track down people that are illegally receiving those benefits.
Third, utilize fingerprint and optical scanning identification to eliminate multiple benefits. If you've been to your bank lately, they have a thumbprint for people that are not banking at that particular bank, from out-of-state or someone who doesn't have their account at that bank. It doesn't seem to be terrible intrusive and, of course, it will help track down people who do commit fraud. Finally, examining the capability of optical scanners to identify fraudulent recipients and merchants, banks are now beginning to utilize that at ATM machines.
Page 46 PREV PAGE TOP OF DOC These changes, of course, will not totally eliminate food stamp fraud, but with the efforts being made at the IG level and your continued oversight, along with public demand for reform, the system will be changed and fraud will be reduced.
Your question regarding the IG's ability to come up with numbers is very helpful because they should be talking about how much they save. A lot of IGs have been able to identify, for every dollar spent, they're saving $6, $7, $8, $10. That helps provide you with the support you need if you wish to increase or otherwise account for how this is working in terms of prosecuting and uncovering the fraud, and it's certainly one area where Citizens Against Government Waste would support additional spending as long as we can identify what we are getting in return.
Now Congress and the administration have a responsibility to the millions of low-income and undernourished Americans to clean up the Food Stamp Program. We estimate that $5 billion is being wasted. That was based on numerous discussions with the GAO and IG's office. We've heard $3 billion is at least as far as the IG would go, but whether it's $3 billion, $4 billion, $5 billion, $2.5 billion, it's certainly too much in the program in which we're spending $22 billion. We're talking about anywhere from 10 percent to 20 percent of the money being spent, which is not being used as it should be, which is to benefit people who truly need the assistance. We must ensure that children, not criminals, are being fed.
Mr. Chairman, thank you very much for the opportunity to testify on the behalf. I'll be happy to answer any questions.
[The prepared statement of Mr. Schatz appears at the conclusion of the hearing.]
Mr. GOODLATTE. Thank you, Mr. Schatz.
I'd like to ask each of you: In light of the testimony earlier that there's $1.5 billion per year estimated by the Department itself in terms of State-caused error in the Food Stamp Program or 7 percent of the total cost of the program, how would you rate the effectiveness of the USDA system of incentives and sanctions that are to encourage the states to reduce the number of errors?
Page 47 PREV PAGE TOP OF DOC Let's start with you, Mr. Robinson.
Mr. ROBINSON. Well, I don't see how anyone could look at the system of incentives and sanctions, particularly the sanction end of it, and view it as credible. Sanctions are made. Sanctions are waived. Sanctions are made. Sanctions are waived. If I were I in the State's shoes, I don't believe I would take it all that seriously.
Mr. GOODLATTE. All right. Mr. Kodeck.
Mr. KODECK. I would have no comment. We don't see it at our point. It's brought to us when there's a crime that's potentially to be committed.
Mr. GOODLATTE. Mr. Schatz.
Mr. SCHATZ. One of the first recommendations implemented out of the Grace Commission was the Income Eligibility Verification System, which came out of the House Ways and Means Committee when Mr. Rostenkowski was chairman. It is in place for every State. The States that have low error rates use the Income Eligibility Verification. They use computer matching. They're able to identify ineligible people. Those States that don't use it often have the higher error rates.
And so it's a matter of using the existing tools that they have, and I think, was pointed out a minute ago, really enforcing these sanctions against the States because for too longthe program's been around for over 30 yearsthey've been allowed to get away with this for far too long.
Mr. ROBINSON. If I could add one more supplementary statement, our work has shown that the most important step you can take to reducing these overpayments is a commitment on the part of the States to take concerted action toward accomplishing that. So sanctions make a lot of sense if they actually are taken seriously.
Mr. GOODLATTE. Thank you. Mr. Kodeck, let me get one maybe you can handle here and that is to ask, what is the source of funding of your office?
Page 48 PREV PAGE TOP OF DOC Mr. KODECK. We areI guess we're a hybrid. We're paid by Baltimore city. We have some Federal funds and we also have some State funds.
Mr. GOODLATTE. Do you receive funding through the Food Stamp Program?
Mr. KODECK. No, we do not.
Mr. GOODLATTE. All right. In last year's welfare reform bill, we allowed the States to keep 35 percent of the fraud over-issuances that are collected by the States, and some States use this money to fund special fraud offices. I wonder if you have any view on whether that it's a good idea, even though you're not the beneficiary of it?
Mr. KODECK. If our office was the beneficiary, I would be certainly in favor of that, Mr. Chairman. [Laughter.]
Mr. ROBINSON. As would we. [Laughter.]
Mr. GOODLATTE. We heard from the IG's office and their need for additional funding to do more work in this area. Do you have the same problem?
Mr. KODECK. Yes, we do. Ms. Ritter, who's in charge of our economic crimes unit, of which I was in charge for 12 years, is a small outfit, and unfortunately, welfare fraud and food stamp fraud is just one of the many types of crimes her unit investigates. And because of the limited resources that we have, and I'm sure, Mr. Chairman, you've heard this all too often, we can only prosecute and investigate a certain number of crimes because of the limited resources we have. We're not trying to minimize food stamp fraud, quite the contrary, but we have very limited resources, of which she has only six attorneys and two investigators assigned to her unit.
Mr. GOODLATTE. Do you have a feel for what percentage of the food stamp fraud cases that are within reach are actually being addressed as opposed to those that are not?
Page 49 PREV PAGE TOP OF DOC Mr. KODECK. I can answer it this way, Mr. Chairman. Whatever is brought to our office, we do investigate along with the IG's office and do prosecute. We do not turn anybody away. While we have a threshold of $50,000, when the IG's office comes to us through the Investigative Unit, we certainly receive them with open arms.
Mr. GOODLATTE. Mr. Robinson, has the FCS been doing enough to ensure the commitment level of the manager of the State programs?
Mr. ROBINSON. Well, you know, the sanctions for fiscal years 1992 through 1996 totaled about $400 million. That was knocked down to $135 million, of which I think the States have to spend $35 million on improvement techniques, and if they do, and get their error rates down, then the other $100 million will be waived. So I guess from an auditor and accounting standpoint, again, I think, if there was a more credible application of the sanctions, it would make a lot more sense.
There may be a host of political and programmatic other reasons why that's difficult to do, but from a commonsense standpoint, it does little to impose sanctions over a period of 10 to 15 years, and nobody ever has to pay. Sooner or later you conclude that this isn't all that serious.
Mr. GOODLATTE. Like the boy who cried wolf, no one believes that there's actually going to be a sanction imposed?
Mr. ROBINSON. That's certainly accurate, but I would say that a lot of Statesfor example, Mr. Thune's State of South Dakota, has for probably more than a decade received enhanced funding.
Mr. GOODLATTE. All right. One last question, then we'll turn it over to Mrs. Clayton.
Mr. Schatz, in your testimony, you support the Grace Commission's recommendation of a W2-like form to document beneficiary's monthly subsidy. Would you elaborate on how that would fight waste in the administration of the Food Stamp Program?
Page 50 PREV PAGE TOP OF DOC Mr. SCHATZ. Mr. Chairman, the objective was to look at all Federal programs. It was not just food stamps, similar to what was discussed about an EBT card, which at this point with technologythe Grace Commission recommendation was in 1984it makes a lot more sense since these benefits are going out, to keep track of them through electronic means. At that point, it was paper. I'd certainly favor electronics over paper at this point.
But it was to look at all the subsidy programs and really determine how much was being spent on those programs, simply as a way to gather the information about how much was going out and then determine whether it was being spent effectively.
So it's simply a tool to track the amount of money that was being spent in this area and, of course, that would also help in terms of duplication in eligibility. If someone's getting food stamps and money in another program for which they shouldn't be qualified, it would be a little more clear as to what the individual was getting.
Mr. GOODLATTE. And to enact that, would it take legislation by the Congress or could it be done administratively?
Mr. SCHATZ. I don't recall which category that fell in. I can certainly find that answer for you, but it seems to me that with congressional support for something like that, it would certainly have a lot more impact on the agencies.
You now have the Government Performance and Results Act and this hearing certainly falls along the lines of where we should be looking. That may be one place where, as the information comes in from the various agencies, the biggest problem they're having is looking outside their own agency to determine what programs are duplicative or multiple benefits.
We have 163 job-training programs. We know we spend $20 billion. We don't know which ones actually are working well. This kind of W4 form in the area of Federal subsidies would provide a lot of that cross-cutting, cross-agency information.
Page 51 PREV PAGE TOP OF DOC Mr. GOODLATTE. Very good, thank you.
Mrs. CLAYTON. Mr. Robinson, your testimony on page 3, you tell us, and again referring to the $1.5 billion which, I guess, you and the administration might have reportedwell, you reported here as 1996, as the estimated $1.5 billion, 6.9 percent of approximately $22 billion dollars in terms of overpayment.
