[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
THE USE AND ABUSE OF GOVERNMENT PURCHASE CARDS: IS ANYONE WATCHING?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON GOVERNMENT EFFICIENCY,
FINANCIAL MANAGEMENT AND
INTERGOVERNMENTAL RELATIONS
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
JULY 30, 2001
__________
Serial No. 107-62
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
78-830 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2002
____________________________________________________________________________
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COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California PATSY T. MINK, Hawaii
JOHN L. MICA, Florida CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
JOE SCARBOROUGH, Florida ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio
BOB BARR, Georgia ROD R. BLAGOJEVICH, Illinois
DAN MILLER, Florida DANNY K. DAVIS, Illinois
DOUG OSE, California JOHN F. TIERNEY, Massachusetts
RON LEWIS, Kentucky JIM TURNER, Texas
JO ANN DAVIS, Virginia THOMAS H. ALLEN, Maine
TODD RUSSELL PLATTS, Pennsylvania JANICE D. SCHAKOWSKY, Illinois
DAVE WELDON, Florida WM. LACY CLAY, Missouri
CHRIS CANNON, Utah DIANE E. WATSON, California
ADAM H. PUTNAM, Florida ------ ------
C.L. ``BUTCH'' OTTER, Idaho ------
EDWARD L. SCHROCK, Virginia BERNARD SANDERS, Vermont
JOHN J. DUNCAN, Tennessee (Independent)
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
James C. Wilson, Chief Counsel
Robert A. Briggs, Chief Clerk
Phil Schiliro, Minority Staff Director
Subcommittee on Government Efficiency, Financial Management and
Intergovernmental Relations
STEPHEN HORN, California, Chairman
RON LEWIS, Kentucky JANICE D. SCHAKOWSKY, Illinois
DAN MILLER, Florida MAJOR R. OWENS, New York
DOUG OSE, California PAUL E. KANJORSKI, Pennsylvania
ADAM H. PUTNAM, Florida CAROLYN B. MALONEY, New York
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
J. Russell George, Staff Director and Chief Counsel
Bonnie Heald, Director of Communications/Professional Staff Member
Scott R. Fagan, Clerk
David McMillen, Minority Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on July 30, 2001.................................... 1
Statement of:
Grassley, Hon. Charles E., a U.S. Senator from the State of
Iowa....................................................... 2
Kutz, Gregory D., Director, Financial Management and
Assurance, U.S. General Accounting Office, accompanied by
Robert Hast, Managing Director, Special Investigations,
U.S. General Accounting Office; Ernest L. Valdes,
Commanding Officer, Space and Naval Warfare Systems Center,
San Diego, CA (SPAWAR); John E. Surash, Commanding Officer,
Navy Public Works Center, San Diego, CA; Keith W. Lippert,
Director, Defense Logistics Agency, former Commanding
Officer, Naval Supply Systems Command (NAVSUP), accompanied
by Larry Glascoe, Executive Director, Navy Supply Systems
Command; Jerry Hinton, Director of Finance, Defense Finance
and Accounting Service; Patricia Mead, Acting Deputy
Assistant Commissioner, Office of Acquisition, Federal
Supply Service, General Services Administration,
accompanied by Sue McIver, Director, Services Acquisition
Center, Federal Supply Service, General Services
Administration; and Deidra Lee, Director of Defense
Procurement, Department of Defense......................... 13
Letters, statements, etc., submitted for the record by:
Grassley, Hon. Charles E., a U.S. Senator from the State of
Iowa, prepared statement of................................ 7
Hinton, Jerry, Director of Finance, Defense Finance and
Accounting Service, prepared statement of.................. 61
Kutz, Gregory D., Director, Financial Management and
Assurance, U.S. General Accounting Office, prepared
statement of............................................... 17
Lippert, Keith W., Director, Defense Logistics Agency, former
Commanding Officer, Naval Supply Systems Command (NAVSUP),
prepared statement of...................................... 54
Mead, Patricia, Acting Deputy Assistant Commissioner, Office
of Acquisition, Federal Supply Service, General Services
Administration, prepared statement of...................... 67
Surash, John E., Commanding Officer, Navy Public Works
Center, San Diego, CA, prepared statement of............... 46
Valdes, Ernest L., Commanding Officer, Space and Naval
Warfare Systems Center, San Diego, CA (SPAWAR), prepared
statement of............................................... 35
THE USE AND ABUSE OF GOVERNMENT PURCHASE CARDS: IS ANYONE WATCHING?
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MONDAY, JULY 30, 2001
House of Representatives,
Subcommittee on Government Efficiency, Financial
Management and Intergovernmental Relations,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2154, Rayburn House Office Building, Hon. Stephen Horn
(chairman of the subcommittee) presiding.
Present: Representative Horn.
Staff present: J. Russell George, staff director and chief
counsel; Bonnie Heald, professional staff member and director
of communications; Scott Fagan, assistant to the subcommittee;
Chris Barkley, staff assistant; Davidson Hulfish, Samantha
Archey, Fred Ephraim, and Christopher Armato, interns; David
McMillen, minority professional staff member; and Jean Gosa,
minority assistant clerk.
Mr. Horn. This hearing of the Subcommittee on Government
Efficiency, Financial Management and Intergovernmental
Relations will come to order. For the last 6\1/2\ years, I have
chaired the subcomittee that ensures that taxpayer dollars are
being used efficiently and effectively. Yet time after time
this subcommittee has received reports that Federal departments
and agencies have not been good stewards of billions of dollars
provided by hard-working taxpayers. Sometimes the allegations
have been attributed to poor accounting procedures. Other times
they have been attributed to flagrant mismanagement. In the
case of the Department of Defense, there seems to have
developed a culture throughout previous administrations that
encompasses both of these elements.
This is the second time in less than a week that
representatives from the Department of Defense have appeared
before this subcommittee to defend illegal or otherwise
improper uses of its roughly $325 billion budget. Last week we
learned that some Defense Department officials have been
illegally tapping closed appropriations accounts despite a 10-
year-old law that prohibits such actions.
Today we will examine the government's purchase card
programs at two Navy units within the Department of Defense,
the Space and Naval Warfare Systems Center and the Navy Public
Works Center. Both are based in San Diego, CA. This
investigation was initiated by our first witness, Senator
Charles Grassley from Iowa. Our second witness will come from
the General Accounting Office.
Last year the Department of Defense used purchase cards,
MasterCards or VISA cards, for more than 10 million
transactions valued at $5.5 billion. That figure represents
more than one-third of the entire government's purchase card
transactions, which totaled $15 billion in fiscal year 2000.
Unlike the government's travel card program in which the
cardholder pays the bill, the purchase card bills are paid by
the Federal Government.
This credit card program was designed to save money by
eliminating bureaucracy and paperwork associated with making
small purchases. As defined by the General Services
Administration, small purchases are those under $2,500. In
addition, Federal agencies can receive rebates from the banks
that issue the cards when the bills are paid promptly. Those
benefits, however, do not consider the cost of fraudulent or
improper use of the cards for personal expenses, and in the
cases we will examine today, they fail to consider the cost of
proper oversight and management of the programs. Most
reasonable people would hardly construe these as legitimate and
necessary government expenses, and all taxpayers would agree.
Senator Grassley and I have asked the General Accounting
Office to expand its investigation of the government purchase
card program as well as the travel card program. If the misuse
and outright fraud found in these two Navy facilities are
indicative of the governmentwide programs, then the cost of the
programs may far outweigh its benefits.
Our witnesses today have been involved in the
implementation and oversight of the government's purchase card
program. In addition, we will hear testimony from witnesses who
are responsible for the two Navy purchase programs audited by
the General Accounting Office. We want to know how these abuses
were allowed to occur and what is now being done to stop them.
I welcome all of you, and we now look forward to your
testimony. We will start with the gentleman from Iowa, Senator
Grassley, who is the one that first picked this up, and he's
got a very good reputation for looking at misuse of the
taxpayers' money. We are delighted to have him with an opening
statement, and we would like him to come with us when that
statement is over and join us here for the question period.
And it is a pleasure to have you here, Senator.
STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR FROM THE
STATE OF IOWA
Senator Grassley. Thank you, Mr. Chairman, and I want to
compliment you for doing a thorough job of our Constitutional
responsibilities of oversight to see that money is spent
according to the Constitution and congressional policy, and to
make sure that the laws are faithfully executed. I'm glad to
join you in that effort. And so I thank you for inviting me to
testify on credit card abuse. It's an honor and privilege to be
here, and especially to work with you on a very important
issue.
As the chairman knows, in recent years I have become
increasingly concerned about the total breakdown of the
internal financial controls at the Defense Department. My
concerns are reinforced by the continuous stream of audits
issued by the General Accounting Office and the DOD's Inspector
General. These audits consistently show that sloppy accounting
and nonexistent internal controls leave the Department of
Defense's financial resources vulnerable to theft and to abuse.
In 1997-1998, as chairman of the Judiciary Subcommittee on
Administrative Oversight, I conducted my own review of internal
controls at the Department of Defense. I issued a report and
held a hearing. I came away from the experience convinced that
there were no effective internal controls in place. Stealing
money was a piece of cake. Fraudulent activity, if detected,
was detected by chance and not, oddly enough, as a result of
effective internal controls.
This work taught me one very important lesson about
government bookkeeping. Bookkeeping is the key to controlling
the money. If your books of account are accurate and complete,
it's easy to follow the money trail, and that makes it hard
then to steal money, and that's how it should be. By contrast,
if your bookkeeping is sloppy and nonexistent, as it is at the
Pentagon today, then there is no money trail, and that makes it
easy to steal money. And that's exactly why I'm so concerned
about the Pentagon's mushrooming credit card operation. Credit
cards weaken controls, erase the audit trail.
Mr. Chairman, I'd like to focus on the dangers of credit
card proliferation in what I will characterize as a zero-
control environment. Today there are over 1.8 million
Department of Defense cards in circulation that generate about
$9 billion a year in expenditures. A credit card is a license
to spend money. Any person with a credit card is authorized to
spend money with no checks and balances. In the past,
Department of Defense employees needed a phony invoice to
trigger a fraudulent check, and getting a fraudulent Treasury
check took some doing. Well, now that obstacle is gone. Credit
cards then provide a shortcut to the cash pile. The Pentagon is
giving everyone a big scoop shovel and telling them to rip into
the national money sack and do it at both ends.
The Department of Defense created an army of spenders. With
the Department of Defense credit card in hand, they have almost
unlimited authority to spend money. There are no controls, no
responsibilities, no accountability. If they want to spend
money, they go to the nearest ATM machine or use a DOD
convenience check to get cash, and they're doing it with
alarming regularity. If they need a new computer or a Palm
Pilot, they go to CompUSA and charge it and keep it. If they
need something for the house, they go to Home Depot and charge
it. If they feel like a night out on the town, they go to a
night club and charge it. Pentagon credit cards are being taken
on a shopping spree, and the taxpayers are footing the bill.
