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Wednesday, February 25, 1998.






    Mr. KOLBE. The meeting of the subcommittee will come to order. This is our first hearing of the 1998–1999 budget appropriations cycle, and we are very pleased this morning to begin by welcoming such a distinguished panel of our top Treasury and law enforcement officials here, Secretary Rubin and Under Secretary Ray Kelly, and also the top law enforcement agencies that I mentioned: John Magaw from BATF, Sam Banks, the Acting Commissioner of Customs, Lew Merletti from U.S. Secret Service, Ralph Basham, Director of the Federal Law Enforcement Training Center, and Stan Morris, Director of the Financial Crimes Enforcement Network.

    This will be the first of our hearings, as I mentioned, in this appropriations cycle, and we are going to focus it on Treasury's law enforcement missions and functions.
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    Mr. Secretary, I have to tell you, I am very pleased and gratified to see you, as Secretary, sitting here, shoulder to shoulder, with the head of all of our Treasury law enforcement team. I think it is more than symbolic. I think it says a great deal about your commitment and our commitment to making the Treasury law enforcement work.

    This Subcommittee has noted, repeatedly, over the past several years, that Treasury's law enforcement role should be regarded as essential to Treasury's mission and the Department's efforts to carry out and oversee the Nation's economic and monetary policies.

    Without exception, your law enforcement agencies have an irreplaceable role, not only in the Federal effort, but also in assuring stability for our economy in the face of major threats from narcotics, from counterfeiting, from electronic and financial crimes, as well as from major national security and destabilizing forces that could affect our society and our economy as a whole.

    Given this, Mr. Secretary, I have to tell you I continue to find it very discouraging to see the emphasis that is placed on funding of Treasury's law enforcement efforts. Once again, they seem to have taken a back seat to other concerns, particularly in relation to other agencies. Funding for other agences, such as the INS, continues to grow more dramatically.

    Mr. Secretary, I have got some charts here that I would like to show you. I will put my glasses on to see these here. I am sure these figures probably do not surprise you, but, to me, when you display them, graphically, they show it in a very dramatic way.

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    What you have there, at the bottom, the bottom line there, is the funding increases for Treasury. Let's see. This one is Treasury law enforcement, all Treasury law enforcement agencies, and up above, of course, you see Justice in the red. You see the rather sharp jump in 1994 with Operation Hard Line, and some of the other things that occurred there, but you do not see a corresponding major increase in Treasury law enforcement.

    What you have is funding for Treasury going up from $2.5 billion to $2.8 billion. That is an increase of 14 percent, while Justice goes from $4.2 billion to $7 billion in 1997, an increase of 67 percent in law enforcement.

    The second chart here shows the numbers of personnel, and again, here, we're talking all Treasury law enforcement. At the bottom there, in the maroon or red there, you can see virtually no increase when you put all of the different agencies, parts, components of Treasury together. There have been modest increases in Customs, but declines in some of the other areas, so you have virtually no change, while you have a substantial increase in the area of Justice Department, both FBI, DEA, INS, Border Patrol.

    So you have a very, very significant increase in numbers of personnel, a 34 percent increase at Justice, none at Treasury.

    This story is the same for all the Treasury law enforcement agencies, but a very sharp picture emerges when you look at the Customs Service, and I think that is shown in the next chart here.

    In 1994, the Administration began to reinforce our southern borders against the unabated flow of illegal drugs, aliens, and other contraband to the United States, including, as I mentioned earlier, the hardening of border areas between our ports of entry, with additional immigration and border patrol resources.
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    At the same time NAFTA, the North American Free Trade Agreement, the Uruguay Round of GATT, the General Agreement on Trades and Tariffs, imposed new trade obligations, so there was additional Customs' responsibility. All of these increased, not only from the standpoint of law enforcement but from the standpoint of compliance with tariffs, increased the demand on Customs' resources, and yet as this chart indicates, while INS spending is going to rise 178 percent—this is real terms—between 1994 and 1999, Customs' real spending will increase by just 15 percent.

    Finally, the last chart shows the personnel disparity. Again, here, this is just Customs, now, versus Border Patrol and INS. You can see, again, the tremendous difference there.

    I said earlier, there were some modest increases in Customs. You cannot see it from that chart, at all. It is so small, it is insignificant. My statement says 3 percent. It does not even look like it is a 3 percent increase there.

    INS, in any event, has grown by 51 percent during that same time, and that does not take into account the new positions, this year and next.

    Mr. Secretary, I think it is time we take a critical look at the implications that this funding disparity has for Treasury law enforcement, not only for our drug strategy, but also our ability to investigate and stop money laundering, gun smuggling, child pornography, church arson, financial crime and fraud, counterfeiting, tax evasion, electronic crime, violent acts such as bombings. This is not to disparage Justice Department programs. They are certainly critical and important and deserving of the funding they have gotten.
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    It is rather to suggest that I think we have some tunnel vision that results in a nonintegrated approach to our national law enforcement policy, and I do not understand, I do not know where this comes from or how this develops, that we have this kind of huge chasm between Treasury and Justice over the roles on law enforcement.

    But I hope that the hearing today is going to underscore the magnitude of the tasks that Treasury law enforcement has to perform and help make clear the level of resources that you need to do your job.

    We have a very full morning ahead of us, and I will reserve specific comments and concerns about individual bureaus during the question and answer period. Let me just say, before I yield to Mr. Hoyer, I know that Secretary Rubin has to leave as soon as he finishes his testimony.

    So as soon as we have the opening statement, we will take questions from Secretary Rubin and then we will go on to the others, to see if they have any statements.

    Mr. Hoyer, and then we will go to Secretary Rubin.

    Mr. HOYER. I will be the one delaying Secretary Rubin, Mr. Chairman.

    Mr. KOLBE. Not at all.

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    Mr. HOYER. I want to welcome the distinguished leaders of various law enforcement components of the Treasury Department. The Chairman's observations I think are very cogent ones, indeed. I am one who has served on this Committee since 1983, and therefore have experienced a lot of the differences between the Justice Department and the Treasury Department on funding levels.

    The virtue the Chairman has is he serves on both of the Appropriations Committees dealing with Treasury and Justice, and I am hopeful that he will redress these differences in his——

    Mr. KOLBE. In both capacities.

    Mr. HOYER. The fact of the matter is I am pleased to see each of you. Particularly, Mr. Merletti, I want to congratulate you on your new job. Mr. Kelly, on your new job. Mr. Basham, on your new job. And for the rest of you ''old guard'' types, I want to say I am pleased to see you.

    I have had the opportunity of working with all of your agencies, and I have had the opportunity of reading Mr. Kelly's comments. Mr. Secretary, I will look forward to your comments because I have not read them yet.

    But I did have the opportunity of reading Mr. Kelly's, who is going to be the new Customs Commissioner, shortly, but is in his capacity now as the secretary, and I am pleased to see that the important work of these law enforcement bureaus is coordinated around the essential goals that I believe Under Secretary Kelly is going to address.
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    First, to reduce the trafficking, smuggling, and use of illicit drugs. There is no doubt that the American public, the Congress, and the Administration share the view that this is one of the most critical problems confronting our society, and, in particular, our young people. We are all concerned. I know the President is concerned because I have talked to him about it, and I know each of you are concerned about the growth in use of some drugs by some young people.

    We are pleased of course that crime statistics are going down, but this particular facet is of great concern to all Americans.

    Second, to combat financial crimes and money laundering. I want to congratulate FinCEN. I want to congratulate all of you. Obviously, the objective of drug smuggling and drug selling, and undermining the health of our young people, and our society, is profit, money, and to the extent that we can go after the money and undercut the profit, we will undermine the incentive for this very dirty business.

    Thirdly, to fight violent crime, where ATF plays the leading role for the entire Federal Government in the fight against armed, violent crime. As Mr. Magaw knows, a good friend, a former Director of the Secret Service, who responded positively to Secretary Bentsen's request that he shift jobs, and has done an excellent and outstanding job as the leader of ATF, but I have said many times on the floor, and in this committee, the ATF confronts some of the most dangerous, deranged threats to the American people, and to American democracy, and to the American society.

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    Fourth, to protect our Nation's leaders and visiting world dignitaries. Lew Merletti follows in a distinguished group of leaders of the Secret Service, the best agency of its type in the world, bar none, and we need to provide the continuing high quality for law enforcement personnel in FLETC, that all of these officers who protect us in so many different ways need in order to do their job in an outstanding fashion.

    Mr. Basham, I want to congratulate you on your leadership, as I said earlier.

    So that all those components—I know, Mr. Secretary, you will speak at great length with particular focus—are critically important. All of those expenditures, all of those increases at Justice, would not possibly be able to do the job if it were not for the Treasury law enforcement component which makes up 40 percent, as all of us know, of law enforcement at the Federal level.

    Therefore, Mr. Chairman, I congratulate you for presenting these charts and focusing on the disparity, not because we want to undercut Justice, because Justice is a critical component in this fight against crime, and to insure the safety of our communities and neighborhoods and schools, and people, but because we need to focus, as well, on making sure that Treasury law enforcement, Mr. Secretary, has the resources to do its job and the job that the American taxpayers and the Congress expect of it.

    We are looking at a combined law enforcement budget request for fiscal year 1999 of $3.2 billion, which represents an overall increase of 5.7 percent above fiscal year 1998 appropriated levels.
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    This amount funds all of these law enforcement operations, strategic investments and equipment, and technology, as we will see today, and 26,580 Treasury law enforcement FTEs. That, in and of itself, sounds very good, but, again, we need to make sure that America, not just OMB, but America focuses on the critically important component that Treasury makes up of this law enforcement effort at our national level.

    I look forward to hearing your testimony, gentlemen, and seeing demonstrations of how you work, and do your outstanding job.

    Thank you very much, Mr. Chairman. Mr. Secretary, I look forward to hearing from you.

    Mr. KOLBE. Let me see if we have any other statements from other Members of the subcommittee.

    Mrs. Meek.


    Mrs. MEEK. Thank you, Mr. Chairman, and welcome, Secretary Rubin, and all of the dignitaries sitting in front of us today.

    Knowing that you are head of the shop, Secretary Rubin and you must leave, I must commend you for what you have done in the past, and by your own admittance, you are very good on the financial matters, and you will perhaps get better, but there are some areas——
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    Mrs. MEEK. There are some areas of concern over which you have governance, that I have quite a bit of concern, and I will talk more about it later today. But I did want you to know I have some very strong concerns about Customs in terms of meeting the needs of people, particularly in the South Florida area, and these areas where we have an infusion of drug traffickers, and an infusion of drugs being sold to inner city youth. That has been my concern, as the Chairman knows, since I have been on this committee, and I will continually speak out against this, and hopefully we can get some more infusion of neighborhood type programs, so that we can put a tap on as many killings by teenagers and young people in our areas.

    I know, as well as the rest of you, that these people within the inner city areas do not import these drugs. They do not bring these drugs in the community. They are just dropped off there, and then we do some kind of sophisticated sting and bring them in. But I am concerned about this being stopped before it gets into these areas.

    I am pleased to see that you have chosen some very capable people, Mr. Kelly and Mr. Magaw, to lead these areas, but we certainly need more help in the area of Customs, and we need more help in the area of the ATF, the Alcohol, Tobacco and Drugs. The firearms. They are killing us, Mr. Secretary, and we need you—you at the top of this—to be sure that there is a top-down model, so we get to really impact on the neighborhood level in these inner city areas.

    Thank you, Mr. Secretary.
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    Mr. KOLBE. Thank you very much, Mrs. Meek, and I think there are no other opening statements. We will go to Mr. Secretary.

    Mr. Secretary.


    Secretary RUBIN. Thank you, Mr. Chairman.

    Let me start by saying that I very much identify with the focus that the three of you who have spoken have with respect to Treasury law enforcement. When I began at Treasury—obviously it goes to my private sector experience—I knew a lot about the financial area, but as Mrs. Meek suggested, law enforcement had not been a part of my life.

    In the three years I have been here, I have learned an enormous amount about law enforcement and about the Treasury law enforcement bureaus. I think they are truly outstanding groups of people, and they are organizations with critical missions, as Mrs. Meek has suggested, and with esprit and with extremely capable people.

    I think, Mr. Chairman, when you look at this year's budget, you will see a real effort by all of us in the Administration working together to find a reasonable and an optimal allocation of budget authority resources.

    But having said that, I also think that there has been a tendency, over time, to under-recognize the extreme importance of the Treasury bureaus and their mission, and so we very much welcome the focus that you have brought to this, and we obviously will be very supportive as we work our way through the question of the budget this year.
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    Let me also say that I think a critical part of law enforcement for the Nation, as a whole, is the relationship between the Treasury bureaus and the Justice Department. The Attorney General told me the other day—we were talking about something—that it is her sense that the coordinating relationship between our law enforcement bureaus and the Justice Department is probably better than it has ever been before, both at the most senior level and also the operational level, and that contributes, very importantly, I think, to the performance of the Federal law enforcement function in this country.

    Let me just, if I may also say, more generally, Mr. Chairman, that we very much appreciate, Treasury very much appreciates the support that this committee has shown, traditionally, historically, for our law enforcement bureaus as well as more generally for the Treasury. And I think our working relationship clearly plays a very important part in enabling us, all of us, to do our jobs as best we can.

    I am joined today by Under Secretary Kelly, and also, as you have already indicated, Mr. Hoyer, by the heads of the Treasury law enforcement bureaus. We have had some very good bureau heads leave us since we last appeared before you, but it is true of any very strong organization—when you lose very good people, you get very good people to take their place. And I think in the case of Treasury law enforcement bureaus, that clearly has happened.

    Lew Merletti has taken over as head of the Secret Service. Ralph Basham is the new Director of FLETC. George Weise did a terrific job at Customs, and of course we greatly miss George. On the other hand, Sam Banks has done an excellent job as Acting Commissioner, and we very much look forward to working with Ray Kelly, once he has been nominated, which in the fullness of time will happen, and then confirmed.
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    As you well know, as both of you have addressed in your opening remarks, Treasury has a wide-ranging array of law enforcement responsibilities to protect the President. We work, Mrs. Meek, to prevent the flow of drugs into the country, though as you correctly say, it is a critical mission and one that needs every bit of intensity that we can bring to it.

    We enforce the Federal firearms laws, investigate violent crimes, such as the bombing in Atlanta at the Olympics. We enforce the tax laws. We investigate financial crimes, counterfeiting and money laundering.


    I think it is fair to say that Treasury is unique in law enforcement, in that in most of these areas, in fact in almost all of these areas, there is a mutually reinforcing interrelationship between regulation, revenue collection, and law enforcement. To strengthen these critical efforts, the President's 1999 budget for Treasury law enforcement bureaus totals $3.204 billion, which is an increase of $172 million, or 5.7 percent above last year.

    The increase is needed to meet certain mandatory cost increases, to enhance initiatives in combatting narcotics trafficking, reducing illegal firearms trafficking to young people, improving presidential protection, White House security, investigating financial crimes, and training law enforcement officers.

    The heads of each of our bureaus will provide more details on the specific functions, but I would like to take a few moments to highlight several of these items.
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    First, in response to the comments that Congresswoman Meek made, we need additional resources to help the Customs Service with the critical mission of drug interdiction.

    In cooperation with the Office of National Drug Control Policy, the Customs Service has developed a 5-year technology plan which is designed to deploy an array of technologies, which would enable Customs to effectively fulfill both of its missions at the same time, preventing the entry of illegal products and of course the principal focus there is drugs, and at the same time processing the large flows of trade that is so central to our economic well-being. Funding for the first phase of this plan has been requested for 1999.

    Second, a major priority at Treasury is combatting money laundering. It is a very, very important area, Mr. Chairman, and one that I think has received very little focus, until recently.

    Money laundering efforts can provide a unique vantage point for getting at the leadership of organized crime and drug lords, by going after their Achilles heel, the profits from their illegal activities. The leaders of organized crime and drug gangs could separate themselves from their street level activities, but they cannot separate themselves from their profits, and so by going after their profits we can get to the leadership of these organizations.

    In addition, money laundering presents a real risk for financial systems, particularly in developing countries, and so by promoting stronger measures, internationally, with respect to money laundering, we not only get at organized crime and drug lords, but we also strengthen the financial systems of developing countries which is particularly important in the global economy that we now are part of.
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    Money laundering is a very sophisticated business that is international. It utilizes state-of-the-art technology. To be effective in combatting money laundering, our efforts also must be international, and we must use equally state-of-the-art technology.

    FinCEN is applying state-of-the-art technology to tracing flows of money that are exceedingly complex. Its budget includes an expansion of the Gateway program which is designed to coordinate Federal, State, and local efforts.

    We need the resources to stay on the cutting edge, and the effort to develop more innovative technologies and techniques, and to make sure that we have the international cooperation that is necessary, if we are going to be successful.

    Third, we are asking for additional resources to support initiatives that the Department and ATF have led over the past two years to prevent violent firearms crime by the Nation's youth. The Youth Crime Gun Interdiction Initiative is a collaborate law enforcement effort between ATF, local police departments and prosecutors.

    Its goal is to develop and share better information about how juveniles and gang offenders are illegally obtaining firearms, and by doing this, reduce the supply of firearms to kids by investigating, arresting, prosecuting, and then incarcerating illegal gun traffickers.

    There has been a preliminary analysis done and it shows us a very promising program. With these resources, we will be able to expand from the current 18 cities to 27 cities, and we will be able to add additional agents in those cities. [CLERK'S NOTE.—Department later clarified that the number of cities currently covered is 27.]
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    Fourth, in fiscal year 1999, the Secret Service will begin to build its capacity to protect candidates and nominees for the elections in the year 2000. Increased funds have been requested to meet this mandatory workload increase, as well as additional funds for ongoing White House security and other protective initiatives.

    Finally, we are asking for additional resources for FLETC so that it can better perform its critical mission.

    Over the past couple of years, FLETC has seen an unprecedented increase in its workload and current projections indicate that this increase is likely to continue for the foreseeable future.

    We will need to continue to work on construction sites, both in Glynco, Georgia, and in Artesia, New Mexico, if we are going to satisfactorily meet this need.

    Let me conclude, Mr. Chairman, if I may, by saying, once again, something that I said at the beginning of my remarks. In the time that I have been at Treasury, I have developed a deep respect both for the institutions and the people in Treasury law enforcement. I think the Members of this committee can feel very good about the leadership of these bureaus and also about the capabilities and esprit and commitment of the men and women in these bureaus.

    I very much look forward to working with you as we work through this budget process, and in making sure that these men and women have the financial support they need to perform their critically important missions.
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    Thank you very much, Mr. Chairman.

    [The information follows:]
    "The Official Committee record contains additional material here."


    Mr. KOLBE. Thank you, Mr. Secretary. As we suggested earlier, rather than going to other opening statements now, we will go directly to questions because we understand that you have other commitments and that you must leave. I do not know whether we will get questions to you, Mr. Secretary, in one round. We will certainly try to do that. Mine are relatively simple.

    Mr. Secretary, from the charts that I showed you, I think the disparity is clear. I think it is undeniable, and I am just wondering if you have any explanation for this—if you can tell me what is going on, to the extent that you can, within the confidences of your conversations at OMB and the White House?

    Why do we have this disparity? Why are we failing to make those who have the responsibility for preparing budget requests understand that there has to be an integrated approach to Federal law enforcement—that you cannot simply put all the resources in Justice and none in Treasury, which is 40 percent of our law enforcement?

    If we are talking about Customs being the first line of defense against drug interdiction, we are not doing anything to give them the kinds of—we are not doing enough, let me put it that way, to give them the kind of resources that I think we need. I think that is undeniable.
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    Certainly, when you look at the—if drug interdiction is that important, and we are looking at the resources that INS and Border Patrol are getting, then something is fundamentally wrong here. I do not understand what is going on and I wish you would address this issue.

    Secretary RUBIN. Let me say, in the first place, Mr. Chairman, that I identify with your overall comments.

    It seems to me what the Federal Government needs to do is allocate the resources for Federal law enforcement in an optimal fashion, or to get the best possible effect for the resources it has.

    I think, in fairness to OMB, that they recognize that there has been an historical disparity, and your charts well show it, and they have committed to what I would call a balanced approach or attempting to optimize, as we go forward. If you look at budget authority, actually, for this year, I think you will find that law enforcement in Treasury went up slightly more than Justice, though that may be neither here nor there.

    On an outlay basis, it goes up less, and I assume that that—I do not know the explanation of that, offhand, though I suspect it may have to do with——

    Mr. KOLBE. It definitely does not in outlays.

    Secretary RUBIN. No.
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    Mr. KOLBE. I did not think it did in budget authority either.

    Secretary RUBIN. Yes, it does, slightly.

    Mr. KOLBE. I do not think the 1999 budget clearly reflects that.

    Secretary RUBIN. Mr. Chairman, I think—maybe I am incorrect—but I think you will find that total Justice law enforcement is up about 5 percent and Treasury law enforcement about 5.7 percent.

    On budget authority, based on outlays, I would guess—and I do not know this, I did not relook at the Justice numbers—but I think what it may be is capital improvements in some measure.

    They also have some special situations in the—my recollection of having sat through the budget process—special situations with respect to Bureau of Prisons and INS.

    But having said that, Mr. Chairman, I think that—and as Mr. Hoyer said, you are on both Subcommittees, so you can be very helpful in trying to accomplish this—we have tried, within the Administration, to make sensible judgments of allocation of resources. I identified very, very strongly with the Treasury law enforcement bureaus. I think they do an excellent job. I think it is a remarkable group of people, I really do. And I think that they have a mission that is unique unto themselves, and I think it is imperative that they be given proper support, so that as you review our budget you, sitting on both these subcommittees, will have to make a judgment as to whether we in the Administration have made a proper allocation of resources or not.
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    Mr. KOLBE. Well, in your view, then, given the coordinated, the new strategy that is being put forward by ONDCP on drug interdiction, does this budget reflect the resources that are necessary to carry that out?

    Secretary RUBIN. I think that this budget will provide Customs with what it needs in 1999, subject to the caveat that all of our law enforcement activities, and in fact the entire Federal budget is constrained by the enormous commitment we have had to bring the deficit down, and getting into a position that now we will be in surplus in this budget.

    If there were additional resources, I can assure you, Mr. Chairman, they could be utilized very, very effectively, but in all of the activities of the—the Administration, as you may know, has a small group of people that work through the entire budget process as part of that—and in all of our activities, our overarching framework was to make sure that we stayed on the path to fiscal discipline.

    As I said, we will now actually expect a small surplus. I think within the context of the framework that we are operating in, I think that the Customs allocation was a correct allocation, or we would not have agreed to it.

    Having said that, if, as it turns out in your wisdom, you, the Congress, make a different set of judgments with respect to the allocation, Customs certainly can make exceedingly good use of additional resources.
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    For example, by adding technology that enables them at the same time, as I said in my remarks, to both process trade and deal with drug interdiction.

    I think, historically, there clearly has been a disproportion. And it is one that OMB acknowledges, and has said that they are committed to an appropriate and optimal allocation of resources both this year, and as we go forward.

    I am not disagreeing with you on the importance of optimizing it.


    Mr. KOLBE. No. I understand.

    Secretary RUBIN. You know, we have made our judgments, and I think you all have to make your judgments.

    Mr. KOLBE. I just find it distressing, that for very solid and sound reasons, I think we have kept our Federal law enforcement organized the way it is, with certain components under Justice and certain under Treasury, but there has to be something over that, that becomes the overarching element that integrates this, and I do not see that happening here.

    Secretary RUBIN. Let me make a suggestion, if I may, Mr. Chairman. You know, we have attempted to do that in the administration in ways that seem to us to be sensible, but since you are both on both subcommittees, you are in a particularly good position to do that. If you analyze both of these budgets, if you think they are inappropriate, then I think—and I am sure you will do this—you will come back and discuss this with us and then we will work our way through——
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    Mr. KOLBE. Well, I will, and I certainly intend to make this point very strongly within the leadership of the Appropriations Committee, and the leadership on our side of the aisle, to try to bring this disparity to their attention. I am not sure, though, that given the figures that we are getting from the Administration, that I am going to have a lot more success with changing it, when we do not see the beginnings of that happening from above in the budget that has been presented to us.

    I have used up my time.

    Mr. Hoyer.

    Mr. HOYER. Thank you very much, Mr. Chairman.

    I want to congratulate the Chairman on his focus. I think it is very appropriate and we need to discuss this, not as I said—and I want to emphasize, because we want to reduce the resources available to Justice.

    Justice's role is absolutely critical. So this is not a question of where we want to take from Justice. It is a question of where we want to make sure that the complementary role that Treasury and law enforcement plays in Federal law enforcement is not overlooked because, generally speaking, when the American public and yourself, when you came in, think of Treasury, you think of IRS, you think of the financial aspects, international finance. You do not necessarily think of law enforcement as being a major component of the Treasury Department, although it clearly is, and I think the Chairman's point is well-taken.
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    I might observe, I was asking the staff of the committee whether this red line of Customs and Justice, or Customs and INS, I guess, reflected appropriated, or requested funds.

    In point of fact under the Reagan administration, under the Bush administration, and I believe under the Clinton administration—I want to check that—the administrations have historically asked for less funds than the Congress have appropriated for Customs.

    That was I know true in the Reagan Administration where we continually added agents to Customs and other—and the expert in the room on what we did in the past, Patty Lynch, tells me that that is exactly—I am correct, and the fact is we will probably continue to do that.

    But part of it is because of this concept, that when you are dealing with border interdiction, or you are dealing with violent criminals, you are dealing with the FBI, when in fact ATF has a leading role there, and go down the line.

    But in any event, Mr. Secretary, I know you have to go.

    I want to make an observation, Mr. Chairman. First of all, I said that your focus is, I think, critically important, and I think you have led this committee very well.

    Secondly, as I said, I have served on this committee since January of 1983. No Secretary—and we have had some very good Secretaries. I do not diminish any Secretary's involvement by these comments. But no Secretary, in my experience, has had the hands-on involvement, and the significant role in the bigger picture with the administration this Mr. Secretary.
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    Now, he has been very involved in IRS, which is critically important, but in terms of law enforcement, I have also engaged with him on specifics, on the finite as opposed to the infinite, and Mr. Secretary, I think you are making a tremendous contribution to this country, to the administration and you are a pleasure to work with because of the fact that you are involved and focused, and very objective, in my opinion, when you pursue these issues, and it is to the benefit, as I said, of this administration, that you are such a critical component of the administration's highest level of policy makers.

    I do not have a question for you, I will have questions for your colleagues, but I thank you for your leadership.

    Secretary RUBIN. Thank you, Mr. Hoyer.

    Mr. KOLBE. Thank you much, Mr. Hoyer, and Mr. Secretary.

    To the other Members of the subcommittee, I have just been advised by the Secretary's staff that the Secretary really does have to depart. He will be back with us next Wednesday and we can continue this line of questioning. Hopefully, we will have more time.

    Secretary RUBIN. Can I just add one thing, Mr. Chairman?

    Mr. KOLBE. Yes, of course.

    Secretary RUBIN. Let me just say, if I may, I think you have opened up a very interesting question, and I think one that really is worth very serious analysis.
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    I have come to identify, enormously, with the bureaus of Treasury, and have, as I said in my comments a moment ago, enormous respect for their missions, for the people, for the work that they do, and I think all of us have brought that to this budget process.

    But as you look at this historical disparity—and I agree with you, it certainly would behoove us to take a look at it and if this has been a disproportionate allocation of resources. As Mr. Hoyer said it is not a denigration of anybody else, it is just a question of whether there has been optimal use of Federal resources in the law enforcement area.

    Now, I think if you frame the issue that way, it seems to me that you open up a very interesting line of analysis, and we would be very happy to participate with you in that project. We, in the Administration, went at that, and arrived at the judgments that we had, and I think they were sound and sensible judgments.

    But I think that if you take a look at the historical record, it certainly suggests that this could well benefit from a continued analysis between this Committee and the other Committee that deals with Justice, and we, the Administration, so we would look forward to that discussion and analysis.

    Mr. KOLBE. Thank you.

    Just for the record, using ONDCP's numbers, the increase in budget authority on drug-related law enforcement for Justice is 5.6 percent, and for Treasury 4.5 percent. So there is more than a percent different there in BA on drug enforcement for Justice, and of course it starts from such a huger base, that it just increases the disparity even more this year.
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    We will be getting into this more as we go through the questions with the others, and Mr. Secretary, we thank——

    Secretary RUBIN. I do not think you are going to find them arguing with you——

    Mr. KOLBE. No, I suspect they will not be arguing with us [Laughter.]

    What we need for you to do, Mr. Secretary, is to go down to the White House and argue the case, and I know that you will.

    Secretary RUBIN. I am delighted to.

    Mr. KOLBE. Thank you very much, Mr. Secretary.

    Secretary RUBIN. Thank you, Mr. Chairman.

    Mr. KOLBE. We will let the Secretary depart, and then we will continue here.

    Before I call on Under Secretary Kelly for his opening remarks, let me just correct, for the record earlier, when I welcomed our panel, I mistakenly welcomed Stan Morris, Director of Financial Crimes Enforcement Center, and he is being represented today by his deputy, William Baity, today, or will be this afternoon, when we get to that testimony. So he will be on that panel.
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    Mr. HOYER. Mr. Chairman, he is, however, in the room, and you are right, he has done an outstanding job.


    Mr. KOLBE. Right. He certainly has.

    I think we are ready to go to Mr. Kelly's opening statement.

    Mr. KELLY. Thank you, Mr. Chairman, Congressman Hoyer, and other members of the Committee for this opportunity to testify on Treasury law enforcement.

    You have my full written testimony and I ask that it be inserted in the record. I will briefly summarize my statement.

    Before I get started, I wanted to take this opportunity to point out that Bill Baity, who has just departed, the Deputy Director of the Financial Crimes Enforcement Network (FinCEN), will be testifying today.

    However, as you stated, I want to acknowledge the presence of Stan Morris. Stan is the current director of FinCEN. In a few days, Stan will be leaving FinCEN and begin his retirement from Government service.

    Stan has had a long and distinguished law enforcement career. It included Director of the Marshal Service; Chief of Staff in the Treasury, Office of Enforcement; the Attorney General's Office; the Office of National Drug Control Policy; the Office of Management and Budget, and of course FinCEN. So I would ask the Committee to join me in wishing Stan all the best in his retirement and thanking him for a job well done. Thank you.
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    I want the committee to know that I certainly appreciated Stan Morris' leadership, particularly in advancing our understanding of money laundering and its corrosive effects, not only in rewarding narcotics traffickers and other criminals, but in its potential for undermining entire economies.

    One of the areas in which the Office of Enforcement has been most effective over the past year in fact was in combatting money laundering. By implementing our rarely used geographic targeting orders, we effectively disrupted the flow of drug profits between the New York metropolitan area and Colombia.

    The money the cartel could not wire back to Bogota piled up in stash houses, and was seized by Customs as the drug dealers tried to smuggle the cash out of the United States in bulk.

    We are seeing similar results in targeting money laundering involving the Dominican Republic. Eventually, a seamless authority will be put in place, tightening the reporting restrictions on cash transfers anywhere in the world.

    The criminal organizations Treasury contends with operate internationally. So we must, too. That is why I was particularly pleased that the Office of Enforcement was able to play a lead role in establishing ILEA-South. That's the International Law Enforcement Academy, opened recently in Panama under an agreement with the State Department.

    This is Treasury enforcement's counterpart to the Justice-run center in Budapest. Our focus at ILEA-South will be counternarcotics and involve police agencies from throughout Latin America.
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    Internally, at the Office of Enforcement, we have moved forward, not as quickly as we certainly would have liked, with the filling of the OPR [CLERK'S NOTE. Office of Professional Responsibility] slots authorized by this committee. About half of the positions are now filled, including the slot focusing on internal affairs issues across the bureaus.

    It is critically important to constantly monitor the integrity functions of law enforcement, especially in an era when the criminal environment is awash in narcotics money.

    It raises the stakes and the corruption potential everywhere, posing a threat to every nation's interdiction efforts. That is why we felt it was critically important to have an expert in internal affairs inside Treasury enforcement, looking at the standards and support for integrity functions across the Treasury enforcement bureaus.

    That is also why we are seeking an additional $6 million in the 1999 budget for the internal affairs functions at the Customs Service. Customs is on the front line of narcotics interdiction. As a result, we want to make certain that Customs gets all the training, equipment, and case management support it needs to make its internal affairs capabilities second to none.

    With that, Mr. Chairman, I want to express my thanks for the support and understanding that you and the committee have shown for the Treasury Department's enforcement bureaus over the years.
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    What you will see today from our bureaus demonstrates the complexity of the jobs they face, and you will also witness the ingenuity they bring to the job in combatting a wide array of crimes.

    Thank you, Mr. Chairman.

    [The information follows:]
    "The Official Committee record contains additional material here."
"The Official Committee record contains additional material here."

Insert offset folio 127 here

    Mr. KOLBE. Thank you.
    "The Official Committee record contains additional material here."

Wednesday, February 25, 1998.  




    Mr. KOLBE. The Subcommittee will come to order.
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    We will be joined very quickly by other members and will resume our hearing.

    First of all, looking out in this room, I would like to ask everybody with a gun to please stand up. That is just a joke. [Laughter.]

    But looking out at this audience, I must say, it seems to be a disproportionate share of men in law enforcement rather than women. Maybe we need a little more affirmative action here in law enforcement.

    We welcome back this afternoon not only Under Secretary Kelly, who has already given an opening statement, but we have with us this afternoon, Mr. Magaw from the Bureau of Alcohol, Tobacco and Firearms. We have Mr. Basham. We have Mr. Merletti from Secret Service. We have Mr. Baity from FinCEN.

    Since you have already had an opening statement, we will begin with Mr. Magaw, who we did not get to this morning, for opening statements. I will remind all of you that we will put your full statement in the record, and if you would summarize it, it would be helpful to us.

    I will also advise members of the audience that we expect another vote in approximately 30 minutes or so.

ATF Opening Statement
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    Mr. MAGAW. Mr. Chairman and the members of the subcommittee, I am pleased to represent all the men and women of ATF who are outstanding in both their abilities and their dedication.

    Once again, I have asked ATF's executive staff to accompany me here today because we find it is very helpful if they hear your questions and they hear your comments firsthand—they sit on both sides of the aisle here and in the second row—so that we can all better respond to your concerns.

    ATF's 1999 budget request is $586,324,000 and 4,038 full-time-equivalent positions. This budget includes $32,000,000 for the relocation of Bureau Headquarters, which is essential for the protection of our employees and our customers.

    The other major increases are found in the $16,000,000 and 81 FTEs to expand the President's Youth Crime Gun Intradiction Initiative, and $2,000,000 to expand our Violent Crime Coordinator Program.


    Our request in the 1999 performance plan of this Bureau are directly linked to the elements of our strategic plan, which includes protecting the public, reducing violent crime, and collecting the revenue.

    As we implement our key programs, we will utilize the full array of enforcement tools to carry out our interwoven mission. That blends tax, regulatory and criminal investigations together.
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    Not only does this unique mix serve ATF's own operational responsibilities, but it allows us to provide otherwise unavailable expertise to State, local, and Federal agencies.


    The Youth Crime Gun Interdiction Initiative typifies the driving collaborative spirit behind our strategic plan, partnerships and technology that merged to provide value to the citizens that we serve. There are 27 major cities that are employing ATF's expertise in resources to trace firearms used by juveniles in crime, to identify sources and patterns of illegal firearms trafficking, and to develop strategies to reduce the flow of weapons to the youngest and most volatile members of our society.


    ATF's Violent Crime Coordinator Program, for which we are also requesting additional funding, is yet another collaborative effort, but one that concentrates on the most hardened members of our society. Because many of the Federal firearms laws contain a provision for mandatory extended sentences, ATF strives to increase State and local awareness of available Federal prosecution under these statutes.

    ATF's Violent Crime Coordinators will work closely with local prosecutors and the U.S. Attorney's Office to provide the investigative component to the Department of Justice's Trigger Lock Program. We will focus on ensuring that the violent career criminals are appropriately matched to the criminal charges that will remove them from our communities for the longest period of time.
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    Our videotape presentation this afternoon and displays in the back of the hearing room highlight some of the critical partnerships and state-of-the-art technology that we have developed to impact firearms, arson, and explosive crimes, and to ensure the integrity of alcohol beverage products, as well as the collection of nearly $13 billion in revenue.


    You can be confident that ATF is able to fully account for the funding that you provide us. I am pleased to report that for the third consecutive year, we have received the highest possible rating on the annual Inspector General's audit of our finances and internal controls. This audit was conducted this year by Price Waterhouse.


    While the demands on ATF have increased dramatically over the past 25 years, I believe that it is of special note that our personnel level has increased by fewer than 100 people in 25 years. Moreover, we have had a 14-percent reduction in the number of special agents between fiscal years 1992 and 1997. This places an enormous strain on our personnel.


    Mr. Chairman, that concludes my statement, and with your permission, I will show our short video, or do you want that done after the statements?

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    [The information follows:]
    "The Official Committee record contains additional material here."

    Mr. KOLBE. Let us go ahead with your presentation now.

    [Videotape shown.]

    Mr. KOLBE. We have a vote under way. I believe it is just one vote. Why don't we break and go do that, and the moment I get back, we will begin again with Mr. Merletti, and I understand we have a very interesting presentation.

    "The Official Committee record contains additional material here."

Wednesday, February 25, 1998.  





    Mr. KOLBE. We are going to go now to Mr. William Baity, the head of FinCEN. It may not be quite as dramatic and exciting, but just as important.
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    Mr. Baity, we welcome you, also, and you are for the first time before this Subcommittee in your role as the Deputy Director of the agency. Thank you very much for being with us.


    Mr. BAITY. Thank you, Mr. Chairman.

    If you could, just bear with us for a few seconds while we set up the monitors. Mr. Chairman, we have a monitor that will be set up for the Committee, as well as a monitor to the right for the audience.

    Again, Mr. Chairman, Mr. Hoyer, and members of the Committee, thank you very much for giving us the opportunity to discuss the mission of FinCEN and our FY 1999 budget request.

    The Financial Crimes Enforcement Network, or FinCEN as we are commonly known, feel the best way to illustrate our effort is to show you, after a brief description, how we work as a network. In fact, we take great pride in the fact that network is in our name because we do believe that we are a link between law enforcement, regulatory, and the financial communities.

    Our goal, of course, is to maximize information-sharing among our partners in order to develop more effective ways to combat money-laundering.
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    Our second objective is to show how important technology is in fighting financial crimes. As financial crimes become more complex, technology becomes for us one of the most important weapons in our arsenal.

    Looking at FinCEN's network approach and how it uses technology, we will show the significance of our 1999 budget request and how it will strengthen the quality of support being provided to law enforcement and to all of FinCEN's other stakeholders.

    As we have described to this Committee before, FinCEN provides case support to well over 150 Federal and State law enforcement agencies [Clerk's note.—agency added that this number includes local agencies]. Through our relationship with the banking industry and other financial communities, we also use our network to administer the Bank Secrecy Act, the BSA.

    Under the BSA, banks and other financial institutions report and keep records on large cash transactions. The purpose of this requirement is to curb money laundering and create a financial trail for investigators to follow, in order to track criminals and their assets.

    BSA records also include information on transactions that banks believe are suspicious or unusual. Not only does FinCEN put the rules in place, but FinCEN also works to use that information to help detect and prevent money-laundering. [Clerk's note.—The agency adds that FinCEN is one of the primary users of such information.]

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    To illustrate the use of the BSA data and our network capabilities, today I will describe three recent law enforcement investigations.

    Our first case is an example of how FinCEN works with State and local governments through a program called Gateway, which the Secretary alluded to earlier this morning. Through this system, State and local law enforcement agencies have direct, online access to records filed by banks and others under the Bank Secrecy Act. Using software designed by FinCEN, Gateway saves investigative time and money. User agencies can conduct their own direct research without intermediaries.

    Last year, Gateway alone processed almost 58,000 inquiries from 50 States, as well as the District of Columbia.

    The case which I am about to discuss shows that hidden behind today's sensational headlines are the chilling realities of criminal activity. We will show that financial records are extremely useful in money-laundering cases, but they can also help investigators in other areas and unravel other crimes.

    This case shows how a highly trained investigator used FinCEN and the technologies we have to locate a very violent and dangerous criminal. This is a story about a man named Arthur Thrash, a man previously convicted of armed robbery who went on to commit murder [Clerk's note.—agency added that Thrash was also convicted of larceny]. Having been arrested and convicted, Thrash received a life sentence without parole. He had been in prison for 6 years when he escaped from the Cummings Correctional Institution in Varner, Arkansas.

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    Authorities learned that Thrash may have had an accomplice who they believed was one Nellie Jean Smith, who had been a counselor at the prison. About the time of the escape, Smith began selling off her assets and told her family that she was leaving the country for a year.

    The Arkansas State Police had jurisdiction of this matter, and the lead investigator, Roy Stayton, traced Smith and her accomplice to Memphis, Tennessee. Investigator Stayton learned that Smith had obtained a Tennessee driver's license about the same time of Thrash's escape. Although Smith used her real date of birth and Social Security number, she had used a fictitious name and address. So, with no additional information, the investigation appeared to have hit a dead-end.

    At that point, Investigator Stayton turned to his police crime analyst, who is the Arkansas State coordinator for FinCEN's Gateway system. Using this system, that analyst queried our BSA database and quickly found five currency transaction reports (CTRs), which had been filed on Smith. Four of the currency transaction reports showed that Smith withdrew almost $112,000 in cash from the Mercantile Bank of Arkansas within a 3-day span of the escape of Thrash. This information confirmed to the investigator that she had been accumulating a large amount of cash. But what was most important in this case was the fifth CTR, or currency transaction report, because it was the one that ultimately led to the capture. [Clerk's note.—agency added that the CTR, which led to the capture of Thrash, was filed two months after the escape.]

    Why? Because that CTR indicated to the investigator that Smith had used her fictitious Tennessee driver's license in Greenville, Mississippi, and at that time did a cash transaction in which the bank processed and sent in a CTR to Planters Bank and Trust of Greenville. [Clerk's note.—agency added that Smith gave a Greenville, Mississippi address when the CTR information was collected, and the report from the bank placed Smith in Mississippi. This provided the first solid lead in months.]
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    At this time, the investigator had a new lead and then proceeded to go to Mississippi. In Mississippi, he learned that a woman meeting Smith's description had lived in a trailer park, but had left, but at the time while being at the trailer park was living with a male accomplice that fit Thrash's description.

    At the same time, the Arkansas investigator used his analyst who had developed an additional lead from the CTR. [Clerk's note.—agency classified that the lead was developed from the 5th CTR by the Arkansas analyst, who continued to work on the case.] That additional lead showed a transaction that Smith had used about $14,000 to purchase a cashier's check. The check had been made out to an individual who, through subsequent BSA queries, was found to live in Pennsylvania.

    Finding the location of that individual using the Bank Secrecy Act data, they [Clerk's note.—agency refers to the Arkansas analyst] in turn found that Smith had purchased a mobile home in Pennsylvania. At that time, they [Clerk's note.—agency refers to Investigator Stayton] contacted the Pennsylvania State Police who were able to locate the mobile home and determine that both Thrash and Smith were living there and effectuated the arrest.

    FinCEN's ability to operate as a network in this case, to link together pieces of extraneous information and make this information available to law enforcement was critical to Thrash's recapture. The BSA database provided the clues that Investigator Stayton needed to pick up what had become, indeed, a cold trail.

    First, the CTRs provided enough circumstantial evidence and confirmed suspicions that Thrash had an accomplice. Second, the currency transaction reports pinpointed the location in Greenville, Mississippi, from which the investigative team gained other leads.
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    Also, the Arkansas crime analyst who was the Gateway coordinator, used the BSA database to locate the individual who sold the property to Smith, and this information led to the location of the two criminals.

    The final result was that the fugitive who had been on the run for approximately 8 months was captured 10 days after first sourcing the Bank Secrecy Act database by the Arkansas State coordinator. Today, Thrash is back in jail, and Smith is awaiting trial.

    In a letter to FinCEN, [Clerk's note.—agency added ''supervisor in charge of the''] Arkansas Crime Analysis Unit said the information provided by FinCEN ultimately resulted in the arrest of Thrash and Smith. This cooperation was key to bringing this case to a close.

    Now, obviously, what we have portrayed today is not a complicated financial case, but it does show the usefulness of the Bank Secrecy Act data, and it is important how FinCEN tries to network between different agencies who use that information linking together those agencies on all kinds of cases which quickly gets the information to investigators who need it.


    I would like to turn now to our next case, which shows how expanding our network assists U.S. law enforcement in financial crimes here at home. As we all know, and to echo again this morning's comments by the Secretary, money laundering trails lead all over the world, and international cooperation is essential.
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    At FinCEN, we foster this cooperation, encouraging the creation of organizations, similar to us, that are now known internationally as financial intelligence units, (FIUs) to work together.

    As you can see on the monitor, these financial networks, which are designed to continually strengthen our developing relationships [Clerk's note.—agency inserted ''with the growing number of FIUs.''], started in 1991 with only four. Today, there are 28, with at least 25 FIUs under some planning stage throughout the world.

    In the last 3 years, a core group of financial intelligence units have met to determine how better to exchange information and develop strategies. Their goal, quite simply, is to promote international cooperation through information-sharing, technology, training, and technical assistance.

    These FIUs now are able to communicate through a secure Internet web site which we have built at FinCEN for them. [Clerk's note.—agency amended this to say the web site was ''designed by FinCEN's technical experts''.] Using the Internet, FIU members are able to communicate with each other, in a secure environment, not only to exchange information, but to track trends and patterns as well.

    To demonstrate how we have used [Clerk's note.—agency amended this to ''our relationship with.''] the FIUs, I would like to briefly walk you through actions we recently took in response to a query sent to FinCEN from one of the FIUs in Europe. These actions will show how FIUs network together to identify and link government entities at home and abroad with common interests.
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    As this committee well knows, among one of the most elusive and difficult money laundering techniques to detect are illegal wire transfers, funds transferred between other countries. This detection is difficult because illicit activity is just a tiny fraction of the total volume of international funds transfers.

    Electronic wire transfer systems move funds between financial institutions and handle a daily volume in excess of a half-a-million transactions resulting in more than $2 trillion [Clerk's note.—agency inserted ''moving around the world.''] a day, and only a small portion of that obviously involved illicit funds. Thanks to the cooperation of an FIU in Europe, FinCEN was informed of millions of dollars, U.S. dollars, being wired into its country by a United States citizen. These transactions were deemed suspicious in their particular country, and FinCEN was asked [Clerk's note.—agency inserted ''by our FIU colleague.''] to determine if there were any interests by U.S. law enforcement or other entities in terms of this movement of money.

    At FinCEN, our analyst ran the name of the individual wiring the funds through our law enforcement databases. We discovered that a Federal law enforcement agency was, in fact, investigating the individual for fraud. The analyst then ran the name through our public record databases and discovered that the subject was an officer of a financial company.

    Further inquiry by FinCEN revealed that a Federal regulatory agency, having jurisdiction over this particular type of financial company, was also simultaneously pursuing civil proceedings against the individual and the company. And so, in this case, FinCEN discovered two agencies conducting investigations on the same subject. These two agencies, until we were able to bring them together, were not aware of each other's investigations.
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    Now, it is not unusual for U.S. agencies to investigate the same individual or business. The fact is that financial crimes are complex and have multiple facets. They cover a number of jurisdictions often, and they require expertise from many different agencies.

    Within this stream of agencies, FinCEN was able to determine the identity of two different agencies which were conducting investigations on the subject brought to the attention of FinCEN by our FIU counterpart. Because these agencies were focused on different aspects of the crime, each was unaware of the other's interest. Obtaining the consent of the FIU and the two agencies, we actually were able to bring these two together to actually network their information. We, again, suggest that this is networking at its best.

    The FinCEN analyst also used our databases in this case to provide additional information and used our Gateway contacts which I previously discussed add value to this case. The FinCEN network proved valuable in several ways in this matter.

    First, because of our relationship with the FIUs around the world, a foreign government sought cooperation on and advised us of sensitive information which was subsequently related to a case under investigation by two separate Federal agencies.

    Second, using our domestic network, FinCEN was able to link these agencies together, adding value to each of their investigations.

    Finally, FinCEN was able to quickly provide additional information to support the U.S. investigative agencies. This is the key characteristic of an FIU, being a central governmental repository of informational databases that have analysts who are expertly trained to use the information.
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    I would like to say to the chairman and the members of this committee, we are very grateful for the support we have received for our international endeavors that you have actually funded over the last year. We believe this shows that the funding that you have provided to continue the promotion of FIUs are starting to pay dividends not only internationally, but domestically as well.


    Turning to our last case, I would like to focus on FinCEN's Artificial Intelligence system, or what we commonly refer to as our AI system, which is yet another tool which we make available to law enforcement to combat money laundering.

    Using advanced AI technology, the system provides a cost-effective and efficient way to locate unusual activity in the tens of millions of currency transaction reports that are required to be filed under the Bank Secrecy Act. AI provides analysts and Federal investigators with the ability to link ostensibly disparate bank transactions. This linking reveals patterns of financial transactions that we know are used to launder money and to perpetuate other crimes, producing hundreds of new investigative leads.