Mr. ROBINSON. Yes, ma'am.
Mrs. CLAYTON. Then further down in your testimony, you say you can account for 21 percent of that being fraud or intentional use. If doing on-the-spot calculation again, that would be about $300 million, would it?
Mr. ROBINSON. Twenty-one percent of the total errors have been concluded through FCS's statistically-based quality control system to be the result of not only recipient mistakes, but intentional mistakes. So you can do the math. I think it's 21 percent of the
Mrs. CLAYTON. Right. Well, I guess, really the question is, as you were just saying about the waivers in the system in place, do you know what has been done to actually to seek the $300 million which would come from the overpayment from the State?
Mr. ROBINSON. The States that have error rates higher than the national average are exposed to sanctions.
Mrs. CLAYTON. Is this not how
Mr. ROBINSON. It's not just related to any specific component.
Mrs. CLAYTON. So you could
Mr. ROBINSON. And not only error rates that lead to overpayments, but error rates that lead to underpayments. FCS combines the underpayment error rate and the overpayment error rate and compares it to the national average. Any State that has a combined error rate higher than the national average is subject to sanctions.
Page 52 PREV PAGE TOP OF DOC Mrs. CLAYTON. So, all right, I guess the conclusion for that, all States would not have to be sanctioned, right?
Mr. ROBINSON. Well, historically, nobody has to pay sanctions. [Laughter.]
Mrs. CLAYTON. Well, you're saying that we've had it on the books, but we haven't been enforcing it. Is that what you're saying?
Mr. ROBINSON. Yes, ma'am. Dating back to the 1980s, I mean, there's been, frankly, congressionally-enacted waivers. There have also been administration waivers. It's been a mixed bag, but the net result is that sanctions have historically existed more on paper than in reality.
Now this last batch of sanctions require the States with the higher error rates to spend $35 million for what they call ''reinvestment.'' This means the States must invest in improvement steps, such as better training of staff or maybe a few computer enhancement here and there, to try and bring their error rate down.
Mrs. CLAYTON. Historically, States haven't been paying and there is a structure; if it's higher than average, they should be paying.
Mr. ROBINSON. They're subject to sanctions.
Mrs. CLAYTON. Subject to sanctions.
Mr. ROBINSON. And those that have a rate below a certain level, it varies over the years
Mrs. CLAYTON. They're rewarded?
Mr. ROBINSON. They're able to receive enhanced funding.
Mrs. CLAYTON. Right. So it's a carrot and the stick. The stick gives you, do wrong, and if you do wrong sufficiently above the average, you supposedly
Page 53 PREV PAGE TOP OF DOC Mr. ROBINSON. If you are above the average, you are subject to the stick. If you are sufficiently below the average, you are the recipient of the carrot.
Mrs. CLAYTON. All right, but historically
Mr. ROBINSON. Not surprisingly, more carrots are given than sticks. [Laughter.]
Mrs. CLAYTON. So, historically, there haven't been too many sticks applied, right? To the States?
Mr. ROBINSON. A lot of stick waving, never any contact. [Laughter.]
Mrs. CLAYTON. I got you. Well, when it comes to the recipients, how about that? What do you do? Do you have any knowledge about how the overpayments have been taken from the recipient, gotten back? How have we recovered the overpayment from the recipients who are guilty of overpayment?
Ms. WHITE. The States are responsible for establishing claims for the overpayments that they identify and collecting the overpayments. We don't have any data here with us on the amount of claims that the States have collected.
Mrs. CLAYTON. You haven't seen it or you just don't have it with you?
Ms. WHITE. We don't have it with us.
Mrs. CLAYTON. Oh, OK.
Ms. WHITE. In 1996, approximately a billion dollars in State established claims had not been collected.
Mr. ROBINSON. These claims were established over multiple years, you know; it's not just from that 1 year.
Mrs. CLAYTON. Do you have an opinion if they are going after them greater than we are going after them, the State? Do we go after
Page 54 PREV PAGE TOP OF DOC Mr. ROBINSON. I don't think we have a factual basis to answer that. I wish we did.
Mrs. CLAYTON. Where would I get that information? Where is the source of that data compiled to see what States are doing?
Mr. ROBINSON. Does FCS collect that on an actual basis?
Ms. WHITE. FCS collects data on States' claims and collections, and also the OIG just issued a report on claim activity in the States.
Mrs. CLAYTON. So we don'tthrough your office, we couldn't obtain that?
Mr. ROBINSON. We can compile that for you, certainly. We'll be happy to do that.
[The information follows:]
States are required to establish claims against households which receive more benefits that they are entitled to receive. States establish claims for overpayments that occur due to (1) State agencies' errors; (2) inadvertent errors by recipients; and (3) intentional violations by recipients. There is a wide disparity between FCS' overpayment estimates and actual overpayments identified by States as a byproduct of normal day-to-day operation of the program. States are able to identify and pursue only a small portion of the overpayment cases that are statistically estimated to occur.
As an incentive for collecting claims, States can retain a percentage of the amount of claims collected. Currently, States can retain 35 percent of collections from intentional violations claims and 20 percent of collections from inadvertent household error claims; the remainder is returned to the Treasury. In fiscal year 1996, the States established $328.2 million in claims and collected $171.5 million. At the end of fiscal year 1996, over $1 billion in claims established over the years remained uncollected.
Page 55 PREV PAGE TOP OF DOC In addition to the State collection activities, FCS works with a number of States to collect intentional violation and inadverdant household error claims from Federal income tax refunds. In 1996, 41 States participated with collections of more than $30 million. During calendar year 1996, the Department initiated collection of recipient error claims from Federal employees through the Federal Salary Offset Program.
Mrs. CLAYTON. Mr. Chairman, that's all I have.
Mr. GOODLATTE. Thank you, Mrs. Clayton.
Mr. Robinson, it is my understanding that Los Angeles County, CA, and perhaps some other places, have begun implementing a identification program for food stamps based upon fingerprinting and fingerprint identification electronic devices apparently that can be used. Are you familiar with that and is this something that is worth implementing nationwide? Will it cut down on duplication of food stamp claims?
Mr. ROBINSON. I know we've written about the technical aspects of these biometric devices; I guess that's the terminology that you use. I know the Secret Service is actively involved with that.
Frankly, as I sit here today, I don't know that I have enough information to comment intelligently on a technical level as to the technical merits or the difficulty in implementing it. I know a lot of folks are going to it. Certainly, in the private sector, they are going to it, as was mentioned earlier.
So, as technology advances, these are the kind of steps that are going to be taken, but I don't have the ability to take a position right now.
Mr. GOODLATTE. Do either Mr. Kodeck or Mr. Schatz have any comment on that particular program? Do you have any knowledge of whether that works or not?
Mr. SCHATZ. Again, just based on what's going on in the private sector and the fact that that's the way technology is moving, it seems that there will be more and more of that at the Federal level in terms of providing benefits. And I know that, given GAO's work in this area, I'm sure that it will be tracked and recorded, and hopefully, be an example for others to follow.
Page 56 PREV PAGE TOP OF DOC Mr. KODECK. And I can only comment, Mr. Chairman, on the prosecution aspect. With the EBT, we find a different type of trafficking as opposed to what we saw before with the paper food stamps.
Mr. ROBINSON. I might add that there's a whole lot of room for improvement on verifying information provided by applicants. The system, as you probably are aware, is based on applicant-supplied information. There's not a lot of verification of the applicant's informationnot even verifying that the individual receiving benefits is who they said they are.
I know, for example, during our work on prisoners included in food stamp households, one of the individuals qualified for benefits by walking into the office and saying he was entitled. This individual said that he didn't have a Social Security number; the caseworker asked if he had anyone that he could call for the number. He said, ''Yeah, call my mother.'' The caseworker contacted a woman who said she was his mother and gave the caseworker a Social Security number. It turned out to be the Social Security number of an inmate. So there's a whole lot of room for verification improvements in this system.
Mr. KODECK. Mr. Chairman, if I may further comment on what Mr. Robinson just saidlooking at the applications that we did when we did the penitentiary matches, again, it's generated as a result of the original application. If we had the resources or if the Department had the resources to check each individual application, as opposed to doing it on the back end, and that was to do the match to see if every individual or any of the individuals that were on the application were incarcerated; that would go towards a great deal of eliminating some of the fraud.
Mr. ROBINSON. And that's why we've recommended computer matching. Our programmers were able to do this relatively cheaply and the computer can do a lot of work on verifying a lot of this information pretty readily.
Page 57 PREV PAGE TOP OF DOC Mr. GOODLATTE. Some of this stuff, though, isn't really fraud. I think you found in your studies that 57 percent of overpayments are recipient error. Of this 57 percent, 36 percent was unintentional errors. Only 21 percent was intentional.