The General Accounting Office testimony today, I think,
will clearly show that no one is minding the store. No one is
checking to see if the goods and services charged to a purchase
card account were received. And no one is checking to verify
the charges if they were legitimate, and that is required by
law.
The General Accounting Office reports that purchase cards
are being used to buy expensive items for personal use with no
accountable records. There were over 500 known purchase card
fraud cases in the last 2 years alone, and with just a small
sample, the General Accounting Office found more. The worst
part of it, Mr. Chairman, is no one seems to care. The Defense
Finance and Accounting Service simply pays the bill in full, no
questions asked.
Mr. Chairman, I know you have looked at the Department of
Defense travel cards, and they remain a festering problem. They
need more attention. And they offer us a rare glimpse at a root
cause of the Department of Defense control problem. As I said,
credit cards are a license to spend money, and they're being
issued with no road test. They're being issued willy-nilly,
with no credit checks.
Mr. Chairman, that may sound like that's got to be wrong,
but that's true. There are no credit checks. Even purchase
cards with a $100,000 limit are issued with no credit check.
One credit card company, the Bank of America, identifies high-
risk individuals, but the bank's appraisal in the case of the
military is irrelevant. At the Pentagon, everyone gets a card.
This is a fatal flaw in the program. It leaves the door
wide open to fraud and abuse. Military and civilian personnel
who could never qualify for credit suddenly find themselves
with unlimited credit on a government credit card.
The application form itself helps to set the stage for
fraud and abuse. It's right up front on the application. No
credit check is an option, and all the applicant has to do is
check box B, ``no credit check.'' When first-time cardholders
see this, they must lick their chops, obviously.
No credit check is the same as no control. A ``no credit
check, everybody gets a travel card'' policy is causing account
delinquencies to go ballistic. As you know, Mr. Chairman, there
are over 43,000 Department of Defense employees, civilian and
military, who have defaulted on more than $59 million in
charges for what is supposed to be authorized travel. This, of
course, is a black mark on the Armed Forces. The Department of
Defense is supposed to pay the cardholder, but the money
doesn't always get to the bank. The government has no liability
for unpaid balances, and the bank has no collection authority
and earns no interest. The bank has to write off the
delinquencies, thus take a loss, and the losses are mounting
fast. They now exceed $200 million.
There is the case of the marine sergeant who ran up a
$20,000 bill and then left the service and the unpaid bill when
his enlistment was up. That case is not unique. There is a
soldier who spent $3,100 in a night club, the dead sailor who
spent $3,565, an Army reservist's wife who spent $13,053 on a
shopping spree in Puerto Rico.
The marine sergeant, Sergeant X, was initially issued a
restricted card in March 2000 because of a questionable credit
record. The restricted status put the lid on Sergeant X's
credit allowance, but not for long. On March 21st, the Marine
Corps arbitrarily raised his credit limit from $2,500 to
$10,000. The higher limit precipitated a spending spree. Then
the alarm bells went off at the bank. There was a fraud alert
on August 3rd due to, ``unusual account activity.''
Two weeks later Sergeant X got special permission to make
charges on a blocked merchant category code [MCC], at a
civilian clothes store like Macy's. The next day, August 18th,
Sergeant X's credit limit was raised again to $20,000. Then
Sergeant X's account became past due and then delinquent.
Now, despite all the red warning flags, the Marine Corps
raised Sergeant X's credit limit one last time, January 29,
2001. This time it went to $25,000.
In just one 2-month period, Sergeant X made cash
withdrawals totaling $8,500. The bank thinks he was using the
cash withdrawals to make payments on his credit card account.
Finally, in February, Sergeant X's credit was revoked. Mr.
Chairman, the Marine Corps was warned, but looked the other way
while Sergeant X robbed the bank.
Mr. Chairman, I hope you will join me in asking the
Inspector General to examine these cases and determine whether
the Department of Defense is paying for unauthorized expenses
and whether others could be involved in stealing money. The
driver behind the delinquencies are cash withdrawals from the
ATM machines for personal use. Over 20 percent of all
Department of Defense travel card transactions are cash
transactions. Now, this is five times the industry average.
Most cash transactions go delinquent and are written off as bad
debt.
Attempted access to blocked MCC codes like Sergeant X's
case is a tip-off. It's the warning flag. Many MCCs are
blocked, like on-line gambling casinos, Toys R Us and the like.
The bank knows when a card is used to gain access to a blocked
MCC code. The banks also know that an unsuccessful hit on a
blocked MCC code is almost always followed immediately by a
successful hit at the nearest ATM machine. ATMs are used to
circumvent the blocked MCC code to make an unauthorized
purchase.
Mr. Chairman, the bank gave the Pentagon an antifraud
control device. It's called by the acronym EAGLS, E-A-G-L-S. It
provides an online capability to detect suspicious account
activity and delinquency; information needed to take corrective
action, in other words. Daily account activities on EAGLS
should be watched like a hawk. If Sergeant X was getting cash
at the ATM machine without travel orders, his access to the
cash machine should have been shut down. Unfortunately, EAGLS
control is ignored. Nobody uses it.
The thinking behind the Department of Defense credit card
explosion is good. Reduce the paperwork. Save money to
streamline the process. Adopt best practices of the commercial
sector. In the private sector credit cards are big business.
That's because the control environment is good. Monthly bills
are reconciled and are paid promptly. In corporate America, if
you abuse your card, you lose it or you get fired.
In the Pentagon there is no accountability and no control.
Trust and accountability are key ingredients in any credit card
program. Trust and accountability go hand in hand because a
credit card provides direct unrestricted access to cash. Credit
cards create a low-control environment. The credit card
environment requires a high degree and level of trust and
accountability.
Mr. Chairman, the low-control credit card environment is
incompatible with the zero-control environment at the Pentagon.
Issuing credit cards willy-nilly with no credit checks in a
zero-control environment is a recipe for disaster, and that's
exactly where we are today, Mr. Chairman, a disaster, and Bank
of America is holding the bag, and the bank can only blame
itself for being in such a predicament. The bank signed the
contract. The bank agreed to assume all the risk and all the
responsibility, but with absolutely no authority. All the
authority rests squarely in the hands of the Pentagon. The
contracts give the Department of Defense absolutely vital
authority over the bank's decisions. On the most important
decisions of all, whether to do credit checks, the Pentagon is
forcing the bank to adopt worst business practices of the
public sector. The contract mandates the policy. There shall be
no control filter with credit checks. Everybody gets a card,
even those with bad credit records.
Mr. Chairman, the ``no credit checks, everybody gets a
card'' policy allows the abuser to rob the bank, and the
Department of Defense is backing them up. That is causing the
bank to sustain unacceptable losses. Bank of America's
predecessor, American Express, endured the same fate. So
something has to give. It seems like the current arrangement is
very unworkable.
I know that the Department of Defense is trying to fine-
tune the process, but recent improvements are very modest. The
root cause of the problem remains untouched: no control and no
credit checks. If the Department of Defense is serious about
adopting the best practices of the commercial sector, then the
Department of Defense has to do an about-face maneuver. The
Department of Defense must give the bank authority to decide
who can be trusted with a card and what the credit limit should
be on each account. This rule should apply to travel as well as
purchase cards. I think that this would solve the problem. I
think that is the key, Mr. Chairman. Modify the contract to
allow credit checks and regulate limits. It seems to be very
simple.
In closing, Mr. Chairman, Secretary Rumsfeld has made a
personal commitment to clean up the financial mess at the
Pentagon. Obviously, he is just getting started, and we know
how things take several years, and it may be that is true with
Secretary Rumsfeld's best efforts before we see results. I
support his efforts 100 percent and look forward to some very
good results. So nothing I have said here today should be taken
as criticism of Secretary Rumsfeld. The problems I have
addressed are the result of decisions made in previous
administrations and mainly by former Deputy Secretary of
Defense Hamre.
I thank you, Mr. Chairman.
Mr. Horn. We thank you, Senator, and please join us here.
[The prepared statement of Senator Grassley follows:]
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Mr. Horn. And we will now bring all of the witnesses and
administer the oath, and also we will tell you about how this--
I would like all of the assistants that will be whispering in
various ears to also take the oath so I don't have to interrupt
this testimony, and so just get them all, and the clerk will
take the names. Please raise your right hands.
[Witnesses sworn.]
Mr. Horn. So I just want to make sure we have all the
witnesses here, and the first will be Mr. Kutz of the U.S.
General Accounting Office, accompanied by Robert Hast, Managing
Director, Special Investigations, U.S. General Accounting
Office; Captain Ernest L. Valdes, Commander, Space and Naval
Warfare Systems Center in San Diego; Captain John E. Surash,
the Commanding Officer, Navy Public Works Center, San Diego;
and Vice Admiral Keith W. Lippert, the Director of the Defense
Logistics Agency, former commanding officer, Naval Supply
Systems Command, and he is accompanied by Larry Glascoe,
Executive Director of the Navy Supply Systems Command; Jerry
Hinton, Director of Finance, Defense Finance and Accounting
Service; Patricia Mead, the Acting Deputy Assistant
Commissioner, Federal Supply Service, General Services
Administration, accompanied by Sue McIver, the Director,
Services Acquisition Center, Federal Supply Service, General
Services Administration; and we have Deidra Lee, Director of
Defense Procurement, Department of Defense.
And we will now start with the gentleman with the U.S. GAO,
General Accounting Office. That reports, for those of you that
are not familiar with them, to the Comptroller General of the
United States, and it is an arm of the Congress, the
legislative branch, and they do excellent work, and we're
both--Senator Grassley and I have certainly made great use out
of the GAO in our years in the Congress.
So we will now start in with Mr. Kutz, the Director of
Financial Management and Assurance.
STATEMENTS OF GREGORY D. KUTZ, DIRECTOR, FINANCIAL MANAGEMENT
AND ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY
ROBERT HAST, MANAGING DIRECTOR, SPECIAL INVESTIGATIONS, U.S.
GENERAL ACCOUNTING OFFICE; ERNEST L. VALDES, COMMANDING
OFFICER, SPACE AND NAVAL WARFARE SYSTEMS CENTER, SAN DIEGO, CA
(SPAWAR); JOHN E. SURASH, COMMANDING OFFICER, NAVY PUBLIC WORKS
CENTER, SAN DIEGO, CA; KEITH W. LIPPERT, DIRECTOR, DEFENSE
LOGISTICS AGENCY, FORMER COMMANDING OFFICER, NAVAL SUPPLY
SYSTEMS COMMAND (NAVSUP), ACCOMPANIED BY LARRY GLASCOE,
EXECUTIVE DIRECTOR, NAVY SUPPLY SYSTEMS COMMAND; JERRY HINTON,
DIRECTOR OF FINANCE, DEFENSE FINANCE AND ACCOUNTING SERVICE;
PATRICIA MEAD, ACTING DEPUTY ASSISTANT COMMISSIONER, OFFICE OF
ACQUISITION, FEDERAL SUPPLY SERVICE, GENERAL SERVICES
ADMINISTRATION, ACCOMPANIED BY SUE McIVER, DIRECTOR, SERVICES
ACQUISITION CENTER, FEDERAL SUPPLY SERVICE, GENERAL SERVICES
ADMINISTRATION; AND DEIDRA LEE, DIRECTOR OF DEFENSE
PROCUREMENT, DEPARTMENT OF DEFENSE
Mr. Kutz. Mr. Chairman and Senator Grassley, good morning.