    This technology, blended with the expertise of FinCEN's analysts, finds the needle in the haystack. To illustrate the effectiveness of the AI system, I have asked Mr. Matthew Cottini, who is sitting to my left, a senior intelligence analyst at FinCEN to describe an actual case that was developed using the AI system.

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    Mr. COTTINI. Thank you, and good afternoon.

    Before I begin my short presentation, what I would like to do is tell you about the data we will be reviewing within our artificial intelligence system. This data consists of Bank Secrecy Act's three forms, which I have in front of me, the CTR or the currency transaction report, the CMIR or currency or monetary instrument report, and the casino report. These three forms track movement of large sums of currency either in or out of a financial institution, in or out of the United States.

    Since the inception of the Bank Secrecy Act in 1970, over 94 million of these filings have occurred. Defined, relevant, intelligent information from that database, which is a large voluminous database, would be impossible without a system such as ours.

    Mr. HOYER. Excuse me. The last one is the casino report?

    Mr. COTTINI. The casino report. It is a CTR based just on filings for casinos. It is deposits and withdrawals within a casino.

    I would like to point out that the CTR form itself, currency transaction report, is a double-sided form, and the complexities of this form alone makes identifying targets, potential money laundering targets, extremely difficult because it provides for multiple people filing from multiple businesses in multiple accounts.

    I would also like to point out that last year, roughly 14 million filings occurred under the Bank Secrecy Act, roughly 12 million of which were the CTR.
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    What I would like to do next is show you an example of how we use our system. If you could divert your attention to our two monitors, we will see the basic target set that we will come up with under our system.

    What we are looking at here is connections our system made looking at all the filings of a particular area in the Midwest of the United States. In this particular example, we looked at grocery stores and restaurants.

    I would further like to divert your attention to the second item on the screen, and we can see it is the first time a restaurant is displayed.

    If we work down into the middle of the screen, we can see another restaurant is displayed there. I would also like to point out that the second column over here to the left indicates that our first occurrence of a restaurant shows a figure of 104. That represents the number of cash filings, 104 cash filings for this restaurant.

    This screen was sorted by the number of cash filings and the next highest filer with a similar type of activity has less than half, which was 43.

    What I would like to next is focus my attention on that individual that is highlighted. We can see his name is Joe Jones. For our example here, we are using a sanitized data set for privacy issues. What we are going to do is ask for a monthly aggregate.

    What just appeared on the screen is a summary total showing us Joe Jones' financial activity, and we are looking at 1995 data. That is when this particular case started. We can see the total of 104 filings down here on the bottom that contributed to over a million dollars cash and deposits.
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    What I would also like to point out, the fourth column from the right indicates 65 transactions marked suspicious by the financial institution. This also confirms why this particular individual should be looked at a little further.

    I would also like to direct your attention to the next column over to the left. It represents 81 filings that were under the $10,000 BSA threshold. That is important because the bank was notifying law enforcement and the Government that this could be a potential structuring violation taking place.

    What I would like to do next is, since we have identified an individual, look further into our system and pull out subjects, the subjects filing with this individual.

    Starting out with our initial subject, Joe Jones, we can see three different businesses were linked to him. This is the way our system identifies and makes those connections, all behind the scenes intelligently in an automated environment. Once again, this could never have been done in a manual sense.

    What I would like to do next is highlight all the subjects and ask for accounts. We get back the account screen which indicates a total of seven accounts for those three businesses. That is unusual in itself since the three businesses, have more than one account apiece.

    What I would like to do next is identify, at this point in time, the business with unusual financial activity. It was supported by the indications from the bank or the financial institution, alerting the Government that something was suspicious in nature with those filings. We also found there were multiple businesses and numerous accounts involved.
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    What I would like to do next is to show this in an automated sense. What I am going to pull up is a link analysis tool we have and which will show in a data-visualization sense.

    What I am going to do in the circle is focus in on the lower corner. As we zoom in a little closer, we will see data inside that circle. These numbers we are currently looking at represent record control numbers, or RCNs, that correspond to the financial transaction.

    If I zoom in, in the blue area, we are going to see our individual, Joe Jones. His name, date of birth, and Social Security would appear. All this information is taken right from those financial transactions.

    Other elements on the screen we see in the different colors represent businesses, locations, bank accounts, and other identifiers. What we see going across on all the lines is where the computer has actually drawn a line connecting people to places, to accounts, and identifiers.

    What we have displayed on the screen so far is extremely abstract, and it would be difficult for law enforcement to make any connections in the field looking at that circle. So what I have asked the system to do is condense the information, take out the actual filings, and show this information with shapes.

    In this example, we are using circles to represent people. We are using rectangles to represent the businesses. We used the jagged boxes for accounts and the houses or locations.
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    What I have to do next is untangle the screen and make it visually pleasing to the human eye, and basically, I can do that just by moving data around on the screen. What I would end up with for this example would be a target that looks like this. If I window in, we can see over to the right or to the left, we have Joe Jones. If we look into the center of the screen, we would have all of the accounts. In this case, we ended up with five accounts, his three businesses, and something very important, all three businesses share one common address. They are not spread out over the city. They are in one particular location.

    At this point, this package was completed. It was submitted to law enforcement in the field. It went to IRS CID, and IRS was unaware of this particular activity taking place at the time. They started reviewing the package for a preliminary investigation.

    At that point in time, based on intelligence reports in the field, law enforcement returned back to FinCEN and said with the information you have provided, we also found through our own intelligence, there is another individual linked to the subject you provided us. This was a close relative, as indicated at the bottom of the screen. The relative has two different businesses, a spouse, and an address. This particular subject was important because they were suspected of smuggling large amounts of narcotics into the United States.

    At that point in time, with the new additional information FinCEN received, we provided a value, once again. We looked at the new information, and looking at public records, there was additional information that we provided back to law enforcement for their review. What I've just shown you is an extremely trivial example. Although it still would be impossible to detect this activity in such a large database. What I would like to do is hold up an example of a much more complex case. We were only looking at 104 transactions. The information we see on this screen represents well over a thousand cash transactions. A thousand cash transactions gave us over 275 individuals, and over 108 different accounts. This type of investigation would be absolutely impossible to extract and make all the relative connections within that database without this type of system.
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    What we ended up with for this particular example, was a final schematic that looks like this one.

    At that point, I would like to return back to Mr. Baity.

    Mr. BAITY. Thank you, Matt. This AI case illustrates the successful marriage between the application of advanced software and the analytical techniques, and the crucial, very crucial, local intelligence that only law enforcement customers in the field can provide.

    To summarize, each of the cases demonstrated today reflect FinCEN's network approach and its use of technology. They illustrate our innovative way of leveraging our resources, adding value to our customers' investigative work in as many ways as our resources will permit. They also explain the significance of FinCEN's FY '99 budget request of $24 million which enables us to continue our support to law enforcement investigations, regulatory efforts, and international coordination.


    In addition, our three new program initiatives, which we are respectfully proposing be funded from the Violent Crime Reduction Trust Fund, are modest in terms of dollars: $300,000 to more effectively analyze suspicious activity reports and other information related to financial transactions which, as we saw earlier in the case, can be essential in detecting unknown criminal activity; $200,000 for continued training for the Gateway Program, also described earlier; and $500,000 to produce a statistically based model to explain and measure the magnitude of money laundering problems.
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    This last initiative we believe will help leverage limited law enforcement resources, including helping Congress in terms of providing information on where anti-money laundering efforts would best be directed. I would also stress that this initiative is the foundation for our strategic planning, and at the heart of measuring our performance.

    If we are able to construct a viable model for measuring the magnitude of money laundering, FinCEN will be able to review all its objectives in a more meaningful way. We will know whether we are making a difference.

    We appreciate the Committee's consideration of our request and the time you have given us today to illustrate key aspects of FinCEN's mission. It has been a personal honor for me. I will be glad to answer any questions you may have. Thank you very much.

    [The information follows:]
    "The Official Committee record contains additional material here."

    Mr. KOLBE. Thank you very much, Mr. Baity.

    Secretary Kelly, I understand you have to leave. Are you sure? Because you can probably leave these gentlemen to our tender mercies. [Laughter.]
    "The Official Committee record contains additional material here."

Wednesday, February 25, 1998.

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    Mr. KOLBE. Very well. We welcome Mr. Basham, who has been on board as the Director of FLETC for all of about ten days, I believe.

    Mr. BASHAM. You are correct. Less than that, I believe.

    Mr. KOLBE. Less than that? Well, we are delighted to have you here, and we welcome your statement. Again, the full statement can be put in the record.

Opening Remarks

    Mr. BASHAM. Yes, sir. Mr. Chairman and members of the committee, I am pleased to be here today to report on the current operations and performance of the Federal Law Enforcement Training Center, and to support our appropriation request for the Fiscal Year 1999.

    Even though I am new to this position, I am well aware of the outstanding reputation this organization has acquired over nearly three decades of delivering high-quality training to law enforcement officers across the country and around the world. And I assure you that I will continue to preserve and build on that reputation.
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    I would also like to acknowledge my predecessor, Charlie Rinkevich. Under Mr. Rinkevich's leadership, the Center experienced tremendous growth and came to be recognized as the nation's premier law enforcement training organization. While he was at the Center, FLETC grew into a partnership of over 70 participating agencies providing the best law enforcement training available anywhere in the world.

    Mr. Rinkevich leaves behind an organization with a highly motivated and talented staff dedicated to the mission of providing quality, cost-effective training for law enforcement professionals. I would like to express my deep respect and sincere appreciation for the outstanding and selfless leadership provided by Mr. Rinkevich over the last 15 years.

    Under the leadership of Secretary Rubin and Under Secretary Kelly, the Center has received strong support and active assistance for carrying out its responsibilities. And throughout the Center's 28-year history, this Committee has also been most supportive in its funding of consolidated training, and discerning in its oversight role. The success enjoyed by the Center and the success of the consolidated training concept are directly attributable to this Committee's strong and consistent support.


    Today I am prepared to discuss the initiatives in our request, which include mandatory workload increases, master plan staffing, the International Law Enforcement Academy, and master plan implementation.

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    The Center continues to face an unprecedented increase in its training workload. Last year the Center delivered more student weeks of training than at any other time in its history. The majority of the increase in training workload results from initiatives by the Administration and Congress to improve the effectiveness of the Immigration and Naturalization Service in protecting our nation's borders. Other factors contributing to the Center's increased workload are security enhancement at federal facilities, new federal prisons coming online, and significant increases in the workload of the Bureau of Indian Affairs.


    The initiatives outlined in our request are targeted at increasing the Center's training capacity in response to this growing workload, and they tie directly to the goals outlined in the Center's current strategic plan. As you are aware, and as has been stated, I have only been Director for a few days; and therefore, I have not had sufficient time to review and assess all the goals and measures in the plan. But I will be looking at the plan over the next few weeks, and I will be asking the Department, OMB, and this Committee for input and support in determining the future of the FLETC as we move into the new millennium.

    I would like to take a few minutes and discuss in more detail two of the initiatives that I mentioned earlier: the master plan and the International Law Enforcement Training Academy for Latin America and the Caribbean Region, otherwise known as ILEA-South.

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    To meet the dramatic rise in its training workload, the Center is moving forward on its master plan construction program to increase capacity at both Glynco and Artesia. Through 1998, Congress has appropriated nearly $83 million for master plan construction projects. By necessity, the master plan has been updated several times over the last few years, and copies of these updates have been furnished to this Committee.

    It should be recognized that the cost of fully implementing the master plan has increased over time, due to inflation and changes necessary to meet training requirements of our customers. I want to assure you that FLETC will continue to work through Treasury, OMB, and the Congress, in dealing with any additional changes that may come about in the master plan.

    In the past two fiscal years, the Center has completed construction on two additions to the main classroom building at Glynco, and has expanded the driver training complex. Additionally, construction is underway on a new dormitory and an administration building at Glynco, and a contract has recently been awarded for the construction of a new dormitory in Artesia.

    Our '99 request includes over $16 million to continue the implementation of this plan. These funds would be used to construct another dormitory and classroom building at Glynco, and for expansion of the cafeteria, construction of a laundry facility, and infrastructure improvements at Artesia.

    The additional facilities are vital if the closure of the temporary facility in Charleston is ultimately to be realized. However, I must tell you that the workload projections have increased since the submission of our budget, and we are now in the process of further analyzing facility requirements to meet this additional workload increase.
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    Our request for ILEA-South is aimed at building strong and lasting relationships with and among law enforcement officials from Latin America and the Caribbean. Current demand for training assistance from the international community, resulting from Congressional and Administration initiatives, already exceeds the FLETC's available resources. That demand, coupled with the added responsibility for management oversight and administrative support of ILEA-South, make it essential that additional resources be provided.


    Now, Mr. Chairman, if I may, I would like to draw your attention to the television monitors located in the room. We have prepared a short video to keep this Committee fully informed on Center operations. The video focuses on three areas of interest to this Committee, ones we believe will assist this Committee in its decision-making process. They are workload, facility expansion, and the use of technology and training.

    I do not know whether the technology is up to starting this right away, but there you go.

    [Video shown.]

    Mr. BASHAM. Mr. Chairman, I am committed, as are all of the employees of FLETC, to the mission of the Center to provide the highest quality training at the lowest possible cost. I look forward to your continued support, and I appreciate your time. Thank you.
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    [The information follows:]
    "The Official Committee record contains additional material here."

    Mr. KOLBE. Thank you very much, Mr. Basham. And I know this has been, for the members of the Subcommittee and those in the audience, a very long day, with the interruptions that we have had of presentations. But I think they have been very important for all of us to hear these presentations on Treasury law enforcement, and we certainly appreciate the time and the effort that was put into this.

    Commissioner Banks, I would like to invite you to come back up here, because we did not get a chance to ask a lot of questions of Customs this morning and so we will take everybody that is here at this time and take any questions.

    I will take the first go here at this, with the members that are remaining, and then we will try to get, as quickly as possible, through all of this. I will submit most of my questions for the record.


    Mr. Magaw, I wanted to ask you a couple of questions about the Gang Resistance Education And Training Program, the GREAT program. I mean, I think I know it's a program that has a lot of popular appeal. There's a lot of community support for it, and I think it's probably done a lot to help the image of BATF, maybe to soften the image of BATF. But I want you to be as candid as possible in telling me whether or not you think this program is really having a measurable impact in communities in reducing gang-related crime and violence. And how are you measuring that?
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    Mr. MAGAW. That was a concern from the very beginning for me, Mr. Chairman. And so about two years ago, we contracted with the University of Nebraska to do a study of this program, to look at the students who had gone through the program who lived in very difficult areas, to find out if in fact this was keeping them out of gangs.

    The first report has come back on that, and it is very clear that it is substantially assisting children to stay out of gangs. There are a number of recommendations that have come up in the last year or so; and that is to have a summer program for them. Local police departments are having the summer programs and, as you know, these programs, both in the school and outside the school, are being taught by uniformed officers. And it is having a tremendous effect on the children. In fact, in two or three cities in the country, they are taking their GREAT program officers and having them teach a program for a month, and then they go out on the streets of that community for a month, and then back into the classroom. So when they see these children in the classroom, they also see them a month later on the street.

    We have reached 1.2 million children, and have the program in every state now, at 800 localities. It has been in so much demand that we were not able to meet the demand just with Phoenix and with us, so now it is in regional. We are just moving into Philadelphia as a regional training center, also in the state of Washington, and also in the state of Florida. That will give us a capability to reach more students and get more officers trained.

    Mr. KOLBE. Just to follow up on that study, though, I believe the study you referred to, if that is the same one, really did not do a study over time. It was not a longitudinal study. It is my understanding you are going to go back and do that. Because it seems to me you have a great opportunity for people to slip back into the behavior that they had before, and that a longitudinal study is the only thing that is going to tell you whether this is really having a long-term impact.
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    Mr. MAGAW. That is correct. We are going to do a longitudinal study. Up until now, you really have not been able to do one, because the program is not quite old enough. But as the program grows now, Nebraska is going to do that.

    Mr. KOLBE. Okay. How many sites are we in now?

    Mr. MAGAW. We are in 800 sites throughout the country.

    Mr. KOLBE. Eight hundred sites? How many communities are on a waiting list to get a program started there?

    Mr. MAGAW. I am not sure of that.

    Mr. KOLBE. I guess it would be school districts, I would guess.

    Mr. MAGAW. I am not sure of that number, but we can get that back to you.

    Mr. KOLBE. Okay.

    Mr. MAGAW. I am not sure of the number on the waiting list.

    [CLERK'S NOTE.—The bureau reported in responses to the Committee's questions for the record that 200 communities had applied for fiscal year 1998 funding, but that the process for determining which communities would receive funding is not yet complete.]
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    Mr. KOLBE. All right. My time is very limited, so I am going to try to just get one more question in here, or topic in, with Mr. Banks here. I think you and I have actually talked a little bit about this, the concern that we have that, despite the fact that we have increased the technology, despite the fact that we have increased the number of Customs agents, despite the fact that we are doing all of that, the drop in the number of drugs seized last year was definitely statistically significant. I think you would agree with that. What conclusions are you drawing from that drop in the number of drugs? Particularly, cocaine I believe, is that not correct?

    Mr. BANKS. Well, Mr. Chairman, some of that has been misinterpreted. Actually, what we witness is, there was a 12 percent drop in cocaine seized last year nationwide. Probably the biggest concern that we had was cocaine seized on the southern border. But actually, we seized the same amount of cocaine virtually in '97 that we seized in '96. What happened was in the areas in which drugs are concealed changed significantly.

    What we saw is less cocaine seized in commercial cargo. And yet a lot of the intelligence was coming out, at least generically saying, that was where the problem was. So did it raise concerns? Absolutely. What we saw is cocaine going back into automobiles. We saw cocaine coming in in much smaller amounts, much deeper concealments along the border.

    So I have to tell you we have been concerned, in terms of how the dynamics have worked. What we have seen is much more cocaine coming in through the Caribbean areas. We are seeing more and more into the fast-boat operations into Haiti and the Dominican Republic. What we have done, one of the things, we have run a couple of intelligence operations along that southwest border, in order to try to gauge the reaction of the traffickers. And the one thing that has come through crystal clear is they watch every move we make. They know everything that we do. They know when we change shift, they know who we have got on the line.
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    And so what we have done is we have launched into this most recent thing, called ''Operation Brass Ring,'' in which we are mounting a completely unpredictable process. We are doing everything we can to shake them up, to change the way that we do business. And we are assessing that right now to try to determine what the impact is on the smuggling organizations.

    So are we concerned about this? Absolutely, we are concerned. But we are mounting a pretty strong effort on this.

    Mr. KOLBE. But Commissioner, yes, cocaine, there was a slightly greater drop in the southern area than there was nationally, but it doesn't seem nationally there was a significant drop. And in heroin it was greater nationally than it was on the southern tier; and in marijuana, similarly.

    So, I mean, we are seeing it all across the board here, the drop in all of the seizures. Are you telling me you think it is related primarily to the fact that they are coming across in smaller amounts now?

    Mr. BANKS. Well, I think that is a big piece of it. The other thing that we are seeing, in sitting down and comparing notes with border patrol, is that they have seen a 70 percent drop in the amount of cocaine seized between the ports and at checkpoints, as well.

    Mr. KOLBE. And yet, if we are to take the measure, as I think the only good measure you can of our success, the street price, I think the street price is actually slightly down for—let us take cocaine over a few months, six months or a year ago. So you are not suggesting that we have stopped the flow of it?
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    Mr. BANKS. No, sir. The last thing in the world I would suggest.

    Mr. KOLBE. All right. So what is happening?

    Mr. BANKS. Part of the reason, I think, that they have gone to deeper concealment——

    Mr. KOLBE. Deeper concealment.

    Mr. BANKS [continuing]. Smaller loads, actually during this same time, we have seen some issues at least where the amount of cocaine seized has dropped or has stabilized, is the number of seizures that we are making are escalating significantly.


    Mr. KOLBE. The last question is, because I have already exceeded my time, I note here that we have got a 31-percent estimated increase in these next two years in rail cars, a 21-percent increase in commercial aircraft. I mean, those are tremendous increases we are talking about, rail cars. I mean, I see it every day, trains coming across the line from Nogales into the United States, and vice-versa. What kind of real inspection are we doing of railroad cars?

    Mr. BANKS. Well, to be quite candid, we really did not do much with railroad cars up until about six months ago. And they are very difficult to inspect. We really did not have the facilities to inspect them. And what we did six months ago was we launched a major effort to go after the rail cars.
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    We have actually reached agreements with the railroads, especially Union Pacific. We are in the process of, one, building those facilities; two, tying into their automated systems so we can track who is actually shipping within their cars. Three, we have launched a joint effort with border patrol to go after these cars. We have sent dogs out. We have brought technology in. We use the gamma ray imagers in order to try to look through the rail cars.

    Within the last four months, we have seized 15 rail cars in El Paso. Most of those have been with false compartments. A couple of them have been active with narcotics. But the concerns that we still have are, they are getting to those rail cars, the bad guys are getting to those rail cars, before we do. They go into those staging areas and they are vulnerable to theft and people going in like we showed on that videotape.

    Mr. KOLBE. Last question. Do you confiscate the rail car the same way you would a truck?

    Mr. BANKS. Yes, sir, we sure do. Fifteen rail cars.

    Mr. KOLBE. Well, if you are doing that, those are expensive pieces of equipment. It seems to me that the railroads would have an interest in providing better security in their yards so that they are not being used inadvertently or unknowingly, unwittingly, as the carriers for this.

    Mr. BANKS. Since we have seized those 15 rail cars, we have gotten significant enhanced cooperation from the railroad companies. [Laughter.]
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    Mr. KOLBE. I have more questions.

    Mr. KOLBE. Mr. Hoyer.

    Mr. HOYER. Do we still have the cars?

    Mr. BANKS. Yes, sir, we still do. We are looking for a locomotive. [Laughter.]


    Mr. HOYER. Good for you. Because our time is brief, I am just going to ask a few questions, not necessarily the most important questions in terms of the fiscal issues, but questions that interest me. The GREAT program I want to mention. Senator DeConcini, as you know, from your state, Mr. Chairman, was very instrumental in the GREAT program. Phoenix, of course, was the first site. And it has been a terrific program.

    We utilize it in Maryland. We were one of the first. Director Magaw has been out there. And our police department and educational officials are very enthusiastic about it, and they believe it is effective. I do not know whether the longitudinal study will show the justification for that enthusiasm, but they think it works.

    And one thing it does, like the DARE program, it gives a lot of young kids a very positive involvement with uniformed officers in a very constructive program, and builds therefore a partnership between young kids and uniformed police officers; not a confrontational relationship, but a cooperative relationship. And I think that is critically important. As well as educating them about the dangers of gangs and negative associations that can result. That is not a question, obviously.
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    Staffing levels. Director Magaw, what has the staffing growth been at ATF over the past four to five years, and how does this compare with the FBI and DEA? This ties in with the charts and the observations made by the Chairman.


    Mr. MAGAW. The ATF has lost about 400 personnel over the last three or four years. And at the same time, agencies like the FBI and—well, the FBI actually has increased about 3,000 agents during that time. But we have gone from a little over 2,000 agents to a little over 1,700. By the projections with all the jurisdictions and the church fires and the abortion clinic bombings and these other things, my projection is—and it is a realistic one—we should have grown to about 2,600 agents. And so dropping to 1,700 is a tremendous net loss for us.

    And it was shown very well this morning on the graphs. And ATF would fit in there as a big loss.

    Mr. HOYER. Let me extrapolate quickly. Would that mean is that you're approximately 50 percent understaffed in agents, from your perspective?

    Mr. MAGAW. Yes, sir.

    Mr. HOYER. Seventeen hundred to 2,600?

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    Mr. MAGAW. And our inspectors are likewise. We were asked to do 100 percent of the explosive storage facilities around the country, and we just cannot do it with the number of people we have.

    Mr. HOYER. How many inspectors do we have, Director?

    Mr. MAGAW. About 745.

    Mr. HOYER. How many do we need?

    Mr. MAGAW. We would need near 1,000. And those are conservative. Those are not stacked figures at all, sir.


    Mr. HOYER. The—I don't know how you pronounce it—NIBIN or ''NEEBIN''—the National Integrated Ballistic Imaging Network; can you tell me how much progress has been made in achieving inter-operability between ATF and FBI?

    As you know, Mr. Secretary, this is one of the turf wars that I and other members on this Committee and members on the Committee that Mr. Kolbe is also a member of, as well as the Authorizing Committees, were involved in. And I would like to hear how—I understand we have got essentially an agreement on how to operate jointly. How is that going?

    Mr. MAGAW. Well, it is going very well so far. It has the chief of police from Boston on it. It has one of our assistant directors and one from the FBI. And they sit as a group and make judgments on how those funds will be spent to best serve local law enforcement.
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    There are some problems, as you would expect, when you put two separate programs together, in terms of the units that are already out there. How do we get those two units to talk to each other? And with our portable system that you saw here, it does both bullets and shell casings. The FBI system does primarily shell casings. And so when you have a situation or a crime scene that has bullets, it will be very important that we get those systems tied together.

    NIST is working with us to try to work out a system so that we can get them to talk together. And if that cannot be worked out satisfactory to this Committee and also to the FBI and to us, then we need to go to one system or the other.

    But I believe we are making real progress in getting them tied together. The attitude from Director Freeh and his entire staff, and our staff, has been very positive.

    Mr. HOYER. I am glad to hear that. It has been my premise that, although we talk about constricted resources, we are spending a lot of money. When you put our DOD assets together with our law enforcement assets and a lot of other assets we have, state, local, and federal, we have a lot of assets.

    One of the reasons, Mr. Secretary, I like HIDTA so much is because my local law enforcement people believe the greatest contribution that HIDTA makes is not in money—which is why, Mr. Chairman, I think it is so popular around the country. It is the coordination that it creates between federal, state, and local law enforcement, successful.

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    Mr. Merletti, again, let me congratulate you for assuming your new duties. You are going to do a terrific job. I have worked with you a long period of time, and know your quality, and am enthusiastic about your leadership.

    Two-point-six million dollars we had in this Committee for the National Center for Missing and Exploited Children. It is not in the budget. I assume, Mr. Merletti, it was in the budget when you made your request to OMB. Am I correct on that, sir?

    Mr. MERLETTI. Yes. That initiative is one which we provide to local, state, and other federal law enforcement agencies the forensic services that we have, which are very unique, as applied to our core missions. And we have applied them to assist in the investigation of child victimization.

    We do understand that during this time of tough budget situations, that that was not able to be put in at this time.

    Mr. HOYER. I appreciate that answer, and understand your judgment on that. Let me ask you for your judgment, however. Was this a useful service that Secret Service was able to perform and had a unique ability to perform, which was leading to better protection for America's children?

    Mr. MERLETTI. Absolutely. It was one of the best programs.

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    Mr. HOYER. Thank you. Can you answer the question that I asked of Mr. Magaw? I know I am transgressing on my time. Well, then let me end with this question. The same question I asked Director Magaw in terms of personnel.

    Mr. MERLETTI. Yes, we are roughly at about 2,000 agents, and as far as uniformed division, we are just about fully—we are whole, just about. There has been a situation with a number of retirements that we have had, in order to get full, completely up to staffing as far as special agents, will take us about another year, but we are well in the process.

    At the end of this year, we anticipate that we will be within 150 of our full FTE, and by the end of 1999 fiscal year, we should be completely staffed.

    Mr. HOYER. And completely staffed is staffed at levels you believe are sufficient to carry out the mission which has been assigned to you?

    Mr. MERLETTI. At this time; yes. We have had a situation in which we had to—we are constantly reexamining ourselves, and we felt it was necessary to move some agents into our protective divisions.

    Our agents in protection were roughly working in a year period, the equivalent of one and one-half FTE. We were not getting our proper training and, at times, there were agents that were traveling upwards of 30 days away from home without a day off. As I said, it was very bad on our training, bad on morale. I think it was even becoming a safety issue.
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    Mr. HOYER. I want to pursue this further with you. Obviously my time is up. The last brief question. Mr. Secretary, do you have any information that Secret Service personnel are also going to be assigned to FinCEN, so that we can have a—I know you are going to Customs, so I am just wondering——

    Mr. KELLY. We keep moving. [Laughter.]

    Mr. HOYER. Keep moving! You do not have to answer that question, but the Secret Service seems to be doing pretty well at that table.

    Thank you, Mr. Chairman.

    Mr. KOLBE. Mr. Price.


    Mr. PRICE. Thank you, Mr. Chairman.

    I want to thank all of our witnesses for being here today and for the fine quality of the testimony. The video aides are most helpful.

    Mr. Magaw, I would like to take my limited time to focus on your agency. I spent some time last week in Raleigh with ATF that are based in my district. I want you to know how impressed I am with the work they are doing there.
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    In fact in some ways I was perhaps more impressed than I wanted to be simply because they revealed a whole range of criminal activities that were occurring in North Carolina that I have been only partially aware of.

    Needless to say, I am very glad that they are aware of these activities and maintaining a strong presence.

    I think their presence will be increasingly important, if the trends they have observed continue—an apparent movement of crime away from some of the urban areas and into the smaller towns of rural America.

    North Carolina is still, in large part, a rural State, and oftentimes the law enforcement capabilities of local and county Governments are simply not going to be adequate to deal with the kind of firearms thefts, drug trafficking and explosive crimes that your agents specialize in.

    So I applaud the dedication with which they are doing their job, and the good working relationship they have developed with the municipal police departments, and county sheriffs departments that make up so much of our law enforcement capability.

    Now one of the issues that we discussed last week was explosives inspections, and I noticed in your budget justification that you proposed making the explosive inspections initiative, which has been funded by the Treasury Asset Forfeiture Fund part, of your base funding.
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    This is a $2.7 million initiative involving 26 FTEs. Your budget justification also indicates that you are attempting to achieve an annual 100 percent inspection rate.

    The agents I met with indicated that they do not have the resources to perform all the inspections they want to—that they need to—so I have to assume this means we are not at that 100 percent inspection rate now.

    I would like to know what rate you calculate we are at now, and whether this funding level you are proposing represents the kind of increase that you will need to get to a 100 percent rate, and if not, what would be required?


    Mr. MAGAW. Well, Congressman Price, we appreciate your visits. You do not know how that influences our personnel. Their morale goes up when they realize how much your interest is, and we appreciate that.

    On the explosive inspections, it would have taken about 55, or 56 more inspectors, new inspectors to get to a hundred percent, over what we have. The budget allows for 24, we have them on board and they are now in training, so we are going to reach about 80 percent of the explosive inspections.

    In order for me to reach a 100 percent, I would have to do something less somewhere else, and with the church fires, the abortion clinic bombings, and things like that that are going on, there is just no way I can reach 80 percent. I have lost not only 100 inspectors, but about 400 agents over the last four years.
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    Part of that was knowing that we had a $52,000,000 shortfall in our base, in our budget, so I had to get us fiscally sound first, and this committee has helped do that.

    We helped ourselves by making sure we were spending our money properly and those audits have shown that. This Committee has given us, for the last three years, in the neighborhood of an average of $14,000,000 to help us get back, and we are whole now, this year.

    So we have restructured our headquarters after our tragedy four years ago, almost five years ago now. We have got a strategic plan. Our field is being restructured to try to meet the needs with the amount of personnel that we have and if we can start to increase and get towards those additional figures, I would like to reach a 100 percent.

    But I am so thinly spread out now, that I just do not think I can. We have had a tremendous case here in the last 10 days, in the State of Pennsylvania, where over 2,000 pounds of explosives were stolen, almost in fact the same mix, virtually the same mix that destroyed the Oklahoma City building. I am happy to tell you that the stolen amount of explosives has been recovered, in its entirety, along with blasting caps, and the fuses that will set that off, and the suspects have been arrested.

    That was a very good working case, along with the FBI and our troops, and the local law enforcement. But a very serious case because it was enough to do as much or more damage than was done at Oklahoma City.

    Mr. PRICE. Well, just to summarize, you are saying now that your current explosives inspection rate is what?
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    Mr. MAGAW. In 1999, we will reach 80 percent, sir.

    Mr. PRICE. And what will the additional FTEs you are requesting bring it to?

    Mr. MAGAW. That is with these. We asked for 56, we ended up getting 24, so about the max that I can get to next year is 80 percent. This year, I am running about 73 percent.

    Mr. PRICE. All right. And I gather this kind of crime, this kind of investigation is greatly increasing in number. Is that true?

    Mr. MAGAW. Well, it is very important that we try to work towards that 100 percent, so that we do not have the availability of some of this material that has been stolen, so that these pipe bombs are made then.

    Mr. PRICE. Excuse me. What I am asking is: Are you seeing a greater need for these inspections? Are we seeing more of this kind of activity, more of this kind of crime being committed?

    Mr. MAGAW. We are seeing more of this crime being committed throughout the country in stolen explosives.

    Mr. PRICE. That is certainly what I was told in North Carolina. Any particular factor that would account for that?
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    Mr. MAGAW. Well, I think with the increase in the militias throughout the country and their intent to train themselves, with the white supremist groups throughout the country, I think when this case in Alabama is solved—and it will be solved, the bombing in Alabama at the abortion clinic—I think you will see that there are various groups who go to secluded areas, do not want any control by any authority, whether it is the city, county or a State, do not want to pay their taxes, and want to train in these kinds of activities.

    If our explosives supplies in this country are not protected—and that is what these inspections will do, to make sure they are in protected bunkers—we are going to have additional problems.


    Mr. PRICE. Finally, I will just ask about one additional area of inspection activity. I know the time is limited. This question has to do with the on-premises inspections that you do of firearms dealers.

    You refer in your testimony to this only briefly. I wonder about the levels of activity there. What is your rate of inspection and how far short are you falling of what, ideally, you would like to accomplish?

    And what kind of information can you give us, either orally here, today, or for the record, of any trends in this area—the overall numbers of dealers that we are looking at now, the findings that you are seeing in terms of firearms trafficking and other illegal activities. Any summary you can give us of that inspection activity?
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    Mr. MAGAW. Well, just three years ago, we had 285,000 firearms dealers in this country. Now it is just a little over 100,000. With the Youth Crime Gun Initiative, where we are tracing all firearms—we are able to identify the dealers who are criminally dealing in firearms. The large portion of the 100,000 firearms dealers, well over 90 some percent, 99 percent are legitimate dealers, obeying all the laws, and so we want to make sure we help them and not make their job more difficult.

    But at the same time, we do not have enough inspectors to get around and take a peek at these questionable ones as often as we should, and we are about at a 7 year mark now, investigating, or inspecting each one of the firearms dealers.

    Mr. PRICE. Well, could you give us, for the record, some indication of the number of inspectors that are assigned to this activity and what kind of estimate you would give of the percentage of inspections that you are conducting as compared to what you would ideally want to conduct?

    Mr. MAGAW. I think if I tried to do that off the top of my head, it would be slightly——

    Mr. PRICE. I was going to say, for the record.

    Mr. MAGAW. We will get this to you, in writing.
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    Mr. PRICE. Thank you.

    Thank you, Mr. Chairman.

    Mr. KOLBE. Mr. Aderholt.


    Mr. ADERHOLT. Because of time, I will only limit to one question and then I may have some others I will submit for the record, and I will direct this either to Mr. Magaw or Mr. Kelly, whichever wants to respond.

    The President announced back in November of last year the suspension of certain semiautomatic firearms and the President at that time ordered a study in order to determine whether the importation of these firearms were particularly suitable or readily acceptable to sporting purposes, and it is my understanding that the Treasury Department is conducting this 120 day review, and theoretically, the suspensions would end or a permanent ban would be imposed in mid-March of this year by the President, or of course he could extend the study period further.

    The question is since we are only a few weeks away from this review being completed, I think it is vitally important that you update us on where the Treasury Department is and where the White House stands on the completion of this study, and what the current status of it is.
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    Mr. KELLY. Yes, sir. That study is being conducted with both Treasury and ATF personnel. It is still ongoing. We intend to make the deadline or certainly do everything that we can to make that deadline. But it is ongoing now. It is a joint effort between Treasury and ATF, who are certainly the experts in this area.

    Mr. ADERHOLT. Okay. So you are saying that by end of the 120 day time period, we should have some information on that?

    Mr. KELLY. Yes, sir.

    Mr. ADERHOLT. Thank you. Because of time I will submit the other questions for the record.


    Mr. KOLBE. All right. A couple of quick questions.

    Mr. Merletti, there is $7.9 million in the President's request for White House security. This is all part of that 1995 security review which ultimately translated into a $62 million budget amendment.

    Does this satisfy all the recommendations? Does this complete all the recommendations included in that 1995 review?

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    Mr. MERLETTI. Concerning the recommendations, yes. With the exception of the funding for FTEs, we are where we should be.

    Mr. KOLBE. Is it going to be done within the $62 million? Are we going to complete all these recommendations within that $62 million?

    Mr. MERLETTI. Yes, it will be. Now, there the Service did request—there is a $15,664,000 request in our 1998 budget, that we need to complete some of the projects. We may have to ask that that be no year money, though, because we do not know that we can get all the construction done.


    Mr. KOLBE. Okay. I will have some other questions in that area, then, to follow up with that, but Mr. Basham, you have taken over in a very tough situation I think. FLETC's had some serious management problems. You alluded a little bit to that in your written statement. There have been some law suits, harassment law suits. I am not sure whether they have all been settled, or not.

    You have a Booz-Allen study that has just been completed which reports some very serious findings of problems between management and staff, communications problems, suggesting that there is an atmosphere of mistrust, disrespect, poor communications.

    Have you had an opportunity to digest this report and the recommendations, and could you comment on them, and your vision of the future of FLETC and what actions you intend to take with regard to this report.
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    Mr. BASHAM. Well, Mr. Chairman, yes, I have had an opportunity to review the report. I have had an opportunity to review the recommendations that are contained within the report. I am currently serving on a committee that is chaired by the Deputy Assistant Secretary at Treasury for Enforcement to look at these recommendations, and to develop an implementation plan for those recommendations.

    I cannot say to this Committee exactly how long it is going to take to actually implement the recommendations, but we will aggressively pursue them.

    I can tell you that in my tenure there, in terms of any kind of discrimination or sexual harassment, there will be a zero tolerance policy.

    We will aggressively pursue and determine if those sorts of things are occurring there, and we will handle them in the most severe method. But at this time, I cannot give you an answer as to when the recommendations will be implemented but we are reviewing those.


    Mr. KOLBE. Mr. Basham, we are supposed to close the Charleston facility, the temporary training facility in, I think, fiscal year 2000.

    Given the build-up we are continuing to see along the border and the prospect that we are going to have continuing training needs, particularly for INS border patrol, do you think that is realistic or not?
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    Mr. BASHAM. Mr. Chairman, I would be somewhat less than candid with you if I were to say that the closure of the temporary facility at Charleston can in fact be accomplished by 2000, mid year 2000. We are aggressively trying to meet that deadline.

    The funds that are represented here, the $13.3 million that has been requested for Glynco for dormitories and classrooms, if we stay on the schedule, which is a rather aggressive schedule to get the buildings erected and on line, there is a possibility that we could close that facility in mid year 2000.

    But everything is going to have to be perfectly set in motion to do that. Even with this $13.3 million and the closure of Charleston, I am not sure that with the added workload and with the additional advanced training that is being requested by our clients, that this is going to be able to be accomplished.

    So again, I have been there a short period of time, I have tried to look at this situation, and we are aggressively trying to meet that deadline.

    Mr. KOLBE. Thank you. I have a series of other questions but I will submit them for the record.


    Mr. KOLBE. Mr. Hoyer.

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    Mr. HOYER. Mr. Baity, I will ask you one question on FinCEN, and you referenced it, your chart was there in terms of—what did you call them? your intelligence units or——

    Mr. BAITY. Intelligence units.

    Mr. HOYER. Throughout the world. Would you elaborate on the success that we are having working with the international community, including Russia and China. In particular, I would be interested in what success we are having in collaborative efforts with them.

    Obviously, money laundering is an international activity. Quite obviously, to the extent that there are countries that give aid and protection, or at least anonymity to those who want to money launder, our success will be less than we would like it to be.

    I would appreciate your talking to me about the success we are having.

    Mr. BAITY. First of all, I could not agree with you more, that the problem must be looked at from an international perspective.

    We have worked very diligently, both in terms of multilateral and bilateral fora, to achieve this. The theory being that the weakest link in the international chain of countries is where the money launderers and other financial criminals will hide. Let me just briefly, if I could, summarize the activity, which I think will address specifically your questions of Russia and China.
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    Primarily, we work in conjunction with the Financial Action Task Force, or FATF, which was created by the G–7, and now includes 26 countries. FATF has created a set of 40 standards which are recognized as the international standards to prevent money laundering. All countries that want to implement money laundering procedures have looked at those standards for guidance.

    Since FATF's beginning in 1989 [CLERK'S NOTE.—agency inserted ''The standards have not been updated.'']. The United States assumed the presidency in 1996, and actually led the rewriting of the FATF 40 recommendations to bring them into a contemporary mode, to reflect new money laundering trends.

    The other part that FATF has done, which we think is very important, is that it create, on an annual basis, a typologies report; it's where we bring experts from throughout the FATF to look at money laundering trends.

    We have been successful in making that a public document. That is very important because it is one thing for law enforcement and Governments to have a sense of what is occurring in money laundering and financial crime but it really does not help if you cannot get the information out to financial institutions and others who need to know how to protect their institutions from infiltration.

    So making that a public document we think is very important.

    About two weeks ago, FATF had its most recent plenary meeting, and it is going to recommend to the G–7 summit that FATF be extended for five more years. There are two purposes: one, to expand the membership of FATF, because FATF, candidly, has been pretty much European-centered, with the United States and Canada, and a couple others.
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    But there is no membership, for instance, from Latin America, no membership from Africa. All of these countries basically have vulnerabilities to money laundering, so it is very important to bring them into the fold, so to speak.

    With that in mind, countries such as Russia, Mexico, and China—I'm being somewhat careful here—not to say that they will automatically come in, but obviously because of their economic importance will be looked at as FATF tries to expand its membership.

    FATF is also going to a concept of regionalization. We have done that in the Caribbean by creating a Caribbean Financial Action Task Force.

    The Asian Pacific Working Group, which is another regional group, also has a very strong involvement from the Chinese Government. We have started to bring them in to develop anti-money laundering programs in that way.

    So we are trying to widen the net in terms of bringing in everybody in that regard.

    Of course the development of financial intelligence units, as I described in our presentation, is critical. Now, the Egmont Group is the core group of financial intelligence units, which, at its next meeting in Argentina, expects to bring in 50 countries [CLERK'S NOTE.—agency adds that this will include 12 new members] that basically have created units that can take the reports of suspicious, unusual activity from their financial community and try to analyze that and exchange intelligence about that.
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    So in that regard, we are seeing that. We are also, in terms of exchanging information with units as they are built, including the Russian tax police, starting to build those networks as well.

    In that regard, we think that the international efforts are starting to move forward to capture all of the people at the same time. [CLERK'S NOTE.—agency clarified that it means by this that efforts are being made to include more countries]

    The Secretary, as you may recall, about two years ago led the Summit of Americas meeting in Argentina, and that was the first time where, in this hemisphere, we brought 29 of the 34 countries together.

    We have seen, in the last two years, positive movement in at least 24 of those countries, either implementing anti-money laundering legislation, criminalizing money laundering, creating units to work on it. So we have started to see some movement in that regard as well.

    Mr. HOYER. I see you are about to tap the board, so I will stop. Thank you very much.


    Mr. KOLBE. Thank you, Mr. Hoyer, and I want to thank all of our panel, and guests here today, and everybody else for their patience.
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    I think this has been an extraordinarily instructive hearing, and Secretary Kelly, especially, you, I know, overstayed your time. I hope we have not caused you to miss something too important there, but we appreciate all of you giving so much of your day to us here. I think this has been very useful.

    This Subcommittee is adjourned.
    "The Official Committee record contains additional material here."

Wednesday, February 25, 1998.





    Mr. KOLBE. We will go to Acting Commissioner Banks for his opening statement. Commissioner Banks, welcome.

    Mr. BANKS. Thank you, Mr. Chairman, members of the subcommittee, I am very pleased to be here today with you, and with Under Secretary Kelly. I have a formal statement that I would like to submit for the record, with your permission.
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    Mr. KOLBE. Absolutely, and I neglected to say at the outset, that all the complete statements of the Secretary and Under Secretary will be, as well as all the others, will be placed in the record.

    Mr. BANKS. Our fiscal year 1999 budget request totals $1.8 billion and 16,766 FTE. That is basically an increase of $125 million and 111 FTE over the current year.

    Half of that is really just to maintain our existing operations and to keep up with inflation. The other half, which is $68 million and 31 FTE, is dedicated to a series of initiatives in the areas of narcotics and money laundering, integrity improvement, child labor enforcement, and narcotics detection technologies.

    We believe this is a modest, responsible budget and we are determined to give the Congress and the American people a solid return on their investment by insuring our borders are safe. Last year, we again confronted a huge increase in the volume of workload. We processed 442 million people—which is one and a half times the population of the United States—crossing our borders into this country. We also scrutinized over $850 billion worth of trade that came into this country.

    Customs seized over a ton of narcotics last year. Every day, every work day, we basically seized a million dollars in currency and last year we made 20,000 arrests. We face an incredibly complex array of enforcement issues—drug trafficking, money laundering, international trade agreements, child pornography, intellectual property rights enforcement, trade sanctions, and control of weapons of mass destruction.
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    I could go on significantly longer, but our foremost priority continues to be narcotics interdictions. To meet these challenges, we rely principally on the dedication, integrity, energy and professionalism of our officers in the field.

    Secondly, we are very dependent on technology, both automation technology and high-tech equipment. Tough, aggressive new approaches and strategies like our Operation Brass Ring allow us to keep the smugglers off balance.

    But rather than just sit here and talk, if I could ask the indulgence of the Chairman, I would like to perhaps do a small demonstration?

    Mr. KOLBE. Certainly.


    Mr. BANKS. Yes, sir; sure do. In fact, I would like to get your coat, and if I could——

    Mr. KOLBE. I told you not to carry those drugs with you. [Laughter.]

    Mr. BANKS. Can you hear me all right on the microphone?

    First of all, I would like to express our appreciation—I hope that fits. The coat is a small size.
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    I would like to thank you for being our guinea pig. What you represent is one of 1.2 million passengers we see every day, vastly more than the population of the District of Columbia, that we have to sort through and figure out who are the ''bad guys,'' who are the problems. Well, actually, we knew—

    Mr. KOLBE. I would like the record to reflect this is a demonstration. [Laughter.]

    Mr. BANKS. We knew the Chairman was coming in because when he boarded his flight to come into the U.S., in Bogota, the airlines swiped his passport through a passport reader.

    That reader electronically transmits to us your bio data, so we know who is coming into the country. It automatically runs against our databases which are our lookout systems. In addition to that, we even reached into the airline reservation systems and saw that you paid for your ticket with cash, and you actually bought two tickets to try to conceal your itinerary.

    So before you ever arrived in the U.S., we knew we wanted to talk to you.

    The second thing that we do is we try to run you through additional technologies. What you hear is a radiation pager. Customs is putting out 1,700 radiation pagers around this country at our ports, so that we can try to prevent the possibility of nuclear products coming into this country.
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    With the current threats, this is a serious issue. Thank you, Inspector Whalen, and by the way, this is just a simulation—I assure you—it is totally harmless. [Laughter.]

    Mr. KOLBE. Well, what is that supposed to detect?

    Mr. BANKS. That actually detects a radiation source. What we are trying to do today is related to what we found when testing with the Department of Energy. We have actually set up a radiation detector at Dulles Airport, and it was set off three times in a period of six months. It scared the Department of Energy. It scared us.

    We launched a program with them to find out how we could do a better job of insuring that we do not have nuclear products or any terrorist type products that could come across our borders, by air, land and sea.

    Mr. KOLBE. People carrying them.

    Mr. BANKS. People actually carrying them; absolutely, sir. And in addition to that, we even put the radiation detectors inside our mobile x-rays at the airports, checking the bags and the containers and the merchandise that go on aircraft every day.

    Another component of our layered inspection process is our dog handler, Tim Spittler, and his dog, Flint, as they are coming in the room.

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    Mr. KOLBE. He is friendly, yes?

    Mr. BANKS. Actually, we have over 600 dog teams around the country. Most of the dogs are aggressive dogs, so if they found narcotics, they would rip them to shreds. That is not entirely true.

    This is a passive dog. We have almost 70 passive dogs around the country, and if they think that you might have something on you, the way they react is they sit down.

    This is a way we can screen a whole room full of passengers at an airport by just walking that dog around, and that is what this dog basically did, is it says that you have a problem. So if we could perhaps get the coat from you at this point? I will take it from you.

    And by the way, last week, in San Luis, Arizona, one of our dogs, Speedway, alerted on a truck and picked up 265 pounds of cocaine. What this dog alerted to was this pound of cocaine that is molded into plastic. It looks like a mechanical gear, but that is real cocaine.

    And if we could, I would be willing to share it with the other members of the subcommittee, although we do need that back. [Laughter.]