What do you believe can be done to make the process of receiving food stamps easier for people, so that we can reduce that percent unintentional error rate?
Mr. ROBINSON. This whole issue of error rates gets into the definition of waste, fraud, and abuse. There is no question that this is the clearest example of waste. If you are paying somebody who is not entitled to receive food stamps or paying them more than they're entitled to receive, that's the clearest-cut drain on the taxpayer.
Certainly, you can argue that trafficking is abusive, but it doesn't have a direct bearing on overpayments, if you will. We really think that computer matching is a very effective tool for reducing errors. There's a lot of training that can be done.
Ultimately, and I have to say this, the welfare eligibility and benefit regulations are substantial. There's a whole lot of room for confusion in those regulations. If you've even contemplated trying to compute the excess shelter deduction, for example, it can be challenging and provides many opportunities for error, because of its complexity. It is especially difficult on the part of the State caseworker who has folks lined up down the hall that they're trying to handle. Simplification, ultimately, is something that we might want to face somewhere down the road.
Mr. GOODLATTE. Any specific recommendations in that regard?
Mr. ROBINSON. It's hard to take those piecemeal. I guess I maybe could give you some examples for the record, but I'm just telling you that when you got a regulation book that's an inch thick, I'm quite certain that there's any number of opportunities.
[The information follows:]
According to numerous State officials, caseworkers make policy errors when determining an applicant's eligibility and benefit level because the Food Stamp Program regulations are complex and confusing. Some State officials have told us that caseworkers make errors because there are so many exceptions to the policies that cause problems.
Page 58 PREV PAGE TOP OF DOC Determining the household's monthly food stamp benefit is often a complicated task. Caseworkers must consider several factors when computing the households benefit level, including the household's net monthly income. A household's net monthly income is computed by subtracting six allowable deductions from the household's gross-monthly income: a standard deduction, an earned income deduction, a dependent care deduction, a medical deduction, a child support deduction, and a excess shelter expense deduction. A household's monthly food stamp benefit is computed by subtracting 30 percent of the household's net income from the maximum allowable food stamp benefits for the household's size. This last step is based on two assumptions. First, the maximum food stamp benefit represents the amount a household with zero net income would need to purchase for nutritious but inexpensive meals each month. Second, a household is expected to spend 30 percent of its net income to buy enough food for a month.
The following example illustrates in detail the calculation of benefits in fiscal year 1995 for a single female-headed household with three children with monthly shelter expenses of $668. This household had a (1) gross monthly income of $1,168 per month (of which $1,115 was earned income), (2) standard deduction of $134 (3) dependent care deduction of $131. (4) Earned income deduction of $223, and (5) shelter deduction of $231. In addition, this household was subject to the cap on the excess shelter expense deduction because none of the household members was disabled or elderly.
Policy exceptions in the regulations also provide additional opportunity for caseworker error. the homestead property exemption is one such example. In this situation, the recipient tells the caseworker that they own 2 acres of land, and the caseworker exempts this property from the determination of the recipient's income. The caseworker exempts this property because a person's homestead property is exempt. However, when the Quality Control reviewer studies the case, the reviewer discovers that the homestead is on 1 acre of land, and the recipient owns 1 acre in another location. The reviewer determines that this is a caseworker error due to misapplication of the regulations. The caseworker should have asked the recipient if the homestead was on the 2 acresif the acres were contiguous. the 1 acre located elsewhere should have been included in the recipients income. With this addition, the recipient is either ineligible for food stamps, or had been receiving too many benefits.
Page 59 PREV PAGE TOP OF DOC Mr. ROBINSON. I might add, in the interest of reducing and having more controls over the number of people eligiblefor example, we instituted the new work requirement, 3 months in 3 years work requirement. Again, that's another kind of data that has to be computed and another kind of computation the caseworker has to make.
So in our efforts to tighten the program, almost invariably you add, or potentially add, to complexity, too. So it's awfully big and it's hard to break it up into specific components very easily.
Mr. GOODLATTE. You talk about caseworker error. That's the other 43 percent of the total. What additional observations do you have about that in terms of the problems that are encountered and what can be done to correct that?
Mr. ROBINSON. Investments in training seem to pay fairly good dividends. Reducing the complexity and caseload management are other areas for improvement. We're seeing caseloads start to come down over timeover the last 3, 4 years, caseloads have pretty dramatically come down. Perhaps it's coincidental, but error rates have started to come down as caseloads have come down, so there may be a connection there as well.
Mr. GOODLATTE. Can the private sector do a better job?
Mr. ROBINSON. Well, the private sector, I'm trying to figure out
Mr. GOODLATTE. Determining food stamp eligibility? Contract out the administration of these services?
Mr. ROBINSON. There's certainly opportunities for the private sector to become involved in verification of information supplied; that's for sure.
Mr. GOODLATTE. Mr. Schatz, you testified that the Food Stamp Program needs constant supervision to ensure that changing demographics are calculated when disbursing benefits, and you also suggested that the Income Eligibility Verification System, a nationwide computerized income verification system available to all States to cross-check income information to verify recipient's income, is a viable tool if used correctly. I wonder if you could explain your thoughts on how this system could be used to reduce the overpayment of benefits?
Page 60 PREV PAGE TOP OF DOC Mr. SCHATZ. Mr. Robinson testified about computer matching being so critical. Certainly, if you're going to rent a home, for example, there's a nationwide system to check your credit. There's a lot of information out there about what people have or don't have, or where they are or not located in terms of the criminal situation and the prisoners who have not just managed to get food stamps, but SSI and a bunch of other Federal programs. That information is there, and whether it requires providing a little more of a carrot to the States to enforce itmaybe they receive a percentage of what's saved, if they're not doing a good job now, since nobody's using the stick. Or another method to ensure that this existing technology is used to enforce the eligibility for these programsthen you're going to continue to see the ability of people to figure out a way around it. There's nothing foolproof but it is something that's been around for a number of years, at least a decade. And it's somewhat disappointing that it's not used far more often in terms of matching individuals to ensure that only those truly eligible are receiving benefits.
Mr. GOODLATTE. Mr. Kodeck, is there anything that we should be doing differently in terms of the legislation we put forward that would make it easier for you to do your job?
Mr.KODECK. No, Mr. Chairman. I think there's certainly enough laws on the books now for us to combat the fraud. Additional resources to help detect it maybe at the State or local level, that would certainly help, additional investigators that could assist us in doing our jobs.
Mr. GOODLATTE. Look into the 35 percent of the over-issuances that we allow the States to keep as perhaps a way, something you can do in your State to get a hold of some more funds to help you do that, because we certainly intended that that be one of the purposes for allowing the States to get an incentive for tracking down and cutting out over-issuances, and we certainly want to do more than that regarding giving more resources. But those are resources that are out there now that are available if you can get folks in your State to direct them your way.
Page 61 PREV PAGE TOP OF DOC Mr. KODECK. I will certainly look into that, Mr. Chairman, and see why the money isn't coming our way. [Laughter.]
Mr. GOODLATTE. We want to thank all of you for participating today.
This is a very serious problem. It's one that I have no illusions about the difficulty of approaching it, but I think that in the last 2 or 3 years, we've gotten far more serious about trying to crack down on all the various aspects of food stamp waste, fraud, and abuse. It's certainly an important issue for every taxpayer in this country, but it's also important for those people who are honestly dependent upon this program to supplement their budget and their diet, and we want to make sure that this program serves the needs it's intended to serve. Otherwise, if the continued loss of credibility with so many of the taxpayers in this country continues, that will jeopardize the good that the program does, and so your efforts to crack down on waste, fraud, and abuse, and to bring to our attention new ways that we can help in the fight against it is very much appreciated by myself and, I'm sure, every other Member of Congress. And so I thank you for taking the time today to come here and share your thoughts.
The record will remain open for 10 days for any additional information to be included in the record.
And with that, this hearing is adjourned.
[Whereupon, at 12:42 p.m., the subcommittee adjourned subject to the call of the Chair.]
[Material submitted for inclusion in the record follows:]
Statement of Robert A. Robinson
Mr. Chairman and members of the subcommittee:
Thank you for the opportunity to discuss our work on fraud, waste, and abuse in the U.S. Department of Agriculture's Food Stamp Program. The program is one of the Nation's largest welfare programs and the largest single program administered by USDA. In fiscal year 1997, about $21 billion in food stamps were provided to about 24 million recipients,For this testimony, food stamps refers to the benefits provided in the form of coupons or through electronic benefit transfers. down slightly from recent years. Reviews by GAO, USDA's Office of Inspector General (OIG), and others have produced ample evidence that the system for delivering food stamps is vulnerable to, and is being victimized by, significant fraud, waste, and abuse.