It's a pleasure to be here to testify on the results of our
audit of Navy purchase cards. With me this morning is Bob Hast,
Managing Director of our Office of Special Investigations and
an expert in credit card security issues.
Purchase cards were introduced into the government in the
1980's primarily to streamline the acquisition process for
small purchases. Usage of purchase cards is growing quickly in
the Federal Government, increasing from about $2 billion in
1995 to about $12 billion in 2000. DOD purchase cards usage in
fiscal year 2000 was about $5 billion.
With rapid growth in the usage of purchase cards,
establishment of effective internal controls is critical to
prevent fraud, waste and abuse. I have a purchase card in my
hand here that Citibank was kind enough to provide for today's
hearing. As you can see, it looks like a normal credit card.
Navy's card is a MasterCard and can be used wherever MasterCard
is accepted; however, notice that it says, ``For official U.S.
Government purchases only.''
As requested initially by Senator Grassley, our audit
focused on Navy purchase card activity in the San Diego area
using a case study approach at SPAWAR Systems Center, or
SPAWAR, and Navy Public Works Center, or Public Works. These
two Navy activities, which provide goods and services to their
Navy clients, had about $68 million of purchase card activity
in fiscal year 2000.
The bottom line of my testimony this morning is that we
found significant breakdowns in Navy purchase card controls in
the San Diego area. These breakdowns contributed to fraudulent
and abusive spending and theft and misuse of government
property.
My testimony has three parts: first, the overall purchase
card internal control environment; second, the effectiveness of
key internal controls; and third, fraudulent and abusive usage
of purchase cards.
First, we found an ineffective overall internal control
environment at SPAWAR and Public Works. Our work has shown that
the lack of a strong internal control environment leads to the
risk of improper behavior. For example, neither SPAWAR nor
Public Works had effective policies over the issuance of
purchase cards. Any employee having supervisor approval could
basically get a purchase card. As a result, as shown on the
posterboard, we found a proliferation of purchase cards, with
36 percent of SPAWAR and 16 percent of Public Works employees
holding purchase cards. In contrast, we found that for six
large defense contractors, no more than 4 percent of employees
held purchase cards, and at GAO, about 2 percent of our
employees hold purchase cards. This control breakdown resulted
in over 1,700 cardholders, each with a monthly spending limit
of over $20,000. We found no compelling reason why over 1,700
individuals were given the power to make purchasing decisions
for the Federal Government.
We found other overall internal control weaknesses relating
to rebate management, training, and the usage of internal
audits. In fact, at SPAWAR, we found evidence that management
ignored internal review results that demonstrated some of the
very same problems that we found.
Second, with the ineffective overall control environment I
just described, it is not surprising that the four basic
controls we tested were ineffective. These controls include
independent documentation of receipt of goods, independent
certification of the monthly credit card bill, timely recording
of purchases into the accounting records, and recording of
property purchases into the property inventory records. These
four controls are intended to provide reasonable assurance as
to the integrity of purchase card transactions.
As shown on the posterboard, we estimate control failure
rates of 35 to 100 percent for fiscal year 2000. The primary
problem we found was that Navy employees were simply not
following basic policies and procedures. For example, for 65
percent of SPAWAR and 47 percent of Public Works transactions,
we found no evidence that a person independent of the
cardholder validated that goods and services were received.
This control is intended to minimize the risk, for example, of
employees going on a personal shopping spree. Unfortunately,
the high failure rate for fiscal year 2000 clearly shows that
this control was ineffective.
In addition, SPAWAR and Public Works did not record
property purchases in inventory records as required by Navy
policy. When we asked to inspect 65 items from our sample, the
two commands could not provide conclusive evidence that 31
items, including laptop computers and a digital camera, were in
possession of the government. One of the 31 items was a video
conferencing camera reported as stolen. For this item we found
that the responsible Public Works employee had received and
deposited in his personal checking account $2,500 from a
personal insurance claim. Only after being confronted by our
investigators did the employee reimburse the government with a
personal check.
Third, we found fraudulent and abusive transactions
involving Navy San Diego activities, including SPAWAR and
Public Works. Weak internal controls contributed to five recent
cases of alleged purchase card fraud related to Navy activities
in the San Diego area. Two of these related to Public Works.
These purchase card fraud cases, which so far total over
$660,000, involve numerous purchases of items for personal
gain. Examples included home improvement items from the Home
Depot, laptop computers, Palm Pilots, DVD players, an air
conditioner, clothing, jewelry, eyeglasses and pet supplies.
The control breakdowns related to these frauds were so
pervasive that the total dollar amount could not be determined.
One cardholder sentenced to 15 months in prison commented that
illegal usage of the purchase card was ``too easy.''
Another of the Navy purchase card fraud cases involved
compromise of as many as 2,600 purchase cards for Navy
activities in the San Diego area. Navy investigators were only
able to obtain a partial list of 681 compromised accounts. The
account numbers showed up on a computer printer at a community
college library in San Diego in 1999. However, the Navy has not
yet canceled the compromised accounts. Rather, they're only
canceling the accounts as fraudulent activity is identified.
Navy investigators estimated that as of January 2001, at least
27 alleged suspects used 30 of the compromised account numbers.
These suspects made more than $27,000 in fraudulent purchases
of pizza, jewelry, phone calls, tires and flowers.
With ineffective internal controls, preventing and
detecting fraudulent purchases for compromised accounts will be
virtually impossible. As of May 21, 2001, we identified 22
compromised SPAWAR accounts that are still active. We also
found transactions at SPAWAR and Public Works that we believe
are potentially fraudulent or abusive. As shown on the
posterboard, the potentially fraudulent purchases include
personal items such as cosmetics from Mary Kay, and gift
certificates from Nordstrom. It is unclear whether these
purchases were made by Navy employees, or were due to
compromised accounts. The ineffective monthly certification
control resulted in payment of these obviously unauthorized
purchases. However, we found evidence that the Navy
subsequently received credit from Citibank for these items.
We referred all potentially fraudulent transactions to Mr.
Hast and his team for further investigation. The abusive
purchases relate primary to SPAWAR and include items where the
purchase was at an excessive cost, questionable government
need, or both. For example, as shown on the posterboard, we
found purchases of items such as flat-panel computer monitors
costing from $800 to $2,500 each. We believe the cost of these
monitors is excessive when compared to standard GSA monitors
that cost about $300 each. In addition, we found items
purchased that were of questionable government need, including
Palm Pilots, designer Palm Pilot carrying cases, and a leather
briefcase from the Coach store. Accessories were also purchased
for the Palm Pilots, including keyboards, travel kits,
additional memory, modems and belt clips. We found no
documentation to justify these as valid government purchases.
Rather, it appears that these purchases were often made to
satisfy the personal preferences of purchase card holders.
In summary, we found that Navy's management of the purchase
card program in the San Diego area is simply not acceptable. We
found significant problems with every aspect of the program
that we reviewed. These problems contributed to fraudulent and
abusive usage of purchase cards.
I testified before this subcommittee in May on the
importance of fixing DOD's serious financial management
problems. Last week we testified that DOD made $615 million of
illegal and improper adjustments to closed appropriations
accounts. Today, you see another example of what can happen
when financial management is broken and accountability is lost.
The individuals here from the Navy appear to be very
capable people who can fix these problems. To do so, they will
need to demonstrate leadership in this area and establish
accountability, proper incentives and consequences for their
employees to ensure proper behavior. We will be issuing a
report with recommendations after this hearing. We are
available to work with the Navy to implement those
recommendations.
Mr. Chairman, that ends my statement. Mr. Hast and I would
be happy to answer questions after the others give their
statements.
Mr. Horn. Well, thank you very much for that presentation.
We have faith in the GAO and you just do a marvelous job. So
thank you.
[The prepared statement of Mr. Kutz follows:]
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Mr. Horn. Our next witness is Captain Ernest L. Valdes, the
Commander of the Space and Naval Warfare Systems Center in San
Diego, otherwise known as SPAWAR.
Go ahead, Mr. Valdes.
Captain Valdes. Mr. Chairman, Senator Grassley, thank you
for the opportunity to discuss the Navy purchase card program.
I entered a full statement to the committee, and I'd like to
provide a summary statement at this time.
Mr. Horn. Without objection, it's in the record. I might
add, when you're called, the whole statement goes in
automatically.
Captain Valdes. Thank you.
Mr. Horn. And we'd like you to summarize it.
Captain Valdes. Yes, sir.
Mr. Horn. Because the sooner we can summarize it and get
into a dialog with Senator Grassley and myself and any others
that want to appear, and so we want to get a positive way.
Captain Valdes. Thank you, Mr. Chairman.
I'm Captain Ernest Valdes, commanding officer, Space and
Naval Warfare Systems Center, San Diego. It's my job to command
an organization whose mission is to provide the joint
warfighter with the technology to collect, process, display and
transfer information necessary to conduct military operations.
My command is one of the many Navy activities that uses and
relies on the government purchase card program. We are a major
command within the Navy and employ a workforce of approximately
80 military and 3,400 civilian government personnel consisting
primarily of scientists, engineers and computer specialists. My
command manages more than 1,000 projects both large and small,
in research and development, testing evaluation, installation
and in-service engineering in support of the Navy and Marine
Corps. For fiscal year 2000, SSC revenues were over $1.2
billion.
The Navy's purchase card program greatly facilitates the
timely and efficient response to our fleet and customer needs
and is crucial to fulfilling our mission in support of naval
forces. For over 10 years, SSC San Diego has effectively
managed the purchase card program that makes over 50,000
purchases a year valued at approximately $45 million per year.
The success of our program is based upon effective management
controls and in the trust we have in our cardholders, who are
career Civil Service employees or Active Duty service members.
We firmly believe the purchases being made are for
legitimate government purposes. For example, during an upgrade
of the operations center of USS Blue Ridge, a command and
control ship forward-deployed in Japan, our team of engineers
and technicians found computer and local area network
components requiring immediate replacement or repair. During
this effort, which includes an installation of an entire
network on board the command ship, and a major upgrade to its
command and control system, we placed 30 people on board the
Blue Ridge for over 3 weeks working around the clock to
complete this effort. The use of the purchase card resulted in
immediate government savings by allowing the team to quickly
procure necessary items and contributed significantly to the
successful upgrade of Blue Ridge, accomplished in time for an
upcoming operational exercise.