    Mr. KOLBE. Are you finished with——

    Mr. BANKS. The jacket? No, sir. I am not totally finished with you; just a little bit longer.
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    Mr. KOLBE. I am still under suspicion.

    Mr. BANKS. You are still under suspicion.

    Actually, this jacket was part of a real seizure, too. If you go into the back of this, it has got false compartments and tape. We picked up $80,000 that was going out of the country, related to drug proceeds. One of things that we check is outbound flights.

    Another piece of technology that we bring into play is a narcotics particle detector, and all we have to do is actually swipe bags. We take a little wipe and we run it on the handle on merchandise. We then put it in this equipment, and this will tell us whether or not it's narcotics. It can even tell us what type of narcotics.

    This also covers explosives, which is a major issue, again, at our airports. We have got a whole variety of technology in the back that we would like to be able to show you.

    If you care to go back, you may go back. If it is all right, can we keep your luggage for a little bit? Yes, sir. All right. Good. Because things are actually going to get worse for you as we go through the luggage. [Laughter.]

    Mr. BANKS. If you would put the luggage up there, Inspector Whalen.

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    As he goes through this, the first thing that the inspector is going to find is a bank draft for $2,245,000, which the Chairman failed to declare when he came into the country.

    I picked that amount only because that is the amount we seized last week that actually came into Federal Express at one of their courier hubs. Again, we are tying it back to whether or not it involves drug proceeds.

    The next thing that Inspector Whalen is going to find, is a simple thing like a magazine and a video. It could be real simple. But, it could be one of those 323 incidences like last year when we actually found child pornography coming into the country on people, in the mail.

    But the real enforcement issue on child pornography is the Internet. We currently have 325 investigations underway on child pornography. Last year, we arrested 145 people for being engaged in child pornography, and this included family physicians, police officers, and a host of others that are involved in youth programs.

    It would be astounding, if it were not so depressing.

    Another thing that you might find in a bag like this is a package of compact discs. These discs were actually seized in the mail in San Francisco. If these were legitimate, they would be worth over $200,000. American industry loses billions of dollars every year because of the theft of intellectual property rights. I promise you, we are engaged heavily to try to protect those industries and protect their property rights.
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     In addition, the Chairman had in the bag a little toy truck for a child. In actuality, this truck really held almost $50,000 in undeclared currency. The money was concealed inside of it.

    The truck also reminds me that when we work at the borders, we are protecting America's kids against unsafe toys, with small parts that break off and can be swallowed. We especially work during the Christmas season in order to find unsafe toys coming into our country. In addition, we try to protect American consumers against unsafe food products, unsafe medicines, environmental issues, and a whole host of other issues.

    So, thank you very much, Inspector Whalen.

    Mr. Chairman, I would like to give you a cigar for agreeing to participate in our——

    Mr. KOLBE. Are you sure this one is okay? [Laughter.]

    Mr. BANKS. That one——

    Mr. KOLBE. Not Cuban, is it?

    Mr. BANKS. That one is not Cuban. But last year, we seized and destroyed 240,000 Cuban cigars.

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    Now, that bag was pretty small. But what you have to understand is that we get 18 million commercial shipments that come into our ports. We get 4.5 million ocean containers. [CLERK'S NOTE.—bureau notes that these are annual figures.] A truck crosses the border from Mexico into the U.S. every five seconds. The amount of work that we face, every day, and try to sort through is just absolutely astounding.

    Most of the cargo is released within the same day, most of it within a couple of hours. We actually process air passengers. The vast majority walk out of our airports within five minutes of getting their bags. The reason we can do it is because we use technology, both automation technology, and applied technology. In addition, we use a layered inspection process in order to do our job.

    In fact, we'll match our enforcement record against anyone else. We seized 982,000 pounds of narcotics last year, $240 million in currency, and made over 20,000 arrests.

    And by the way, as part of doing our process, we also collected for the Treasury over $22 billion in revenue, a 15 to 1 return for the United States Government based on our S&E budget.

    So we are trying to be what we think is a solid return on investment. Also, I have just got a short video, if I could show it to you, of some things, actual cases that happened, things that I cannot bring into this room to demonstrate.

    [A videotape is shown.]

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    Mr. BANKS. The first happens to be a Cessna Citation jet flying and following this fellow. He is flying at about 100 feet coming into South Florida. As it turns out, he was a pilot on a major commercial airline. He is dropping bales of cocaine into South Florida and, actually, he is pretty good, because he almost delivered it door to door. When he knew we were chasing him (that was his house, back there), he virtually dropped the bale right on top of his house.

    We, by the way, have aircraft all over South and Central America, even into Mexico.

    The next clip is going to happen real fast. This is when we actually arrested him and his team when they landed. On this one, again, it is a Cessna Citation. There is the ''bad guy,'' right there. That is him ramming one of our boats, and then we pick him off. This, again, is in the middle of the night. This, is by FLIRs [CLERK'S NOTE.—Forward Looking Infrared Radar], is the only way you can see this at night.

    And what you cannot realize is how dangerous this work is. We have got our people out there every day. Off San Diego last month, we had an undercover operation. We infiltrated some of the group. we knew about two boats coming in and we got together with the Coast Guard in order to bring them in. But, you would need fast boats in order to catch these individuals.

    We pulled in on that one three thousand bales of marijuana.
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    The next clip that we have got is another undercover operation. What you are going to see is a freighter just north of Cuba. You see a freighter here. This is the ''bad guy.'' That is 5,100 pounds of cocaine, dope on a rope, that is just trailing behind him. That is actually an undercover Customs vessel, in which we pick the stuff up in order to bring this case down. Twelve days ago, we picked up another two tons of marijuana off Jamaica. Last night, our people got over 2,000 pounds of cocaine off the coast of Puerto Rico with our fast boat operations.

    This is the Seaport at Newark. This was actually an undercover operation. We infiltrated a group that was using dock workers. What you can see is people that are going in the container. Again, this is the middle of the night. These are all lights. This is an infrared camera. These folks are going in and breaking into that container which came off the ship. This is before it ever gets to us for inspection.

    These guys are going in and ripping it off, and then toting out 250 pounds of cocaine from this container. They will then go back and reseal that container with an authentic seal that they got from the shipping line in South America.

    So when it actually gets to us, you will never know it was touched. These are some of the challenges that we face with internal conspiracies.

    The next clip, which is going to happen fast is a seaport operation in Miami. It was an undercover operation. We infiltrated a longshoremen group. We knew a container of cocaine was coming into the port. We set a hidden camera in this next container as you will see in a second. This camera will trigger when the container door is tossed open. Two longshoremen are going in and two bales, two duffel bags of cocaine, are ripped out of the container.
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    The point I want to make is that this happened in seven seconds. That is our window of opportunity to nab these people. Seven seconds. It is a real tough job, especially when you have got people that are complicit within these organizations.

    I want to back that next one up for just a second, if I can.

    What we have here are two inspectors on our southwest border. In just a second, you are going to see two inspectors go up and talk to this driver, and start to make an inspection of the driver. The driver does not want to get caught, so he almost runs over our inspectors. Port runners will run over anybody, smash through anybody in order to get away. Now, this really is stolen vehicle going southbound into Mexico. We do a lot of stolen vehicle work.

    Mr. KOLBE. Did you get him?

    Mr. BANKS. No, we did not get that one. But last month, we had 30 of those port runners come in. I do not know if all of them were carrying dope. Thirty of them came up into the United States, and we have had officers injured. We have had shootings as a result of this. Again, the work that those guys are out there doing on the border is incredibly dangerous, difficult work with an amazing array of complexity.

    What we have tried to show you is really just a microcosm of the magnitude, the complexity of the job, and also the danger.

    If you actually go out and talk to our officers in the field, I think you will find they are incredibly dedicated and committed to doing this mission correctly. We need to support them with the right tools. That is reflected in the budget request. We also need to be able to rapidly move products through for the U.S. economy.
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    It is a big job, but it is not an impossible job. Our commitment to you is that we are going to try to spend every cent that you give us the best we can. We will give the American taxpayer the best return on their investment. That is our objective.

    Thank you very much. I would be happy to answer any questions.

    [The information follows:]
    "The Official Committee record contains additional material here."


    Mr. KOLBE. Thank you very much, Commissioner Banks. A very interesting demonstration. I think it really does highlight the critical work that you are doing, and as you say, the tremendous danger that your people work with every day.

    I am going to come back in my second round of questions with some thoughts, some questions for you, but in this first round, let me, if I might, limit my questions to Under Secretary Kelly, and I am going to follow up on the things I was talking about with Secretary Rubin.

    My staff, the staff of this Subcommittee and I, and Mr. Hoyer, have had an opportunity to visit parts of the border during the last year, and my staff has been in other significant areas where Treasury law enforcement operations have been working, looking at such things as Operations Gateway, Hard Line, and HIDTAs.
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    Each of these agencies and these programs have told us that since, in the last three years, that they are losing personnel and resources that are needed to keep up with the criminal activity that is associated with drug trafficking.

    The result is, Mr. Secretary, that we have interdiction boats that do not have crews on them, we have Black Hawk helicopters that do not have the apprehension teams on board, we have night operations that lack night vision and infrared equipment, and we have air and marine assets that are not being coordinated. We have precious little outbound screening, that we talked a little bit about it here . WE have very limited capability for train, container, and tanker examinations.

    Yet billions of dollars are getting laundered, going out of this country, and we lack coordination in our operational intelligence. I give a lot of credit to you and to the agencies, the Treasury law enforcement agencies that are, I think, doing herculean efforts, and doing a tremendous job under such difficult circumstances.

    But my basic question, Mr. Secretary, is are we weakening our Treasury law enforcement? Is it deteriorating to such a level that we really cannot expect to meet the kinds of standards that we are talking about with ONDCP's drug strategy for the next decade?

    Are we satisfied with the current status of our law enforcement in Treasury, and the amount of funding that we are getting, the amount of technology that we are getting, and what efforts are we making to try to change this, Mr. Secretary?

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    Mr. KELLY. Well, first, let me say, Mr. Chairman, that I, too, have been out on the border, and I have been very impressed with the work that is being done by the agents and inspectors who are on the front lines.

    I think you raised a lot of issues here. You talked about coordination. I think you mentioned intelligence. Yes, resources are an issue. Would we like to have more? Of course we would. But we went through a budget process, as Secretary Rubin said, judgments were made in an attempt to optimize available resources.

    We requested, obviously, more than what we got. I think that we are doing a good job. Could we do a better job with more resources? Absolutely. We are hopeful that the $54 million technology that is budgeted in the 1999 budget will make a significant difference. Would we like more? Sure. We would like more to do that.

    I think General McCaffrey has done a good job in pulling together some of these issues and focusing on them.

    We are meeting now with the Justice Department and ONDCP on a regular basis, to better coordinate our operations on the border.

    In fact I think Justice and Treasury, specifically Sam Banks, and Doris Meissner in INS, have been doing a lot of work to better our coordination. There is a model that exists on the southwest border in the San Ysidro area that we would like to replicate because we think it does certainly improve the coordination that is being done between law enforcement entities, not only INS and Customs, but other law enforcement agencies as well, State and local.
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    We need improved intelligence. Traffic at the border is projected to increase about 6 to 10 percent a year well into the next century. We need better intelligence to help Customs target who is coming across the borders. Without that intelligence, it just becomes much more of a random effort, pig-in-a-poke type operation.

    So I guess to answer your question, yes, we could use more resources. I think we are doing a good job with what we have. I have been very impressed with the people who are on the front lines. The Secretary has pledged to you that he is willing to work and see if more resources can be made available.


    Mr. KOLBE. Well, Mr. Secretary, there is no doubt all of us could do more with more resources, if we had them available. Any agency in Government would give us that answer. That really is not what I am trying to get at with the thrust of my question. It is to try to understand what is going on internally, within the administration, to understand why Justice is so favored in this effort, just knowing that we have limited resources all the way around, why we favor Justice law enforcement so enormously over the Treasury law enforcement?

    Does it suggest, that having gone through a review, that it is the view of the administration that Treasury law enforcement is not that critical, that it really is not the frontline, that it is not what the public really wants? I am trying to get a handle as to why, year after year, we continue to give almost level funding, or such small increases to Treasury, when we continue to give very substantial increases to Justice in law enforcement.
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    There does not seem to be a lack of will to do something about law enforcement when it comes to resources. It is the allocation of these that I do not understand and I am trying to get a handle on.

    Mr. KELLY. Well, obviously, we make that argument within the administration. But I think to be fair to Justice, and to OMB, I think they have been responding in recent years to chronic understaffing in both the Border Patrol and the Bureau of Prisons. [CLERK'S NOTE.—Department added the Immigration and Naturalization Service to these.]

    We know that the prison population has gone up, dramatically, and the Bureau of Prisons' of course has to go up to keep pace with that increase in population. Also, the Border Patrol, in a lot of people's judgment, has been understaffed for a long, long time, and now they are approaching levels that most people think will enable them to do a much more effective job.

    But having said that, yes, I think there has been recognized here by the Secretary, an historical pattern of a lack of parity between Justice and Treasury enforcement agencies. I cannot give you the historical basis, why it happened years ago. All I can say is we have made our arguments, we made what we think are cogent arguments, we have gone forward, and in the budget process we were not funded, obviously, at the level we requested.

    Mr. KOLBE. Thank you.

    Mr. Hoyer.
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    Mr. HOYER. Thank you, Mr. Chairman.

    I do want to make an observation here, that the administration seems somewhat caught in a vise, either way it moves, in terms of criticism.

    Obviously, the integrity of our borders is a very substantial concern. What these charts show is the administration has beefed up, very substantially, our INS border patrol people.

    Frankly, notwithstanding the speaker's comments, that the administration does not seem to be engaged in this effort, in fact we have had a substantial increase in the War on Drugs. I know General McCaffrey does not like to refer to it as the War on Drugs, but we have had a substantial increase in a lot of different areas, and of course this is one of them.

    Now, I agree with the Chairman that we have historically, since I have been on this committee, 1983, not had the level of funding at Customs coming from any administration, that I think was necessary, and in fact we have beefed it up almost every year, I think.

    I am not sure, exactly, whether we have done it every year, but we have certainly done it most years.

    Let me ask you something, Mr. Secretary. In terms of requests, either at Customs, specifically, or Treasury law enforcement as a percentage, how far under are we in terms of our request in the OMB submission, or the President's submission?
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    Mr. KELLY. Well, I can tell you that the aggregate total for the bureaus was about $3.9 billion, that we submitted. That went to OMB with some minor modifications in the total amount. [CLERK'S NOTE.—Department adds that ''OMB reduced that request in their initial passback'']

    We appealed at a $3.7 billion level, and our budget is now roughly $3.2 billion. So that takes you through the process. That is what we came out with, $3.2 billion, based on a request of $3.9 billion. [CLERK'S NOTE.—Department classified that the aggregate request was $3.6 billion and the appeal was for $3.3 billion.]

    Mr. HOYER. What was last year's figure?

    Mr. KELLY. Last year was less than that. The total increase is a little over 5 percent. [CLERK'S NOTE.—Department amended this to 5.7 percent.] $3.0 billion was enacted for the last fiscal year.

    Mr. HOYER. Okay. So it was 3 even and went to 3.2. That is a little more than 5 percent. 5 percent would be 1.5. And it was $200 million.

    Mr. KELLY. That figure, exactly.

    Mr. HOYER. $150 million, I guess would be 5 percent. $200 million is 7.5, I suppose.

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    Mr. KELLY. 5.7 percent.


    Mr. HOYER. Okay. Let me focus, just briefly, on the—I have talked to General McCaffrey. I would like your observation on this. Having headed up an operational agency in one of the toughest cities in American, New York, and done so, successfully—and I have indicated this to the administration—what we need to convince the American public of is that the ONDCP, and the component parts of our drug effort, whether in Justice or Treasury, or any place else in Government, is operational.

    My question to you is, Is there a sense that General McCaffrey and the Administration are able to overcome the turf wars that have so often undermined our full effectiveness? And you know what I mean. FBI versus ATF. DEA versus Customs, or INS—which they are all on the same team, and the theory that Congress had, and the objective that Congress hoped to achieve was to fully coordinate these efforts, which is what I think Secretary Rubin indicated, and the Chairman indicated earlier.

    Is somebody making sure that all component parts of a lot of resources being spent—I do not know what our drug—$15 billion? Anybody know where we are now? In that neighborhood. Twenty? Anybody know? Well, anyway, whatever the figure is, it is a lot of money.

    Mr. KELLY. $17 billion.

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    Mr. HOYER. $17 billion. Okay. The question therefore is do you feel, based upon your experience, that we have an operational, integrated, coordinated effort, maximizing the effectiveness of the resources we are applying to the integrity of our borders and the safety of our neighborhoods from those who would undermine it through the sale and distribution of drugs?

    Mr. KELLY. You mentioned turf wars, and I believe, and I have been told that there are less now than ever before. Certainly there are still jurisdictional issues, no question about it.

    I know that we coordinate very well with the Justice Department at the higher levels. Are there areas of friction in the field? In some places, yes. But I am also told, as the Secretary said, that there is better cooperation now than ever before.

    We work closely with General McCaffrey. Indeed, that is what General McCaffrey is attempting to do, to put together a coordination model, and we are working towards that end. Is it perfect now? No. Do we have a ways to go to improve our relationship? Yes.

    But it is better now than it probably has been in a long time, and I think both the Attorney General, Secretary Rubin, and General McCaffrey are committed to closer coordination.

    We have lots of working groups who are talking on a regular basis, trying to put a model together. In San Ysidro, as I mentioned, we are working very closely with the Justice Department. We are looking to replicate that—the coordination of Customs and INS—along the border.
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    It is not going to be done with one fell swoop. You just cannot wave a magic wand and say, ''Everybody get along.'' But we are doing it incrementally, and I see a lot of promise in what General McCaffrey and the Attorney General are doing.

    Mr. HOYER. Mr. Secretary, I understand that you cannot wave a magic wand, but if we go to actual war, magic wands are waived. It is made clear to everybody by the President and by others, you are going to cooperate, you are going to coordinate effectively, and we are going to defeat the enemy. I think that is the level of cooperation that we need in this effort, and I would hope that you would work toward that effort, and that General McCaffrey would effect that kind of coordinated effort.

    Thank you, sir.

    Mr. KELLY. Yes, sir.

    Mr. KOLBE. As has been our custom, we will go on the basis, alternating between sides, that people appeared at the subcommittee. We will begin with Mrs. Meek.

    Mrs. MEEK. Mr. Chairman, most of my questions are directed regarding Customs, and of course if Secretary Kelly or Mr. Banks—are you available to address them now? Or should I wait, Mr. Chairman?

    Mr. KOLBE. No, you can—either one of them that are here. Mr. Magaw will be back with us, shortly.
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    Mrs. MEEK. Good.

    I have two concerns. One is with the financial part of your group—and this would go to Mr. Kelly in that you are the Deputy Secretary, correct?

    Mr. KELLY. Under Secretary.

    Mrs. MEEK. Under Secretary. So you do have the ability to think about Treasury and what it does in the financial arena.

    I have a great interest in your community development of financial institutions. Are you familiar with that, Mr. Kelly?

    Mr. KELLY. Somewhat.

    Mrs. MEEK. I think that is the one segment of what Treasury is engaged in, that will help to revitalize some of our crumbling economies in some of the small cities in urban areas, and I would like you to talk just a wee bit about what can be done in this area.

    I notice from your budget you are asking for $125 million to be placed in that particular category.
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    I would like to know, what do you expect to get done with that small amount of money?

    Mr. KELLY. Well, if you are talking about community development, I am not certain what budget amount you are referring to, but I think that question would probably best be addressed next week when—

    Mrs. MEEK. The financial area?

    Mr. KELLY. The financial area.

    Mrs. MEEK. All right.

    Mr. KELLY. They have people who do that, specifically, who will be here with Secretary Rubin.

    Mrs. MEEK. All right.

    Mr. KELLY. I can give you my general opinion, but it is probably not worth much.


    Mrs. MEEK. Good. I will move on to the next one.
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    The other one has to do with Customs. Last year, when Customs came before us, I asked several questions regarding how you are going to be able to beef up your employees, and this year, there is only an increase of less than 2 percent over this year's level and I believe that that is too small.

    I think that is what I am hearing. That is the undertone of what I am hearing throughout this panel today. That you are requesting a small amount of money for an agency which is already underfinanced, and I would like you to look into Customs' workload, to see if there is some way that you can enhance this, and I would like to comment on what areas within that Customs allocation can you use the pittance which you have to enhance that area?

    Mr. KELLY. Well, we requested more FTE, clearly, than what is in this budget, and I agree, but, again, this is all part of a budget process. A figure was ultimately determined that we would go forward with and do the best job we can. We requested several hundred more FTE in the Customs budget; the Secretary supported that request; it went to OMB; and it did not survive.

    And again, we are all part of a team, part of the Administration team. Could we use more people in a whole host of functions in the Customs Service? Yes. Particularly inspectors, and particularly investigators. The investigative population of Customs has remained stagnant, in fact has gone down over the last several years period.

    So I am in agreement with you, that we could use more people to do the job.
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    Mrs. MEEK. I would just like to reemphasize for the record as well as for your future attention, when you look at the four year period of fiscal year 1996 through fiscal year 1999, the Customs' workload, according to your own figures, is projected to grow much faster than its labor force, and the number of cargo entries cleared by Customs is projected by Customs to reach 19.6 million next year, and that is an increase of about 23 percent since fiscal year 1996.

    And the number of air passengers, by your own figures process, is projected by Customs to reach almost 82 million next year. That is an increase of 26 percent since 1996.

    The number of sea passengers processing is projected by Customs to reach 10 million next year, an increase by 43 percent since fiscal year 1996.

    I wanted that read into the record because it demonstrates the crisis that you are in in the Customs area, and I will continue to reemphasize that in that it plays such a critical role in interdicting the drugs, that all of us have such an interest in, and I am hoping that through your efforts, Mr. Kelly, that OMB will be better impressed with this particular problem.

    So just based on the workload, it would appear to me that that is a strong rationale for an additional funding amount.

    I would like to turn, Mr. Kelly, as to how you are going to allocate the total resources in different parts of the country.
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    If you will remember, that is one of the questions I asked you last year, not you but the person who was here. In terms of the number of Customs employees, the three largest airports are JFK in New York, Miami International, and Los Angeles. I would like to submit for the record some detailed written questions, so that the Committee can better understand the workload per employee at each one of these airports, and of course I have charts and information showing the cocaine seizures in commercial airports throughout the Nation last year.

    So I ask, Mr. Chairman, unanimous consent to place it in the record.

    [The information follows:]
    "The Official Committee record contains additional material here."

    Mrs. MEEK. It shows, Mr. Kelly, that most of these seizures are in South Florida. I am told that Miami Airport had more narcotics arrests than JFK and Los Angeles combined. It points out the strong problems we have in Miami in the cargo area.

    I am also told that South Florida lost more than 150 narcotics positions over the past five years. I have been told that in order to save on overtime pay Customs will no longer inspect every cargo ship coming from a foreign port, that arrives after normal business hours of 9:00 a.m. to 4:00 p.m.

    Doesn't this all mean that Miami Customs needs more resources to deal with the flood of narcotics? I am putting this in the record so you can see the importance of this in terms of that particular area, and that more attention should be placed where the greatest problem is.
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    Thank you very much. Would you like to comment on that, Mr. Kelly?

    Mr. KELLY. Well, ma'am, if you are going to submit that for the record in detailed questions, we will respond in writing.

    Mrs. MEEK. Thank you. Thank you.

    Mr. KOLBE. Thank you very much, Mrs. Meek.

    Any questions that Members have to submit for the record will of course be submitted.

    Mrs. MEEK. Now, Mr. Chairman, I know my time is up——

    Mr. KOLBE. Yes. We will have a second round of questions.

    Mrs. MEEK. Wait for the next round.

    Mr. KOLBE. Right.

    Mrs. MEEK. All right.

    Mr. KOLBE. Thank you.

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    Mr. Forbes.

    Mr. FORBES. Thank you, Mr. Chairman, and I thank both of you for being here today, and Mr. Kelly, I appreciate that the administration is looking for additional service from you, and speaking parochially, we are very proud of that.

    Mr. KELLY. Thank you.


    Mr. FORBES. I just had one or two questions, and I will submit the balance for the record.

    Mr. Secretary, the President's Initiative on Youth Crime Gun Interdiction Initiative, which would be aimed at, I guess, initially 27 cities and cost about $60 million, could you—I understand that Mr. Magaw will be back, and probably would want to address it in greater depth—but if you could, what is not happening in the seizure of weapons with gangs and youth, that this initiative seeks to address?

    What is not happening?

    Mr. KELLY. This initiative seeks to develop information for both local and Federal law enforcement as to how guns are being obtained by young people. People in gangs; people not in gangs. [CLERK'S NOTE.—Department clarified that this refers to illegally obtained guns, and that ''people'' means juveniles and youths.]
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    In fact this project was done as a pilot, initially, in 1996, with 17 cities, and a report was issued last year, and the report, in my judgment, having been in local law enforcement for a long time, was very helpful to police chiefs.

    Let me back up and say what happened in the Youth Crime Gun Interdiction Initiative is that police chiefs, police executives and prosecutors signed up in this program to put all of their crime guns into a tracing system that will enable information to be obtained as to where the guns were coming from. [CLERK'S NOTE.—Department clarifies that this refers to illegal sources of guns.]

    A report was issued to the public, but particularly focused on these 17 cities, and we have gotten a lot of positive comments from police chiefs, police executives who are involved in this program, saying that it gave them a lot of information, showed them where the flow of guns was coming from, particularly for young people, but other people as well. [CLERK'S NOTE.—Department clarified that this reference is to the illegal flow of guns.]

    So it gives police executives a clearer picture, and therefore they can develop strategies. Now what this report showed, that in all but I think two cities, crime guns were coming from the States in which those cities were located. So we can develop more specific localized strategies to address the guns coming into a city.

    Mr. FORBES. And heretofore there has not been any kind of tracking system on weapons and how they fall into the hands of young people or gangs?

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    Mr. KELLY. No, there was not. There was simply not a system to do that, and a part of this is because of developing technology that enables it to now be done. [CLERK'S NOTE.—The Department adds that this refers to the previous absence of trace analysis and reporting to police departments.] This adds to ATF's Project Lead, which John Magaw can certainly talk more about.

    Mr. FORBES. Thank you.

    Mr. KELLY. And also, there was no commitment by local Government to actually have their guns traced. [CLERK'S NOTE.—Department clarified that this refers to recovered guns.] And it is also a resource issue with local Government. So they signed up to this do, to participate in the program, and that is what we are giving them back in return—a report. [CLERK'S NOTE.—The Department adds that the report shows them crime facts about their jurisdiction, and something that can serve as a basis for federal and local collaboration on specific localized strategies.]

    Mr. FORBES. Are we going to be running into computer problems, the whole idea of trying to have a national computer system in which I think there has been some question raised about the lack of an efficient national computer system, and keeping track of, for example, the tenets of the Brady Bill, it has been difficult to get that system up and running.

    Are we going to run into a similar problem?

    Mr. KELLY. No, it is certainly not our intention. We think that [CLERK'S NOTE.—Department clarified that this refers to a national computer system.] is not authorized in the law. I am not clear what database you are talking about, but if guns are submitted, that are traced——
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    Mr. FORBES. For law enforcement, sir. I mean, in other words, if a local police department is trying to participate in this program, are they not going to be having to tap into a national computer system to see traces of where weapons are, and how they could contribute to that national system? Is that part of this at all?

    Mr. KELLY. That information comes back through the ATF, and again, John Magaw can give you more specific information on it.

    Mr. FORBES. Thank you.

    Mr. KELLY. They do not tap directly into that system. [CLERK'S NOTE.—Department clarified that there is no national computer system, but ATF provides trace information to police departments.]

    Mr. KOLBE. Thank you.

    Mr. Price.


    Mr. PRICE. Thank you, Mr. Chairman.

    Mr. Kelly, Mr. Banks, I would like to add my welcome this morning, and to thank you for your testimony.
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    Mr. Banks, I was able to visit last week with some of your agents and inspectors based at the ports of Wilmington and Morehead City, and also at Raleigh-Durham Airport. We had a good, informative visit. I very much appreciate the work that they are doing there.

    Mr. KELLY. We appreciated that visit, too, sir.

    Mr. PRICE. It is very important to our State.

    This morning, I want to focus on softwood lumber. I have some questions that are rooted in a concern for the price of lumber, and ultimately, for the price of homes in this country.

    I would like to ask you about the status of the efforts of Customs to review the interpretive ruling on lumber, particularly predrilled studs.

    As I understand it, Customs ruled last year that predrilled studs fell outside the scope of the U.S.-Canada Softwood Lumber Agreement. I thought that was a sensible ruling and supported it.

    So I was concerned about some language that was included in the conference report on the Treasury appropriations bill, which essentially directed Customs not to enforce its own ruling.

    The language was not included in either the House or Senate versions of the bill, but apparently was slipped in at the last minute at the Senate's insistence. I believe our distinguished Chairman and Ranking Member have some of the same concerns I do, and have expressed those concerns, about telling Customs that they must ignore their own best judgment on a matter such as this.
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    Now, as I understand it, Customs is attempting to adhere to the conference report language, and you requested comments on the prior ruling as a precursor to issuing a revised ruling.

    I realize you are in the midst of a review, but since the matter was not discussed publicly during our last hearing cycle, I would like to ask you what was Customs' justification behind the original ruling on predrilled studs. I would also like to know the logistics of this review process you are undertaking now to ensure that the final outcome is a fair one. I would like to know when you anticipate a final ruling or recommendations to the Congress on this matter.

    Mr. BANKS. Well, Congressman Price, it was in February of 1997 that our New York office actually received a ruling request about these wooden studs with the holes drilled in them. They did a ruling like they normally do. We issue 8,000 plus rulings a year in order to try to help importers have a predictable import process.

    This obviously ended up being a very controversial ruling. When our officer in New York actually classified the product, we did not put it outside the scope. Technically, the scope of the softwood lumber agreement has specific harmonized tariff numbers in it but when we classified in a category it just did not fall within that scope.

    When the issue became somewhat more difficult, and somewhat more controversial, we do what we have done on a number of other occasions. We actually publish this issue. We go out for comments. We solicit comments from industry representatives. We ask for experts in this field to come back and comment to us on what is the appropriate action to take.
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    So, really, we are just soliciting input from the industry and from the public. I believe our ruling closed recently. We received, I believe, in excess of 5,000 comments.

    Mr. PRICE. Excuse me. Your comment period was closed?

    Mr. BANKS. Our comment period closed, and we received in the vicinity of 5,000 comments. We have done the analysis on those comments and we have just recently forwarded our analysis to Treasury for a discussion on this issue.

    My estimation is this spring we will have a decision on this issue. I do not think I could say in the midst of this process what that decision would be, or, you know, any direction that we might be leaning. But we are trying to take as candid and objective an analysis of this issue as possible.


    Mr. PRICE. Good. Well, as I said, I think there was sound reasoning behind your initial ruling, and I would hope that its thrust would not be greatly changed. But that essentially answers my question as to the process you are undertaking and the time frame within which the review is going to take place.

    I would also like to ask you, very briefly, about an issue I raised last year with Mr. Weise about Customs' monitoring of peanut imports. There were some delays in Customs' implementation of certain provisions of the North American Free Trade Agreement designed to protect domestically produced peanuts, as you know.
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    NAFTA included a rule of origin requirement and a provision stipulating that peanut imports be subjected to the same quality controls imposed on domestically produced peanuts, as laid out in USDA Marketing Order 146.

    I want to take note of, and applaud the efforts you have made over this past year to correct that situation, and to begin the proper monitoring of peanut imports.

    I understand you have uncovered some violations of both the rule of origin requirement and the prohibition of reimportation of U.S. peanuts.

    What I would like to ask you to comment briefly on, either here, this morning, or for the record, is the enforcement actions that you have taken, or anticipate.

    You do share enforcement responsibility with USDA in this matter. What are you doing, and what do you anticipate doing, to follow up on the findings that you have made, and, in general, to enforce the peanut provisions of NAFTA?

    Mr. BANKS. Well, Congressman Price, when this issue was raised in NAFTA, we made a commitment that we would insure that, like other products, peanuts would not be transshipped through NAFTA countries, for example peanuts from China or peanuts from Argentina or other countries would not be transshipped.

    One of the things that I did not even mention in our presentation—is we have a laboratory system, and we are actually able to do analysis to determine where peanuts were grown. This is how we enforce the pistachio embargo against Iran, and things like that.
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    We have actually taken, I think, 167 samples of these peanuts. We do trace analysis on them, and we can tell whether they came from Mexico or not. In fact, we found one case so far where the imports of the peanuts were not from Mexico and we have taken action against that particular importer.

    In doing the analysis of this whole issue, we have actually sent teams down to do audits on, I believe, three importers and three shippers, that actually constitute over 90 percent of the peanuts that come in from Mexico. For the most part, they are in compliance with the law as we have seen it to this date.

    It is just in the one case for sure, that we have an issue. We are still looking at a few other importers at this point.

    Mr. PRICE. Thank you. Thank you, Mr. Chairman.

    Mr. KOLBE. The time of the gentleman has expired.

    Mrs. Northup.


    Mrs. NORTHUP. Yes. Mr. Kelly, I would like to ask you a question about coordination of resources. I was visited recently by the Louisville police department who brought me pictures of their work at the UPS hub, and there is quite a connection of drugs coming across the border, then going to the nearest shipping center.
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    They can be any carrier—FedEx, UPS—across State lines, across the whole country. It is a very easy way, a very cheap way, very sort of undetectable way to spread drugs that have just come across the border throughout the United States.

    The Louisville police department I think is questioning whether this should be, sort of, their responsibility. They have actually taken drugs to the overnight hub and the dogs have been able to sniff out—I mean, you should see the pile, in one night, of boxes they pulled out. They are very identifiable. They use certain mailing services. So they spot them, they open them up. There is a computer inside.

    It is completely gutted. It is filled with narcotics. At that point, for anything to be done other than just confiscation, they have to reseal the boxes.

    They get shipped to New York City, Richmond, Virginia, and, at that point, they have to work with the local police there in order to catch the person to whom these drugs are being delivered, and then of course back up and figure out who sent them.

    A question I have is, number one, Is this the drug czar, because at that point it is going across State lines? or because most of these seem to be coming in across international lines, would there be a role for the Department of the Treasury?

    Mr. KELLY. Yes, there would be a role. I would have to look in specifically at what is happening in Louisville.

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    I can say, in general terms, law enforcement, State, local, Federal, are working much closer these days than ever before. There are lots of task forces throughout the country.

    I do not know specifically what is going on in Louisville but it is something that we should certainly look into.

    Mrs. NORTHUP. You understand of course the concern is not that the drugs are winding up in Louisville on our streets, although some of them may be, but the concern is that the Louisville police department is entirely understaffed and unprepared to bear the brunt of this.

    Mr. KELLY. I understand.

    Mrs. NORTHUP. The other question that exists, that I would like to ask you about, is the sort of protection that we have in place for the companies that cooperate. UPS has been very cooperative. I have it raised to me that at least maybe not all of them are quite so comfortable.

    Because in fact these are private packages, they have to be opened to—even after the dogs sniff them, they have close to a 100 percent incident, where the dogs sniff, they open the package, and in fact there are drugs there.

    But what sort of protection does UPS have? Do we need to look at that and could you make a recommendation, so that we can have—they are protected from any suits, or threats in their cooperation.
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    Mr. KELLY. Let me say that Federal law enforcement certainly is involved in operations like this to control deliveries, where the delivery would go through and you would have a Federal agency involved in that—Customs, DEA, perhaps, so we have got to look into this more specifically in Louisville.

    I think we should probably—if that is a concern of the companies, we should probably meet with them and talk with them. I would just like to have an opportunity—maybe we can talk after this—and we can have some people direct some attention to the situation in Louisville and try to address it.

    Mrs. NORTHUP. But your office would be involved in this?

    Mr. KELLY. We would certainly coordinate it; yes.

    Mrs. NORTHUP. Okay.

    Mr. BANKS. If I could mention something.

    We currently have partnership agreements with over 3,200 companies, mainly air carriers, steamship lines, and even some of the courier companies that operate. We are trying to work with them on their security issues and to improve their security process, so that we have those currently in play today. The liability issue is only a concern if there is complicity on their part.

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    So we would be more than happy to sit down and talk to that company and others.

    Mrs. NORTHUP. Okay. I am finished.

    Mr. KOLBE. Thank you.

    Mr. Istook.


    Mr. ISTOOK. Thank you, Mr. Chairman.

    Gentlemen, I appreciate your taking the time to be here and I know that when it comes, especially to the interdiction of illegal drugs being smuggled into America, that it is a job that is sometimes routine, and in an instant it can turn deadly, and I appreciate the people that undertake that mission.

    I wanted to ask about something that is an inherent problem, not just with you, but with everyone that is involved in trying to stop the smuggling of drugs at the point where they enter the country.

    In the hearing last year that we had focused a lot on the problem of corruption that can come in because of the extreme amounts of money that are involved.

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    If someone, simply by looking the other way, or arranging to be absent at a particular time, can make more in 15 minutes than they earn all year, that is a terrible temptation that confronts people, and I know that you are greatly concerned with that difficulty.

    We discussed this at some more length last year. The subcommittee attempted to appropriate some funds for some special inquiry into that area, and some measures for you to undertake. I understand that those measures are only part way in process and I would appreciate hearing from you, what you have done so far, in differentiating what has actually been done from what you intend to do with the extra resources we have tried to make available to address this problem.

    Mr. KELLY. Sir, last year, we directed $11 million to the set-aside, or used to increase Internal Affairs of the Customs Service by, I think, 55 positions. Most of that has been done. In addition——

    Mr. ISTOOK. And those positions are filled?

    Mr. KELLY. Yes. Close to being totally filled.

    Mr. BANKS. Or in the process.

    Mr. KELLY. Right.

    Mr. ISTOOK. Well, how many have been filled?

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    Mr. KELLY. In the forties.

    Mr. ISTOOK. Okay. Go ahead, please.

    Mr. KELLY. We had purchased vehicles and computer equipment for the Internal Affairs operation. We had a consultant come in and do an analysis of the Internal Affairs operation of the Customs Service, and in fact he has produced a draft report. We hope to have a final report from him, I would say in a month's period of time.

    Some of the recommendations that were made in that report have already been enacted or have been started to be put in place by the Customs Service.

    This year, we are looking for an additional $6 million. Or your question, sir, is on what we have done already. So we are looking for more resources.

    But we have done an analysis of it. We have brought in OPR personnel that have started looking at specifically the Customs Internal Affairs operation. They have already started that. And again we added equipment and personnel to the Internal Affairs function.

    Mr. ISTOOK. And I, as well as the other Members of the Subcommittee, I know would have an interest in the draft as well as the final report. Sometimes there are important differences, as we all know, between the two.

    What are the recommendations which have been implemented so far?

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    Mr. KELLY. There were some equipment recommendations that were made regarding vehicles, that we have responded to.

    There is a recommendation concerning rotation of people out of the Internal Affairs Division back into the Office of Investigation.

    That is in the process of being implemented. It is not that easy just to kick in a rotational program, but we—Commissioner Banks can address this more directly—have met with members of the Internal Affairs component and discussed the rotational policy.

    We are going to go forward with it. The question is what is the right mix? Permanent cadre versus people that are going to be rotated in and out. How frequently will the rotations take place? These things have not been finally determined but this is part of the recommendation of the consultant.

    Mr. ISTOOK. The rotation of people.


    Mr. BANKS. Yes, sir, and we actually had to dedicate $2.5 million in order to provide for that rotation and pay for those costs.

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    In addition to that, we have actually increased the number of special operations and undercover operations that we have. We have put people on joint FBI task forces around the country.

    We have brought in forensic computer people because a lot of our work is done through automation and you actually have to trace back through the audit trail in order to determine if there are issues or if there are problems. If there is a violation it must be determined who did it. You looked at that tape of that vehicle ramming through the port; every one of the cars that comes in gets punched through the computers so we have audit trails on them.

    One of the things we are trying to do is build in internal controls. The reason those two officers were out in front of the booths is because we are trying to take away the capacity of a ''bad guy'' to pick which particular booth he can go to.

    In other words, no one's got total control over this. We have got a layered process, so that there is no predictability for the traffickers that are trying to operate in our systems. We have got people operating ahead, as well as behind the booths. We capture the people after they go through, and try to do blitzes. It continues to add to the unpredictability of the process.

    We try to build integrity and internal controls into the system.

    Mr. ISTOOK. I will look forward to the further information on that because we all know this is a very significant problem that is inherent in trying to stop the smuggling of the drugs.
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    Thank you, gentlemen. Thank you, Mr. Chairman.

    Mr. KOLBE. Thank you very much, Mr. Istook.

    As Members and the audience know from the bells, we have a vote that is underway now.

    Unfortunately, I know a lot of us have other questions we would like to ask, particularly of Commissioner Banks, on Customs, but we are going to break now and we understand Mr. Magaw will be able to return this afternoon, when we have the Secret Service, FinCEN and law enforcement with us.

    So we will recess from now until that time.
    "The Official Committee record contains additional material here."

Wednesday, February 25, 1998.




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    Mr. KOLBE. If everybody would take their seats. We only have a few minutes before we have two more votes, and then we are going to be completed with the votes here, but I think we have enough time to get one more presentation in. So we will go to Mr. Lew Merletti.

    We welcome you. This is your first appearance before this subcommittee as the Director of Secret Service, and we appreciate your appearance. Lew Merletti, thank you.

Secret Service Opening Statement

    Mr. MERLETTI. Thank you.

    Mr. Chairman, members of the Committee, I am privileged to come before you today for the first time in my capacity as the Director of the United States Secret Service. I have the members of my executive staff with me here today.

    While this is my first appearance as Director, my career in the Secret Service spans 23 years, and I am well aware of the historically strong relationship between this Committee and the Secret Service. This Committee has been most supportive of the agency's employees and its mission, and I intend on continuing my agency's tradition of working with all of its members cooperatively and honestly.

    Of the many lessons I have learned from my predecessors, one which I will apply today, is the value of keeping my comments brief and to the point.
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    As you know, my agency is charged with a vital mission of protecting the President, the Vice President, foreign heads of state, and others. It also contributes to the protection of the Nation's financial stability by ensuring the integrity of the Nation's currency, financial obligations, and institutions.

    Having worked as a special agent in three field offices, and as a supervisor on the protective details of Presidents Ronald Reagan, George Bush, and Bill Clinton, I know firsthand that the protective and investigative missions appear distinct but are, in fact, inseparable.

    The skills developed by agents during their investigative and protective assignments are invaluable to both missions. Most, if not all of our training, carries with it dual applicability.

    The Service's unique forensic and technical capabilities are also applied regularly to both our investigative and protective missions. They, too, are inseparable.

    The Secret Service will work vigorously to meet the unique challenges posed by our protective and investigative missions. The fiscal year 1999 budget request totalling $612.8 million provides the funding necessary to meet those challenges.

    New technologies present sophisticated threats to our protectees, and we continue to meet those challenges by developing and applying appropriate countermeasures to detect and neutralize those threats.
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    In fact, today, I will personally speak on one of two demonstrations we have planned for this hearing. My demonstration, which studies the recent assassination attempt on President Shevardnadze of the Republic of Georgia serves as a reminder of the ever-present threats we face in our protective mission and the need to stay current in technology, equipment, and training in order to deal with these threats.

    I know that my predecessor provided closed-session briefings to members of this Committee on the subject of our protective limousines. Those briefings will have even greater meaning to you today following my presentation.

    With the development of highly innovative technologies relating to financial transactions, such as electronic banking, the Internet, and wireless telecommunications, there has emerged new methods of defrauding financial institutions, commercial enterprises, and individuals. You will see a presentation by one of 5,000 dedicated employees of the Secret Service, Special Agent Mary Riley from our Electronic Crimes Branch, who will demonstrate a sampling of these emerging schemes.

    As an agency, we will meet these investigative and protective challenges, as we have throughout our 133-year history.

    We have been conducting criminal investigations since our inception in 1865 and have provided protection to the President and others for nearly a century.

    During the past eight months that I have served as Director, I have become stronger in my long-held belief that the strength of the U.S. Secret Service lies in its people. The Secret Service personnel are career civil servants. They carry out their duties with commitment, dedication, professionalism, and competence day in and day out in the United States and throughout the world. They take great pride in their agency's history and mission. For that, I am proud of them.
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    Mr. Chairman, with your permission, I am submitting a more detailed statement for the record and will commence our presentations. I know that following these demonstrations, you may have questions for me.

    Before closing, I again wish to thank this Committee for its support, and as the Director, I pledge my continued commitment and cooperation.

    Members of the committee, Special Agent Mary Riley.


    Ms. RILEY. The United States Secret Service has spent a great deal of time perfecting its ability in the area of high-tech crime, specifically as it relates to the traditional financial crimes-related violations that we have worked for a very long time.

    As you know, the Internet has become a very important tool in both electronic commerce, and to the criminal element. For example, within the financial institution community itself, the Internet has become a vehicle for the financial institutions to very effectively deal with their consumers.

    For example, these banks here from Arizona, these from right here in Virginia, very effectively use the Internet to be able to communicate with any of their customers that are out there.

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    On the flip side of that, however, the criminal element has been able to utilize that to victimize individuals as well. This is a perfect example.

    This summer, a group of individuals put together an Internet page that looked very legitimate. They advertised a Visa credit card available at a very low interest rate, about seven percent, enticing people to sign up for that credit card.

    As people would fill in all of their personal financial identity information, that information was fed back into an illegitimate source who eventually disappeared after about 30 days, taking with them all of that personal financial identity information that could be used to open up accounts in other locations.

    The credit unions are also using it in very much the same manner. The credit unions are able to use the Internet to communicate not only with their customers, but also with the merchants that need that valuable information to carry on day-to-day business. The flip side of that, however, is illustrated by organized fraud groups that are able to use the Internet to put together, for example, a credit repair service. Again, by making their page look very legitimate, they are able to go in and entice people to provide their personal financial information and then disappear after a very short time.

    Because of the global implications of the Internet, people that put these pages together could be located anywhere in the world, making our international law enforcement responsibility even more important than it was before.

    One tool that is currently available on the Internet is illustrated by this program known as Credit Wizard. This program was put together by a group of bank employees who, using the education they had and knowing how the mathematic formula was put together that generates credit card numbers, put together this very user-friendly piece of software.
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    First of all, if you see the list there on the right, they loaded up a large number of the institutions that issue credit cards. For example, Citibank Arizona, they have their credit card account listed there. I can just choose that from the list, go over to the number of cards that I would like to generate. I will just generate 15 for this demonstration and hit the ''generate'' key.

    That list you see come up on the left-hand side is actually a valid list of credit card numbers that can be used. Now, of that list, we did some tests with authorization centers. We found that probably only about 10 percent were good chargeable account numbers that are ready right now. The rest of them either have not been issued yet or were canceled for whatever reason.

    The way that they test to find out if those are good numbers is by typically making long-distance telephone calls. If you try to make a long-distance call without a current calling card number, the operator will automatically ask for a credit card number. So trying to complete that call using one of these will give them the verification that they need to know if they have got a good number.

    Once they are able to identify good account numbers, they can also generate personal information. Using a simple white pages database that is also available on the Internet, I can go in and choose an individual's name, address, and phone number. For example, today it could be Carol Talbert in Hartford, Connecticut, and give up that address and phone number when applying for accounts at any of a variety of merchants. If those merchants, to protect themselves, checked the database to make sure there really is a person in Hartford, Connecticut, by that name, they would find out that that is, indeed, true.
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    So it is a very valuable tool, and the Visa and MasterCard group are not the only ones that are vulnerable. The credit card generators have been put together for American Express, AT&T calling cards, and just about anyone who has account numbers out there and employees who would share that information and put together packages like this.


    In addition, desktop publishing has become a very big problem within the industry. Any document, both official and financial, can be scanned into a computer with the lower cost of very good computer systems and software that are out there. Valid documents can be produced from personal checks to commercial checks. Signatures can be taken, and so can false identification.

    You will see in front of you a couple of boards that we put together. We put a board together in front of you there using your photographs that were taken right from the Internet and produced false identification using the photograph that came right from your home page. Because of the quality of the information that is out there, it has become something that is of great concern to us in protecting the financial infrastructure that really rely upon this type of identification.

    The other type of information that is out there is counterfeit currency. Counterfeit currency—for example, this page was put out on the Internet about six months ago, where they instructed people how to make counterfeit currency using desktop publishing techniques. Using photographs and images of currency that are currently available, they were able to produce a document like the one you see on the lower right. This image was seized from a case that we did in Kansas City, Missouri, and as you can see here, they made a very good attempt at duplicating some of the security features that protect our currency.
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    From the fibers that you see here, the red and blue fibers, to an attempt at duplicating the micro-printing around the portrait. That is something we really have to watch closely as far as the education that is being provided out there, and being able to effectively work our investigations in the area of counterfeit currency.