Page 62 PREV PAGE TOP OF DOC Today, we will discuss fraud, waste, and abuse in the Food Stamp Program from three perspectives: (1) the nature and extent of the problem, (2) the roles and responsibilities of the major Federal agencies involved in minimizing it, and (3) the potential of electronic benefits transfer (EBT)a system of benefit delivery that replaces the traditional food stamp coupons with a debit cardto reduce it.
In summary, we found the following:
Fraud, waste, and abuse in the Food Stamp Program takes two primary forms: (1) overpayments to food stamp recipients and (2) the use of food stamps to obtain cash or other non-food itemsa process known as trafficking. According to USDA, in fiscal year 1996, the most current year for which data are available, about $1.5 billion was paid out to individuals who either should not have received any food stamps at all or who received more than they were entitled to receive. These overpayments represented nearly 7 percent of the approximately $22 billion in food stamps provided. Overpayments are caused by both inadvertent and intentional errors made by recipients and errors made by State caseworkers. In addition, program regulations specify that recipients use food stamps only to purchase food from authorized retailers. However, USDA has recently estimated that up to $815 million in food stamps, approximately 4 percent of the food stamps issued, were traded for cash in fiscal year 1993 through retail stores participating in the program. Numerous retailers are caught each year paying food stamp recipients a discounted value of the stamps (for example, 70 cents on the dollar) and then redeeming the stamps at full face value from the government. There are no reliable data on the extent of trafficking that occurs before the food stamps are redeemed by an authorized retailer.
USDA's Food and Consumer Service administers the Food Stamp Program in partnership with the States. The States are responsible for the day-to-day operation of the program, including meeting with applicants and determining their eligibility and benefit levels. FCS provides nationwide criteria for determining eligibility for assistance and the amount of food stamps recipients are entitled to receive. It monitors the accuracy of State benefit determinations and operates a system of incentives and sanctions to encourage States to reduce the number of errors. FCS also approves retailers to participate in the program and monitors and investigates their activities to identify those potentially violating program regulations. The Department's OIG devotes a substantial share of its audit and investigative resources to identifying program irregularities, especially trafficking.
Page 63 PREV PAGE TOP OF DOC EBT systems have the potential to reduce some aspects of the fraud, waste, and abuse in the Food Stamp Program but not others. By providing a clear ''paper trail'' of all food stamp transactions, EBT systems help reviewers identify trafficking activities and remove and/or prosecute retailers engaged in such activities. These systems also address problems associated with food stamp theft. Because EBT is a benefit delivery system, however, it cannot address the substantial problems associated with determining eligibility for food stamps or establishing benefit levels.
Nature and Extent of Fraud, Waste, and Abuse
The two main areas of fraud, waste, and abuse involve (1) overpayment of food stamp benefits and (2) trafficking.
Concerning the first area, overpayments occur when ineligible persons are provided food stamps and when eligible persons are provided more than they are entitled to receive. In 1996, for example, the States overpaid recipients an estimated $1.5 billionor 6.92 percentof the approximately $22 billion in food stamps issued. Overpayments occur for two reasons. First, recipients make errors, either inadvertent or intentional, in providing information to the State caseworker about the recipient household's size, income, assets, or other pertinent information needed to determine the household's eligibility and benefit level. Second, State caseworkers make errors in determining either an applicant's eligibility for food stamps or the appropriate level of benefits. According to 1996 data, recipient errors accounted for 57 percent of the overpayments36 percent were unintentional errors and 21 percent were intentional. The remaining 43 percent of the overpayments were caused by caseworkers' errors. It should be noted that errors by participants and caseworkers can also result in underpayments. FCS' data show that food stamp recipients were underpaid approximately $518 million in fiscal year 1996.
In March 1997, we reported on one specific example of food stamp overpayments payments involving violations of the Federal regulations that prohibit inmates of correctional institutions from participating in the Food Stamp Program.Food Stamps: Substantial Overpayments Result From Prisoners Counted as Household Members (GAO/RCED-97-54, Mar. 10, 1997). By matching automated food stamp and prison records in four StatesCalifornia, Florida, New York, and Texaswe identified over 12,000 inmates who were included in the households receiving food stamps in fiscal year 1995. These households improperly collected an estimated $3.5 million in food stamps. Subsequently, in August 1997, the Balanced Budget Act of 1997 (P.L. 10533, Aug. 5, 1997) included a provision directing the States to ensure that individuals who are under Federal, State, or local detention for more than 30 days are not participating in the Food Stamp Program. In response to a request from the Senate Committee on Agriculture, Nutrition, and Forestry, we are currently examining the potential for computer matching to identify other ineligible populations participating in the program.
Page 64 PREV PAGE TOP OF DOC With respect to traffickingthe second main area of fraud, waste and abuseprogram regulations specify that participants must use food stamps only to purchase food items from the retailers authorized by FCS to accept food stamps. Once they receive them, authorized retailers are required to forward food stamps directly to financial institutions for redemption. However, numerous Federal and State officials told us that food stamps have essentially become a second currency exchanged by some recipients for cash or non-food items. Trafficked food stamps may change hands several times, but all food stamps must eventually flow through an authorized retailer because only such a retailer can redeem food stamps for cash from the government. Numerous retailers are caught each year accepting food stamps from recipients, giving them a discounted value of the stamps in cash (for example, 70 cents on the dollar), and then redeeming the stamps at full face value from the Government.
Data on the extent of trafficking between parties prior to reaching authorized retailers are unavailable. However, a 1995 FCS studyThe Extent of Trafficking in the Food Stamp Program, U.S. Department of Agriculture, Food and Consumer Service, Aug. 19, 1995. estimated that up to $815 million, or about 4 percent of the food stamps issued, was exchanged for cash by authorized retailers during fiscal year 1993. The study found that supermarkets, where over three-fourths of all food stamps are redeemed, have low trafficking rates compared with other types of retailers. The trafficking rate reported for publicly owned supermarkets (i.e., a company whose stock trades publicly) was less than 0.1 percent of food stamp redemptions, and the rate reported for privately owned supermarkets was 2.6 percent. By comparison, the trafficking rate for small, privately owned food retailers and privately owned retailers that do not stock a full line of food was 15.1 percent of the food stamps they redeemed.
Roles and Responsibilities of the Federal Agencies in Minimizing Fraud, Waste, and Abuse
The Food Stamp Program is administered by USDA's FCS in partnership with the States. FCS provides nationwide criteria for determining who is eligible for assistance and the amount of benefits recipients are entitled to receive. The States are responsible for the day-to-day operation of the program, including meeting with applicants and determining their eligibility and benefit levels. In making these decisions, State caseworkers rely on documentation provided by households and information obtained in interviews with the applicants. FCS is also responsible for authorizing retailers to redeem food stamps as well as for monitoring program compliance by the approximately 190,000 stores currently authorized to redeem food stamps. FCS and USDA's OIG are responsible for investigating retailers suspected of violating program regulations. The OIG performs all the criminal investigations of the Food Stamp Program conducted by USDA and coordinates investigative activities with other Federal agencies. Otherssuch as the Federal Bureau of Investigation (FBI), the U.S. Postal Service, and the U.S. Secret Serviceas well as the States assist in combatting fraud.
Page 65 PREV PAGE TOP OF DOC The Food Stamp Program's Quality Control System is FCS' primary tool for evaluating the States' performance in issuing benefits and determining the level of overpayments. Under the QC System, the States must review a sample of their household cases each year to determine the accuracy of the eligibility and benefit determinations made by State caseworkers and the extent of payment errorsboth overpayments and underpayments. FCS reviews a subsample of each State's sample to ensure the accuracy of the States' efforts. FCS then determines the official error rate for each State and a national error rate. If an individual State's error rate exceeds the national error rate, FCS can sanction the State by requiring it to reimburse the Federal Government for a portion of the erroneous payments. On the other hand, States that have low error rates are eligible for additional reimbursement from the Federal Governmentreferred to as enhanced funding.
According to USDA's data, overpayments in the Food Stamp Program have declined since 1993. At the national level, the overpayment error rate has decreased from 8.27 percent in fiscal year 1993 to 6.92 percent in fiscal year 1996. The 1996 overpayment error rate is the lowest level ever achieved in the program. Since 1995, FCS has increased its emphasis on achieving payment accuracy and has employed various initiatives to assist the States in reducing the number of errors. The Congress appropriated over $3 million for these initiatives. Specifically, FCS' activities include sponsoring national, regional, and State conferences; providing direct technical assistance to the States; and facilitating the exchange of State information on effective strategies for determining accurate payments. As we reported in 1995,Food Assistance: Reducing Food Stamp Benefit Overpayments and Trafficking (GAO/RCED-95-198, June 23, 1995). while technical assistance and related steps are undoubtedly useful, the single most critical factor in reducing overpayments is the commitment of the managers of the States' Food Stamp Programs to aggressively address the error rate problem.