In addition to the trust we place in our cardholders, we
have management controls to oversee the program. These
management controls include as a first line of defense
responsibility of the cardholder to review and challenge any
discrepancies on their monthly card statements. Approving
officials then review their individual cardholder statements as
a second line of review. My command's agency program
coordinator further reviews a random sample of cardholder
statements each month, contacting cardholders and their
supervisors when deficiencies are noted, including taking the
action of revoking the card for misuse or, in other areas,
disciplinary action to the cardholder.
Given the significant size of this program, we conduct
regular reviews that occasionally reveal misuse or compromise
of the purchase card. For example, our internal review process
disclosed an employee's misuse of a purchase card for personal
items while on travel. In this and other similar cases,
cardholder authority was revoked. We also rely on our workforce
to do the right thing and report cases of purchase card abuse,
either directly to their supervisor or through hotline calls.
We have seen a few cases that revealed compromise of a
purchase card by third parties outside the Navy; that is, the
card number was stolen. And this resulted in the purchase of
cosmetics and items at a record music store. In these instances
of compromise or stolen purchase cards, the affected
cardholders immediately reported and disputed the charges, and
the cases were resolved in favor of the cardholders. And I
refer to the Mary Kay issue that the GAO discussed earlier.
That was an incident of a stolen credit card number.
I will now address the specific GAO findings and address
weaknesses in the program that merit attention and followup
action. Our first action was to review the number of purchase
cardholders at my command, and we have reduced the number of
cardholders at the center by 18 percent. Our existing program
is to require that all cardholders receive training prior to
receiving the purchase card. We experienced a backlog in
refresher training, and I intend to correct that problem by
accelerating the training schedule to complete all training and
refresher training by the end of the fiscal year.
SSC San Diego relies on the following procedure and
management control to execute our program and combat
vulnerability to abuse: First, a mandatory initial training
program and following refresher training every 2 years--these
are existing management controls at the Center; supervisory
oversight of cardholders' use and need; cardholder review of
their monthly statements; approving officials' review of the
individual cardholder's statement.
We conduct random reviews every month by the agency program
coordinator, and we have an aggressive action plan to correct
deficiencies through counseling, retraining, and cardholder
revocation for the serious cases. Mr. Chairman, we conduct
formal investigations and pursue disciplinary action.
Finally, SSC San Diego has recognized that the purchase
card program was a manual, paper-intensive process that would
benefit from the employment of modern e-business solutions. My
command recently implemented an enterprise resource planning
system incorporating best commercial practices and utilizing
commercial off-the-shelf software. This system will
substantially improve our business processes at the command,
including the purchase card program, and significantly improve
our documentation issues that the GAO auditors highlighted.
In conclusion, Mr. Chairman, the purchase card program is
vital to the successful implementation of SSC San Diego's
mission to support our Navy and Marine Corps team. I also
believe the implementation of enterprise resource planning will
greatly improve the management tools available to oversee the
program, while providing our workforce the necessary
flexibility to accomplish the Center's mission in support of
our Naval forces.
Mr. Chairman, Senator, thank you for giving me this
opportunity to address the committee, and I'll address
questions at any time, sir.
[The prepared statement of Captain Valdes follows:]
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Mr. Horn. I think at this point we're going to yield to
Senator Grassley, because he has another appointment coming,
and he'll question you and some of the others, even though you
haven't had a chance to give your testimony at this point.
Senator Grassley. I have my questions of the General
Accounting Office, but I hope that before the day is over, we
hear that part of the solution to the issues that we have
before us is that we are going to give the normal commercial
way of checking credit for the issue of the credit cards to
have the authority to issue credit cards to those that have
good credit risk as opposed to everybody. And I hope the
Defense Department would look to the banks for that normal
commercial way of doing business.
Mr. Kutz, in 1997-1998, you provided extensive support for
my review of internal controls at the Department of Defense. We
discovered that supporting documentation like receiving reports
simply did not exist. At the conclusion of that review, which
was in September 1998, Mr. Hamre launched the purchase card
initiative. Purchase cards eliminate the need for receiving
reports.
Do you think that the Department of Defense answers to the
internal control problems that we uncovered in 1998?
Mr. Kutz. I believe most of the problems we found were
actually implementation of policies and procedures. As part of
this study, we found certain flaws in policies and procedures,
but for the most part, the controls that we looked at were
adequate. The issue was that the employees were either not
doing the control or not leaving a documentation trail that
shows that they did the control. We believe that the problems
that we found are for the most part the employee following
mostly valid policies and procedures.
Senator Grassley. OK. The General Accounting Office has
documented extensive misuse of purchase cards. To what extent
have you checked the Department of Defense payment records to
verify that taxpayer dollars have been used to cover
unauthorized purchases?
Mr. Kutz. As part of this review, we audited the underlying
records for these two locations. We're doing a DOD-wide
purchase card review for you and Chairman Horn, as was
discussed earlier today. So beyond what we found at these two
locations, as you mentioned in your opening statement, we're
aware that for the 2-year period there are 500 or so potential
frauds DOD-wide. But beyond these two locations, we really
can't speak to other findings or issues with respect to the
purchase card program at DOD.
Senator Grassley. Has anyone examined the Department of
Defense payment records to determine if the Department of
Defense is using tax dollars to cover unauthorized charges on
travel card accounts? And this is in regard also to my asking
the internal--or the Inspector General to do an examination of
the most egregious cases, like Sergeant X that I talked about
in my opening comments.
Mr. Kutz. We're doing a DOD-wide audit of travel cards for
you and Chairman Horn. And again, beyond that, I know Chairman
Horn had a hearing on that in the spring, and the issues with
respect to the delinquency of the Department were discussed
extensively. Beyond that, we're in the middle of putting a plan
together to look at this DOD-wide, and we will look at all
aspects of management of the travel card program at the
Department and hopefully report back to you and Chairman Horn
in the Spring.
Senator Grassley. And, Mr. Chairman, that will be the last
of my questioning, but, once again, I want to thank you for
your leadership in this area and would pledge to continue to
work with you.
Mr. Horn. Well, it's always a pleasure to work with you.
When I was a Senate staff member in the early 1960's, there was
Senator Williams of Delaware, and he was the one that really
looked after all this, and I'm glad to see that your fine work
goes in Senator Williams doing it. And they woke up when he
came in asking questions, and I think that hopefully they will
get your questions and get the point.
In the group 2 days ago, I said we're going to have another
hearing in 3 months. We're not going to just let this drift.
And we're going to do that until the Pentagon gets organized
and starts doing what any corporate group would do. So we need
to get you on track. And when the Bank of America came in to
see me, I said, goodbye, folks. Don't even talk to me about it;
that, you know, you've taken that risk, and you should have--
you should have done just what the Bank of America would have
done to its own people. So thank you.
So we'll go down the line now and get everybody's testimony
then. I've got a whole series of questions.
So Captain John E. Surash, the commanding officer for the
Navy Public Works Center in San Diego.
Captain Surash. Good morning, Mr. Chairman. I'm Captain
Jack Surash, commanding officer of Navy Public Works Center in
San Diego. Sir, we provide the full range of Public Works
services to the Navy and Marine Corps activities in the San
Diego area. These services are provided to over 3,000 buildings
on seven major bases, as well as military family housing
located at several off-base sites. These commands and
activities, including support for the many ships at the
waterfront in San Diego Bay, consist of over 400 clients
located in a 200-square-mile area. We must operate our business
with the same price, quality, customer service and
competitiveness issues that challenge and motivate all
commercial businesses.
The Public Works Center employs a workforce consisting of
14 military and approximately 1,700 civilian and contractor
personnel. Prior to the introduction of purchase cards, we
obtained materiel requirements through a central procurement
office. Frankly, this was a very cumbersome, bureaucratic,
expensive and slow procedure.
The purchase card plays a critical role in handling our
daily operations in support of the Navy fleet and Marine Corps.
During fiscal year 2000, my cardholders made over 56,000
purchase card transactions valued at approximately $30 million.
The purchase card replaced a procurement system that was not
cost or time-effective for small dollar purchases.
Mr. Chairman, in 1999 my command's internal review process
uncovered several areas of concern. To determine whether these
concerns were unique or systemic, we took the rather
extraordinary step of requesting a review of our purchase card
program by the Naval Audit Service. The auditors periodically
updated me on these findings, and, based on their updates, I
directed a number of changes be put in place.
In September 2000, we published a completely reviewed
purchase card instruction which strengthened internal control
procedures. I instructed my agency program coordinator to
conduct stand-down training for all cardholders, supervisors
and approving officials. Purchase cards were suspended for any
employee who did not attend this training. I also required my
agency program coordinator to conduct refresher training on an
annual basis for all cardholders, supervisors and approving
officials. We reviewed the number of purchase cardholders,
resulting in an approximate 30 percent reduction from about 360
down to 247 cardholders.
As a part of our new process, we now require the
cardholder, the supervisor and the approving official to sign a
certification on each monthly cardholder statement. I tasked my
supervisors to review the cardholder package and provided them
with a checklist to aid their review. I directed that all
original purchase card documents be maintained in one central
location, so that if the need arose, all documents could be
easily retrievable. I also strengthened internal controls for
the dispute process.
GAO's audit covered fiscal year 2000. Mr. Chairman, I would
point out that this is approximately the same period that the
Naval Audit Service was conducting their review of my command.
However, based on the GAO review, I learned there were a couple
of areas that still needed to be addressed, so as a result of
their investigation, I took the following action: A key issue
was ensuring separation of functions between the person
ordering material and the person receiving and accepting it.
Our program had allowed cardholders to order and receive
materials and services so long as someone else had made the
original request for the material. I have now issued a revision
to that policy that strictly requires that someone other than
the cardholder accept and receive material and services.
Although our cardholders had received the required
training, I issued contracting warrants based upon the training
they took. The training records were discarded at the time we
issued the new instruction, and we conducted stand-down
training. I have now directed that all future training and
contracting warrants be maintained for historical audit
purposes. In addition, I've added another person to my
command's internal review staff and initiated a program where
they independently perform a review of the purchase card
program every month.
The GAO presented a list of 39 questionable purchases. Mr.
Chairman, we were already aware of 20 of these, all from three
cardholders, as a result of our normal internal investigations.
All 20 transactions were being handled through appropriate
means involving our internal review office, consultation with
the Naval Criminal Investigation Office and our own legal
counsel.
Research on the additional 19 transactions, 12 were, in
fact, proper; 2 were disputed, and credits were received; and 2
involved cardholders using the wrong card by mistake. The final
three were valid official requirements; however, the purchase
card was the incorrect procurement tool to use. In addition,
the General Accounting Office identified 21 purchases that had
been improperly spread to stay under purchase card thresholds.
Further research shows that 12 were, in fact, split purchases.
Mr. Chairman, however, much of the work at the Public Works
Center is task-oriented. Purchases are made based on
requirements that are known at a specific point in time. As
work progresses, similar requirements may become evident, and
purchases are made to fulfill the additional requirements. In
these cases it may appear that purchases have been split to
circumvent the purchase limits, when, in fact, the purchases
were made based on requirements as they were known at the time.
However, this is an area that we know we have to continually
watch, and I have directed my people to do so.