    Another area that we are looking at and very much trying to stay on top of is the area of telecommunications fraud. In addition to the telecommunications industry itself, suffering very great losses from the fraud that occurs out there, we also recognize the telecommunications industry as the backbone of the financial industry, and that they use that to be able to transmit their information between institutions and carry on their day-to-day business.

    Regarding this scanner that you see, I actually have one running right here in the hearing room today. Right now, since we set this up, we have captured 113 account numbers that have been used in the vicinity of this room. The information you see on the lower right is created every time a cellular phone is turned on and used in this vicinity. The scanner will capture everything you see there on the right, from the phone number in the phone, the electronic serial number, and everything there is to know about that account number.

    We worked a case in West Palm Beach, Florida, in which we had individuals utilizing scanned information like this to clone cellular phones, one after another, that they used to fraudulently place calls to the Middle East.

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    This list up here in the upper left reflects a disk that was seized from that location in which account number after account number was used to clone back into other cellular phones to continue that call cell operation. Approximately 26,000 account numbers were seized from one apartment, representing $7 million in losses.

    One thing that we found from the type of cloning activity that occurs out there is that it is very commonly used to facilitate other crimes.

    For example, in a hearing that was held before the Judiciary Committee last November, DEA testified that 80 percent of the drug traffickers out there today are using cloned phones to facilitate their business, and this is exactly the type of equipment that is being used.

    One of the things that we have also very adeptly tried to make sure is that our forensics teams are capable of identifying all of this electronic equipment as we seize it from the defendants out there. From that type of scanner that you saw there to this type that is commonly used on the side of a road, to capture cell phone information as people drive by. It has a very limited range, but it is very effective.

    Once the account numbers are stolen, the equipment is very easy to obtain and this enables one to clone the account number into another phone. A box this small provides that capability, and it is very inexpensive and can be gotten from locations right out on the Internet.

    Because of the expertise that we have been able to gain specifically from telecommunications crimes, we have been able to perfect our ability to track locations of people using cellular telephones very effectively.
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    For example, within our protective mission, if a threat call comes in from someone using a wireless telephone, from the background we have gained in telecommunications, we can actually assess the location of that phone and relate it to our protective mission as well.

    In that regard, I would like to turn this back over to Director Merletti.

    Mr. MERLETTI. Mr. Chairman, would you like me to go with the second presentation?

    Mr. KOLBE. How long is it going to take, about?

    Mr. MERLETTI. About 10 to 12 minutes.

    Mr. KOLBE. We only have 10 minutes left on the vote. So we cannot get through it all. So we might as well——

    Mr. HOYER. What is that agent's name?

    Mr. MERLETTI. Mary Riley.

    Mr. HOYER. Can I ask a question of the Director?

    Mr. KOLBE. Sure.

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    Mr. HOYER. How many times has Ms. Riley given that presentation?

    Mr. MERLETTI. Today was the first time she—no, sir. No, sir. Many times.

    Mr. HOYER. However many times she has given it, it was excellent, Ms. Riley. Agent Riley, I thought that you did it very, very well.

    Ms. RILEY. Thank you.

    Mr. HOYER. I think it was fascinating and very scary at the same time.

    Mr. KOLBE. It certainly is.

    Mr. HOYER. We are all living through electronic devices nowadays. At the same time you are talking about being connected, how everybody is connected, of course, everybody being connected is also everybody being intercepted. I mean, what they are connecting about. It is a very, very scary ''1984,'' which we are long past, but George Orwell would have said, ''I told you so.''

    Mr. KOLBE. Since we do not have time to get through your second presentation before these two votes, we will recess, and when these two votes are over, we will be back and then we will be here until we finish.
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    Mr. KOLBE. The Subcommittee will come to order.

    Mr. Merletti.

    Mr. MERLETTI. Thank you, Mr. Chairman.


    The U.S. Secret Service armored limousine project is one of the most critical elements of our protective mission. Last year in an executive session, my predecessor, Eljay Bowron, briefed you on this program. Another important aspect of our protective mission, which is crucial to developing new strategies and to maintaining state-of-the-art equipment, is our practice of dispatching U.S. Secret Service experts to the scene of any assassination attempt throughout the world.

    On February 9, 1998, just 16 days ago, there was a sophisticated, well-organized, and very violent attack in Tibilisi, Georgia, upon President Edwarde Shevardnadze.

    Our team left on February 12th and returned February 20th. Today, I would like to share with you some of the team's findings and afford you the opportunity to view a most dramatic film clip of the actual attack.

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    Our team evaluated the performance of President Shevardnadze's limousine. We will look at how the limo succeeded and how it failed.

    This shows the armored limousine. It took two rocket-propelled grenade hits. It was immediately rendered inoperable and burst into flames.

    Now, this vehicle—well, we are switching slides here. Do you want to go back to that one?

    This vehicle had been built by Mercedes Benz in Stuttgart, Germany, and they have been armoring vehicles in a factory setting for 50 years. They produce approximately 150 vehicles a year.

    The level of protection provided by these mass-produced vehicles is considerably less than that offered by our armored vehicles. The vehicles built in the Mercedes factory provide minimum under-the-hood protection. If you could see these rocket-propelled grenade hits, the vehicle was rendered—it was crippled immediately.

    The Secret Service provides armoring in our vehicles that is far superior to the commercially available vehicles. This is accomplished by engineering our vehicles from the ground up. That allows us to put in more mass, which enables us to apply more armor material to the vehicle itself.

    We are also able, because we are building it from the ground up, to relocate those important electronic parts that keep the engine running.
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    I feel confident in saying that our vehicle would not only have survived this attack, but that we would have been able to continue to drive right through the kill zone and safely drive to the residence without ever stopping.

    Could we go to the next slide?

    In summary, there were two security personnel killed, two security personnel wounded, and one assailant was killed. The attack lasted between 10 and 12 minutes, during which approximately 14 rocket-propelled grenades and hundreds of rounds were fired.

    Mr. Chairman and members of the Committee, I feel that the significance of the film you are about to see will demonstrate very quickly some of the points that we discussed last year in executive session.

    This is a photo of the follow-up vehicle. You can see there are hundreds of rounds of bullet impact along the doorways.

    This is another one of the security cars.

    I would like you to take note of this slide. You can see where it says ''camera location.'' It is approximately 300 yards from the actual kill zone, and it was across the river.

    Now, in a few moments, we are going to show this VHS film that our team brought back, but I want you to orient yourself because you are going to be looking across the river and across the street, and, again, this attack took place at about 11:10 p.m. at night. So it is dark. You will see street lights, and then the motorcade itself will come into view.
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    Again, the camera angle was such that the fellow recording this dipped it down at times because he was trying to look over the viewfinder, and he actually places the camera lens into the view of a reflection off of the river. So just bear with the fact that it is a bit shaky, but you will be able to very clearly see how the attack develops.

    Mr. HOYER. What was he taking pictures of?

    Mr. MERLETTI. He was there to record the attack. He was one of the terrorists. They wanted to record it for posterity.

    Mr. HOYER. How was he there to record this for posterity?

    Mr. MERLETTI. He was one of the terrorists.

    Again, those are the rocket-propelled grenades that you are seeing detonated.

    Following the attack, the cameraman fled, and he left the camera there.

    Mr. KOLBE. So much for posterity.

    Mr. MERLETTI. The significance of showing you this ambush is to demonstrate that this type of attack is a reality. It is the very reason that the Secret Service transports the President's limousines to every location he goes, whether it is domestic or foreign.
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    I believe that this film clearly demonstrates just how important these armored limousines are to us and to the success of the protective mission.

    I would like to thank you for your time, and our portion is concluded.

    [The information follows:]
    "The Official Committee record contains additional material here."

    Mr. KOLBE. Thank you very much, Director Merletti. These have been fascinating presentations for us.
    "The Official Committee record contains additional material here."

Wednesday, March 4, 1998.





    Mr. KOLBE. The subcommittee will come to order again. Let me just at the outset inform Secretary Rubin and other members of the subcommittee that there is a meeting of the chairmen of the subcommittees—fondly known as ''the Cardinals''. I have certainly advanced here, got my red hat—at 4:00 o'clock. So we will need to be completed by that time. But I see no reason that we shouldn't be by that point.
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    Mr. Secretary, thank you very much for coming and making your second appearance before the subcommittee this year. There are a number of critical issues that face the Department that I think we are going to want to explore today.

    The first is one that we touched on last week when you were here, and I will want to follow up with a few more questions. And that is funding levels for the Department's law enforcement areas.

    We showed you last week a number of charts that illustrated the dramatic difference between funding and staffing for Treasury law enforcement, as compared with Justice law enforcement.

    And just in case those have slipped your memory here, we have them here again today. That's okay, Frank, we will hold on just one minute before we get to those. Let me get to the questions here.

    We also expressed our frustration and dissatisfaction about the lack of attention and stature that has historically been given to the Treasury law enforcement bureaus, as vital participants in our national anti-crime and drug control strategies.

    I would say, Mr. Secretary, that if we were to dissolve these bureaus today there is no other agency in government that could pick up the ball without losing a beat, and maintain the same level of national security and protection that our citizens expect, and I suspect you would agree with that statement.
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    For this reason, I continue to be baffled at the disregard of the administration, and I would have to say to some extent of the Congress, itself, for having an integrated law enforcement strategy. I think we need that very much.

    The fundamental issue here is not comparing Treasury to Justice, but the operational survival of these critical law enforcement bureaus that have been neglected as they desperately struggle to meet our level of expectations.

    The other area that I think we want to talk about—at least I do—is the issue of insuring that our information systems which are responsible for the Nation's finances are going to be fully operational on January 1, 2000.

    The failure of those systems would quite obviously be a disaster for this country, and some of the most critical ones are in Treasury.

    We are particularly concerned about the whole Financial Management Service, which provides for the payments, the collections, the accounting information and debt collection services for most of the Federal agencies, and individuals who receive money from the government, and every individual who pays a bill that is owed to the government.

    I continue to think that there is reason to believe that FMS, the Financial Management Service, is far behind where it needs to be in addressing this problem. And we really are at an absolutely critical, last minute stage, it seems to me, in this issue.

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    If we are going to provide an adequate time for testing, agencies have less than a year to either renovate their systems or replace those that cannot be renovated.

    Certainly it is not something that can be done in the last half of 1999. We are committed to providing the resources necessary to address this problem, but we cannot provide the management emphasis and push that is going to be needed to insure the success of this program.

    Mr. Secretary, we talked about this with Mr. Rossotti last week. But in the end, Mr. Secretary, it is up to you and all the other senior managers in the Department. We certainly look forward to hearing your testimony, and of course, as always, your full statement will be placed in the record.

    Before I ask you for your comments or a summary of your statement, let me ask Mr. Hoyer for some opening remarks.

    Mr. HOYER. Thank you, Mr. Chairman. I will be very brief. I want to welcome the Secretary, and Secretary Killefer to the committee.

    As the committee knows, and I have stated before, I think Secretary Rubin has been the most engaged Secretary of the Treasury with whom I have had the opportunity of working, as it relates to the workings of the Treasury Department.

    Now, quite clearly, Secretary Rubin is perceived nationally and internationally as an expert on the issues of finance confronting our country and the international community. And that he is.
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    But as well he has engaged himself in making sure the Treasury Department as a department is not only managed well, but runs well and is responsive. So I am pleased to welcome him here.

    Mr. Secretary, I want to say that I have also had the opportunity to meet with and discuss the Treasury Department and her role with Secretary Killefer, and I think she is an excellent addition to your team.

    So I welcome you here, and look forward to discussing with you some of the issues that we are concerned about.

    Secretary RUBIN. Thank you. You don't want to expand on your introductory comments? [Laughter.]

    Mr. HOYER. I could obviously get unanimous consent, I suppose, to revise and extend my remarks.

    Mr. KOLBE. Mrs. Meek, did you have an opening comments?

    Mrs. MEEK. No, Mr. Chairman. I just wanted to welcome Secretary Rubin and Ms. Killefer.

    Mr. KOLBE. Mr. Secretary.

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    Secretary RUBIN. Thank you, Mr. Chairman. I do have a written testimony, and we will submit that for the record. I have oral testimony as well, but I think what I am going to do in the interest of time, Mr. Chairman, is just pick a few highlights and mention those, and then we can get to our discussion. And Nancy Killefer and I would then be delighted to respond to whatever you would like.

    We are requesting, as you know, $12.3 billion. It is a 7.2 percent increase. In our judgment is requisite for three purposes: one, to maintain current operations, including mandatory cost increases as well as an anticipated work load increase; to invest in critical capital improvement; and also to accomplish enhancements that we think are very important.

    As you well know, the Treasury Department has an enormously broad range of activities ranging from tax enforcement, revenue collection, law enforcement and financial management, to tax policy, banking policy, and then very importantly international economic policy and domestic economic policy.

    We have tried to focus very carefully on the question, given the range of our activities, of providing customer service, and also lowering our costs. And we, as Treasury, but also I as Secretary, have tried to take the GPRA process and make it not just an exercise, but make it an integral part of our lives at Treasury so it will help frame and form the decisions we make with respect to strategic and tactical matters, and I think we are having considerable success in that.

    We provided the committee with a detailed presentation with respect to the 1999 budget. Let me just focus on four areas that are of particular concern that I would like to highlight in this testimony.
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    First, the Departmental Offices. It is an area that often gets overlooked, but I think the request for an increase with respect to Departmental Offices is critically important given the issues we face, and I would like to touch on that for a moment.

    In tax policy we have the question of implementing the 1997 tax bill, and that is an enormous additional burden in terms of issuing regulations. And I can tell you from having worked closely with these people, they are enormously over-stretched.

    Secondly, in the international area, we are providing leadership, not only for the United States, but the reality of life is for the world with respect to both the crisis in Asia, and then the broader question of restructuring the architecture of the international financial institutions.

    In economic policy, we are deeply involved in the issues I just mentioned on the international side, plus entitlement reform and the economic initiatives in the President's budget.

    And in law enforcement, we have expanded policy and oversight objectives.

    In addition, in Departmental Offices, we have our central management functions. And, with Nancy Killefer's leadership, we have been very focused on a whole host of management concerns—human resources, technology, and then the repair of our building from the fire we had several years ago, plus the restoration or revamping of the systems which are old, outmoded and in many cases put us in code violation. That's Departmental Offices.
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    Internal Revenue Service, you met with Commissioner Rossotti, so you have a good sense of what we are doing there. Let me just say that we started about two and a half years ago in what we view as a highly intensified focus on reform.

    I became aware of the problems there largely, I think, because of this committee, and that in turn directed us toward trying to get our arms around this, and move the process forward on reform and change.

    I think we have accomplished a great deal. On the other hand, there is an enormous amount to do, and certainly the bulk of that which needs to be done lies ahead.

    Our request includes additional resources to improve customer service, including improvement with respect to telephone access—although a good deal has been accomplished there already—rewriting of notices and forms, expanding the taxpayer advocate staff—although let me say there, too, we have greatly strengthened it over the last year—and implementing Citizen Advocacy Panels.

    Second, we feel it is absolutely imperative that we move forward with the Modernization Blueprint. The systems underlie all of the efforts that we need to make at the IRS, including customer service, efficiency, tax compliance and financial reporting.

    And on a broader basis, we need seed capital in order to implement the organizational reform concepts that Commissioner Rossotti has described to you.

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    And finally we have business-line investments. These are issues that we have deferred over the last couple of years as we have reallocated money to Y2K, but the fact is that we have outmoded computer equipment that is being used by frontline personnel throughout the IRS, and it is essential in our judgment that it be replaced and upgraded.

    And then, of course, we have very important Y2K requirements in the IRS and I will get to that in a minute.

    With respect to law enforcement, we have, as you said, Mr. Chairman, an extensive and critical law enforcement set of responsibilities. In order to better perform those, we have requested an increase of 5.7 percent above last year's budget.

    A portion of the 5.7 percent is required to meet mandatory cost increases, part of it is required for various enhancements with respect to our mission operations, including initiatives in narcotics trafficking, reducing illegal firearms trafficking to young people—that's the ATF Youth Crime Gun Interdiction Initiative—improving presidential protection and White House security, training in FLETC, and fighting financial crimes.

    You raised the question, when I was last here, Mr. Chairman, about the comparison with Justice. What we have tried to do in the administration, within the constraints of fiscal discipline, which in our judgment is absolutely central to economic performance, is to make the most sensible allocations we could of scarce resources.

    But I think that, as we discussed a bit when I was here last time, it would be constructive for this committee to take a look at the comparisons between ourselves and Justice and try to see whether or not the administration is correct in its allocation of law enforcement resources and to the extent we can be helpful in that respect, we obviously would be happy to be.
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    Let me also say—and I think I said this when I was here last week—that both the people at Treasury and the people at Justice feel that there is a cooperation that exists today between our two agencies, both at the management level and in the field, that is substantially better than it has been at many times in the past. And I think it is very important in terms of our Nation's law enforcement effort.

    We have enormous pride, as obviously you do, too, from the comments you have made, Mr. Chairman, in the Treasury's law enforcement bureaus, and we have been committed to fully supporting them, including support in some very difficult issues—the Secret Service's White House security enhancements, ATF's reforms and their defense against strident attacks by the NRA, and then obviously the securing of appropriate funding.

    Finally, Mr. Chairman, let me say a word about Y2K which you raised in your opening remarks. That, obviously, is a critically important problem, and as you correctly say if we get that wrong, then that can create horrendous problems, especially at Treasury, where many of our systems interrelate to the rest of the Government or to the outside world and the economy at large—particularly in the IRS.

    In that respect, our 1999 budget requests additional funding for this area of $253 million. And we are putting in a supplemental request of $250 million in 1998 for additional flexibility.

    Now, how much of that we are going to have to use is not clear at this point. We have identified something close to $200 million—I think about $175 million—of additional monies that are needed in 1998. My guess is we will ultimately wind up with something above the $175 million. But the $250 million we think will give us adequate flexibility to fund these requirements.
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    It is absolutely essential for the reasons you said, Mr. Chairman, that the work be done in 1998. It's particularly true of the IRS, with a filing season coming up in 1999, so you lose a whole chunk of time there.

    So we cannot defer these activities. They need to be done now, and that is what we are focused on doing.

    I meet biweekly—that's every two weeks, roughly speaking, with Nancy Killefer, and also the Treasury CIO—it is every two weeks, isn't it?

    Mrs. KILLEFER. Yes.

    Mr. HOYER. Thank you for the explanation of what biweekly meant. [Laughter.]

    Secretary RUBIN. Oh, that wasn't for this committee, which obviously would know that. I was actually thinking to myself was it biweekly or semi-weekly. So I was defining it for myself.

    In any event, we meet biweekly on this, and we are totally focused on identifying problems where they exist, and trying to do the best we can with them. As you correctly say, Mr. Chairman, the area we are most concerned about at this point is FMS.

    Let me conclude on one personal note, and then we will be happy to respond to questions. When I became Secretary, I had dinner with a friend of mine who had been in two administrations. What he said was the secretary of any department faces a lot of challenges, management and policy.
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    What you have to do is make a judgment about your priorities, and his very strong advice was that your number one priority ought to be management of the Department. You have a terrific institution, both in Main Treasury and also in its bureaus, and what you ought to do is do everything you can to build that institution.

    And I think he was right, and that is certainly what we have tried to do. And in that respect I think that you all can feel very good about the people at Treasury. I have been enormously impressed, both at the political appointee level and the career level, in the quality and the commitment of people, and how they work weekends and nights, and I think with enormous good effect on the issues that they are dealing with.

    And secondly, in the time I have been here working with this committee has been very constructive. There is no question that in the computer technology area it was you all who really brought to our attention—I'm now speaking about Larry's and my attention—the enormous problems we faced and we've done our best to try to respond to that, and I think we have made a dramatic change in that area.

    With that, Mr. Chairman, we would be delighted to respond to questions.

    [The statement of Secretary Rubin follows:]
    "The Official Committee record contains additional material here."

    Mr. KOLBE. Thank you very much, Mr. Secretary, and let me just say that on that last point I appreciate your comments. It is certainly the intention of this subcommittee, and I know I speak for all the members, Republican and Democrat, to be constructive in our efforts, to work with you.
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    And I certainly feel that you and I personally have had a very constructive relationship. That is not, however, to say that that is a carte blanche approval of everything that you asked this subcommittee to do, because we may have different ideas about the priorities—all with the same goal in mind, however.

    Mr. Secretary, let me just ask you one very little question. This is a tiny little gnat on your side, and I realize that, but I just feel compelled to ask it. We just received today a letter that had been requested, or actually was required by last year's bill with regard to this little issue of the paper for the Bureau of Engraving.

    Secretary RUBIN. Oh, yes.

    Mr. KOLBE. Yes. I just wanted to ask, the letter says in the first paragraph, we had asked you to certify it personally as secretary.

    Secretary RUBIN. Yes, I noticed that.

    Mr. KOLBE. You noticed that. It's your signature at the bottom. The letter says, ''I am satisfied that the price of the bridge contract is fair and reasonable in the context of United States Government critical need for currency paper.''

    Would it be a fair interpretation, if I translated this into English, as saying we have a critical need and we may be getting ripped off, but we don't have any choice about it right now?
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    Secretary RUBIN. Well, it is an interesting problem. What we did here—or I should speak for myself, because I don't know the contract myself. We brought in, or Nancy did, I should say, outside people. We brought in the Defense Department—I've forgotten what they called—well, it says in the letter, doesn't it?

    Yes, Contract Audit Agency, and then we brought in some others from the outside—IRS, if I remember correctly, their procurement people—to take a look at it. And they told us that this was a fair pricing and fair terms.

    It is a bit of a problem, because it is a very small market, and the question is how do we—let me say, if your view is that we should have competition, I agree with that view. The problem is how do we get competition in such a narrow area.

    We brought in these outside people, and they tell us these are fair terms and a fair price. The RFP is out now, and I think—have the responses come in yet, Nancy?

    Mrs. KILLEFER. Yes. Responses have come in, but we are waiting the GSA audit of the previous contract before we make any awards. I think Secretary Rubin brings up a good point. It is a difficult issue. We would like competition. We have here a small and declining market. Hence, it is difficult to get anybody to invest in what is significant capital equipment to enter a declining market.

    I believe that as technology changes in the currency, as we go to things like plastic substrate and other materials, we will actually get significant competition in this market place.
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    Mr. KOLBE. I'm sorry. Would you say that again? As you go to what?

    Mrs. KILLEFER. As we go to new materials. We are looking at——

    Mr. KOLBE. Plastic?

    Mrs. KILLEFER. Plastic substrate, which is now available in Australian currency. So it is out there in the market place.

    Secretary RUBIN. What is plastic substrate, for the benefit of the Chairman?

    Mr. KOLBE. Thank you, Mr. Secretary, for asking the question that I was too embarrassed to ask. They are not using paper in Australia?

    Mrs. KILLEFER. In Australia they are using a plastic substrate, so it is paper combined with plastic that creates a kind of in between material.

    Mr. KOLBE. I think I have seen it.

    Mrs. KILLEFER. It extends the life four-fold of the currency, and has some other properties, in terms of anti-counterfeiting.
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    Mr. KOLBE. But that is not what this RFP is about?

    Mrs. KILLEFER. No, it is not. It is about paper.

    Mr. KOLBE. Okay. I do not want to dwell on that. I just wanted to ask that question.

    I do want to go back to this issue we discussed last week, the disparity between Treasury and Justice law enforcement. And I am wondering if we could put that chart up, to show the differences in the resources that we have.

    There again, we see what is clearly a pattern. And again I want to make it clear that this goes back, although the real disparity does begin in the 1995 budget, where we really started to accelerate over in Justice, and we continue a pretty flat line over here in Treasury.

    So I continue to be pretty baffled about this, and I know this sounds a little parochial, I guess, for us on this subcommittee to be saying this. I do serve on the other subcommittee that funds the Justice law enforcement, as well. I am not chairman of that, but I serve on that.

    But it just seems to me that we are not really getting an integrated approach to law enforcement. I ask this question only slightly tongue in cheek, Mr. Secretary. What about—well, I don't ask it tongue in cheek at all.
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    What about transferring all of Federal law enforcement to Justice?

    Secretary RUBIN. Oh, I think that's a——

    Mr. KOLBE. Bad idea?

    Secretary RUBIN. Well, I don't, you know——

    Mr. KOLBE. Well, what about putting it all under one——

    Secretary RUBIN. I think that is a separate question that was debated extensively about three years ago as a result of issues with ATF.

    The question raises many interrelated issues. I think the funding question is one issue. My own view is that there would probably be a benefit from having a very careful look at it. That is something that you can direct to get done, particularly since you are on both committees.

    I think there are at least two problems there, Mr. Chairman. This was, as I say, debated at length approximately three years ago. One problem is that from the very beginning of the Republic there was no national police force. I think there are probably a lot of good reasons for that, when one thinks of the history of various agencies in that regard.

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    Secondly, with the exception of the Secret Service, or even in some respects with respect to the Secret Service, what you have with the Treasury law enforcement agencies is a very useful combination of regulation, of revenue collection and of law enforcement.

    If these interrelated functions were not kept together, if you took the law enforcement function move it to Justice and kept the other two functions, regulation and revenue collection, within Treasury, you would have to re-create the connection.

    John Magaw, at the time of the ATF debate, made the point that his people were cross-trained and they actually crossed functional lines in their work. I can tell you at the IRS, because I have been very involved with them myself, the IRS CID people and the rest of the IRS work very closely together.

    So I think that you have a lot of practical, synergistic benefits from keeping these functions together within Treasury. Even the Secret Service, in its counterfeiting mission, works closely with our banking people and our domestic finance people.

    So I don't think that, in a substantive, conceptual sense, that the transfer of all Federal law enforcement to Justice, is too sensible an idea. I do think the question of the funding is one that you could probably very constructively try to direct people to take a look at.

    Mr. KOLBE. This is just——

    Secretary RUBIN. A lot of it is driven by the focus on the INS and border enforcement and this business view. I don't know whether it is a right view or a wrong view, but I have heard it explained at great length, that there was a need for tremendous enhancement in the INS.
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    And Nancy just gave me these numbers. It looks like, if this is correct, about a doubling there.

    Mr. KOLBE. Well, that's true. But, I mean, it is also there, if you look at FBI, which is not border enforcement.

    Secretary RUBIN. Mr. Chairman, I do not disagree with you. As I say, I think that an unbiased and serious analysis, would be a useful thing.

    Mr. KOLBE. Is that an invitation for us to ask you to participate in such an analysis?

    Secretary RUBIN. We would cooperate with anything Congress wants to do, including this.

    Mr. KOLBE. Most everything; most everything.

    Secretary RUBIN. No, but if you go back to OMB or to CBO, and request an analysis, we would obviously be happy to participate.

    Mr. KOLBE. You are certainly right about the border, but we also have a great attention in this Congress, and nationally, to the drug issue, obviously. In fact, probably even more than the border issue, and I do not think anybody doubts that, really, Customs is the first line of defense there. DEA performs a critical role, but they are not the first line of defense on interdicting drugs coming into the United States.
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    So I am just puzzled about—and I do not think the historical thing answers it. I am just kind of puzzled about why you think we have this persistent continuing mismatch of resources here. I am asking, really, a question I have already asked, I know, so——

    Secretary RUBIN. I have sat through debates, internally, on how to allocate resources, and I do not know whether the comparison to Justice is the right way to do this, or not. My recollection—somebody can check me on this—is that with Justice you have had a very large increase in prisons. Bureau of Prisons had an enormously increased load for all the reasons we know, and INS has been built up. I think that was partly drug-driven. Part of it was illegal immigration, but I think part of it, was drug-driven.

    But having said that, I go back to what I said before. I think that you raise a very useful and worthwhile question. I think you just have to figure out what process you think would be best in evaluating the issue.

    You know, the other thing, the Crime Bill—I do not remember, is the Crime Bill about $4 billion, or something like that?

    Mr. HOYER. Seven years, wasn't it?

    Secretary RUBIN. Yes. So it's in the neighborhood of 4, $4.5 billion, something like that.

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    Mr. KOLBE. I think that is about right.

    Secretary RUBIN. And that I guess is done in Judiciary, right? Yes. Justice. State.

    Mr. KOLBE. Well, it was not done in any——

    Secretary RUBIN. Partially.

    Mr. KOLBE. Part of it, yes.

    Secretary RUBIN. Well, I guess it is done at the full committee.

    Mr. KOLBE. It was done at the full committee, but it was of course authorizing legislation. The funding of it was——

    Secretary RUBIN. Right. But my impression is that when the appropriations are done from there, we get very little and Justice gets more than half.

    Mr. KOLBE. You get very little, and that is really what we are trying to get at.

    Secretary RUBIN. But, again, my impression is that when you all do that in Congress, it is done with sort of a mindset that Justice represents law enforcement, and Treasury people are not thought of in the same way.
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    Mr. KOLBE. I agree.

    Secretary RUBIN. But I think that as you raise the profile, and I know that Congressman Hoyer did the same thing when he was Chairman, raise the profile of Treasury enforcement, hopefully that would be helpful in that respect.

    Mr. KOLBE. Well, I agree, and that is why I said this is not just—I am not pointing the finger just at you. Let me just say—and my time has definitely expired here—but let me just say we know what the numbers tell us. I mean, right there, you have got it charted there in terms of personnel and in terms of resources. What I guess we really need, and what any analysis has to look at, is what is the real life effect that we are having here on law enforcement is.

    Secretary RUBIN. You know how your processes work far better than I do, but maybe—well, it might be hard to do this. But if you could get the Joint Committees to request some kind of analysis, that would be very useful. Now, they might not want to do that.

    Mr. KOLBE. Thank you. I hope we have time. I have a couple more questions I would like to ask.

    Mr. Hoyer.

    Mr. HOYER. In just following up on that question, I have a sheet here, and I agree 100 percent with the Chairman's premise, that we ought to look at this and see whether disparity is justified, and I also agree with your observation, that this may or may not be the right criteria on which to judge whether or not we are properly funding Treasury law enforcement.
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    Our needs may not be as great, our emphasis may not be the emphasis of the day, if you will, or of the year, or of the decade. But law enforcement, as I understand it, from 1996 to the President's budget today, is a 25 percent increase.

    Secretary RUBIN. Treasury law enforcement.

    Mr. HOYER. Treasury law enforcement.

    Secretary RUBIN. Yes; that is approximately correct.

    Mr. HOYER. So that what we are really saying is—which is approximately over 3 years, obviously—about 8 percent a year, which is substantially above inflation, so that there are real increases incurring in that——

    Secretary RUBIN. Oh, yes. I actually had it in my statement but I did not read it out. You will also find that Treasury law enforcement has increased about 40 percent more, if I remember, than NDD overall. Nondomestic discretionary overall. That is correct. Over the last 5 years.

    Mr. HOYER. In other words, we have in fact, as a percentage, directed, in terms of the nondomestic discretionary programs, we have got a bigger portion of that non-discretionary spending than we otherwise would have gotten.

    Secretary RUBIN. That is correct.
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    Mr. HOYER. That is taking it across the board.

    Secretary RUBIN. Yes.

    Mr. HOYER. And I think that is useful to note. It does not undermine, in any way, the Chairman's analysis with respect to the disparity. Let me say as an aside: Federal employees paid all of that money, because that money comes from the trust fund created by Senator Byrd out of the 278,000 Federal employees that were reduced in size, as you know. That is where that trust fund money——

    Secretary RUBIN. You are talking about the Crime Bill?

    Mr. HOYER. The Crime Bill.

    Secretary RUBIN. The Crime Bill; yes.

    Mr. HOYER. The Crime Bill Trust Fund comes from laid off, or not filled Federal employees.

    Secretary RUBIN. Yes.

    Mr. HOYER. Positions filled. I just thought I would make that observation, that we gave at the office, and Mr. Secretary, I know, because the economy is going so well, that you will certainly weigh in and say that we ought to follow the Federal Employee Pay Comparability Act because economic times are good, and we ought to give a full comparability adjustment.
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    My advice is you probably do not need to answer that in the affirmative until you talk to people, but——

    Secretary RUBIN. Oh, I actually have discussed that issue with people. I actually commented on this, publicly. Maybe I should not have, but I did. In fact it was even reported in the press.

    Mr. HOYER. I missed it. What did you say?

    Secretary RUBIN. I have forgotten, so I am a little afraid to repeat myself. [Laughter.]

    No. I think I said something to the effect, it seems to me that people who are in public service, who are performing vital functions, they should be paid fairly and in ways that are consistent with the way the private sector is paid.

    Now, how you reconcile that with our budget situation, it seems to me is the question.

    Mr. HOYER. Well, I appreciate your saying that because——

    Secretary RUBIN. Oh, I do think that, very strongly. Then the question is just how you reconcile with your budget situation.
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    Mr. HOYER. In fact as a manager, if you are going to pay attention to management—and by the way, I do not know who advised you to pay attention to management but they had not talked to some of your predecessors, he says, charitably.

    The fact that I presume, in the management area, all of your managers are telling you you are having a tough time retaining really good people.

    As you know one of the things the Chairman and I both did and worked on was making sure that some of our technical people in ATF and Secret Service got comparable adjustments, that FBI was getting, or we would have lost all our people just walking across the street.

    Secretary RUBIN. That is absolutely correct and I think you have got, now, a very serious problem in the IRS with respect to these legacy programmers, and we cannot afford to lose those people because that is the basis on which the Y2K is going to be done, and we have put——

    Mr. HOYER. Yes. Mr. Rossotti spoke of that.

    Mrs. KILLEFER. We put a program in place last week to retain legacy programmers.

    Mr. HOYER. And the fact is Mr. Rossotti I believe said that in some instances there was as much as 36 percent, on average—that was on average. There was obviously a higher—36 percent disparity between private sector pay and IRS pay.
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    Mrs. KILLEFER. That is correct.

    Mr. HOYER. In those specialties.

    Secretary RUBIN. And am I right? We are losing one a day or something, out of a total of 900?

    Mrs. KILLEFER. One a day; yes.

    Secretary RUBIN. It was a very serious problem.

    Mr. HOYER. You know, it bears repeating. In the Reagan administration, Ed Meese was the strongest proponent of pay comparability, and the reason was because he had a broader political perspective as well, in terms of filling positions in the administration.

    It is not hard to fill a Secretary's position. You cannot replicate, really, in the private sector what you do in the public sector.

    Mrs. KILLEFER. That is true.

    Secretary RUBIN. I agree with that. [Laughter.]

    Mr. HOYER. But you know, there is a lot of opportunity there.
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    Secretary RUBIN. There are supposed to be advantages to it; right.

    Mr. HOYER. Yes. And there are. The fact of the matter is, though, when you get to the younger folks who are making a decision—I have got kids in college, can I take this responsibility?—pay does really become a factor, not so much in the fact they do not want to do the job, but they cannot afford to do the job.

    Secretary RUBIN. I agree with all of that, and if you had enough flexibility in the system so you could do it, that would make it a lot easier. By the way, you know, the IRS—well, you do know all this—but we are trying to get some flexibilities. But I think your general proposition is right.

    Mr. HOYER. You spoke to two of the questions that I was going to ask about law enforcement. We have covered that, briefly.

    On IRS, which I think has been your major management problem, the good news is under your administration you have been fortunate in that in our law enforcement sector, we really have not had major management problems.

    We had major management problems before you came, and they were worked on them. But in IRS, obviously, that is not the case. As I have said, you have paid a lot of attention to it.

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    We see changes coming to the IRS. You have effected changes and led change. How do we insure that the highest levels of IRS personnel are engaged in insuring that the agency is customer-driven, and that they are committed to weeding out the poor performance that gives IRS a bad name?

    With a little more expansion on that because I want to hear you.

    The testimony that we heard before the Roth Committee had to anger everybody in America. There were only four incidents, but that was four too many. I think all of us would accept that, and we all need to be committed to insuring that does not happen.

    The overwhelming majority of taxpayers, they want to pay the least amount they can, but they want to be honest. They want to pay the proper amount, and they do not want to be abused or misused by arbitrary, capricious, illegal action in some cases. What are we doing, Mr. Secretary, to make sure that that does not happen?

    Secretary RUBIN. Well, it is a big question. Let me try to give you a brief answer.

    You have a Commissioner who is totally committed to everything you have just said. His view, which I think is right, is that the way to get the best compliance rate in the country is to basically have an IRS that people feel comfortable with and with which they can work out their problems. I think that is right.

    Now, where there are people who are intentionally evading their taxes—tax cheats—then it seems to me you have got to have an effective enforcement arm. Otherwise this thing is not going to work. But his view is that you are primarily going to make compliance work by making the IRS a place that people can work with effectively, and I think that is right, and that is what he is committed to doing.
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    I must say, we had dinner about three or four weeks ago with a group of Senators, and it had nothing to do with any of this, but somehow, the IRS came up—I do not remember how—and it was very interesting. A number of them said that they have noticed a change in attitude at the IRS over the last several months, since the Roth hearings, and since Charles Rossotti has taken over.

    I think there is reason to feel IRS can correct these problems though it has a long way to go. On the question of the people involved in the abuses, not just those abuses, but I think one could be even more troubled in some way because those were four cases, by the audits that came out—whenever they came out, a month or two ago. I have forgotten. Charles Rossotti has set up what I think is a very good process because it involves DOJ and other places.

    It is DOJ, and where are the others from?

    Mrs. KILLEFER. It is from Customs, DOJ, and one person from IRS, and a deciding official in the Department.

    Secretary RUBIN. To put in place a process that is independent of the IRS, to take a look at these things, and then to recommend disciplinary action, and I think you will find, from having talked with Charles Rossotti about this, at length, that he will be very serious about doing what needs to be done.

    Mr. HOYER. Thank you, Mr. Secretary.

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    I know my time is up, Mr. Chairman. Thank you.

    Mr. KOLBE. Mrs. Meek.

    Mrs. MEEK. No questions, Mr. Chairman.

    Mr. KOLBE. Mr. Price.

    Mr. PRICE. Thank you, Mr. Chairman.

    Mr. Secretary, I would first like to second the comments which you made about the people of your Department. I had occasion, in anticipation of this hearing, to visit with agents of ATF and Customs, and the IRS, that are based in North Carolina, doing a good job, working hard.

    A number of the questions that I raised in their superiors' appearances before us last week were based on those discussions, so we do appreciate the work they are doing on the ground in North Carolina.

    Secretary RUBIN. Thank you.

    Mr. PRICE. I have one rather narrowly focused question and one broader one. I think I will start with the narrower question because it is a matter of considerable importance and it does contain some details. So if you will bear with me, I want to revisit an issue that I raised with Sam Banks when the Customs Service was before us last week, and that is the question of Treasury's review of its interpretive ruling on the importation of pre-drilled studs and ultimately, the affordability of housing.
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    As I understand it, Customs ruled last year that pre-drilled studs fall outside the scope of the U.S.-Canada Softwood Lumber Agreement. That seemed, to me, to be a sound ruling. So I was concerned about some language that was included in the conference report on Treasury, Postal appropriations, which essentially directed Customs not to enforce its own ruling.

    That language was not included in either the House or the Senate versions of the bill, but apparently was slipped in at the 11th hour, at the Senate's insistence, in the conference. I believe our distinguished Chairman and Ranking Member, as well as many other Members in both bodies, have some of the same concerns I do about telling Customs that they must ignore their own best judgment on a matter such as this.

    Mr. Banks testified that Customs had completed its evaluation of the comments received, and that this matter had been forwarded on to Treasury to determine the final ruling.

    I understand you are trying to work with both Customs and the U.S. Trade Representative which negotiated the U.S.-Canada Softwood Lumber Agreement, and wants the Custom ruling reversed.

    Mr. Secretary, this matter was not discussed publicly during our last hearing cycle. Many of the Members on relevant committees have voiced concerns about reversing this ruling.

    I remind you—Treasury has reversed a Customs ruling only three times in 20 years, and on the most recent occasion, in 1993, that decision was overturned by the Court of International Trade.
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    So for all of these reasons, I think it is very important to procedure cautiously in this matter, and I hope you will proceed cautiously.

    I understand that a decision may be imminent. I urge you to pay close personal attention to this matter, and I would welcome any light that you would want to shed on the question now, or on your decision process.

    Secretary RUBIN. Well, I would be happy to. The thing that confuses me a touch, Mr. Price, is that there are about 6,000 comment letters. I think that is right, is it not?

    Mrs. KILLEFER. That is right.

    Secretary RUBIN. There are about 6,000 comment letters. The comment closed off some time in December, and I do not think—it has not come to my desk yet, but I had not realized they had completed their evaluation. But I can tell you it has not come to my desk yet. I was told they were still looking at those letters.

    But in any event, wherever it may be, it is ultimately going to wind up with us, and——

    Mr. PRICE. Well, I am relying on what Mr. Banks told us last week.

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    Secretary RUBIN. Oh, no, if he said it, I am sure he is right. He runs the Customs agency. In any event, when it comes over, I can assure you we will look at it with great care, and as you correctly say, it is both a very controversial and a very important and difficult issue, and we will look at it with great care, and I suspect this probably will get to my desk.

    Mr. PRICE. Well, there were a flood of comments, I understand. I also understand about 4,000 of the 5,000 were a flood of postcards, and if you are looking at substantive comments, I think the bulk of those will be the sort of comments that question the wisdom of reversing this.

    Secretary RUBIN. Let me promise you one thing, Mr. Price. I understand this is a very sensitive issue to a lot of people. We will look at it with great care and seriousness.

    Mr. PRICE. Good. Thank you.

    Well, let me now go to the opposite sort of question, a very broad one, which is not actually within our ambit this afternoon, but I nonetheless want to raise it with you because you of course have been very centrally involved in drawing up the administration's budget request. I am very pleased, as I am sure you are, that the administration has been able to propose a balanced budget for the coming fiscal year, three years ahead of projections, and that we in fact plan to end, or it looks like we can end fiscal year 1998 in the black.

    So I want to thank you for your efforts to make this state of fiscal solvency a reality, and ask you about an aspect of this budget debate that has received a great deal of attention, namely, the President's focus on Social Security and the idea that we should forego spending any surplus until we have made a long-range plan with respect to Social Security.
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    As I understand it, the effect of that proposal—that the spending of any surplus be reserved pending a resolution of Social Security's long-term demographic problems—would be to reduce the debt held by the public.

    You have appropriately emphasized the wisdom of this. Let me ask you this, though. What if the budget surplus were used more directly to redeem Treasury bonds held by the Social Security Trust Fund, and the cash from that transaction were invested, then, in a more diverse portfolio including equities, obviously under appropriate governance procedures.

    Couldn't the trust fund be strengthened and the national debt held by the Government be reduced, and would this be a good small, first step, towards both extending the solvency of Social Security, and providing, systematically, for debt reduction?

    Secretary RUBIN. Well, I will give you my view. I think you are raising, in a longer term sense, you are raising one of the questions I imagine will be central to this whole debate over the course of the year, and then the legislative process, hopefully next year, with respect to Social Security.

    Now should it be invested in equities? There are a lot of strong arguments in favor of it. I think there are also some concerns and risks which should be taken with great seriousness. I rather suspect that if the market had not gone up as much over the last 4 or 5 years, people might be looking at this a little bit differently.

    But having said that, there are a lot of powerful reasons to do it, and I at least think there are a lot of concerns and risks that should be taken with great seriousness.
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    I do not think we should do anything different than—I think we should do exactly what we are doing right now.

    I think until Social Security gets addressed—and we debated this a lot before the President determined what he was going to do—I think until it gets addressed, I do not think we should do any of the various kinds of things that, ultimately, might become part of a program.

    I think we ought to stay just where we are, and as you say, the surplus, to the extent it exists, will go to retire debt, and meanwhile, I think maintains a continuing pressure to try to get a serious program to deal with the long-run issue. That is what I think.

    Mr. PRICE. But tremendous pressures are going to be created down the road to redeem all that debt held by the trust fund, isn't that true?

    Secretary RUBIN. Oh, absolutely, and one advantage of repaying, or paying down public debt with the surplus we have, until this gets resolved, is it puts the Federal Government in a stronger position to then raise the funds that it needs to pay down the special debt securities that are in the Social Security Trust Fund.

    Mr. PRICE. At the same time you could begin to pay down that debt held by the trust fund, directly?

    Secretary RUBIN. You could do that. I do not know that it matters that much, which debt you retire, but you can take that one step further and then say that the money should be invested in equities, or whatever.
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    Mr. PRICE. Well, I am asking whether that might be a good idea, basically on a limited basis. I am not suggesting that you change the basic policy of investing the trust fund surplus in Treasuries. What I am suggesting is that the general fund surplus might be used to redeem that debt and then invest a like amount in the equities market.

    Secretary RUBIN. Well, just to speak for myself, I think the question of whether any Social Security resources should be invested in equities is a very big, and I think not easy question. So I think it will be part of the general long-term debate.

    You know, if Social Security reform actually happens over the next couple of years, the amount of surplus that you are going to be talking about is relatively small, although it is certainly very nice to think there will be a surplus.

    Mr. PRICE. Thank you.

    Thank you, Mr. Chairman.

    Mr. KOLBE. Mr. Secretary, let me just ask you a couple of questions on an issue that I do not think we had alerted your staff to, so I am not trying to catch you by surprise.

    Secretary RUBIN. Oh, that is okay.

    Mr. KOLBE. This just came up in some discussions with my staff, prior to the meeting here. I just want to ask a couple of questions about our Treasury economic and financial advisers that we have overseas with foreign governments. You know, you have a number of those.
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    Secretary RUBIN. You mean the technical assistance people?

    Mr. KOLBE. I guess they are called technical assistants, but you have a number of advisers in Russia, and I met one in South Africa last year who was working down there with them.

    Secretary RUBIN. Yes, we have some in South Africa on inter-governmental budgeting, right.

    Mr. KOLBE. What is your view of that function? Do you think it is working well?

    Secretary RUBIN. Oh, yes, I think that is really sort of almost—to overstate this slightly maybe—but it is sort of a crown jewel of Government. I think the problem with it is that we do not have the funding for doing what we ought to be doing.

    You know, we talked before—Mr. Hoyer had raised the question, How do you get good people in the Government?—we can get very good people to do this sort of thing because they think it—and they are right—they can make a real contribution, they can take their work experience, and apply it in a practical fashion overseas. We can get really good people to do this, and in Central Europe—well, you said you met some in South Africa. In Central Europe, where this has been done extensively, and we now have a special arrangement with the State Department so we can facilitate funding. It is a terrifically good program.

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    The problem, when you get away from Eastern Europe, is that we have to get the funding through AID, and it is an enormously complex process. We are fortunate we do have—we have one person in South Africa? I have forgotten.

    Mr. KOLBE. We had one, I think, when I was there last year.

    Secretary RUBIN. Yes. We get requests for this sort of thing from countries all over the world, and our problem is getting the funding, and we did in the 150 Account this year request a very small amount of money so we could do some independent funding. I think we requested $5 million or $3 million. I have forgotten. Was it $5 million or $3 million? Five.

    Mr. KOLBE. For the record, since you may not be able to tell me this offhand, would you provide how many of your FTEs serve in this capacity overseas. Some are in contract, I think, and some are your own FTEs, is that not correct?

    Secretary RUBIN. Yes, a lot of them are in contract, and I do not know the answer to that. Do you know?

    Mrs. KILLEFER. I do not know either.

    Mr. KOLBE. For the record, I wish you would provide that and also how they are funded.

    [The information follows:]
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    "The Official Committee record contains additional material here."

    Mr. KOLBE. Do you know if you get reimbursed by USAID for these?

    Mrs. KILLEFER. Yes, we do.

    Mr. KOLBE. I think that is one of the problems with it, it was a very expensive program, and I think it is about $500,000 per individual, I think.

    Secretary RUBIN. When you say ''reimburse,'' I mean, they—correct me if I am wrong——

    Mr. KOLBE. They reimburse you for salary, if it is your FTE.

    Mrs. KILLEFER. It is a combination. When you describe that number, it includes relocation costs, housing costs, you know, equipment and office costs, the actual salary component.

    We can give you that breakdown as a fraction of that number, so I think when people talk about that number, that is what I would describe as a fully loaded number.

    Mr. KOLBE. I will give you a whole series of questions but I would also like to know what countries you have them, and how many you have, and what——
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    Mrs. KILLEFER. We will do that.

    Secretary RUBIN. Let us get you a full response to this. This is really a very good program.

    Mr. KOLBE. I think it is, too.

    Secretary RUBIN. The United States Government would be well-advised to very substantially increase it, if we could figure out a way to get the funding.

    Mr. KOLBE. I think you have got $5 million in your budget for 1999 for this.

    Secretary RUBIN. That is our request and that was to give us some independence of the very cumbersome process we have right now.

    Mr. KOLBE. And at the cost of $500,000 per individual, that would give you only ten, I guess, total, overseas.

    Secretary RUBIN. We will have to get you information on that, Mr. Chairman.

    [The information follows:]
    "The Official Committee record contains additional material here."
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    Mr. KOLBE. Okay. Quickly, on year 2000 compliance, you know, I continue to be nervous about this. I guess like this subcommittee was before I came on to it, about the tax system's modernization, whether we are really on track with this.

    So Mr. Secretary, let me just ask: Does the Department or the administration have a contingency plan to postpone the millennium in the event that we are not successful?