Supplementing its efforts to help the States reduce errors, FCS has implemented a new strategy for conducting its sanction activities. Historically, for a variety of reasons, the States with high error rates paid little of the sanction penalties FCS imposed. Beginning in 1996, FCS reached agreement with some of these States regarding more than $404 million in penalties owed for unacceptable error rates that occurred in fiscal years 1992 through 1996. FCS agreed to reduce this penalty to $135 million and entered into settlement agreements with these States that establish performance goals tied to payment accuracy. Of the $135 million sanction liability, the States are required to invest almost $35 million in activities that directly lead to the reduction of their error rates. If a State meets its performance goals as set out in the agreement, its share of the remaining $100 million liability will be waived. According to FCS, as a result of these settlements, the States are more actively engaged in activities to reduce errors, which should continue to have a positive effect on improving payment accuracy.
Page 66 PREV PAGE TOP OF DOC With respect to trafficking, our 1995 report stated that FCS' controls and procedures for authorizing and monitoring the retailers that participate in the Food Stamp Program did not deter or prevent retailers from trafficking in food stamps. Stores that did not meet eligibility criteria were being admitted to the program because the process for authorizing them was flawed. The single most effective deterrent to preventing ineligible retailers from being authorized is a preauthorization on-site visit. However, because of insufficient time or resources, FCS made few visits before authorizing stores to participate in the program. Furthermore, FCS' monitoring process was inadequate to detect authorized retailers that were violating program regulations. Reports on retailers' activities, such as total food sales and food stamp redemptions, were often untimely or inaccurate and of limited utility in identifying retailers' trafficking. In addition, we reported that FCS had only 46 investigators nationwide to conduct investigations of retailers suspected of trafficking or violating other program regulations.
Since our report, FCS has initiated several actions to reduce trafficking in the program. For example, FCS has contracted with a number of different companies to make 35,000 to 40,000 store visits by the end of fiscal year 1998. These visits will be made primarily to new stores requesting approval to participate in the program and to stores requesting reauthorization to participate in the program. In addition, FCS reports that it has improved its Store Tracking and Redemption System by, for example, developing a profile that enables FCS to better identify stores that may be trafficking in food stamps or selling ineligible items. The system also includes information on sanctions taken against the stores that violate program regulations. The system is used to screen all new applications for participation in the program in order to keep ineligible retailers from returning to the program during a period in which they are disqualified. The system is also used to monitor stores' redemptions and to identify retailers for investigation or other administrative actions. For the States using EBT systems, FCS has developed an automated system that identifies transaction patterns in EBT data that indicate trafficking violations.
Page 67 PREV PAGE TOP OF DOC In addition to FCS' oversight activities, USDA's OIG investigates retailers that illegally use food stamp benefits and coordinates its investigative activities with other Federal agencies. For example, the OIG is currently looking at food stamp trafficking with State and local agencies in about 30 locations nationwide. The OIG has also taken an active role in monitoring and reviewing EBT systems and developing the automated system to analyze EBT data to identify fraud in the Food Stamp Program.
Outside of USDA, a number of Federal investigative agencies also play a role in the process. For example, the FBI investigates criminal violations of USDA programs if the violation has involved bribery, organized crime, or major fraud perpetrated by Federal employees. The FBI focuses its investigations on links between food stamp trafficking and other criminal activities under the Bureau's jurisdiction, such as narcotics, terrorism, and white-collar crime. The U.S. Postal Inspection Service has primary responsibility for enforcing laws concerning property in the custody of the U.S. Postal Service. The Postal Inspection Service's main investigative focus for the Food Stamp Program is the theft of food stamps and EBT cards from the Postal Service's custody prior to receipt by the food stamp recipient. Finally, the U.S. Secret Service investigates food stamp counterfeiting and makes recommendations on security measures relating to EBT cards.
States are responsible for investigating and prosecuting individuals suspected of falsifying information in order to obtain food stamps and misusing their food stampssuch as selling their stamps for cash. States sometimes work with FCS or USDA's OIG to investigate retailers' fraud and abuse in the program. In an effort to supplement Federal efforts to investigate retailers, FCS has used State Law Enforcement Bureau agreements. Under these agreements, FCS provides the States with food stamp coupons to use in conducting their own trafficking investigations. FCS has established agreements with 32 States, but only 10 States have conducted sustained efforts against food stamp trafficking.
Page 68 PREV PAGE TOP OF DOC Observations on the Use of Electronic Benefits Transfer Systems
Food stamp benefits have historically been distributed in the form of printed coupons. In Reading, Pennsylvania, in 1984, however, FCS piloted the use of an alternative delivery systemEBT. Since this pilot, there has been increasing interest in moving to EBT systems. Under such systems, recipients receive plastic debit cards to obtain their food stamps and pay for purchases through point-of-sale terminals installed at check-out counters in food stores. At the time of the purchase, recipients enter a personal identification number. The EBT computer then verifies that sufficient funds exist in the recipient's food stamp account, debits the purchase amount from the recipient's account, and credits it to the retailer's account. At the end of each business day, the authorized sales are totaled and funds are transferred electronically to the retailer's bank account. Currently, 11 States have implemented EBT systems statewide. Eight of these States deliver multiple program benefits with their EBT system, including other Federal and State programs. Additionally, 16 States use EBT systems in selected counties. All the remaining States are in the process of implementing EBT systems. Collectively, EBT systems supply almost 20 percent of all food stamps.
By eliminating paper coupons that may be lost, sold without any record of the sale, or stolen, EBT systems can help cut back on food stamp fraud. EBT systems reduce the likelihood of benefit theft. Of most importance, however, EBT systems create an electronic record of each food stamp transaction, making it easier to identify and document instances where food stamps benefits are trafficked. EBT data include the following information on each transaction: the exact time of day, the amount, the recipient's identity, the store's identity, and the specific cash register in the store. Reviewers can use these data to identify suspicious transactions or transaction patterns. Since 1991, USDA's OIG has opened 234 cases involving food stamp trafficking as a result of analyzing EBT data. The stores involved in these cases redeemed over $70 million in EBT food stamps, of which the OIG identified over $27 million as being fraudulent.
Page 69 PREV PAGE TOP OF DOC The August 1996 Welfare Reform Act explicitly states that EBT data alone can be used as evidence to take action against retailers violating the Food Stamp Act. As a result, FCS can now use EBT data to levy administrative sanctions against retailers caught trafficking, such as permanently barring them from the program and imposing fiscal penalties, without the expense of criminal investigation and prosecution. The legislation also mandated nationwide implementation of EBT systems by October 1, 2002.
While EBT systems make a major contribution to reducing certain aspects of food stamp fraud, they will not eliminate all fraud. Even in States where EBT systems have been implemented statewide, trafficking is still occurring. In such cases, a store owner accepts a card, gives the recipient a discounted value of the benefits in the recipient's account in cash, then claims the full value of the benefits from the government. Furthermore, because EBT systems are simply another vehicle for distributing benefits, they cannot correct fraud, waste, and abuse that occurs during the process of determining eligibility and benefit levels. Unless better ways are found to verify applicant-supplied information and to avoid errors made by State caseworkers, individuals will continue to receive benefits to which they are not entitled, regardless of whether these benefits are distributed by coupon or EBT systems.
In addition, moving to EBT systems is not without costs. Substantial investments must be made in computer systems, point-of-sale terminals, and other hardware. FCS reported that initially EBT systems were more expensive to operate than conventional coupon systems. More recent estimates suggest that EBT systems have become more cost competitive. EBT costs are expected to continue to diminish as the technology becomes more widely used.
In any event, however, as we reported in 1994Food Assistance: Potential Impacts of Alternative Systems for Delivering Food Stamp Program Benefits (GAO/RCED-95-13, Dec. 16, 1994). and continue to believe today, EBT systems will likely be most cost effective if they are used to deliver food stamps in conjunction with other Federal and State assistance programs such as Temporary Assistance to Needy Families and the Special Supplemental Nutrition Program for Women, Infants and Children. In this way, overhead costs can be spread across a larger program volume and serve the purposes of multiple programs.
Page 70 PREV PAGE TOP OF DOC Thank you again for the opportunity to appear before you today. We would be pleased to answer any questions you may have.
Testimony of Craig L. Beauchamp
Thank you, Mr. Chairman and members of the committee. I am Craig L. Beauchamp, Assistant Inspector General for Investigations. With me today is James R. Ebbitt, Assistant Inspector General for Audit. We are pleased to provide testimony about our agency's efforts to address fraud and abuse in the Food Stamp Program, and the Electronic Benefits Transfer system of benefit delivery.
The Food Stamp Program is our nation's primary nutritional ''safety net'' for those in need. Program expenditures in fiscal year 1997 were about $21.5 billion, with benefits provided to about 23 million recipients monthly. Currently, about 75 percent of food stamp benefits are issued using food stamp paper coupons. However, States are rapidly moving to implement EBT systems and under welfare reform it is mandated by 2002.