In summary, Mr. Chairman, we have previously recognized
that management and control of our purchase card program
required increased attention. The General Accounting Office
pointed out some additional areas where revisions to the
program were needed, and we are quickly making those changes.
The purchase card program provides my command a flexible
and powerful procurement method, one I truly believe makes us
more responsive and cost-effective in meeting Navy and Marine
Corps requirements. I fully recognize that proper controls are
a key element, and I am committed to ensuring these controls
are in place.
This concludes my summary statement, Mr. Chairman.
Mr. Horn. Thank you very much.
[The prepared statement of Captain Surash follows:]
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Mr. Horn. And we now go to Vice Admiral Keith W. Lippert,
Director of Defense Logistics Agency, former commanding
officer, Navy Supply Systems Command.
Admiral Lippert. Mr. Chairman, thank you for the
opportunity today to discuss the Department of the Navy
Purchase Card Program. I am Vice Admiral Keith Lippert,
currently serving as the Director of the Defense Logistics
Agency. I took over on July 20th. I previously served as the
Commander of Naval Supply Systems Command, or NAVSUP, from
August 1999 to July 11, 2001.
NAVSUP is the Department of the Navy's purchase card
program manager, and in this capacity we are responsible for
the establishment of Navy and Marine Corps policies and
procedures for use of the purchase card and the management of
purchase card services provided by Citibank. I am aware that
there are issues surrounding the purchase card program. The
Department of the Navy is addressing these issues, and I am
confident that the policies, procedures and metrics that are in
place to manage this 12-year-old purchase card program are
adequate and comparable to the best practices of private
industry. However, there can be improvements.
The General Accounting Office noted during their outbrief
to the Department of the Navy that its written purchase card
policies and procedures are generally adequate. The Department
of the Navy recognizes that program execution is not always
perfect. Oversight procedures, however, exist to identify and
address areas of concern.
The Department of the Navy's Purchase Card Program is very
successful overall and represents a significant business
revolution in how the Department of the Navy purchases supplies
and services. The card allows the purchase of commercially
available supplies and services without the delay incident to
the traditional purchasing process. The purchase card also
reduces costs by consolidating transactions into a single
monthly invoice for payment.
The Department of the Navy's reliance on the purchase card
continues to grow. Today the Department of the Navy buys 99
percent of all requirements valued at $2,500 or less through
the purchase card. And throughout the Navy and Marine Corps and
in every commanding activity, there are more than 30,000
purchase cards with 9,100 approving officials and 1,800 agency
program coordinators providing management and oversight.
The Department of the Navy purchase card policy establishes
the structure and procedures used to manage the card program.
The Department of the Navy's purchase card policy is available
in hard-copy and on the Naval Supply Systems Command Web site,
making it readily accessible to all. The Department of the
Navy's policy establishes controls for the oversight and
management of the program from the Department of Navy's major
command level to the local activity cardholder. The controls
cannot completely eliminate the occurrence of misuse. They can,
however, deter and identify misuse.
The greatest strength of the system is employee honesty.
The workforce is relied upon to properly use the card and to
report misuse. The Department of the Navy's Purchase Card
Program is structured in a way to place responsibility and
accountability at the lowest possible level, and the Department
of the Navy trusts that its employees will execute these
responsibilities with integrity.
There are three separate processes that provide checks and
balances. The first is the establishment of accountability at
the various levels of the program. The program establishes
oversight responsibility for each level of the subsequent
levels below them. This structure is similar to that used by
Citibank for its corporate customers and creates a multitiered
network of oversight.
The first tier, is the agency program coordinator,
establishes cardholder limits and restricts vendor lists and
conducts a semiannual review of purchase card use. Also
resident at the local level is the approving official, who
certifies all purchase invoices prior to payment.
Another level of oversight is performed by the Department
of the Navy's contracting personnel. Contracting personnel
approve and monitor execution of purchase card activities.
Financial management policy also establishes procedures for
funds control. Additional reviews are also conducted by the
Navy and DOD Inspector General and audit services.
And finally, CitiBank, the Department of the Navy's bank
card contractor, constantly monitors purchase card
transactions. Since the inception of the purchase card contract
with Citibank in November 1998, the Department of the Navy has
made over 7 million credit card transactions. It is interesting
to note that the commercial benchmark for vendor fraud and
compromised card activity is 0.06 percent to 0.09 percent of
the total dollar value spent. The Department of the Navy's rate
is less than half of the commercial benchmark. One measure of
the effectiveness of our oversight is that since November 1998,
only 38 cases of fraudulent activity have been reported by the
Naval Criminal Investigative Service.
I would like now to address some of the Department's
initiatives to improve our purchase card program.
First, the Department of the Navy is in the process of
moving from a manual purchase card process to a fully automated
purchase card system, such as the Enterprise Resource Planning
System.
Second, the Department of the Navy has increased training
of the Department of the Navy's employees to reinforce proper
purchase card usage.
And finally, the Department of the Navy is implementing
electronic management tools such as Citibank's newly fielded
dynamic reporting system that will permit it to better analyze
purchase card transaction data.
In conclusion, the purchase card is a vital acquisition
tool for its service members and civilian employees. I commend
the General Accounting Office audit team for identifying
opportunities for the Department of the Navy to improve an
extremely complex program. The Department of the Navy has taken
actions to improve its existing program.
This concludes my statement, and I am readily available to
answer your questions, sir. Thank you very much.
Mr. Horn. We thank you very much.
[The prepared statement of Admiral Lippert follows:]
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Mr. Horn. We now go to Jerry Hinton, the Director of
Finance for Defense Finance and Accounting Service.
Mr. Hinton. Good morning, Mr. Chairman. My name is Jerry
Hinton, and I'm the Director of Finance for Defense Finance and
Accounting Service. I welcome the opportunity to discuss with
you the responsibilities for paying purchase card bills at
DFAS.
DFAS purchase card payment process is in accordance with
the DOD Financial Management Regulation and DOD policy
memorandum. Specifically, DFAS performs a prepayment audit
review or audits before charge card payments are made. Their
prepayment review includes checking for the procurement
identification number [PIN], and, if needed, the subprocurement
instrument identification number [SPIIN]. We check for the
payees' names and addresses. We check that the invoice date is
later than the purchase order date, that the invoice is
originally invoiced, that the estimated pay date is correct,
that the appropriate payment office is identified by the line
of accounting reference, that the prompt payment or
certification is provided, that the correct amount is being
paid to include interest where applicable, and that only the
charge that is certified by the approving official is being
paid.
In the case of the Navy, the entitlement system, which is
called the Standard Accounting and Reporting System [STARS] One
Pay, automatically schedules the payment through a disbursing
module to make the payment when required.
Now I would like to address the GAO draft that discussed
duplicate payments for charge card invoices. We have confirmed
some duplicate charge payments were made at DFAS San Diego
during the period covered by the audit. Most of these payments
were caused by Citibank error. Shortly after the duplicates
were discovered, Citibank systemically corrected the problem
that had contributed to the duplicate payments. All duplicate
payments identified were recovered from Citibank.
Mr. Chairman, that concludes my remarks, and I'll be happy
to answer any questions.
Mr. Horn. Thank you.
[The prepared statement of Mr. Hinton follows:]
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Mr. Horn. And we now have Patricia Mead, the Acting Deputy
Assistant Commissioner, Office of Acquisition, Federal Supply
Service, General Services Administration.
Ms. Mead. Good morning, Mr. Chairman and members of the
subcommittee. I am Patricia Mead, Acting Deputy Assistant
Commissioner, Office of Acquisition of the Federal Supply
Service. I am pleased to be here on behalf of the General
Services Administration to discuss the governmentwide purchase
card program.
GSA has been responsible for contracting for purchase card
services since 1989. The most recent purchase card contracts
were awarded in 1998 to five banks as part of the GSA Smart Pay
Program. The purchase card was initially adopted as a
management tool. The purchase card replaced the paper-based,
time-consuming purchase order process for small dollar
procurements.
Now, as the primary payment and procurement method for
purchases under $2,500, the purchase card currently saves the
government approximately $1.2 billion annually in
administrative costs. In addition to these administrative
savings, the government received refunds from GSA contractor
banks in excess of $50 million last year based on total
purchase card charges of $12 billion.
Because the GSA Smart Pay Program was designed as a
managerial tool, agencies have numerous tools for oversight of
the program. GSA mandated that contractors provide electronic
reports to agency managers. These reports are secure and easy
to access via the Internet. Agencies use these reports to
assist in the identification of questionable transactions; for
example, split purchases, improper cardholder limits exceeding
the cardholder's contract warrant authority, and fraudulent
activity.
While all payment mechanisms are subject to a certain
degree of risk, GSA has built safeguards and systematic
controls into the program designed to minimize risk. For
example, when accounts are set-up, agencies determine what
limits to set on each transaction. They are able to set limits
by dollar amount per transaction, number of transactions per
month, total per month and the types of businesses at which the
purchase card may be used.
In addition, the agency decides to whom a purchase card
should be issued; any limits on the use of the card; approval
procedures; roles and responsibilities; and degree of agency
program oversight. Most agencies establish their operating
procedures at the Department level with further refinements in
the field locations.
The controls GSA established in the contracts with the
banks operate at multiple levels. Each cardholder with account
activity in a given billing cycle receives a statement from his
or her bank at the end of the cycle. This statement is a
critical control. The cardholder receives training to
understand the importance of promptly reviewing and approving
the accuracy of the statement in accordance with agency policy.
Operationally, after the cardholder reviews the statement, it
is routed to an approving official or certifying official who
approves the statement. This review is intended to validate all
transactions as proper. Training has been established for all
reviewing officials, emphasizing the need to report suspected
card misuse to the agency program coordinator or to the
Inspector General for further action.
Liability for transactions made by authorized cardholders
rests with the government. If the card is used by an authorized
cardholder to make an unauthorized purchase, the Government is
liable for payment, and the agency is responsible for taking
appropriate action against the cardholder.
The contract provides for agency program coordinators to
oversee the program. The role of the agency program coordinator
includes ensuring that cardholders properly use the card and
monitor account activity. Because GSA Smart Pay is a critical
managerial tool, agency program coordinators receive numerous
reports on cardholder activity from the banks. To simplify the
oversight process, transactions can be segregated by dollar
amount, merchant type and frequency of transactions with
specific merchants. Although reports can be helpful in
identifying questionable purchases, reviewing and approval of
transactions at the local level continues to be our most
effective control mechanism.
GSA recognizes that cardholder training is essential to
ensuring proper use of the card. GSA provides online cardholder
training free to all purchase cardholders. The training
discusses how to make purchases with the card, roles and
responsibilities of cardholders and ethical conduct. Many
agencies choose to supplement this training with written, oral
or online training of cardholders on agency procedures.
GSA requires that all contractors participate in an annual
training conference for purchase card program coordinators.