    Secretary RUBIN. We do not.

    Mr. KOLBE. Do not? So, in other words, we really have to do this, don't we?

    Secretary RUBIN. I think we are operating on the assumption that the postponement of the millennium is relatively unlikely, and if it is going to be postponed, it is powers way beyond the administration that I think are going to do that.

    Mr. KOLBE. It goes to a higher pay grade than yours and mine, I think.

    Secretary RUBIN. Yes.

    Mr. KOLBE. Are you satisfied with the progress that is being made?
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    Secretary RUBIN. I think we have done a heck of a job, and I think, frankly, Nancy Killefer deserves a lot of the credit for it, for energy and focus.

    But I think we have some problem areas, particularly the FMS, which you identified, and if you want to ask Mrs. Killefer to comment for a minute——

    Mr. KOLBE. You know, it is a computer problem but it is really a labor-intensive issue. I mean, it is a matter of changing computers, and I was interested in the article that appeared in, I believe it was Business Week, just last week, about the problems that the private sector is having in this area, that a lot of companies are not focused on this enough, and that we are going to find ourselves terribly, terribly short of the people that are just needed to do this work, and it is just very labor-intensive work.

    Mrs. KILLEFER. You are exactly right. Since I have been here, as the Secretary points out, we have started an intensive process.

    Jim Flyzik, who is our CIO, is shepherding this effort at Treasury. We have four working groups at Treasury. We have a war room. We meet on a weekly basis, intensively, with each bureau, and we invite the bureau heads to come, and they have come, and we have seen in the process of this—and then we meet with the Secretary every other week to update him, and we hold our own report card meetings—we have seen significant progress.

    Places like Customs, that, frankly, were in trouble, are now back on track. With Commissioner Rossotti coming to the IRS, we have a task force at his level, that he leads, that I sit on, where we meet monthly and we clear up issues, immediately, to insure that we can keep this progress going.
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    I believe now that we are in a situation where, at Treasury, we will meet our critical systems needs. My concern remains FMS, but I want to assure you that we——

    Mr. KOLBE. That is a big concern.

    Mrs. KILLEFER. It is a big concern. What we have done at FMS is we have new leadership, as I think you all know, which is very focused on this issue. We have prioritized their systems to insure that those systems that directly affect the American public are fixed, and in fact some of those systems have already been fixed.

    The ones that may slip, and I think will still get done by the year 2000, but late, are ones that are intergovernmental.

    So they will be, if you will, invisible to the American public. The American public will get their Social Security checks on time, their tax refunds on time. We will assure the public that that will occur.

    Most of those systems are already fixed at FMS. So I think while your point is absolutely right, it is people-intensive, and that is why we put in the retention program at IRS.

    If you do not have the people, you can throw all the money you want at it and you cannot get it done. So we are very concerned with our critical resources.

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    Also, some of it is equipment replacement and we have a diverse set of locations, so you have the logistics of getting out to every location and replacing that modem or switch, and that is why we believe that it is absolutely critical that we get full funding in 1998. 1999 is too late for many of these initiatives.

    Mr. KOLBE. Well, I appreciate those comments, and it is encouraging. Yes, Mr. Secretary?

    Secretary RUBIN. Correct me if I am wrong. I am just repeating something you said, but the place we may have trouble is the intragovernmental accounting, and that is the one area that we are most—it is called GOALS or something?

    Mrs. KILLEFER. The GOALS Program. We actually still think we will be finished but we will be finished later than anybody would like, I believe. You know, we will still get done in 1999 but it will be late in the year.

    Mr. KOLBE. Well, we will all be nervous all the way through this thing, until we see this actually take place.

    I appreciate your comments and am encouraged by the response that we are getting.

    I am going to ask Mr. Hoyer to take the gavel and complete the hearing, but before I go, I just wanted to say, Mr. Secretary, that with regard to my questions about law enforcement, I really do not want to sound like I am picking on you because I am going to be asking these same questions of the director of ONDCP and some of the other agencies that come before my subcommittee, because I think they are very much involved in this analysis that you are talking about, and decision. So I am really not trying to put all the responsibility in your shoulders for this analysis.
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    Secretary RUBIN. Oh, no. I think they are very constructive—the notion of whether the resources are actually being optimally allocated, it seems to me are very constructive and should be raised, and I think when you look at those numbers it at least raises a question that somebody ought to have a very good tight, analytic answer to. So I think it is a very constructive thing to do.

    Mr. KOLBE. Thank you very much and I would yield to Mr. Hoyer.

    Mr. HOYER. Thank you, Mr. Chairman.

    I think 4:00 o'clock is the magic hour, so nice to see all of you. [Laughter.]

    Mr. HOYER. Finally, Mr. Secretary, the only thing between your leaving is me. Let me just ask a couple of questions and we will conclude the hearing. Thank you, Mr. Chairman.

    As I understand your answer, you have asked for some flexibility in transferring funds for Y2K work.

    Mrs. KILLEFER. That is correct.

    Mr. HOYER. To apply those. As I understand your answer, money may not be the problem on FMS, it just may—a lot to do, or is it money?
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    Mrs. KILLEFER. There are funding issues in FMS. It is one of the three bureaus that we are asking for additional funds for in 1998. We need, desperately, to bring in contract resources to shore up some of the programs. So we need to add resources at FMS.

    Mr. HOYER. Do you think we will need any supplementals? Assuming we adopt your fiscal year 1999 budget as proposed, are we going to need some 1998 supplementals, later on, in the fall?

    Mrs. KILLEFER. Well, I think we have identified a series of offsets that we have shared with your staff. They are difficult. I will say that.

    We have also identified, as we have gone through this process, we have pushed some stuff that probably we would rather not, into 1999. So we have got, actually, an additional request in 1999, above our current budget, and so that is to the tune of about $60 million. Once again, we have shared that with the staff.

    Mr. HOYER. Well, I think the Chairman reflects the view of this committee in a very bipartisan way, that there is great concern about this. It is something that we cannot finesse, we must get this done, and therefore, this committee, I am sure, is going to be very engaged with you in trying to make sure that we have the resources to get it done, because it is not an option.

    Mrs. KILLEFER. We appreciate that support.

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    Secretary RUBIN. The only thing I would add is if, as time goes on, it looks like we are going to need more 1998 money, we will just have to come back and talk to you all about it, and hopefully, the $250 million will give us more than enough to deal with 1998, but if we need more, we will have to come back.

    Mrs. KILLEFER. Yes. I do not anticipate that we will in 1998. If you found a way to actually give us some of the 1999 money, the additional money that we are requesting, we could actually use it, frankly, but we have gone through a very difficult offset process, so we have tried to minimize our 1998 needs to the extent we could.

    Mr. HOYER. That may be a useful thing for us to look at in terms of acceleration of some expenditures, which may be easier, in some ways, depending upon what obviously the surplus is going to be for saving Social Security, but we may have some flexibility in 1998 that we do not have in our fiscal year 1999 302(b) allocation. So we may want to look at the possibility of some acceleration of 1999 expenditures, that we know have to be met, which may fit more easily in our 1998 numbers.

    Mrs. KILLEFER. And we have identified those, so your staff has actually seen some of that, and we are more than happy to work with you because we actually have almost fully identified all our needs. So we can work with you on that.

    Mr. HOYER. All right. Thank you.

    Mr. Secretary, you were not there. Linda was there. Bob, were you there on the fire? You were there as well.
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    Secretary RUBIN. You were there.

    Mr. HOYER. I was there when the fire—I heard about it, and came down. I want to ask you just a couple of questions about what you are now doing.

    As I understand it, some of the money that we have appropriated has been utilized for our Y2K problem. Is that correct?

    Mrs. KILLEFER. What we are proposing in the offsets is that $17 million that we have, that would go toward restoration of the building, be used for Y2K. That is correct.

    Mr. HOYER. Now it is my understanding further, which I think makes good sense, that in light of the fact we need to do some general restoration and in light of the fact we need to do repair on the fire damage, that we are now putting those two together. Secretary Killefer, perhaps you could comment on that.

    Mrs. KILLEFER. That is correct. I was not there during the fire, but what has happened is that we have expended some of the fire funds to obviously complete the roof and make necessary repairs.

    When we did that and actually opened up the walls, we found that we have parts of systems, and they are 150 years old. So we did basically the minimum to get people back in their offices and have a working building and went forward, then, with a plan for a major renovation of the building as kind of the prudent way to go about this fix, rather than fixing parts of one system, knowing that we would have to rip open the walls again to fix another.
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    We then constructed and put the rest of the fire money together with a major restoration program of what is a very important historic building.

    Mr. HOYER. Clearly, because of its historic aspect, of the Treasury building and its obviously critical location, it is a great tourist attraction and all tourists see it as they go down Pennsylvania Avenue past the White House, I think it makes a lot of sense, personally, to combine the two activities and to insure that we get it done—it may cost us a little more but it is going to save us a lot more in the longer run.

    So I am sure this committee will want to work with you on doing that.

    Mr. Secretary, I had a question but I think you have really answered it, on the relatively small sum of money relative to your budget, on the $8 million and the staffing increase of 33 FTEs in the departmental offices.

    Secretary RUBIN. Yes. I would just repeat what I said in my statement.

    Mr. HOYER. Yes.

    Secretary RUBIN. I really do think that is critically important, that people are enormously overstretched, given all that is going on at the moment.

    Mr. HOYER. Mr. Secretary, let me ask you a final question, which like David Price's question, is not directly related to the the budget numbers but is very critical and very much in your portfolio. You have been the leader on this.
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    I would like you to comment on the IMF issue. We are obviously just about to get, or have already gotten in the last hours a supplemental dealing with that.

    Secretary RUBIN. You actually got it already.

    Mr. HOYER. We have it already.

    Secretary RUBIN. Yes.

    Mr. HOYER. Could you comment on that because I think the American public needs to know why it is so critical that we do that. It is controversial, obviously. We had problems with it last time, to some degree, for unrelated reasons, but nevertheless, I would like you to comment on that.

    Secretary RUBIN. I would be happy to. It is a very complex issue, but the bottom line of it is we have been dealing for the last, oh, six months or whatever it has been, with the crisis in Asia that has enormous ramifications for economic well-being in this country, and also our national security.

    There came a time as you got toward Christmas, where I think there was a real threat—and I have said this publicly before—a real threat or a real possibility that in South Korea, the 11th largest economy in the world, you could have had a default, a systemic default in the private banking sector. Had that occurred, that could have had profound ramifications around the world and then for this country.
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    I am not saying it would have but it could have. What we need to do—and fortunately we—Treasury and the Fed together took leadership and we got banks around the world to coalesce on a voluntary basis around a refinancing plan for the debt which is in the process of being worked through now.

    There are enormous challenges ahead in Korea but it is on a constructive path.

    The key, now, and Chairman Greenspan and I have both testified to this effect a number of times, is that while the probability of a truly major crisis in the world system may be low—and I believe it is low, probability is low—should it occur, it could have severe effects on our economy and that is a risk that we should not take. In order to be able to effectively cope with that kind of a crisis, should it start to develop, you have to have an adequately funded IMF, and the IMF right now is at funding levels that are very substantially short of what it would need to deal with a truly major crisis. That is the basic thrust of the very strong request we made of Congress to approve on a supplemental basis the full $18 billion—three and a half billion for the New Arrangements to Borrow and 14 and a half billion for the quota increase—the full $18 billion, and do it as quickly as possible.

    And while it is obviously a very difficult congressional issue, I think we are making headway. In any event, independently of its current status, legislatively, it is, I think, absolutely critical in terms of protecting our economic interests in this country.

    Mr. HOYER. Thank you, and again, Mr. Secretary, congratulations to you on your leadership, both here, in this country and around the world on that issue, and others, which I think have been a very important factor in our stability. I think you have a lot of confidence throughout the world, and credibility throughout the world and I think that is helpful.
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    Secretary RUBIN. Thank you.

    Mr. HOYER. I know you would like to stay here longer.

    Secretary RUBIN. We would be delighted. We can order in dinner; whatever you would like.

    Mr. HOYER. Discuss the issues of the day.

    But again, we thank you for appearing, and we look forward to working with you over the next three months as we try to forge a budget on an appropriation bill for the Treasury Department, which both in terms of its law enforcement responsibilities, its fiscal responsibilities, and its revenue collection responsibilities, meets the needs of the American public.

    Thank you very much.

    Secretary RUBIN. Thank you.

    Mrs. KILLEFER. Thank you.

    [Questions for the record and budget justification material follow:]
    "The Official Committee record contains additional material here."

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    Mr. KOLBE. The meeting of the Subcommittee on Treasury, Postal Service, and General Government will come to order. We are here this morning for our second in our series of hearings. And this morning we welcome the Commissioner of the Internal Revenue Service, Mr. Charles Rossotti, in his first appearance before this subcommittee. And having been sworn in, I think on November 13th of last year, Mr. Rossotti comes on board at a time that there are enormous changes going on within this agency. He faces a number of tremendous challenges.

    Among these challenges are assuring that the IRS will continue to function and not collapse on January 1, 2000; continuing to move forward with the much needed and oft failed or postponed modernization of the IRS computer systems; and implementing the restructuring legislation that is now being considered by Congress, and which I am confident will be enacted into law very soon with the strong support it has in the Senate and with the Administration. On top of all of these items, the Commissioner has now placed his own proposal for modernizing the Internal Revenue Service onto the table.
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    Mr. Commissioner, we are looking forward to working with you as you address some of these extraordinarily complicated, and we know very tough, issues. We are pleased that you are taking an active role in both the management and technology issues that face the service. For too long, these critical components of IRS operations have been without adequate leadership at the top.

    And I think it is a tribute to the Secretary and to the Administration that they have gone out and sought somebody with your background and your talent and caliber to make sure that we are leading the IRS at this very critical moment.

    We are particularly interested in your concept of modernizing the IRS as described in the opening statement which you have submitted and which I have read. We hope that you will keep us fully informed as you go through the process of validating this concept. The IRS can only benefit—I think all of us would agree—from some very fundamental restructuring.

    Last year, as we heard in the hearings that took place in the Senate Finance Committee, there are too many examples of the IRS becoming an organization that has been unresponsive to its customers, which are the taxpayers.

    These kind of taxpayer abuses cannot and will not be tolerated, which is why we have the restructuring legislation now being considered. The subcommittee will certainly use its oversight role and aggressively use performance measures to make judgments about appropriate funding levels for the IRS.

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    I also want to take this opportunity to welcome back, and in this case not for the first time but for the last time, Mr. Arthur Gross. This will be his last appearance before the subcommittee as he has decided to leave the IRS to pursue other interests.

    I think I speak for my colleagues, not just those that are on this subcommittee, but a lot of others that have worked on the Ways and Means Committee and on the tax system's modernization program, to say that we are very grateful for the service that Mr. Gross has provided.

    You have done a remarkable job, Art, of turning around the IRS tax modernization program. And I think you have clearly left the building blocks, that are going to be needed, to make sure that this works for whoever your successor is, and that will make it easier for Mr. Rossotti.

    Having said all of that, I do want to point out that the TSM, tax systems modernization, is something that we are very concerned about. The General Accounting Office just this week issued a report, if you will, an interim report on TSM. And they express a number of concerns. Among them, they express their doubt as to whether the IRS is going to have the ability to implement and enforce the modernization blueprint once that it is completed.

    So we will perform what we think is a vital role, to monitor this program closely so that we don't wind up in a position that we were in a couple of years ago where we had literally poured billions of dollars down a drain and had nothing at all to show for it, or precious little to show for it.

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    Let me just say a word also about the IRS budget request for FY '99. It is $529 million above the amount we appropriated last year. We certainly recognize the importance of the programs for which you have requested increases, but I have to be candid in telling you though, that the realities of the budget and what is likely will be our allocation on this subcommittee, are going to make it very, very difficult for us to meet and accommodate all of those increases.

    So as we go through the appropriations cycle, you could be very, very helpful to us if you would help prioritize these requests for new funding. It would be very useful for us. We will do everything we can to be sure that you get what you need to carry out the job. But you must help us by telling us where the highest priorities are.

    Mr. Commissioner, we look forward to hearing your testimony, and, of course, your full statement will be placed in the record, if you want to summarize it. But before I do that, let me turn to my friend and colleague, Mr. Hoyer, for his opening statement.

    Mr. HOYER. I thank the Chairman for yielding. I want to join him in recognizing and welcoming to the committee our new Commissioner, Mr. Rossotti. This is his first time appearing before the committee, and I know he will do well. And I think you will find this committee to be an ally, not an uncritical ally from time to time, but an ally in trying to build an IRS that is effective, customer friendly, and perceived by both internal observers and external observers as being an organization that works as it is designed to do.

    I want to also add my words, which I have done privately but want to do publicly as well; Art Gross I think was a very significant addition to the IRS. I want to congratulate him once again. I mention this frequently, but, unfortunately, not very many people hear it in America, the role that Secretary Rubin and Secretary Summers have played, and for the first time of any Secretaries that I have been involved in or Central Administration of Treasury, focused on how IRS is operating and how they can respond to assist in upgrading the management of IRS.
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    Art Gross was a very, very significant addition, very significant management decision that was made by Secretary Rubin and by Larry Summers. And, Art, I want to say to you that I have enjoyed working with you. I believe that some of the positive things that have happened at IRS, some of the observations that have been made by GAO this year, are a direct result of the focus that you brought to what we call tax systems modernization, what can be called modernization, whatever the name that applies, is to making sure that technologically we are able to do the job that IRS needs to do to ensure that this government operates hopefully in the black, but at least effectively and efficiently in collecting the revenues due and owed.

    Art, I want to wish you the best of success in whatever endeavors you pursue and thank you again for the contribution that you have made during your short, in my opinion too short, tenure at the IRS and congratulate you.

    I was one of those, Mr. Chairman, who sat down with Secretary Rubin approximately 18 months ago and said to him that I thought we needed a manager at IRS. Tax lawyers are great. I happen to be lawyer myself. I am not one of those who has a jaundiced view of lawyers, obviously.

    On the other hand, it is somewhat like education. We have some master teachers who are hired to teach children who are then promoted to principals and management, not so much because they have shown management skills, but because that is the only way we can pay them in the system.

    The analogy limps somewhat because the lawyers we were hiring to run IRS were good, smart, able people, and they would all make a lot more in the private sector than they were making in the public sector, unlike Mr. Rossotti, who I am sure got a raise when he took the Commissioner's job.
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    Mr. KOLBE. He says it facetiously in case anybody may have taken that with anything other than a grain of salt.

    Mr. HOYER. But I suggested to Secretary Rubin and to Larry Summers we needed a manager. We needed somebody who could bring business practice skills to the operations of the IRS, and, furthermore, that we needed somebody with tenure.

    I didn't mean tenure in terms of not being fired if they did a lousy job, but a long enough period of time in which to implement management decisions, not simply in the door-out the door, again in somewhat of a jaundiced view, to enhance one's private sector worth.

    And I say that with no criticism of prior Commissioners, many of with whom I have worked and I enjoyed my relationship with. But I think the fact that the Administration, Mr. Chairman, has brought in somebody with the management skills that Mr. Rossotti has is a very, very positive step forward, and I am pleased to see it.

    Your budget request is $8.196 billion, 99,829 FTEs, representing an increase of, as the Chairman has pointed out, 529 million or 6.9 percent. The Chairman observed it might be difficult to get that sum. I voted against the reform bill, which was the result of this report. I was one of four to do so. It was somewhat of a pyrrhic vote, a little bit quixotic I suppose.

    But what it was was a statement that I made on the floor, and sometimes, Mr. Chairman, your relevant statement doesn't get picked up by the press. But in this case, when it was reported in the Washington Post, my statement was that the relevant sentence was picked up.
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    And I said if you are going to be for IRS reform, you need to be for IRS reform at budget time, i.e., appropriation time, and at taxwriting time. And if you are not for IRS reform, at budget time and taxwriting time, you are not for IRS reform, notwithstanding the pretty words in a bill that passes that beats our chest and says we want to be taxpayer friendly.

    Of course, we want to be taxpayer friendly. But I want to tell you, Mr. Chairman, I am not friendly to people who cheat, connive, and commit fraud on their tax forms because they cause my kids and me and my family to pay more taxes. To some degree, I don't expect the police to have necessarily friendly relations with criminals. There are some criminals who commit tax fraud in America.

    Now, the four examples that were used by the Senate Committee out of thousands and thousands and thousands of people that were interviewed were egregious, and I hope we fire the people who were responsible for committing those abuses, Mr. Commissioner.

    We ought to be angry about them. I am angry about them. I am angry at those people because they undermine the credibility that 98 percent of the IRS employees are due for the hard work and conscientious work that they do on a daily basis. Mr. Chairman, I know I—oh, you are not getting—I thought you were going to start gaveling.

    Mr. KOLBE. No, not at all, Mr. Hoyer.

    Mr. HOYER. And I know I am going a little longer, but this is a critically——
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    Mr. KOLBE. I am listening with interest to every word.

    Mr. HOYER. Thank you, sir. The Chairman and I, you could say, have an extraordinarily good relationship. I have been blessed with having very friendly Chairmen and very positive Chairmen. The Chairman is one of the most positive people that we have in this Congress on either side of the aisle. And IRS and the other agencies that come within his purview are lucky to have him as Chairman.

    But in saying further, it is easy to pick egregious examples. When you have almost 100,000 people working for you and you are dealing with 128 million taxpayers, maybe more, in that neighborhood, people are going to mess up, and we need to get at that. And you are getting at that, and I think that is good.

    But on the other hand, we need to make sure, Mr. Chairman, that our colleagues understand that this agency is [a] critical and [b] needs resources to accomplish the very gargantuan task that it has been assigned.

    Furthermore, we are about to complicate the tax code even further if we adopt some of the proposals of this Administration, some of which I support, by the way. But I agree with those that say we ought to have a much simpler tax system because if we had a much simpler tax system, those 99,000 people would have a lot easier job. I heard Steve Forbes last night, Mr. Chairman, at the Business Council.

    Mr. KOLBE. I was there.
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    Mr. HOYER. Were you there?

    Mr. KOLBE. Yes.

    Mr. HOYER. And you heard him say nobody in America understands the tax code. They may understand segments of it because people pay them a lot of money to be up on it, but nobody understands the tax code. He makes the point that it is now over 7.5 million words long, as opposed to the Gettysburg Address and the Bible, which is less than a million words in length.

    Nobody understands the tax code, and IRS is not responsible for that. We are, the Congress, and the private sector, who all wanted special deals or a particular consideration, some of which, Mr. Chairman, as you well know, had very, very, very worthy objectives and have worked very well to accomplish the ends—economic, social, whatever ends that we wanted to accomplish.

    In any event, I want to congratulate you and thank you for agreeing to take on this task for an extended period of time. Five years I know is your contract. I hope it is longer than that, if need be—if you determine need be.

    Mr. Chairman, I am pleased with this GAO report that has just come out, which points out that right now the custodial financial statements are for the first time now in order. When I say the first time, maybe it has been—is it the first time?

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    Mr. ROSSOTTI. The first time.

    Mr. HOYER. That is a very significant step, and I want to say that has been accomplished through the efforts of myself, Mr. Lightfoot, and Mr. Kolbe on this committee, and all the members of the committee—Mrs. Meek and others—in saying to IRS you need to get your act together. The critics are not all wrong by any stretch of the imagination, as you know. So we need to admit, yes, we have got some things that need to be fixed, and we better be about the business of fixing them.

    But both this report and happily the more general report that you read from—in my opinion, I read the most recent GAO report as the glass is half full, as opposed to it being half empty in previous reports. They say that they see light at the end of the tunnel, that we are getting together. Mr. Gross, I think you are, as I said, in large part responsible for that step forward.

    Mr. Chairman, I look forward to going through this budget with you. There are obviously a number of issues here in dealing with a little bit of a spike-up in FTEs, but as you know, FTEs have come down very substantially, over 10 percent in the last five years, as we have done more with less.

    I know Mr. Rossotti in his testimony is going to say he intends to continue that, but we need to spike up a little bit because this report correctly—I don't want to be misinterpreted when I say there are crooks out there that I don't want to be customer friendly with. I don't want to be tough on them and make them pay up because I have got to pay up and my colleagues have to pay up, and they need to pay their fair share.
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    But this report correctly emphasizes being customer friendly. There is no reason why we shouldn't treat honest taxpayers who want to comply, but it is a complicated code, and they make mistakes or their spouse makes a mistake, why we shouldn't bend over backwards to make sure that they are good citizens, and we want to help them, not harass them.

    Now, perhaps I am haranguing at this point in time, and I do not mean to do that. But this is a very, very important issue. Yesterday, as I told Mr. Rossotti, we had some outstanding people—$3.2 billion law enforcement people in Treasury—critically important people. We had the cameras here. We had all sorts of things here. This is, in many ways—this activity funds them and funds everybody else.

    We don't have the interest here that we had on the four people in Mr. Roth's hearings. That is understandable. That makes good PR. But this is the focus. This is where we are going to solve those problems, and, Mr. Rossotti, we have a great deal of confidence in you and very high expectations for you.

    And I look forward to your testimony, look forward to working with you, and look forward to supporting those efforts which will allow you and your people to do the job that we expect in a manner that the taxpayer will feel good about. Thank you, Mr. Chairman.

    Mr. KOLBE. I want to thank my friend and ranking member for his comments. I could have just skipped mine and listened to his because I think they said it all, and I agree completely with what you are saying particularly about that if we are going to make the whole—not only the modernization, but the restructuring of IRS work, it has got to be done in this subcommittee. Mrs. Meek, did you have any opening statement?
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    Mrs. MEEK. Thank you, Mr. Chairman, and I would like to congratulate Mr. Rossotti for taking on this challenging endeavor.

    I want to say to each of you that a lot has been said before about IRS, but we need the IRS. I am convinced that we need it. We need a reformed IRS, but I would like to say to you that computers and things will not make IRS what it should be. It may bring you up to date with all of the new data and technology, but it will not maintain the credibility that you aspire for.

    Only people will do that, the people who manage the agency, the people who work with the people, the people who give service to the people. So it is very good to know that you are ready now to take on some changes within the agency.

    I noted that from 1995 to 1998 the number of your employees fell by 10 percent, and that your total funding grew by only seven percent during the last three years. You barely kept pace with inflation. Now, your new budget does speak to that, and that you are asking for $8.2 billion, an increase of seven percent over this year's level.

    I think this committee should give you that. They have given you a mandate to improve. They have given you a mandate to reform. And along with those mandates should go the kind of funding you need to do the kind of upgrading, to improve the credibility of the IRS. And I am sure that my Chairman and the ranking member are going to take that into consideration. And if they listen to me, they will.

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    Mr. KOLBE. Mrs. Meek, we always listen to you.

    Mrs. MEEK. Thank you. I repeat that the good, conscientious service that I know you must give is going to be there. And I also want to congratulate Mr. Rossotti and the members of your management team for reaching out in the community and establishing citizens advisory councils so you can get feedback from the people. I think that is essential. And I want to congratulate you and tell you Godspeed. Thank you, Mr. Chairman.

    Mr. KOLBE. Thank you very much, Mrs. Meek. Well, we have done all the talking. It is your turn, Mr. Commissioner.

    Mr. ROSSOTTI. Thank you very much, Mr. Chairman, and distinguished members of the committee. I just want to say on a personal note that I really appreciate the welcoming and generous comments you have made about me. The only trouble is it makes me lose even more sleep because I keep worrying about how I am possibly going to live up to all these expectations, but I am going to do the best I can.

    What I would like to discuss——

    Mr. HOYER. It is a motivational technique.

    Mr. ROSSOTTI. It is a motivational technique. What I would like to talk about in my oral testimony is to summarize how I think we can use the FY '99 budget as a start in transforming the IRS into the kind of agency that I think we all want, which is one that provides the right kind of level of service to taxpayers while, of course, also ensuring the compliance is fair. And I think we can do that while actually continuing to shrink the size of the IRS in relation to the economy, which is something that hasn't been happening. I believe that is possible to do.
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    I think the essential shift that we need to make at the IRS is away from solely a focus on the internal operations of the IRS itself and make it an agency that is like a lot of modern businesses are, which actually looks at things from the taxpayers' point of view and tries to help taxpayers solve the problems that they encounter in attempting to cope with the tax code that does exist on the books. And I think that the budget that we have before you is a start. I have said many times that I think this is a long-term effort, but I think this can be a start.

    In order to accomplish the kind of goals that we need, we are going to have to modernize pretty much top to bottom the business practices, the organization structure, and the technology. And these are going to take some investments over a period of time, both in technology and in the organization itself. And so the FY '99 budget is a start in this direction.

    Although it is a long-term effort, I think we have to make progress step by step. We have to deliver some things right away to the American taxpayer, and there are some key service improvements, some of which we have already started to do, and more which we can do with your help with this budget in '99.

    But before talking about the budget in detail and some of the near-term steps, let me just briefly describe some of the concept, which is in more detail in my written testimony, which I think sets kind of a direction of where I think we need to go to make these kinds of things happen.

    There are five areas of change that I believe encompass everything we need to do over the long term at the IRS, and these are summarized on the chart that is in my written testimony, chart two. But the first one of them is really to revamp all of the business practices of the IRS.
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    These are everything from the way we educate taxpayers, the way we file, the way we collect money, the way we enforce compliance. If we emulate the things that are known to work in the private sector, all of these practices have a great deal of prospect for improvement. I mean, that is the good news.

    And I think one of the key principles here is that we need to do a better job of understanding specific problems for different kinds of taxpayers. I mean, college students and senior citizens and small businesses and large businesses, have really quite different kinds of problems. And, as a matter of fact, different parts of the tax code apply to these people, not the whole code to each person.

    So I think if we can adopt that principle and try to tailor these practices to each group of taxpayers, over time we can dramatically improve the level of service and also our compliance to taxpayers.

    I think in order to do that, we are going to have to rethink the entire organization structure of the agency. The structure that exists today, which consists of 10 service centers, 33 districts, four regions, a national office, and three computing centers, is very complex. It has been built up over 45 years, and there is a chart which I think pretty well shows how complex it is.

    I think most of the managers in the IRS agree that although not everyone may know exactly how to do it, they know that this structure really does not allow us to fully achieve the goals that we want for the agency, nor I believe will it enable us to succeed in the modernization program. And some of the points in that GAO report actually made that point.
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    I think what I have proposed as a logical way to deal with this problem is to simply take a play out of the playbook of most of your large private sector companies and simply divide up the taxpayers into logical groups—there are actually four that make a lot of sense—and put a management team in charge of understanding those particular problems of those taxpayers and solving those problems.

    We can then convert the national office to more of a corporate-style office, which wouldn't have to be as large, and which I think could then do a better job of fulfilling its oversight responsibilities, as opposed to being sort of a mixed staff and line operation as it is now.

    And as you can see from chart four in the testimony, there are four groups of taxpayers that fall pretty logically. You have 100 million filers that are individual wage earners. You have small businesses, which are very particular kinds of taxpayers and where some of the most significant problems are right now in terms of service.

    You have large businesses, which have a different set of problems in regulations and multinational operations, and then you have an enormous tax-exempt sector, which has still a different set of problems.

    If we can set up a management team that would have full responsibility for serving each of these groups of taxpayers, one of the big benefits that we would get is that these management teams would be able to really understand more specifically the problems of small business, the problems of individual taxpayers, and would be able to be held accountable to a much greater degree than people can be held accountable today in this complex structure.
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    I think that there would also be more attractive roles for people to come in from outside the agency, as well as be developed inside the agency because they would be more clearly responsible for a particular set of activities.

    We have had a lot of problems with performance measures that have been highlighted in a number of hearings, as your members know. It is essential in any organization to have performance measures, and the key thing, of course, is that they have to measure what you really want. And we want taxpayers to be satisfied. We want compliance to be fair. And we need our employees, who are the people, as Mr. Hoyer said, to actually deliver the service to the taxpayers, to feel that they are getting what they need.

    And, finally, in order to deliver to the American taxpayers broadly, we need to do this in a way that uses our resources in a highly productive way. I think performance measures can be devised that can do that. I don't think we have them today, but we are going to work very hard. And I think the structure—this modernization concept—provides us a way to move in that direction.

    And, finally, of course, of great concern to this committee is the need for new technology. We absolutely need to replace the old base of technology which exists in the IRS today and which really does not adequately support our business; to build new computer systems that try to support what is essentially an obsolete set of business practices in an excessively complex organization structure that will not work—again, this is a point that GAO correctly observed in their report.

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    What my colleague here, Mr. Gross, has done in a remarkably short period of time is to begin to establish the right kind of a professional information systems organization. It needs more work, and that is part of what we need in the '99 budget. He has also issued a technology blueprint, which I believe is at the appropriate level of detail, and which provides the guidepost as to where we need to go longer term.

    I think that the revamped business practices in the organization structure that I have discussed will be the other missing piece that we need to have in place in order to successfully implement the blueprint. And, again, I cite the GAO report, which I think basically in not quite as much detail said essentially that same thing.

    Let me now shift a little bit to how we can begin this process in '99. I indicated that it will take a number of years to accomplish all of these changes, of course, but we need to deliver some things in the short term. And, of course, in the short term we also have some mandatory requirements of which the two most important are to accomplish the century date change update to our computer systems and also the tax law changes that have been recently passed in the recent tax bill.

    So to accomplish this, as well as move in the direction that we want to go longer term, we have put forth for fiscal '99 basically five areas of initiatives, five particular things that we have to focus on in '99. The first one is just completing—I say just—it is a huge job—completing the century date change program. And this, of course, is one of the most critical elements in the '99 budget.

    Because of the way that the schedule works in the IRS, many of the renovations to our systems that need to be done will actually have to be completed this calendar year—in other words, before January of '99 when the next tax season starts. Then during '99 itself, during calendar year '99, we will have a huge job of completing the testing and the certification.
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    And there is $234 million in the FY '99 budget request for this century date change program, which is obviously an essential element so that we really can continue the basic operations of the IRS without the kind of major problems that would exist if we didn't accomplish this.

    A second major area for fiscal '99, Mr. Chairman, is just making some highly focused improvements to service to taxpayers. And these are in areas such as clarity of notices by rewriting some of the forms and publications and notices; better phone service; more walk-in service in retail locations; expanding electronic filing where are making good progress, but we have a lot of way to go; improving the training of customer service representatives, which I must say is one of the most important areas of all in terms of not only delivering service to taxpayers accurately, but also keeping our employees in a state in which they feel comfortable in actually delivering service.

    There is nothing that makes the employees feel more under pressure than being caught between taxpayers who want accurate information on the tax law and not having the materials and the information they need. And believe me, I have heard this from many employees.

    We also want to do some things for small businesses and begin the increased staffing for the taxpayer advocate office and the creation of the citizen advocacy panels, which Mrs. Meek mentioned. The total cost for these, and they are detailed in chart five of the testimony, is $103 million in FY '99.

    Third is that we need to do some things in the very near term in fiscal '99 to invest in some important near-term technology initiatives simply to maintain an acceptable level of service. There is just a certain amount of investment, in an organization the size of the IRS that needs to be made.
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    These are listed in the testimony. Some of the more important ones are a new call router, which is part of the customer service improvement program for phone service; deploying some computers to field collectors who don't have any computers at all right now; and replacement of some of the computers for the field agents who go out to customers' offices and who depend on these computers so they can do examinations in a reasonable period of time.

    And, finally, the one other place where Mr. Gross put a lot of emphasis on and still, as GAO has noted, needs a lot of work is what we call product assurance. This is testing these computer programs before we put them into production and start sending out material to millions of taxpayers. And we are not at an industry standard right now on that, and we really need to do something about that quickly. So you can see in chart six in the testimony all of these near-term investments.

    And, fourthly, there is the beginning of the long-term program, which is going to take a number of years to actually replace the base of technology that we have today. The blueprint was a very important beginning. We have under Mr. Gross's leadership begun to establish what is called a methodology of systems life cycle to manage this. And we have recently just finished what we hope is the final draft of the RFP for the Prime contractor. And we are really expecting to issue this to the contractors before the end of March.

    In '99, we will continue this step by step, carefully managed process of long-term modernization by strengthening, as GAO has said we need to do, some of the management capabilities, the systems life cycle, and the other internal management processes. And we will work with the Prime once the contract is awarded on two subreleases, which are two individual projects that are the first two in the blueprint.
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    These are relatively small. Nothing is that small in the IRS, but there are relatively small releases that focus basically on generic telephone and communications operations that will be essential no matter what we do elsewhere. And chart eight shows the FY '99 budget for the long-term items.

    And, finally, we have an item in the budget, $25 million, to begin the support of the organizational changes that I outlined. These will be the kind of funds that will be needed to complete the planning, as well as to begin potentially recruiting and relocating and retraining some of the people that will be required to have their jobs changed as a result of the modernization.

    We have a management consulting study that we are about to begin with the aid of an outside firm that will help us to provide more detail around these organizational modernization matters. And as the Chairman requested, we will be in very close touch with the committee over the next four or five months as we go through this study. We will obviously provide more details on what we propose to use the money for in fiscal '99.

    Finally, let me just conclude with a little bit of a historical perspective. As I came in as the new guy on the block. I tried to look back a little bit and see what has happened, and there are some charts in there, charts nine and ten, that really show what has happened to the IRS budget over the last three years.

    And it actually has declined about seven percent in actual dollars, while the amount of money that is collected has gone up by about 24 percent, and the number of returns has increased by eight percent. And, of course, we have now got 800 tax law changes from the tax law that was just passed.
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    And these changes and these increases in activity do ripple through the entire system of the IRS, not just the processing and returns, but all the people who are answering phones who have to be trained and the auditors, the forms and publications, and the technology.

    So, you know, we have had somewhat of a conflicting trend here, and I certainly understand why this has happened and why there has been a cut in the budget for the IRS over the last few years. But it does present some challenges for us as we move forward.

    Let me say, however, though to the committee that I am not one who believes that money is the only answer to these problems. I do not think that at all. And I think that in order to really solve the problems of the IRS, yes, we are going to need the assistance of the committee to have appropriate money for the right purposes, which we hope we can justify to you. It will only produce the results that we seek if we can do the other things that we need to do from a management standpoint, which I have outlined in terms of business practices, organization structure, and, of course, technology.

    So let me conclude and say I hope it is a new day at the IRS. I think people in the IRS want it to be a new day actually, and I really believe that we can transform the IRS into an agency that views its mission as helping taxpayers meet the obligations that they have because there are tax laws on the books while ensuring that compliance is fair so everybody pays their fair share.

    And I even believe that we can do this while actually improving our productivity and actually shrinking the size gradually of the IRS in relation to the size of the economy because the economy is growing. It will take some investments in improving the organization and some technology, but I believe that with the support of Congress, as well as the Administration, and certainly I have gotten that so far in my short tenure, I really believe it can be done. So that is a summary of my thinking, Mr. Chairman, and I am certainly more than happy to answer any questions that you or the members have.
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    [The statement of Mr. Rossotti follows:]
    "The Official Committee record contains additional material here."

    Mr. KOLBE. Thank you very much. I think that statement was certainly very helpful to us and, I think, gives us some of the structure for some of my questions and I suspect others on the subcommittee. And we hope that this questioning will be helpful for both sides, for us to understand your work and your efforts and for you to understand some of the concerns that we have.

    Let me begin with some questions on the modernization proposals—your concept. I am intrigued with—and you talked to me when you were in my office about your concept of restructuring the IRS. By the way, the four areas that you are talking about, that would be both taxpayer service and enforcement in each of those areas—for example, large businesses? You would include service to large corporations, but you would also include collecting the taxes from them. Is that correct?

    Mr. ROSSOTTI. That is exactly right.

    Mr. KOLBE. You don't separate enforcement from the service?

    Mr. ROSSOTTI. No.

    Mr. KOLBE. Is there any dichotomy there, that the same people doing the—going out and nailing people for taxes are also providing the services?
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    Mr. ROSSOTTI. Well, I think that when you look at it though, what you find out, Mr. Chairman, is that in any business that I am familiar with, you have different functions in order to provide a complete round of service to a customer. Take a bank. You have people lending money, and then you have people collecting money, just like we do.

    I think the most important thing is to recognize that what you want to do is understand the problems of that particular customer, and you want to tune all of your resources, whether they be helping the taxpayers understand how to file returns, or also helping them to stay in compliance. You want to have a set of people who are responsible so that taxpayers—or customers if you were in a bank—don't get bounced around from one person to another.

    This is one of the biggest problems that created, for example, the four taxpayers who testified at Senator Roth's hearings. They were being bounced around from different districts and service centers and other people that were responsible. So the idea would be that you have a management team that would be responsible for everything that is required to provide all of the services that are needed for a taxpayer.

    Now, we have more work to do with the aid of this management consultant, we would certainly have, you know, some subdivisions of responsibilities within each of those. You would have, you know, one set of——

    Mr. KOLBE. I guess that is what I was trying to get at. So even though they would be in the same management team, there would be some subdivision? I am just thinking of the guy——
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    Mr. ROSSOTTI. Yes, there would be.

    Mr. KOLBE [continuing]. The small business guy who calls up and asks for some advice, and the next week the guy who gave him the advice at IRS shows up on his doorstep and says, hey, you know what you told me last week, I want to audit you now and all that.

    Mr. ROSSOTTI. No, it wouldn't be like that. I mean, obviously you would break it down. I mean, just like in a bank, you have a different group that collects money. But, you know, most of the taxpayers don't deal with the people in compliance. I mean, there is only one percent of the taxpayers that are ever audited, and there is a tiny percent that ever get in collections. So, I mean, you don't want to make the whole——

    Mr. KOLBE. A lot of people worry about it.

    Mr. ROSSOTTI. They do.

    Mr. KOLBE. Which is what they are supposed to do, of course, worry about it, and you want to make sure they all worry about it.

    Mr. ROSSOTTI. Well, you know, I think that my view is that most people are willing to pay their taxes. And they may not like to do it, but they are willing to do it. And, as Mr. Hoyer said, we should not treat the majority of people who are willing to do it or even may get into trouble from time to time for some reason that they are willing to acknowledge, we should not treat those people as people who are recalcitrant and unwilling. And, I mean, that is the thing that we have to try to turn around.
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    Mr. KOLBE. Back to your plan, your reorganization plan or your modernization plan. You have said you are going to do a study to validate the concept. First of all, you might give me a little understanding of what validating the concept is, as opposed to actually—or is that designing it, and what is your schedule for that?

    Mr. ROSSOTTI. Okay. That is a very good question. As a matter of fact, we have spent most of this week meeting with the consultants and talking about those topics. At this time, we don't have all the answers to many questions that we need to—for example, the kind of questions you were asking—would compliance within one of these units be separate from service and so forth—we don't have those answers yet because we have only designed this at a very high level.

    We need to go down one more level of detail in order to understand some of the answers to those—not every detail but enough to be able to ensure that there aren't any fundamental flaws or problems with this; to actually compare it more specifically to practices in the private sector, which is what we are trying to emulate wherever we can; and then to get some better cost estimates of what we have to do to actually make this happen.

    And those are the basic things that we are trying to do. We are going to hire—through a competitive process—one of the large management consulting firms to study the existing organization, to study the proposed concept, and to compare it to private sector practices, to basically give us their views as to whether and how we could do this, how long it might take, and whether it would, in fact, in their opinion, meet the goals that we set out for us.
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    And that is what we are going to do over about the next four to five months. Now, that will not provide all the details. That will not provide every detail to every answer. It will give us, however, I think enough assurance to know whether it makes sense to actually proceed in this direction.

    Mr. KOLBE. Well, I am trying to get a handle as to whether or not you would expect some of the—if this works and it is validated—whether you would expect to begin to implement that in FY '99? In other words, does this budget proposal contemplate that you will be doing that reorganization or that structure modernization?

    Mr. ROSSOTTI. It contemplates that we would begin in a small scale way in FY '99. We would have to begin to do a detailed plan. Even after this first four or five months, assuming we go forward, there is a great deal more of detailed planning to figure out. I mean, there are 100,000 people in this organization. You know, there are 10 service centers. There are many things that would be changing if we move with this concept.

    So in FY '99, of course, I am anticipating the results of this study, but assuming it works, we would be going into a much greater level of detail of exactly how to implement this plan from where we are now to get to the new concept. And we would I hope begin to make some of the moves to actually implement it in FY '99 after the 1999 filing season. And then, of course, in the following year, it would probably be when the biggest number of changes would take place.

    Mr. KOLBE. Well, we will need to know whether that is going to mean a supplemental or a reprogramming or what kind of changes would be required for that. I have so many more questions. I will come back. I want to try to keep everybody to the five-minute rule, and that way we can keep going through and get different rounds of questioning. But I will turn to Mr. Hoyer.
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    Mr. ROSSOTTI. Could I make just one final comment, Mr. Chairman?

    Mr. KOLBE. Yes, of course.

    Mr. ROSSOTTI. I just want to assure you that we hope to keep in very close touch with you and your staff during this next four or five months.

    Mr. KOLBE. I certainly hope so.

    Mr. ROSSOTTI. We will be sharing everything that we are doing in this way.

    Mr. KOLBE. Good. Thank you.

    Mr. HOYER. Thank you, Mr. Chairman. I mentioned the Roth hearings, which were dramatic, highly publicized, and brought forward egregious actions about which Americans were and should have been angry. What actions have been taken with respect to those particular cases? What adverse personnel actions have been taken—I don't want the names per se—as a result of those cases? And what are we doing to preclude them happening in the future?

    Mr. ROSSOTTI. Those are sort of two questions. With respect to what we have done, not only with those cases, but with other potentially abusive kinds of situations, we have—and some of this was done before I got there—launched some rather intensive internal audit and then some internal security investigations in a number of different districts to determine whether taxpayer rights were abused and whether the taxpayer bill of rights was not followed in a serious way.
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    Some of those audit results have already been made public. At the audit result level, they are being followed, and they did conclude that, in fact, there was misuse of statistics and mismanagement of some of the seizure activity, for example, in certain districts, which was certainly a very troubling finding.

    Following up on that, we have had internal security, which is the other arm of our inspection service, investigating certain particular cases of employees, managers—primarily at the management level—who may have been responsible for this. In those investigations, the first ones are just being completed right now.

    Now, the special thing that we have done in addition to the investigations and audits though is that because these things did cover a number of different areas of the IRS and had persisted for a number of years, in order to be totally objective in understanding what kind of actions to take on these reports, we should get some input on this from outside the IRS.

    So we have set up a panel of three senior government officials, two of them from outside the IRS. One of them is a senior official from the Customs Service, the other one is from the Justice Department, and the third person is from the IRS.

    This panel will review all the results of the investigations on these initial cases and will make a recommendation as to what kinds of actions should be taken, if any, for the individuals involved. And then there will be, as is called for by the Federal Personnel Rules, a citing official who will also be outside the IRS—a Treasury official—who will make the final decision on what to do about this. So we are taking it very seriously.
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    We also want to be very objective about this and not go off the track in either direction the wrong way, either not take it seriously enough and not implement enough sanctions if they are required, but also not to overly be unfair to the employees. We want to make sure that we are completely fair, and I thought this process, which is a very extensive process compared to other things that have been done, was the best way that we could respond to that.

    Mr. HOYER. Mr. Commissioner, I think it might be useful if you provide—if not wide dissemination—that is, every member of Congress—but certainly to the relevant committees, the Ways and Means Committee, this, the Appropriations Committee, and the Finance Committee, and Appropriations Committee on the Senate side—either in-room sort of progress reports on those.

    Because I think the American public had these hearings, Newsweek, Time, you know, they were front page, and one of the things I think citizens get frustrated about is they hear about problems, but they don't hear about solutions. Because the problems, of course, are a lot sexier and sell more magazines, and I understand that. We all understand that.

    But we need to convince them that, yes, we are angry about it too, we are concerned about it too, and we have responded and we have solved this problem, or we have addressed this problem. Particularly, with respect to—I just asked staff whether we had an interim report from IRS regarding the four cases that were spotlighted.

    Mr. ROSSOTTI. Yes. We did respond to the Senate Finance Committee on what has happened on those four cases.
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    Mr. HOYER. I am sure the Chairman would like—I know I would like to have a copy of that response.

    Mr. ROSSOTTI. Okay. We will do that. We can do that. And there are other things that we are doing besides that. We have been basically doing it back to the Senate Finance Committee because they have been the ones——

    Mr. HOYER. That makes sense.

    Mr. ROSSOTTI. But we will give it to you, and some of it is a work in progress. I guess the other big point I wanted to make is that besides these individual cases, we have also really pulled the whole statistics business back and have withdrawn all of those statistics that were being used to measure districts. We haven't got the new ones in place yet. We are working on figuring out what they are going to do. But, in the meantime, we are not going to use those enforcement statistics as they were used in the past.

    Mr. HOYER. I have got a lot of questions. Let me ask one more question in this round. You referenced it but can you be a little more specific about the impact you foresee at least preliminarily on the workforce by the modernization plan?

    Mr. ROSSOTTI. The long-term concept?

    Mr. HOYER. Yes.

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    Mr. ROSSOTTI. Of course, we are still studying, but basically what I believe from looking at information from the private sector that I have seen in other institutions as well as what I can access from the IRS, is that on the one hand we have an increased workload because the economy is growing, which ripples through everything, as well as the tax law, and, of course, we have a huge service deficit. I mean, we are just not providing the service to the taxpayers on a number of fronts where we need to be providing it.