Because of the huge size of the program and its vulnerability to fraud and abuse, OIG devotes a significant portion of its total resources to work in the Food Stamp Program. Our audit work focuses on the adequacy of controls and systems used to manage program areas such as issuance operations, wage matching requirements, bank and retail store monitoring and quality control procedures. Our audit staff is also working closely with FCS, other Federal agencies, and the States monitoring and reviewing EBT systems as they expand in use. Our investigative emphasis is on food stamp trafficking, which is the illegal exchange of food stamp coupons or EBT benefits for cash or for other nonfood items. For fiscal years 1993 through 1997, OIG has conducted over 3,400 investigations of food stamp fraud, which have resulted in over 3,200 convictions and $66 million in monetary results.
Page 71 PREV PAGE TOP OF DOC Trafficking in food stamps has been a problem since the program has been in existence. While most food stamps are properly issued to eligible recipients and are used as they were intended, a significant amount of trafficking continues and remains a problem to this day. Since the FCS-authorized retailer is the key to the eventual redemption of illegally obtained food stamps, OIG's primary investigative focus is on identifying and investigating those retailers who purchase food stamps. During 1997, 326 retail stores were disqualified by FCS based upon OIG investigations. Those stores had annual redemptions of $65 million. Over the past 3 years our investigations have lead to 1,474 store disqualifications. These stores had annual redemptions of over $266 million.
Because of our continuing concerns about the legitimacy and eligibility of FCS-authorized retailers, we have initiated other efforts, in addition to our criminal investigations, to attack this problem. One very successful approach was our ''sweep'' of suspect authorized retailers in 1995.
We visited 5,162 authorized retailers in seven metropolitan areas during our sweep and found 1,308 which were either ineligible or of questionable eligibility.
Based on our sweeps, FCS took action to terminate the authorizations of 794 retailers. FCS has conducted additional sweeps at other metropolitan areas around the country with similar results. We believe that on-site review of stores is key to assessing whether a retailer should be permitted to participate in the program.
Electronic Benefit Transfer
Concerning EBT, it has an impressive impact in identifying individuals and retailers who are committing fraud in the program. While trafficking of benefits has not been eliminated by EBT, we believe the number of individuals involved in trafficking has been reduced. EBT benefits are less negotiable ''on the street'' and thus less likely to be used as a ''econd currency.''
Page 72 PREV PAGE TOP OF DOC Information available under EBT is now used to identify and prosecute those who engage in illegal transactions. While paper food coupons are generally not traceable to individual recipients, under EBT, details of all transactions are recorded. This information is used to identify and prosecute both the retailers and the recipients involved in trafficking. FCS has also used EBT data to disqualify violating retailers and State authorities are using information obtained from EBT records 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 transaction information and lists of recipients who used their EBT benefits in stores which we found to be buying benefits to the Maryland Department of Human Resources (MDHR), Baltimore city Food Stamp Trafficking Unit. This information was compiled from data developed during OIG investigations of 14 stores.
As an unfortunate indication of the extent of food stamp fraud and abuse, to date, over
4,600 heads of household in Baltimore have been disqualified from the Food Stamp Program based upon the EBT data. Another 7,188 Baltimore households are in various stages of administrative action.
Monitoring and Review of EBT Systems Implementation
Not only has OIG been supportive of EBT from a criminal investigation perspective, we have also taken an active role in monitoring and reviewing EBT systems. In this respect, we view our role as providing assurances to program managers that the systems are operating as intended, or reporting the problems that need to be addressed so that the systems operate properly.
In August 1995, under the President's Council on Integrity and Efficiency (PCIE), we consolidated reported findings and currently identified concerns of the Inspector General community with implementation of EBT nationwide.
Page 73 PREV PAGE TOP OF DOC Major cross-program issues which needed to be addressed included:
Making EBT processor records available to Federal and State auditors and investigators.
Increasing security measures over employees' access to EBT systems.
Limiting the number of unsuccessful attempts to access benefits, reducing the length of time EBT cards are valid (at the time of our review all had 1999 expiration dates), securing EBT cards returned as undeliverable, and prohibiting the selection of personal identification numbers (PIN's) during nonbusiness hours.
We also issued, in September 1996, a nationwide report, ''Monitoring EBT System Development and Implementation,'' based on work we did at the FCS national office and the States of Maryland, New Jersey, South Carolina and Texas.
We continue to be the lead agency for the President's Council on Integrity and Efficiency on EBT activities for State administered programs. Our plan is to continue monitoring EBT systems as they are implemented.
This concludes our statement, Mr. Chairman. We thank you again for the opportunity to address the committee, and we would be pleased to answer questions you and members of the committee may have.
Testimony of Thomas A. Schatz
Good morning, Mr. Chairman. Thank you for the opportunity to testify today before the House Agriculture Subcommittee on Department Operations, Nutrition, and Foreign Agriculture. My name is Tom Schatz and I represent the 600,000 members of the Citizens Against Government Waste.
CAGW was created 13 years ago after the late Peter Grace presented to President Ronald Reagan 2,478 findings and recommendations of the Grace Commission (formally known as the President's Private Sector Survey on Cost Control). These 2,478 recommendations provided a blueprint for a more efficient, effective, less wasteful, and smaller government.
Page 74 PREV PAGE TOP OF DOC Since 1984, the implementation of Grace Commission and CAGW recommendations have helped save taxpayers more than $486 billion, but our work is far from done.
In 1964, under the leadership of President Lyndon B. Johnson, the United States government launched one of the most ambitious and sweeping Federal initiatives in its history, the United States Department of Agriculture (USDA) Food Stamp Program. The program, structured to reach millions of needy and undernourished Americans, particularly children, has today swelled to a $27 billion leviathan with more than 26 million beneficiaries, covering one in ten Americans.
The Food Stamp Program is the cornerstone of a massive Federal feeding bureaucracy, including the Child Nutrition Programs; the Special Supplemental Food Program for Women, Infants, and Children; and the Food Donations Program, all of which are administered by the USDA's Food and Consumer Service (FCS). In addition to the benevolent motive to ensure adequate nutrition for the Nation's most impoverished citizens, the program also has had the added salutary affect of stabilizing farm prices through the distribution of surplus food. Of the programs run by the USDA, the Food Stamp Program is by far the largest and most costly, $27.5 billion in FY 1997, consuming 67 percent of the FCS's $41 billion annual budget. The Federal Government pays for the printing, distribution, and destruction of spent food stamps. It also pays 50 percent of the States' administrative costs.
Food stamp fraud has been an issue for CAGW since the Grace Commission recommended streamlining the delivery of food stamps, including a proposal that the USDA update the Food Stamp Program annually to reflect changes in the average participant household's size and composition (statistics which are requisite in determining benefit levels). The benchmark for defining an average American recipient household was established in 1971, and no changes have been made since to reflect the country's changing demographics. The recommendation, for which the Commission estimated savings of more than $3 billion over five years, was never implemented.
Page 75 PREV PAGE TOP OF DOC As the program has grown, so have the documented instances of food stamp fraud. Evidence of widespread and systematic abuse of the program was documented as far back as 1977. The Grace Commission, General Accounting Office, Office of Management and Budget, and the USDA Inspector General have all tracked and made recommendations to reduce food stamp fraud. Today, with its far-reaching disbursement, high visibility, and inconsistent government oversight, scamming the Food Stamp Program has become an almost effortless crime. The stamps themselves act as an underground currency for opportunists, petty thieves, drug and illegal arms dealers, counterfeiters, smugglers, and money launderers. A review of recent investigative newspaper articles and unofficial loss estimates due to illegal trafficking and overpayments suggests that the true cost of fraudulent activity may be $5 billion annually.
In 1996, the Committee on Government Reform and Oversight outlined weaknesses in the Food Stamp Program. The Committee's conclusion was that, ''[t]he coupon-based system is vulnerable to waste and abuse, and there are no reliable data available to precisely determine the full extent of the problem.'' Now, under your leadership as chairman of this subcommittee, we hope Congress can address ''the problem'' in a constructive manner.
The GAO has been issuing reports on food stamp fraud since 1977, and in its 1988 Transition Series report on agriculture, delivered a laundry list of measures designed to improve the management, efficiency, and fairness of benefit delivery. The GAO's recommendations included eliminating bureaucratic roadblocks to prompt delivery of benefits to eligible households; assuring that States use compatible record-keeping procedures to track food stamp applications and evaluate the State's program performance; stepped-up monitoring of State-run automated systems; and, regularly reviewing the program's internal controls to ensure that ineligible people are deterred from participating in the program.