Subjects of the annual training conference include electronic
reporting tools, industry best practices, fraud monitoring and
card management controls. The contractors are also required to
provide onsite training to agency program coordinators. Written
training materials provided by the contractors include
cardholder guides and agency program coordinator guides. These
address authorized uses of the card and responsibilities of the
cardholder and the agency program coordinator.
As part of a continuing effort to improve the card program,
GSA has recently formed a purchase card roundtable comprised of
25 agencies, which will address issues of concern, including
fraud and program audits. This is an opportunity for agencies
to share experiences and learn from each other.
Finally, there is a full electronic record of all
transactions under the GSA Smart Pay Program. This electronic
footprint makes fraud or misuse far easier to detect than any
paper-based environment. A strong training program, state-of-
the-art tools and a detailed review structure give Federal
agencies all the tools and internal controls necessary to
effectively run the purchase card program.
But as stated in the recent GAO Report on Strategies to
Manage Improper Payments, people make internal controls work,
and responsibility for good internal controls rests with all
managers. Agencies must use the tools GSA has made available.
GSA will continue to work with our industry partners and our
customer agencies to minimize risk to the Government and ensure
proper use of the cards.
Mr. Chairman, that concludes my prepared remarks today. I
would be happy to answer any questions you may have. Thank you.
Mr. Horn. Thank you.
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Mr. Horn. Our last presenter is Deidra Lee, Director of
Defense Procurement for the Department of Defense. And I gather
you do not have a written statement because you have been out
of town, and you came back for this hearing, so thank you for
coming.
Ms. Lee. Good morning, Mr. Chairman. It's a pleasure to see
you again. We have worked together on some other issues. I do
not have a written statement for the record, as you mentioned,
but I am here to tell you that I would like to assure you that
the Department of Defense takes financial responsibility very,
very seriously. We will look into these issues regarding the
purchase card and other financial issues that have been raised.
And I certainly look forward to working with GAO, the services,
and this committee to make sure we have demonstrated to the
taxpayer that we are spending their dollar wisely.
Mr. Horn. We thank you for that, and we'll now go to
questions. And let's start with Mr. Kutz.
You have heard this testimony. Do you think they'll solve
the problem, or is this just talk?
Mr. Kutz. As I said earlier, I know Captain Valdes
mentioned his enterprise resource system off-the-shelf package
that's being implemented. I think that will certainly help
automate some of the processes. But what we're talking about
here, Mr. Chairman, is a people issue, a leadership issue and
an accountability issue, and I think they have clearly the
capability to do it. I have read the backgrounds of these
folks. They have done fine service to our country, and I
certainly don't have any doubt that they can fix the problems,
but it's going to take attention and, you know, some of their
precious time. And I'm sure they are busy with lots of things
in the positions that they're in, but they are going to have to
spend probably a little bit more time on this type of issue to
make it happen.
Mr. Horn. What do you think we should do, have a 3-month
rule for this group also, and will you be doing a check and
repeating what you have already done, put in your blue cover,
and see if the recommendations are being implemented; or is
this----
Mr. Kutz. We could certainly do that. As we said earlier,
we are looking at this issue beyond these two locations for you
in a broader study of DOD purchase card usage. But certainly we
would hope to work with these folks to deal with the
recommendations and find valid ways to implement them. And if
you would like us to report back to you this fall on that, we
would be happy to do that.
Mr. Horn. Let's get it done by November 1. And then in the
meantime, you are going through two more operations, I take it.
Mr. Kutz. We'll probably look beyond that. We had not
looked at the Army or the Air Force, So we will probably take a
look at Army and Air Force. I think of the 500 potential frauds
that Senator Grassley mentioned, I believe 322 of them, based
on my notes, are Army-related. So probably Army is the place
that we will focus some case studies on in the immediate or
short term.
Mr. Horn. Admiral Lippert, it's your responsibility, I take
it, now throughout the Defense Department, and you would have
the same policies for the Navy that you will for the Army and
the Air Force?
Admiral Lippert. From NAVSUP's perspective, we set the
policy for the Navy, and now as Director of the Defense
Logistics Agency, I will be setting the policies within the
Defense Logistics Agency, which is separate from the rest of
the Department of Defense.
Mr. Horn. But that is the right button to press if
something happened?
Admiral Lippert. Yes, sir.
Mr. Horn. So I'm sure you will solve that problem.
Mr. Kutz, in Admiral Lippert's testimony, he said the Navy
rate of vendor fraud and compromised card activities is less
than half of the commercial benchmark. Given your findings, do
you think he is correct?
Mr. Hast. Mr. Chairman----
Mr. Horn. Mr. Hast is assistant to Mr. Kutz.
Mr. Hast. In listening to the Vice Admiral's testimony, he
stated that commercial fraud at Citibank is between 6 and 9
percent.
Admiral Lippert. That was 0.06 and 0.09 percent.
Mr. Hast. Actually, it's 0.006 and 0.009. Those are basis
points. And the credit card industry is running fraud at about
6 to 9 basis points. We did not check to see whether the Navy's
was half of that, but if they are 0.04, that would be
significantly higher than what the credit card industry is,
which is 0.006 to 0.009.
Admiral Lippert. The numbers I was quoting were correct. As
I said, it's 0.06 percent, which is not 6 percent, but 0.06 of
1 percent. And the numbers that we got are quoted from
Citibank.
Mr. Horn. What's the best thing GAO can give to the Admiral
that is the most important thing for him to look at in the next
3 months?
Mr. Kutz. Probably reducing the number of purchase cards or
taking a long hard look at why there are this many purchase
cards out there. It does appear for the Navy that there's
47,000 or 48,000 purchase cards based on what we found in the
records. I think there needs to be a look to see if that is
something that is really controllable, or is that just way too
many purchase cards to control.
So I think the first line of defense here would be looking
to make sure that we have the right number of cardholders,
because the more cardholders you have, the harder it's going to
be to train them, to monitor them, to review their
transactions, etc. So, again, I would recommend that as the
first thing to take a look at here.
One other thing, and Mr. Hast can probably expand on this,
is that those compromised accounts that I mentioned are still
live out there, and I think somebody needs to immediately
cancel those accounts.
And, Bob, do you want to add to that?
Admiral Lippert. Could I address that point, Mr. Chairman?
The accounts he is referring to were identified by us in the
Naval Criminal Investigative Service, and they asked us to keep
those accounts open while they are doing an investigation. So
why they are still open is, based upon their suggestions and
direction to us, is that it's an ongoing investigation.
Mr. Horn. Any comment?
Mr. Hast. I understand that law enforcement would need some
of those accounts to stay open, but when you have 2,600
accounts open, you have the vulnerability of almost $230
million worth of fraud if they got into the wrong hands and
someone was able to exploit that. I think that's an awful lot
of vulnerability to leave sitting out there.
Mr. Horn. Well, I must say it seems to be that they're
getting very high priced items, computer hand-held this and
that, and they can go out and just simply say, Well, we needed
it for whatever we did, and instead, they are making a few
bucks on the side. Is that what you saw in some of this?
Mr. Hast. Yes. Those were some of the types of cases that
we reviewed.
Mr. Horn. And if you were in the Admiral's place, what
would you do? Would you just say, look, you are doing it for
the Navy or the Army or the Air Force, we expect you to use
that card in that way and not go out and make yourself a
fortune.
Mr. Hast. I am sure those controls are in place and those
expectations are in place. I think that working with the credit
card industry--and as I said, they are--working with Citibank
on the front-end-loaded software that recognizes abnormal
purchases and recognizes fraud is really the way to go. The
credit card industry, when they found fraud creeping up, put a
lot of money into research and development and developed front-
end-loaded fraud control, and they have been successful since
1984 until the present in lowering fraud from close to 30 basis
points down to 7 or 8 basis points.
So I do believe that technology and working with the
industry on the front-end-loaded system are the way to go.
Mr. Horn. When the GIA started looking at this, did they
have any reports from the Inspector General of the Navy or
Defense or Army or Air Force? Where are the Inspectors General
on these?
Mr. Kutz. The DOD Inspector General is doing a Department-
wide study that has not been released. There were several Naval
Audit Service audits done of the Public Works, and I don't know
if they were requested by the captain or not. It sounds like
they maybe were. One of those was issued in December 1999 and
had some of the issues that we found for 2000. The other one
was done for fiscal 2000. And I believe that the captain was
briefed on that, and we do not know the results. So he may be
able to elaborate on what the Naval Audit Service found with
respect to Public Works.
Mr. Horn. Admiral, when the GAO noted that 2,600 purchase
card accounts were compromised, and many of these accounts had
been hit for items such as jewelry, pizza and other
inappropriate purchases, why hasn't the Navy canceled those
accounts and just let them work their way back?
Admiral Lippert. Mr. Chairman, that is the direction that
we have from the Naval Criminal Investigative Services, to keep
those accounts open while they are doing an ongoing
investigation for fraud. So that's why we haven't canceled
those immediately.
Mr. Horn. So that service of the Navy is working on this?
Admiral Lippert. Yes, sir. Yes, sir.
Mr. Horn. And then I guess, Mr. Hast, why did the Office of
Special Investigations get involved in the compromised card
number case? Did you develop information that would help to
identify the source of the compromised numbers or what?
Mr. Hast. Yes. As part of GAO's review of the Navy Purchase
Card Program, the Office of Special Investigations was asked to
review ongoing Naval Criminal Investigative Service
investigations. One investigation was the one with the 2,600
cards, and we are especially interested in that because that
seemed to have the greatest vulnerability. While NCIS initiated
an investigation with a Secret Service task force, we conducted
an investigation in which we developed information to help NCIS
identify the source of the 2,600 numbers. Specifically, we are
able to identify that the addresses on the list were shipping
addresses, and they were a number of merchants that kept this
type of information. NCIS has now identified that merchant who
has verified that the list came from their data base and that
two former employees were targets.
Mr. Horn. Ms. Lee, as the Director of Defense Procurement,
tell me how your office can solve this problem, and do you have
ground rules?
Ms. Lee. Yes, sir, we do. We have Department-wide policy,
Department of Defense-wide policy on how the purchase card is
to be used. As was discussed by GAO and others, we set the
Department-wide policy, which is then implemented at the
various services, at the various units. It certainly does run
along these lines, which is make sure that people that need the
card have the card; that their supervisor is aware of it;
review of their purchases; and overall review of the system.
And we will certainly take a look at where, if anything, we
need to strengthen those policies, including training for both
the individuals and the supervisors, to make sure we are
protecting the cards.
Mr. Horn. Had you had any knowledge of what was going on
here in the last couple of months?
Ms. Lee. Yes, sir, I was aware there was a review ongoing
at those particular units. I was also aware that we have
various IG looks periodically, and also that our regular
procurement reviews that the services conduct of their various
units, they look at their purchase card programs.
Mr. Horn. Well, did you call in the various service IGs,
the very service--people on the financial side? How do you
operate on behalf of the Secretary of Defense?