    But at the same time we have an opportunity to improve productivity through a number of different things such as all these revamped business practices, better filing, new technology. And I think that what we can do over a period of years, is handle the increased workload of the economy.

    And I think we can dramatically improve service with basically the goal of keeping the workforce stable, not increasing the workforce, investing in the workforce for better training and better technology, not through more people. Now, we have a very slight requested increase mostly for temporary folks this year to answer the phones, but it is on the order of one percent.

    Mr. HOYER. That is what you referred to as trying to meet the service deficit——

    Mr. ROSSOTTI. Yes, exactly, the service deficit.

    Mr. HOYER [continuing]. Which is what the report wanted to accomplish.
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    Mr. ROSSOTTI. But basically if we can do that, I think what we will be doing is shrinking the IRS in relation to the size of the economy because the economy is growing quite rapidly. And, you know, as has happened in the last number of years, the IRS has shrunk in relation to the size of the economy, but, unfortunately, it has not met the service goals that we seek.

    So I think the big difference is that we need to do both. We need to not only shrink it by having the economy grow while our workforce, more or less stays stable, but we need to do a better job in providing service.

    Mr. HOYER. Thank you.

    Mr. KOLBE. Mrs. Meek.

    Mrs. MEEK. Thank you, Mr. Chairman. In your testimony, Mr. Rossotti, you mention the fact that the workforce had been reduced through attrition and buyouts and resulting in less than optimal deployment. And what is critical here to me in your statement is in your historical perspective, you mention there are fast growing economic areas of the country.

    Those with the highest demand for IRS employee skills have seen the largest reductions in the workforce. In places where the demand for IRS employees was weakest, the opposite has been true. Now, in terms of your management strategy, how are you going to accomplish that or balance that out?
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    Mr. ROSSOTTI. Yes. Well, I think that that is a very significant issue that is going to take, a while—a number of years to resolve. Part of it has to do with the organization. I mean, right now these people are divided up into these 33 districts and 10 service centers.

    And while there is an attempt to balance across the country, it is quite difficult because of the fragmentation of the organization. I think if we can begin to look more broadly across the whole nation at different groups of taxpayers, we will get a better picture of where we need the resources and how we can use them.

    The other thing simply though is that if we can't stabilize the workforce, what we can do with attrition and replacing people that are leaving, we can put the new people in the places where we need them the most, as opposed to not doing that. So we are going to have to work on this.

    I would say it is going to take a period of four or five years at least of sustained effort to gradually deal with balancing and getting the people in the right jobs and the right places.

    Mrs. MEEK. And the second question is relative to the first one a little bit. You also mentioned that across the board many of your workers need additional professional training to do their jobs well, to keep up with the tax laws. Explain to me what your training program is like and how your budget addresses that concern.

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    Mr. ROSSOTTI. Okay. Let me just make some general comments, and then I am going to ask Mr. Dalrymple here to say a few comments about it. There are a number of different training programs for employees. But I think that what has happened over the last few years just at a general level is that there has been an increasing number of changes to the tax law. As we know, there is a lot of them now.

    And there has been an increasing number of regulations and other kinds of procedures to implement those tax laws. And then on top of that, we have been trying to improve the level of service by putting more people on the telephones to be able to answer questions from taxpayers.

    And what has happened is that the demand for the service has exceeded the ability of the IRS with the programs that it has in place to actually provide materials and training and information to the front-line workers. And this has caused a great deal of stress in the workforce, but, most importantly, it impedes our ability to provide good service to the taxpayers. Let me ask John to answer a few more of these things on training.

    Mr. KOLBE. Mr. Dalrymple, just for the record, would you identify yourself?

    Mr. DALRYMPLE. I am John Dalrymple. I am the Acting Chief of Taxpayer Services, Acting Chief Compliance Officer of the Internal Revenue Service. I guess what I would say to really address your point, Mrs. Meek, is to talk about what we are going to do, as opposed to what we haven't done because I think that is probably more important to you.

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    We have seen a substantial deficit in our training abilities over the last couple of years, and we have really tried to address them specifically this year, and then ongoing in 1999, and then try to set sort of a mark, if you will, that we will maintain for training purposes.

    And I think the restructuring report that was done and other studies that have been done recently have rightfully criticized us for not providing adequate training to our technical employees, folks who are doing examination, collection work, and, in addition, our customer service employees. So we have tried to react to that.

    In the '99 budget, specifically we have asked for about 300 FTE that will allow us to train our customer service representatives, while at the same time ensuring that we maintain the ability to answer the telephones as people are calling us.

    And in addition to that, I think we have somewhere in the neighborhood of $70 million we have asked for in training and specifically in the budget, which will get us back to ensuring that all of our technical employees have appropriate CPE, continuing professional education, each year, that basic and advanced training is provided to all the employees who need it each year.

    And I think once we do catch-up this year, which we are doing—we have actually diverted some funds into training this year—it will put us in a pretty good stead next year if we are able to get the budget we ask for in training and then maintain that over the long haul.

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    And as the Commissioner mentioned earlier, we have what we consider to be some temporary needs in 1999, specifically in customer service, which will allow us to train and not allow our level of service to diminish, which I think is everybody's objective here.

    Mrs. MEEK. Thank you. Thank you, Mr. Chairman.

    Mr. KOLBE. Thank you. Mr. Aderholt.

    Mr. ADERHOLT. I don't have anything right now.

    Mr. KOLBE. All right. We will go to round two here. I have a couple of other questions—I am still not quite finished here on your concept of modernization. We have tax systems modernization. We have the congressional restructuring, and I am going to call yours the reorganization, just so we keep these straight. I have a couple of other questions on your proposal for reorganization here.

    Specifically, I wanted to ask how it relates to those other two, to the congressionally driven restructuring legislation and also to the tax systems modernization. Are there specific elements of this restructuring legislation that you believe will be critical for you to have in order to carry out this reorganization?

    Mr. ROSSOTTI. Yes, Mr. Chairman. Actually, there are and we have been working right now with the Senate Finance Committee on these. We do need some additional authority, some language in there that would allow us the authority to do this reorganization.

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    The current code has little references all over the place to the current IRS organization, and there is some technical language, but it is very important language that we need to just provide authority to be able to do this kind of a reorganization.

    The other that is more of a substantive point, and there is a provision in the bill that the House passed, but we really were going to try to broaden a little bit, and add some additional provisions to bring in some senior executives from the outside.

    I think that one of the things that will benefit the IRS as we go forward here is to bring in selectively, not in mass quantities, but selectively some individuals, some senior executives, and it is a little bit difficult to do that right now with the legislation. So that is the other key provision.

    Mr. KOLBE. Well, let me just turn the question around on the other side then and ask about the tax systems modernization. Is that also critical to this, or is that a little different?

    Mr. ROSSOTTI. Yes. I think that the tax systems modernization, the technology blueprint, as we call it, which is actually a very good term, is one of the dimensions of what we need to do to basically make the agency what it is. And as many people have observed, including most recently GAO, technology in an organization like the IRS does not exist in a vacuum.

    It is not something that you go off and build and then, you know, some day it comes back. It is part and parcel of the way the organization works. And there have been a number of organizational problems I think that have impeded our ability in the IRS to successfully execute a technology modernization program on the huge scale that is anticipated here. And basically I view that there are two organizational problems that I believe will be addressed by what I have proposed.
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    One of them is to just basically complete a process that has already been underway, to actually have a centrally managed and professionally staffed information systems organization. And Mr. Gross here, my colleague, has begun that process, as you noted. It is not complete yet, but as part of the proposal I have, we would complete that, and we would end up having ultimately a single professionally managed information technology organization, which would be supplemented by the Prime contractor for the development effort. So that would one of the issues that would be resolved.

    The other one though is you have to have clients. You have to have people on the business side, the people that are actually running the operations, who work very closely with the technology organization and actually have built new systems because that is a what a system is. It just codifies the way that business is done, the way the structure, the process is worked, and the way you talk about collections, for example, I mean, a computer system has to support collections.

    Right now we have three different kinds of collection groups that are spread over 43 different organizational units. If you try to build a computer system to support that, you have major problems. You really are going to have a very difficult time succeeding.

    By focusing this organization in much simpler terms and with people who are specifically knowledgeable about a particular set of taxpayers' requirements, I think we will complete the loop. We will have the final piece that we need in place in order to really make technology modernization work.

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    Mr. KOLBE. You have put into your budget $25 million, basically as kind of a placeholder I guess you would say. Do you expect to use that to begin to implement these reorganizational changes? And, if so, what do you think the full cost will be, or do you have any idea?

    Mr. ROSSOTTI. Well, this is—honestly—that is why we are doing this study, Mr. Chairman, and really I know that we will have costs in '99, and they will be partly to complete the planning and to begin the initial steps. But until we complete the study, which we hope to do by early summer, as I said, we will be sharing this with you every step of the way, I can't say precisely, you know, what that would be.

    I know that we will have to do some additional planning work. We will have to use some consultants to help us do that. We will begin to recruit some people from the outside to help to fill out these new units. And we will be undoubtedly relocating some people. Those are the kind of things that we will begin to do in FY '99. And we will certainly get back to you with more detail on that, you know, by early summer.

    Mr. KOLBE. I want to get back to the Y2K in my next round, but my time is up. Mr. Hoyer.

    Mr. HOYER. Thank you, Mr. Chairman. I think you have taken some significant steps, and I want to commend you on the proactive efforts that IRS has taken to improve customer service. Clearly, that is critical. We have got to have our people thinking that we are serving them.

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    Again, I am not talking about the bad guys who are consciously, with intent, trying to defraud us. That is a different category of people. It is the overwhelming majority, 90 percent plus maybe, of the people who don't want to comply, but they are prepared to comply and trying to figure out how to comply best with paying as little as they have to pay, which makes them like all the rest of us.

    To that extent, I participated with you in the first customer service day; went to Baltimore; very, very positive effort. Can you speak just a little bit about our problem-solving days, and the effect it has had, and where you think that effort is going?

    Mr. ROSSOTTI. Yes. That was almost the first thing I did when I took office. It was literally the second day I think I was in office. We have instituted these problem-solving days around the country. They have continued every month in every district, and they have been moved into different towns or cities in each of these districts in order to accommodate different taxpayers. And they have been not all on the same day because in different districts, some people like to do it on Saturday, and some people like to do it on weekdays.

    But the effect of this—I think at this point we have served about 17,000 taxpayers, and we have had an independent consultant do a survey of these taxpayers to basically determine whether they were satisfied with the service they got. And I must say we got extraordinarily good results on that. I think the first survey I saw showed that on a weighted average it was about a 6.4 out of 7 score that the taxpayers gave us.

    And what is interesting to me about that is that we got these scores from the taxpayers even though a significant number of taxpayers did not actually get the resolution that they were hoping for. I mean, as you can imagine, some taxpayers were hoping that they would find a solution that would require them to pay less money than they wanted to, and that wasn't always possible.
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    And, nevertheless, they did give us these scores for providing the right kind of service to them. So I think it provides kind of a model. I think these problem-solving days provide an excellent model of the kind of behavior that we want to encourage in the IRS longer term.

    Mr. HOYER. I think that the 6.4 out of a 7—I don't know what our score was in Baltimore, but as you recall, we had a number of taxpayers who were extraordinarily pleased because we paid attention to them and listened to them.

    One of the frustrations is, I don't know about the rest of you, I hate when the answering machine answers the phone to my call. It just drives me bonkers, and I know it is very efficient. And I sometimes hang up and then say that was stupid, I should have left the message. It would have saved me time, saved the other person time, et cetera. But we like to know that, you know, whatever our problem is it is very important to us, and that I thought was a very good step forward for us.

    You have asked for $103 million. And, by the way, the Chairman has gone to vote. He will come back. When it gets down to five minutes, why don't you let me know, and I will recess. And then as soon as he gets back, we will continue. The $103 million—you have talked about the $103 million, but if you don't get the $103 million or a significant increment of that, what is the impact on customer service?

    Mr. ROSSOTTI. Well, you can look at the items—I mean, I think you can probably see it for yourself pretty well by just looking at this chart, which is chart five. It is really quite specific as to what we are going to do. The biggest item has to do with phone service.
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    I mean, even though we have improved phone service a lot in this filing season, we are still not providing a level of phone service that is anywhere comparable to the private sector. People call up their Visa card, and then they call IRS the same day probably, and if they have more trouble getting through, they think we don't do as good a job, and they are right.

    So the big part of this is improving phone service, which includes some technology improvements, a device called the call router, which will help us to move calls around the country to where they can be best serviced, as well as to provide some more staffing in order to get our level of access up.

    And then, of course, the customer service training that is down here, which is the second biggest item, is directly related to that because that is the point that John here was mentioning. If you put people on the phones to answer questions from taxpayers and you don't train them as to what the answers are, you are not helping the taxpayer and you are not helping the employee. So those are the two most important things.

    Now, some of these other ones, the next biggest one here is the taxpayer advocates, office. As a result of the successful problem-solving day, as well as some of the other publicity about the IRS, people have come to expect that this service will be provided to them, which is what we want. But we have to provide some additional staffing and some additional phone lines and things like that for people in these taxpayer advocate's offices. So if we don't get this money, obviously we are not going to be able to do these kinds of things.

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    Mr. HOYER. Would it be correct to observe then that if we don't get the $103 million, we are not going to be able to accomplish the objectives that this very useful report, although I voted against the bill—and I may vote against it when it comes back from the Senate if it isn't a decent bill—but very useful report. I thought this crowd did a good job. The Kerry-Portman report I think is a very useful, positive contribution.

    But as I said on the floor when I voted against it, if you are not there at budget time and not there at taxwriting time, adopting a bill which says we are going to modernize and have reform is somewhat specious and a little bit of demagoguery, maybe a lot of demagoguery.

    So am I correct—because we are going to have to argue this. The Chairman is right. We are going to have a shortage of money, and to get this $529 million, the $103 million component of it, we are going to have to show pretty strongly that this, in fact, accomplishes what we all said we wanted to do.

    Mr. ROSSOTTI. I couldn't agree with you more. I mean, it is a step, and it doesn't even accomplish all of it. I mean, it is just a step in that direction.

    Mr. HOYER. I don't have to yield to anybody else. Interestingly enough, Mr. Rossotti, one of the first hearings that I had when I became chairman of this committee in 1993 was to invite I believe it was City Corp, but it might have been City Bank—a couple of the very large card members, Visa, MasterCard, to come in and testify on tax system modernization as to why I could go to an ATM machine and they could give me money, and they could give me the balance within seconds, and why I can't call the IRS and get similar information.
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    Now, to their credit, they said, frankly, Mr. Hoyer, it is a lot easier for us because we are dealing with very specific information. They were very candid. They did not try to demagogue and say because we are the private sector and government can't do it. They made it very clear that what we are doing at IRS is a much more complicated response, and the nuances of differences between taxpayers is much more complex than the nuances of differences between people who, you know, charge something, have it on the list, and then owe for it.

    But we did exactly that. Because you are right. Taxpayers don't understand. If I can get this information, when I know there are millions of people, and I can go to Europe and put my ATM card in and get money out, you know, why can't I do it with the IRS.

    Now, customer satisfaction and the measurement program. What exactly is it? Is this the first program of its kind? How optimistic are you that we can get a solid report back?

    Mr. ROSSOTTI. Well, I think this is another one of these major steps. I think it is a major step, but it is going to take, again, as a lot of them are, a number of years to play out. I mean, the basic idea is to follow another playbook out of the private sector. If you want to know what your customers think of you, the best way to do it is to ask them when you have provided them service.

    The IRS has done customer satisfaction surveys in the past, but they have been fairly general of the population. The big difference here is we are actually going to ask taxpayers who had a specific interaction with the IRS, including exams, collections, appeals, and phone service. I mean, those are the main ways we interact.
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    In the case of the phone service, it would be a sample, of course, because you couldn't ask everyone, but in the case of the other ones, we would generally in most cases have a form that people would fill out for each one. And we have an independent contractor that is working with us that has done this kind of survey work for the private industry.

    There is a series of questions. It is really modeled after what we did on the problem-solving day survey, and we would then get these answers back. And we would be able to determine, you know, what the taxpayers think of the service that they got and what the weak spots are in terms of improvement for the future.

    Now, I think that as far as what the results will be, we don't know. I mean, we are going to wait. That is why we are doing the survey. It will be the first time that this has ever been done. Is that right, John?

    Mr. DALRYMPLE. In terms of this survey of this type and this magnitude, we have done a couple of general surveys but no case-specific surveys in the past. And so it will be a first for us.

    Mr. HOYER. I have got to go, but what do you mean by case specific?

    Mr. ROSSOTTI. Each transaction—in other words, you come in and get an exam, we ask you what you thought.

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    Mr. DALRYMPLE. So you will randomly be selected for a letter that will go out later anonymously back to the contractor so it doesn't come back to the Internal Revenue Service, the contractor will then develop the analysis and send that analysis back to us so that we can then take whatever necessary steps we think to improve service. So it is an anonymous survey too.

    Mr. HOYER. Mr. Commissioner, the Chairman has asked me to recess the hearing, and he will be back. He has gone over just to take a couple of minutes so he will be back. As soon as he gets back, he will start obviously with his questions. Then I will be back as well. This hearing is recessed until the return of the Chairman.


    Mr. KOLBE. The subcommittee will come back to order. We didn't lose much time at all on that, and we have finished our heavy voting for the day so we are done. We won't have any more interruptions here, and we will go to Mr. Price for his first questions.

    Mr. PRICE. Thank you, Mr. Chairman. Mr. Rossotti, I want to add my welcome to you and your colleagues. We appreciate your being here today and your testimony. As many have mentioned, and as you well know, there is a great effort underway in Congress to make some positive changes in the Internal Revenue Service and to make it a good customer service oriented agency.

    I visited one of the IRS service centers in my district last month, and I was able to talk with a number of your personnel about both their desire to see change and their frustrations in this whole process. I am no stranger to helping constituents resolve problems with the IRS, and I very much hope that some of those kinds of problems will be less frequent in the future.
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    But I also disagree with the tendency some have had in the Congress to vilify IRS agents. It simply isn't productive. We have got to remember how this kind of IRS bashing affects the morale of people on the front line because we all know we will not be able to make the kind of changes that need to be made in the IRS without the full engagement and participation of the workforce there.

    Knowing the atmosphere you have been operating in over the last six months, I want to tell you how pleased I am to see that you are not waiting for the Congress to enact reform legislation to be making the kinds of changes that need to be made at the agency. I commend you for that. I especially applaud your efforts to develop performance criteria that properly balance customer service with tax law enforcement. And I look forward to watching you put them in place and a cooperative process of evaluation as that gets done.

    Let me ask you a couple of specific questions, first about the Earned Income Tax Credit Compliance Initiative. I supported expansion of the EITC as part of the 1993 Budget Reconciliation bill, and I believe that by and large it sends the right signal to working families by letting them know that hard work pays off.

    Unfortunately, it sent some Americans the wrong signal. IRS uncovered a fair amount of fraudulent noncompliance, prompting Congress to provide $138 million for a new EITC Compliance Initiative, almost $31 million more than the Administration had requested. I would like to know how this initiative is proceeding.

    I spent a fair amount of time talking with the IRS service center employees about this issue. It was very much on their minds. They expressed particular concern about the use of post office box addresses, for example, on tax returns. There were lots of details of enforcement and compliance that we got into.
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    Because eligibility is sometimes granted only when married couples are not living together, they believe there is a great deal of potential for individuals to provide information they cannot easily verify in order to receive the EITC. So I wonder if you could comment on the trends you are seeing in fraud and abuse and what IRS is doing to address these and related issues?

    Mr. ROSSOTTI. Let me make just a few general comments, and then I am going to ask Mr. Dalrymple here because he is the one that is really taking the point on this. This new additional funding, as you know, came up towards the end of the last fiscal year, and so we have been working hard to put as quickly as possible some new things in place.

    In general, I think the strategy, which is the right strategy, is to look not at any one solution to this problem because there isn't any one solution but a number of different activities. Part of it is up front, trying to educate people and tax preparers especially on what their responsibilities are so we head off some of the problems in the first place.

    A second one is getting more information on a research basis to try to figure out more specifically what the vulnerabilities of the system are that create the most risks that we can target resources most effectively. And then, of course, where the biggest part of the money goes is in the actual checking of returns and in various ways to head off potential refunds or potential money that is sent out that shouldn't be sent out. And there are a variety of ways to do that.

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    Mr. PRICE. Let me just amplify my question one bit. I think what you say about education up front of taxpayers and tax preparers is important. Do you have any figures either now or later for the record as to the number of eligible people—a percentage of eligible people who are, in fact, taking advantage of the EITC?

    Mr. DALRYMPLE. Let me address that. We really don't have much information yet, Congressman, because it is very early in the filing season at this point in time. We have really tried to take this program this year with the money that the Congress gave us towards this program to make sure that we spend the money wisely.

    And as the Commissioner mentioned, we want to also make sure that we deliver what we promise. So we have sort of broken it into four areas. One is research and in that vein, we are really making sure that our activities that we are taking this year have the desired results because we are setting up a system to actually measure compliance this year, and we will start a baseline so we will be able to tell in '99 then what effect our activities this year had and each year thereafter.

    And in addition to that, the research that we are doing in addition to setting that baseline is to understand different taxpayer segments within that market because not all of these folks are the same.

    Then, second, in prevention and that is really specifically around education and outreach, and we have got a number of new initiatives there. I will just give you a feel with a few examples. We sent informational letters to the top 100 employees most likely to employ taxpayers who would be eligible for the credit. We sent a notice to over 6 million EITC recipients informing them of the advanced earned income payment option. We sent a notice to about 2.5 million taxpayers who did not claim the credit last year but appear that they would be eligible.
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    Mr. PRICE. What number is that?

    Mr. DALRYMPLE. 2.5 million.

    Mr. PRICE. I see.

    Mr. DALRYMPLE. We have expanded our efforts to service EITC eligible low income and elderly taxpayers by providing tax information and return preparation. So you can see we have got a number of initiatives there. And the research that we are doing should be able to tell us how effective these programs are.

    The next area that we really focused on is detection, and we have improved and are continuing to improve our system so that we identify what we think are the most likely returns that may have some abuse in them to poll. And then, finally, enforcement where we deny EITC claims to those who are not eligible. And I have some data from last year which, of course, predates our initiative, but the numbers this year are so small because we are so early in the filing season.

    And then to address the issue on the post office box return, it is a dilemma in terms of our enforcement activities, but one of the things that sometimes our front-line employees don't understand and don't realize, and perhaps it is because we haven't done a good enough job communicating this to them, is that a number of these folks use post office boxes because they literally live in areas where they can't trust having mail delivered without its being stolen, especially if it looks like it might have a refund check in it. So the reason that they use post office boxes in many cases has nothing to do with fraudulent activity. It has to do with the nature of the areas where they live.
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    Mr. PRICE. But could that be combined with the street address, even though the street address were not the one used for mailing?

    Mr. DALRYMPLE. It could be.

    Mr. KOLBE. Mr. Price, do you have more questions? Would you like to just continue, or do you want to go back and alternate as we have been doing here?

    Mr. PRICE. It is your call, Mr. Chairman.

    Mr. KOLBE. Well, I mean, if you only have a few more questions, I will just let you finish. But if you have a whole other series of questions, I would like to——

    Mr. PRICE. No, just a couple of brief ones, if I can——

    Mr. KOLBE. Okay. Go ahead and finish then.

    Mr. PRICE [continuing]. And you let me know when you need to resume.

    Mr. KOLBE. Go ahead and finish.

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    Mr. PRICE. Well, I appreciate that answer, and if you would like to elaborate further for the record, that——

    Mr. DALRYMPLE. Well—as we get filing season data—if you would like that information, we could provide it as we get it.

    Mr. PRICE. Well, just keeping the subcommittee up to date on the progress on all fronts of this initiative. We want people who are eligible for this to take advantage of it, obviously. The best welfare program as I think President Reagan once said was for people to be able to keep more of the money that they are earning. At the same time, there have been serious problems, and I commend your effort to address them.

    Let me ask you briefly about browsing. I would like to ask you about the efforts to stop the unauthorized access of taxpayer records. Some of the employees portrayed that as a two-edged sword. They are worried that they might be accused wrongly of browsing simply for responding to a taxpayer, for example, calling to check the status of their case, which could have been assigned to another agent. How are you distinguishing between authorized and unauthorized access of taxpayer records? How is this policy being communicated to your employees?

    Mr. ROSSOTTI. I will let Mr. Dalrymple answer that one as well.

    Mr. DALRYMPLE. Well, we have actually listened to our employees as we set this program up. They had a number of suggestions for us to ensure that that actually didn't happen. And, in fact, any time that they believe that they are at risk there, we developed a form and format for them to document that, share it with their manager, and sort of be held at no harm in that kind of situation. So we have tried to be responsive by reacting to the concerns as they raised them with us.
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    Mr. PRICE. My final question has to do with the data center consolidation. Last year very late in the cycle, IRS revised its budget request for fiscal '98 based on new estimates of the needs for year 2000 compliance. As I understand it, you determined that you could address some of your modernization, and year 2000, and consolidation needs by utilizing contracts for new equipment that had been negotiated some time ago.

    We appropriated roughly $165 million for that effort, including $7 million for retraining and relocation of employees who might be affected by the consolidation. I would like to ask how much you have been able to accomplish in terms of the consolidation, and what effect it is having on personnel, and anything else you would want to say about the status of that effort?

    Mr. ROSSOTTI. Let me just make a brief comment, and I would like to ask Mr. Gross to comment. This is one of the biggest pieces of the entire program that we need to do to deal with the century date change. It is one of the pieces that has some long-term benefits.

    In other words, rather than just strictly fixing up something, it will have the benefit of centralizing the management of some of those mainframe resources, which is a trend that is pretty common throughout the private sector, as well as the public sector.

    And it will also not only give us better control, but also save some money long term by having fewer personnel required to manage these multiple data centers. And that program is going underway. I would like to ask Mr. Gross to give you a few more details on where we stand on it.
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    Mr. GROSS. Thank you, Charles. The status is as follows: as you know, there are 67 mainframe computers in the 10 service centers that we aim to consolidate into the two computing centers. We have completed the first of the 10 service center consolidations successfully, and we are still on schedule to complete the remaining nine.

    I think that the project is not only material because of the potential savings and long-term benefits in terms of a future mainframe platform for modernization, it is also the first instance in which the IRS is using contractors as Primes, the principal program managers for this program. And hopefully it will be a bellwether for future modernization efforts in which the IRS successfully partners with the private sector to effectuate major technology change.

    A little known piece of the project but critically important to us is not only the consolidation of mainframe computers, but it is also the conversion of one of our major networks comprising 20,000 workstations. And that piece of the project is also well in hand. We have completed the replacement of 4,000 of the devices in that network.

    Mr. PRICE. What kind of PC needs does this involve?

    Mr. GROSS. That is what we are achieving. We are achieving the replacement and upgrading of those 20,000 PCs in the network, and we are also creating what is called an open architecture, a TCPIP architecture, rather than the customized network that we have used to date.

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    Mr. PRICE. All right. Thank you. Thank you, Mr. Chairman.

    Mr. KOLBE. Thank you very much, Mr. Price. Let me return to some—not return but ask some questions about the Y2K issue. I read the article not long ago, and you may have seen it in Forbes about how they believe that a lot of the private sector is really not addressing this issue.

    If the private sector isn't addressing it, I just have an instinctive feeling that a lot of our government agencies are probably not addressing it very well since they usually are less up to speed when it comes to technology and modernization of systems. And I just wanted to know, Commissioner Rossotti, where does this issue fit into your list of priorities?

    Mr. ROSSOTTI. It is the first issue that I turned my attention to—literally the first issue that I turned my attention to when I got to the IRS just because the date is one thing that can't be moved.

    Mr. KOLBE. Well, you know, in Congress that is what we would do. We will just have an appropriation to postpone the millennium.

    Mr. ROSSOTTI. Yes. Well, actually, on just a slight light note, Secretary Summers came back from a conference in Europe a couple weeks ago and was talking to me. And he said that he was talking to a Frenchman who is the head of a large bank who was saying that he didn't understand why all of the Americans and British were spending so much time on this so-called century date change.

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    He thought it was just because the Americans and the British were litigious and that that was why we were working on this. So we got kind of a chuckle about that. I said maybe what they will do is just postpone the date for a couple of years over there. But it is a very serious problem. It is an extremely serious problem.

    Mr. HOYER. It is an English problem.

    Mr. ROSSOTTI. Yes. It is a very serious problem. It can't be postponed. And, as a matter of fact, Mr. Chairman, I have made the point on a number of occasions I think to you and to others that in the case of the IRS, our key date is actually in a material way one year earlier than for other places because we really have to get a good deal on most of our renovation work done prior to the 1999 filing season.

    There isn't too much you can do during a filing season. You have to stabilize everything because we need the period after the '99 filing season to do this final testing and certification. So as a result of the work that Mr. Gross here and his colleagues did, they really began, on a very large scale quite some time ago to to get this process underway.

    When I came in, I added a few things to it to try to make sure that we had all of the components together. I mean, there are about, I would say, a dozen different major pieces of this. The mainframe consolidation is one of them. The data entry system is another whole one. There are all the application programs, the telecommunications network—you go down all these different elements.

    I would say that at this point I have a reasonably high degree of confidence that there is not going to be a disastrous result at the IRS. I really believe that. I think we have that underway, and I think we have a program to identify what the risks are.
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    Having said that, it is an enormous program. If you add everything together, all of it over all fiscal years, it is over a $900 million program, and it includes, you know, many, many, many thousands of different components and different kinds of pieces that all have to come together.

    So I don't think it is without risk. As a matter of fact, it has a great deal of risk associated with it, and it could very well be as we get into the '99 season that there will be some things that will go wrong. We are going to try to make sure that nothing goes wrong, but with the number of pieces, there could be some.

    However, I think that in putting it in the correct perspective, there is a great deal of management attention at the IRS that is going to this. I am personally chairing this Executive Steering Committee that is reviewing every month every one of these programs. And we are taking action where we see risks, and there are risks. But we are taking action as early as we can to fix them.

    Mr. KOLBE. Well, that answers part of my question. The direct day-to-day management responsibilities for this is in Mr. Gross's office. Is that right?

    Mr. ROSSOTTI. Correct.

    Mr. KOLBE. And are you satisfied with Mr. Gross's departure that it is going to be in hand and that these pieces are——

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    Mr. ROSSOTTI. Well, I am not satisfied with Mr. Gross's departure.

    Mr. KOLBE. I understand. None of us is satisfied with that. But are you satisfied that this issue is in hand?

    Mr. ROSSOTTI. Yes.

    Mr. KOLBE. Mr. Gross, do you feel that way in your office——

    Mr. GROSS. Mr. Chairman——

    Mr. KOLBE [continuing]. There that there are people that have a handle on this thing?

    Mr. GROSS. Mr. Chairman, just two comments. One is that this is an opportunity for me to thank the subcommittee for the extraordinary support that they have provided to the service in my short tenure here. And in one of the most paramount ways you have supported the program for funding a critically growing Y2K program.

    When we first began this effort, we were looking at a $20 million budget, and now, as Charles indicated, it is well over $900 million. And we have identified the problems and identified the funding for this program, the subcommittee has been extraordinarily supportive in funding and supporting the effort.
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    In terms of the management, from the first day that Charles landed, he has grabbed hold of this issue, and he has personally managed it through the steering committee that he just identified within the CIO organization. We have established it as our highest priority, and we have placed our strongest, most senior management in this program, most notably Bob Albicker, our Deputy Chief Information Officer, and John Yost, who is our Y2K Project Director.

    They are without qualification among our strongest, most dedicated managers. And, in fact, it is indeed their efforts over the last 18 months that have brought this program as far as it has come. So I am quite confident that with Charles's leadership and direction and both Bob and John focused on this as their highest priority, it will, as Charles indicated, have a successful outcome.

    Mr. KOLBE. Are you on target to meet your conversion date of January '99?

    Mr. GROSS. Yes, we are. We have completed 62 percent of the renovation of the application code, which is the first critical piece. I think the exposure areas are in the platforms at a tier two and tier three level and in our telecommunications.

    Mr. KOLBE. Mr. Hoyer, if you will just indulge me to finish this line of questioning for just a couple of questions on the budget?

    Mr. HOYER. Mr. Chairman, I want you to know I will indulge you as long as you want to be indulged.
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    Mr. KOLBE. How much are you requesting in the '99 budget for this?

    Mr. ROSSOTTI. I think the number is $234 million. Isn't that right? It is $234 million for all parts of it.

    Mr. GROSS. It breaks down into three components; $140 million for Y2K conversion, $18 million for ISRP or DISRPS, and $76 million for the data center conversion.

    Mr. KOLBE. You expect to have a budget amendment, do you not, for equipment? My notes here from staff suggest that there is going to be a $49 million additional request?

    Mr. ROSSOTTI. Yes. Since this budget was put together, you know, quite some time ago, in the area of primarily tier two hardware and the nonIT components there are some additional money needs. I don't think the exact number is settled on yet. That is still being worked with Treasury and OMB, but I think there will be a need for some amendment along the lines of what you have said to cover these areas.

    What has happened, Mr. Chairman, is that as this process has gone forward, the areas that were most critical to focus on earlier, which were the application programs of which there are about 90,000, the critical tax application programs, and that is what they focused on first. And they got a very good handle on those. There is nothing more required for those.
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    As we have gotten down into it, some of the other areas that were given attention as a second priority but are still critical are the minicomputers, of which there are about 1,421 minicomputers, and the telecommunications network, and what is called the nonIT; in other words, building systems like security systems for buildings and things like that. Those were not identified as early, and I think that was appropriate because you have to start with the things that are most critical.

    As we are getting down to the end here now, we are really getting down to identifying these other areas, the tier two hardware, the telecommunications network, and the nonIT. That is primarily where we still have a little uncertainty in terms of money.

    Mr. KOLBE. Two other quick questions I think you can give me very quick answers to. Last year, we appropriated $376 million for this or provided $376 million. We appropriated $289 million, and said that you should reprogram $87.5 million. You have not come to us yet with those reprogramming requests.

    Mr. ROSSOTTI. They are pending.

    Mr. KOLBE. They are pending. Okay. But that is not the supplemental, and you also have a supplemental you are going to be asking for?

    Mr. ROSSOTTI. That is right.

    Mr. KOLBE. That is my question. Why do we have a supplemental? Why didn't we get a handle on this last year for the right amount?
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    Mr. ROSSOTTI. Well, Mr. Chairman, I have to tell you that——

    Mr. KOLBE. I know you weren't onboard at that point.

    Mr. ROSSOTTI. No, I know but even if I had been, I don't think we would have. Because if you look at the number of components—let me just give you a few numbers. There are 90,000 application programs that are just the internally developed application programs. There are how many mainframe computers?

    Mr. GROSS. Sixty-seven.

    Mr. ROSSOTTI. Sixty-seven mainframe computers, each of which has thousands of software components. Those pieces were pretty well identified earlier on because those were the most critical ones. Now, we are getting into 1,421 minicomputers which have 15,000 different components that have to be identified. There are 134,000 of what are called the tier three, which are basically the PCs and the desktops that have 236,000 components.

    And then on the telecommunications network, which is the one, frankly, that has the most risk associated with it still, we don't, frankly, have all of them identified even now. But there are several hundred thousand just in the telecommunications network, probably somewhere between—I would guess—100 to 200,000 individual components.

    A component is a particular product, a particular serial number of a particular item, that may or may not have to be replaced. There is the process of identifying every single one of these things and determining, for example, in the case of the products, if it is Y2K compliant, is it not Y2K compliant, which vendor do we have to go to, is the vendor under contract today to provide that, or do we have to get a new piece of hardware to replace it. You know, each one of these things requires research, and, of course, in some cases there is cost.
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    So in the early stages of this—and I can assure you I worked on this until three months ago in the private sector—there wasn't any company that I knew of that a year ago had a complete handle on exactly what it was going to cost because they had the same issue. They had to go through these hundreds of thousands of components. So I really believe that the process here that has been applied has worked pretty well relative to anything I have seen in the private sector.

    I do think we are getting to the end here though. I think we have most of these components identified. What we have got left are these tier two and tier three platforms, and some of the things in the telecommunications network, and the building components. And we are sort of getting down finally to the point where we have all these things in the database.

    Mr. KOLBE. So maybe I should have somewhat more confidence that next year there won't have to a supplemental at least in this area?

    Mr. ROSSOTTI. Yes. I think that we are getting a lot closer to this.

    Mr. KOLBE. Thank you. Mr. Hoyer.

    Mr. HOYER. Thank you. Let me ask you a question which is not particularly on point to us individually, but it follows up on the Chairman's comment, and perhaps also evidences my ignorance of the whole computer information technology area.

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    The Chairman observed, well, the private sector gets on top of this earlier, and I am not confident the public sector does. And we hear that, and that seems to be the traditional bias. My premise is the government didn't produce any software. My premise is the government has produced no hardware. It has bought from the private sector.

    The private sector has sold us computers and software and apparently were incredibly surprised by the fact that the millennium was coming. I think we ought to sue the private sector vendors. I think they ought to pay for this. You know, maybe it is my ignorance.

    I don't understand why the hell these computers didn't understand that the year 2000 was going to come when they sold us computers in '85 and '90 and '91 and '92 and '93. I don't know why we don't sue for breach of contract and breach of warranty and let them pay for this—the great private sector that we talk about.

    Now, I am a big proponent of the private sector. That is what made this country great and builds our economy. But, frankly, Mr. Chairman, with all due respect, I don't think 2000 coming is a surprise, and I don't know why this stuff we bought for millions and millions and billions of dollars in terms of the Federal Government doesn't work, and we now have to spend a lot of money getting back up to speed. Why is that, Mr. Rossotti?

    Mr. ROSSOTTI. Well, first of all, in the interest of full disclosure I have to say I was until about three months ago in the private sector producing some of that stuff that was sold to various people. So, I mean, I have a little bit of——

    Mr. HOYER. Then perhaps you can answer my question.
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    Mr. ROSSOTTI. Well, actually, I think I can. It isn't that people didn't know—actually, this is the second time this problem has arisen, not the first time. Because it arose the first time in 1970.

    In the '50s and '60s when they put the first computer systems together, they only used one digit for the date field in order to save storage. So when 1970 came—of course it was much smaller because there weren't that many computers—they had to go back and renovate all the programs to make it to two digits to go to 1970. Now, was that because people didn't know 1970 was coming? It wasn't.

    What has happened is that one of the principal costs of computer technology is storage, both internal storage inside the memory of the computer and external storage in the form of disk drives, and that is a very expensive resource. The cost per unit has been coming down dramatically over the last 20 years. I mean, that is what technology has done with the Intels.

    And in 1985, and I did a study of this on one application in my previous job, it turned out if you had known and you had done a complete calculation, it would not have been economical to make a four-digit date field in 1985, even if you had factored in what it was going to cost to renovate it in 1998, because the cost of having that much storage for that many years would have far exceeded the cost of actually doing the renovation. And that is basically the reason why people used this thing. It was to save on storage. It was not an irrational economic decision to do that.

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    Mr. HOYER. Well, now that is a point, for instance, that we ought to make clear then that this is not the government being dumb, which some people said we were to spend all this money to get up to speed because we apparently didn't contemplate that. In fact, the money that we are now spending, if I understand you correctly, is less than we would have spent to buy the capacity at the time we purchased the software?

    Mr. ROSSOTTI. It is generally true. Of course, in every case it might not be, but it is generally true. And the same thing has happened in the private sector. All private sector people have bought this, and it was basically that it was just storage—programmers spent incredible amounts of energy trying to figure out how to save a small amount of storage because it was so expensive. And that was the fundamental reason why it was done that way.

    Mr. HOYER. Okay. Now, I am sure I have got time for one additional question.

    Mr. KOLBE. You just go ahead.

    Mr. HOYER. Obviously, funding has been transferred out of information systems account to fund Y2K—not all of it, but a substantial part of it. Mr. Gross and I discussed that, and he discussed it with the Chairman. And we worked on that last year, and we tried to do as much as we could with the best information we had available at the time.

    IRS has a $227 million increase you are asking for in this account for fiscal year '99. Can you tell me how time sensitive these initiatives are and what the impact would be for further delay? Now, I asked the question—I think it is an important question, but what is going to happen? The Chairman is right. We are going to come up—he is going to come up, sit down with the other 12 chairs of the subcommittees, and he is going to say we need this extra money because.
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    And if he doesn't have a good follow-up to ''because'' and what will happen if we fail to do this, then he is going to have a tough time, because I have participated in those meetings, getting the 602B allocation to do this half billion dollars that we are talking about at IRS of which this is $227 million.

    Mr. ROSSOTTI. Let me just say, Mr. Hoyer, that I really believe that the IRS technology base today is in dire, dire need of improvement. And I understand very, very well that a great deal of money was spent in the past and probably did not produce anywhere near what was expected. And I can only say I was paying the taxes along with everybody else back then.

    So I regret that, but the practical fact is that because those systems in many cases did not come in from the previous modernization effort and because this committee appropriately required that money be reprogrammed out of other IRS initiatives in the last two years in order to deal with these urgent requirements of the century date change, there has been really very, very little just even ordinary renewal of basic computers in the last two years. And that is the situation that we are in.

    So what we are looking for in this $227 million is what I would consider extremely important near-term things that we absolutely need. On chart six, those are basically shown, and you can see that the two biggest ones are just replacement of computers for front-line people that either don't have them at all, or where the computers are just falling apart.

    I have been out with the people that do this. It is very, very simple to see what happens. If you send the person out to collect money from somebody and they either don't have a computer or they have one that is broken down or can't get the information, it simply imposes more time to do that job on the taxpayer, as well as on the employee, and increases the risk of inaccuracy, which then goes directly back into the kind of problems that we have with serving taxpayers.
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    The other two on here are the increases for customer service, which we have already talked about—the call router in order to be able to increase handling the telephone calls. And the final piece is the money for product assurance.

    I mean, one of the things that Mr. Gross pointed out to me when I first came here, which, frankly, horrified me, is that there are a considerable number of changes to systems that are made at the IRS to respond mainly to tax law changes and things like that, which are not subject to a separate testing process before they are put into actual production to actually take care of taxpayer records.

    I mean, this is unheard of in the private sector. It is just unheard of. You would not take a complex piece of software and have some programmers do the job on it without having a separate group test it separately. I mean, it is just basic standard practice.

    We have not had the resources to do that recently so it is something like 70 percent at the present time of the changes we made don't go through a separate product assurance process. And, I mean, I can't imagine that we would do something like this in a tax agency. I mean, this is the kind of thing that can cause problems directly for taxpayers by having wrong notices or wrong pieces of information in their accounts. So these are the kinds of things that we are talking about.

    Now, the only other piece of this is getting ready for the longer term modernization, which is the kind of things that GAO has recommended. This is putting in the methodology and the performance matrix so that we can be in a position to actually manage the beginning of this modernization program.
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    The net of it is that I understand very well the difficult task of this committee. You definitely have your job cut out for you. As far as the technology base of the IRS is concerned, we have a situation where we have a real deficit. We have a real problem. And what we have to do is to take what money you can make available to us and put it to work as effectively as we can, and over a period of years we can perhaps, and, in fact, I believe we can, fix this problem. But there are definitely some urgent requirements in this fiscal year.

    Mr. HOYER. Thank you. Thank you, Mr. Chairman.

    Mr. KOLBE. Thank you. Mr. Istook.

    Mr. ISTOOK. Thank you, Mr. Chairman. Thank you, gentlemen, for being here. On the course, all the operations of the Federal Government, the fiscal operations depend upon the flow of cash received by the IRS. The huge flow, of course, is associated with all the 1040s, which we file January, February, and March, and then 99 percent I guess on April 15.

    Now, in looking at the problem of the year 2000, because come the year 2000 when you get all those millions of returns, if you can't process them, everything comes to a grinding halt. And it is my understanding that the distributed input system handles 169 million returns each year, and that the IRS reports it is not and cannot be made compliant with year 2000.

    My question that I am coming to you on this, when we are trying to understand the deadlines—you know, a plane takes off. There is a point rolling down the runway, I think it is called V–1, they say it is a point of no return. We are committed to a takeoff, especially on an overseas flight. They know when they have passed the halfway point of the fuel that it is better to go on than to turn back if there is any sort of problem.
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    When it comes to being able to handle things, what are the deadlines working back from that I suppose it is going to be January 1, the year 2000, but by when do you have to have new systems functioning and in place as an absolute necessity? And then backing that up, you know, what are the deadlines working back from there? We tend to work on deadlines here from the congressional process.

    Working backwards, seeing that the entire system becomes nonfunctional because the heart of it is not compliant with year 2000, 169 million returns cannot be processed as of January 1, 2000, what are those drop-dead dates, points of no return, whatever you may wish to call them, working back from there? We need to know those dates.

    Mr. ROSSOTTI. Well, your characterization of it is correct. There are drop-dead dates, and, you know, beyond a certain point, you are beyond the point of no return. And in terms of the specific system that you mentioned, which was referred to by—you know, there are too many acronyms in this business—the DISRPS, which is the distributed input system, it is, in fact, the one that processes all these returns.

    And, fortunately, my colleagues here, long before I got here, recognized that that was a drop-dead requirement because it could not be made. These things are almost 20 years old and, in fact, they can't even be moved from one place to another without breaking. That is how old they are.

    Fortunately, they did issue a contract to a Prime contractor to replace that. That contract was awarded last year in 1997, and that new equipment has already been delivered as we speak and is in testing in one of the service centers in Austin, Texas.
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    Mr. ISTOOK. When you say it has been delivered, you mean the entirety for the whole nation or just the equipment for Austin has been delivered?

    Mr. ROSSOTTI. Well, it has been delivered for Austin, but the hard part is really the software that supports it. And most of that software for everything that we need has already been delivered as we speak and is being tested in Austin. And the plan would be to have the remaining service centers up and running before the end of this calendar year. Do you want to comment on that? Go ahead.

    Mr. GROSS. That is correct, Charles. We are in the process, Mr. Congressman, of completing our first test in Austin in one of the 10 service centers. And the software schedule that Charles alluded to is correct. We are on schedule to complete the software development and testing through two phases now and a second phase in July. And then the schedule provides for us to roll out the equipment and to deploy the applications prior to next filing season, to be completed in December of '98. The project is on schedule.

    Mr. ISTOOK. This is using manual data entry instead of the earlier plans to do it through scanning in?

    Mr. GROSS. That is correct. Although I would say that this system would be replaced—it is not only a Y2K compliance system, but it is projected to improve productivity of those data entry operators by approximately 10 percent.

    Mr. ISTOOK. And how many individual workstations are involved?
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    Mr. GROSS. There are about 4,500, Mr. Congressman. There are about 450 in each of the 10 service centers. That is correct.

    Mr. ISTOOK. And what is already onsite in Austin, are they working through terminals, working off of some other server? Are they working through PCs?

    Mr. GROSS. It is a server-based solution.

    Mr. ISTOOK. And each workstation is a PC or a terminal?

    Mr. GROSS. It is a PC.

    Mr. ISTOOK. Okay. And what——

    Mr. GROSS. I also might add that if we ever do move to an imaging solution, the concept is to be able to migrate those workstations into some of our critical customer service needs as well so there is no potential for throw-away of that investment.

    Mr. ISTOOK. And the system which you intend to have, you have two stages of testing, one that is going on I guess in the next month or two I believe you said?

    Mr. GROSS. It is in progress as of this moment, Mr. Congressman.
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    Mr. ISTOOK. And the other is in July. Is it intended that the transition then to fully using that system rather than DIS in Austin at least will happen this calendar year?

    Mr. GROSS. The pilot in Austin represents about one-half of the workload for that service center.

    Mr. ISTOOK. Okay. So part of the testing is you are processing returns as they are coming in right now—about half of them?

    Mr. GROSS. That is correct. This is a pilot. It is not a prototype. It is a pilot. And what we mean by that is we are using live tax return data. We are processing live tax return information.

    Mr. ISTOOK. Okay. And do you expect that the other half of the Austin personnel will be utilizing the new equipment during this calendar year, or you are keeping it about half and half?

    Mr. GROSS. We are limiting it to a half, and then there is what is called a software drop on a second application roll of the remaining form types scheduled for July of '98, which represents only about five percent of the total workload of the system. Ninety-five percent of the system in terms of its functionality and scope is being tested in this initial pilot that is ongoing at this moment, even though we are only processing about 50 percent of the returns through a few of those new devices.
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    Mr. ISTOOK. If you are then pilot testing it with Austin, which represents I guess about one-tenth of the total returns approximately, and then the new system will be processing about half of those—namely, five percent of the total returns—that means that if you are taking the rest of this calendar year to do that, then all of the other 95 percent of the return processing capability must be put online during calendar year 1999?

    Mr. GROSS. Actually during calendar year '98. Our goal is to have the entire rollout completed by December of '98 for the '99 filing season.