The Food Stamp Program has also been included regularly on the OMB's annual ''High Risk'' list, a who's who of grossly mismanaged Federal programs which are ''at risk'' of losing significant percentages of their budget to waste, fraud, and abuse. The OMB calls food stamp fraud and illegal trafficking ''pervasive,'' labeling $100 million in benefits as ''at risk'' annually due to the program's inability to detect fraudulent food stamp activity by both individuals and retailers. OMB has recognized that although illegal trafficking cannot be eliminated completely, FCS and the USDA have developed additional corrective actions designed to establish controls over trafficking to the greatest extent possible over the next several years.
Page 76 PREV PAGE TOP OF DOC Recognizing that the incidence of food stamp fraud and illegal trafficking is on the rise and highly visible, the USDA IG has publicly rededicated itself, both before Congress and in official press releases, to a policy of fraud abatement. The department's watchdogs already devote nearly 50 percent of their investigative resources to food stamp fraud. The IG testified in 1995 before the House Agriculture Committee detailing changes necessary to ''combat trafficking in food stamps and other illegal activities associated with the program.'' A September 1995 press release further reinforced the IG's commitment to eradicating food stamp fraud and trafficking by announcing that the department's intensified anti-fraud initiative, ''Operation Checkout,'' had, in its first seven weeks, ''resulted in the indictments, arrests, or convictions of 106 individuals. During this fiscal year, approximately $110 million in fraud has been identified, resulting in 1,800 court actions.''
In 1996, CAGW's ''Through the Looking Glass Report,'' Food Stamp Fraud: Out of the Mouths of Babes detailed dozens examples of waste, fraud, and abuse in the food stamp program. The report identified five areas of weakness in food stamp delivery: eligibility and benefit determination, illegal trafficking, counterfeiting, theft or loss, and overpayments. I would like to submit the report for the record.
Certain eligibility requirements must be met in order to receive food stamps. Household income and family composition must be checked to ensure that only eligible individuals receive benefits. This is where abuse may first creep into the system, either when ineligible persons are granted benefits or when eligible persons are provided more benefits than they are qualified to receive.
The three most widespread forms of fraud are (1) the deliberate underreporting of income; (2) illegally applying to receive multiple benefits; and, (3) receiving benefits in more than one State. One food stamp recipient traveled from State to State by bus, eventually qualifying to collect food stamps in 17 States. This ubiquitous scam artist had defrauded taxpayers of $18,000 worth of food stamps from 1992 to 1995or approximately $100 per weekand was captured only after he was arrested for harassing a woman on a bus en route to yet another State to pick up his food stamps.
Page 77 PREV PAGE TOP OF DOC Due to the Federal Government's fragmented and incompatible accounting and verification systems, it is often difficult to substantiate applicants' income status. To tighten up the weaknesses in the individual eligibility and benefit determination system, the Grace Commission in 1984 recommended that States issue to food stamp recipients a kind of W2 form documenting the beneficiaries' monthly subsidy. The form would be made available to the IRS, as well as other State and local agencies, to help them adequately monitor eligibility for the program.
Another pervasive problem in the Food Stamp Program is the buying and selling of food stamps for other than their intended purposes, or illegal trafficking. Judging by the billions of dollars in reported fraud, trafficking appears to be a relatively risk-free activity, with the taxpayer as patsy. Some nefarious grocers buy food stamps from recipients, usually for between 50 and 70 cents on the dollar, and then return the stamps to the Federal Government for their full value. Recipients in turn use the cash for purchases other than food, while the third-party players, including restaurants, wholesalers, and drug dealers (who swap stamps for drugs, guns, and other contraband), get their payoff by reselling the trafficked food stamps to store owners.
In a significant number of cases, food stamp fraud has become such a lucrative business that some stores eventually abandon any pretense of legitimate commerce and turn their establishments into fronts for their main business, trafficking. The depth and breadth of food stamp fraud can be illustrated as follows:
An investigative report found food stamps were used to buy everything from handguns and drugs, to machine guns, cars, and surface-to-air missiles. Wisconsin undercover agents once used food stamps to buy a house.
Fifteen Connecticut individuals were arrested in a food stamp sting operation. Employees and owners of eight stores purchased nearly $256,000 in food stamps for $118,450 in cash, two handguns, and two vehicles. The owner of one store was a city councilman, who pled guilty to food stamp fraud.
Page 78 PREV PAGE TOP OF DOC A Georgia mayor was sentenced to 1 1/2 years in prison after he pled guilty to bank fraud. The plea was the result of an investigation into food stamp trafficking occurring in a grocery store owned by the mayor. The mayor admitted paying cash for 70 percent of the $832,000 in food stamps he redeemed over a 4-year period. The plea agreement included the forfeiture of $36,000 in cash and two vehicles. He also agreed to give up his position as mayor.
In St. Petersburg, FL, more than a dozen members of an organized network of convenience store employees were arrested in August of 1997 for trading food stamps for cash, beer, pornographic videos and drug paraphernalia.
An undercover operation in Des Moines, IA, led to the arrest of a husband-and-wife team willing to trade food stamps in exchange for cash, cases of beer, cartons of cigarettes, and a 1981 Dodge van.
The list goes on. CAGW's report details many more examples of illegal trafficking.
According to the Secret Service, counterfeiting food stamps is not a major problem because people with the requisite skills to be successful counterfeiters generally devote their energies to counterfeiting currency of higher denominations than food stamps, which have a maximum denomination of $10.
But there remain vulnerabilities within the Food Stamp Program which, if left uncorrected, could invite more attempts to counterfeit. The American Bank Note Company, for example, which has been under contract with FCS since 1975 to print food stamps, drew the IG's attention because of a lack of security and financial weaknesses. The IG found that even though there was no evidence that the company tried to conceal problems, inadequate accounting controls could increase the risk of theft or loss of printed food stamps in the company's custody. The IG also found inadequate controls over the blank watermark paper used to print the food stamps. On several occasions during 1992 and 1993, the company was forced to adjust its inventory records when it found that the records did not match the amounts of paper observed at the warehouse.
Page 79 PREV PAGE TOP OF DOC Food stamps are susceptible to theft from the time they are printed until they reach the hands of a recipient. According to the IG, 42 States and their agents mailed more than $6.3 billion in food coupons directly to recipients in 1994. The IG has expressed its concern that States might be unable to ensure that the stamps were not stolen or embezzled before they reached the post office or after they were returned as undeliverable, as the following examples suggest:
One employee at a mail issuance office was left alone with $16 million in food stamps while his co-workers went to pick up the day's mail. In another case, an employee at an issuance site stole more than $5,000 in food stamps out of the return mail while under surveillance. After her arrest, she admitted to stealing an additional $100,000 worth of food stamps.
An armored car transport company in Georgia was found guilty of stealing $78,000 in food stamps from a vault at the company's headquarters. Approximately $40,000 in food stamps were recovered during an IG investigation. The courier was sentenced to serve 15 months in prison and ordered to pay more than $37,600 in restitution.
Overpayments and underpayments also plague the Food Stamp Program. The IG identified more than $2.3 billion in combined payment errors during FY 1994. Once State officials have identified overpayments, they are required by law to try to recover them, regardless of the cause. But success at recouping those losses has been patchy at best. Noticeably high error rates (over and under payments) for FY 1996 have occurred in Virginia, Missouri, and Ohio with 13.95, 13.38, and 12.63 percent respectively. Error rates in other States demonstrate that food stamps can be administered efficiently. South Dakota, Hawaii, and Massachusetts have the lowest error rates with 3.5, 3.99, and 4.69 percent respectively. The national error rate average was 9.22 percent, with 29 States scoring at or below the national average.
In 1994, the IG recommended that FCS work with State officials to reduce certification periods to three months for households whose circumstances are likely to change, process reported changes in household income promptly, and develop a statewide error-prone profile for households and reviews.
Page 80 PREV PAGE TOP OF DOC Problems documented in high error States have common issues: caseloads grew quickly, and available information was not used to ensure that only eligible people were receiving benefits. The Food Stamp Program needs constant supervision to ensure that changing demographics are calculated when disbursing benefits. The Income Eligibility Verification System, a nationwide computerized income verification system available to all States to cross-check income information (a Grace Commission recommendation) to verify recipients income, is a viable tool if used correctly.
GAO officials are convinced that States' overpayment errors can be reduced. According to the GAO, ''The primary factor in lowering error rates in these States appears to be the willingness of States to focus on reducing overpayments and making a commitment to do so.'' States that have reduced their overpayment rates have done so in a number of ways, including restructuring State administration of the program; holding management and caseworkers more accountable for error reduction; conducting more detailed analyses of local error data; targeting supervisory reviews on error-prone cases; and, improving caseworker training.