Ms. Lee. Periodically, certainly as these kind of issues
arise or as we find them from our normal review process, we try
to put out--and we discussed that I have an interdepartmental
staff where all the services come together, and we talk about
these kinds of issues and what they're doing at each service
level. I also meet with the other defense agencies, who do,
although not represented by the major services--we have a good
number of people out there in that area as well. We look at
what our overall policies are and periodically put out updates,
reminders, and additional information to the whole Department
for the purchase card program.
Mr. Horn. Do you have other situations like this, and if
so, what are you going to do about it?
Ms. Lee. Mr. Chairman, we certainly are going to make sure
that every time in every instance when there is a purchase card
issue or a perceived issue that we investigate the appropriate
circumstances and take the appropriate action. As has been
mentioned here, the purchase cards are a valuable tool. We just
want to make sure people are using them correctly.
Mr. Kutz. Mr. Chairman, last week, just for your
information, GAO testified on purchase card problems at the
Department of Education. And so that is another place that we
are aware of that has some of the same types of issues as we
reported on here.
Mr. Horn. Well, I thank you on that.
Captain Valdes, going back to your computer purchases, you
told GAO that the acquisition of flat panel monitors, which
cost between $800 and $2,500, that that was justifiable because
they use less energy than the traditional 17-inch monitors,
which cost approximately $300. Could you share with the
subcommittee the study showing that the savings in electricity
offsets the additional cost of a flat panel monitor?
Captain Valdes. Yes, Mr. Chairman. The benefits are in
power savings. We have seen numbers upwards of 75 percent, And
the recent Consumer Reports indicates such. But it's not just
an electricity savings. That is important in California, as you
might imagine. But it's just not----
Mr. Horn. I advise people to take a candle to California.
Captain Valdes. I've got one in my briefcase.
We buy these flat panels for shipboard use. We put a whole
network of ultrathin monitors on board USS Coronado, the
flagship for the Third Fleet, and the purpose there was to save
space, reduce the heat on board the ship, and to maximize the
efficiency of the space that's available to the crew members,
which already are very tight quarters.
So there's a number of benefits to the flat panel display.
The price is coming down significantly, and we feel in many
areas with power savings--it's also fairly immune--well, it is
immune to electromagnetic radiation effects. So if you have a
CRT, and you are a high-powered transmitter, for example, you
will see distortion with a standard CRT. With a flat panel you
won't.
So from a military point of view and from a space,
electricity and weight point of view, it becomes very important
for the Marine Corps. We use vans for radar air traffic
control--these are very small vans, Mr. Chairman. And we use
flat panels to save limited space in those vans.
I'm also prepared to discuss some of the GAO findings as
they relate to fraud if you feel it's necessary.
Mr. Horn. Do you think the computers should be bought one,
two at a time, or do you think the Navy should buy computers in
bulk like other government agencies in order to get the best
prices?
Captain Valdes. That is a valid point, Mr. Chairman. I am
going to look into how we might improve our procurement process
with respect to bulk versus individually. Right now we buy
these systems by project because that's the way the accounting
works in the Navy Working Capital Fund Command. And I have over
1,000 different projects at the Command. So the challenge there
is going to be to align the dollars with the project to make it
work. But I'll look into that.
Mr. Horn. How many Palm Pilots did you have to give away,
as it seems to be?
Captain Valdes. Sir, we have used Palm Pilots, just like
most folks in business do, to improve the efficiency and
effectiveness of the worker.
Mr. Horn. And what do you find that does for you?
Mr. Valdes. Well, what it does is it allows people to
manage their time effectively. It allows them to retrieve data
fairly quickly. I use it personally to be able to manage my
time during the day.
Mr. Horn. Well, is it everybody that has to have one?
Captain Valdes. No, sir.
Mr. Horn. I see some of that here, too. But it just seems
to me that not everybody has to carry one of these around.
There can be a scheduler that does that.
Captain Valdes. That is a valid point. For all purchases,
we require that the supervisor or approving official approve
the purchase. And so if an engineer or a scientist feels he
needs a Palm Pilot, or one of our legal or professional staff
members, then the supervisor will make that determination, sir.
Mr. Horn. Now you haven't had that up to now, so is this a
new policy?
Captain Valdes. No, sir. We have always had the policy
where the approving official makes a determination on every
purchase. That's been a long-standing policy at the Center and
in accordance with Navy and DOD policy.
Mr. Horn. Who has to sign-off on a Palm Pilot?
Captain Valdes. The supervisor and approving official.
Mr. Horn. And what rank would that be?
Captain Valdes. A typical supervisor is an engineer,
roughly at what we call the DP-3 level, DP-4 level. So it is a
senior supervisor engineer with typically 10 to 15 years of
experience in government service. So that's really the level of
approval that occurs.
Mr. Horn. So this is in the senior Civil Service?
Captain Valdes. Yes, sir. It is individuals who have
seniority within Navy.
Mr. Horn. How about the uniformed?
Captain Valdes. Well, it's a similar approval. We only have
80 military personnel, so it's typically a smaller group of
people, but it's a senior-level person. In the case of if a
lieutenant needs a Palm Pilot, it will be his or her
supervisor.
Mr. Horn. What did they do before they had a Palm Pilot?
Captain Valdes. They carried a lot of paper.
Mr. Horn. Are you thinking of a slide rule?
Captain Valdes. Slide rules and paper.
Mr. Horn. Seems to me you have got to make some tough
judgments, and these are little toys for a lot of people. And
gee, you know, I am at such and such a level, and look, I've
got a Palm Pilot.
Captain Valdes. Mr. Chairman, I'm going to look into it
within my command.
Mr. Horn. Meanwhile the taxpayers are making out their
1040's and all.
Could you give us some examples where you feel the
organization's purchase card program was effectively managed,
and what are you going to do about it, real fast?
Captain Valdes. Yes, sir. Our management is, as I
mentioned, at various different levels. We have management
controls across the command. I mentioned the approval
authority. I mentioned the supervisory controls. My plan is to
reduce the number of cardholders. I've already reduced it by 18
percent. I intend to approve training. We currently train every
cardholder before the card is issued, and we have a very good
track record in making sure that every cardholder gets training
before the card is issued.
What we need to improve on is refresher training, and I'm
going to work to improve that posture in my command.
Mr. Horn. When was that training implemented?
Captain Valdes. We've always had that policy at the
command.
Mr. Horn. Well, if you've had that policy, and we've got
fraud, I don't know why we can't get a new system.
Captain Valdes. Yes, sir. When the GAO came to my command,
they looked at all the folks that were carrying cards, and we
provided them with assurances and documentation that they're
all trained. Where we're weak is on some of the documentation
to prove that the individual is trained. But all of the members
of my command are trained prior to receiving a card.
The other areas are refresher training--it's required every
2 years. And we will work hard to catch up in that area.
Mr. Horn. For those that seem to be mall happy, do we just
take the scissors and cut the card in half? It would save a lot
of taxpayers' money.
Captain Valdes. Yes, sir. In the cases that GAO has
highlighted and other cases that I'm aware of from our own
internal controls, we revoke the card immediately.
Mr. Horn. Mr. Kutz, is there anything you want to add?
Mr. Kutz. I am sure what Captain Valdes said about the flat
panel monitors is probably accurate, but I would note that we
found them in the accounting department and with secretaries
also. So I am not sure how that relates to the mission he was
talking about.
Captain Valdes. That was the power savings aspect.
Mr. Kutz. And I did read the same Consumer Report in July,
and I think according to that report, the entire cost of
operating a normal computer for 5 years is about $57. So I
would like to see his study that demonstrates the cost benefit
of the electricity savings.
But I do think the Navy needs to look at what they're
buying with the purchase card. If we are going out and buying
one and two computers at a time, are we paying full retail, and
are we getting the full benefit of having the--or are we
outweighing the savings that we've got from the streamlined
acquisition process? The same thing with Palm Pilots. Whether
they are a valid Government item or not, I am not certain. I
know a lot of people that have them, and I'm not sure of anyone
I know in the government or the private sector that has
actually paid for them.
So you need to take a hard look at what is actually being
purchased and if the purchase card is the right vehicle for it,
because my understanding is that buying computers in bulk
results in substantial savings. And I know at GAO, we buy them
400, 500 at a time.
Captain Valdes. Right now, our numbers show that roughly 10
percent of our total computer buys is flat panels. So it is not
a pervasive issue throughout the command. It's roughly 10
percent. But I'll look into decreasing that number.
Mr. Horn. Captain Surash, the General Accounting Office
noted that one of your employees effectively stole $2,500 by
accepting a personal reimbursement from an insurance claim for
stolen government property. Now, what action has the Navy taken
against this individual for pocketing the reimbursement that
belonged to the government?
Captain Surash. Mr. Chairman, we were aware of a number of
the issues that GAO had discovered. That one, though, was one
we were not aware of, and I've disciplined--administrative
discipline is quite possible. That is currently under review.
We just found out about that a very short time ago, sir.
Mr. Horn. Was it just one case, or do you know about more
cases?
Captain Surash. That is the only case with those
particulars that I'm aware of, sir.
Mr. Horn. Now, some of your employees were buying at
Macy's, Nordstrom and Sam Goody. I don't know who Sam Goody is,
so enlighten me.
Captain Surash. Sir, the Nordstrom buy was actually safety
shoes. We provide our--we're mainly a blue collar workforce.
Our 1,700 folks for the most part are blue collar and not white
collar and out maintaining bases, and a lot of our folks need
safety shoes, and we pay for their safety shoes. In this
particular case, we had one of my female employees purchase a
set of safety shoes at Nordstrom for $99.95, sir.
Mr. Kutz. We were talking about three gift certificates for
$1,500. We are OK with the safety boots. We didn't question the
safety boots.
Captain Surash. On that, sir, there is a case the General
Accounting Office discovered seven purchases that sparked their
interest all from the same individual. Actually, there were a
total of 22 transactions that we were already aware of and
taking action on this individual.
The action we took was we referred this case to the Naval
Criminal Investigative Service. That--I do not have the final
outcome of that particular investigation.
At my command, sir, we have canceled 54 cards. Some of that
was because we had some employees leave, but it was also
because of misuse. I currently have 30 cards suspended as of
the close of business Friday, and these were because our
internal review process now has found things that we don't like
are going on. There are three individuals that misuse was so
serious that essentially I tried to fire them. In the Civil
Service system, I issued a notice of proposed removal. And one
individual was, in fact, fired, one resigned, and one was able
to retire before I could complete administrative action on him,
sir.
Mr. Horn. Well, thank you. And that started last Friday?
Nothing like a good old congressional hearing for some action.
Captain Surash. That is not--those aren't actions since
last Friday. The actions that I'm talking about are within the
last year, sir.
As I mentioned in my testimony, we did a major overhaul at
my command effective in the fall of 2000. And unfortunately,
the GAO review of things at my command was essentially before
my major changes were put in place. I don't want to sit here to
tell you that I've got a perfect running process, but it is
much improved from what GAO saw during their onsite last year.