    Mr. ISTOOK. Okay. I thought you had indicated otherwise a while ago that you were just going to be continuing that pilot testing in Austin through this calendar year. But you intend to have the equipment onsite to the service centers this calendar year?

    Mr. GROSS. That is correct.

    Mr. ISTOOK. And the intent is to have not only the equipment there, but to have it functioning and processing returns at the other service centers when?

    Mr. GROSS. Beginning in the '99 filing season.

    Mr. ISTOOK. Beginning in the '99 filing season. Okay.

    Mr. GROSS. And could I just add one point to that?

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    Mr. ISTOOK. Please.

    Mr. GROSS. I think that the most difficult part of this effort, as all of these efforts, is the development of the application code. And it is not so much the deployment of the equipment and the operationalization of the equipment. It is the application code.

    And the Lockheed project plan is structured to provide us with the earliest possible validation of that application code. And that is why the pilot now, which represents about 95 percent of that application code, and the remaining five percent this July, represent the most critical portion of the project effort.

    Mr. ISTOOK. Are all of these with funds that we have already appropriated, or is some portion of it depended upon this year's?

    Mr. GROSS. There is a piece of appropriation required for fiscal year '99. I believe it is $18 million.

    Mr. ISTOOK. But the——

    Mr. GROSS. It is correct. It is $18 million for fiscal year '99.

    Mr. ISTOOK. Okay. But the remainder is budget authority—that you are laying out is budget authority you have already received then?
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    Mr. GROSS. That is correct.

    Mr. ISTOOK. Very good. Thank you. Thank you, Mr. Chairman.

    Mr. KOLBE. Thank you, Mr. Istook. Those are very helpful questions. I am going to submit the rest of my questions for the record so that we can finish as soon as possible. Mr. Hoyer.

    Mr. HOYER. I will ask one last question. I understand the IRS has been having problems retaining information technology experts. Can you tell me what efforts are underway to retain these highly skilled and obviously essential employees?

    Mr. ROSSOTTI. Thank you. As a matter of fact, that was one of the first items that I turned my attention to. Remember I said that I came in and looked at the Y2K. I wanted to identify the risks that I thought we had. And one of the first risks that I identified was that we were simply losing the people because of the increase in salaries that was taking place in the private sector, but also because——

    Mr. HOYER. Because you get onto also because, what is the disparity between what we are paying these folks and what they are getting paid or the offers they are getting and receiving in the private sector?

    Mr. ROSSOTTI. Well, that, of course, is a very individual thing, but I will say this. And just if you look at increases in the last two years of the private sector increases for qualified programmers, it has been in the range of 12 to 15 percent a year. And, of course, we in the government have been more like three percent a year. So whatever it was, they have been falling further behind.
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    Mr. HOYER. Let me see if I understand what you just said. Twelve to fifteen—let us take the low side—last three years—36 percent increase in the private sector, less than three in the public sector. So nine percent in the public sector, if we take three percent, versus 36 percent in the private sector?

    Mr. ROSSOTTI. I mean, those are not unrealistic numbers. I mean, it may not apply to any individual, but yes.

    Mr. HOYER. Yes. Or 27 percent less in the public sector than in the private sector?

    Mr. ROSSOTTI. I think that there could very well be many cases where there could be that much difference, and as a result, we have been losing the people.

    Mr. HOYER. Okay. Now, let us get to the but also because.

    Mr. ROSSOTTI. Well, and the point is that at this point in time, for the people that are in this specific group, that is basically the ones that are maintaining and updating these application programs, while it is important to fill vacancies, I mean, there really is no way to replace those skills. I mean, it just takes a period of time to learn these old programs.

    And so one of the first things that we have decided that we had to do is something special to retain these people. And, as a matter of fact, it was only this week that after a considerable period of figuring out how to do this, we came up with a plan, an announcement out in New Carrollton to come up with a six-point program to help retain these people.
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    One of the specific components was specifically targeted at the group of the programmers, which is the ones who were the most skilled. It was a 10 percent retention allowance, which we said would be for this fiscal year and depending on what we get in the budget for the following fiscal year.

    But equally important to that, it doesn't close the gap, but it was at least something to tell people we were trying to help close the gap a little bit. But equally important, I think, is we tried to lay out a vision of what we were going to try to do in the way of training for these people and in some cases some grade upgrades where it was appropriate that the grades needed to be changed slightly; and I think, more particularly, giving the people a vision that there was hope here that they weren't going to be left with a sinking ship on this year 2000 problem.

    And I think we got a tremendous response from the technical people out there—a very tremendous response. Far in excess of what the money is, just the notion that we were recognizing the problem that they were in helped. So that was a step that we have just recently taken this week, and I think it is one of the most critical steps we can take to reduce the risk of not being able to update the programs on time.

    Mr. HOYER. Thank you. Mr. Chairman, I am not going to ask any more questions, but let me make the observation. As you may have seen on the Federal page yesterday, we had a little press conference the other day—two days ago I guess—about trying to comply with the Federal Employee Pay Comparability Act.

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    What we have not been doing because of so-called economic crises in the Federal Government is giving the full comparability adjustment; in other words, the comparison that Mr. Rossotti has just drawn between what we are paying for skills in the private sector and what we are paying in the public sector.

    Obviously, if we do not pay comparable wages, we won't be able to compete for comparably competent people. And, particularly, what will happen, you will lose your best people because obviously they are the most competitive in the private sector.

    I know it will be perceived that Hoyer is trying to take care of his Federal employees. That is perceived absolutely correctly. I am. But I am doing so on the premise that if we don't, it won't be just Federal employees, my constituents or Frank Wolf's constituents or, frankly, your constituents along the border, the customs people, it will be America that loses because we will lose these kinds of competent people.

    Now, in this instance, we are taking a 10 percent because we have got some flexibility in employees, and one of the good things I think in the bill that we passed, which I had in my bill too that Matsui and I and others sponsored, had flexibility in it so you could deal with these particular problems.

    But in addition, Mr. Chairman, we are going to really—and I would hope that you would sort of give attention to this as well and all our Chairmen would—that we need to focus on complying with comparable wages. We need to play comparable wages, and then, Mr. Chairman, what we need to do, and I have told this to my union friends, we need to expect performance.
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    And if you don't perform and you are not good, then, you know, you are going to have to leave. But we can't not pay people and then expect high performance and outstanding productivity. The private sector doesn't expect that. There is no athletic team in America that expects that. Don Devine once said, ''Well, you know, I have got a lot of people standing in line to fill up these jobs,'' and that is correct.

    Let me tell you I could get 10,000 people within 24 hours to play ball for Abe Paulie. There is no shortage of lines. People want to play in the NBA. The problem is there is a real shortage of people who can win in the NBA. And that is really the issue we are talking about, not whether there are long lines to take jobs.

    There are long—you know, even in this economy, we can hire people, but it is hiring those people that will give us the kind of quality performance that we need so we can solve these problems that are tough problems, both in the private and public sector.

    Thank you for this time, Mr. Chairman. Thank you, Mr. Rossotti. And, again, in closing, Art, I want to tell you how impressed I have been with your accomplishments, with the spirit you have brought to your job, and I think you have made an incredibly important contribution to solving a very difficult problem that appeared to be one that was intransigent for many, many years. So I want to thank you for your service to the American people.

    Mr. KOLBE. Thank you, Mr. Hoyer. And, Mr. Rossotti, thank you and welcome again on your maiden voyage here before our subcommittee. Mr. Dalrymple, thank you for your answers, and, Mr. Gross, I would echo certainly what Mr. Hoyer said. We certainly thank you for the service that you have given us and wish you well.
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    We know that we are going to be relying on your—that Mr. Rossotti is going to continue to rely on your advice in the months ahead, and we appreciate that. And we thank you for what you have done to launch us in the tax systems modernization, Y2K, and get us on the right track. This subcommittee is adjourned.

    [Questions for the Record and budget justification material follow:]
    "The Official Committee record contains additional material here."

Thursday, March 5, 1998.








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    Mr. KOLBE. The subcommittee will come to order, and we want to welcome all of our agency people here today for this multi-purpose hearing.

    We are pleased today to welcome the two agencies of the Federal Government that manufacture our money—the United States Mint and the Bureau of Engraving and Printing—and the agency that, as its name implies, is responsible for managing the nation's finances and payments—the Financial Management Service.

    The Mint is represented this morning by its Director, Mr. Philip Diehl. Bureau of Engraving and Printing is represented by its Acting Director, Mr. Thomas Ferguson. And Financial Management Service is represented by its Commissioner, Mr. Richard Gregg. And we are pleased to have Assistant Secretary Killefer with us again today.

    As my colleagues know, both the Mint and the Bureau of Engraving and Printing operate through revolving funds and do not require appropriations. However, both agencies are currently dealing with a number of issues that are of interest to the subcommittee and to the Congress as a whole, and it is important that we continue to have a dialogue with them as we work together on these issues.

    The Financial Management Service certainly does require an appropriation. It has requested $202 million plus for fiscal year 1999. This is just slightly above the amount appropriated in fiscal year 1998.
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    As I mentioned to Secretary Rubin yesterday when he was before this committee, we are very concerned about the Financial Management Service, where it is, and where it needs to be with regard to its computer systems and making them year 2000 compliant. We certainly heard concerns from the Secretary yesterday about Financial Management Service being the weak link in this chain at the moment. Because of the nature of the mission, FMS is one agency—one of the two or three top agencies, I would say, of the government—that simply cannot be allowed to fail when it comes to being Y2K compliant.

    We are also concerned about the lack of progress that has been made in the implementation of debt collection provisions that were established under the Debt Collection Improvement Act of 1996. We will be monitoring the progress of the Financial Management Service in these and other areas.

    In order to expedite matters this morning, we will hear each of your statements and then open it up for questions from the members of the subcommittee. And, of course, as is always the case, the full statement will be placed in the record, and you may summarize as you wish. But before I call on you, let me see if Mr. Hoyer has any opening remarks.

    Mr. HOYER. Mr. Chairman, I just want to welcome the witnesses, look forward to hearing from them, and I will not take any time of theirs. I do not have anything to pontificate on this morning, so we will hear from you.

    Mr. KOLBE. I do not believe you have a statement, is that correct, Ms. Secretary?
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    Ms. KILLEFER. That is correct. That is right.

    Mr. KOLBE. All right. Then I think we are going to begin with Mr. Gregg and the Financial Management Service. Mr. Gregg?

    Mr. GREGG. Thank you, Chairman Kolbe, Congressman Hoyer. I appreciate this opportunity to appear before you to talk about our fiscal 1999 appropriation.

    Before I begin, I would like to introduce Don Hammond, who is to my left here. He is Acting Fiscal Assistant Secretary.

    Mr. KOLBE. I apologize for not introducing him.

    Mr. GREGG. With your permission, I would like to request that my full statement be submitted for the record——

    Mr. KOLBE. Yes, of course.


    Mr. GREGG [continuing]. And I will summarize my remarks.

    The Financial Management Service is requesting $202.5 million and 2,006 FTE for fiscal 1999. The mission of FMS is to make the government's payments, to handle its collections, manage the debt collection responsibilities for the government, and to do government-wide accounting.
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    In performing our mission, each year we make 850 million payments totaling about $1 trillion, and handle collections of $1.4 trillion. So that these payments and collections, as well as the other important functions of FMS, are not interrupted, we must ensure that our automated systems are modified to run in the year 2000.

    Doing what is necessary to be year 2000 compliant is our top priority. To make the necessary modifications for the century date change requires a massive, all-out effort in every part of FMS. And here is a brief summary of our actions.

    We have carefully identified and assessed our mission critical systems. We are well underway with making changes to our software code to have our systems in compliance. Our payment and collection systems are on schedule and will be completed by the end of 1998. Coding for other systems will also be done by 1998, except for a portion of one system that will extend into early 1999. That is an intergovernmental accounting and processing system, and there are a number of components to that. But we are monitoring that carefully and moving ahead on that as quickly as we can.

    This summer we will begin testing internally, and with all of our customers, and testing will continue until all systems are ready. In summary, while there is much to be done over the next 22 months, all of our efforts will be marshalled to ensure that systems will operate on January 1, 2000.

    There are other important initiatives taking place at FMS. The Debt Collection Improvement Act of 1996 mandates that all non-tax payments be made electronically after January 1, 1999. This is referred to as EFT 99. Currently, 66 percent of all non-tax payments are made by EFT, and the percentage is climbing steadily.
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    Under EFT 99, one of the most difficult and sensitive issues involves providing federal payments to individuals who do not have bank accounts. To accomplish this, we will establish an electronic transfer account, known as an ETA, at federally-insured financial institutions. These accounts will be provided at reasonable cost and with the same consumer protections as other accounts at financial institutions. We are currently working on structuring the ETA account.

    The second part of the Debt Collection Improvement Act is also receiving extraordinary attention and work. This is a responsibility to manage the collection of past due non-tax debt owed to the Federal Government. While much work remains to be done, I believe that we recently have made good progress. We are moving quickly to issue a host of regulations to implement this law.

    We are analyzing the debt portfolios of the largest creditor agencies to categorize and assess the value of the debt. FMS is conducting administrative offset by matching debts against vendor and federal retirement payments, and later this year will begin phasing in salary and benefit payments.

    Agencies are referring more debt to us for offset. In 1997, the amount was $9.4 billion, and currently it is $16.5 billion.

    We are working to collect past due child support debt. Through the Department of Health and Human Services, we have agreements with 13 states to assist in the collection of child support.
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    And finally, we have contracted with 13 private collection agencies to assist in the collection of delinquent debt. We will continue to press forward to use all of the debt collection tools provided to us under the Debt Collection Act.

    Finally, let me briefly mention that FMS is responsible for managing the preparations of the new government-wide consolidated financial statements, and working with every federal agency, OMB, and GAO to meet this requirement.

    Mr. Chairman, this concludes my remarks. I would be happy to answer any questions after you finish with the panel.

    [The prepared statement of Mr. Gregg follows:]
    "The Official Committee record contains additional material here."

    Mr. KOLBE. Thank you very much. We will have questions, of course, but we will do that after we hear the other statements.

    We will go now to the Bureau of Engraving. Mr. Ferguson?

Summary Statement

    Mr. FERGUSON. Thank you, Mr. Chairman, Congressman Hoyer. It is indeed a pleasure to be before you this morning representing the outstanding men and women of the Bureau, and to report on our progress for 1997 and our plans for the future.
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    As you noted, sir, we operate under a revolving fund and are not seeking any appropriation. I would note that in our area of finance that for the 13th consecutive year we have received an unqualified opinion from our outside accounting firm. We are very proud of that fact, and that represents the efforts of our former Chief Financial Officer, Paul Blackmer, who retired, and our current CFO, Greg Carper.

    The financial status of the Bureau is reported in our CFO report of 1997, and I will provide copies for the members and staff after the conclusion of the hearing.

    In 1997, the Bureau delivered 9.6 billion Federal Reserve notes, including over one billion of the newly-designed $100 note and $50 note. And we also delivered 22 billion stamps to the U.S. Postal Service, the vast majority of that being in the new format, the peel and stick, as opposed to the lick and stick variety, that the public seems to prefer greatly. [Laughter.]

    Our operating costs were significantly below budget. We had an overall productivity increase of 4.7 percent in 1997, while reducing overtime by 40 percent. These activities allowed us to reduce our billing costs in both of our major product areas to our customer agencies.

    These reductions were a result of efficiencies and also of a streamlining effort that has been ongoing for the last several years. In the first quarter of FY97, the Bureau offered a voluntary separation and incentive package and had 254 employees take that package and retire off of the government rolls.
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    In December of 1997, we offered a second voluntary incentive program for people to retire, which reduced our rolls by an additional 128 employees.

    In the area of the new currency program, as I mentioned earlier, we produced over a billion of the newly designed notes last year. The $50 note went into circulation in October of this past year. The newly designed $20 note will go into production this spring for issuance in the fall of 1998. Five-dollar and ten-dollar denominations will follow in the next year or year and a half.

    An area that the Bureau considers extremely important is in our Y2K compliance area. In 1997, the Bureau completed an upgrade of its major computer systems. This put all of our major financial and management systems into compliance for Y2K. We will have all of our systems fully compliant and tested by the end of this fiscal year.

    A couple areas which deserve specific note are in the area of contracts. We are currently involved in a major currency paper solicitation which has been ongoing for a while now. We issued a draft solicitation, one of the first solicitations that was put out on the Internet. That draft was put out for over eight months for the private sector to be able to comment on and assure that we are leveling the playing field for competition.

    The bid was officially released in May of 1997 and closed January 6, 1998, and we have received competition.

    In 1993, the Bureau ordered four currency presses and three finishing lines, in response to projected demand increases from the Federal Reserve System. Subsequent to that, the demand has leveled off. Approximately two years ago we initiated a study to determine how best to utilize this equipment.
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    Currently, we are installing the three finishing lines, those are cope presses, at the D.C. facility. Those presses can replace our older equipment in D.C. and can be fit into the existing production system with minimum capital expense.

    The four intaglio presses, I10 brand name, are currently being stored at our Fort Worth facility pending resolution of a study to determine how best to maximize the value out of that equipment.

    Sir, this concludes my opening remarks, and I will answer any questions that you or Mr. Hoyer may have.

    [The prepared statement of Mr. Ferguson follows:]
    "The Official Committee record contains additional material here."

    Mr. KOLBE. Thank you.

    The Mint, Mr. Diehl? If you will just turn that microphone towards you. Thank you.

Summary Statement of Mr. Diehl

    Mr. DIEHL. Thank you, Mr. Chairman, Mr. Hoyer. It is a pleasure to be here in front of you again this year, and, of course, I am delighted that we are working under a revolving fund rather than asking for appropriations. That, of course, is a product of the work of this Committee which only three years ago passed legislation authorizing the United States Mint to operate under that revolving fund after many years of working in that direction.
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    You have also been an essential support for us in a number of other crucial reinvention initiatives that we have undertaken at the United States Mint, including granting a full procurement waiver from the requirements of the Federal Acquisition Regulations, which has allowed us to completely reinvent how we acquire goods and services that we require in the production of the nation's currency.


    What I want to talk to you about today is our strategic plan. And I know that your Committee, as well as the authorizing committees, have a great deal of interest in our agency's accommodations to the requirements of the Government Performance and Results Act (GPRA), so I want to focus on that today.

    As you know, we have three primary missions at the United States Mint. The production of circulating coinage is, of course, what we are best known for. We also manufacture and market about $400 million worth of commemorative and bullion products, which we sell around the world. And we protect about $100 billion worth of assets, mostly gold and silver that is stored at Fort Knox and at our other facilities.

    Our strategic plan has been designed to focus our efforts in these three areas. And it is increasingly driving the way in which we are making decisions at the United States Mint. I would say that we are one of the few federal agencies that is now operating under annual business plans with concrete performance measures that are tied to a mature organization-wide strategic plan.
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    We are now four years into our strategic planning effort, and it is beginning to bear fruit in very concrete ways. We began our formal planning process in October 1994, not so much out of adherence to GPRA, because we were well ahead of the requirements of GPRA, but because we recognized that strategic planning was crucial to our efforts to reinvent the United States Mint and become more customer friendly, customer focused, and more efficient.

    Our strategic plan also became the central crucial means of building a partnership between Mint management and our union, AFGE, the American Federation of Government Employees, for changing the Mint's culture and making it more businesslike, and for boosting the performance of our people.

    In a nutshell, Mr. Chairman, our plan examines each of our three missions—circulating, numismatics, and protection. It addresses each as a discrete operation and sets for each specific challenges to be met by the year 2003. It sets eight goals for those three lines of business, plus four enabling goals which support our ability to run the enterprise across all of those mission areas.

    The plan defines 25 objectives under those goals and numerous strategies for the attainment of those objectives, and there are 31 concrete measures which are tied to those goals and objectives to help us gauge our performance and our progress in meeting the objectives by the year 2003.

    We have indicated some of our goals and performance measures as an addendum to my testimony, but I would like to highlight a few of those in each of our three mission areas. These are areas in which we can probably say that we have made great progress, and there are also some in which we are disappointed with the progress that we have made. We believe we will need to intensify our efforts in the years ahead to meet those goals.
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    In the circulating coinage area, our foremost goal is to meet Federal Reserve requirements for our product. This calls for us to forecast coinage demand, to produce to meet that forecast, and to maintain inventory sufficient at both the Mint and the Fed to meet their near-term requirements.

    In 1997, we produced 14 billion coins, which is well below what we had been running for the three previous years. We had been averaging close to about 19 1/2 billion coins between 1994 and 1996. So coin demand at the Fed dropped significantly, and that showed up in our production schedules in 1997.

    We also refined our econometric models of coinage demand to meet our standard of a 95 percent confidence interval. And we are working further in that direction over the next year or so to develop forecast models that go down to the regional Federal Reserve Bank level rather than just at the national level.

    A second of our four goals we have set for this mission is to reduce overall costs of producing circulating coinage by 25 percent by the year 2002. This is a very aggressive goal, and it really reflects the kind of philosophy that we have taken toward our strategic plan. And that is to set aggressive goals and know that those aggressive goals will lead us to higher accomplishments, even if we cannot actually meet the goal itself in the timeframe we have required.

    A key measure for determining our progress on this goal is average unit cost for each denomination of U.S. coinage. In 1997, we met those goals for all denominations except the quarter. We also reduced average total cost of circulating coinage production, and we will continue to pursue our average unit cost goals by acquiring new technologies, amending procedures that add more expense than value, and reducing cycle times on processes.
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    In the numismatic area, our numismatic business plan called for selling 13 million commemorative, bullion, and other numismatic products, and achieving $363 million in sales. We exceeded both of those objectives by wide margins in 1997. Part of our success is attributable to favorable market factors. The falling price of gold, for example, and, ironically enough, the rising price of silver stimulated demand for our bullion products, which was very helpful.

    But we also get some of the credit for meeting these goals as well. We made several crucial business decisions that have paid off already, and will pay off in the future. For example, we strengthened relationships with bullion coin distributors in the U.S. and abroad, and in 1997 it paid off when the United States Mint became the number one bullion seller in all three of our markets—gold, silver, and, of course, the new platinum program.

    New commemorative collectors would welcome stellar product options at reasonable prices in restrained mintages. And in 1997, we provided them, thanks largely to commemorative coin reform legislation that Congress passed in 1996 and which we began implementation of in 1997, which greatly reduced the mintages and the flooding of the markets that we have seen in the last 10 years.

    We also knew a platinum coin would increase revenues, so we sought and received congressional authority to make them. And acting on that knowledge, we were able to reach a handsome profit of about $18 million in our numismatic line of business, probably about half of that coming from the new platinum coin program.

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    Of course, one goal has been signature for us over the past three years, and that is our commitment to match the best in business and product quality and customer service. And in a 1995 customer satisfaction survey from an independent firm, 85 percent of our numismatic customers rated us as excellent or very good as a supplier of coins and other products.

    We repeated that survey in 1997, and our rating of excellent or very good went from 85 percent up to 90 percent. Also, we just received the University of Michigan Business School's customer satisfaction survey, which is done for major companies all over the world.

    And the United States Mint, for a second consecutive year, received the highest satisfaction rating ever accorded to any government agency. Of all the government agencies and private sector companies that the University of Michigan surveys, only one company had a higher rating than us and that was Mercedes-Benz.

    In the third area, Mr. Chairman, of protection, last year, as every year, Mint police safeguarded 2,000 employees, nearly a million visitors, $400 million in customer payments, $675 million in circulating coinage, and about $100 billion of the American people's bullion reserves.

    Officers and their supervisors faced threats of increasing subtlety and seriousness, ranging from high explosives to credit card fraud. In our protection mission, our foremost goal is to provide security commensurate with changing threats to our environment. Our foremost performance measure is losses as a percentage of reserve value, and we are performing. Our losses are minuscule—pennies on the millions of dollars.

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    Mr. Chairman, there are a number of other initiatives I know this committee is interested in that I will be happy to address in questions, including our proposal for a performance-based organization, our capital investment plan, the dollar coin, the 50-state commemorative quarters, the year 2K efforts, and our enterprise information resource system.

    Thank you.

    [The prepared statement of Mr. Diehl follows:]
    "The Official Committee record contains additional material here."

    Mr. KOLBE. Thank you very much, Mr. Diehl. Very impressive statistics you gave us there about your customer work.

    Lots of opportunities for questions here. This is what I call target rich. [Laughter.]

    And I mean that in the most friendly way. There are lots of things I am curious about and interested in, but I will try to alternate here. I will take a first round of questions here, and I will start with Mr. Gregg.

    Just so that I am clear, you said you had about—you make about 850 million payments a year?

    Mr. GREGG. Yes.

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    Mr. KOLBE. Is that right? And is it $1 trillion?

    Mr. GREGG. Yes, sir.

    Mr. KOLBE. So your mean payment, then, is a little over $1,000, is that right? That would be the mean, obviously. But the median would be much less, because a lot of those are Social Security payments that would be very small, is that right?

    Mr. GREGG. Yes.

    Mr. KOLBE. And then you have large payments to hospitals, and so forth, so your mean is over $1,000.

    Would you pull the mike just a little closer to you, to make it easier for us to hear and for it to get recorded here.


    Let me start with some questions on the Y2K, because we are very concerned about that. You hit it head on. Your view is that you are—I think you said that you believe you are on schedule and you will be fully compliant. Is that correct?

    Mr. GREGG. Yes, sir.

    Mr. KOLBE. You say that with great confidence.
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    Mr. GREGG. I say it with confidence. I also say that it is not where—we are not where I would like to be. But I came to the Financial Management Service on December 15th. That afternoon I had a meeting with all of our senior managers, and I said our top priority is year 2000. We have got a lot of other things on our plate, but if we do not succeed in that, then nothing else is going to matter. And that especially is true in the payments area.

    One of the first things I did was made clear to everyone in the organization that the assistant commissioner in charge of our information resources had authority to speak for me on issues dealing with Y2K, and I think that action alone has helped to clarify the importance but also who is responsible.


    Mr. KOLBE. How much do you have in your budget request this year for Y2K compliance activity?

    Mr. GREGG. Just about $2 million in our '99 budget has been requested.

    Mr. KOLBE. That is going to be sufficient for an agency of the scope that you are talking about?

     Mr. GREGG. We are going to redirect a couple more million within our other resources within FMS. So we have—in our direct appropriation for '99, we have approximately $4 million. I think my own view is that the resources are tight, but I do think that we have sufficient resources to do what we need to do for Y2K.
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     Ms. KILLEFER. Mr. Chairman, if I could just add to the question on '98. As part of the supplemental flexibilities that we have asked for, one of the bureaus that we are requesting additional funding for is FMS for $7.4 million to actually get in contract support and speed up some of the changes that Dick is talking about.

    Our feeling is we need to do this in '98, and so the level in '99 is much lower because most of the work actually will be completed in '98. But we do need additional funding in '98.

    Mr. KOLBE. Your submission here shows $4 million in the base level and $2 million in the '99 request, for a total of $6 million for FMS in the Y2K. Is that——

    Ms. KILLEFER. For '99?

    Mr. KOLBE. For '99.

    Mr. GREGG. For '99. I believe——

    Mr. KOLBE. That is what I am trying to talk about here.

    Mr. GREGG. Just four.

    Mr. KOLBE. Just four?
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    Mr. GREGG. No, it is just four. I am pretty sure I was right.

    Mr. KOLBE. This is from the Department of the Treasury.

    Mr. GREGG. One thing that could be confusing, Mr. Chairman—and I do not know exactly which one that is—but we do have some other sources of funds. Other than our direct appropriations, we have some reimbursables from other agencies that we——

    Ms. KILLEFER. We do. It is four in the base level, which is what Dick is referring to, and then the additional two comes from other sources. So it is six.

    Mr. KOLBE. It is six. Okay.

    Ms. KILLEFER. Sorry for the confusion.

    Mr. KOLBE. I have not even started here. [Laughter.]

    I am on the first line with the first——


    Mr. KOLBE. But I am going to pass to Mr. Hoyer.

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    Mr. HOYER. Well, I was ready to have you continue, Mr. Chairman. I was interested in that.


    The debt collection initiative—obviously, there has been a lot of controversy about that, one of the highest priorities. You referenced this, but are you confident that FMS has the necessary resources and manpower to accomplish this task?

    Mr. GREGG. I think we do, Mr. Hoyer. There is a lot to be done, but the approach that we are taking is to manage and direct this effort, as opposed to having a huge number of people within FMS do the work. And we have, for example, contracts with 13 private collection agencies that will assist us. We are doing computer matching.

    So there is certainly a lot of work to be done. I think that we do have the resources, and we have—since I have been there, we have reorganized that area of FMS, and I think we have got some very good managers in there. And they are focused on getting the things done that need to be done, and also focused on I think, making sure that the expectations are realistic, to say how much of the debt that is out there is actually collectible, and then focus on what is the best way to collect that.

    Mr. HOYER. On the 13 contracts to which you refer, what is the total value of those contracts? Do you know, sir?

    Mr. GREGG. I do not have that right off the top of my head. I do know that for the most part—and, well, the contracts are set up where they are paid by what they collect. They get 28 percent of the collections that they obtain, so I am sure there is some cost to setting up the contracts themselves. But I do not think there is any payment at all coming out from FMS.
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    Mr. HOYER. So these are contingent contracts?

    Mr. GREGG. That is correct.

    Mr. HOYER. Sort of like a regular debt collection agency would take a percentage of——

    Mr. GREGG. Yes.

    Mr. HOYER [continuing]. The debt collected. What is the total amount of debt that that 28 percent might possibly be attributed to?

    Mr. GREGG. We are in the midst of trying to figure that out, to be quite blunt.

     Mr. HOYER. Right.

    Mr. GREGG. The total amount of delinquent debt, of non-tax delinquent debt, is $52 billion. And we have gone through the largest five agencies, to work with them to assess how much of that is, first of all, available for transfer to us for offset, how much of it is available for cross servicing.

    And in the process of that effort, which has gone on the last two months, the numbers declined quite dramatically actually. Beyond that, we have contracted with a private contractor to further analyze the debt of not only those five agencies but other large creditor agencies to analyze and come back to us with a report to say, ''This is our assessment of how much of that debt is likely to be collected.''
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    Mr. HOYER. And have you made a determination of that yet, ball park?

    Mr. GREGG. No, we have not yet.

    Mr. HOYER. That is still in process?

    Mr. GREGG. We are still in the process. I expect that by the end of March, or very early April, we will have at least the first round of evaluations with the large agencies and the report from the contractor that we have engaged to help us in this. And we would be happy to provide you with that information as——

    Mr. HOYER. Do we have any of the private sector that—maybe not analogous debt, obviously. But of the $52 billion to which you refer, are we talking about 40 percent, 30 percent, 20 percent probably being—10 percent?

    Ms. KILLEFER. Well, I think, as Dick mentioned, it is unusual. It does not actually compare with private debt because we talk about debt that is already 180 days old, and private collection is much closer into the time that the debt goes delinquent.

    I think what we are talking about is of the $52 billion, a fraction of that—we do not know yet what it is—but it may be as low as 10 percent will actually come to FMS for cross servicing. And then, of that, given the age of the debt, one can look at, once again, small fractions of that being collectible, frankly, because of the age of the debt. We do not know that yet, though. That is why we are having an outsider look at the status of those assets.
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    Mr. HOYER. What are we doing to accelerate the time of initial action that we take vis-a-vis the age of the debt? In other words, moving 30 days, 60 days, subsequent to the debts being delinquent.

    Mr. HAMMOND. Well, I think the statute calls for FMS to be in receipt of the debt once it becomes 180 days delinquent. So the responsibility for managing delinquent federal obligations does not even begin at FMS until the debt is six months old.

    Mr. HOYER. Based upon what Secretary Killefer said, it may—well, let me back up. What percentage of their debt are the agencies collecting prior to sending them to you? In other words, you only get them when they are really tough and the probability of collection is pretty small.

    Mr. HAMMOND. I think one of the issues that is really challenging on debt collection across the government is that the quality and the type of debt varies widely among agencies. You can be looking at secured obligations at HUD, for example, dealing with multi-family apartment structures. On the other hand, you may be dealing with delinquent judgments and fines at other agencies.

    So the quality of the collection capability is really asset dependent or debt dependent in many cases. That is why this portfolio evaluation is so key to understanding what the expectations for this program are really going to be. As far as dealing with debt prior to 180 days, though, I think it is important to note that OMB has taken the lead as encouraging agencies to find ways to create obligations that do not even become delinquent.
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    And as part of the '99 budget submission, one of the President's management's initiatives is, in fact, trying to create a better front-end process, which will in turn lead to hopefully fewer delinquencies to deal with at the back end.

    Mr. HOYER. I am not sure I understand the phrase—it is certainly desirable—of creating obligations that do not ever become debts. And as soon as the private sector learns how to do that from the Federal Government, which is pursuing that objective, they are going to do it, I am sure. All of us would like to do that. What does that mean?

    Mr. HAMMOND. I apologize for the confusion. In essence, what I am saying is that——

    Mr. HOYER. You do not have to apologize. I would just like to know what it means.

    Mr. HAMMOND. The notion is to try to create obligations on the front end which become more collectable, and, therefore, are performing such that while they are debt—for example, student loans. Student loans are, by definition, debt.

    They should be, however, performing and collectable, and there is a number of steps that can be taken at the beginning of that process to make the loan more collectable during the life of the obligation, such that it never becomes delinquent. You never have to send it to a private collection agency. That is the point I was trying to make.
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    Mr. HOYER. Obviously, one of the problems with public sector debt is that the level of angst regarding collection is substantially lower. That is why these debts are so old, because the angst of the agency to collect and the consequences of non-collection, are not as high as they are in the private sector, obviously.

    Now, the larger the organization is in the private sector, of course, they simply pass it along to the other consumers, and then the other consumers have a one percent or one and a half percent premium on whatever their payment is for whatever the product or service is, which amortizes that debt that the private sector owns. We do not do that, although—well, we do do that. We do that at a higher tax rate.

    Mr. Chairman, I will yield to you. You wanted——


    Mr. KOLBE. Just one question, just on that issue of the student loans. I am not sure I understand how you make them better collectable. I mean, we set the parameters for who is going to get them. Sure, you can make your—do better risk analysis, but then you do not—the students do not get the loans.

    Mr. HAMMOND. I think, you know——

    Mr. KOLBE. I mean, only rich parents' kids get loans.

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    Mr. HAMMOND. I think the question is, really, there are a number of steps, as I understand it, and I would really refer that to OMB and the Department of Education. But there are a number of initiatives that they have underway for improving the origination process.


    Mr. HOYER. Thank you, Mr. Chairman.

    Mr. Gregg, one of the things I think that we need to do in FMS, as you look at this, is to make a recommendation to us and perhaps the authorizing committees as to whether or not receiving debt 180 days old is a realistic enterprise, and whether we are spending more money to accomplish it, whether it is through contracts to private sectors or through public sector employees trying to provide that service.

    That is why I asked you what the value of the debt is—$52 billion. Obviously, these are all contingent contracts, so presumably there is no cost to the Federal Government other than the administrative costs of processing the debt notice to the debt collector, so that they know what they are trying to collect.

    I was not very involved with the Act, but in light of the fact that we do oversee the agency that is responsible for doing the old debt, the most difficult debt, we ought to determine whether or not there is any use in doing that.

    Mr. GREGG. My own——
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    Mr. HOYER. If we get down to 10 percent, and then what I understand Secretary Killefer saying, it is a small percentage of that 10 percent that may be collectable that is actually collected.

    First of all, I presume the private sector would start dropping out at some point in time, although the sums are very large, even at small percentages. At $5.2 billion, you do not have to collect $2 million to have a profit, if you—

    Mr. GREGG. I think a couple of things, Mr. Hoyer. First of all, the Debt Collection Act is new, and some of the $52 billion is—the debt there has been there for years and years, and that is just something we will have to assess.

    I think on an ongoing basis the idea of having debt referred to us after it is six months delinquent is actually soon enough, because of the processes that we have for using offset, for using cross servicing, for using garnishment, and those sort of procedures. I think actually we have many years of some debts that have been on the books that probably are not collectable. They probably need to be written off. But I think going forward, I think the six-month timeframe is probably very realistic, in my opinion.

    Mr. HOYER. Sufficient time in which to get it, and the agencies need to work on it in that timeframe.

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    Okay. Mr. Chairman, I have a lot of other questions, but I will yield back to you and then go a second round.

    Mr. KOLBE. Keep going back and forth here. I am going to just follow up quickly on the debt collection there.

    Did I hear you say that there is about $52 billion of uncollected debt but only about 10 percent of that is in your hands? No?

    Mr. GREGG. There is $52 billion of debt. We are assessing this——

    Mr. KOLBE. That is past due?

    Mr. GREGG. Yes, that is past due.

    Ms. KILLEFER. One hundred eighty days past due.

    Mr. KOLBE. Oh, that is—all of that is 180 days past due?

    Mr. GREGG. Yes.

    Ms. KILLEFER. That is correct.

    Mr. KOLBE. But only 10 percent of that has been turned over to you? I thought it was all supposed to be turned over to you.
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    Mr. HOYER. Mr. Chairman, I think what they are saying is 10 percent of that is probably collectable.

    Ms. KILLEFER. Collectable, yes. It could be referred.

    Mr. HAMMOND. I was going to say, there are two different programs. One is administrative offset, where we match federal payments against those delinquent debts, and a very high percentage of that $52 billion will be put into a debtor database for matching against those payment streams.

    There is a very small percentage, just the 10 percent, which will ultimately be referred to FMS to be passed on to the private collection agencies for independent collection action. The statute contains a number of exemptions from referral for cross servicing, as well as there are other administrative issues with regards to passing that debt through.

    Mr. KOLBE. If 10 percent of that is collectable, roughly 5.8—we will say $6 billion of that is collectable, and yet I think you also said when fully implemented you expected to have revenues of about $85 to $100 million annually. So we are talking 60 years to collect all of this?

    Mr. HAMMOND. Keep in mind that of the collectable number, we do not know, of that $52 billion, what is collectable. The 10 percent that you were talking about, the $5.2 billion, is the upper range of what may be referred on to the private collection agencies for other collection action. It will be a percentage, and for some of those debts a very small percentage, of that $5.2 billion that those private collection agencies will ultimately be able to collect.
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    What we do not have for you are meaningful assessments of that $52 billion as to its ultimate collectability. That is the analysis that is going on right now. It is——

    Mr. KOLBE. The idea of your making some suggestions to us in this area, and to the authorizing committees, that Mr. Hoyer put to you I think is a very good one.

    It just occurred to me that if this was a private business, at the end the private business would have to take a writeoff of its debt, and that goes against the bottom line. We do not have any system for making the agencies write it off and take it against their bottom line.

    Mr. HOYER. They do have a synergy, though. The taxpayer pays in both instances.

    Mr. KOLBE. Yes.


    Mr. HOYER. If they write it off, the taxpayer pays for it for lack of revenues against profits. If we write it off, we pay for it directly.

    Mr. KOLBE. What I was getting at is if there would be some kind of system that might make some of these agencies, before they turn it over to you and say, ''This is uncollectible,'' give them more of an incentive for collecting some of that if they knew that it was going to go against their budget the next year or something.
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    Mr. HAMMOND. It is my understanding that OMB is, in fact, working with the agencies to try to refine the agency writeoff policies, and then build that into some of the credit program analysis.

    Mr. HOYER. Mr. Chairman, could I clarify—when you say—am I correct that the $47 billion, is what you are saying is there may be a set off for payments going to the debtor from the Federal Government?

    Ms. KILLEFER. That is correct.

    Mr. HOYER. Either in terms of taxes, contract dollars for services or goods——

    Ms. KILLEFER. Or wages.

    Mr. HOYER [continuing]. Or wages. Is that what you are saying?

    Mr. HAMMOND. Yes.

    Mr. HOYER. How much of that $47 billion do you think we will collect in that way? Because that puts a lot better spin on it if you are not talking about losing the $47 billion. See what I am saying, Mr. Hammond?

    Mr. HAMMOND. Yes. What I cannot tell you at this point is what we know the additional tools will bring us in collections. What I can observe is that what the success of the tax refund offset program has been over the past few years.
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    In last year's filing season, about $1.8 billion was offset through tax refund offset for delinquent federal debts and the collection of child support combined. This year, even though we are only in the first week of March, we have already offset through the tax refund process over $500 million in delinquent federal and state child support obligations.

    Mr. KOLBE. I have a series of more questions on electronic transfers, but I do not want Mr. Ferguson and Mr. Diehl to feel neglected at that end of the table. [Laughter.]


    Mr. Ferguson, let me ask you a few questions. Last year you were directed to undertake a study of the most effective option for replacing your production facility here in Washington, and that was to be submitted by May 1st. You have just sent us a letter in the last month asking for a 90-day extension. What is the problem? What is going on here? Why do we need that extension?

    Mr. FERGUSON. Sir, we have requested that extension in order to complete the study in its most thorough form. I would not classify it or define it as a problem, but rather an extremely challenging study that requires a great deal of thought, and effort. We have assigned a senior executive to lead this study.

    We have put forth a great deal of effort, but there are a number of factors that need to be considered—engineering, environmental, financial, transportation, security—and we are addressing all of those things. We want it to be a comprehensive document that the Department and the committee can trust and use to make a very, very challenging decision.
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    Mr. KOLBE. And when would you expect to make that decision, that final decision?

    Mr. FERGUSON. Sir, we have asked for 90 days. The report then becomes due by August 1st, and that document will then serve as the basis for making the decision, which will rely on a lot of other people to make that decision in the end.

    Mr. KOLBE. Yes. Ultimately, the Congress, I suppose.

    Ms. KILLEFER. In consultation with you.

    Mr. KOLBE. In consultation with the Congress on that.

    But you would not expect anything to happen on that in the current fiscal year, then?

    Mr. FERGUSON. Certainly not the final decision. We will be back up here and provide briefings, whatever is required.

    Mr. KOLBE. I want to just turn it back to Mr. Hoyer for some more questions. But let me just follow up on that one, if I might, to the issue of the new facility—you have all told us that about 40 percent of your total capacity—I think that is total, or maybe that is just the Washington facility is in $1 production, is that correct?

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    Mr. FERGUSON. Currently, about 45 percent of our production is in $1 notes, sir.

    Mr. KOLBE. Both facilities.

    Mr. FERGUSON. Total facilities.

    Mr. KOLBE. It is about the same at each of them roughly?

    Mr. FERGUSON. A little higher in Fort Worth, actually.

    Mr. KOLBE. Mr. Diehl is going to be introducing a new design for a dollar coin. If that coin were more successful than perhaps people had anticipated, would that not suggest something about the size and scope of a new facility that you need?

    Mr. FERGUSON. Obviously, sir, a number of factors, as far as demand projections relate to currency, are of great interest in the study. Things that are difficult to project—the impact of the new dollar coin that you mentioned, the impact of smart cards, debit cards, electronic funds transfer, things that are new and coming onto the horizon. Chairman Castle on Banking feels very strongly that these things will take over completely.

    But, certainly, there are a number of factors that we are trying to get our hands on which will, in fact, have a major impact on the size and scope of the Bureau of Engraving and Printing in total.
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    Mr. KOLBE. All of those are going to be included in the study, or is the study just of the facility?

    Mr. FERGUSON. To the best extent possible, sir, we are trying to look at what level demand is a driver in the decision. We cannot project all of those factors, and the Federal Reserve cannot at this point. So what we are looking at is at what point is demand itself a decision factor, and we put that in and say if it is more than this, that would force the decision in one direction. If it is less, it no longer is a driver.

    I will say, though, that we can longer look just at numbers of notes as our business. Notes are going to become more and more complex. They are going to require more and more manufacturing steps as we keep ahead of the counterfeiting threats of technology. So, therefore, one of the space issues will, in effect, be the potential of adding new manufacturing steps to the production of U.S. currency.

    Mr. KOLBE. I have some more questions, but I will yield to Mr. Hoyer.


    Mr. HOYER. An issue in terms of—we do not take the same steps on one-dollar bills that we do on hundreds and fifties, do we, or do we?

    Mr. FERGUSON. Currently, at the Bureau, as opposed to in the base materials, they go through the same manufacturing steps. However, we use more of the capabilities of our equipment in putting more features on the high denomination notes.
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    I will say, though, that if you think of the total capabilities of our equipment, we have utilized every possible capability on our new currency, and to add any additional materials, different features, we will have to add new manufacturing steps.


    Mr. HOYER. Going on to the things that are going to go into this, it is my understanding security obviously is a significant concern. And I also want to say you are trying to quantify in this study the various aspects. Tell me about quantifying security. How does that work?

    Mr. FERGUSON. Well, sir, you cannot live in our business and not go to bed every night worrying about security.

    Mr. HOYER. We are in the same business, by the way. [Laughter.]

    Mr. FERGUSON. Right.

    Certainly, a new facility offers the potential of greatly enhanced security, especially in the area of perimeter security. Director Diehl mentioned protecting against new and different types of threats from the outside, as opposed to internal theft.

    The issue of the perimeter—protecting the perimeter of an urban downtown facility is much more difficult than protecting a new site, putting up adequate setbacks with double fencing, etcetera. So there is the issue of external security which could be enhanced.
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    Internal security at a new facility offers better sight lines, better camera lines. Designing a building from the outset with that in mind provides for the optimization of new security technology. However, we cannot, even if we are looking at a new facility—sit back and not take advantage of every possible security enhancement in our current facility.

    We currently produce about five billion notes in our current Washington facility every year, and we will not step away from making increased security investments in Washington. Trying to quantify that comes down to looking at costs, looking at the threat, looking at the potential losses, and trying to come up with an analytical way of doing that. It is very difficult, but it is one of the major issues in the study.


    Mr. HOYER. Continuing on that, it is my understanding the Peat Marwick recommendations have been almost fully implemented. Is that correct?

    Mr. FERGUSON. Yes, sir, they have been almost fully implemented, along with the Secret Service recommendations that were made several years ago. We are currently going to begin this summer a review of all of those recommendations to determine that what we said we had done three years ago have been maintained. In two years we will have the Secret Service back in again for a full evaluation.

    Mr. HOYER. I think you mentioned this in your statement, but obviously there are still some security lapses, which is why you stay awake at night or do not sleep quite as soundly at night, worrying about whether they have occurred. Assuming that we will never get to 100 percent, but that you want to get 99 point something, pretty high, where did you say we were in terms of security breaches at this point in time? Where do you want to be?
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    Mr. FERGUSON. Since our last testimony last year, we have had seven incidents reported. These are reports from the field where a currency has been reported short in shipments that we, upon investigation, feel has the potential to have occurred in one of our facilities. They represent approximately $17,500 in face value.

    So that would be 99.999 percent, I believe. However, I will tell you that that is not an acceptable number.

    Mr. HOYER. The issue is not so much the amount, although presumably the more you steal the more likely one is to find out about it. But obviously, if you steal anything, there is the possibility you can add volume to the process you are using to steal it. Got me? If you have got a wheelbarrow going out of the bank and you have got a dollar in it, not much problem there. But if you put $100 million and the same wheelbarrow goes out, it is a big problem.

    That was my point in terms of how did this—you have not found out presumably how this was done at this point in time and how——

    Mr. FERGUSON. Yes.

    Mr. HOYER [continuing]. That relates to Peat Marwick's recommendations, and do we need to go beyond Peat Marwick's recommendations to—that is my point.

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    Mr. FERGUSON. Yes, sir. I understand it completely now. And yes, we have identified how this occurred, and have identified, we believe, the individuals responsible who are no longer employed. It goes beyond what was recommended and points out additional areas that we need to take efforts.

    As I said, we will not step away from those. We are putting new efforts in place to address this pilferage level of theft. And, again, certainly not to minimize that. It is something we take very seriously, and if allowed to proliferate would be a big issue. We have 2,600 employees. If they were all taking a little bit, that adds up very quickly. Fortunately, we have excellent employees, and only a few have availed themselves of this and have been identified and removed.


    Mr. HOYER. Let me ask you one last question on this round. The Chairman has been very generous with the time.

    Skill level of the workforce at BEP—I want to know how important you think that is, particularly as it relates to the existing workforce, and how that will compute into your study of siting of new facilities.

    Mr. FERGUSON. Sir, we have—perhaps I may be a little too self-involved in this, having worked my career there. We have the finest workforce of any security plant I have seen anywhere in the world, and I have seen a number.

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    Our employees are dedicated, they are highly skilled, they possess a wide range of skills that could not easily be replicated without them, and it is something that, as we look at relocation of a facility, we always look at relocating our workforce also. We are not thinking of leaving them behind and replacing them. That would not be possible in the short term.

    Mr. HOYER. I hope you are not thinking of leaving them behind, period.

    Mr. FERGUSON. Oh. Never.

    Mr. HOYER. Hopefully, you are not thinking of leaving.

    Thank you, Mr. Chairman.

    Mr. KOLBE. I think there was a message there. [Laughter.]

    And it was well received.

    Mr. HOYER. However subtle it might have been. [Laughter.]

    Mr. FERGUSON. It is duly noted.