The most common form of alternative delivery of food stamps is the electronic benefits transfer system, which involves the use of a debit card that allows the grocer to debit the recipient's account with every purchase. Currently there are 20 States with a form of EBT. The Welfare Reform Act of 1996 requires that every State have an EBT system in place by 2002. Because the card can only be used at authorized grocery stores, there is reduced risk of cheating and counterfeiting. In States which have tested the system, including Pennsylvania and Maryland, EBT had several benefits. Its use was more convenient for the recipient and decreased the stigma associated with being on welfare. The cards also make it tougher to cheat the system, and easier for law enforcement officials to find and prosecute people who do.
GAO Associate Director Robert A. Robinson testified in 1995 before the House Agriculture Committee that the most promising benefit of EBT is the ''electronic trail'' that is left by con artists when they defraud the system electronically. This trail includes the amount, location, date, and time of the transaction. An additional benefit of EBT is that there is no cash given to recipients after they make a legitimate purchase.
Page 81 PREV PAGE TOP OF DOC Though the EBT delivery system is still in its infancy, it may eventually have its share of problems. Oversight officials at the GAO and in the IG's office are wary of the instantaneous nature of an electronic transfer, which may someday make it easier to defraud the system.
How can food stamp fraud be reduced? CAGW believes stronger enforcement of illegal trafficking laws and stronger EBT delivery is the key to ensuring that children, not criminals, are being fed.
The attack on food stamp fraud was accelerated in the Welfare Reform Act of 1996. In addition to mandatory EBT use, the act:
expands criminal penalties for violations;
doubles the penalties for violating food stamp program requirements;
permanently disqualifies individuals convicted of trafficking more than $500 worth of food stamps;
requires food stores be visited by program officials before they are eligible to receive food stamps;
expands USDA's authority to require relevant income sales tax documents to verify that the stores' food stamp redemptions are legitimate;
disqualifies retailers who intentionally submit false information or have been disqualified under the WIC programs; and,
provides incentives for States to improve program administration and reduce error rates.
While these reforms have yet to take full effect, much more still needs to be done. CAGW recommends the following additional steps:
Encourage whistleblower participation in exposing corrupt retailers by offering financial rewards for tips that lead to conviction.
Page 82 PREV PAGE TOP OF DOC Establish financial penalties on a dollar-for-dollar basis. These financial penalties would affect States as well as individual retailers.
Strengthen background checks on all applicants and establish a time frame to update food stamp records and family demographics. The structure of the ''typical'' family has changed so drastically since 1964 that food stamp benefits should also change. Many also receive duplicative and/or multiple welfare benefits which are not calculated at any level.
Utilize fingerprint and optical scanning identification to eliminate multiple benefits. Some banks are currently using fingerprinting to help track down illegal check cashing.
Utilize optical scanners to aid USDA investigators in identifying fraudulent recipients and merchants. Various banks are using optical scanners to access automated teller machines.
Continue to pursue alternative options for delivering food stamps, such as a more effective electronic benefits transfer system. EBT is the wave of the future, but additional work needs to be done to ensure that this instant access method is not abused.
Will all of these changes guarantee the elimination of food stamp fraud? Probably not. But absent these, which will require continued legislative oversight along with public demand for reform, the system will allow fraud to continue unchecked. Thirty-two years into the program, neglect will not satisfy either taxpayers, who pay the program's bills, or those Americans who so desperately rely on the benefits an effective Food Stamp Program will offer them.
Congress and the administration have a responsibility to millions of low-income and undernourished Americans to clean up the Food Stamp Program. Its continued plunder is not only a waste of our Federal tax dollars, but an attack on our most valuable resource, the American people. The Food Stamp Program is typical of a well-intentioned government program run amok. Any program that gives out benefits to States and people without strong checks and balances is not fulfilling its mission. The $5 billion that CAGW estimates is being wasted in the Food Stamp Program means that 4.8 million truly eligible beneficiaries are being denied benefits.
Page 83 PREV PAGE TOP OF DOC Thank you very much for this opportunity to testify. This concludes my testimony. I will be happy to answer any questions at this time.
Testimony of Haven H. Kodeck
Thank you, Mr. Chairman and members of the committee. I am Haven H. Kodeck, Deputy State's Attorney for Baltimore City. With me today is Elizabeth Ritter, Chief, Economics Crimes Unit of the Baltimore City State's Attorney's office. We are pleased to provide testimony concerning the prosecution of fraud and food stamp abuse.
Prior to being appointed Deputy State's Attorney, I was in charge of the Economic Crimes Unit for Baltimore City. One of the many crimes we investigated and prosecuted was Food Stamp Fraud.
Working with the Office of Inspector General, Investigations Division our unit prosecuted numerous individuals charged with theft, welfare fraud and conspiracy to commit these acts.
Our office found the Investigation Division to be well-prepared, extremely efficient, and totally committed to the investigation and prosecution of food stamp fraud.
Initially, we prosecuted individuals who did trafficking in food stamp paper coupons. After the conversion from the paper coupons to the EBT systems, we continued to prosecute individuals and store owners engaged in trafficking.
In 19791980, Operation FENCERIDER was conducted, which was one of the first major sting operations in Baltimore City involving food stamp trafficking. Baltimore City and Baltimore County police, along with agents from the USDA Inspector General's Office, and the Baltimore City State's Attorney's office conducted a sting operation of major fences in the Baltimore City and County areas. This operation consisted of USDA Special Agents selling food stamps for stolen property and firearms. In this operation, stolen diamond rings to tractor trailer loads of tires were purchased with food stamps. Approximately 30 individuals were charged federally for food stamp trafficking and over 100 individuals were charged by the Baltimore City State's Attorney's office for theft of stolen property.
Page 84 PREV PAGE TOP OF DOC In 198283, another sting operation, named Operation STAMPOUT was conducted with the Baltimore City Police Narcotics Unit, DEA, and Special Agents from USDA and OIG and the U.S. Attorney's office. One of the major heroin dealers in Baltimore City, along with 12 of his workers were charged in Federal Court for food stamp and narcotics trafficking and also operating a continuing criminal enterprise. The defendant received a 15-year sentence. Sixteen people were charged by the Baltimore City State's Attorney's Office on state narcotics and food stamp violations.
From 1984 to 1991, four other sting operations were conducted by the Baltimore City Police Department, agents from USDA, the U.S. Attorney's office, and the Baltimore City State's Attorney's Office involving narcotics and food stamp trafficking. The majority of the individuals who were charged were owners or associates of authorized stores.
Starting in 198990, the State of Maryland converted from paper food stamps to an electronic benefit transfer system (EBT), better known as the Maryland Independence card. Since the use of the EBT cards, the trafficking for narcotics and firearms for food stamp benefits is a rare occurrence.
In 1992, an investigation conducted by USDA agents focused on a small corner grocery store which basically had few food items. This store was owned by a father, daughter, and son-law. One defendant was charged in Federal court with food stamp trafficking. The others were prosecuted by the Baltimore City State's Attorney's Office and were charged with fraud. This store trafficked in over $200,000 in food stamp benefits in 1 1/2 years.
In 1994, twenty recipients were indicted for theft and welfare fraud for selling food stamp benefits at several stores, all located in Baltimore City. The owners of these three stores were charged in Federal court.
In December of 1995, the Baltimore City State's Attorney's office prosecuted ten food stamp recipients for fraud.
Page 85 PREV PAGE TOP OF DOC In 1996, the Baltimore City State's Attorney's office authorized the prosecution of four family members for narcotics distribution, welfare fraud, and conspiracy to obtain public assistance by fraud. During the investigation of the target, a major marijuana distributor in Baltimore City, approximately $100,000 in cash and bonds was found in the safe deposit box. Also, evidence was discovered that showed the family had been receiving food stamp benefits since 1995.
In July 1997, the Baltimore City State's Attorney's Office also authorized the prosecution of two Canadian citizens for food stamp trafficking. They were charged with theft and welfare fraud.
We have seen drastic reductions in street trafficking, however fraud of another kind continues to flourish. With this conversion, drug exchange has been reduced but the money exchange and non-food items with recipients continues to exist. Through computerization, the EBT has enhanced the ability to identify and prosecute those individuals engaged in illegal transactions.
Additionally, a joint investigation was recently concluded where a computer match was conducted with the Department of Corrections and Baltimore City Detention Center resulting in over 400 potential matches. These matches were shown to indicate that individuals incarcerated were still being considered eligible for food stamp benefits. The Department, through the local Department of Social Services investigated 391 of these cases and administratively closed or reduced benefits on 225 cases. Another 50 cases had data corrected. The remaining cases were not fraud. The total value of these cases is approximately $400,000, $140,000 in overpayment and $260,000 in cost avoidance.
Fifteen individuals were indicted as a result of the match and charged with theft and welfare fraud. Nine persons have already plead guilty with six remaining yet to be apprehended.
Page 86 PREV PAGE TOP OF DOC This concludes our statement, Mr. Chairman. We thank you again for the opportunity to address the committee, and we would be pleased to answer questions you and members of the committee may have.