Mr. Horn. Mr. Hinton, you've paid the bills. Do you have
some kind of auditing control that would send up a red flag if
a bill came through with large purchases made at Macy's or
Nordstrom?
Mr. Hinton. The way the system works today, we see the
bills, but not the details behind it, we do not have the
details available to us. We rely on the process that the
Department has in place, that the certifying official, those
people that have signed-off on these purchases, have looked at
them and reviewed them.
Mr. Horn. Wouldn't common sense in your organization say,
wow, there's a real red light here? DFAS, what good is it? I
mean, if you can't look at the check and say, good heavens,
$2,500 for this? And, you know, especially when you see Macy's
and Nordstrom.
Mr. Hinton. As I said earlier, we cannot see that as
Macy's. We receive a certification from the particular service
that says--under the Certifying Officers Act, that
responsibility rests with the person that does the
certification. We have attempted to go in and look at some
merchant category codes. We did a study--we have an operation
to go in and look at some of the transactions, but they are
normally after the buys and more after the fact as opposed to
before the payment is made.
Mr. Horn. Well, when you get that--it's really a purchase
order of sorts, isn't it?
Mr. Hinton. Yes, sir.
Mr. Horn. Or are they paying it out-of-their-pocket and
then turning it in? I don't think so.
It just seems to me, DFAS is--you know, they've fouled
things up for the last 10 years that I know about in Columbus
where that place was just a mess. Now, I know you've improved
that. And they were knocking off $1 million checks to people.
And when they threw up their hands and said, I didn't have that
contract, I mean, good heavens.
What can your operation do, and why can't it do something?
Mr. Hinton. Well, thanks Mr. Chairman, for recognizing some
improvements in Columbus. I would just like to say just like
the people mentioned at the table, DFAS is a part of the
Department and will look at ways we can also improve our
processes as well.
Mr. Horn. Well, that's where I raised the flag of why the
Inspectors General didn't check this sooner. And it seems to me
we put them in there so they can get at things like this. So
good old General Accounting Office comes in and does it.
Mr. Kutz, anything you want to add to this?
Mr. Kutz. With respect to preventing the payments of
vendors like Nordstrom, Macy's, etc., the key control there is
the monthly certification, which doesn't take place at DFAS.
That takes place at the activity. And that's why it is
important that each month, before the bill is paid, things like
the Nordstrom, Macy's, etc., get flagged so you don't pay them.
Rather than the pay-and-chase type of situation where you pay
it, and then you go back and try find out later whether you had
overpaid for things that weren't yours or were improper
purchases. So that is the key control to making sure that you
don't pay improper payments.
Mr. Horn. And, Ms. Mead, does GSA have this problem
throughout the Federal Government, or what's your reading on
this?
Ms. Mead. We're not aware of it going on unless an agency
reports it to us.
Mr. Horn. So you've setup a training program?
Ms. Mead. We have a training program, and we have extensive
electronic reports that enable the agencies to make their
controls work. The data is available and very visible.
Mr. Horn. Well, are you sure that those training exercises
are being done?
Ms. Mead. I am sure they are being done. We're not sure
that the things that people are learning are being put into
effect.
Mr. Horn. Well, what would you do about it? Can you help
them? I mean, you're putting training in, and then it seems to
me that every agency has an Inspector General. And I can
certainly ask, is the training being done? Now, is that
training by GSA, or is it by the agency?
Ms. Mead. GSA makes training available on a Web site, and
the contract requires that the banks provide training to the
agencies. So we do know people who attend the training once a
year at the annual training conference.
Mr. Horn. OK. So, could they find whether training has
occurred or not just by asking the question?
Ms. Mead. Of each of the Department agencies?
Mr. Horn. Each Department. You're there because
centralization and the Hoover Commission said, hey, we can save
money for the taxpayers. Now that we find it, nobody seems to
care much about it. And GSA ought to. You've got a very fine
Administrator there, and I would think he would get at this.
Ms. Mead. We see our role as putting the tools in the hands
of the agencies so that they can have effective controls.
Mr. Horn. So you've got a model training program; is that
it?
Ms. Mead. We think we have a good training program.
Mr. Horn. Could you file for us at this point in the record
just to see what it's like? Give it to the staff and we will
put that in the hearing record. Thank you.
Anybody else want to make any points on this that we
haven't asked? This is your chance.
Mr. Kutz. Mr. Chairman, there are two more I would make.
One other thing that Senator Grassley pointed out is management
of the issue of credit limits for individual employees on a
monthly basis. That's something that the Navy probably needs to
take a look at from the standpoint of should everybody have a
$20,000 or $25,000 limit, or are there some that maybe could
get by with a couple thousand dollars a month limit, which, as
Mr. Hast said earlier, reduces your exposure?
The other idea that was raised, and I'll let Mr. Hast
expand on it, is the issue of credit checks, which probably
does have some merit, because some of the frauds that we have
seen are for people that had prior credit problems that were
then given a government credit card and then committed frauds.
Mr. Horn. Mr. Hast.
Mr. Hast. I agree. I think it would be prudent that prior
to giving someone a government credit card with a very high
credit limit on it, we would check their credit and make sure
that they behave responsibly in their personal life. I think
someone who doesn't behave responsibly in their private life is
much more likely not to behave responsibly with the public's
money.
Mr. Horn. Who do you see should do that credit check? Is it
the bank? Is it the Navy or the Army or the Air Force?
Mr. Hast. Whoever is issuing those cards. Whichever command
is actually giving out the cards should set up a mechanism that
they're able to do credit checks, and they're very easily done
now by computer. They don't take a long time, and they are not
very expensive.
Mr. Horn. Well, is it easy for them to get the check? And
if so, do they have to pay a fee for it?
Mr. Hast. They would have to pay a fee for it.
Mr. Horn. What is the fee?
Mr. Hast. I would have to look. I'm not positive.
Mr. Horn. Well, perhaps Captain Surash and Captain Valdes
would know.
Captain Surash. I'm not familiar with a fee for credit
check.
Mr. Horn. Well, maybe that's because nobody's ever done it.
But let's look into that, and we ought to check on people's
credit.
Captain Valdes. Mr. Chairman, I would like to briefly
discuss the abuse issue, with your permission.
The GAO came to audit my command in August of last year.
They spent 10 months. The total period of the audit was 10
months long. During that time they looked at 50,000
transactions, and they used an automated tool for that, which
we are trying to get from them, on how to automatically review
50,000 transactions. But they started with Citibank data, from
what I understand. And they found 78 cases of suspicious
vendors--what they term suspicious vendors; 78 cases out of
50,000. Now we have--of those 50,000 transactions, they
resulted in 6,000 vendors, and then they looked at each vendor
to determine whether or not it was a suspicious case or
suspicious transaction.
I had our legal inspector general look at the GAO list, and
they found the following: Of the 78 vendors and transactions
that were suspicious from the GAO's point of view, the vast
majority, 62 cases on the list, were for legitimate government
purchases and transactions. There were six cases of stolen
cards or third-party fraud. There were five cases in the GAO
list that we found through our Inspector General and legal to
be cardholder misuse; not fraud, but misuse. The total value of
that misuse was $2,107. Every dollar is important. I take this
seriously. But just to put it in perspective, it's $2,107 out
of $45 million in transactions. There were four cases of
erroneous use of the card, and there was one possible billing
error.
In summary, out of 50,000 transactions, a total of $45
million, GAO data itself revealed five cases of cardholder
misuse for a total of $2,107.
I'm taking action, and I've already taken action on many of
these cases, and I am going to pursue it. But I just wanted to
make sure we put it in perspective, because I do not feel we
have a problem--a serious abuse and fraud problem. In fact, I'm
pretty proud of our workforce. I'm proud of their honesty and
integrity. Over 99.98 percent of our purchases are for
legitimate government use.
Thank you, Mr. Chairman.
Mr. Horn. Mr. Kutz, do you want to comment?
Mr. Kutz. We only looked at supporting documentation for
the two commands now for 400 to 500--or 4/10 to 5/10 of 1
percent of the transactions. What the captain is talking about
are our automated tools where we downloaded information from
Citibank into our system to scan it for obviously abusive-type
things, such as the Coach store, which popped out when we did
that. We didn't look at 50,000 transactions. We scanned through
for obviously fraudulent or improper types of things. So to say
that we looked at 50,000 transactions and have no problem with
anything but what we found is a mischaracterization of our
findings.
Captain Valdes. Sir, I did not say they looked at every
transaction. What I said is that they scanned 50,000
transactions for all vendors. From that, they were able to pull
6,000 vendors that our command uses. And from that, they looked
at 6,000 vendors and determined that there were 78 suspicious
vendors or transactions. And that's the methodology that they
used.
Mr. Horn. And that is the one that you are using, too; is
that correct?
Captain Valdes. What I would like to do with that automated
tool--right now, we do all this by hand. It's a manual process.
I mentioned the Enterprise Resource Planning will help me
automate that process, but I am also interested in tools to
detect abuse, and whatever tools I can be provided with, I will
use.
Mr. Horn. Is GAO able to transfer that material?
Captain Valdes. They have given us enough information to be
able to find that tool, yes, sir.
Mr. Horn. Any other comments?
Well, Captain, this is the last comment I'll ask. Your
staff justified the purchase of a leather briefcase from the
Coach Store as being more durable and thus less expensive in
the long run than other briefcases. Do you believe the Federal
Government should be buying all of its employees briefcases
from the Coach Store?
Captain Valdes. No, sir. That was abuse of a purchase card.
I have written a letter of caution to the employee, and she's a
good employee, Mr. Chairman. She probably made an honest
mistake and happened to be at Nordstrom and purchased that bag,
and I think she'll do better next time.
Mr. Horn. I won't comment on that.
Let's see. In closing, we will check back 3 months from
now, just as we're doing with the last group from the Pentagon
this last week. With the advent of the new administration, we
anticipate the type of problem we have been discussing today
will be resolved. Secretary Rumsfeld has been very clear in his
desire to make the Department of Defense accountable for the
money it spends, and I want to be equally clear in my
endorsement of that policy. The examination of government-
issued purchase cards has only just begun.
I want to thank all of our witnesses today. I am sure there
are ways you would have preferred to spend this morning. Let's
hope there won't be need for another hearing on these two
programs.
I would like to thank the staff who put this hearing
together, and this is on our side and the minority: J. Russell
George behind me, staff director/chief counsel; Bonnie Heald,
to my left, your right, professional staff member and director
of communications; Scott Fagan, assistant to the subcommittee;
Chris Barkley, staff assistant; Davidson Hulfish, intern;
Samantha Archey, intern; Fred Ephraim, intern; Christopher
Armato, intern.
Minority staff: David McMillan, minority professional staff
member; Michele Ash, minority counsel; Jean Gosa, minority
clerk; and Christina Smith, Nancy O'Rourke and Lori Chetakian,
our court reporters.
So we will have a hearing where we can go over these things
about 3 months from now. So we will be looking for that. So
with that, we're adjourned.
[Whereupon, at 12 noon, the subcommittee was adjourned.]