    Mr. KOLBE. Mr. Diehl, why is coin demand dropping?
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    Mr. DIEHL. Coin demand is dropping for a couple of reasons. First of all, we know that coin demand is a cyclical business. And as an economic cycle matures, coin demand falls off as we get deeper into it. And this has been an extraordinarily strong and long economic growth period. In fact, in 1994, 1995, and 1996, as I said earlier, we averaged about 19 1/2 billion coins a year in production to meet the Federal Reserve requirements. And two of those three years set all-time records for us.

    So we knew that this period of very high demand would not last forever. In fact, we were crossing our fingers that it would not last much longer, because we were really stretching the production capacity of our people and our equipment through 1996.

    1997 saw a sharper drop in coin demand than what our economic forecasting models indicated we should expect. I think it is very clear that most of the reason for that additional drop is related to some new technology that has come into the market from the private sector, which we call coin recycling or coin recirculation technology.

    There are two or three companies that are offering this service. One, in particular, is probably the best known, has gotten the most media coverage, and its name is Coin Star. Since early 1995, they, as an industry, have expanded very rapidly. It has been remarkable how quickly they have expanded the number of machines and the number of markets that they are in. We have seen a substantial impact on coin demand resulting from their penetration of more markets.

    Mr. KOLBE. So it just means less coins in circulation?

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    Mr. DIEHL. What it means is that coins——

    Mr. KOLBE. Coins are circulating faster. They are not—people are not holding them, so they are——

    Mr. DIEHL. That is right. The large stockpiles of coins that people store in mason jars and piggy banks and sometimes big five-gallon plastic water barrels, are being recycled much more rapidly in these markets.

    Mr. KOLBE. Well, is the demand for coins dropping in all of the categories of coins?

    Mr. DIEHL. They are.

    Mr. KOLBE. The pennies?

    Mr. DIEHL. No, it is dropping faster in pennies, and to a lesser degree——

    Mr. KOLBE. There were periods of places with severe shortages of pennies. Is that no longer true?

    Mr. DIEHL. Well, there were some transitory shortages of pennies during the peak demand periods of 1994 and 1995, during the summer months. But no, there are no shortages. We are not getting any kind of reports of shortages like that at this time. That is not surprising, because coin demand, in general, has fallen off.
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    But what we have seen happen is that, as you would expect, as people have taken these coins into grocery stores to be recycled, they have had a tendency which I think is a natural human tendency, when I leave my coins on my dresser top in the evening, the next morning I pick out the quarters and the dimes and maybe some of the nickels, and it is the pennies I leave behind and maybe some of the nickels.

    What we are seeing is that the impact of Coin Star and its competitors is very clear on the penny. It is statistically significant on the penny and on the nickel, but we are not seeing a statistical impact on——

    Mr. KOLBE. Okay.

    Mr. DIEHL [continuing]. Demand for the dime and the quarter.


    Mr. KOLBE. How many Susan B. Anthonys do you have in stock at the moment?

    Mr. DIEHL. We have——

    Mr. KOLBE. And how many did you put into circulation in that last year?

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    Mr. DIEHL. Okay. We have right in the neighborhood of around 120 million. Is that right? About 120 million are currently in our stockpile. In the last 12 months, demand has been at around 48 million a year. That is a significant dropoff from what we had seen a year or even two years ago, where it had bounced up to around 60 million a year. We are seeing a continual month-by-month slow deterioration in demand.

    Mr. KOLBE. And what do you attribute that to? Surely not the coin—faster circulation.

    Mr. DIEHL. No. We think that the dropoff is related to the fact that when the United States Postal Service began introducing change machines and stamp machines——

    Mr. KOLBE. I wondered whether that was the biggest——

    Mr. DIEHL [continuing]. That use the Susan B, that they have stopped their aggressive expansion of the use of those machines.

    Mr. KOLBE. Okay. Nonetheless, even at roughly 48 million, you are looking at, by the end of 1999, roughly being pretty much out of these things.

    Mr. DIEHL. Yes. We are currently looking at the April/May timeframe of the year 2000 when we would exhaust the supplies.

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    Mr. KOLBE. When are you going to be prepared to introduce the new $1 coin design? What is your plan for the new design coin?

    Mr. DIEHL. We intend to be in production of the new design by January 1, 2000.

    Mr. KOLBE. Do you think you are going to be able to meet that?

    Mr. DIEHL. I think so, yes.

    Mr. KOLBE. You and I discussed in our office—would you share with the committee some potential problems you might have in being able to meet that deadline? That is a very tight deadline. That is——

    Mr. DIEHL. Oh, it is. It is a tight deadline.

    Mr. KOLBE. That is 20 months away.

    Mr. DIEHL. Yes, it is very much a tight deadline. We are in the process of determining what is the best coin alloy or clad material to use to meet the requirements of the legislation—that it be gold in color, have similar anti-counterfeiting characteristics as current coinage does. We have not selected, at this point, which clad material. We do not really need to select at this point which clad material or which alloy we would use.

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    We have focused on two possibilities, but we continue to work with coin strip manufacturers and suppliers to narrow down the range of options and make sure that we are looking at the full range of options that should be considered.


    Mr. KOLBE. Is design holding up the process?

    Mr. DIEHL. No. Design is not holding up the process. The issue of what image goes on the obverse of the coin or on the reverse side of the coin is one that was left to the Secretary of Treasury in the legislation that was passed and signed into law by the President on December 1, 1997.

    We are working with the Treasury Department to come up with an appropriate process by which the Secretary would be advised and——

    Mr. KOLBE. So you expect to be able to put that decision in front of them at the appropriate time and not have a delay on that account.

    Mr. DIEHL. Yes, I do.

    Mr. KOLBE. You did mention something about your advisory committee and the concerns about the timeframe of getting that advisory committee in place.

    Mr. DIEHL. Yes. Unfortunately, we are, of course, subject to the requirements of the Federal Advisory Committee Act, which would impose certain kinds of requirements in terms of public hearings and the like. If an advisory committee is created to advise the Secretary on this, and if it is subject to those FACA requirements, then——
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    Mr. KOLBE. The legislation did not require the creation?

    Mr. DIEHL. It did not require the creation of——

    Mr. KOLBE. And you do not automatically do that? So you may not have to do that?

    Mr. DIEHL. It is at the option of the Secretary as to whether an advisory committee of some kind is created. And, of course, the FACA requirements apply in certain circumstances. In other circumstances, they do not apply. For example, my understanding is that if the committee were all government employees, then the FACA requirements would not be imposed on the committee. But if there is anyone from outside the government who is not a full-time employee of the government, then the FACA requirements would have to be met.

    Mr. KOLBE. Presumably, if you want a real advisory committee that is going to help with the acceptance of this new design, you are going to want people from outside.

    Mr. DIEHL. I think in the best of all possible worlds, we would have broader representation.

    Mr. KOLBE. Secretary Killefer is nodding at that. Then, does not that suggest that you need to make a decision and get—if you are going to have to comply, that you need to get moving?
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    Mr. DIEHL. Yes.

    Ms. KILLEFER. Just to be clear, because we have been working closely on that, we already have a memo in front of the Secretary laying out options, and we will be meeting on that. So we are moving very quickly.

    We are also proceeding with OMB to request a FACA committee, if we need one. So we are kind of parallel processing to ensure that nothing holds us up. And I think—as we have been working closely on this, I agree with Phil that that will not hold us up in the process.

    Mr. KOLBE. Well, but you did say it is how many months, roughly, it could be to get a FACA-approved committee?

    Mr. DIEHL. Well, we have indications that we can do it quickly. We are hoping that we are going to be able to do it quickly.

    Ms. KILLEFER. We have the support of the administration to do it quickly.

    Mr. KOLBE. I will believe that when I see that it actually happens that way, just knowing how these things actually work.

    Mr. DIEHL. The schedule we are on is that by this fall we would need to know what the design is going to be on the observe. By sometime this fall, we need to know what that design is going to be. So we still have five or six months ahead of us to make this decision.
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    Mr. KOLBE. I have more than taken my share of time here.

    Mr. Hoyer?


    Mr. HOYER. Mr. Ferguson, let me go back to you. Tell me about the status of relations with your employee representatives.

    Mr. FERGUSON. We are in the midst of an extremely challenging labor relations issue. A number of years ago, 15 of our craft and non-craft unions sought to have the pay-setting system become negotiable. After a variety of FLRA and court intercedings, the decision was made approximately 14 months ago that, in fact, the wage-setting system was negotiable. And after a ULP decision in December, it became obvious that, negotiations needed to occur.

    We are in the midst of an extremely challenging issue of trying to negotiate the wage-setting system with 15 separate unions. It is something that in the federal sector there is not a lot of experience, quite frankly, on either side of the table. And I think that perhaps there were some unrealistic expectations on both sides of the table when we started.

    We have made some progress. We are in negotiations with a total of nine unions, with six more to come in. And it is my firm belief that at the end of the negotiations that our mutual interests far outweigh our disagreements, and that we will come up with, at the end of this painful process, a much better system and actually a much better labor relations. But during the process, it is difficult.
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    Mr. HOYER. Okay. When you say you have completed the negotiations with nine of the——

    Mr. FERGUSON. I said we are in negotiations.

    Mr. HOYER. In negotiations.

    Mr. HOYER. With six or——

    Mr. FERGUSON. Six are pending to come in to the table. And as I said, with the nine, they are at various stages of having met and potentially seeking federal mediation to assist us.


    Mr. HOYER. Okay. Mr. Diehl, what are the costs to produce the dollar coin? Have we projected that?

    Mr. DIEHL. We are estimating that it is going to cost about eight cents per coin to produce the dollar coin. That is based on our experience with the Susan B. Anthony, and it is a rough estimate but I think it is a pretty good estimate at this point.

    Mr. HOYER. How does that relate to, for instance, the 50-cent piece? What does that cost us to produce?
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    Mr. DIEHL. Right about the same, I think. It is right around seven cents.


    Mr. HOYER. Okay. The Chairman, of course, has been a strong proponent of this and knows much more about this than I do. But my understanding is there is a new poll from CBS News that shows about three-quarters of the people do not want a dollar coin. That may, obviously, change. And five percent believe that the dollar coin should replace the dollar bill. Legislation provides that that would not happen. We will have both available.

    Do you have any projections as to what those present sentiments will have on demand for the dollar coin?

    Mr. DIEHL. We expect the demand for the dollar coin to be modest, quite frankly. As I indicated earlier, the current demand level for the Susan B. Anthony is right around 50 million coins a year. When a new dollar coin is issued in the year 2000, we expect the novelty of that coin to generate a lot of publicity, and to create a lot of at least temporary demand for the coin, where demand might be as high as 100- to even 150 million coins. That is a very tiny fraction of our 15- to 20 billion coin production capacity.

    What I get from the CBS poll that you are referring to, is that it showed 74 percent of the American population saying that they did not want a new dollar coin, I took a couple of things away from that. One was that that question has been asked in a number of polls over the last seven or eight years, and I think that is the highest I have seen that number.
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    Usually, there is a little more acceptance of the dollar coin, as long as it is not linked to the elimination of the dollar bill. That is when it begins to get more controversial.

    The second thing I think it indicates very clearly, is that we have a public education campaign to do when we roll out the new dollar coin. We need to inform people as to why we are producing the dollar coin, what the uses of the dollar coin are, and to make sure that we come up with a dollar coin that does not suffer the disadvantages that the Susan B did, and that it is not confused with the quarter. That is one of the reasons why the legislation requires it be gold in color. Also, it will have a distinctive edge, so that the sight-impaired can tell the difference by touch with a quarter.

    We think that by working with the vending industry, with the banking industry, the other intermediaries between us and the American public to make sure that we have the kind of support for the implementation of this dollar coin, that we are going to be able to cover any kind of public resistance to a new coin.


    Mr. HOYER. Last question on this round. Your reorganization——

    Mr. DIEHL. Yes.

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    Mr. HOYER [continuing]. What ramifications will that have as it relates to level of workforce? And have you had your employee representatives involved in the process?

    Mr. DIEHL. Yes. We are going through a reorganization as we speak, we are aiming for implementation of that reorganization by the end of March. We have worked hand in glove with representatives of AFGE as we have put together the reorganization plan, the implementation plan, and our communication plan with our employees.

    AFGE representatives from each of our facilities have been at the table with us the whole time. And we have undertaken the reorganization as part of our partnership agreement.

    The reorganization, for the most part, is affecting our headquarters employees. It is having very little effect on the field facilities. It is rearranging the boxes of our organization in order to help us overcome organizational obstacles, that we have faced to higher performance for many years.

    I think that there are some significant efficiencies that will come out of this reorganization, but I think the reorganization itself is unlikely to have a significant impact on the number of employees that we have at the headquarters.


    There are some other things that are going on at the United States Mint, which are not a part of the reorganization, that are more likely to have an impact on our manpower requirements. For example, over the last three years we have reduced the number of FTEs involved in human resource functions by about 27 percent. And we are aggressively looking at some options where we can reduce that by another substantial percentage over the next 12 to 18 months.
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    When we finish the implementation on October 1 of our coins project, our enterprise-wide information system which includes financial management information, manufacturing information and is also our primary means of fixing our year 2K problem, when that is implemented it will make us far more efficient in the way in which we do our financial accounting. And because of that efficiency, we will not need as many people doing financial accounting work at the Mint as we have today.

    So those two initiatives, in particular, much more so than our reorganization, are likely to have an impact over the next 12 to 18 months on our manpower requirements.

    Mr. HOYER. Thank you very much.

    Thank you, Mr. Chairman.

    Mr. KOLBE. Thank you. We are just starting a vote here. I think we can finish this up here.


    I have a couple more questions. Mr. Ferguson, and then I do want to come back to Mr. Gregg—Mr. Ferguson, you did not mention anything about redesigning the one-dollar bill. Do you plan to have a one-dollar bill redesign?

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    Mr. FERGUSON. Currently, sir, we have completed preliminary designs on fives and tens. We are looking at the potential of a minimal redesign, if you will, or a minimal alteration to the one-dollar note, to incorporate the feature that we added starting with the 50 that helped the sight-impaired.

    So we are looking at a minimum issue on the one dollar note currently, and I will say that the potential, though, is we are looking longer term at the potential of what—the benefits of perhaps looking at the substrate and going to new technologies in that area, which would require a further redesign in, you know, the next century.

    Mr. KOLBE. The $100 bill, with all of the counterfeit measures in it, anti-counterfeit measures in it, costs about what to produce?

    Mr. FERGUSON. Approximately 5.2 cents as compared to our mean—our mean cost is about four cents; a one-dollar note is about three.

    Mr. KOLBE. Three. So it is not a huge difference there between the amounts, even with all of the counterfeiting measures in there.

    Mr. FERGUSON. Well, it is not huge until you multiply it by billions.

    Mr. KOLBE. That is right. I guess, actually, it is. I mean, I guess the differential seems less than it was on the coins that I was hearing about earlier here, the cost of doing a penny versus the cost of doing a dollar coin.
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    Mr. FERGUSON. I think it is probably the material cost.

    Mr. KOLBE. The material cost, yes, in that. So I would have thought the counterfeiting measures would have added more cost to that—to the production, but you are saying it does not really add all that much.

    Mr. FERGUSON. Well, it is close to doubling it.

    Mr. KOLBE. Yes. Actually, you are right; it is close to doubling it there.

    Do any of you, either of you, have any concern about four separate one-dollar currencies in circulation—Susan B. Anthony, a new coin, an old one-dollar bill, and a new one-dollar bill?

    Mr. FERGUSON. From our standpoint, from the issue of counterfeit deterrents, which is a major concern for us, having consistency is a major plus. It allows the public to only know one instrument or a smaller number.

    However, in the case of the one-dollar note and the potential of an altered one-dollar note, they will be so similar that the public will easily and readily recognize those two as being the same instrument, and counterfeiting of one-dollar notes is not a big concern.

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    Mr. KOLBE. What about the different substrates that you are talking about?

    Mr. FERGUSON. Yes, sir. Well, we are in the process, as a number of the countries that I talked to, of looking at the potential of using polymers, plastics, or laminates.

    Mr. KOLBE. Laminates. Yes, I have seen a lot of those. The reason is they last significantly longer?

    Mr. FERGUSON. Yes, sir. The life cycle costs potentially could be greatly reduced, although the substrate itself is more expensive. If they last four times the circulation life, then the Federal Reserve will recognize——

    Mr. KOLBE. At what point do you think you might actually get into doing that?

    Mr. FERGUSON. We are looking at it, experimenting with it, constantly. And I would not project the note being in circulation before, you know, the end of the decade.

    Mr. KOLBE. Okay. Mr. Hoyer, I am just going to ask a couple questions of FMS, but go ahead, Mr. Hoyer, if you have a couple more questions.
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     Mr. HOYER. No. I think we are probably running pretty short on time, if you want to ask a couple of questions.

    Mr. Gregg, just let me wish you the best of luck in your new responsibilities. Of course, as you know, I have a particular focus on FMS, because it is, obviously, in my district or a large part of it. And I am very pleased that the setting—which was a little controversial some 10 years ago, has worked out well. And I want to make sure that they treat you right out there, that our employees feel comfortable and healthy and well cared for in the physical setting in which they find themselves.

    Thank you, Mr. Chairman.


    Mr. KOLBE. Mr. Hoyer, do you have any reason to want them to come back after the vote? I want to make sure you have all of the opportunities to ask questions.

    Just very quickly, Mr. Gregg, on this electronic transfer—and for all of you, I will have some other questions for the record here. I am really concerned about this electronic funds transfer. That is supposed to go into effect next January, is that not right?

    Mr. GREGG. That is correct.

    Mr. KOLBE. What steps are we taking to make sure people are going to have an account? What is the status of the pilot program?
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    Mr. GREGG. There is a lot going on here. Just generally, first of all, a lot of people are already moving to convert to electronics. We have gone from 50/50 in 1995 to 66 percent of the payments, the non-tax payments are going electronically today. We are working with the Department to establish the structure of this ETA account, and we expect within a couple months to be able to go out and describe that to the public and have a 30-day comment period.

    Mr. KOLBE. Thirty-day comment period? Okay. So when do you expect to go to the consumer, the people that are actually getting the checks now, and say, ''Hey, January 1st is coming. You are going to have a new electronic account.'' Or else you have to go through this process, I guess, of filling out a form asking for a waiver for this.

    Mr. GREGG. If I may defer to Don Hammond. He has been involved in this for quite a while.


    Mr. HAMMOND. I think you have to look at it in just a couple of phases. The first component, where January '99 is truly the statutory deadline, deals with those individuals who have bank accounts today. And, you know, we see no obstacles to going out and talking to the individuals who——

    Mr. KOLBE. That deadline applies—okay. Then I was not clear on that. That deadline applies only to those who already have this——
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    Mr. HAMMOND. The way we have structured it—and we went out with a proposed regulation in September—the Secretary has broad waiver authority under the statute, so it——

    Mr. KOLBE. And the statute is going to say you are supposed to have had it done by January. So you have already conceded you are not going to get it done by January.

    Mr. HAMMOND. The statute gave us kind of a split responsibility. It said we should achieve 100 percent electronic payments, but it also said that before we could require anyone who did not have an account to receive their payment electronically, we had to assure access at reasonable cost with the same consumer protections.

    So, in essence, we have been struggling with that significant other requirement, which is that in order for someone to receive payment electronically, they have to have an account. And we have to be able to either find that low-cost accounts exist throughout the marketplace, which we have been unable to conclude, or, alternatively, then come up with alternative means of providing them electronic access to funds, which is what this ETA account is that is——

    Mr. KOLBE. It is more than just Social Security checks. We are talking food stamps are included in this number.

    Mr. HAMMOND. No. Food stamps are——
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    Mr. KOLBE. No. Food stamps are not.

    Mr. HAMMOND [continuing]. State-administered federal payments.

    Mr. KOLBE. State-administered. But you have——

    Mr. HAMMOND. Those are under——

    Mr. KOLBE [continuing]. A pilot that includes trying that.

    Mr. HAMMOND. We have an eight-state pilot in the southern alliance of states which is a combination Electronic Benefits Transfer program, riding the food stamp technology, but at the same time allowing the capability of putting a Social Security payment on the same delivery device—an electronic card in those states. That is already being rolled out in five of those eight states. Alabama is statewide.

    Those are optional components. That is one more option for someone who does not have an account who—for example, if I was a food stamp recipient, this would give me the capability—and also an SSI recipient—I will now have the capability of receiving both payments on the same delivery request.


    Mr. KOLBE. Do you consider those pilots a success?
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    Mr. HAMMOND. At this point, it is way too early to know.

    Mr. KOLBE. Do you have an evaluation underway?

    Mr. HAMMOND. Well, we do have an evaluation underway, because, as I said, of the eight states, three of them have not even implemented the pilot programs of the states.


    Mr. KOLBE. Are you designing an—I am sorry I am going so quickly, because I have about 60 more seconds here. Are you designing an education program that is going to inform people how this is going to work? Is that component underway?

    Mr. HAMMOND. We have a——

    Mr. KOLBE. This looks to me like a massive education program.

    Mr. HAMMOND. It is a huge undertaking for us, and it is a massive education campaign to which we have already budgeted over $10 million between ourselves and the Social Security Administration.

    Mr. KOLBE. Well, it sounds to me like the Y2K people are really working on that problem and trying to keep abreast of it. I do not see that we are giving the same attention to this, and it does not have the urgency I——
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    Mr. HAMMOND. No. I think that perhaps that is—it may be—you know, we would be happy to come up and explain to you in more detail the efforts going on. But I think it is safe to say that EFT 99 has received considerable attention within the Department.

    Mr. KOLBE. Thank you. I will have some other questions for all of you to submit to the record. We thank you all very much for coming today and for the candor of your testimony, the forthrightness, and the answers you have given.

    The subcommittee stands adjourned.

    [Questions for the record and budget justifications for the Financial Management Service follow:]
    "The Official Committee record contains additional material here."

Wednesday, March 4, 1998.




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    Mr. KOLBE. The subcommittee will come to order. I have just been advised by staff that our ranking member, Mr. Hoyer, will be a little late, but we have been urged to go ahead and start, which we will do, Mr. Calahan.

    This afternoon's hearing will be in two parts. We will be hearing from the Deputy Inspector General of the Department of the Treasury, and then following that we will be getting into general Treasury issues with the Secretary of the Treasury.

    So I would begin by welcoming today Mr. Richard Calahan. Mr. Calahan, the role of the inspector general is critical to the integrity and effectiveness of the programs in the Treasury Department. This is an office that is charged with performing financial audits to determine if the agency's financial condition is fairly presented, and each of the components of it; assessing the adequacy of accounting controls; compliance with laws and regulations; overseeing and conducting investigations of alleged fraud and abuse; performing program audits to promote economy, efficiency and effectiveness; and performing audits of contracts awarded by Federal agencies.

    Unfortunately, as recent reviews of the Treasury's Inspector General's Office have revealed, the very office that is charged with prevent and detecting fraud, waste and abuse in the Federal agencies was and perhaps still is fraught with its own abuse and problems.

    On January 30th of this year the Permanent Subcommittee on Investigations of the Senate Committee on Governmental Affairs reported that former Inspector General Valerie Lau and members of her staff violated Federal laws, misled Congress, destroyed documents relating to ongoing investigations.
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    I will be just very candid with you and tell you that I am very pleased that Ms. Lau has resigned from the position that she held.

    Nonetheless, I think some of the issues still remain. In regards to some of the findings of the Senate committee I will say this: It is now clear from reading that report that this subcommittee was the target of much or some at least of the misleading testimony.

    I find this completely unacceptable. I will state for the record that in the event this subcommittee is given again misleading information in testimony that I will do everything in my power to terminate the Office of Inspector General, period.

    Our goal today is not only to insure that we have adequate funding provided to the Office of Inspector General so it can carry out the legitimate responsibilities that it is required by law to carry out, but that these responsibilities are carried out in an effective and efficient manner, and one that is fully compliant with the law itself.

    Mr. Calahan, you are only the Deputy Inspector General, but you are in charge until there is a new Inspector General that is nominated by the President and confirmed by the Senate.

    It is my understanding that your office has been experiencing significant problems with regard to morale as well as a very high turnover of staff, and we have what I would say lingering questions related to integrity within that office.

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    So these are issues that cannot and must not be ignored by this subcommittee, nor will they. Given the roles and responsibilities of the Inspector General in Treasury, I think it is critical that these problems be addressed as quickly as possible, and we certainly expect to hear from you on that today.

    We certainly look forward to the testimony that you would have for us, Mr. Calahan, and at the appropriate time when he comes I will recognize Mr. Hoyer for any remarks he would like to make.

    I will now turn to you for an opening statement, and per our normal custom your full statement will be put in the record, and you can summarize it or give as much of it as you feel necessary. Mr. Calahan.

Opening Remarks

    Mr. CALAHAN. Thank you, Mr. Chairman.

    I am pleased to be with you today to discuss the Office of Inspector General, its current status, and the fiscal year 1999 budget request.

    Accompanying me today at the table is Mr. Dennis Schindel, who is the Assistant Inspector General for Audit.

    I would like first to assure you that there was never any intention on my part to mislead you in any way at last year's hearing.
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    While it is true that we have had a difficult year, it is also true that we have accomplished a great deal and are poised to do more in the coming year, and this is largely due to the fact that we have a very dedicated group of career civil servants working in our office.

    For example, we have one of the strongest financial statement auditing capabilities in the IG community. Perhaps our greatest contribution this year was our audit work on the Department's financial statements.

    This year Treasury will issue the first fully audited Department-wide financial statement. We have played a big part in making this happen.

    Regarding the future, we have identified eleven issues that we believe are the most important challenges facing the Department. These are described in more detail in my prepared statement, and we have provided committee staff a copy of our letter to Congressman Armey.

    We have work planned or in process in each of these areas, which are detailed in an attachment to that letter.

    One area that is very important is Year 2000 compliance, and I would like to briefly describe what we are doing to address this issue. We have a two-phased approach for evaluating the Department's efforts, to make its information, telecommunications and other systems Year 2000 compliant.
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    In phase one we are reviewing the Department's financial systems for compliance with the Federal Financial Management Improvement Act. In phase two, we will assess whether the Department and the Bureaus are effectively managing the Year 2000 conversion.

    At a minimum, we will look at the systems certification process, contingency plans, and cost estimates. Our goal is to alert the Department to any major risks which need immediate attention.

    Our audit will be coordinated with GAO and the IRS Chief Inspector who also have work ongoing and planned in the Department.

    We are also reviewing the Financial Management Service's strategy for implementing the Debt Collection Improvement Act, including its development of information systems to identify issues which could delay collection activities.

    In addition, we plan to continue monitoring and reviewing the activities of the IRS within our existing resources. We currently have more requests for oversight and investigative work at the IRS than ever before.

    We are moving forward from the problems of the past to turn the focus of the OIG to increase productivity and efficiency.

    Thank you for your support and with your help we will look forward to a future of productive service.
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    [The statement of Mr. Calahan follows:]
    "The Official Committee record contains additional material here."

    Mr. KOLBE. Thank you very much, Mr. Calahan. As I suggested at the outset, when Mr. Hoyer got here I would call on him for any remarks he may have. We did go ahead, at the suggestion of your staff and begin, and I have made my opening statement, which I just provided you, Mr. Hoyer.

    So I would like to call on you for any opening remarks you would like to make before we go to questions. And I understand that you have to be in and out. So as a matter of fact, after you finish your opening remarks, if you would like to begin with questions, please go ahead.

    Mr. HOYER. Thank you, Mr. Chairman. I am not going to ask any questions. I have a couple for the record, because we have a bill on the Floor that I am involved with.

    I have had an opportunity to read the statement of the Chairman, and I share the Chairman's views. I want to say, as well, that I have a certain degree of reticence about the Inspector General's position. I think it is—and I mean generally, not in terms of particular performance.

    I think inspector generals need to be very careful. My concern is that the IG position will become a discouraging factor as it relates to innovation and entrepreneurial spirit, which the Vice President and all of us hope occurs in government.
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    Risk taking is not necessarily the first rule of government service. And it is not the first rule of government service, first of all because if one takes risks and wins, the profits are not necessarily observable.

    You do not necessarily get the praise, and certainly you don't get the profits, because we are not in business with a bottom line. But on the other hand, if you fail, this committee, Senate committees, House committees, the newspapers, the public and the inspector general will be looking over your shoulder.

    And while we want to be vigorous in our attempt and commitment to get rid of fraud, waste and abuse in government, the taxpayers expect that and we expect it. I know Secretary Rubin expects it, and we need to do that, because we need to have the confidence of the American public that their tax dollars are being spent wisely and efficiently.

    But if the actions of the inspector general in each of these Departments is perceived to be sort of a Robespierre looking over the shoulder, what it does is it makes everybody hide and take the more careful route, and keep their head down, and not express dissent, and not take risks.

    We will have saved a dollar of fraud and lost a hundred dollars of entrepreneurial, innovative spirit which may have made a real difference.

    That does not deal with the specifics to which the Chairman's statement spoke. But it seems to me throughout the Government we ought to really be talking within the fraternity of inspector generals that they be very careful that that is not happening.
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    We have abroad in America today an evil, denigrating, negative inclination to investigate everybody for everything. And we do not stop until we get something, and the more money we spend on it, the more incentive there is to get something.

    And I am very concerned about it. I have been concerned about it not just in the recent investigations of the President, which I think have gone far beyond the pale, and are deleterious to our democracy—not just to this President, but to our democracy.

    I was concerned about it in my own State and on a continuing basis. Again, going much broader than your particular responsibility and certainly there is no allegation that you are doing anything wrong. I want to make that clear.

    I just make these as general remarks following up on the Chairman's remarks. I share the Chairman's deep concern over the actions of the Inspector General. I, too, am pleased that she has resigned.

    Resignation, perhaps, was the quietest way to go in this instance. But in a much broader sense, without allegations of any wrongdoing, simply the office itself, if it has a chilling effect on executive and employee innovative action, will not be helpful.

    Thank you, Mr. Chairman. I appreciate that opportunity and I will probably run out as soon as the staff tells me I am going to get ready to do something on the Floor. Thank you, sir.

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    Mr. KOLBE. Mr. Hoyer, if you would like to ask a couple of questions—if you have any that you would like to ask I would be happy to yield to you for that.

    Mr. HOYER. I may have a couple of questions but I would just as soon have them included for the record.

    Mr. KOLBE. For the record. Okay.

    Mr. HOYER. Thank you.

    Mr. KOLBE. Thank you very much.


    Let me begin by talking a little bit about—you talked about the problems of this last year in your statement, and you alluded to that in your opening comments, and I understand that you have had a study which has been done to try to evaluate employee morale, and I think diversity is the term that was used.

    And I would wonder if you would characterize the results of that study for us, and how you would grade the current morale of your Department.

    Mr. CALAHAN. Well, in regards to the study, I do not believe this study was very effective. In regards to current morale, I think current morale has some serious problems.
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    Mr. KOLBE. On the study, let me interrupt. Am I correct, it was $345,000? Is that correct? Do you know?

    Mr. CALAHAN. I want to be really careful with that.

    Mr. KOLBE. Well, I am not trying to trap you. I was trying to get some idea of what was spent on that. Is that roughly correct?

    Mr. CALAHAN. That is roughly correct. And you are referring to the KLS study?

    Mr. KOLBE. Yes, the KLS study. Go ahead with regard to the comments about morale.

    Mr. CALAHAN. With regard to morale I think there are three really significant things that we need to do. We need to hold employees accountable. You have indicated that there are carry over issues, if I may allude to them that way. And I think that's true. We must hold employees accountable and we must do it fairly and judiciously and with all due deliberation.

    I think that we need to make procedural changes, and I have outlined broadly what some of those changes would be in our long statement. And then I think we need to have a focus on productivity and quality of production in the Office.

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    I think the only way that you really develop morale in the Office is for employees to have pride in the products they are producing. So that would be my response to your question.


    Mr. KOLBE. What is your current staffing? How many do you have on board right now? What is your authorized staffing, and how many do you have on board?

    Mr. CALAHAN. We have 292 FTEs, and right now we have on board 264.

    Mr. KOLBE. How many, can you tell me—and if you cannot, I will ask it for the record—but how many of your employees have you had that resigned or transferred out of the IG's office in the last six months?

    Mr. CALAHAN. I do not know that I have a six month figure. I would have to provide that for the record. We had 40 employees leave in fiscal year 1997, and 15 so far this year.

    Mr. KOLBE. Does that constitute, roughly, a normal turnover?

    Mr. CALAHAN. No.

    Mr. KOLBE. That is higher than normal?
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    Mr. CALAHAN. Sure.

    Mr. KOLBE. Were some of those 40, when you say left, were they transferred out?

    Mr. CALAHAN. The word, transfer, would be inappropriate. Some of those folks left for promotions. There was a new Postal IG that just started last year. The new IG at the Postal Service used to be an employee at the Treasury IG's office, so this person hired many of our staff members.

    There has also been some hiring by a couple of the other IG offices, and we lost several people to promotions to other offices.


    Mr. KOLBE. Are you actively seeking replacements for the ones who have gone?

    Mr. CALAHAN. Of course.

    Mr. KOLBE. Are you having any success? Are you getting people in?

    Mr. CALAHAN. Oh, yes.
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    Mr. KOLBE. How many people have you hired in the last couple of months, or since the first of the year?

    Mr. CALAHAN. We have a large number of people that are currently going through security clearance. I think we had a group of nine or so that was just cleared last week, and so we are hiring people.

    It is not a situation where people are reluctant to come to work for the Treasury IG's office. I just interviewed a couple of folks last week. They both very much wanted the job, and they were both high quality employees.

    So I do not think that is a problem.

    Mr. KOLBE. What kind of impact is all this having on your office and your missions?

    Mr. CALAHAN. I think that the answer to that has some complexity, I think. In terms of Mr. Schindel's office, I don't think the impact was very great.

    The Office of Audit continued performing its mission, I think, at a very high level. I think the same is probably true of our Office of Evaluations and the Administrative Office.

    But for our Office of Investigations this has been a difficult period of time.
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    Mr. KOLBE. I have a number of other questions. But let me see if Mrs. Meek has any questions.

    Mr. MEEK. No questions, Mr. Chairman.

    Mr. KOLBE. All right, Mrs. Meek, then I will proceed.


    Turning the focus of the questions here from your staffing numbers, it is likely that you are going to be the acting IG—knowing the problems of getting and vetting people, and getting them through the process, and then naming them and then getting them confirmed—that you are likely to be the acting Inspector General for some time. I am wondering if you could describe for me some of your plans to address the management issues that have troubled this office for the last few years.

    Mr. CALAHAN. Again I think that we have repair work to do. I think that in response to the GAO report there are several procedural changes that both the Department and the IG's office has undertaken.

    Regarding the Office of Investigations, I think there are some procedural changes that are appropriate and are under way, the largest of which would be to put in place a new management information system, so that we have better communication on cases, and so that management has a better opportunity of knowing what is occurring on cases, and more of an opportunity to supervise cases.
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    That is a real key, I think, to what we are undertaking. We are providing for better security for investigative documents to help assure that in the future it will never again become public knowledge that there are folks who are subjects of an IG investigation.


    And then in terms of another issue that has been at least raised by inference is the issue that the IG's office doesn't really have an internal affairs office. And we are studying ways to approach that problem.

    Mr. KOLBE. I'm sorry. Would you repeat that last—what did you just say?

    Mr. CALAHAN. That the Office of Inspector General needs an internal affairs office to——

    Mr. KOLBE. An internal affairs within your own IG office.

    Mr. CALAHAN. That's right.

    Mr. KOLBE. That's what I thought I heard. Is there any other IG that has an internal affairs office?

    Mr. CALAHAN. Absolutely.
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    Mr. KOLBE. Is that right?

    Mr. CALAHAN. Absolutely. I think several of the other IG offices have already taken steps along those lines to provide themselves an independent, internal way of providing for accountability. I think it is something that has been fairly well discussed, even in the papers, is the issue having to do with how do the IGs hold their own employees accountable.

    And there is something called the President's Council on Integrity and Efficiency PCIE Integrity Committee that has jurisdiction over the IG and the Deputy Inspector General, but not over the staff.

    Mr. KOLBE. Excuse me for interrupting. PCIE is an abbreviation there that we need for the record.

    Mr. CALAHAN. The President's Council on Integrity and Efficiency.

    Mr. KOLBE. And what is that?

    Mr. CALAHAN. That is the group of—all of the IGs are members of the PCIE, and it is chaired by the Deputy Director for Management at OMB.

    Mr. KOLBE. Kind of the club.
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    Mr. CALAHAN. People refer to it that way.

    Mr. KOLBE. Go ahead. Excuse me.

    Mr. CALAHAN. And the Integrity Committee was established in effect to police the PCIE community at the higher levels with the thought that if there is a problem with an employee at a lower level, the inspector general would be able to find a way to deal with that internally.

    And sometimes that doesn't work out too well. And so several of the IGs have established in effect a small cadre of investigators, reporting directly to them, who do high level projects and internal affairs investigations.

    Mr. KOLBE. Have you sought counsel, or independent evaluation from the PCIE?

    Mr. CALAHAN. Yes. We sought——

    Mr. KOLBE. Since you have been the acting?

    Mr. CALAHAN. No.

    Mr. KOLBE. That took place earlier?

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    Mr. CALAHAN. No. The answer to that question is yes, I have.

    Mr. KOLBE. Yes you have since you have been the acting.
    Mr. CALAHAN. That's right.

    Mr. KOLBE. And just give me the nature of what you have asked. Have you asked them to come in and do a formal review? Or what?


    Mr. CALAHAN. Well, the PCIE report made no recommendations to the IG's office. The PCIE report made recommendations to—I'm sorry, the Permanent Subcommittee on Investigations (PSI) report. I think I said PCIE.

    The PSI report made no recommendations to the IG's office, but rather to the PCIE Integrity Committee. And so when we received that report, we weren't actually charged with doing anything as a result of it, but I sent it back to the PCIE Integrity Committee and asked them for advice, in terms of would they be able to provide us advice on how to deal with the matters reported in that report.

    Mr. KOLBE. Mr. Calahan, is anyone who is accompanying you today currently being reviewed by the PCIE and/or the Department of Justice Office of Public Integrity as a result of this Permanent Subcommittee on Investigations Report?

    Mr. CALAHAN. I think it would be better if we did not discuss that.
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    Mr. KOLBE. All right. I assume then, I take it that there may be individuals who are under review.

    Mr. CALAHAN. I would be happy to be totally open with you on this matter in a smaller setting.

    Mr. KOLBE. When an individual is named or when you are informed that somebody is under review, what kind of action do you take under those circumstances, normally? Is there suspension of the individual, or is it noted and that is it?

    Mr. CALAHAN. There is a great variety in terms of what could occur. It depends on the situation.

    Mr. KOLBE. As noted in the PSI report here, last year in testimony before this subcommittee, when asked about the Office of Inspector General's investigation of Secret Service agents, the Inspector General, Valerie Lau stated, and I quote, ''This has never been an investigation of the agents, as you mentioned. It was an investigation regarding the process by which the Secret Service develops and maintains access lists to the White House in that they may have been relied on to obtain FBI files.'' unquote.

    I realize that is not your statement, but I am wondering if you would on behalf of the OIG's office, whether you would maintain that that statement is an accurate statement today?

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    Mr. CALAHAN. Mr. Chairman, I think it is knowledge at this point that the investigation was begun on October the 2nd of 1996, and was recorded in our files as an investigation of two Secret Service agents.

    And what I want to tell you is that I did not become aware of that myself until April the 11th of 1997, when members of my staff informed me of that.

    I was sitting before you when the Inspector General made that statement, and when she made it I did not think it was an inaccurate statement. The day I found out that the two agents had been listed in our files as subjects of the investigation, I called—including a staffer of this committee—I called staffers all over the Hill all afternoon, letting people know that.

    And all I can do is apologize to you for the occurrence. I do not know what more I can do at this point.

    Mr. KOLBE. So you are saying you took, as soon as you knew of it, you took the corrective action.

    How did it come to your attention, you said, on April 11th? What was it? A staff meeting?

    Mr. CALAHAN. Yes, it was. What occurred in terms of background, it became disconcerting to me that we had a real problem, I think, in terms of communication with the Hill. From our perspective we were looking at that investigation from one point of view, and from the perspective of several staffers in some of the key offices, they were looking at it from a totally different point of view, and we just could not understand the situation.
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    So I asked the Inspector General if she minded if I would go up and just hold some meetings with staff people. And we met with folks from several of the Senate offices, and as a result—and I brought the investigators along with me.

    I was later informed that as a result of those meetings there were conversations between our investigators, that it looked like the Hill probably knew that these people were subjects at one time and it was time to inform the boss that this was the situation.

    And so I was informed that there was something important we have to tell you, and they set up a meeting with me and they just flat told me.

    Mr. KOLBE. They just flat told you?

    Mr. CALAHAN. They just told me. They just told me what had actually occurred that first week of the investigation.

    Mr. KOLBE. And you took steps to correct that, and you did it verbally, but not with a letter? Is that correct? I don't believe there was a letter.

    Mr. CALAHAN. There was.

    Mr. KOLBE. There was? To the committee?

    Mr. CALAHAN. The Inspector General signed a letter out to you, and I don't remember who else. The matter was immediately referred to the PCIE Integrity Committee. There was a letter to you, and I would be happy to find it.
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    Mr. KOLBE. Acknowledging——

    Mr. CALAHAN. Yes. I would be happy to find that letter and get it to you.

    Mr. KOLBE. I do not doubt your word on that. I just do not remember that letter, and I would have thought I would remember that letter. It would have been dated around that time?

    Mr. CALAHAN. I think it was dated the following Tuesday. So it would be the 15th or something. I would be happy to find that for you.

    Mr. KOLBE. Mrs. Meek?

    Mrs. MEEK. Thank you, Mr. Chairman.

    Mr. Calahan——

    Mr. CALAHAN. Mr. Chairman, I have the letter in front of me. Could I give it to someone to provide you?

    Mr. KOLBE. Yes, of course. And we will put it into the record at this point as well.

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    [The information follows:]
    "The Official Committee record contains additional material here."


    Mrs. MEEK. Mr. Calahan, perhaps the chairman has asked you a similar question, but I would appreciate it if you would address this one.

    Why is it that your Department does not have single audit and investigative responsibilities? Why is that not in one entity? It seems to be proliferated between these other agencies.

    It would seem to me in any management kind of organization that this would in some way inhibit your propensity for doing good audits.

    Mr. CALAHAN. Thank you for the question. That is in fact true. In fact, one of the central tenets of the IG concept, as it was originally formulated, back in the old days when I worked at the HEW Office of Inspector General, the first inspector general's office was at HEW.

    One of the central tenets was to put the non-program audit and investigations functions in the IG's office. And when they established the IG's office at the Treasury Department, that was not done.

    There are internal affairs components in each of the enforcement bureaus. There is, in fact, a larger office at the IRS. The IRS Chief Inspector's Office is four times larger than ours.
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    In fact, that is a major flaw that I think Senator Roth is looking at now, in seeking ways to correct this very important function at the IRS, by providing independence, that is at least comparable to what IGs have.

    Mrs. MEEK. It appears from your statement that most of your audit reports are concluded after the activity is finished. Is that normal procedure? Would it not help the unit more if you were to do some proactive kinds of audits, so there would be some things that could be pointed up ahead a time, and not cause trouble later?

    Mr. CALAHAN. That's a very good question. The audits, as they have historically existed in terms of just functional responsibility, audits look at the past. And historically that has been the case in the audit community, that audits look at past issues, develop information on past issues, report on past issues.

    I think one of the great success stories that we have had in the Office of Inspector General is that, particularly in terms of our financial statement audits, where we find material weaknesses, other difficulties that put the different components of our Department in a situation where they cannot get a clean opinion on their financial statements, we provide them assistance and give them advice on how they can improve operations so they can get a better report next year.

    And I think that is one of the real successes that our office has had.

    Mrs. MEEK. Thank you.
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    Mr. SCHINDEL. I would just like to add that we have a number of other audits that take that approach. We are currently looking at FMS's, the Financial Management Service's, planning of implementation of the Debt Collection Act. That is not fully operational yet, and we are looking at how effectively that is being brought on line.

    Mrs. MEEK. Thank you.

    Mr. CALAHAN. And I could also talk about our evaluations office and the work it does to look to the future of organizations. Right now our Office of Evaluations is reviewing the strategic planning function at FMS to determine what they are doing now to plan for the future.

    I think that is an important role that IGs can perform. I totally agree with you.

    Mrs. MEEK. Thank you, Mr. Chairman.


    Mr. KOLBE. I just have a couple of more questions, but one first follow up, and I thank you for providing me with the letter which as I said we will place in the record.

    But I am a little puzzled. The Inspector General was here, and on February 26th of last year, in response to a direct question, says there has never been an investigation of the agents as you mentioned.
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    Why would not someone from the IG's office in the audience or reviewing this, would not know about that earlier than seven weeks later or six weeks later, when you apparently were informed, seven weeks later when the letter was written?

    Why would it take that long to find this discrepancy in the testimony?

    Mr. CALAHAN. It is actually worse than that. The prior, I think December the 3rd, Senator Shelby held——

    Mr. KOLBE. Asked the same question.

    Mr. CALAHAN. Asked the same question, got the same answer, and folks intimately involved with the investigation were at that hearing.

    Mr. KOLBE. And knew.

    Mr. CALAHAN. Did not choose to inform either her or me.

    Mr. KOLBE. All right. We will leave that for the moment here.


    Let me just ask you a couple of questions about OIG's role with the oversight of the IRS. I think you testified a month ago before the Senate Finance Committee in connection with the IRS restructuring legislation, about the importance of establishing an independent oversight of the IRS.
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    Is that correct? Or would you just summarize briefly the testimony you gave then?

    Mr. CALAHAN. I would be happy to. Succinctly, my testimony boiled down to the fact that the IRS chief inspector's office performs one of the most critical investigative and audit functions in the Government and has a staff of 1,200 people, but does not operate under IG independence.

    And you have, really, a proliferation of IGs. You have almost 60 IG offices, and many of them performing functions that are—I mean, they are important functions, but they are at a lower level, I think, in terms of criticality.

    And therefore for some reason the Government over this long period of time has chosen to leave in place this critical function at the IRS without IG independence. Chief Inspector is not presidentially nominated with Senate confirmation. IGs can only be removed by the President. This is not true of the Chief Inspector. IGs have a non-interference clause. That is, the Secretary cannot interfere with an audit or an investigation.

    Most IGs have their own legal counsel. There is a large—in fact, in my testimony I provided a list of elements of IG independence that the Chief Inspector's Office does not have.

    And so basically my testimony was it is time to reconsider this.

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    Mr. KOLBE. But your office has that independence, does it not?

    Mr. CALAHAN. It does.


    Mr. KOLBE. And do you not have any current oversight responsibilities for IRS?

    Mr. CALAHAN. We do have oversight, dotted line responsibility. But understand, the chief inspector reports to the Deputy Commissioner of the IRS.

    Mr. KOLBE. I'm still not perhaps following. If something develops that requires your attention, you are able to go in independently and look at that, is that not correct?

    Mr. CALAHAN. That's true, within resource constraints. You understand that we have an FTE limit of 292 to devote to——

    Mr. KOLBE. All of Treasury.

    Mr. CALAHAN. That's right. And the chief inspector's office has an FTE complement of 1,200, although I think that is declining some, to devote just to IRS.

    In fact, we just finished a review of their planning process to see what are they doing, and how are they deciding what to do. And we do get involved in terms of critical activities. And we get a lot of Congressional requests these days asking for specific oversight of specific investigations or audits that are being performed to insure that independence is in place.
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    But your concept is correct. We have that. In fact, one of the key issues over the years that we have been involved in is Integrated Data Retrieval System (IDRS), which is a computer snooping problem that the IRS had with their employees reviewing tax files that they had no need to be reviewing.

    And we have done two reviews on that over the last couple of years.


    Mr. KOLBE. Just so I understand, then, would it be your contention that the independence of this office, or raising this office of the status of an IG, within IRS, is more related to the sheer size of IRS and the need to separate this out from the other functions, the other responsibilities that you have?

    Or is it because of the nature of the work that is done? In theory you could put all 1,200 of those people directly under your responsibility, and you would have one IG for Treasury. And some of them are devoted to IRS and some are devoted to other functions.

    Mr. CALAHAN. Theoretically, you could. There is a variety of suggestions that have been made to resolve this matter.

    One was that. Another would be for there to be a separate IG for IRS reporting to the Deputy Secretary of the Treasury. Another would be for there to be a separate IG for the IRS reporting to the new board that is being discussed for the IRS.
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    Another would be for there to be a separate IG for the IRS, but have it report to the IG at the Treasury Department. And so there are a variety of different options that are being discussed.

    Mr. KOLBE. Okay. Mrs. Meek, do you have any other questions?

    Mrs. MEEK. No, Mr. Chairman.

    Mr. KOLBE. Mr. Calahan, we will probably have other questions for the record.

    [Questions for the record and budget justification material follow:]
    "The Official Committee record contains additional material here."

    Mr. KOLBE. After that I think that completes our questions for the day, and we thank you very much.

    Mr. CALAHAN. I thank you.

    Mr. KOLBE. We expect to have Secretary Rubin here in less than 15 minutes so we will stand briefly in recess until that time.

    "The Official Committee record contains additional material here."

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